Consider a program such as social security which collects money and pays out money. Dollars collected from the richer taxpayer probably cost him less utility than dollars collected from the poorer taxpayer cost him. But dollars paid to the richer taxpayers also provide less utility than dollars paid to the poorer.Friedman's mistake is a common one. It is one misapplication of the concept of diminishing marginal utility (DMU): the entirely sensible notion that the enjoyment of a particular good or service declines, at some point, with the quantity consumed during a given period of time. For example, a second helping of chocolate dessert might be more enjoyable than a first helping, but a third helping might not be as enjoyable as the second one.
The misapplication of DMU arises from an error of logic, an error of observation, and an error of arrogance. (Friedman doesn't make all three errors, but avowed redistributionists do.)
The error of logic is to assume (implicitly) that as one's income rises one continues to consume the same goods and services, just at a higher rate. But, in fact, having more income enables a person to consume goods and services of greater variety and higher quality. Given that, it is possible always to increase one's enjoyment by shifting from a "third helping" of a cheap product to a "first helping" of an expensive one, and to keep on doing so as one's income rises.
As for the error of observation, look around you. As I explain here,
diminishing marginal utility, DMU, is a key postulate of microeconomic theory. Therefore, the [rich] Xs of the world must be "sated" by having "so much" money, whereas the [poorer] Ys remain relatively "unsated."
In other words, should you run out of new and different things to consume (an unlikely event), you can make yourself happier by acquiring more income to amass more wealth and (if it makes you happy) by giving away some of your wealth.If that were true, why would Bill Gates, Warren Buffet, and partners in Wall Street investment banks (not to mention most of you who are reading this) seek to make more money and amass more wealth? Perhaps the likes of Gates and Buffet do so because they want to engage in philanthropy on a grand scale. But their happiness is being served by making others happy through philanthropy; the wealthier they are, the happier they can make others and themselves.
Is there a point at which one opts for leisure (or other non-work activities) over income? Yes, but that point varies widely from person to person and, for some, isn't really a marginal preference for leisure over work and income. The committed workaholic sleeps, at times, but only in order to sustain himself in his quest for more income and wealth. Even non-workaholics generally say "yes" to better-paying jobs. And most of them keep saying "yes" until the offers stop coming. Why "yes"? Because the extra effort involved in earning a higher salary (and there usually is some extra effort), is worth it. Where's the diminishing marginal utility in that?
Why do most people try to save some of their income instead of spending it all on current consumption? For a "rainy day," a new house, the kids' education, retirement, the kids' legacy, etc. How do they do it? By choosing investments that (they hope) will yield a high return (given the risk involved); that is, by earning more income (and amassing more wealth) than one is able to do just by working. How much is enough? For almost everyone (the main exceptions being super-rich hypocrites like Warren Buffet), there's never enough. Where's the diminishing marginal utility in that?
Except for the rare bird who truly prefers less to more, the marginal utility of income per se does not diminish. That is why we accept promotions, invest our savings, and (irrationally) buy lottery tickets.
I come now to the error of arrogance:
Thus endeth today's lesson in economics and humility....[H]ow much wealth is "enough" for one person? I cannot answer that question for you; you cannot answer it for me. (I may have a DMU for automobiles, cashew nuts, and movies, but not for wealth, in and of itself.) And that's the bottom line: However much we humans may have in common, each of is happy (or unhappy) in his own way and for his own peculiar reasons.
In any event, even if individual utilities (states of happiness) could be measured, there is no such thing as [a] social welfare function: X's and Y's utilities are not interchangeable. Taking income from X makes X less happy. Giving some of X's income to Y may make Y happier (in the short run), but it does not make X happier. It is the height of arrogance for anyone -- liberal, fascist, communist, or whatever -- to assert that making X less happy is worth it if it makes Y happier.
