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