Rawlsian Growth: Dynamic Programming of Capital and Wealth for Intergeneration 'Maximin' Justice.

Phelps, E.S.; Riley, J.G.

The key feature of the model studied here is its overlapping generations. Each generation is egoistic, working and accumulating tangible capital for its own life-cycle purposes—subject to its prior allegiance to "maximin" justice. Nevertheless the selfinterest of every generation is itself intergenerational because its desire to consume will span its period of retirement when the next generation will provide the economy's labour supply. We show that, for every initial condition inside some domain, there exists a "maximin" solution characterized by a unique sequence of intergeneration "trades". A generation that adds (say) to the capital stock receives in return a moral claim to additional old-age consumption. A generation receiving added capital accepts an obligation to work more. It is further shown how the "maximin" allocation can be "supported" by institutions of private wealth owning, perfect markets, public grants and public debt. If a generation (optimally) adds to the capital stock it is entitled to issue more public debt to itself so that it and future generations will benefit equally. In this model the "maximin" solution does indeed equalize utilities as the utilitarians contend. But not even that property survives once certain externalities are accorded their place. Rawls, perhaps taking the utilitarian objection too much to heart, suggests that "ties of sentiment" ensure that a generation would like to improve the opportunities of its successors if some satisfactory level of development has not been reached. Yet a principle of justice is still needed to mediate differences in desires. We show in the last section that Rawls's sentiments, when imbedded into our "maximin" framework, can indeed lead to a growth-path of rising utility.

ECONOMETRIC models; ECONOMIC development; DYNAMIC programming; UTILITARIANISM; MATHEMATICAL programming; THEORY of Justice, A (Book : Rawls); CAPITAL; WEALTH; ECONOMIC policy

Review of Economic Studies, 1978, Vol 45, Issue 1, p103

0034-6527

Academic Journal

10.2307/2297088