Update on the Costs of Regulating Inequality

Josh Wright —  9 August 2006

UPDATE: Larry has posted a very thoughtful response and overview of the debate (link below).

Larry Solum was kind enough to link to my post on economics and arguments about social justice, and raises the following concerns about my argument :

I’m not sure I really understand, but I wonder if there is a sense in this post that the normative case for equality must be cashed out in terms of “costs” or “benfits”. If so, this seems to me to miss the point of distributive justice theories (in their most sophisticated forms). Such theories do conceive of inequality as a cost–that would be to make a category mistake–confusing a deontic constraint for a consequentialist consideration. I’m certainly not accusing Ruhl or Wright of making this mistake. I just can’t quite tell what they are trying to say.

Let me attempt to clarify.

I understand that one might make an argument for regulating Apple’s business conduct, or kidney transactions, on deontological grounds. I also understand that taken on those terms, my argument that one should understand that regulatory intervention seeking to reduce inequality comes with costs (say, in terms of reducing consumer welfare) is non-responsive. Simply put, I was responding to specific claims that economics has nothing to offer in terms of the normative debate about these types of interventions because “conventional economic models are indifferent” as between any market structures that generate equivalent total revenues. In sum, I was responding to a debate that I presumed had at least some consequentalist element, i.e. would a prohibition on vertical integration in the music industry condemn vertical integration in the music industry decrease consumer welfare? (I understand that the context of the debate is especially difficult to absorb from just my post, since the discussion occurred on three different blogs!)

One way to approach this type of question is to assume that there are zero economic costs to the intervention at issue by drawing upon a “straw man” version of economic theory, i.e. no impact on consumer welfare in this example, and that therefore any costs of inequality (or anything else) justify intervention. Another method is to claim that obsolete economic models are not capable of contributing to this debate and that therefore these questions of “social justice” can only be resolved by appealing to non-economic approaches. A third way to address these issues is to take the strictly deontological approach. This is common in the kidney market debate, i.e. organ markets will commoditize, which is bad, and we should prohibit live-saving transactions in these markets in the name of this principle.

I presumed we were not talking about the third approach, rightly or wrongly (why all the talk about economics and what it has to say about the interventions if we were? Wouldn’t the right answer if that was the case be, “who cares what the consequences of the regulation will be?”). Also, antitrust has clearly adopted the consumer welfare approach rather than regulating business conduct by relying upon some other non-economic principle. In addition, the context of the posts from Madisonian should help to give context to the discussion wherein the question was under what conditions the consumer welfare metric might systematically underestimate social value, i.e. these trade-offs matter. Further, in the post I concede that there are things that economics cannot do:

“I am not claiming that economics is capable of addressing all of the social concerns that Frank seems to believe justify intervention. To the contrary, I am quite sure it cannot (and believe it should not).”

So, if we are to have a consequentalist discussion of a possible regulation of “inequality,” the idea that economics cannot contribute to the discussion is without merit. Finally, to the extent that we wish to engage in such a discussion, it makes sense to talk about actual trade-offs rather than hand waving around them. I certainly will not speak for J.B. Ruhl, but I presume that what he and I were getting at (at least on this one point) is that we should have realistic discussions about the trade-offs involved in terms of consumer welfare when we talk about attacking Apple’s business practices, or lives lost when we talk about prohibiting kidney transactions. I presume that any sensible policy discussion of antitrust or organs would want this information.

Finally, and to reiterate, if one is to have a strictly deontological conversation about any of these things, economics doesn’t have much to say. That just wasn’t the conversation we were having (at least that I was having), and it surely isn’t the conversation that occurs in antitrust (the context we were discussing). I hope this helps to clarify.