Abba P. Lerner (1903-1982) [2] — Optimality

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The most controversial aspect of Lerner's book was his discussion of distributional optimality: What distribution of income would maximize happiness (aggregate satisfaction)? As Lerner had recognized but set aside in his article of 1934 ("We cannot here go into the problems connected with optimum distribution"), Pareto optimality was compatible with any and all distributions of income, however skewed. The principle seems intuitively unjust. In The Economics of Control, Lerner posed the question: What income distribution would maximize the sum of individual satisfactions if (1) the size of income were independent of its distribution; (2) the ability to experience satisfaction were independent of distribution; and (3) the ability to experience satisfaction were unknown, that is, if utility functions differed in ways unknown, so that ignorance was symmetric? 

His answer: if we assume there is diminishing marginal utility (that satisfaction decreases with growing consumption of any good or service) and that a move away from equality is as likely to increase as to diminish aggregate satisfaction, society's overall satisfaction will be highest if income is equal for all.

This argument, needless to say, became a subject of sharp debate, in which logical proofs alternated with comparisons of abstract values and psychological attitudes. Was the sum of individual utilities a proper measure of social welfare? Was satisfaction a function of absolute income or relative as well? Is equality of result inherently good or does it reward some more and some less than they deserve? And if it does the latter, that is, misallocate reward, does such misallocation reduce the social pie? Do incentives matter? And even if there are some distributions that are more productive than others, who is to say what they are and how to bring them about, much more convince people of their productivity and fairness? The kind of demonstration provided by Lerner is testimony to the power of economics to pose questions clearly, specify conditions, and generate answers within these constraints, but testimony also to the limitations of such reasoning as constraints are relaxed and complications introduced.

Source: here and here.

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