Inequality vs Injustice
no one cares about inequality. People care about injustice, unfairness, poverty, sexual predators, family values, gay marriage, terrorism, and many other problems of everyday life. People don't care about Gini distributions.This passage was written about Paul Krugman's new book, but it can be taken as a much broader critique of the conventional economic approach to inequality.
The whole theory of optimal taxation and redistribution, best exemplified by the literature that follows Mirrlees, assumes that the social planner cares about inequality in itself. Government policy in the model is driven by a utilitarian calculus, which in turn is based on the axiom of diminishing marginal utility. The planner would, if he could achieve the goal without blunting incentives and diminishing efficiency, use the system of taxes and transfers to equalize incomes.
There is no room in the model for the concept of injustice beyond inequality of ability, the distribution of which the model takes as inherent and immutable. The model also maintains the neoclassical conclusion that, given ability, people are paid the value of their marginal product. That is, people are paid what they contribute to society.
I agree with Gintis that people care more about injustice than about inequality. For example, greater outrage is directed at highly paid CEOs than at highly paid athletes. People sense that athletes earn their high income by being highly talented, whereas they feel (correctly or not) that CEOs are paid a lot because they have manipulated the system.
If Gintis is right, then the standard model is barking up the wrong tree.