Frank v. Friedman on redistribution

This blog got started in response to the insistence by many on the right that evidence from the real world is no longer relevant for public policy decisions. But the left and right have been talking past one another since way before the appearance of the reality deniers. When the left says that redistributive taxation is required in the name of social justice, for example, the right counters that forced income transfers are morally illegitimate. There the conversation typically ends.

There seems little hope that the right will start trying to see things from the left’s point of view. But progress may be more likely if the left is willing to confront the right’s arguments in their own terms. As a case in point, I call your attention to a potentially fruitful dialog provoked by this strategy.

According to many libertarians, an ideal world would be one in which well informed people could exchange freely with one another with no significant market frictions. They concede that when transaction costs stand in the way of this ideal, collective action can sometimes improve matters. But the guiding principle behind any such action, they argue, should be to mimic the kinds of arrangements people would have negotiated on their own, had transaction costs not prevented them from doing so.

With this framework as a starting point, I argued in my most recent New York Times column that redistributive taxation is justified because it closely mimics the pay schemes we observe in every private firm. In those schemes, the most productive workers in any group are paid substantially less than the value of what they contribute to the employer’s bottom line while the least productive are paid substantially more.

Close scrutiny suggests that this pattern reflects the workings of an implicit market for high-ranked positions in every work group. If, as in the United States, people cannot be forced to work for an employer against their wishes, no one can occupy a high-ranked position in any work group unless others agree to occupy low-ranked positions in that same group. The logical implication is that if people prefer high-rank to low-rank, no stable group of mixed productivity can survive in which all workers are paid the value of what they produce. Those who find low-ranked positions aversive could always quit such a group in favor of a new one composed of others like themselves.

But markets make a better outcome possible for everyone. Those who value high rank can transfer some of their pay to less productive colleagues to compensate them for the burdens associated with low rank. Along the resulting pay schedules, the distribution of wages is substantially compressed relative to the corresponding distribution of productivity, just as we observe in practice.

Under these pay schedules, the best option available to someone who doesn’t care about local rank would be to join a group in which he was the least productive worker. For in that position, he would receive a substantial pay premium relative to the value of what he produces.

Rank matters not just within work groups but also in society at large. And irrespective of whether someone cares about rank per se, social rank matters for instrumental reasons. People at the bottom of society’s income distribution, for example, find it much harder to send their children to good schools, since a good school is an inherently relative concept. To send your children to a good school, you must buy a house in a neighborhood surrounding such a school, and those houses are expensive for precisely that reason.

If new societies could form and dissolve as easily as private work groups can, people might be able to sort this kind of distributional externality out on their own. But transaction costs make it impractical to form new societies. Because we’re more or less stuck in the societies we’re born into, social institutions cannot suit every preference exactly. We must choose those that work best on average.

What the labor market tells us is that when people are free to form groups of their own choosing, they always agree to an implicit tax that transfers income from the most productive members to the least productive ones. So if libertarians believe the best public institutions are those that mimic the arrangements people would have chosen for themselves if transaction costs had not been an obstacle, they cannot consistently insist that redistributive taxation is morally illegitimate.

That, at any rate, is my challenge to libertarians. David Friedman, son of the late Milton Friedman and a leading libertarian thinker, has taken up my challenge. His attempt to rebut my argument is here, and he has graciously posted my response to his rebuttal here.

He’ll have more to say, I am sure. We may not bridge the communication gap between us, but I hope it will be clear to readers of our exchange that we’re each seriously trying to engage the other’s position in its own terms.

Update Friedman parries. I counter-oarry and riposte.

21 thoughts on “Frank v. Friedman on redistribution”

  1. Each link has an extraneous quotation mark at the end. Just go to the page that you get linked to and in the address bar remove that final quotation mark.

  2. The issue you raise about the difficulties of establishing new societies seems to me to point towards the most fundamental problem. I'm not much of a scholar but to the extent that I understand what libertarians are trying to say, they don't want the government to coerce individuals, in this instance regarding property and economic behavior. This is "morally illegitimate." Except, that is, that we are all required to pledge our fealty, our money, and if necessary our lives to maintain the laws, courts, and police required to enforce property rights and contracts — and this is backed up by social action including coercive force. Governmental coercion to force an individual to adhere to a system that may be working out very badly for him, for some reason, isn't "morally illegitimate."

    To put this in less "moral" terms: Everyone in a society needs to pay for social order. Social order benefits richer people much more than it benefits poorer people. If you get what you pay for, you also need to pay for what you get. So richer people need to pay more commensurate with the greater value they receive.

    Beyond this fundamental issue, a key instrument of redistribution is progressive taxation, and I don't think you need to get into this kind of really general argument to justify that. Lots of narrower arguments will work. E.g.: Taxation should be fair. A fair tax will cause equal pain. Marginal utility means that a flat tax will hurt poorer people much more than it hurts richer people. Hence to cause equal pain to everyone a tax must be progressive. (I believe this argument has been around since Mill.)

  3. While I concede that as a practical matter, taking libertarians/conservatives on their own terms might be a wise strategy in the short term, it doesn't get us to what I think is the next fundamental conceptual transformation that society must undergo.

    What is being taken on their terms is this: "an ideal world would be one in which well informed people could exchange freely with one another with no significant market frictions". The key phrase here is "well-informed people", and it needs a bit of unpacking. For there to be an equal "playing field", in which individuals perform transactions in which exchanges can be made freely, the individuals must have similar levels of "human capital". This entails not just comparable levels of objective knowledge, but also everything else that goes into self-efficacy. They must have similar cognitive and communication skills. They must have knowledge of self and emotional and behavioral awareness. In short, being "well informed" is everything that goes into being a productive citizen.

    Our biggest problem in society today is that we don't grasp how important this understanding of human development really is. We have a somewhat schizophrenic, incoherent view of humanity, in which on the one hand we value things like culture, parenting, education, and other social institutions, yet we treat individuals as if they all possess equal levels of self-efficacy and free agency. We assume that each individual determines his own choices – whether that is to create a run business or rob a liquor store. We acknowledge that children do not have this sort of free agency, but when they reach adulthood, it is magically acquired.

    I say magically because there is no evidence for anything like free agency. It is something we intuitively "know" exists, but all evidence points towards it being an illusion concocted by our conscious mind. A quick debunking can be done, however. If all adults have equal levels of free agency, we ought to see a random distribution of ability across all socioeconomic demographics. Just as say, 20-20 vision, the ability to walk upright, or speak language is distributed evenly across groups, so to would behaviors that are purported to arise from man's free agency.

    Of course they do not. In fact, one can predict life outcomes before people are even born, simply based on their mother's environment. Things like neighborhood, environmental toxicity, parental education level, income, and others are very predictive of life success. A child born in a ghetto is simply much more likely to have lower levels of self-efficacy, or agency than one born in a wealthy suburb.

    Libertarians and conservatives deny this reality. Some might claim they accept it, but claim that there is nothing to be done – that government intervention won't help. But this is simply not true, both for those who are currently experiencing the effects of structural disadvantage, as well as young children who could be thriving with adequate government intervention at home and at school. Further, if we accept that free agency is a myth, then we accept that humans are socially determined. This has consequences not only for our treatment of the less fortunate, but for the fortunate. Wealthy people, to the extent that they benefit from social structural inequalities, have no right to their wealth.

    Now, what to do about all of this as a practical matter is quite difficult. But before we can even begin that project, we must as a society come to terms with the transformative notion that free agency is a myth, and that true freedom lies in accepting our limitations as conscious beings.

  4. Larry Birnbaum: I'm with you, but Frank's libertarian interlocutors would reject the straightforward utilitarian premise of your last paragraph. As far as I understand their position, individuals do not (cannot?) cede their fundamental rights to liberty and property in a general way to a Leviathan however beneficent: so the government is not entitled to use an utilitarian calculus to override these rights without much further argument. You and I would probably agree with much of this on liberty but not on property, where the claim of prior existence is as incredible as the converse legal fiction that the whole of England belonged to William the Conqueror in 1066 and everybody since ultimately holds English land by grant or fief from the Crown.

    The beauty of Robert Frank's argument is that unlike Mill's, it works within the libertarian frame of reference.

  5. "Taxation should be fair. A fair tax will cause equal pain."

    Fair means you pay for what you get, and get what you pay for. Fair does not mean that Bill Gates pays $10,000 for a happy meal at McD's.

  6. How does one account for CEO pay? It seems to be exceptional – the high paid CEO does not transfer some pay to lower ranked workers, nor does the productivity enabled by a Robert Nardelli justify his compensation. rinse and repeat with other notoriously paid CEOs.

  7. As far as I can see, liberals spent the entire decade of the 1990's trying to deal with libertarian thought on its own terms. It was called "Clintonism." Mixed success; much failure.

  8. We can of course discuss what it means for a tax to be "fair." Equal pain is only one possible model. But it isn't an irrelevant one. And in any case I'm not obliged to agree that the government is a good or service on the order of Happy Meals.

    Still I think we can all agree that richer people get more value out of social order than poorer people inasmuch as they have more to lose should it break down. I expect that that value is highly nonlinear with all sorts of threshold effects. At this point we are haggling over the price. And while (some) rich people will no doubt prefer to pay the least amount for the least amount of social order they think they can get away with, everyone else isn't obliged to agree with that.

  9. I agree with Larry's point: civilization benefits the rich more than the poor. But I can easily see somebody like our friend Brett Bellmore saying: "But rich people contribute so much more to society beside their taxes. If their extra benefits from civilization should be incorporated into their taxes, their extra contributions should be deducted from their tax."

    There may be a few libertarians who see the point to Larry's argument: the Julian Sanchezes and Radley Balkos of the world. (They might not agree!) But most "libertarians" are movement conservatives who don't care much for the Jesus and like their dope. They're impervious to any argument that doesn't support their conclusions. Which is why I think that Robert Frank and Larry are just spinning their wheels.

  10. Eli: you sound hot.

    So, can we deport libertarians to Nevada, or Monaco? That would leave more jobs for the rest of us. And they would obviously be happier in a low-tax state. Does not the fact that they don't already live in those places undermine their claims? Do they prefer to live among people who do not think like themselves, in a psychologically free-riding way?

    I agree that it would be good to understand libertarians well enough to frame our arguments to appeal to some of them, when possible, for purposes of elections.

    But I think the underlying condition for being a libertarian is that they are basically cold people, who think they have no responsibility to their fellow humans. All this fancy talk is just to rationalize their chief desire of being left alone, with which within reason one might sympathize. And people like that can't be worth much effort.

    Moreover, I don't think any of you will ever be able to convince libertarians they're wrong, for the simple reason that many important values simply aren't a matter of logic. I can't logically prove to someone why it's wrong to go to a prostitute, for example. Under economic theory, I don't think there's a way to do it. Differentiating between using someone's labor in a factory versus in a hotel room is not a matter of reason, and that's not even getting to the issue of coercion. Either people believe in the value and dignity of other humans, or they don't. Same with a minimum wage and a lot of other things. So at some point, you're talking to people who can never understand. Especially since it's not in their interest. Maybe you could try some John Rawls on them, but people are much too stuck in their actual privileged situations to take it seriously.

  11. I wanted, first, to thank Bob Frank for pointing people here at the discussion on my blog. Second, I wanted to warn people here that any statement about what libertarians believe, especially at the level of principles, is almost certain to be false for at least some libertarians. As I put it in my first book a very long time ago, there may be two libertarians somewhere who agree with each other on everything, but I am not one of them.

    Thus, for example, while I share some of the libertarian intuitions about natural rights and the illegitimacy of coercion, I long ago concluded that I had no good way of demonstrating that those intuitions were true, and thus that it was more fruitful to argue on consequentialist grounds—loosely speaking, to try to persuade people that the institutions I favored would produce outcomes that both they and I would prefer to the outcomes produced by alternative institutions.

    And I would add that anyone here who is inclined to make an argument that starts with his explanation of libertarian views and why they hold them ought first to consider the likely consequences of libertarians basing their arguments on their view of what liberals (modern American sense) believe and why.

    Finally, can someone here offer me a cite to "the insistence by many on the right that evidence from the real world is no longer relevant for public policy decisions?" To the best of my knowledge, the blog's title comes from an account by someone on the left of something he attributed to an (unnamed) member of the Bush administration–not by anything actually published, or said in public, by anyone "on the right."

  12. If you want a market argument for progressive taxation (or, unfortunately, any other kind of taxation) you need look no further than the short squeeze: when you've traded stuff you don't own for money and other nice things, and the time comes to pay up, it is laissez faire gospel that the supplier(s) of those items of stuff (whether shares in a company, roads, clean air or whatever) get to set the price. It's not an argument I endorse, but it's one most of the kinds of libertarians represented in the comments at that link would be unwilling to disavow for suppliers other than governments.

  13. “But rich people contribute so much more to society beside their taxes. If their extra benefits from civilization should be incorporated into their taxes, their extra contributions should be deducted from their tax.”

    Two thoughts on this hypothetical argument:

    1. Money, or at least remuneration, appears to me to be a somewhat noisy measure of value creation.

    2. I read in an ad on a plane once (actually a million times) — "In business you don't get what's fair, you get what you negotiate." (Some) rich people want to negotiate a lower fee for social order; let's saya whole lot of other people don't agree. Since achieving social order depends ultimately on the consent of those other people, they have some leverage. Let the negotiations among well-informed people begin, or rather continue; I'm sure they can reach a mutually agreeable free exchange of value. Who are we to call such an agreement "morally illegitimate?"

  14. How does one account for CEO pay?

    Classic agency problem; capture by rent-seeking parasites. It was clear as early as 1932 that this is where we'd end up.

    To be clear, with "parasites", I refer to those who pillage the corporate treasury while at the same time destroying the value of the firm whose owners have hired them as stewards. A CEO who builds value in excess of what he extracts might be just as greedy, but fair play to him. As long as the ox's treading out the corn enriches shareholders and fellow employees, he should not be muzzled.

  15. Brett:

    “Fair means you pay for what you get, and get what you pay for. Fair does not mean that Bill Gates pays $10,000 for a happy meal at McD’s."

    If Bill Gates were taxed on the basis of the government services he has received, he'd be paying a high tax rate indeed.

  16. Why bother with this line of thought? Why not just point out that Somalia is the libertarian's paradise: no fiat currency, no taxes, no welfare state spending, no market regulations, and private enforcement of contracts. Libertarians should be flocking to the paradise on earth that is Somalia, right? It is everything to which they aspire our country to be.

  17. Actually, if you were to look for a libertarian paradise, Hong Kong under British rule might have come close. Somalia isn't so much an anarchy, as much as it suffers under a plurality of governments competing for control.

    Barry, easy claim to make. Not so easy to back up, unless you go all tautological on us, and define not having your wealth taken away as a government service. Which line I have seen some liberals adopt…

  18. Hooray, we don't have to pay Congress anything because they have such high status, right?

    I think this analysis breaks down on the 'rank' problem.

    "Close scrutiny suggests that this pattern reflects the workings of an implicit market for high-ranked positions in every work group."

    I'm skeptical of this interpretation. Or at the very least it seems to me there are other competing interpretations. Perhaps for example many of the high 'rank' people are afraid to push hard to get what they are 'worth' under your analysis. Perhaps they value an already established position rather than the problems of proving themselves again somewhere new. Perhaps they are not fully aware of their own worth. Perhaps they get other things out of it (they get a more satisfying job?). It seems to me that reducing it all to rank-order positions is a bit too pop-psych.

  19. Somalia isn’t so much an anarchy, as much as it suffers under a plurality of governments competing for control

    Libertarians are funny. Almost as funny as Christians.

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