The blogosphere is aflutter over Harvard economist and former chairman of the Council of Economic Advisors to Bush 43, Greg Mankiw‘s recent article “Defending the One Percent“. Mankiw’s paper mostly argues against the classic utilitarian reason for redistribution – a dollar is more useful to a poor person than a rich one. However, near the end of the paper he proposes that an alternative basis for fair income distribution should be the just desserts principle where everyone is compensated according to how much they contribute. Mankiw believes that the recent surge in income inequality is due to changes in technology that favour superstars who create much more value for the economy than the rest. He then argues that the superstars are superstars because of heritable innate qualities like IQ and not because the economy is rigged in their favour.
The problem with this idea is that genetic ability is a shared natural resource that came through a long process of evolution and everyone who has ever lived has contributed to this process. In many ways, we’re like a huge random Monte Carlo simulation where we randomly try out lots of different gene variants to see what works best. Mankiw’s superstars are the Monte Carlo trials that happen to be successful in our current system. However, the world could change and other qualities could become more important just as physical strength was more important in the pre-information age. The ninety-nine percent are reservoirs of genetic variability that we all need to prosper. Some impoverished person alive today may possess the genetic variant to resist some future plague and save humanity. She is providing immense uncompensated economic value. The just desserts world is really nothing more than a random world; a world where you are handed a lottery ticket and you hope you win. This would be fine but one shouldn’t couch it in terms of some deeper rationale. A world with a more equitable distribution is one where we compensate the less successful for their contribution to economic progress. However, that doesn’t mean we should have a world with completely equal income distribution. Unfortunately, the human mind needs incentives to try hard so for maximal economic growth, the lottery winners must always get at least a small bonus.