Christian’s theory of relativity

Posted on January 1, 2011 by


Global GDP

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’treally my own original theory, just my own way of arguing the point. On top of this, it isanother small example of one of the many pitfalls of neoclassical economic theory. Finally, itis also a few musings on a philosophical question about happiness where I still can’t figureout what I believe.

I will begin with a brief description of the economic theory of ‘Pareto Efficiency’ beforearguing against it, or perhaps not against the theory, but against the notion that economicefficiency should ever be placed above a just distribution of wealth. Pareto efficiency inshort, means that an economy is arranged so that no change can bring about animprovement in outcome – resources are allocated in the most efficient way possible. Thisis a single, theoretical point which takes no account of the distribution of wealth within aneconomy but simply says that nothing can change that will bring about an overallimprovement. I would argue that a lot of modern economic and social policy is aimed atremoving 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 becomebetter off without others being worse off, and it is here where I will challenge theassumption of this ‘improvement’, because unless the benefits are shared, then I do notthink it to be an improvement at all.

Consider a hypothetical street with ten residents each with an equal income, say $50,000per year. If it was discovered that this situation was inefficient, and that one person’sincome could be increased to $100,000 without any change to the others, then this wouldbe 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 bebetter off. Why? Well, I believe that above a certain minimal level, it is not the absoluteincome that is important, but the amount relative to those around you. So although thenine 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 otherscan’t afford to do. Before the ‘improvement’, everyone felt they were keeping up withsociety, and now they feel like they are falling behind. The one rich man might feel betteroff, but on the other hand, perhaps he now worries that the other neighbours might steelhis car, or are jealous of his swimming pool. His trust is diminished, his suspicion hasincreased 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 payrise? This would certainly be better than the previously described case, but is stilldebatable whether everyone feels richer. Their place in society hasn’t changed. It could belikened 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 highlightis the importance of fairness and some degree of equality. Even if wealth redistribution isinefficient in the traditional theoretical sense, I believe it can be efficient if this relativitywithin society is accounted for. Excessive wealth among few inflicts a negative externalityon the rest of society, making everyone else feel poorer.The Easterlin Paradox – Happiness versusGDP in the United States.

This is also related to the ‘Easterlin Paradox’,an observation first made in the 1970s thatincreasing levels of Gross Domestic Product(GDP) in rich countries have not been leadingto an increase in happiness. Happiness isnormally measured on a bounded scale, as asubjective measure between say 1 and 10, butthis leads on to a separate important questionrelating to happiness – is it purely a subjective measure, and if so, can we really expect toimprove it? If people live in poverty, but think they are happy because they have neverseen anyone living any other way, is it a problem? If happiness is purely subjective and thekey goal is to maximise it, then it could perhaps be argued that there is nothing wrong withdrugging or brainwashing people into believing they are happy, as happens in AldousHuxley’s excellent book Brave New World. If you were offered the opportunity to beeternally convinced that you were the luckiest and happiest person in the world, andnothing could possibly be better, would it be wise to accept the offer, even if it was based onno real, objective change? I believe there are certain objective necessities for happinessthat must be met, such as having sufficient food, and basic freedoms to choose your owndirection in life. However, I also think that the majority of how we feel is based on ourobservation of others and their way of life. I therefore think there is a strong justification toprevent or remove large inequality, or a lesser alternative, simply to avoid showing thepoor what they don’t have. Globalisation adds to these problems. With satellite televisionnow reaching even the poorest villages, people are becoming more aware of their relativepoverty after seeing shows on MTV promoting the glamorous lifestyles of the rich. I havelittle doubt they would feel poorer after seeing such shows, and that they would be betteroff without having the option. Or is it still best for them to decide?

Christian Williams

Posted in: Economics