Oct 8, 2015
Frankfurt’s “On Inequality”: How Much Is Enough?
In his review of “On Inequality,” Kuznicki argues that Frankfurt’s short book repudiates some foundational ideas in economics and is the worse for it.
Harry Frankfurt’s “On Inequality” seems unlikely to leave libertarians too happy.
Frankfurt’s argument in the first and more controversial section of the book is that wealth and/or income inequality is not morally important for intrinsic reasons. He admits that this type of inequality may still be morally important for extrinsic reasons - the effect, for example, that it might have on democratic institutions (though that’s another story entirely, with its own mostly empirical controversies). But nothing about money inequality should be considered morally important in itself.
To my mind, the chief virtue of “On Inequality” that it makes one very clear distinction: Frankfurt is, sensibly, still anti-poverty. Poverty has bad effects. These bad effects are intrinsic to poverty, in that they seem likely to happen regardless of the social setting where poverty occurs. As a result, we should take policy steps to curb poverty. (We can argue about what those might be some other time. Of course, I have a few ideas.)
Meanwhile, Frankfurt observes, when self-proclaimed opponents of inequality want to condemn their chosen foe, they often somehow end up talking about poverty instead. This they should not do, because the two are quite different. Vast inequality may exist in a society where everyone has a comfortable life, and where material worries are few. Meanwhile, everyone’s fortunes may be – must be – precisely equal in a society where everyone is abjectly poor. Although the perfectly poor society may be perfectly equal, it’s hard to detect anything intrinsically praiseworthy about it.
So far, so good.
But I think the more attentive sort of libertarians are likely to object to three things from this short book in particular: (1) the great importance Frankfurt assigns to utility thresholds; (2) the denial of a necessarily declining marginal utility of money; and (3) the very fuzzy analysis of what an economist would call a wealth effect in the determination of what counts as sufficient wealth.
Let’s take them one at a time.
First: Utility thresholds exist whenever a smaller quantity of a good is significantly less valuable, or is even harmful, to the possessor or the consumer. As Frankfurt notes, if a single effective dose of a medicine consists of five units, then a sick person is hardly helped at all by the existence of, or the possession of, just one unit. Unless the other four can be obtained, the consumer will get no benefit. Moving to two units likewise carries no benefit. (Or, if the side effects are significant, one could even imagine that consuming two units would be much worse for them.)
Many goods have utility thresholds, and as a direct result, Frankfurt argues, there is also no necessary reason to prefer an egalitarian distribution of goods: If forty units of medicine exist, and if ten people are sick, it will do no good to give each of them only four units. They will all die anyway. It is only by providing eight people with five units that the maximum number of lives can be saved.1 Related concerns exist with goods that are better enjoyed in tandem, and with collections that are better off complete, and (presumably) with many other types of goods.
Certain libertarians may already be uneasy. As Ludwig von Mises wrote in Human Action, “A supply [of a good] is ex definitione always composed of homogeneous parts each of which is capable of rendering the same services as, and of being substituted for, any other part.”2 By this definition, one or two units of the medicine is in no sense at a unit of a good at all. It’s rather like having half a baby, and no one wants that.
And yet this definitional exclusion shouldn’t necessarily satisfy. For one thing, it’s ad hoc. For another, a savings of one unit iterated thousands of times in the course of industrial production represents and enormous benefit. Clearly in some sense, then, one unit of a drug has value, even if it takes five to cure a fatal disease. We might speak of the manufacturer having a different set of utility thresholds, perhaps, but it seems nonsense to say that he manufactures a different good from the one that the consumer consumes. These are some thorny problems, and I would welcome a better account of threshold goods from an Austrian perspective. I likely have something to learn hereabouts.
Second: Frankfurt rather ingeniously uses the above observation as a springboard toward a related point: Although the marginal utility of each unit of a given good may decline, the marginal utility of money may actually increase, provided only that declining marginal utility from other goods is the result of satiation, a process that as we all know can be reversed. Rotate your consumption among various goods, and your marginal utility for money isn’t necessarily going to decrease. In the simplest case, as you consume A your hunger for B will be growing, and vice versa.
The payoff from rejecting the declining marginal utility of money is surprising but maybe welcome: If the utility of money doesn’t decline as we get richer, then many forms of redistribution may not actually increase utility at all, despite mainstream economists’ claims that they do.3
The problem for libertarians here is simple: All of this cuts against both Austrian and classical economic foundations, which equally posit the declining marginal utility of money.4 Now, Frankfurt may be right, but to accept his claim is to accept a complicated bargain: One strong argument for equality must fall, but so must a good deal of elementary economics. With it goes Austrian macroeconomic theory, which depends axiomatically on the declining marginal utility of money.
Third: Frankfurt ties himself in knots trying to define what having “enough” money might look like. Having rejected the declining marginal utility of money, he can’t very well deploy that same concept to describe sufficiency. And yet he seems to slouch back to it despite himself. For example:
To say that a person has enough money means – more or less – that he is content, or that it is reasonable for him to be content, with having no more money than he actually has.
Which sounds – more or less – like the marginal value of money has declined after all, and that other goods, like leisure time, or freedom from the stressful pursuit of more money, have come to be seen as relatively more valuable on the margin. That’s precisely what the declining marginal value of money would look like in practice, and it’s hard to come up with a better explanation for the behavior of someone who chooses, say to become a Cato Institute policy analyst rather than a hedge fund manager. Having rejected the idea of the declining marginal utility of money, Frankfurt seems hard pressed to say what “enough money” really means.
A further problem arises, too: If I am right, and if we were to state Frankfurt’s idea of money sufficiency in terms of the declining marginal value of money – his protests against the concept notwithstanding – we soon find that everyone’s sufficiency point is different. Which is only an instance of a larger principle, namely that value is subjective, and that trying to provide it through legislation faces problems that Frankfurt’s book only barely mentions.
- Ah, one might ask, but which eight people should get the drugs? Frankfurt does not answer; in his thought experiment, he considers then more or less undifferentiated – which real people never are. Perhaps a lottery might be set up. Or even a market: The latter possibility appears horrible when we imagine that the supply of medicine can never increase. But when we consider that the supply of medicine can increase, and when we ask which general or social conditions might promote the increase, markets begin to make more sense. ↩
- Ludwig von Mises, Human Action. 3rd Edition. New Haven: Yale University Press, 1963, p 122. ↩
- Frankfurt would redistribute, mind you, to provide a material sufficiency, beneath which life might be genuinely unpleasant. (His definition of a sufficiency is problematic; more on that later.) But he would not redistribute merely because the rich aren’t having that much more fun, or – to say the same thing – because the utility of money would be greater in someone else’s hands. It is curious, though, how readily we recombine our money in the form of joint stock corporations, and how these corporations also seem to suggest a greater utility to be had from money in greater quantities together. This utility is so large, in fact, that we have contrived ways of obtaining it even when no one person in our society is wealthy enough to do so alone. This too is a threshold effect; with one’s personal wealth, virtually no individual could operate an auto company. And yet auto companies are excellent to have around. ↩
- Daniel B. Klein, for example, some years ago used the following question to test how ideology biases individuals’ ideas about basic economics: “Agree or disagree: a dollar means more to a poor person than it does to a rich person.” The correct answer is to agree, because this is exactly what basic economics teaches. Conservatives, who tend to oppose redistribution, would find it convenient to say that the statement is false, because its falsity would make their own political beliefs more palatable. (Lots of other things work well here too, but simply declaring the statement false cuts the Gordian knot.) Frankfurt proposes to do just that, and to provide an argument for why the statement is false, one that he hopes will convince the naysayers, rather than just an answer that accords with a previously held opinion. ↩