This is a post I originally posted on my LiveJournal but thought it was worth copying over.
It’s so good to be reminded why I do my subject!
A bit of background: I’ve always been left of centre on a variety of issues and for several of my teenage years I was on the far left – usually calling myself a socialist but for about 6 months or so being a pretty full-on communist (public ownership of property and all that). These days I call myself a social liberal.
The point of this post: Over the last two weeks in Micro we have been looking at Welfare Economics and I have learned a particularly interesting result. Given a utilitarian social welfare function where all individuals are given equal weight and a social planner who can perfectly observe individual’s labour supply/effort and consumption, then the best possible outcome perfectly embodies “from each according to his ability to each according to his need” – each person gets the same utility from consumption and the most productive people work the hardest.
I’ll try to make that a bit clearer, because that paragraph’s prime jargon (I know, I’m just showing off)! The social planner is only interested in one thing – getting the highest possible welfare for society. This welfare is just the sum of the welfare of each individual – which economists refer to as utility (this concept deserves a post of its own sometime when I’m feeling philosophical). In our simplified little model it has two components – consumption and leisure (which is total time minus time spent working). It’s not a straightforward linear relationship – both components have diminishing marginal returns (for each extra unit you have the less welfare is added). This is pretty intuitive – if you’ve got very little food then getting some more makes a lot of difference, but if you’ve got a fair bit then having some more doesn’t matter so much (although it’s still nice). Likewise leisure, having your weekends off makes a big difference but once you’re down to a three day week, getting an extra half day really doesn’t improve things much. For simplicity we make the components “separable” – i.e. they don’t interact. If you’re interested in how they could, check out Becker (Nobel-prize winner) but it’s not what we’re interested in here.
So into this mix we add a production function – how inputs result in output. We stick to something very simple – number of hours working times a constant that represents productivity, which varies across individuals. Then there’s the constraint that society can’t consume more than it produces (you can’t save or borrow – we want clarity rather than stringent realism because then the results tend to get lost in a mass of complexity). Then it’s just a simple maximisation problem for our social planner.
Who is the social planner? A disinterested individual? (NB that’s disinterested, like impartial, not uninterested! So many people misuse this word). The government? A committee? A collective? It doesn’t really matter, all that matters is that they have this one (and only this one) objective. This requirement does clearly cause a fair few problems when looking at the real world, and there’s a vast and fascinating literature on the behaviour of politicians, but that’s for another blog post.
Anyhow when you do the maths (a nice tidy Lagrangian in this case) you get this interesting result: where everyone has the same utility function (i.e. get the same welfare from each unit of consumption and each unit of leisure as everyone else) each individual gets the same amount to consume but the more productive you are, the harder you work. This means the more productive people are producing a lot more than the others, so there’s a lot of redistribution going on – think about the utility function as measuring “need” and productivity as “ability” – then it’s classic Marxism in a simple orthodox model.
So why aren’t more economists communists? Because now the interesting stuff happens – we introduce imperfect information (which needs several blog posts of its own – this is the stuff I *love*).
This is really a fascinating view of how much difference information makes – when looking at perfect competition, perfect information is one of the requirements for competitive markets to provide an efficient equilibrium (in Economics jargon efficient means that you can’t find another outcome that benefits someone without hurting someone else), yet here perfect information is what we need for communism to be the best possible system. Of course the models in both cases are hugely simplified, particularly in the communism case, where the productive function has no subtlety whatsoever, but I still think it makes an interesting point.
What exactly is that point? Perhaps if we have perfect information it doesn’t matter how we organise our society? Actually no, although I imagine many centrists/right wingers would love that to be the case. When looking at competitive markets the distribution of resources is barely affected by trade, even if everyone’s lot is improved, whereas our social planner goes in for drastic redistribution, so much so that your more productive folk end up with lower welfare than the less productive because everyone gets the same amount of “stuff” but those able workers have to do more hours (cue Daily Fail screeching about benefit scroungers).