Front Page Titles (by Subject) 8: Disjunction, Conjunction * - Justice and Its Surroundings
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
8: Disjunction, Conjunction * - Anthony de Jasay, Justice and Its Surroundings 
Justice and Its Surroundings (Indianapolis: Liberty Fund, 2002).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
Chapters 2, 3, 4, 7, 10, and 11 are not available online for reasons of copyright. Liberty Fund makes the remaining chapters available with thanks to the original copyright holders.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
A society can, for the purpose of understanding distribution problems, be seen as the aggregate of three groups of adult residents arranged in decreasing order by income per head or per household: the Top, the Middle, and the Bottom group. Let all members of these groups have two social options: to emigrate, or to submit to a social choice rule by which two groups together decide the distribution of aggregate income among all three. Any two groups can form a coalition and cause the redistribution, to themselves or to sub-groups designated by them, of some part of the pre-tax income of the third group. The relative sizes and initial pre-tax incomes of the groups is such that the potential gain from applying this distribution rule is greatest if Bottom and Middle combine to take income away from Top. In democracy with simple majority rule, Top and Bottom are ideally each 50 percent of the electorate, and Middle is a single person, the median voter; this maximizes the size of Top, hence also the potential gain to Middle and Bottom from redistributing Top’s pre-tax income to themselves or to sub-groups they wish to favor. In real life, one may usefully relax this maximization condition, and think of Top as 40–45, Middle as about 10–20, and Bottom as about 40–45 percent of the electorate.
Under these conditions, rational use of the social choice rule results in a partial or total disjunction of benefits from costs in the politically determined domain of distribution. Benefits are unrequited cash transfers and free or subsidized goods and services in kind. Resources to meet their costs come from two sources: taxes of all kinds (including “social” insurance contributions that, being mandatory, function like taxes) and net public borrowing. The former give rise to interpersonal, the latter to intertemporal redistribution. In the former, gainers and losers are both identifiable, and their gains and losses are simultaneous. In the latter, gains precede losses, the identity of the future losers is uncertain, but it is a fair conjecture that they are, broadly speaking, the young and the unborn members of all three groups, with future members of Top bearing a more than proportionate share.
If the full cost of a benefit is not borne by the beneficiary, excess demand is likely to be generated for the benefit. If the cost-benefit disjunction were total, excess demand for transfers and benefits in kind as a whole would be infinite. (If a particular good or service were subject to saturation, a non-saturated one would be demanded in excess of supply). Partial cost-benefit disjunction may be perceived as total. This will be the case if an individual ignores the effect of his own consumption of “free” benefits in kind and transfer receipts on his own taxes—an effect that is individually negligible though it may become significant at group level.
The “Mature” Welfare State
If the above mechanism, once installed and bolstered by doctrinal legitimization, requires time to operate, the demand for benefits will be met by some supply, not instantaneously, but by gradual increments. The welfare state will have relatively modest beginnings; it will then go on growing in terms of the size and diversity of the benefits provided; and a ratchet effect is liable to prevent any substantial reduction or withdrawal of a benefit once granted.
There is no obvious equilibrating tendency setting an upper limit that the growth of the welfare state may approach but not breach. Instead, it “matures” and its growth abates, and then it approaches one of two constraints.
One constraint is a complex set of dysfunctional effects that come into play as the share of incomes received in the form of unrequited transfers and “free” benefits in kind increases. These benefits are either independent of personal effort, or may indeed be inversely related to it; with other things equal, their increase reduces effort. It also reduces that part of personal saving that can be imputed to precautionary motives. Further, associated effects spring from welfare fraud, tax fraud, the erosion of the economic raison d’être of families, and a host of others that space does not permit to enumerate. When the growth of the welfare state presses against this constraint, heavy efficiency losses tend to arise.
The other constraint operates upon intertemporal redistribution through the well-known effect of the public debt trap. In as much as the public debt is not indexed nor denominated in foreign currency, escape from the debt trap is in principle possible through inflation. However, if holders of the debt understand this and anticipate inflation, this escape route will be rapidly closed. In addition, refinancing the public debt will probably require sharply higher real interest rates.
Allowing the economy to press against one of these constraints, let alone against both at the same time, entails serious material and moral losses. It is for this reason that the call arises for “reforming” the mature welfare state, instead of passively letting the above constraints do the work of limiting it, as it were, “naturally.”
Collective or Individual Rationality
It is irrelevant, or nearly so, whether policy-makers or informed public opinion understand or not that society as a whole is in some sense worse off when the welfare state reaches the vicinity of these constraints. Even the more precise claim, that a reduction in the provision of welfare benefits would in fact increase potential well-being in the sense of meeting the Kaldor-Hicks compensation criterion, would not be decisive. For while reducing the benefits would presumably be “collectively rational,” it would be individually irrational, as long as by imposing an excessive, collectively irrational level of welfare provision, a majority (e.g., the Bottom and the Middle) could still obtain some gain at the expense of the minority (e.g., the Top)—quite irrespective of whether the resource loss of the losers was larger than the resource gain of the gainers.
This is saying no more than the trivial truth that a player in a distribution game can do best by maximizing his own payoff even if his doing so causes the payoff of the other player(s) to decrease by more than his marginal gain (i.e., if individual maximization decreases the game sum). There is no known method of assuring that a “social” bargain is reached that would reconcile the conflict between collective interest and individual majority interest. It is even debatable whether such a solution is conceivable in the face of the dependence of the collectively efficient resource allocation on an income-distribution that favors a minority.
Nor is there much reasonable ground for believing that collective rationality can prevail at the constitutional level if it cannot prevail in ordinary fiscal legislation. If it is irrational for a winning coalition to forego potential gains, it is equally irrational for it to adopt a constitution that would oblige it to forego potential gains. If such a constitution is in fact accepted, it is not necessary; if it is necessary, it will not be accepted (or will be circumvented).
A Fiscally Neutral Delayed-Action Reform
Recent history in both Western and Eastern Europe and the United States suggests that this logic does in fact operate most of the time, and political systems based on procedural social decision rules do not lend themselves to any radical rolling back of the welfare state. Voters do most of the time punish almost any curtailment of “free” benefits. In order to have even a minimal chance of success, a major reform attempt must for this reason meet two fundamental conditions. It must restore the conjunction of benefits and their costs at least at the margin; and it must incorporate this in an integrated, non-separable set of fiscal measures that is at least marginally favorable to a possible majority coalition, which may be the existing one or a new combination to replace it.
Is such a set of measures feasible? For feasibility, I shall assume, as minimum necessary conditions, that it must not directly clash with what seem to be political imperatives in mature welfare states (of which the Swedish political scene is probably one of the most characteristic examples); heavy progressive taxation of persons (combined with light corporate taxation to discourage the emigration of mobile factors, capital, and enterprise); egalitarian provision of welfare goods and services (no “first and second class” in health care, education, etc.); universal entitlements (no means testing) are features that, where they obtain, can only be undone at high political risk. However, should these political imperatives prove to be less compelling than expert opinion now believes, welfare reform would of course gain some degree of freedom. In broad outline, the following measures, taken together, take account of the several considerations discussed earlier in this paper, and might have some chance of attracting a majority coalition:
With the Grain
Clearly, as long as politics is unrestrained by deontological taboos about property and contract, men will always use it to disjoin benefits from their costs, get the former, and make others bear the latter. The reform sketched in Section 4 would, for evident reasons, fall far short of offsetting this primordial political drive. It would, however, establish at least a few cost-benefit conjunctions. They would be less efficient and less potent than the standard marginal equalities of cost and benefit prevailing in ordinary market exchanges. But though initially modest, they should have delayed and possibly important effects. For both the individual option to switch from welfare to market goods, and the closer and more visible links between welfare benefits and their costs, are likely to operate over electoral processes in future periods to curb excess demand for “welfare” by its consumers and willingness to meet it by its providers. With such mechanisms in place, the welfare state would acquire at least a modest built-in tendency to reform itself, so to speak, with the grain, rather than against the grain under the destructive pressure of its efficiency and debt constraints.
[* ]Reprinted with permission from Can the Present Problems of Mature Welfare States Such as Sweden Be Solved?, edited by Nils Karlson (Stockholm: City University Press, 1995), 20–27.