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10.2 REDISTRIBUTION

Extensive redistribution (reallocation of the results of productive activity in some other way than purely on the market for factors of production) is a part of every economy in the modern world. It has also been a part of human history since time immemorial. Recipients of income from productive activity provide a proportion of that income to needy fellow citizens and/or the poor in other parts of the world in the for m of alms, gifts, sponsorship or charity donations. Taxes — vital for funding state pension and social security systems and for financing public goods — are another for m of redistribution.

Neoclassical microeconomics, however, more or less ignores this phenomenon. It argues that in conditions of microeconomic equilibrium, the distribution of the results of economic activity in a market economy corresponds to the gains (marginal product) of the individual agents involved. If an agent's economic activity is to be maximally efficient, the distribution of the results must correspond to the marginal product of the individual factors of production and of the individual agents. Hence, a profit-maximizing model firm will pay an employee a wage equal to the marginal product of that employee's labour, the rent on agricultural land will correspond to the marginal product of that land, and so on. The profit of an entrepreneur (assuming free market entry) will be at a standard level that can be derived from the marginal product of capital.

This distribution is consistent with market logic (especially given perfect competition), so redistribution is treated by microeconomics de facto as a violation of efficiency resulting from the fact that the economy does not consist solely of agents matching the homo economicus paradigm. In standard microeconomics, economic (i.e. profit-seeking, exclusively own-material-gain maximizing) behaviour in the narrower sense is the norm, while redistribution is in some way imperfect and flawed.

Yet it is precisely at this point that economics, with its "economic man" paradigm (homo economicus agents maximizing their own prosperity subject to given constraints), departs from reality. The Darwinian principle of survival of the fittest (which to a large extent also holds for economic institutions and relations) has led advanced societies to redistribute approximately 50 per cent of the income they generate. Over the last 100 years the redistribution-to-in- come ratio of advanced economies has been rising, and the living standards of redistribution-dependent households have been rising even faster. This leads us to believe that it is wrong to dismiss redistribution as a "flaw in the system" or a "non-economic phenomenon” and that, on the contrary, the taking into account of the joys and sorrows of others is a highly economic phenomenon. The incidence of altruistic and cooperative traits in individuals' economic preferences and the fact that social cohesion can be classed among the determinants of growth and among the necessary conditions for sustainable economic development are consistent with this belief.

To construct descriptive models of redistribution in various decision-taking situations, we need to understand the motivation of the individuals involved and identify the reasons why people often take into account the joys and sorrows of others, be it directly by supporting those close to them or indirectly by accepting taxation, where the state intermediates the redistribution process.

10.2.1 THE SUPPLY SIDE OF REDISTRIBUTION (THE WILLINGNESS TO FOR GO PART OF ONE'S PERSONAL PROSPERITY) DERIVED FROM THE SOCIAL NATURE OF INDIVIDUALS' PREFERENCES

As mentioned earlier, human individuals group together and for m communities in the interests of their own survival. A necessary condition for establishing and maintaining a community is mutual trust. Greater mutual trust implies an economically stronger and longer-lasting community. This holds not only for communities such as firms, but also for economies as a whole.[1]

Appropriate control and regulatory authorities of higher instance, in particular the state, can enhance mutual trust and, as a result, strengthen the economy as a whole. Such control and regulation constitutes sui generis a positive externality. It reduces — at the state's expense — how much individuals need to spend on determining whether a potential business partner is reliable, on hiring legal services, on creating reserves against unpredictable action by uncooperative business partners, and so on.

Our approach to modelling these problems involves generalization of the agent's economic criterion as applied in this book, in the sense that we assume that the agent is averse to situations that entail a high probability of extinction, including extinction of other agents or of the community. Minimization of the probability of extinction enables us to compare different extinction threats. The case of a single threat — that of a lack of money — accords with the standard rationality of homo economicus.

There are many reasons for taking into account the joys and sorrows of others. In the following sections we will describe at least the most important of them in detail.

10.2.1.1 TAKING INTO ACCOUNT THE INTERESTS OF OTHERS WHEN SUCH ACTION DIRECTLY INCREASES THE PROSPERITY OF THE INDIVIDUAL ("PSEUDO-ALTRUISM")

This motive explains social behaviour within the framework of the neoclassical homo economicus paradigm. It covers, for example:

• the for going of immediate profit by a firm in order to enhance its reputation and thereby increase its future profits,

• conspicuous giving by individuals in order to increase their social standing,

• sports or cultural sponsorship that a firm can use in its marketing to increase its profits,

• the funding of a political party by a firm in order to increase its chances of penetrating a lucrative restricted market (insurance, banking, pharmaceuticals, etc.) or of winning a lucrative central or local government contract,

• the finding that cooperative behaviour — enabling membership in the set of "reputable firms” — reduces the costs of checking the integrity of economic partners.[2]

All these manifestations of unselfish behaviour can be explained by standard microeconomics. They are de facto cases of rigorous application of the principles contained in the homo economicus paradigm.

10.2.1.2 THE UNCALCULATED NEEDED TO DO GOOD (HARD-CORE ALTRUISM)

Uncalculated selflessness is a characteristic of human behaviour. Examples include:

• the urge to protect one's own and others' children, the elderly and the frail from material hardship,

• the urge to provide alms (anonymously, without calculating, for internal reasons only),

• the sense of wrongdoing associated with refusing the outstretched hands of a beggar.

These are actions in which the altruistic urge manifests itself irrationally, "without cause” and without logical explanation, and is directed exclusively at the benefit (survival) of others. This "hard-core altruism” described in more detail in section 10.1, can lead to self-sacrifice in favour of another individual or the community

Manifestations of altruism towards unrelated human beings were and are a necessary condition for belonging to the community per se, and are therefore a consequence of biological evolution.

We believe that these reasons for unselfish behaviour cannot be explained by economics (not even generalized microeconomics) in any other way than simply as a biologically given part of an individual's motives. Such altruism does not involve deciding between alternatives — an individual either does or does not have an unselfish motive. If he does, the problem can be modelled using generalized microeconomics, for example by maximizing the probability of simultaneous survival of the decision-taker and the person or community he is protecting and analysing the impacts of this maximization on the distribution of economic goods between them. We describe such models in section 10.3.

10.2.1.3 RECIPROCAL ALTRUISM

Reciprocity can also be a motive for altruistic behaviour. An individual does good in the expectation (backed by his own experience or by experience learned, for example, from his parents or from books) that those around him will do likewise. Manifestations of responsibility (provided and expected) towards related and non-related vulnerable individuals are a necessary condition for cohesion and for the ability of human society to survive and are therefore a result of biological and cultural evolution and cannot be derived from purely economic motives.

10.2.1.4 THE URGE OF INDIVIDUALS TO GROUP TOGETHER IN CLUBS

Individuals have a specific interest in taking part in club activities. Clubs are based on mutual support among agents bound by a common interest They arise in situations where individuals have, for example, a common hobby and where the pursuit of that hobby is conditional on having common property (e.g. a playing field or gym), as none of the individuals can afford such property on their own. The same property often provides a benefit — a positive externality ( for instance the ability to attend a football match) — to non-members of the club. In such case, the running of the club is funded partly from private capital and partly from public capital.

Something similar applies in the case of the prosperity of a town, to which its citizens are the main contributors. The citizens' sense of belonging to the local community makes local taxes and voluntary work more acceptable to them.

In addition to clubs, various coalitions, lobbies and political groups are formed on the basis of mutuality. Although these often appear to be defending the public interest, what they are really trying to do is gain an advantage over the "rest of the world”.

An interesting theory dealing with this issue is Buchanan's economic theory of clubs,[3] which regards a club good as a cross between a purely public good and a purely private good. Club goods are rivalrous and excludable and partly have the character of public goods, although only within a given group of consumers (the club). The group (club) is the owner of the good and shares the acquisition costs and utility arising from it. Solidarity with the club prevents the danger of overuse of the good, so there is no risk of Hayek's "tragedy of the commons”.[4]

On the other hand, club goods may be exposed to the opposite danger, referred to as the "tragedy of the anticommons”.[5] This danger consists in the under-use of resources as a result of the over-restriction of consumption. Here, by contrast, solidarity with the club can exacerbate the problem if very limited and exclusive membership is seen as shared utility and so the existing members block an otherwise economically rational reduction in the annual club membership fee through the taking on of new members. Such membership in an exclusive and expensive club represents a switch from conspicuous leisure (characterizing the leisure class) to conspicuous consumption.[6]

Generalized microeconomics gives us some ability to model the relationship between the individual and the club. Suppose, for example, that a decision-taker regards a threat to the club as a threat to himself and that the club's revenue (the membership fees of the other members) D is fixed, the boundary of the club's extinction zone is B and the decision-taker has income d and subsistence level b. The decision-taker provides the club with an amount a from his income. The probability of simultaneous economic survival of the individual and the club is

We are seeking the optimum, so we set the first derivative equal to zero:

The domain of function p'[a) is the semi-closed interval (0, d - b), since we cannot expect the provision of a subsidy that is 100% self-destructive.

Let us assume that the extinction threat to the individual is lower than the threat to the club (otherwise the decision-taker is more threatened and it is irrational for him to pay any membership fee to the club]:

Given this assumption, function p'(a) has values with the opposite sign at the extreme points of its domain:

Hence, given that p'(a) is continuous, there must be a root of equation p'(a) = 0 that is the member's optimal membership fee. Given the decreasing shape of function p'(a) (because, as can be demonstrated, p"(a) < 0 over the entire domain, hence function p(a) is strictly concave], there is just one root and so the optimal membership fee a* given parameters b, d, B and D is unique.

For illustration, Figure 61 plots p(a) for the case where d = 3, D = 2, b = B = 1. The optimal membership fee here is a* = 0.5.

It is worth noting that under the given conditions the membership fees of the individual members are not equal, i.e. each member has a different optimal membership fee. However, this ceases to hold if we abandon the assumption that the membership fees of all agents except the decision-taker are given. In this case we arrive at a much more complex problem where we need to combine the approaches of generalized microeconomics and game theory. We will consider the possibilities of these approaches in future research.

Figure 61: The probability of simultaneous survival of the individual and the club versus the individual membership fee

The probability of simultaneous survival of the individual and the club versus the individual membership fee

10.2.1.5 MUTUALITY (SOLIDARITY) OF COMMUNITY MEMBERS

A sense of belonging to the community makes an individual willing to make sacrifices to eliminate external threats, be they through degeneration of the community or through a threat to the community from outside. He may do this out of simple fear or out of feeling for the community (environmentalists speak of the "principle of collective guilt' that a growing proportion of the population shares regarding the environment].

Mutuality manifests itself, for example, as:

• an effort to prevent the community (e.g. a firm, a family, a club or an in for mal group of collaborating firms] from collapsing,

• an urge not to damage the environment or opposition to the misuse of science due to the fear of human extinction,

• a willingness to sacrifice part of one's prosperity to educate "one's own" doctors and other educated people,

• a willingness to support the strengthening of the community against external enemies (support for the army] or against internal freeloaders (support for the police).

The urge to protect the community can be explained by the urge for cooperative, social behaviour that has arisen during human evolution. The collective utility strategy here can also be explained in terms of the biological mechanisms through which an individual subordinates himself to the majority or to the strongest individuals in a hostile world and in difficult situations.

Such evolution, however, can also result in a "moral imperative”. To explain this, we need to take into account a far broader range of causes of mutuality, including upbringing, value systems and respect for truth and freedom.

It has been demonstrated that people [individuals] in smaller communities behave more considerately, decently, helpfully and cooperatively. Their willingness to work together and help each other, including by redistributing individual wealth among members of the community, is also higher.[7]

We will present additional models of altruistic behaviour and belonging to the community based on generalized microeconomics in section 10.3.

10.2.1.6 RESPECT FOR AUTHORITY

Since prehistoric times, the fight for survival has led people in the majority to accept and welcome a social contract with an authority (e.g. a tribal leader or the state]. In return for its position of supremacy, this authority provides others with the ability to organize resistance against external and internal threats. Under this contract, people expect the ruler to prevent mutual wrongs by means of penalties and to encourage cohesive behaviour by means of rewards. The authority defines the space for "fair" individual competition, thereby allowing people to benefit from trade in the market. The authority makes life more secure and more predictable.

One of the elements of respect for authority [and in recent decades perhaps one of its main elements] is respect for the media, especially television. Surprisingly, even the better educated classes of society regard instructions emanating from the television as a benchmark of values and behaviour. People often stop conducting their own analysis and incline to believe "proven” opinions. The louder the voice, the stronger the inclination. If the opinions promoted on television include the need to pay taxes or make donations, the social acceptability of redistribution can be positively affected. If, on the other hand, voices on television condemn the unemployed as workshy, people's willingness to cede part of their earnings to others will fall sharply.

People's inclination towards authority and their willingness to give up part of their prosperity to it of course rise at times of change, at times when a sense of uncertainty and threat dominates. At such times, people are willing to pay a premium for security.

A specific feature here from the microeconomic perspective is the hierarchical structure of decision-taking and the dual assessment of an agent's economic situation (his own and that of the authority above him]. Sections 10.3 and 10.4 contain hierarchical models based on generalized microeconomics.

  • [1] Fukuyama, R.: Trust: The Social Virtues and the Creation of Prosperity. London: Hamish Hamilton 1995, proved empirically that economically advanced states display a higher degree of trust (by comparison with other states) in relations between economic agents, primarily as a result of high transaction costs in poorer economies with a lower degree of trust.
  • [2] This is illustrated by Frank's parable of the hawks and doves. See Frank, R. H.: Microeconomics and Behavior. New York: McGraw-Hill, 2006, pp. 236-39.
  • [3] See, for example, Buchanan, J. M.: An Economic Theory of Clubs. Economica 32, 125(1965): 1–14, and also Frohlich, N., Hunt, T., Oppenheimer, J., Wagner, R. H.: Individual Contributions for Collective Goods: Alternative Models. The Journal of Conflict Resolution 19, 2(1975): 310–29, and Hart, J. A., Cowhey, P. F.: Theories of Collective Goods Reexamined. The Western Political Quarterly 30, 3(1977): 351–62.
  • [4] Hayek, F. A. von: The Road to Serfdom. Chicago: University of Chicago Press, 2007 (first published in 1944).
  • [5] See Heller, M. A.: The Tragedy of the Anticommons. Property in the Transition from Marx to Markets. Harvard Law Review 111, 3(1998): 621–88, or Buchanan, J. M., Yoon, Y. J.: Symmetric Tragedies: Commons and Anticommons. Journal of Law and Economics 43, 1(2000): 1–14.
  • [6] See Veblen, T.: The Theory of the Leisure Class: An Economic Study of Institutions. New York: Macmillan, 1899, pp. 68–101.
  • [7] See Milgram, S.: The Experience of Living in Cities. Science 167, 3924(1970): 1461-68.
 
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