Payment for winning the genetic lottery

One of the more interesting issues in the inequality debate is how we should treat the genetic lottery that contributes to unequal outcomes.

In a recent Econtalk podcast, Mike Munger and Russ Roberts touched on this issue in their discussion of profits and entrepreneurship (the quotes below are from the Econtalk website, so are not exact):

Munger: [T]he question that John Rawls raised in the Theory of Justice and elsewhere was: Why would any of us think that we deserve any of the character or effort or intelligence that lead us to perform well? … Rawls says you got those from your parents. You won a genetic lottery. Those are morally arbitrary. We may decide to keep some of it, but only what is necessary to motivate you to do what’s good for society. The things that you know, that you do, your character–those are collectively held. They are not privately owned, according to that theory of desert. … If you start from the premise that all our talents and character are collectively owned because they are morally arbitrary, then the only reason that anyone gets to keep profits is to motivate them to do what we want them to do for the public good. …

Roberts: … [M]y first thought is, once you give the power to the state to allocate the rewards you are not going to be in the world of justice like you hope. You are going to be in the world of rent seeking and power. My second thought is, so okay, I’m willing to admit that people would still be hedge fund managers–assuming they do something valuable, which I think many of them do. Not all financial folks are doing productive things these days, but many do. And you’d say: I concede the point that a billion is too much in the sense that less than that would still motivate them to do a good job. How would you pick the number that you think was the right number, and how would you enforce it?

Munger: It is really interesting that most of us think, if we are defenders of capitalism–no one that I know would defend the greed claim. What we defend instead is that what the price system does is provide information about the scarcity of resources so that it’s easier for us to correct mistakes.

I appreciated that Roberts and Munger do not argue that people receive exactly what they deserve, which is equal to their value to society. Instead, Roberts and Munger hit on the two of the points that I usually make about how we should respond to the genetic lottery. First, government does not equalise outcomes. More often than not, it entrenches the status quo, with redistribution to powerful interest groups (for example, home owners or agribusiness) and not the economically weak.

The second point is the more interesting. How do you decide how much a person should receive to motivate them to use their genetic talents wisely and allocate them to their most valuable use? As Roberts and Munger ask, how much should Steve Jobs have received for all that he did? At what point would you say, “Steve, you’ve received a lot of money, and as you received your talent in a lottery, you can’t keep any more”? How would this have affected his effort in delivering the raft of Apple consumer goods that so many of us use? I don’t know, but neither does the person determining what is someone else’s just deserts.

(And as for most Econtalk podcasts, the rest of the discussion is worth a listen.)

5 thoughts on “Payment for winning the genetic lottery

  1. “How do you decide how much a person should receive to motivate them …? I don’t know, but neither does the person determining what is someone else’s just deserts.” In combination with Munger’s comment about the price system “provid[ing] information about the scarcity of resources so that it’s easier for us to correct mistakes” this would presumably lead to the conclusion that government should just get out of the way and let the free market work its magic. Which I think is a reasonable conclusion as far as it goes.

    However, maybe I’m missing something, but this doesn’t seem to exhaust the discussion. Going back to the Steve Jobs example, the contention seems to be that we can’t effectively determine collectively (i.e., through government) how much someone like Jobs should be rewarded. But at the same time we have collectively determined the various ways in which Jobs and other entrepreneurs are able to find advantage in the free market system, for example, that Apple and other companies should be able to have government-granted exclusive rights (e.g., patents and copyrights), that these rights should have certain terms and not others, and that corporations can call upon government to coercively enforce these rights.  This seems a case of having one’s cake and eating it too: government is good, but only when it’s to my advantage.

    1. Fair point. The Apple-Samsung litigation going on at the moment is a good example of the untended consequences of trying to determine just deserts for innovation from the top.

      Personally, I now find myself sitting close to the Boldrin and Levine camp on this:

      1. Thanks much for the Boldrin and Levine reference; I’m reading their book as I write. (As someone with experience in the open source software world this is a subject of great interest to me.) It’s worth noting that Steve Jobs was in fact absolutely obsessed with the thought that Google, Samsung and others were “stealing” Apple’s ideas. To quote him: “I will spend every penny of Apple’s $40 billion in the bank, to right this wrong.” Which as an admirer of Apple’s innovations and a (very minor) Apple shareholder  is a pretty scary thing to contemplate.

  2. A graduated expenditure tax (GET) used to finance across-the-board wage subsidies avoids the problem of income and wealth inequalities, and is therefore compatible with the “natural” distribution of income in a market economy (I think).  See Kaldor’s book, The Expenditure Tax.  It was first proposed by Irving Fisher.

    1. I agree with the use of a GET (in place of, not in addition to other taxes). It might constrain some inequality at the limits – although that should not be the primary purpose. However, I am skeptical of wage subsidies. Subsidies tend not to go where they are intended, but find their way to the fixed factor.

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