Chapter 16Chapter 16

DistributionDistribution

Geog 3890: ecological Geog 3890: ecological economicseconomics

A fat, rich, man who just ate a 16 ounce steak & a baked potato createsmore demand for food when he orders an after dinner mint thana 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 Outline of Chapter ► Pareto OptimalityPareto Optimality► Efficiency, Scale, and DistributionEfficiency, Scale, and Distribution► Economics as a “Positive Science”?Economics as a “Positive Science”?► Distrribution of Income and WealthDistrribution of Income and Wealth► Functional and Personal Income DistributionFunctional and Personal Income Distribution► Measuring DistributionMeasuring Distribution► Distribution and TaxationDistribution and Taxation► Consequences of Distribution for community Consequences of Distribution for community

healthhealth► Intertemporal distribution of WealthIntertemporal distribution of Wealth► Normative approach of Ecological EconomicsNormative approach of Ecological Economics► ““Positive” approach of Neoclassical EconomicsPositive” approach of Neoclassical Economics► Discounting, Psychology, and EconomicsDiscounting, Psychology, and Economics

Global Distribution of WealthGlobal Distribution of Wealth

Distribution of Wealth: Distribution of Wealth: American Perception & RealityAmerican Perception & Reality

http://urizen-geography.nsm.du.edu/~psutton/Sutton_Courses/Geog_3890_Ecological_Economics/Miscellany/WealthDistributionArticle.pdf

Pareto Optimality & Pecan Pareto Optimality & Pecan PiePie

►Efficiency maximized at Pareto Optimal Efficiency maximized at Pareto Optimal allocation of resources by the marketplace.allocation of resources by the marketplace.

►This allocation This allocation is fundamentally dependent is fundamentally dependent on the initial distribution of wealthon the initial distribution of wealth

►Re-distribute wealth equally & there will be Re-distribute wealth equally & there will be no market for Lamborghinisno market for Lamborghinis

►EfficientEfficient does not mean or imply does not mean or imply FairFair..►Economist’s typical solution to unfairness is Economist’s typical solution to unfairness is

simply to grow the economy.simply to grow the economy.

7 minute Video: Pareto Optimality and Pecan Piehttp://www.youtube.com/watch?v=wCuI-2LI6-M

Question: Does Pareto Optimal Question: Does Pareto Optimal allocation assume a given allocation assume a given ScaleScale as as well as a given well as a given DistributionDistribution??►Linear, areal, or volumetric scaling? Linear, areal, or volumetric scaling? (They (They

can’t all be the same)can’t all be the same)

►The size of the economy The size of the economy

Relative to the size of the of Relative to the size of the of

World’s ecosystems is World’s ecosystems is

constrained.constrained.

►Optimal Allocation assumes a given scale Optimal Allocation assumes a given scale just as it assumes a given distribution.just as it assumes a given distribution.

““Positivism” and EconomicsPositivism” and Economics► Economics prides itself on being a “positive science”. Allocative Economics prides itself on being a “positive science”. Allocative

efficiency is thought to be a positive, or empirically measurable, efficiency is thought to be a positive, or empirically measurable, issue, even though, as we just saw, it presupposes a given issue, even though, as we just saw, it presupposes a given distribution. Whether or not the scale of the economy is distribution. Whether or not the scale of the economy is sustainable is also considered to be a positive issue involving sustainable is also considered to be a positive issue involving biophysical constraints, although normative questions of biophysical constraints, although normative questions of conservation for the future and other species are not far below conservation for the future and other species are not far below the surface. Distributive equity, on the other hand, is a the surface. Distributive equity, on the other hand, is a normative issue. This is the main question addressed to normative issue. This is the main question addressed to

distribution: distribution: “Is it Fair?” “Is it Fair?” Not, Not, “Is it Efficient?” “Is it Efficient?” or, or, “Is it “Is it Ecologically Sustainable?Ecologically Sustainable?” The question: ” The question: “Is it Fair” “Is it Fair” is is directly and unavoidably normative, and for that reason alone directly and unavoidably normative, and for that reason alone it is given minimal attention by the positivist tradition of it is given minimal attention by the positivist tradition of economics. economics.

- We’ll give it some attention now - We’ll give it some attention now

Can redistribution increase Can redistribution increase total utility while being total utility while being

‘inefficient’?‘inefficient’?► The Pareto Optimal criteria forbids interpersonal The Pareto Optimal criteria forbids interpersonal

comparisons and summations of total utility.comparisons and summations of total utility.

► The extreme individualism of economics insists The extreme individualism of economics insists that people are so qualitatively different their that people are so qualitatively different their hermetical isolation from one another that it hermetical isolation from one another that it makes no sense to say that a makes no sense to say that a leg amputationleg amputation hurts Smith more than a hurts Smith more than a pin prick pin prick hurts Jones. hurts Jones.

► If we abandon the Pareto Optimal ‘forbidding’ of If we abandon the Pareto Optimal ‘forbidding’ of making interpersonal comparisons we could making interpersonal comparisons we could improve the human condition by redistributing improve the human condition by redistributing wealth.wealth.

Which Cat do Which Cat do you think you are? you think you are?

Distribution of Income & Distribution of Income & WealthWealth

Winners Take All…..Winners Take All…..

► http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

How rich are the super-rich?How rich are the super-rich?

A huge share of thenation'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 house-hold. 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: Capitol Gain: Do our congresspersons live on Wall Street or Main Street?Do our congresspersons live on Wall Street or Main Street?

Functional Income Functional Income DistributionDistribution

► Functional Income Functional Income (above)(above)

► How do Histograms on How do Histograms on left differ in meaning?left differ in meaning?

Measuring Distribution: GINI Measuring Distribution: GINI coefficient Icoefficient I

► The GINI coefficient is used The GINI coefficient is used to measure the inequality of to measure the inequality of the distribution of wealth or the distribution of wealth or income across a population. income across a population. A GINI coefficient of 1 A GINI coefficient of 1 implies perfect inequality implies perfect inequality (one person owns (one person owns everything), and a everything), and a coefficient of zero indicates coefficient of zero indicates a perfectly equal distributiona perfectly equal distribution

Australia: .305 China: .415 Denmark: .290Guatemala: .551 U.S.: .450 India: .368

Measuring Distribution: GINI Measuring Distribution: GINI coefficient IIcoefficient II

http://www.sustainablemiddleclass.com/Gini-Coefficient.html 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?When is enough enough?OrOr

When is the CEO making way tooWhen is the CEO making way toomuch more than the Mail Clerk?much more than the Mail Clerk?

►Plato – 4xPlato – 4x►Ben & Jerry – 5xBen & Jerry – 5x►U.S. Today - U.S. Today - 500x500x

►Back to Slide #4…Back to Slide #4…►Americans think it Americans think it ►Should be about Should be about

3x 3x

Distribution & TaxationDistribution & Taxation

Can you find Krugman’s “Gilded Age”, “Middle-Class America” and “Great Divergence” in the figure above?

Consequences of Distribution Consequences of Distribution for Community and Healthfor Community and Health

► Do societies with lower GINI Do societies with lower GINI coefficients have better coefficients have better Health outcomes? Health outcomes?

► The answer is – YES , according to:The answer is – YES , according to:► Richard G. WilkinsonRichard G. Wilkinson ( (Richard Gerald Wilkinson;Richard Gerald Wilkinson; born born

1943) is a British researcher in social inequalities in 1943) is a British researcher in social inequalities in health and the social determinants of health. He is health and the social determinants of health. He is Professor Emeritus of social epidemiology at the Professor Emeritus of social epidemiology at the University of Nottingham, having retired in 2008. He is University of Nottingham, having retired in 2008. He is also Honorary Professor at University College London.also Honorary Professor at University College London.

► He is best known for his 2009 book (with Kate Pickett) He is best known for his 2009 book (with Kate Pickett) The Spirit LevelThe Spirit Level, in which he argues that societies with , in which he argues that societies with more a equal distribution of incomes have better health more a equal distribution of incomes have better health outcomes than ones in which the gap between richest outcomes than ones in which the gap between richest and poorest parts of society is greater. His 1996 book and poorest parts of society is greater. His 1996 book Unhealthy Societies: The Affliction of InequalityUnhealthy Societies: The Affliction of Inequality had had made the same argument a decade earlier.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 Inter-temporal Distribution of WealthWealth

► Seven generation sustainabilitySeven generation sustainability is an ecological concept that is an ecological concept that urges the current generation of humans to live sustainably and work urges the current generation of humans to live sustainably and work for the benefit of the seventh generation into the future.for the benefit of the seventh generation into the future. It originated It originated with the with the Iroquois - Great Law of the IroquoisIroquois - Great Law of the Iroquois - which holds that it - which holds that it is appropriate to think seven generations ahead (a couple hundred is appropriate to think seven generations ahead (a couple hundred years into the future) and decide whether the decisions they make years into the future) and decide whether the decisions they make today would benefit their children seven generations into the future.today would benefit their children seven generations into the future.

► Ecological Economics – (Intergenerational Justice)Ecological Economics – (Intergenerational Justice)► Mainstream Economics – (Intergenerational Allocation)Mainstream Economics – (Intergenerational Allocation)► Evolution of the ethical question from:Evolution of the ethical question from:

► How much should we sacrifice to make the future better off?How much should we sacrifice to make the future better off? ToTo

► How much whould we sacrifice to keep the future from being How much whould we sacrifice to keep the future from being worse off than the present?worse off than the present?

Ecological Economics take….Ecological Economics take….► The generation into which someone is born is based entirely The generation into which someone is born is based entirely

on chance. There is therefore no moral justification for on chance. There is therefore no moral justification for claiming that one generation has any more right to natural claiming that one generation has any more right to natural resources than any other. At the very least, future resources than any other. At the very least, future generations have an inalienable right to sufficient resources generations have an inalienable right to sufficient resources to provide a satisfactory quality of life. The current generation to provide a satisfactory quality of life. The current generation has a corresponding duty to preserve an adequate amount of has a corresponding duty to preserve an adequate amount of resources. resources.

► Limit Fossil Fuel use to at least the waste Limit Fossil Fuel use to at least the waste absorption capacity of the biosphere.absorption capacity of the biosphere.

► Minimize generation and dispersal of garbo-junkMinimize generation and dispersal of garbo-junk► Develop substitutes for consumed non-renewable Develop substitutes for consumed non-renewable

resourcesresources► Harvest biotic stock flow resources at less than Harvest biotic stock flow resources at less than

MSYMSY

The “Positive” approach of The “Positive” approach of NCENCE

►Objective decision rule for Objective decision rule for intergenerational allocation: intergenerational allocation: Intertemporal DiscountingIntertemporal Discounting

►People Prefer Things NOW. Why?People Prefer Things NOW. Why? ImpatienceImpatience Uncertainty and of course – Uncertainty and of course – Death Death (PRTP)(PRTP) Opportunity Cost – Opportunity Cost – Could at least have made interest on Could at least have made interest on

itit

Richer Future argument – Richer Future argument – diminishing marginal utilitydiminishing marginal utility

►Pure Time Rate of Preference (PRTP)Pure Time Rate of Preference (PRTP)►The primacy of the Discount Rate and Net The primacy of the Discount Rate and Net

Present Value (NPV) calculations.Present Value (NPV) calculations.

Intertemporal Discounting Intertemporal Discounting and Global Climate Changeand Global Climate Change

►High Discount Rate (~6%) – No Justification High Discount Rate (~6%) – No Justification for reduction in greenhouse gas emissionsfor reduction in greenhouse gas emissions

►Low Discount Rate (~2%) – We should make Low Discount Rate (~2%) – We should make substantial investments to reduce impacts of substantial investments to reduce impacts of global warmingglobal warming

►High discount rates favor projects with costs High discount rates favor projects with costs put off to the future with benefits now.put off to the future with benefits now.

► Is choosing a discount rate an art or a science, Is choosing a discount rate an art or a science, a normative or an objective question?a normative or an objective question?

Discounting ReconsideredDiscounting Reconsidered

►People Die. People Die. ►Societys don’t (Societys don’t (societal existence continues societal existence continues

indefinitelyindefinitely))►This is a serious difference.This is a serious difference.►Consequently social discount rates should Consequently social discount rates should

be lower than individual discount rates.be lower than individual discount rates.►The complementarity of Natural and The complementarity of Natural and

manmade capital coupled with the law of manmade capital coupled with the law of diminishing marginal utility suggests we diminishing marginal utility suggests we should apply a negative discount rate to should apply a negative discount rate to Natural Capital.Natural Capital.

Hyperbolic Hyperbolic DiscountingDiscounting

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 explanationhttp://www.paulchefurka.ca/Hyperbolic%20Discount%20Functions.html

Distribution is fundamentally different from Distribution is fundamentally different from allocation, and, consequently, justice replaces allocation, and, consequently, justice replaces efficiency as the relevant criterion for policy efficiency as the relevant criterion for policy when time periods become intergenerational.when time periods become intergenerational.