Pareto Efficiency and Income Redistribution


This is a continuation of my last post when I introduced the economic concept of Pareto Efficiency. 

It is my assertion at our globalized economy is approaching the point at which it is no longer possible for one person to improve their lot in life without the necessity for someone, somewhere to lose ground.  That is the classical definition of Pareto Efficiency as coined by Italian economist Vilfredo Pareto in the 19th century.

Nothing raises the ire of right wing politicians and economists more than the notion of income redistribution.  “Communism!” they scream and point to the failed economies of the former Soviet Bloc, without realizing that the totalitarian Stalinist form of communism that gained influence in the latter half of the 20th century had about as much to do with the original ideas of Karl Marx as the NFL has to do with FIFA.  True Marxism was extremely democratic and goes beyond mere majority rule to the point of consensus.  Karl Marx himself famously declared;

“I do not know communism, but a social philosophy which has as its aim the defense of the oppressed cannot be condemned so lightly.”

That doesn’t sound much like Stalinism to me!  But I digress…

Before I go any further it must be noted that a discussion of Pareto Efficiency is not a moral one.  Pareto Efficiency is a mathematical concept and is about as moral is 2+2.  The fact that we are approaching Pareto Efficiency on a global scale assumes no moral imperative but it does have huge moral consequences.

The right wing argument is that if we force the wealthy, through taxation to give up some of their income to help the less fortunate the loss at the top of the ladder will be far greater than the gain at the bottom and there will be no incentive for those that at the bottom to strive for something better.  But as our economy approaches Pareto Efficiency the lie of that argument is exposed. The fact is that in a Pareto Efficient economy everyone, the wealthy and the poor, must run faster and work harder just to stay in the same place and the only way you move up is if somebody moves down.  Our resources are finite so for one to have more, someone must end up with less.    

In short the only way for the poor to move up is through some form of income redistribution.    That’s not communism and it’s not capitalism, it’s just first grade math.   2+2 =4 but so does 1+3 and 3+1.  Not to belabor the point but if 4 is all there is and you have 3, the only way for this to equal out is for someone to only have 1.   If the person with 1 wants 2 the only way for that to happen is for you to give it to him.

So where am I going with this? 

Honestly, I don’t know.  Since the Arab spring and the occupy movement of 2011 hardly a day goes by when we don’t hear about growing income inequality.  In my humble opinion that’s because the so called free market no longer works in a world that has reached Pareto Efficiency.  I don’t have any solutions.  All I know is that the rich need the poor to buy their goods and the poor need the rich to keep producing.  We are locked in a sort of symbiotic relationship and if we are to avoid conflict we need to recognize the situation for what it is.

 I’m not naïve to the fact that we will never reach true income equality.  I don’t believe that is any more practical or sustainable than a world in which 1% percent of the population controls 99% of the wealth.  But I am also not naïve to the fact that what we have now is nothing more than a giant pyramid scheme and we all know what happens to a pyramid once the people at the bottom figure out they’ve been duped.

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