QandO

June 10, 2004

Re: Distribution
Posted by Jon Henke

(link via Pejman) Robert Lucas has a very interesting essay on the economic fundamentals and theory of growth...

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother.

This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor.

The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.

On the other hand, there is also a cost--two separate costs, really--to redistributing. The first cost is to those who have money taken from them. That is, perhaps, a small cost since the wealthy will tend to place less marginal value on the money expropriated from them than would a less wealthy person.

However, there is also an opportunity cost - a cost not readily measurable. It manifests itself in three ways:
1: The opportunity lost to the wealthy to spend that money - and to create opportunities with the resources they value.
2: The lowered incentive to produce - among the more wealthy - due to lowered potential return.
3: The lowered incentive to produce, thus lower production and higher general cost of production - among those receiving benefits - due to a reduction in the negative consequences of not working to potential.

The long and short of it is this: in the short term, the cost of redistribution on society may not be that high, and the poor will likely benefit. In the long term, however, the poor will have fewer resources available them, since the costs have been redistributed for short term, non-productive gain.

Today's poor may thank you, but tomorrow's poor will not.

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