Diminishing Marginal Utility Cuts Both Ways

A familiar argument for wealth redistribution is that diminishing marginal utility means that the benefits of wealth distribution to the poor are, in the aggregate, greater than the costs to the wealthy. While I don't agree that this argument is invalid because interpersonal utility comparisons are impossible, I do think that the law of diminishing marginal utility cuts both ways.

There are a few professions (e.g., doctor, lawyer, investment banker) that require a tremendous amount of work but compensate by paying very well. And there are other activities, like starting a company, that, in addition to requiring an extraordinary amount of work, also carry considerable risk of not paying off at all, or possibly even leading to financial ruin.

If the marginal utility of wealth and leisure were constant, most people would be willing to work 100 hours per week for the same hourly rate for which they're willing to work 40. That very few people work more than one full-time job suggests that this isn't the case. Nor are there many who would take on the risk and workload associated with starting a business if it had the same expected value as a regular job.

With each additional hour of leisure sacrificed for work, the amount of money necessary to compensate for it increases, partly because of the diminishing marginal utility of money, and partly because of the increasing marginal utility of leisure. Likewise risk---as the likelihood of payoff decreases, the return needed to justify the risk increases disproportionately. The upshot is that very few people would do these jobs if they didn't offer the possibility of extraordinary returns.

So while I do recognize that the law of diminishing marginal utility provides an argument for wealth redistribution (although not necessarily a very good one---see my other objections in the post linked above), it's important to keep in mind that it also provides an argument against redistribution and progressive taxation.

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