Should Money Be Redistributed to the Rich?

By Tyler Cowen

In many cases, purely utilitarian prescriptions will have morally counterintuitive implications, but running counter to the usual fears of enslaved American doctors serving poor Africans. Namely utilitarianism may support the transfer of resources from the poor to the rich.

A talented entrepreneur, for instance, can probably earn a higher rate of return on invested resources than can a disabled great-grandmother. Indeed it is a common complaint in the literature on inequality that “the rich get richer,” while the “poor get poorer,” or at least more or less stay put. If this portrait is to be believed, it implies that the rich earn higher returns on their accumulated wealth, as indeed has been stressed by the French economist Thomas Piketty. If there is a trickle-down effect from the wealth of the wealthy, combined with a zero rate of discount, it is easy to generate scenarios where utilitarianism recommends redistribution to the wealthy.

For instance let’s say — for purposes of argument — that the wealthy earn eight percent on their holdings, annually and on average, and the poor earn one percent. If a fifth of the gains to the wealthy, over time, trickle down to the poor, the poor are better off if the wealthy command more resources. They will get a fifth of the eight percent, or 1.6 percent, rather than the one percent they earn on their own. Usually this trickle down won’t come right away, but over time the rich will build more factories, buy more products, hire more servants, fund more research and development, push for more immigration, and so on. Sooner or later a lot of the poor will benefit. If we have a deep concern for the distant future, it matters less if a lot of these benefits come later.

The implications of this redistribution to the rich will be anti-egalitarian at first, but over a sufficiently long time horizon the poor will benefit increasingly from the high rate of economic growth. The results need not be anti-egalitarian if we consider the appropriate broader stretch of time, but they will appear anti-egalitarian by many common metrics, which focus on the short run only or which focus on a single country only, rather than taking an appropriately longer, broader, and more global perspective.

I am not suggesting that a good pluralist theory will, all things considered, endorse major, systematic redistribution toward the wealthy or the talented. For one thing, this may be one case where a “rights constraint” limits the core recommendation of growth maximization. Maybe it’s just not right for Bill Gates to seize resources from a poor bricklayer, no matter how good a manager, investor, and philanthropist he may be. An alternative worry, also limiting redistribution towards the wealthy, is that a sufficiently unequal distribution of wealth may lead to lower growth through a number of channels discussed above.

What’s important, however, is how this reframing shifts the burden of proof by examining the implications of a very low discount rate. Direct, short-term redistribution to today’s poor is no longer the default option for a moral theory that emphasizes individual well-being. Instead, in many cases utilitarianism has to work to avoid the conclusion of redistributing more resources to the wealthy. Once again, it is possible to have a moral theory which focuses on good consequences without requiring everyone to give up eighty percent of their income or to work as a doctor in Africa.[1]

Finally, we need to think carefully about where the most significant gains of the past have come from, and we should emphasize the extension of those gains rather than redistribution per se. Arguably the most important gifts of the past generation to the current generation come from wise investments, a belief in rules of just conduct, good political institutions, and good values, among other related historical factors. Growth-enhancing institutions do require hard work, but that investment is a positive-sum rather than a zero-sum game across the generations. Again, the moral intuition which results is the idea of strengthening good rules which are conducive to future economic growth, properly understood, and that is again not so far from common sense morality.

[1] For a discussion of the issues surrounding our obligations to save, see Rawls (1999, p.252).