Sunday, December 18, 2011

Why Rawls trips and falls

John Rawls is a famous philosopher who argued for welfare capitalism as the ideal form of government through the use of his philosophical tool: the veil of ignorance. He contends that if we are behind a veil of ignorance and had absolutely no idea what our lot would be in life when we were setting up society, then we would set it up in such a way in which inequality would only be tolerated as long as it improves the lot of the worst off among us.

Far from being a call for welfare state capitalism, the Rawlsian veil of ignorance makes one of the most compelling cases for laissez faire capitalism possible. First of all, when one is behind the veil of ignorance, one would have absolutely no issue with increased wealth inequality as long as the poor are not worse off. This can be explained with another metaphor (a meta-metaphor, if you will). Imagine you are in a casino with two games. One game you flip a coin and if heads you make a dollar and if tails you make 10 dollars. In the other game, if you get heads you still make a dollar, but if you get tails, you make 100 dollars. There is no question that one would obviously rather play the game with the higher payout. There is an argument to be had for the first game, if in the second game the alternative to the 100 dollars was only 10 cents however, risk aversion aside, one is always willing to accept the game with the higher Bayesian payout.

Beyond the fact that those behind the veil of ignorance would rationally choose to accept a higher payout, the second and most damning attack on the Rawlsian welfare state is the existence of inter-temporal life. What I mean by this is that behind the veil of ignorance, one does not know where one would fall in time either. This means that decisions behind the veil of ignorance ought not increase the welfare of those who are alive now at the expense of those who will be alive in the future.

This has dire implications when looking at the effects of taxing capital. A Rawlsian who argues for a progressive income tax would have to grapple with considering what the other uses of that income might have been. For if people are better investors than the government, a tax on income will result in a decrease in the growth rate of the economy. A man with billions of dollars can invest more than a man with millions of dollars, and the main consideration about investment is that investment compounds. The marginal dollar invested today is worth an infinite amount of utility in the indefinite future in comparison to a dollar consumed today. Given that humanity will probably not last eternally, we could simply assume a very high value for the dollar invested. A truly Rawlsian state would have taxes minimized to the point where it maximizes the return on investment of the dollar.

This would in turn fall right in line with a flat minimal consumption tax, and a minimal state that encourages investment through a strict enforcement of property rights and proscriptions against fraud. Well what you know, Rawls was a libertarian after all!