The Veil of Ignorance: Don’t confuse tools with the buildings they create

2010 August 13
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By Navin Kumar
Article ID: 1413

The “veil of ignorance” is a thought experiment: Imagine you have to design a society. You have to decide if slavery will be permitted or not. Are women supposed to stay at home? Are they allowed to work? Or must they do a bit of both? How high are income taxes? How are they applied? After you design your society, you become one of the positions in that society.

Here’s the kicker: you aren’t allowed to choose your position. You get one at random. So you could end up male or female, rich or poor, black or white, slave or owner, scientist or secretary. Since you don’t know what position you will occupy, you are said to be designing this society from behind a ‘veil of ignorance’.

Not good enough? How would you make it better?

How would you design such a society? What would it look like? You could end up as a coal miner or a CEO. Will the CEO be heavily taxed to subsidize the coal miner’s healthcare?

Most people are risk-averse: they would rather have a million dollars guaranteed rather than a 50% chance of having 2 million dollars and a 50% chance of having nothing. This is fairly logical: with the first million you will buy what’s important: a house, a decent car, a retirement fund, et cetera. The second million will get you a fancier car, a holiday house and maybe some nice suits but the happiness (in economic terms, the utility) you get out of the second million is less than the happiness you get out of the first million.

(Mathematically, let’s say the first million gets you a utility of 50, while the second million gets you a utility of 40. If you just take the million your utility is 50. Winning gives you a utility of 90, while losing gets you zero. Therefore, if you take the gamble, you have an expected utility of (.5 x 90) + (.5 x 0) = 45. Thus taking the gamble will, on average, give a lower overall utility and less happiness.)

John Rawls, the philosopher who invented the concept of the veil of ignorance, concluded that because people are risk-averse, they would construct a society where everyone is equal rather than one where there are rich as well as poor people.

Since this is the kind of society that we would choose if we didn’t know our positions, this is the kind of society which we must try to create in the real world. Right?

To use the example above, you’d want to hedge your bets and tax the CEO if you weren’t sure if you’d become him.

Rawls took this idea one step further. He argued that people would want a society where there is equality of outcome: everyone ends up in the same place, regardless of intelligence, talent or strength, because even these things are randomly distributed at birth. You might be born stupid, weak or talentless. Wouldn’t you want to hedge your bets against that affecting you?

This equality of outcome hasn’t really caught on in a big way. Even egalitarians accept you’d need some degree of inequality to convince people to put in a decade of work to become a doctor instead of a jazz musician. Even so, Rawls’ conclusions about an equal society being a just one are very influential.

These conclusions have been subject to a variety of criticisms. Are people really that risk-averse? What about those thousands of ‘actors’ who end up doing bit roles for tiny amounts of money their entire lives so they have a one-in-ten-thousand shot at becoming Tom Cruise? And how do you decide the best ratio of security versus liberty?

Let’s focus on one criticism, that of Rawls’ society where a fixed amount of wealth must be distributed.

Everything else being equal, a person would prefer a society where incomes were $10, $4 and $4 to one where the distributions were $3, $3, $3 because in the first example all incomes are higher in all cases.

To simplify the analysis, assume that all people are risk-averse, and we’ll use the Veil of Ignorance as our tool of choice. But rather than designing a society, let’s say that the person behind the Veil is designing a civilization. He can’t decide which position he will be born into. He can’t even decide which generation he is born into. He might be born in Egypt, 2000 BC or Tokyo, 2000 AD. Would he still design an equal society?

Nope. Over such long timelines, technology changes. The more technological innovations that existed in generations preceding his birth, the better off the decider will be.

Innovation isn’t cheap and it’s getting increasingly expensive: most of today’s ground-breaking innovations require large amounts of money, energy and time. It’s also (and this is the key) very risky: most startups fail. Thus the higher the potential income from risks that pay-off, the more likely people will invest. And there’s often a powerful side benefit: innovations that fail only destroy the investor’s investments, but the ones that succeed add to the human knowledge pool and enrich us all.

A civilization which severely taxes those who become wealthy as a result of risk-taking behavior finds that many people become reluctant to take risks. In this situation, innovation slows down. Since innovations enrich all subsequent generations, reducing the pace of innovation would make everyone less well off. (Given a lifespan of 75 years, think of how many technological changes you’ll see over the course of your own life. Then think how much it would affect you if certain major advancements never happened.)

Back to our civilization planning: if there was a good chance you would end up as one of the later generations, you’d set things up so that risk-takers are rewarded, even though this means allowing for a heavy amount of inequality. This is even easier to justify when you consider the cumulative, exponentially-increasing returns from technology.

People get so caught-up in one particular perspective that they fail to see that another perspective can exist, even if one were to keep the same assumptions as before. People get so caught up in the theory of “distribute all wealth equally” that they won’t consider real-life implications, such as incentives, rewards or future payoffs.

Do the needs of the many outweigh the benefits to the risk-takers? It’s an important question. Our future depends on it.


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4 Comments
2010 August 28
Ben permalink

“… a society where incomes were $10, $4 and $4 to one where the distributions were $3, $3, $3 because in the first example all incomes are higher in all cases.” This asserts that the system with wealthy people will have more money while the distributed system will not. Why not add a third option where everyone gets $6 regardless and try that again?
Do the needs of the many outweigh the benefits to the risk-takers? As the risk-takers are a subset of the many it comes down to a question not of happiness but security. If the government were to provide for the needs of the many, that reduces the risks for the risk-takers. So for the It changes the utility equation when having zero money still has a utility value, increasing the benefits to the risk takers and making it safer to take the all or nothing million dollar risk.

2010 September 16
Matthew permalink

Ben is right.  Bill Gates was a freak event; most successful entrepreneurs try and fail several times, declaring bankruptcy and otherwise depending on the social safety net (now almost non-existent in America) before finally succeeding.  Without that, we will see very little real innovation.
It’s also a canard to suggest that because some inequality is a necessary reward for innovation and risk, a “heavy amount of inequality” should follow. Does the reward for the successful entrepreneur really have to be enough money that their great great grandchildren will never be able to spend it all, or an economic position that forces others in to poverty?  Should there be no point at which we recognize that the wealthy, no matter how bold and talented, are also very lucky, and expect them to give back to the society that gave them their opportunities?
Finally, arguing against the theory of “distribute all wealth equally” is a straw dog.  Nobody serious is actually claiming we should do that today.  That’s the old old old communist goal, and it was never realistic.  Even the most leftist of the modern democratic socialist nations don’t go nearly that far.
But on the topic, check out social credit as a completely different alternative to choosing between low and high tax rates.

2010 October 11
geraldguild permalink

A couple thoughts crossed my mind while reading this.  First, I wonder to what degree people make their choices from behind the veil, based in erroneous blank slate thinking.  “Success” is largely a function of heritage rather than raw talent and work ethic.  The meme of the rags to riches tale is an illusion that keeps the middle class thinking that they can reach that brass ring if they work hard, take risks, and sacrifice.  Meanwhile it promotes the notion that the poor are solely responsible for their plight.  The reasoning also goes “If only they weren’t so lazy and stupid, they too could rise up.”  If one has a self serving bias steeped in the notion that intelligence and work ethic alone will bolster one’s success, no matter the starting point, I am guessing that one would be less risk averse.  On the other hand, if one’s thinking takes into consideration the reality and power of opportunity, one may be more inclined toward a more equal distribution.
Second, I agree with Ben – the 10-4-4 distribution versus to 3-3-3 distribution seems to me to be inclined to skew results.  Everyone is better off in the former.  It is not a true measure of risk aversion or valuation of fairness. It is not an apples to apples comparison.  The 6-6-6 alternative, seems more appropriate.

2010 October 15
charonme permalink

Good article. It’s interesting how many discussions of this topic completely disregard capital accumulation. People would like to redistribute wealth, but they don’t stop and think about where did the wealth came from in the first place. The truth is that without inequality there would be no capital, no investment, no improvement and progress and thus no wealth. The reason why some societies at some point in their history are able to redistribute is that they allowed for some inequality in the past and so there is something to redistribute. If there was equal redistribution from the beginning of a civilization, it would only get poorer and poorer with the rise of its population. So the real choice is not between 3-3-3 and 12-4-4, but between 0-0-0 and 12-4-4.

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