Pro-Human Extremist

Extremism in the defense of humanity is no vice

Altruism and the welfare state

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This post is really The economics of altruism III, so you may want to check out the last two if you haven’t already.

One phenomenon pondered by economists who study the economics of altruism is the welfare state. In affluent democracies, voters routinely support social safety nets that they help pay for with their tax dollars and that mostly benefit people they have never met. What motivates people to give up their hard-earned money to support total strangers?

A common explanation is a sense of justice. This supposes that we think it’s wrong for some people to have much more than others, even if we are among the people who have more. So we’re in favor of government taxing affluent people more, and using the extra money to help out the disadvantaged.

Another possible explanation is a kind of insurance policy. While we may be doing fine right now, our lives could sometime take a turn for the worse. By voting in favor of a social safety net, our higher taxes now are buying insurance against some future catastrophe in our own lives.

Either or both of these explanations may indeed help explain this curious phenomenon. But can it also be explained simply in terms of other people’s utility factoring into our own utility functions?

Consider how the transactions of a welfare state work. The extra taxes you pay lower your total consumption (xi from the equation in The economics of altruism). Your contribution is added to those of a great many other taxpayers, all of whom presumably are doing reasonably well or they would be net recipients of the welfare-state payout. The money collected from you and all the other taxpayers goes to people who presumably need it more than the people who are contributing the taxes do.

So your money isn’t a one-off payment that goes to a complete stranger in need. By voting in favor of a welfare state you ensure that everyone else pays too, in proportion to their ability to pay. Your share is just a tiny part of a much greater sum that can then be distributed to the needy, and increase their utility.

In the personal utility function that describes this situation, one factor is your own consumption, which is decreased by some amount depending on how much you are taxed to support the welfare state. The other factor is a set of the utility functions of all of the other people who pay taxes and/or receive benefits. There’s an equation for this utility function, but I won’t bore you with it.

Since the people who pay into the welfare state are all fairly affluent, the loss to their own consumption shouldn’t decrease their utility all that much. Since the people who benefit from the welfare state are more needy, the money that is transferred to them should produce a proportionately greater increase in their utility. The welfare state thus causes a lot of people to experience a small decrease in utility and a lot of people to experience a correspondingly greater increase in utility. Even though the vast majority of them are unknown to you, you know it’s happening because it’s been legislated and will be enforced.

What, then, is your trade-off in deciding whether to cast your vote in favor of a welfare state? One factor in your utility function is your own loss of consumption as a result of the taxes you pay. The other factor is the value to you of the increased utility of millions of complete strangers (the beneficiaries), against the much smaller decreased utility of another group of millions of complete strangers (the other taxpayers). Even if the well-being of each of these complete strangers factors only very weakly into your utility function, the sheer number of the people benefited by the welfare state may be enough to make you feel that your utility is increased by the existence of that welfare state, even though you have to pay some taxes to support it.

This line of reasoning can explain popular support for a welfare state without invoking a sense of justice, or a desire to insure against the future, or any other motivation. It can come down simply to a rational economic calculation by a person who derives some small value from the well-being of others. Given the number of people involved, that value can in fact be quite small and still outweigh the cost that they themselves have to pay in taxes.

I know, I know—there are arguments against a welfare state too. It may create inefficiencies, the higher marginal tax rates may discourage economic activity that would otherwise benefit everyone, it may create perverse incentives for the less well-off. But all that is a conversation for another day. My only point here is that we can explain the existence of a welfare state merely by supposing that voters have utility functions in which other people’s utility is a component.

© Joel Benington, 2011.

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Written by Joel Benington

June 8, 2011 at 7:32 pm

Posted in altruism, economics, numbers

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