Bryan Caplan  

How Markets Value the Welfare of the Poor: Follow-up to A Non-Socratic Dialogue

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Reading Brad DeLong's "non-Socratic dialogue on social welfare functions" has inspired me to return to one of my favorite literacy forms.  In DeLong's original dialogue, Prof. Agathon helps Prof. Glaukon reach a shocking conclusion:

Agathon: "That means that the market system, in weighting utilities and adding them up, gives you a much lower utility than it gives Richard Cheney. In fact, if marginal utility of wealth is inversely proportional to the square of lifetime wealth, the market system gives Richard Cheney about 400 times as big a weight as it gives you."

Glaukon: "That's sick."

Agathon: "And it gives Bill Gates a weight about 400,000,000 times as big a weight as it gives you."

Glaukon: "That's sicker."

Agathon: "But it gives you about 40,000 times the weight it gives your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system's concern as Bill Gates has. Will you teach that?"

Glaukon: "They'll call me a Communist!"

Agathon: "But it's true!"

Glaukon: "That I'm a Communist?"

Agathon: "No. That that's what the market system does!"

My follow-up takes place a day later:

Glaukon: "Now that we know how little weight the market puts on the poor, I've been trying to find a system that's better from their point of view.  We know it's not communism - the poor starved by the millions."

Agathon: "Sadly true, my dear Glaukon.  The answer, of course, is social democracy.  Communism kills the goose that lays the golden eggs.  Social democracy, in contrast, gives the poor extra eggs so the market will treat them like human beings."

Glaukon: "That sounds like a good answer, Agathon.  But would you humor two objections I googled?"

Agathon: "I'd be delighted.  Objection #1?"

Glaukon: "Well, here's a little graph (Exhibit 1.13) that shows the income share of the poorest 10% as a function of countries' economic freedom.  It's basically flat -  however much latitude the market has, the poor get about 2.3% of national income."

Agathon: "Hey, don't start blaming social democracy for the evils of Third World kleptocracies!"

Glaukon: "I'm not trying to.  Still, if the market is as indifferent toward the poor as you say, shouldn't there be some noticeable tendency for their income share to be lower in countries where markets have more sway?"

Agathon: "Well, the fact that markets put a low weight on the welfare of the poor doesn't necessarily mean that politics treats them any better."

Glaukon: "Interesting you should say that, for it brings me to Objection #2.  Remember how you highlighted the plight of the average Bengali peasant, who gets 1/16,000,000,000,000 the weight of Bill Gates in the market's social welfare function?"

Agathon: "Indeed.  A devastating critique of capitalism, isn't it?"

Glaukon: "I'm not so sure.  If those Bengalis somehow managed to get low-skilled jobs in the U.S., wouldn't the market suddenly put vastly more weight on their welfare?"

Agathon: "Of course.  That's the golden rule - whoever has the gold (or dollars) makes the rules."

Glaukon: "But what's stopping those Bengalis from coming to the First World and taking those low-skilled jobs that are, by their standards, incredibly lucrative?  Surely it's not the price of a plane ticket."

Agathon: "Fair enough.  What's your point?"

Glaukon: "Well, a very interesting paper I just read shows that in the absence of immigration restrictions imposed by First World governments, Third World workers could massively increase their income merely by moving here.  It sounds like the market counts Bengalis very little largely because of governments' labor market regulations.  A free labor market would do vastly more for Bengalis than even the most internationally generous social democracy."

Agathon: "But we can't have a free international labor market!  Without immigration restrictions, social democracy would collapse.  Can you imagine all those Bengalis coming here and going on welfare?  Not to mention their impact on domestic wages."

Glaukon: "But isn't your whole complaint about the market that it counts the welfare of the truly poor for virtually nothing?  Now it sounds like you care less about their welfare than the market does.  Maybe less than zero."

Agathon: "'Less than zero?'  Come now, Glaukon.  You know I'm a compassionate man.  How can you say such a thing?"

Glaukon: "Well, I read another piece that suggested an interesting compromise on immigration.  We could keep the welfare state and improve the welfare of the truly poor if we made them the following deal: We admit them as second-class citizens who (a) can't collect welfare and (b) pay a surtax to compensate low-skilled natives for the increased labor market competition."

Agathon: "Sounds monstrous.  It goes against the commitment to equality that defines social democracy."

Glaukon: "But what's so monstrous about it?  Poor foreigners are much better off, and by hypothesis we've protected the natives as well.  So how much weight in the social welfare function does social democracy really give to the truly poor?"

Agathon: "Sigh.  Less than zero?"

Glaukon: "Verily, my dear Agathon.  There may be good arguments out there for social democracy.  But 'It's better for the poor than laissez-faire,' isn't one of them.'"


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COMMENTS (35 to date)
Gabriel writes:

DeLong needs to assume that everyone has the same preferences.

KMcC writes:

your punctuation goes awry in your final sentence - I think you meant this:
But 'It's better for the poor than laissez-faire' isn't one of them."

Interesting post; I was arguing this very topic with a friend on my morning commute today - I also said that inequality is the engine of progress, since the desire for betterment provides the incentive to provide goods and services to the poor, and the wealthy provide a testing ground for new goods and services.

My friend is a leftist; and I don't think she has ever heard anyone defend inequality before.

spencer writes:

Your model assumes that all those third world migrants would have the same productivity after they migrate as the population in the advance country had before the migrations.

But that is a highly questionable assumption.

If productivity and/or wealth is largely a function of the capital per workers -- including social and/or educational capital -- the flooding of an advance country with third world workers would sharply reduce the capital per worker in the advance country. Moreover, it would alter the relative supply of capital and labor making labor cheaper and inducing firms to shift towards more labor and less capital intensive production processes. Consequently,massive migration of third world workers to an advance country might mean that the third world workers would be modestly better off after migration, but the productivity and/or well being of the original residence of the advance countries would be sharply reduced.

So you could not call this a Pareto improvement and would be reduce to applying your own personal welfare function in judging if this would be a good thing?

Bob D writes:

Bryan,
I like your buy in proposal, but I think that doing it with higher skilled workers or business owners would do more for jobs and wealth. Canada does this. We already have your system in law, but not practice. Theoretically an illegal immigrant is not entitled to social welfare benefits, but government chooses to disregard the law.

ryan yin writes:

Spencer,
You're arguing with a strawman. Nothing above implies or depends on the assumption that immigrants have the same productivity or income as do natives. And the above specifically assumes that they would pay a surtax, which could in principle create a Pareto improvement. You seem to either ignore this bit or assume that such a transaction is impossible even in theory (perhaps because you assume that the hypothesized immigration is zero sum or negative sum, though I'm not sure why you'd think this is the case).

Chris writes:

Bangladesh has capitalism and a "market system"? That's news to me, as Bangladesh is ranked 108 out of 141 in the "Economic Freedom of the World" index (http://www.freetheworld.com/cgi-bin/freetheworld/getinfo.cgi).

It seems unfair to claim that "it [the market system] gives you about 40,000 times the weight it gives your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system's concern as Bill Gates has" when the market system doesn't even exist in that country!

William Newman writes:

Chris writes "Bangladesh has capitalism and a 'market system'?"

This is Brad DeLong, he can see free markets where you and I do not (and so delight his readers when he then proceeds to criticize them). E.g., "John Derbyshire encounters the free market in health care" when speaking of the dysfunctionalities of insurance for health care in the US.

(And be patient, everyone, I may well spontaneously stop ranting about this hundreds of milliseconds before I breathe my last.)

Dave writes:

I have a much simpler day-after follow-up to DeLong's dialogue:


Glaukon: I decided to actually study some economics and discovered that interpersonal comparisons of utility are impossible, so our conversation yesterday was moot.

Kurbla writes:

We already passed through that.

You are making an argument for immigration from utilitarian point of view. Allowing immigration is free, but making life of immigrant better actually requires some investment, and effect is much better if these resources are given as aid or invested directly in poor countries. So, it is not well spent money.

But, even worse, free immigration depletes poor countries of their most intelligent, most active people, making things actually worse for old, sick, orphans, those bellow average - in poor countries. So, if you allow immigration, you are making things worse, not better for those absolutely poorest in the world you supposedly want to protect.

You might try some non-utilitarian argument for free immigration, like freedom of movement or something.

Max M writes:

Kurbla: Without a market system the only thing the "intelligent" do to get ahead in the third world is play the zero-sum game of politics in order to take from those "absolutely poorest" what little they have.
Furthermore, I suggest you look into Bill Easterly's work entitled "The white man's burden". As it turns out, aid does more to hurt a country's economic affairs than even natural resources.

Greg Ransom writes:

The pseudoscientific notion of "utility" is the original scientistic error of the economists -- traceable back to James Mill.

And pseudoscientific economics gives us bad social policy and bad political economy.

And I'm not at all surprises that Brad DeLong trades in such stuff.

Passerby writes:

The poor get 2.3% of national income regardless of the country's economic freedom...what does this prove?

What if the data showed that the poor had a *higher* share in countries with low economic freedom? Would that be an argument in favour of Third World kleptocracies? Of course not. A greater share of a smaller egg is of much less use than a smaller share of a larger egg.

Discussing the plight of the poor in terms of their percent share completely ignores the marginal utility of money.

Russell Nelson writes:

Ow. I'm glad I'm not Brad DeLong. But then again, if I was, I wouldn't be claiming to be an economist.

spencer writes:

Ryan Yin tell me, if the new immigrant does not have excess to greater capital than they did before they moved, how do they raise their standard of living?

ryan yin writes:

Spencer,
Surely you don't think that output is purely a function of capital and labor? If I could explain exactly how the "Solow residual" works, I'd think that the Bank of Sweden would've given me a fancy medal by now. But it's quite clear that a given amount of labor and a given amount of capital are more productive in some countries than in others -- that's why both labor AND capital want to flow in the same direction.

MikeP writes:

Ryan Yin tell me, if the new immigrant does not have excess to greater capital than they did before they moved, how do they raise their standard of living?

What you are missing is intangible capital, which a recent World Bank study found accounts for 77% of the world's wealth.

From one article...

A Mexican migrant to the U.S. is five times more productive than one who stays home. Why is that?

The answer is not the obvious one: This country has more machinery or tools or natural resources. Instead, according to some remarkable but largely ignored research—by the World Bank, of all places—it is because the average American has access to over $418,000 in intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000.

See also this interview.

Kurbla writes:

Max,

I didn't wrote about market vs. plan but about emigration. In both plan and market economies in poor countries, there are many people who work honestly and on benefit of society. If you pull good medical doctor from Chad to EU, then you help this particular doctor, as Bryan said, but you harm his patients who suffer from say, malaria. So, immigration helps the poor and harms the poorer. (Again, from utilitarian point of view.)

Also, aid can be harmful, however, there are the cases of famine or epidemics, such that only direct aid helps - if we really want to help the poorest. So we cannot simply say that all aid is harmful, and that all aid is beneficial. It would be too easy.


Mark Seecof writes:

Glaukon: "Poor foreigners are much better off, and by hypothesis we've protected the natives as well."

That sounds like "assume a can opener" to me.

If you let me hypothesize some optimal government policy, with no enforcement problems and no unintended consequences, then I can produce (on paper) nearly any happy results you might desire.

However, that's not the real flaw in Glaukon's suggestion.

Any prediction about the effects of immigration (on immigrants' or natives' utils, much less their incomes) must be calibrated to the quantity and rate of immigration proposed.

An existing native rich-country economy could absorb a few low-skilled immigrants from poor countries without difficulty. Those immigrants would make large income gains and get a higher standard of living. Low-skilled natives' wages would decrease very slightly because the ratio of immigrant workers to natives would be very small. It is even conceivable that growth powered by immigrants' productivity would make low-skilled natives better off over some modest time frame.

But suppose a great number of people, enough to double the population of the rich country, all immigrated in one year. That is, imagine adding 300 million unskilled immigrants to the USA in one year. Undoubtedly that would be a disaster for natives and immigrants alike. Most of the immigrants would remain unemployed; even a rich-country economy could not take up so much new labor instantly. Wages for low-skilled labor (native or immigrant) would drop to nearly zero, or at best to the legal minimum wage, and stay there. There would be great turmoil in the prices of food and shelter. (We shall "hypothesize" that all the immigrants would be peaceful; if they weren't then crime and/or security measures would destroy the rich country.) If Glaukon's no-welfare plan were in effect, many of the immigrants would starve to death.

No doubt Glaukon would shy away from either extreme scenario. Glaukon undoubtedly wishes to increase immigration, but not so quickly the recipient country would unavoidably be devastated.

However, everyone ought to acknowledge that there is some level of immigration which would do more harm than good even taking immigrants' welfare to be as valuable as natives'.

Perhaps Glaukon would argue that people in poor countries would only choose to migrate if they were likely to improve their welfare. That is, immigration would proceed until the marginal gain (to the immigrant) dropped to zero. (Note that migrants might accept wage cuts if they thought their children would do (probabilistically) better in the destination country than the origin country.)

There might be information or risk-assessment problems, though. Some ill-informed or overly-optimistic people might migrate even though their eventual gains would be negative.

How could any tax (Glaukon's hypothesis) on immigrants' wages compensate natives as immigrants' wages approached zero and the gap between natives' pre- and post-immigration wages approached a maximum?

Indeed, reasoning backwards for a moment, wouldn't Glaukon's immigrants-to-natives transfer scheme collapse as soon as the decrease in native wages (due to immigration) exceeded the difference between immigrants' pre-tax wages and their subsistence wages?

"Ah," Glaukon might say, caught up in the argument: "we can just limit immigration to the rate which maximizes the tax transfer. At that point the marginal cost and the marginal value (to natives) of additional immigrants are equal and zero!"

Agathon: "Is that a market solution?"

Glaukon: "Not exactly."

Agathon: "So now we know what you are; we're just haggling over the price!"


Okay, that was unfair. Glaukon merely tweaked Agathon-- he didn't say he was offering a complete solution. But consider:

Agathon: "Will the immigrants have children?"

Glaukon: "Sure, why not?"

Agathon: "Will those children pay the immigrant-wage tax?"

Glaukon: "No-o-o... I don't think so."

Agathon: "But they will compete with native labor, won't they?"

Glaukon: "Yes, but officially no, because we will count them as natives."

Agathon: "What about the current natives? Do they want their children to compete with immigrants' children?"

Glaukon: "Probably not."

Agathon: "So how can we convince voters to aid poor foreigners by accepting them as immigrants?"

Glaukon: "We will appeal to their moral sensibilities!"

Agathon: "Does evolution care about moral sensibilities?"

Glaukon: "I don't think so."

Agathon: "What happened to the pre-Columbian population of the Americas, anyway?"

Glaukon: "Unrestricted immigration."

Jeremy H. writes:

Exhibit 1.14 from the linked Economic Freedom report seems to be the stronger point. Per capita income of the poorest 10% of the population (by quartiles of countries):

Most Free: $6,519
2nd quartile: $2,322
3rd quartile: $1,186
Least Free: $826

MikeP writes:

Agathon: "Will those children pay the immigrant-wage tax?"

Glaukon: "No-o-o... I don't think so."

Why not?

At least tax them until they are 18, by which time one presumes they have all the expectations and advantages of anyone else raised in the country and should not be hamstrung by such a tax.

Frankly, the single biggest change we can make to take care of the complaints about immigrants and welfare is to put citizen children of immigrants on exactly the same welfare schedule as their parents. If your parents are not eligible for welfare, neither are you.

Agathon: "What happened to the pre-Columbian population of the Americas, anyway?"

Glaukon: "Unrestricted immigration."

Conquest, actually.

happyjuggler0 writes:

Mark Seecof,

Given two otherwise identical countries, one very close to pure capitalism, the other very close to pure "social democracy" (whatever that means), which one do you think could absorb the most poor immigrants before all hell broke loose?

Bryan's point was that those "compassionate" social democracies aren't nearly as compassionate as one might think from hearing their propaganda.

Anyway, the more poor immigrants that come in there are, the more profitable it is to hire them (due to falling wages from increased supply of low wage workers), assuming no stupid anti-capitalist institutions such as a minimum wage. The more profitable it is to hire them, the more capitalists there are that enter such businesses. The more capitalists there are that are entering such low wage industries, the higher the wage they get paid.

Given enough time, presumably all we get is an oscillation around the previous "equilibrium" wage for low skill [immigrant] labor. Rich capitalist countries ought to be able to absorb many more immigrant workers than you seem to imagine. Rich social democracies on the other hand seem destined to fall apart given enough time if they bring in the same amount of immigrants.

happyjuggler0 writes:

It is worth pointing out that Bill Gates, and Warren Buffett for that matter, can't possibly, and won't, spend all that money. They are indeed giving it away to the poor, which kind of turns that argument on its head.

Robin Hanson writes:

Great job Bryan!

K. D. writes:

Brilliant dialogic reply to DeLong!

Jared writes:

Not to distract from the content for too long, but it is worth noting that this form of communication is one of your favorite *literary* forms, not one of your favorite *literacy* forms. This little trip-up is particularly amusing in light of the definition of literacy: the ability to use language.;-)

A clarification on an otherwise very interesting post.

muirgeo writes:

Glaukon: "Well, here's a little graph (Exhibit 1.13) that shows the income share of the poorest 10% as a function of countries' economic freedom. It's basically flat - however much latitude the market has, the poor get about 2.3% of national income."

and


Glaukon: "Verily, my dear Agathon. There may be good arguments out there for social democracy. But 'It's better for the poor than laissez-faire,' isn't one of them.'"

Anyone who cared to look into the details of these two statements would realize the flaw with Kaplan's argument.

I'll elaborate if anyone is interested. For a hint... which of these countries is run laissez-faire and which is considered a social democracy?

Per Kurowski writes:

“your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system's concern as Bill Gates has”

“It sounds like the market counts Bengalis very little largely because of governments' labor market regulations.”

Yes, but also because the market has to price Bill Gates much higher than it would normally do because of the intellectual property rights regulations.

Bill Koehler writes:

Freedom or the free market has three things to
recommend it. 1) It always provides the greatest good 2) to the greatest number 3) at the lowest price.

Nothing anyone can name has a better record.

Sheldon Richman writes:

"That means that the market system, in weighting utilities and adding them up, gives you a much lower utility than it gives Richard Cheney. In fact, if marginal utility of wealth is inversely proportional to the square of lifetime wealth, the market system gives Richard Cheney about 400 times as big a weight as it gives you."

1. Why isn't this jibberish? (Interpersonal utility comparisons can't be done.)
2. Why doesn't he mention that Cheney has lived off the taxpayers one way or another his whole life. (If you bring up Bill Gates, I'll bring up intellectual "property.")

caveat bettor writes:

I read the Sokrates dialogue, and wondered why someone who adores Thomas Reid as Bryan does, would loathe Reid's faith, along with other thinkers of the Scottish Enlightenment, the same faith which informed that Enlightenment.

Any answers out there?

LowcountryJoe writes:

Saw this at CafeHayek and decided to read it and the DeLong entry that inspired it. I must be the only person with several undergraduate Econ courses under my belt (with some additional voluntary reading to go along with them) that finds DeLong's comments going way over my head with Bryan's being comprehensible. I feel like an idiot when trying to read DeLong in this one; am I alone?

Also, to go slightly off topic, why not advocate for statehood admission through the contitutional process rather than for increasing immigration quotas? Governments that agree to disband and agree to join as a state to the U.S. would pave the way for migration, while expanding U.S. Territory, imfluence, other non people resources, hegemony, proserpty, etc. The trend alone, being otherwise very positive, would force structual changes to the social safety nets that badly need it. All this assuming that anyone not currently a citizen of the USA is even interested in becoming one through the political process.

Jayson Virissimo writes:

I must be the only person with several undergraduate Econ courses under my belt (with some additional voluntary reading to go along with them) that finds DeLong's comments going way over my head with Bryan's being comprehensible" -LowcountryJoe

In this case, undergraduate courses in political philosophy and ethics would have been more useful in understanding Delong's comments than economics courses.

Niccolo writes:

Mark Sceeoff,

You're assuming that jobs are either stagnant or stable relative to immigration. I don't think they are. People don't go to a country with relatively low labour regulations to "get work" they go to a country with relatively low labour regulations because it's easier to have work. Jobs are not a fixed thing in an economy, they grow relative to population. If the population of the United States were to jump to 900 million in one year, you would see growth, jobs, consumption, etc. grow as well.

-------

muirgeo,


I don't think you understood the statistics you cited.


-------

LowcountryJoe,

It's really just a divergence in ability to communicate. I've noticed that, in general, Caplan is a better communicator than DeLong. DeLong is a part of the popular opinion, but Caplan can articulate his better.

Gary writes:

Excellent.

mwrix writes:

Though I agree with Caplan's principles I fear, like Mark Sceeoff, his solution may be the wrong one.
Surely under a system of free trade, American companies outsource their production to LEDCs and employ low-skilled workers there?
This basically creates the same effect as the poor farmers migrating here, but without them having to move and so no destabilisation.
And it creates upward pressure on wages in those countries, rather then downward pressure here, as US companies in Bengal must offer a better deal than subsistence in order to get farmers to move off the land in the first place.
So the free market wins anyway.

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