Chapter 16
Distribution
Geog 3890: ecological economics
A fat, rich, man who just ate a 16 ounce steak & a baked potato creates
more demand for food when he orders an after dinner mint than
a destitute child who has not eaten anything in two days.
In the market, hunger is not demand for food, money
is.
In fact, it would not be ‘efficient’ or ‘pareto optimal’ to feed that child.
Outline of Chapter
Pareto Optimality
► Efficiency, Scale, and Distribution
► Economics as a “Positive Science”?
► Distrribution of Income and Wealth
► Functional and Personal Income Distribution
► Measuring Distribution
► Distribution and Taxation
► Consequences of Distribution for community health
► Intertemporal distribution of Wealth
► Normative approach of Ecological Economics
► “Positive” approach of Neoclassical Economics
► Discounting, Psychology, and Economics
►
Global Distribution of Wealth
Distribution of Wealth:
American Perception & Reality
http://urizen-geography.nsm.du.edu/~psutton/Sutton_Courses/Geog_3890_Ecological_Economics/Miscellany/WealthDistributionArticle.pdf
Pareto Optimality & Pecan Pie
► Efficiency
maximized at Pareto Optimal
allocation of resources by the marketplace.
► This allocation is fundamentally dependent
on the initial distribution of wealth
► Re-distribute
wealth equally & there will be
no market for Lamborghinis
► Efficient does not mean or imply Fair.
► Economist’s typical solution to unfairness is
simply to grow the economy.
7 minute Video: Pareto Optimality and Pecan Pie
http://www.youtube.com/watch?v=wCuI-2LI6-M
Question: Does Pareto Optimal
allocation assume a given Scale as
well as a given Distribution?
► Linear,
areal, or volumetric scaling?
(They can’t all be the same)
► The
size of the economy
Relative to the size of the of
World’s ecosystems is
constrained.
► Optimal
Allocation assumes a given scale
just as it assumes a given distribution.
“Positivism” and Economics
►
Economics prides itself on being a “positive science”. Allocative
efficiency is thought to be a positive, or empirically measurable,
issue, even though, as we just saw, it presupposes a given
distribution. Whether or not the scale of the economy is
sustainable is also considered to be a positive issue involving
biophysical constraints, although normative questions of
conservation for the future and other species are not far below
the surface. Distributive equity, on the other hand, is a
normative issue. This is the main question addressed to
distribution: “Is it Fair?” Not, “Is it Efficient?” or, “Is it
Ecologically Sustainable?” The question: “Is it Fair” is
directly and unavoidably normative, and for that reason alone
it is given minimal attention by the positivist tradition of
economics.
- We’ll give it some attention now 
Can redistribution increase total
utility while being ‘inefficient’?
► The
Pareto Optimal criteria forbids interpersonal
comparisons and summations of total utility.
► The
extreme individualism of economics insists that
people are so qualitatively different their hermetical
isolation from one another that it makes no sense to
say that a leg amputation hurts Smith more than a
pin prick hurts Jones.
► If
we abandon the Pareto Optimal ‘forbidding’ of
making interpersonal comparisons we could improve
the human condition by redistributing wealth.
Which Cat do
you think you are?
Distribution of Income & Wealth
Winners Take All…..
►
http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph
How rich are the super-rich?
A huge share of the
nation's economic
growth over the
past 30 years has
gone to the top
one-hundredth of
one percent, who
now make an
average of $27
million per household. The average
income for the
bottom 90 percent
of us? $31,244.
http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph
Capitol Gain:
Do our congresspersons live on Wall Street or Main Street?
Functional Income Distribution
► Functional Income
(above)
► How
do Histograms
on left differ in
meaning?
Measuring Distribution: GINI coefficient I
►
The GINI coefficient is used to
measure the inequality of the
distribution of wealth or
income across a population. A
GINI coefficient of 1 implies
perfect inequality (one person
owns everything), and a
coefficient of zero indicates a
perfectly equal distribution
Australia: .305 China: .415 Denmark: .290
Guatemala: .551 U.S.: .450 India:
.368
Measuring Distribution: GINI coefficient II
http://www.sustainablemiddleclass.com/Gini-Coefficient.html
►
The GINI Coefficient for the United States has risen steadily
since 1967. If the current trend continues, the United States
will reach a GINI Coefficient of 0.546 in about 37-years, or
2043. This coefficient is equal to the one Mexico had in year
2000. Mexico is not known for having a large prosperous
middle class.
When is enough enough?
Or
When is the CEO making way too
much more than the Mail Clerk?
► Plato
– 4x
► Ben & Jerry – 5x
► U.S. Today - 500x
► Back
to Slide #4…
► Americans think it
► Should be about 3x
Distribution & Taxation
Can you find Krugman’s “Gilded Age”, “Middle-Class America” and “Great Divergence” in the figure above?
Consequences of Distribution for
Community and Health
►
Do societies with lower GINI
coefficients have better Health
outcomes?
►
The answer is – YES , according to:
►
►
Richard G. Wilkinson (Richard Gerald Wilkinson; born
1943) is a British researcher in social inequalities in health
and the social determinants of health. He is Professor
Emeritus of social epidemiology at the University of
Nottingham, having retired in 2008. He is also Honorary
Professor at University College London.
He is best known for his 2009 book (with Kate Pickett) The
Spirit Level, in which he argues that societies with more a
equal distribution of incomes have better health outcomes
than ones in which the gap between richest and poorest parts
of society is greater. His 1996 book Unhealthy Societies: The
Affliction of Inequality had made the same argument a
decade earlier.
4 minute video on “The Spirit Level: http://www.youtube.com/watch?v=jsEZr3s1aBA
Inter-temporal Distribution of Wealth
►
Seven generation sustainability is an ecological concept that urges the
current generation of humans to live sustainably and work for the benefit of
the seventh generation into the future. It originated with the Iroquois Great Law of the Iroquois - which holds that it is appropriate to think seven
generations ahead (a couple hundred years into the future) and decide
whether the decisions they make today would benefit their children seven
generations into the future.
►
►
Ecological Economics – (Intergenerational Justice)
Mainstream Economics – (Intergenerational Allocation)
Evolution of the ethical question from:
►
How much should we sacrifice to make the future better off?
►
To
►
How much whould we sacrifice to keep the future from being
worse off than the present?
Ecological Economics take….
►
The generation into which someone is born is based entirely on
chance. There is therefore no moral justification for claiming that one
generation has any more right to natural resources than any other.
At the very least, future generations have an inalienable right to
sufficient resources to provide a satisfactory quality of life. The
current generation has a corresponding duty to preserve an adequate
amount of resources.
►
Limit Fossil Fuel use to at least the waste absorption
capacity of the biosphere.
Minimize generation and dispersal of garbo-junk
Develop substitutes for consumed non-renewable
resources
Harvest biotic stock flow resources at less than MSY
►
►
►
The “Positive” approach of NCE
► Objective
decision rule for intergenerational
allocation: Intertemporal Discounting
► People Prefer Things NOW. Why?




Impatience
Uncertainty and of course – Death (PRTP)
Opportunity Cost – Could at least have made interest on it
Richer Future argument – diminishing marginal utility
► Pure
Time Rate of Preference (PRTP)
► The primacy of the Discount Rate and Net
Present Value (NPV) calculations.
Intertemporal Discounting and
Global Climate Change
► High
Discount Rate (~6%) – No Justification
for reduction in greenhouse gas emissions
► Low Discount Rate (~2%) – We should make
substantial investments to reduce impacts of
global warming
► High discount rates favor projects with costs
put off to the future with benefits now.
► Is choosing a discount rate an art or a science,
a normative or an objective question?
Discounting Reconsidered
► People
Die.
► Societys don’t (societal existence continues indefinitely)
► This is a serious difference.
► Consequently social discount rates should be
lower than individual discount rates.
► The complementarity of Natural and manmade
capital coupled with the law of diminishing
marginal utility suggests we should apply a
negative discount rate to Natural Capital.
Hyperbolic
Discounting
Why is it so difficult to generate concern for
events that are seen as belonging to the future
even though their consequences may be
dire? Why is it so easy to generate concern
for much smaller events that are happening
right now? Consider the outpouring of
generosity that happens when a local family
without insurance is burned out of their
home. In a single day the community will
respond more than they would to a year's
worth haranguing by Peak Oil activists. A
recent article on the web site "The Oil
Drum" sheds some light on why this happens,
and it's as simple as it is surprising.
This web site provides best explanation
http://www.paulchefurka.ca/Hyperbolic%20Discount%20Functions.html
Distribution is fundamentally different from
allocation, and, consequently, justice replaces
efficiency as the relevant criterion for policy
when time periods become intergenerational.