Christian’s Theory of Relativity

Posted on July 1, 2010 by

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Just in case you are worrying, this isn’t about E = mc2 or anything vaguely complicated. It’s a far simpler theory relating to inequality and its consequences, and in fairness, it isn’t really my own original theory, just my own way of arguing the point. On top of this, it is another small example of one of the many pitfalls of neoclassical economic theory. Finally, it is also a few musings on a philosophical question about happiness where I still can’t figure out what I believe.

I will begin with a brief description of the economic theory of ‘Pareto Efficiency’ before arguing against it, or perhaps not against the theory, but against the notion that economic efficiency should ever be placed above a just distribution of wealth. Pareto efficiency in short, means that an economy is arranged so that no change can bring about an improvement in outcome – resources are allocated in the most efficient way possible. This is a single, theoretical point which takes no account of the distribution of wealth within an economy but simply says that nothing can change that will bring about an overall improvement. I would argue that a lot of modern economic and social policy is aimed at removing these types of ‘inefficiencies’ from the market, a change that can be termed a ‘Pareto Improvement’. A Pareto Improvement is a change where someone can become better off without others being worse off, and it is here where I will challenge the assumption of this ‘improvement’, because unless the benefits are shared, then I do not think it to be an improvement at all.

Consider a hypothetical street with ten residents each with an equal income, say $50,000 per year. If it was discovered that this situation was inefficient, and that one person’s income could be increased to $100,000 without any change to the others, then this would be a Pareto Improvement. The overall income has gone up, and nobody is worse off. That is the theory. In reality, nine people are worse off, and one person might or might not be better off. Why? Well, I believe that above a certain minimal level, it is not the absolute income that is important, but the amount relative to those around you. So although the nine residents still have the same $50,000 to spend, they now all feel poorer. This is because they notice the things that the richest one now affords and that they cannot. Perhaps he has bought a Porsche and put in a swimming pool and hot tub which the others can’t afford to do. Before the ‘improvement’, everyone felt they were keeping up with society, and now they feel like they are falling behind. The one rich man might feel better off, but on the other hand, perhaps he now worries that the other neighbours might steel his car, or are jealous of his swimming pool. His trust is diminished, his suspicion has increased and he is anxious about protecting his wealth. In other words, this, in my opinion, would not be an improvement for society. How about if each resident got a $5,000 pay rise? This would certainly be better than the previously described case, but is still debatable whether everyone feels richer. Their place in society hasn’t changed. It could be likened to an audience standing and watching a concert – all are trying to get a better view, so they all stand on their toes. They are all taller, but nobody has a better view than before, because their relative height has not changed. What I’m fundamentally trying to highlight is the importance of fairness and some degree of equality. Even if wealth redistribution is inefficient in the traditional theoretical sense, I believe it can be efficient if this relativity within society is accounted for. Excessive wealth among few inflicts a negative externality on the rest of society, making everyone else feel poorer.

This is also related to the ‘Easterlin Paradox’, an observation first made in the 1970s that increasing levels of Gross Domestic Product (GDP) in rich countries have not been leading to an increase in happiness. Happiness is normally measured on a bounded scale, as a subjective measure between say 1 and 10, but this leads on to a separate important question relating to happiness – is it purely a subjective measure, and if so, can we really expect to improve it? If people live in poverty, but think they are happy because they have never seen anyone living any other way, is it a problem? If happiness is purely subjective and the key goal is to maximise it, then it could perhaps be argued that there is nothing wrong with drugging or brainwashing people into believing they are happy, as happens in Aldous Huxley’s excellent book Brave New World. If you were offered the opportunity to be eternally convinced that you were the luckiest and happiest person in the world, and nothing could possibly be better, would it be wise to accept the offer, even if it was based on no real, objective change? I believe there are certain objective necessities for happiness that must be met, such as having sufficient food, and basic freedoms to choose your own direction in life. However, I also think that the majority of how we feel is based on our observation of others and their way of life. I therefore think there is a strong justification to prevent or remove large inequality, or a lesser alternative, simply to avoid showing the poor what they don’t have. Globalisation adds to these problems. With satellite television now reaching even the poorest villages, people are becoming more aware of their relative poverty after seeing shows on MTV promoting the glamorous lifestyles of the rich. I have little doubt they would feel poorer after seeing such shows, and that they would be better off without having the option. Or is it still best for them to decide?

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