Luck, Wealth, and Richard Posner

By James Kwak

I disagree with Richard Posner—the old Richard Posner behind the law and economics movement—on so many things that I always worry when he seems to agree with me. Did I do write something stupid? I wonder.

A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“* In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”

Posner now goes even further than I did: “I think that ultimately everything is attributable to luck, good or bad,” he writes, including the propensity for working hard, a low discount rate, and so on. “In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not ‘entitled’ to his wealth in some moral, Ayn Randian sense.”

He goes on—he is still Richard Posner, after all—to argue that tax policy should be concerned solely with incentive effects. High taxes on the wealthy are not unfair in any meaningful sense, and it is meaningless to say that rich people pay a disproportionate share of their income in taxes, absent some incentive-based argument. It does make sense to tax inherited wealth more than earned income, because of the incentives it creates. The same goes for investment profits, either because they are the product of luck (in the ordinary sense) or because people with lots of money are going to invest it anyway rather than consuming it all in the current period.

But I don’t think it’s quite right to say that tax policy should be entirely utilitarian. Right now, our country faces large federal government deficits, the prospect of growing spending on social insurance programs, and sorely inadequate expenditures on infrastructure and the safety net. To fix those problems, money has to come from somewhere. If rich people don’t have any particular moral entitlement to their wealth because that wealth is the product of luck in one form or another, isn’t it obvious that they should pay more in taxes than poor and middle-class people? Imagine three people stranded on a desert island and a genie that gives one person ten coconuts, the second person two coconuts, and the third zero coconuts. Who should share with the third person: the first or the second? You can get the same result by looking at the marginal utility of wealth, à la Diamond and Saez.

Now redistribution can go too far because of the incentive effects, but that doesn’t mean that redistribution is not an appropriate objective of the tax system. It just means that it has to be balanced against incentive considerations. There is a moral dimension to tax policy (although Diamond and Saez would call it part of utility maximization). It’s just the opposite of what Paul Ryan thinks it is.

* Of course, I’m not saying that Posner is copying my ideas, since (a) there’s virtually no chance that he knows who I am and (b) the ideas in that post, like most of my ideas, are pretty obvious.

37 responses to “Luck, Wealth, and Richard Posner

  1. I’m not clear on the implications of this. If rich people have no moral entitlement to their wealth, and therefore, to their property, this seems to imply that its okay to take it from them until they have no more than what everyone is morally entitled to. Is the argument that everyone is morally entitled to basic sustenance shetler, education, health, transport and other public services and this trumps individuals property rights?
    Isn’t the end result of this just basic collectivism?
    Not trying to troll, just very uncomfortable with the idea that all of life is luck and what you have achieved/failed to achieve is just a deterministic result, nothing you could have done to change it and since its luck, you have no rights to anything and it could (and maybe should) all be gone tomorrow.

  2. Be careful what you troll for, it very well can come true. The broader issue is wealth-vs- your health, and the truth behind the phrase “it is easier for a camel to walk through the eye of a needle, than it is for a rich man to make it heaven”. If there were a direct correlation between wealth and health, then the need to tax wealth people would diminish. Instead the wealthy age and die with all types of ailments stemming mostly from their bad behaviour because they had to much money and not enough sense. And now the unsustainability of it all has them tapping the lower classes in the name of their health issues. The wealthy have a better chance with a casino and dice, rather than thinking to much about the losers and their chances with luck.

  3. There’s one more element to consider – the return or cost to society of that wealth. Maybe teachers should be taxed at a lower rate than, say, the LBO specialists at Bain Capital, who add little value from their financial engineering. Those working in a cigarette factory should be taxed more than, say, workers in a car factory.
    .
    I know it’s impractical. Further, tax deductions or credits, the usual way we incentivize certain economic activities, “distort” the tax code – sometimes in unexpected ways. However, unlike some poor schmo stuck in a mill town those at the very top have a choice where to employ their talents. When they choose unwisely, maybe they should pay for the privilege?

  4. I think there are many justifications for progressive taxation and I do think that socities should have red lines and definitions of acceptable and moral behaviour.
    I don’t think that defining the wealthy as having fewer property rights or less morally worthy ones is one of those justifications. Saying “You have more and therefore, as part of our society, should give more to support those that don’t and to make sure that our society functions on a deep level ” is very different, in my view, from saying “You don’t deserve what you have because its all luck. Others who have less deserve what you have and have the right, and through government, the force, to take it” .

  5. How do you define return to society? Is teaching kindergarten more or less value than teaching chemistry? We replace supply & demand with imputed social values? Who calculates these? I am not convinced that the teachers I have seen in public schools add more value than a banker, but your experience may vary. If rich people don’t have the moral entitlement to their property then who does? People who don’t have property? Lindblom dealt with this in “The Market System”. Not perfect but better than collectivism.

  6. Frank Knight put it perfectly many years ago: inheritance, luck, and effort, in that order. If you acknowledge inheritance as luck, then luck is clearly the dominant influence.

  7. this is absurd. if wealth is the result of luck and if you can take it from someone and give to another, you can also cut off someone’s beautiful face (more likely to be the result of luck) and give it to another who is ugly. why don’t you cut tall people’s height and add to short people’s heights? I wish these corrupt-minded people to leave this country voluntarily and immdeidately, and go to a communist country (if there still is any) and live there happily thereafter.

  8. The argument I always trot out when I discuss this issue with my right wing friends is that a lot of what paying taxes is about is paying for stuff that increases your own wealth but that are individually irrational to pay for, i.e. its a lot about market failure. The example I use is street lights and traffic signs.

    And I stress the point by noting that I knew a woman who grew up wartime Beirut and she said that actually you don’t need any of that stuff people just figure it and the whole thing works. But she also said that its way nicer if they’re there.

    You see, we’d all muddle through in the libertarian world but paying for collective stuff makes us all better off. The smart hard working types are actually benefiting from someone coming along and confiscating some of their money and using it to pay for the stuff that makes a developed country a neat place to live.

  9. Seriously, 480 people in USA are collectively worth 2.08 TRILLION $$$$.

    And that’s NOT ENOUGH? Still turning that Eye of Sauron out over the trashed and empty MAIN STREETS looking for a penny to *tax*?

    No one f’n CARES what they want or think. It’s a WAR. What? War is a metaphysical and existential hobby only for the filthy rich?

  10. My children are largely here due to luck, and I have 4. Hence, if someone were to take one and give him or her to another family unfortunate enough to not be able to have a child on their own, that woud be OK because I really don’t have any moral entitlement to my children.

  11. @Yehuda (and others): Any discussion of “property rights” outside the context of a well-regulated and functioning state is nonsensical, as it is the state itself that establishes and enforces these “rights.”
    Thus, any amount of revenue required for the continued proper function of the state is justified. The questions then become ones of efficiency and incentives. “Fairness” really falls under the rubric of incentives, because people have more incentive to participate in a system they see as fair.

  12. slaves used to be considered property just like taxpayers are the property of the IRS

  13. The problem with america IS the middle class. The “rich” are supposed to take care of the ppor. They are supposed to buy the infrstructure for the military rodas and schools and be a backstop to finance in times of need.

    The middle class is supposed to be self sufficeient and pay for the teachers , the soldiers, the government salaries and the utilities and mainataince of roads and such.

    If we accept this premise and do the math it is easy to see that the bulk of the debt has been used to subsidize the midldle class and its bs entitlements. The middle clas never questioned tuitions at college bcause congress borrowed and gave away grants and loans.

    The rich need to be taxed more to fix ONLY infrasturcure and the very poor, but the middle class needs to grow up and expect less from government in the way of niceties and more in the way of accountability.

  14. Anonymous, the middle class is largely gone and forgotten about. Their voice has shrunk so greatly as to be barely herd from, the chaos of the msm and the entitled wallets voices. Once taxing and accountability are factored in, they now become emotional tools to be used by the remaining upper classes. The rich need to be taxed as if it did not pay to die, which, if the Bush tax cuts expire, that’s exactly what will happen.

  15. @engineer27 – I disagree. One of the primary purposes of states is to enable the exercise of rights by enforcing law and order, ensuring that people can live freely. Outside of states strength (force) is what enforces those rights, but that’s not a fun world to live in.
    The state needs revenue to enforce laws but that does not mean that any amount it demands to function is justified. A state that functioned by stripping people of all property would not be justified. So the question is, between the zero and the 100%, how much do we give the state and how do we give it.
    Also, we’re not talking about fairness. James talked about the rich not being morally entitled to their wealth and the results of that can be significantly more serious than fair or unfair.

  16. As DCBob points out, this is old Chicago School economics. “I see nothing morally ideal in a distribution according to innate personal ability—certainly not ability measured by pecuniary demand for its products, unless the rest of the human race are idealized—and suggest that such a distribution would yield vastly more inequality, misery, and despair than does the present order. Nor, in the abstract, can I see any connection between innate ability and moral desert. Is inherited ability on any better footing morally than inherited property?” Frank H. Knight, Risk, Uncertainty, and Profit (1921)

  17. So much on us having to pay our taxes, and so little on them having to earn our taxes… or are we perhaps quite often not really talking about taxes, but more about “give me your money!”

    Yes there is a moral dimension to tax policy. Everyone should pay at least some taxes in his own name, because it is a human right to be able to hold completely accountable those governing you.

  18. @Anonymous – Would you mind identifying what planet you are visiting us from?

    “…The problem with america IS the middle class. The “rich” are supposed to take care of the ppor….”

  19. “they didn’t do anything to deserve their intelligence or their propensity to work hard”
    What was i thinking studying so hard and working hard, fighting my natural genetic disposition to slack off and party. How stupid of me.

  20. Yehuda,
    Thats a slippery slope perspective or a false dilemma logic. Kwak’s counter argument about wealth is qualified and tempered with the comcept of balance with specific regard to inventives. One old economist capped personal wealth at 35 million in 1992 dollars for example.

  21. What we mean by ‘deserve’ in this context is ‘showed a useful behaviour that increases when rewarded’, That’s why society rewards hardwork; in order to encourage that behaviour, not because those who work hard are necessarily worth more morally.

  22. “because they didn’t do anything to deserve their intelligence or their propensity to work hard. ”

    WRONG !!!!! So very WRONG !!!

    Inate intelligence is merely a starting point, intelligence must by nurtured and worked into something practical, like a medical degree, or an MBA to be of best use. Try teling someone with such a degree they didn’t “do anything” to earn these degrees.

    As far as the “propensity to work” that so-called “propensity” comes at a price. Time away from family, friends and leasure activities. Dedication to other instead of oneself, willingness to risk capital, willingness to hire others and take responsibility for an enterprise….but our author says that’s “nothing” special.

    When a surgeon misses his kids ballgame, or wakes up in the middle of the night…isn’t his “propensity” to save someones life worthy of extra compensation ? (our author says… “NO !?!”)

    When a business owner lays his money on the line, and a lifetime of extra work and worry…isn’t he worthy of extra compensation ? (our author says… “NO !?!”)

    This is what is very wrong with America today.

    Too many people want equality of outcome regardless of education or effort, not enough think that living in this country, and having an opportunity is reward enough.

    “Lazyness leads to poverty; hard work makes you rich” – Proverbs 10:4

    I’d rather listen to the good book…than bad opinions

  23. One of the problems nowadays is that we only reward efforts with money. We have completely debased social appreciation by the excessive use of it.

    When I came to the USA in order to be one of 24 Executive Directors at the Board of the World Bank, I almost vomited hearing so many “I appreciate … for a job well done” that were given for normal jobs reasonably done and for which they were paid.

    In the same vein, if there is no real social accountability there cannot be any real social appreciation, and so you are stuck with having to pay more and more money.

  24. Clockwork Universe.

    You didn’t mention the case where the two individuals with fewer coconuts decide to gang-up on the third, and impose a ‘redistribution’.

    For those interested in a modern discussion of freewill, I suggest reading Sam Harris’ (thin) monograph ‘Freewill’. Or just view one of his lectures/debates on Youtube.

    The issue of freewill ultimately touches on the existence of ‘objective’ morality, as opposed to ‘subjective’ morality. And again, I would point those interested in a modern take to Harris’ ‘Moral Landscape’.

    Personally, I’m inclined to believe that Life’s (in the most encompassing sense) has both one fundamental objective – to produce more of its own kind. I’m not at all sure whether morality even plays a role beyond that of a possible (adaptive) ‘tool’ to accomplish this objective.

    Anyway, nice blog. Though I have to admit, the really scary bit is the implied suggestion that we (as a society) may be looking to economists, businesspeople, and ultimately accountants for moral guidance. At least Harris is a neurophysiologist. Exactly what he has to gain from promoting his views and findings seems to less tied to his own wealth or the wealth of his scientific peers – unless you think he is just coming up with this stuff to keep the grants coming in, or to sell books, or to be able to continue doing what he likes to do (arguably, all of which are kind of wealth.) His views are also subjected to peer review. Regardless, freewill is a big topic, and it goes to root of virtually all philosophical thought – disturbing stuff.

    Once again Mr. Kwak, you have rocked my morning read – my cornflakes are now like totally soggy.

    kc

  25. @Kevin Casey.

    Indeed in democracy two would get 6 coconuts each!

  26. @Per – and if there is a large pack of coyotes on the island, the three would suddenly see the value in each other because they have a common enemy – which is how the evolution of cooperation (“government”) really came about in history.

    So everyone gets a big red “F” in problem solving ala “theories” and political “isms” coughed up by the fevered mind of people stuck in the stage of childhood known as the “terrible twos”:

    More misery for others = More $$$$ for ME ME ME

    Should have asked the genie to get rid of the predators instead of the coconuts hanging in the tree next to you…

  27. What I meant to write was, “…Should ask the Genie to get rid of the predators instead of handing your lazy ass the coconut up in the tree next to you….”

    Now, where’s that bottle….

    :-)

  28. There never was a rich person who had enough money. This debate misses the obvious: of course the wealthy have no entitlement, moral or earned, to “their” wealth. Their wealth, as everyone’s wealth, comes from the collective labor of all past workers. Our language, laws, technology, infrastructure, knowleged are all given to us at birth. Any person’s contribution is but a drop of water in the ocean of past contribution. All have a democratic claim on how society’s wealth should be distributed. I’d vote for health care, food, housing, employment, education, leisure, retirement as a right and I’d fund it now.

  29. But isn’t the problem even deeper than that? If there is no free will, then Posner and Kwak are simply advocating positions that they had to advocate based on their brains, education, experience, etc. They had no choice in the matter. And whether anyone is persuaded by their arguments will in turn be determined by the readers’ brains, experience, education, etc. And they, in turn, will have no choice in the matter. So, the tax policy we adopt, and the incentive systems we create, are simply the ones that we will adopt and create. There is no alternative, because we have no choice in the matter. So, what’s the point of advocating anything at all? We’re going to do what we’re going to do. Of course, we can’t help advocating what we advocate, so we’re going to do (or not do) it anyway. Perhaps this reduction ad absurdem reflects the world as it really exists, but, if it does, it seems the only rational outcome is to go completely insane. Surely there must be more to the story than this.

  30. @Deep Thinker, “…Perhaps this reduction ad absurdem reflects the world as it really exists, but, if it does, it seems the only rational outcome is to go completely insane….”

    Insane IS where you end up when you continue to rationalize irrational behaviour – a clear indication of the existence of “free will” if you ask me :-)

    If we were will-less and merely some cosmically impossible but man-made anyway “square circle” – a hybrid of an animal and a mechanistic theoretical derivative of physics (Minsky, Pinsky or Schminsky?), would we be capable of going insane?

    @Paul P – you are in my “binder” :-) Let’s go get the predators….

  31. Yes, predators away, I’d vote for a king bed, a seven and one half foot couch, and a lazy boy recliner. Then I’d go for the race car, efficient housing, feed yourself, and no maintenance health care. The rest is gravy after the pursuit of happiness educational thing.

  32. The difference between the sublime and the depraved mind…easy to divine.

  33. Yes, this line of thinking is credited to John Rawls most notably in the 20th century.

  34. Why did USA men participate in appying a whole lot of “technology” efforts into stuff like dishwashers and washing machines and microwave ovens?

    What kind of philosophy was going on in men’s minds? Yes, the obvious was beating swords back into ploughshares on an industrial level, but wasn’t there a lot more in the PRIVATE relatiosnhips between men and women besides “role-playing” happening? What did people want to have more time to do? Quality time with kids, music, art, continuing education, HEALTH care advancements? All the more interesting and rewarding HUMAN activities revolve around having th etime to build relationships that ADVANCE the culture and standard of living for the FAMILY – as a unit, first, and then on to “beauty in the commons”, so to speak.

    CULTURE! Bottom line is that there IS no price tag on that.

    The fact that 480 billionaires in USA worth 2.08 TRILLION are squeeeeeling that there is no FIAT $$$$ for culture is where we are at.

    Here’s the LINE IN THE SAND.

    The 480 have spent BILLIONS on spying. That needs to stop. If the a-h-es in D.C. are MORALLY incapable of minding their own fnk business because they NEED to continue to STEAL from 300 million people penny by penny every nanosecond of the day to GET MORE than the 2.08 TRILLION in their own private accounts,

    and they continue to DISMANTLE factories and “beauty in the commons” infrastructures THAT THEY DID NOT BUILD to sell to some fnk Global Slave or Drug Lord to keep that “trade route” open, then

    it has to be OFFICIALLY stated that these predatory cretins operating in the USA in such a “business” manner (VULTURES) and their “Deliverance Boyz” army of ZOMBIES

    are NOT the official government of ANYONE HUMAN.

    They are LYING in this ludicrous election time about being anything other than NIHILISTS.

    Sorry, but gay men have always had their world of famous names that no one else knows about and when I read up on John Rawls on wiki – just another “mental masturbator” in the Poison Ivy Tower who was so flawed he developed a philosophy that no one adopted until Gen X. Gen X MEN know that there will never be an “app” that women can use on their cell phone – one that will clean the dirty diaper if you wave it in front of the phone when the app is on. So they decide, politically in the one second they stop mentally masturbating, that it is not worth their “time and money” to do anything that includes half of the human species – the female half.

    JUST WAR on so many trajectories at once, but it’s a -happening.

    All 480 billionaires hate my guts. And the feelin gis more than mutual. Keep throwing BILLIONS more into analyzing my “mind” based on the WalMart purchas I made today. Tell me something ELSE that will make me bend my knee to the misanthropic squirt of mind you deem to be the “politics” of ruling the world. How much more MISERY can be manufactured using the formula:

    More misery for others = more $$$$ for ME ME ME…?

    Even THAT profit margin has a LIMIT based on man to land ratio, Nimrods…

  35. I don’t think you understand me.

    It is all about the female, and always has been. But he doesn’t agree.

  36. Just War, “wildflowers”.

    “….sqeeeel like a pig….” ehjewkashun

  37. It’s about “religion” without “love”.

    Money God