The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

PART 7

Economics, True and False

WHAT PRICE PRIDE?

ON THE HIDDEN COSTS OF ECONOMIC ILLITERACY*

In eight years of arduous haggling, the last major effort at dismantling trade barriers, the Uruguay Round, completed in 1994, is now estimated to have reduced the average trade-weighted import tariff and nontariff obstacles of the European Union by a mere 2 percentage points, from 14 to 12 percent. The remaining protection of domestic food and manufacturing output is estimated to raise consumer prices by 6 percent. As a result, employment in agriculture and in the main protected industries of the Union is now 3 percent higher (and in the nonprotected sectors of industry and the services presumably 3 percent lower) than it would be under free trade. Employment in the protected sectors was boosted by an average annual cost to the European consumer that roughly amounts to the annual wage of ten average European semiskilled workers. In other words, the hidden cost of keeping one more worker employed in the protected (and probably one fewer in the unprotected) sector of the European economy is the output that ten currently unemployed workers could have produced. The rise in the real incomes of consumers upon the fall in food and other prices would have been just about enough to purchase this additional output. But this staggering cost is not a levy, not a tax anyone has to pay. It is merely forgone income the average voter is totally unaware of and that does not hurt him.

After the Uruguay Round, it is now the turn of the Doha Round. To obtain the participation of the less developed world, the European Union and the United States had to agree to reduce their farm subsidies radically in exchange for more liberal trade mainly in services.

The Brussels Commission must negotiate the Doha Round on behalf of the European Union, and it cannot do so unless it manages to get the member states to agree to a thorough reform of the famous, and infamous, Common Agricultural Policy (CAP). However, last October in a daring preemptive move, France obtained Germany’s agreement to a freeze of the CAP until 2006 in exchange for capping CAP expenditure at the 2006 level until 2013. France is the chief beneficiary of the CAP and Germany the chief paymaster, so that both parties thought to have done a nice enough deal. The other member states acquiesced.

Despite the Franco-German move to postpone CAP reform till 2006, the Commission must under the Doha commitment try and press on with it. It is therefore once again putting forward, in a slightly modified form, a plan that was far too sensible and sophisticated to be acceptable last year.

Stripped of its complex details, the essence of the plan is that farm subsidies should no longer be linked to farm output. Instead of benefiting from price supports on grain, dairy products, wine, and olive oil, farmers would get roughly equivalent payments in recognition of their putative contribution to keeping the countryside inhabited and looked after. They would get these payments even if they greatly reduced the output of their farms—something they would almost certainly do as farm prices fell and it became uneconomic to farm intensively with high inputs of chemical fertilizers, weed-killers, pesticides, and brought-in animal feed.

Total value added by agriculture in the EU at the last count was 146 billion euros,1 produced on 6 million farms by a labor force, including owners, of 14.7 million. (Many of the “farms,” especially in Spain, Portugal, Italy, and Greece, are very small, under 1 hectare and do not provide full-time occupation.) Value added includes the reward of labor, rent, debt interest, and profit (if any). On this basis, the average annual income of farmers and farmworkers appears to be 10,000 euros. Needless to say, this average conceals many six-figure incomes in Britain, France, and northern Germany. Nevertheless, it is clear that it is quite insufficient to keep up the farm population, stop the drift to the towns and the abandonment of marginal farms.

However, in addition to what appears in the statistics as the value they produce, farmers also get EU subsidies of 42 billion euros a year, which makes the lot of the average farmer look a little less grim. Since these subsidies are linked to production, in order to earn them he engages in intensive farming. European consumers spend about 800 billion euros a year on food at retail prices. The on-farm value of this food, allowing for net exports, is of the order of 350 billion euros, which exceeds value added in agriculture by about 200 billion euros. This, then, is the cost of the inputs European agriculture buys from the chemical and farm-machinery industries, from overseas producers of feed grains, and from service providers of all kinds. Though such estimates are hazardous, it is a fair guess that at least half of this expenditure serves only to earn the 42 billion of production subsidies and would be uneconomic if subsidies were stopped or decoupled from production—which is precisely what the CAP reform proposes.

Merely by shifting the farm subsidies from a pro rata to a lump-sum basis, perhaps 100 billion euros of wasted inputs could be saved. Admittedly, realizing the saving would require adjustments in the pattern of industrial output and in foreign trade, with an increase in both industrial exports and food imports, but such adjustment would be perfectly feasible.

Or rather, it would be feasible if farmers had no pride and politicians had no incentives to excite their pride to fever pitch. Farmers, notably in France, Spain, and Ireland, now swear that the switch from production subsidies to lump-sum payments will take place over their dead bodies—and the dead bodies of many riot policemen.

The subsidy on cereals, dairy products, or meat, they angrily exclaim, is an act of justice pure and simple; what it does is to bring the farmer’s receipt for his produce up to his cost of production, which—as everyone must see—is only fair. It would be monstrous to expect farmers to make Europe self-sufficient in food and be out of pocket for doing so. Many politicians repeat, as a self-evident truth, that Europe must be able to feed itself if it wants to safeguard its independence. The man in the street cannot be bothered to think too hard about whether this is really self-evident. He also accepts, without a second thought, that farmers must get prices that will cover their costs of production.

It takes a little economic literacy to see that costs of production are as high as they are because prices, topped up by farm subsidies, are what they are. It should be obvious that grass-fed cattle cost less to fatten than cattle stuffed full of Brazilian soybeans, fish meal, hormones, and vitamins.

The force of the farmers’ argument, and the driver of their present fury, is that they find the CAP reform proposals humiliating. From producers, they feel they would be reduced to national pensioners, recipients of alms, with only a lame face-saving function as keepers of the countryside. Much of that function, they shrewdly foresee, would be sheer make-believe.

Much of their concern is understandable. It is doubtful, though, whether it weighs enough to justify the extravagant cost of dressing up their subventions as rewards for much-needed production. The saddest aspect of this whole inglorious dilemma is that public opinion is almost completely oblivious of the hidden cost that must be paid to comfort the farmers’ pride.

ON THE ECONOMICS OF PROTECTING EMPLOYMENT*

Karl Popper once advised a student that if he wanted to reap intellectual fame, he should write endless pages of obscure, high-flown prose that would leave the reader puzzled and cowed. He should then here and there smuggle in a few sensible, straightforward sentences all could understand. The reader would feel that since he has grasped this part, he must have also grasped the rest. He would then congratulate himself and praise the author.

The misfortune of Bastiat was that he never spouted endless pages of obscure prose. He wrote with such impeccable, jargon-free clarity that his readers thought he was simply stating the obvious that they knew anyway. He was, and still is, widely taken for a mere vulgarizer, clever with his pen but not a great thinker. In his own country, where obscure and high-flown writing is often prized above simplicity, Bastiat is as good as unknown. Yet it is there that heeding his words would do the most good.

In one of his most pathbreaking essays, “What Is Seen and What Is Not Seen,”1 Bastiat writes:

What is politely called “employment policy” or the “fight against unemployment” in much of continental Europe today is a classic example of how the visible good conjures up an invisible evil. Job protection, in particular, stands out.

Today, in Germany and France, divorcing your spouse is easier, and in most cases cheaper, than dismissing an employee under due observance of the provisions of the contract of employment. The administrative hurdles can be a long nightmare. Court approval may be required and, failing it, the employees in question must be reinstated. The labor union representing a majority of the employees must agree to the “social plan” by which the employer company undertakes to assist the employees who lose their jobs. Nestlé, losing vast sums of money year after year at its French mineral water firm, Perrier, and made to jump through hoops by the radical labor union CGT, which kept rejecting one “social plan” after another, could tell a tale about this. So could many others who often spend the best part of their management time trying to obtain permits for job cuts.

Lately, a French draft bill, redefining the conditions under which job cuts could be permitted, included the “safeguarding of competitiveness” as one of the grounds for authorizing such cuts. The CGT cracked the whip, President Chirac heard the crack, Mr. Raffarin the premier heard that Mr. Chirac had heard it, and the provision about competitiveness was tactfully scrapped.

It is too obvious for words that when firing is very difficult, very expensive, and takes long to accomplish even if it is eventually allowed, hiring will look a much more dubious proposition than it would otherwise do. The potential employer will think twice before creating a new job or filling one that falls vacant by natural wastage. Having thought twice, his third thought is quite likely to be not to hire.

Perhaps there is something to be said for making companies think twice about hiring, for while costless and riskless hiring and firing may make for an ideally efficient labor market, it does not make for loyalty and stability, nor for the employees’ peace of mind. But their peace of mind suffers more when faced with long-term unemployment.

With the exits from a hall blocked by formidable legal devices and extraordinary privileges granted to labor unions, it is surely fatuous to stand at the entry, wave a program called Employment Policy at the potential employers dithering outside, and tell them to “come in, come in all the same.” How many would come in, knowing that they could not get out as and when they wished?

It may be, though it is hardly certain, that “blocking the exits” does preserve some jobs. Volkswagen has recently accepted to block its own exit by agreeing to maintain present employment levels till 2011 in exchange for a wage freeze to 2007—an astonishingly audacious undertaking. Perhaps it will work out. Be that as it may, the jobs that are saved by one means or another are “what can be seen.” The jobs that fail to get created, or fail to get replaced, because of the very justified fear the blocked exit raises in the employer, are “what cannot be seen.” As Bastiat would have it, the small but visible present good must be followed by a greater but invisible future evil. Surely, however, not everybody is a complete idiot? Surely, many or most people must see that this is so? In fact, many do see it, but this does not necessarily prevent the few but visible jobs from being preferred to the many invisible ones that may be lost as a result.

The peoples of East and South Africa suffer heavily from AIDS but are reluctant to talk about it. They prefer to regard it as a malevolent act of Nature, rather than to admit that its spread had something to do with their own free and easy practices. The “political classes,” if not the peoples, of continental Europe display much the same attitude in the face of endemic unemployment. It is a malevolent circumstance beyond their control. The social regime they have put in place is not responsible for its spread. In no way is it the consequence of the “European model,” which is blameless in the matter. They will readily praise the European model for its purported humane dispositions, including its concern for protecting employment, but will not admit that the spread of unemployment owed anything to these concerns. Much of this is just fake innocence and whistling in the dark, for it is impossible honestly to believe that chronic unemployment is in no way the “model’s” fault.

Behind the fake innocence, a powerful political mechanism is at work, forcing attention to be confined to “what can be seen”—a mechanism that Bastiat in the 1840s did not account for, because in his time it did not yet exist. It developed after World War II along with the rise of the welfare state, and its systematic study was left to the “public choice” branch of economics to undertake from the 1970s onward. Job protection is an instructive case study.

“Blocking the exit” in a country the size of Germany or France may well abort each year 200,000 or more jobs that would have been created. A company trying to cut 200 jobs at its plant in a smallish provincial town will set off 200 furious and desperate screams insisting on protection. The despair and fury are perfectly understandable. They could hardly be mitigated by telling the protesters that overall job protection will cost the country as a whole 200,000 jobs. The local screams will be transmitted to the capital, and multiplied in volume, by the labor unions and the news media, frightening the wits out of a government worried about its score in the polls and the next election. It takes more self-confidence and “long-termism” than most governments possess, to rise above such worries.

Once the state has moved into the economic sphere and taken responsibility for propping up the well-being of its citizens with the money it takes from them, it can hardly stop them running to it for help when their well-being needs propping up. The process, of course, becomes cumulative, for “what is not seen” must systematically be sacrificed for the sake of “what is seen.” Bastiat’s great discovery, opportunity cost, that evaluates a chosen alternative against the forgone alternative that could have been chosen in its place, must then lose its edge.

THE COSTLY MISTAKE OF IGNORING OPPORTUNITY COSTS*

Projects involving major expenditure and intended to produce future benefit are usually assessed in terms of expected payback. Comparing expected yield to the interest rate, or discounted cash flow to the capital cost of the project, is the standard way of judging whether it is worthwhile. In an accounting sense, the cost is straightforward. It is seen as and when it is incurred. “What is the cost of a million-dollar project?” is a silly question. The answer is in the question: it is a million dollars.

This is a fair enough way of looking at cost as it appears in a competitive market. Raising a million dollars from the market for a given project will not noticeably hinder further millions being raised for other projects. If we said billions in place of millions, the relation would probably still hold, though perhaps only just. With ever more general “globalization,” the supply of resources is getting so elastic that even preempting a significant chunk of them for one purpose may not seriously jeopardize the fulfilment of other purposes. Resource scarcity is correctly measured by the cost of capital. The capacity to cover that cost is the sole test of a project. No concern arises about one project “crowding out” another.

Yet “crowding out” is inevitable, for the same million cannot be spent on two alternative projects, each of which costs a million. The crowded-out alternative is not seen. It is quietly ruled out by the market because it is not judged capable of meeting the test of at least paying for itself. The project that is carried out meets the test, or is believed to do so. Its opportunity cost is the forgone alternative that does not get carried out. It does not meet the test, or is not believed to do so, hence it is worth less than the project that has crowded it out. In the competitive market, the visible accounting cost and the invisible opportunity cost perform the same work of selection.

This happy coincidence abruptly ceases to hold in a nonmarket environment, where the cost may be raised from the taxpayer, where the expected benefit is most often unpriced, nontraded, and intangible, and where resources move from one use to another in response not to profitability but to legislative and regulatory commands. It is in this environment of public policies that Bastiat’s pioneer teachings about opportunity cost1 become strikingly timely again, just as they were during the 1848-49 socialist episode when he wrote them down.

Public expenditure is seldom totally useless; its usefulness, however modest, is “what is seen,” and this is one reason why even such expenditure can be so popular. The public tends implicitly to believe that “what is not seen” does not even exist—that when a new opera house or stadium is built, it is all a net gain of national wealth, for nothing else would have been built in its place. In the limiting case, even useless outlay can be “useful” if it provides employment. Bastiat has a tale about the broken window that gives the glazier a job of work: “what would become of the glaziers if nobody ever broke a window?” He also relates that when Napoleon had ditches dug and filled in again, he was convinced of doing good, by causing “wealth spread among the laboring classes.”

The belief that even useless activity is good if it provides work and income for the glazier and the ditchdigger, instead of leaving them idle, and thus by a ripple effect stimulates demand and employment throughout the economy, has been lent intellectual respectability by the good old Keynesian doctrine that the cause of unemployment is lack of effective demand. After the experience of recent decades, this belief is no longer widely held. Bastiat, of course, never held any such belief. Indeed, he seems to have been quite unaware of the possibility that if resources are idle, their opportunity cost may in fact be zero. However, the bitter and stubborn failure of make-work schemes in Western social democracies to lure idle resources out of unemployment into work shows that in practice zero opportunity cost, like Milton Friedman’s free lunch, just cannot be had.

Perhaps the most important area where public policy tends to overlook opportunity cost is in the defense of “what is seen.” Bastiat takes issue with the poet and revolutionary deputy Lamartine over subsidies to the arts and the theater. Maintaining these activities by state aid serves a worthy aim, including employment for artists, actors, and artisans, but Lamartine sees only what is thus preserved. He does not see the opportunity cost, namely that the resources devoted to the arts would have served other aims that corresponded to what people actually chose rather than to what the state induced them to choose by subsidizing a particular branch of activity. Bastiat does not deal with the idea of “merit goods” that ought to be produced whether the public wants them or not. But he stresses that promoting the fine arts can only be done at the cost of cutting back other things—a loss we do not see. It is, he notes, impossible to promote everything at the expense of everything else. This echoes his famous definition of the state, “the great fictitious entity by which everyone seeks to live at the expense of everyone else” (op. cit., 144).

There is great anxiety today about the migration of jobs from high-wage to low-wage areas. Western Europe and North America are supposed to lose in this process, and there is great agitation to stop it and preserve the employment “we see.” A massive regulatory apparatus, notably in Germany and France, makes it difficult and expensive to dismiss employees. The obvious effect is to frighten employers, for who wants to hire if he may be unable to fire? However, while the opportunity cost of thus defending existing employment is to suppress new job creation, the latter is “not seen.”

Migration of work across geographic frontiers obeys the same economic logic as its migration across technological ones. The basic case of the latter is when work is taken from men and given to machines. This classic symptom of rising wealth has long been accepted as such by modern man, whose concern today is with other symptoms of progress in productivity, such as “outsourcing” and “delocalization” to low-cost areas. However, in the middle of the nineteenth century, the machine was regarded as the chief enemy of the working man and of all traditional activity.

In the same tongue-in-cheek manner that he adopts when speaking of the broken window, the candlemakers who must be protected from the unfair competition of the sun, and the “negative railway” that, by not being laid, will keep all the carters and their horses in business, Bastiat finds that only “stupid nations” can enjoy wealth and happiness, for only they are incapable of inventing the machines that destroy prosperity.

Much regulation has been inspired by the same kind of reasoning. “Outsourcing,” “delocalization,” and other ways in which firms respond to the high cost (aggravated by high social charges) of low-skill labor are rendered difficult and sometimes impossible by government action. This is tantamount to suppressing the opportunities for the improved, more profitable use of all resources—including the labor that is released from poor jobs and is induced to move to more skilled, more productive ones. There are clearly industries and occupations that highly industrialized countries should simply not engage in. Defending them by passing legislation in favor of what we have and against what we could have is not unlike the long-forgotten attempts to legislate against machines.

“Good Lord,” Bastiat sighs, “what a lot of trouble to prove in political economy that two and two make four; and if you succeed in doing so, people cry: ‘It is so clear that it is boring.’ Then they vote as if you had never proved anything at all.”

“GLOBALIZATION” AND ITS CRITICS

MUTUAL GAIN VS. CLOUD-CUCKOO LAND*

It is an old truth that lack of understanding and sheer stupidity cause more harm and suffering in the world than wickedness and self-seeking. This is particularly the case when politics holds a broad sway over individual lives, when a large proportion of the national income is spent by government, and when a few major collective decisions can make the difference between prosperity and penury; for in such situations the obtuse and the stupid have immense leverage to spoil things while intending to improve them. To aggravate matters, they also possess a mode of discourse that has a more potent and immediate impact on popular opinion than the cooler voice of lucid good sense.

Much of the passionate criticism of “globalization”—perhaps even the very use of this woolly term—can be best understood by bearing these factors in mind. So can the truculent nature of many of the hodgepodge of antiglobal policy measures adopted to combat it. Both the criticism and the policy amount to a protest against the intrusion of reality into a fairyland where everyone had the “right” not to get hurt.

“Globalization” is blamed on many things, of which two stand out. The more naive of the two is a conspiracy theory. Capitalism, personified by the multinationals and especially by the oil majors and the makers of some famous consumer brands, are everywhere busy sacrificing humane values for the sake of profit. They locate production where wages are the most miserable. They pressure gutless governments to condone their destructive practices, to allow them to evade taxes by tricky transfer pricing, to speculate in currencies and commodities, and to steamroll national industry into the ground. In short, they quietly build worldwide capitalism. (It is amusing to note that if multinationals did do all these things, the almost exclusive beneficiaries would be present and future pensioners, very much part of the common people, who own all but a fraction of these sinister multinationals. Exxon Mobil and Coca-Cola do not pay dividends to themselves. Their dividends go mostly to “ordinary people.”)

The other supposed culprit in bringing about “globalization” is the rise of market liberalism and in particular the gradual freeing of trade and capital movements that began in the 1950s and which is, albeit slowly and jerkily, still going on. The freer trade is, the more limited is the sovereignty of states over their own economic destiny. “Globalization” rubs out national identities, smothers diverse national cultures under an American layer, and undermines the primacy of politics over economics, a primacy that is sacrosanct to democratic ideology. Antiglobalizers want to ward off these by-products of freer trade by reverting to cozy protectionism. At the same time they tacitly assume that one can have it both ways and the riches created by the free movement of goods and capital can somehow be preserved.

A Kennedy Round, a Uruguay Round, an EFTA or a NAFTA, the GATT, and the WTO have undoubtedly made trade more free and global. But they did not invent free trade. Instead, they have restored a situation of few or low barriers that had prevailed more than once in history, the last time in the final third of the nineteenth century. In fact, free trade and protection have usually alternated in a complicated geographical and time pattern in which it is hard to discern a bias one way or the other.

Deep underneath these ups and downs, however, there has been a great trend for as long as we can look back: the trend of a steeply improving transport technology at sea, on inland waters, on the road and rail, and lately in the air, evolving from such basic devices as the wheel, the sail, the oar, the spring, and the engine that transforms energy into motion.

The effect of improving transport technology was, of course, that the movement of goods and also of persons became progressively less costly in both time and other resources. The scope for the division of labor and mutually profitable exchange steadily widened. This manifested itself in the steep fall of transport cost as a proportion of the delivered value of merchandise—an effect that, over the centuries, far outweighed any effect the raising or lowering of trade barriers may have had.

It was by historical standards only recently, in the sixteenth and seventeenth centuries, that long-distance trade was still practically limited to spices, tea, silk, dyestuffs, and precious metals—goods with a high value-to-weight ratio. Today, even lowly cement and scrap metal will travel thousands of miles. In Goschen’s day, half a percent on Bank Rate was supposed “to draw gold from the moon.” Today, a single-digit basis point rise will do it.

The long decline of transport and communication cost, and hence the declining relevance of location, has in our own age reached a point where competition is never far away. Business and labor can no longer get away with comfortable practices. In the post-World War II period, even in some of the more advanced economies, workers used to “own” their jobs, wages could only go up and hours worked could only go down. Everybody had a “right” to make a living in his chosen occupation or, failing that, draw earnings-related unemployment pay almost indefinitely. If winemakers or shoe manufacturers could no longer make their business pay, they nearly always managed to get state aid and carry on. Structural change in the economy, that would force many to adapt and suffer damage in the transition, was powerfully retarded by the political will not to let anyone get hurt.

This was Cloud-Cuckoo Land, and rather abruptly it is proving to be unsustainable. Welfare reform is in the air, working hours are getting longer again, and instead of the unions blackmailing the employers as has been the case for decades, it is now the employers who start blackmailing their workers by the threat of relocating, outsourcing, or straightforward job cuts. There is of course fierce political gesticulation to stop these developments, but what is politically desirable is no longer necessarily practicable. Reality is back with a vengeance. And reality, when it takes people by surprise, is not uniformly tender.

If globalization throws the doors open to reality, and reality is harsh, what is the point of globalizing? If it could be halted or reversed, should it be?

The short answer is that since transport and communications technology cannot be disinvented, reversing globalization cannot be done. However, such an argument will not stop wishful thinking.

In a public debate with antiglobalizers, Frits Bolkestein, arguably the clearest mind in the outgoing Commission of the European Union, once innocently asked them: “Why do you want to keep the poor countries poor?”

One elegant achievement of economic thought is the Factor Price Equalization theorem proved by Paul Samuelson. It states that if trade in goods is free and transport costs are zero, the rewards of factors producing tradable goods will in equilibrium be equal everywhere. More realistic assumptions used by Olin and Heckscher yield the result that factor prices will at least tend to converge. The significance of the theorem is that people do not have to migrate from poor to rich countries to achieve higher incomes; free trade will do it for them even if they stay at home. The point of globalization, then, is that both the rich and the poor countries gain, but the poor ones gain more, faster. Lovers of equality and worldwide “social justice” ought to welcome it, and not begrudge the transfer of less skilled jobs from the richer to the poorer countries.

They contend, instead, that in practice the opposite happens and social justice is flouted. The rich gain more than the poor; indeed, the poor may actually lose. Statistics can be made to say almost anything. They are made to say that the majority of third-world countries have been losing ground to the rest of the world in the course of trade liberalization. The International Labor Office has in a recent report held globalization responsible for this.

The majority of third-world countries that have grown more slowly than the world average are mainly African and mainly small- or mediumsized. They suffer cruelly from their incompetent governments, which are often engaged in shameless thieving. Two countries in the third-world minority, which is growing faster than the world average, are China and India. With a combined total of close to 2.5 billion inhabitants, they account for nearly a third of the world’s population between them. Their recent growth rate has been twice to three times that of the first world. If globalization was at least partly responsible, it certainly does seem to prove the point.

ARE HIGH OIL PRICES A FORM OF EXPLOITATION?*

No day passes without the news offering a neat economics lesson or two. No tuition fee is payable; only a little thought is needed to absorb the lesson.

It is in the nature of news that much or most of it is bad, for good news is no news and commands neither much airtime nor many column inches. In democracies, where everything ultimately hinges on the popular vote and the polls report almost day by day which way the popular vote would go if it were cast then and there, governments need nerves of steel not to lean the way the polls go, and few governments have nerves of steel, especially when they have election dates to think about. Nondemocracies have other reasons to be concerned about popular discontent.

One recurrent piece of news is about shamelessly high, and rising, oil company profits. Latest broker consensus estimates put the 2005 net earnings of the ten oil majors at over $100 billion. Exxon Mobil alone is expected to earn $31.6 billion, with Royal Dutch Shell, BP, and Chevron each making over $20 billion. Such numbers make the lay public feel dizzy and furious, especially when the moment comes to fill the car’s tank and pay painfully more than one did last time, or three months ago.

Governments find it imperative to be seen to be doing something to get the price down. In Western Europe, between two-thirds and three-quarters of the retail price of gasoline is tax and the easiest way to reduce the price would be to cut the tax. Nearly every government has so far resisted the pressure to do this. Keeping the tax high is the main way to keep European consumption below the American level and put an obstacle in front of the triumphant advance of the “sports utility” behemoths. The remaining way to appease the angry public is to attack oil-company profit margins. Though high profits curb consumption no less than do high taxes, cutting the former does not hurt government revenue, while cutting the latter does.

Last month, both the Austrian and the French governments threatened to put an excess-profit tax on oil-company profits unless they reduce gasoline prices at the pump. (They duly did so to a minor extent, though some of the reduction was due to an easing of crude prices after the International Energy Agency organized a release of 2 million barrels/day from government stocks.) France in addition invited the companies to make greater efforts to develop renewable energy sources.

WASTING RESOURCES ON RENEWABLE ENERGY

Renewable energy deserves a digression. Seven kilometers offshore from where I live on the Channel coast, the French powers-that-be have just given the go-ahead for a German company to build the country’s biggest wind farm, from which twenty-one windmills, tall as forty-story skyscrapers, will deliver 105 megawatts of power into the national grid when the wind blows. To attract the investment, a price equal to 2.2 times the Western European average had to be guaranteed. Although 105 megawatts is about a tenth of the capacity of an average-sized thermal power station, both will have the same initial capital cost.

If oil companies have not so far put more money into renewable energy, it is because, short of a technological miracle, they thought it would be a waste of money. Some miracle of an unexpected kind will very likely occur one day to make some renewable energy source economical, but until it does, responsible oil companies will make haste slowly toward biomass, solar, or wind power beyond the research stage. They can hardly invest in anticipation of technological miracles, and to invest in existing technology is to waste two units of hydrocarbon energy to produce one unit of renewable—as is the case with hydrogen as a fuel and ethanol of vegetable origin.

WILL OIL GO TO 100 DOLLARS A BARREL?

Hydrocarbon reserves are supposed to start running out around 2020-2030, and go to $100 a barrel or more before they do. These conjectures need to be put in perspective.

Crude oil reserves have been supposed to be running out for the last forty years, yet have remained remarkably constant as a multiple of annual production, rising as production rose. There is no guarantee that this will go on being the case indefinitely. But contrary to the somewhat simplistic argument that “like everything else, oil in the ground is a finite quantity,” there is no presumption of the reserves-to-production ratio falling in the foreseeable future. For all we know, it may rise. The headlong progress of seismic search and drilling technology is likely to permit exploration to depths undreamt-of a mere five years ago. After all, over 90 percent of the world’s sea bottoms remain wholly unexplored. Deep drilling in very deep water used to be unthinkable; now it is just very expensive, but as the practice spreads, it will become less expensive.

Currently, about 30 billion barrels of oil a year are taken out of proved reserves and about the same amount put back due to new discoveries and transfers from probable to proved reserves. At an average price of $50 a barrel, this oil will fetch $1.5 trillion, of which $500 billion accrues to OPEC countries and $1 trillion to non-OPEC producers. At a “ballpark” figure for finding costs of $12/barrel, it takes $360 billion to add back the same quantity of oil to the reserves. The difference between the finding cost and the selling price is accounted for by amortization of production installations (in fiscally generous countries, by a depletion allowance as well) by lifting costs, royalties, and taxes, and the upstream profits of the operating companies. Downstream profits are earned from much thinner refining margins. Raising the finding cost by, say, 50 percent to replace reserves would raise the total cost of crude, and of refined products, by much less than 50 percent. There seems to be no good reason for crude to cost $100 for any length of time. If it did, a glut of crude might well follow a few years later.

It is the upstream profit that acts as the tail that wags the dog. Its expected level determines the finding cost the oil company will be willing to incur to replace (or raise) reserves. Until two years ago, the French oil company Total had a policy of not undertaking an exploration-and-development project unless it could at least pay for itself at a world oil price of $10 a barrel. This severe cut-off level would hardly allow spending more than $3 a barrel on finding costs. However, what determines the finding cost that an oil company will be willing to risk is not the expected price of oil, but the expected profit it can make at that price. If the price goes from $50 to $70 or even $100 a barrel but the company is not allowed to make any more money at $100 a barrel than it did at $50, it will not be prepared to incur higher finding costs. The deep ocean bottoms will remain unexplored and known world oil reserves will start to run out. Then will biomass and wind farms come into their own, at a vastly higher cost than would have been necessary if oil company profits had not been threatened with excess profit taxes and publicly pilloried as shameless if not downright criminal.

BUT OUGHT EXPLOITATION NOT TO BE STOPPED?

One lesson to be learned from the high price of oil is that it acts as a lure, inducing oil companies, from Exxon down to the small wildcatter, to explore prospects that did not look economic before, thus to increase probable and proven reserves and—perhaps to their own dismay—get the oil price down again. We call this economics, and it takes cool heads to let it work itself out. Most of the voting public lacks cool heads, and poll-watching politicians cannot afford to stay cool if they want to keep their influence and their seats. They will feel a need to reject the workings of oil economics for being “exploitation of the defenseless consumer” that ought to be stopped. Hence the threat to confiscate “excess” profits—a threat that will discourage some of the very investment that would in time raise oil reserves and deflate the “excess” profits that called it forth.

Behind this easy lesson looms a larger one about labor and capital, wages and profits. A self-correcting mechanism inherent in contractual freedom helps push up low wages because low wages permit high profits and high profits lead to more rapid capital accumulation, hence higher demand for labor. The mechanism works in the opposite direction if high wages squeeze profits and curb capital accumulation.

In his Journeys to England and Ireland1 the sociologist and historian Alexis de Tocqueville was appalled by the miserable living conditions and low wages of workers in early-nineteenth-century English industry and noted that the mill owners were bringing starving men over from Ireland to have a large and docile labor supply and prevent wages from rising.

It is a fact that the Irish were made better off by being brought to work in the Lancashire mills, and it is a fact that the English were flocking to the mill towns because their life as farm laborers was more miserable still than as cotton spinners. Nevertheless, to observers like Marx and Engels, exploitation was flagrant. If it had been stopped by legislative fiat and regulation, capital accumulation would have stopped and the spectacular industrial expansion of England would not have taken place. It was thanks to this expansion that by the latter part of the nineteenth century the English worker was arguably the best paid and generally best off in the world and the Irish immigrant to northwest England and west Scotland could share in this relative prosperity. Without “exploitation” and the corrective mechanism of capital accumulation that it sets off, much of the developing world would still be stuck in utter misery.

IMMIGRATION

WHAT IS THE LIBERAL STAND?*

Poverty is the chief bane of the greater part of the world, especially of Africa, much of Southeast and Central Asia, and Central and other parts of South America. A variety of local causes are blamed. A common cause, however, is government that is either downright vicious or at least incompetent to handle and employ without causing harm, the power with which it is endowed. A common remedy is on its way, operating in some areas—most spectacularly in China and India—and rising on the horizon in others. It is popularly called “globalization,” and in the economist’s language it is the falling relative cost of transport, transaction, and trade barriers. “Globalization” promotes the progressive equalization of productivity-adjusted wages all over the world. If their governments are not getting worse (and some are in fact getting marginally better), it is only a matter of a few decades for the poorer two-thirds of the world to rise above absolute poverty.

The reduction of relative poverty—what sociologists call relative deprivation—looks far more difficult, if not impossible. Demography will see to it that real income per head in the poor world will increase only a little faster than in the rich world, where indigenous population will be stagnant or falling. At the same time, television and its ilk will keep undermining social stability and will see to it that people in the poorer regions of the world should see their own standard of life more and more by the yardsticks of how the other half lives. They now seem to feel more miserable even as their physical circumstances become less appallingly bad.

The upshot is that the pressure to immigrate to the fairylands of Western Europe, the U.S., and the white ex-British dominions is rising and is destined to go on rising perhaps for several decades. Economists may be tempted to say that free trade will serve as a safety valve, for where goods and capital move freely, people need not move to make themselves better off. But as the depressing story of the Doha Round shows, trade is not getting free enough fast enough, and capital movements will never be broad and sweeping enough as long as Bolivian, Russian, or Zimbabwean governments can lay their hands on it in the hallowed name of national sovereignty or social justice.

WHAT HAS CHANGED

Immigration, of course, is nothing new. During the great migrations after the fall of Rome, entire peoples moved from Asia to Europe, though this was not a movement into settled countries across defined frontiers. From the eighth century onward there was a broad stream of involuntary migration from Central and East Africa, with Arab traders catching or buying from tribal chiefs black Africans to be sold into slavery. Estimates of black African slaves moved to the Middle East over the thousand years to the seventeenth century vary from a low of 8 million to a high of 17 million. (It is claimed that the great majority of male slaves were castrated, which would explain why there is next to no black minority population in Arab lands.) After the seventeenth century, demand for slaves from the Caribbean, Brazil, and the southern United States priced the Middle East out of the market, and the slave trade passed into white hands. Until the abolition of slave trading (though not of slave owning) in 1808, 8 to 10 million more black Africans were shipped across the Atlantic.

There have since been two radical changes. Immigration ceased to be involuntary. People moved from Europe to North America and other lands with temperate climates of their own free will, attracted by economic incentives. Entry to these lands was unrestricted. The second great change, coming roughly with World War II, was when the entrance gates started to close. Immigrants were no longer admitted as a matter of course, but as a selective privilege granted sparsely. More and more immigrants turned into intruders, slipping in through porous frontiers and living and working with no legal status.

There are now an estimated 8 to 12 million illegal immigrants, mostly Hispanics, in the U.S. Europe’s illegal immigrants are ethnically far more mixed, coming as they do from black Africa and the Caribbean, Arab North Africa, Pakistan, Bangladesh, Ceylon, Indonesia, Turkey, and the Balkans. An estimated 570,000 live in the United Kingdom. French guesses range between 200,000 and 400,000, though the reality is almost certainly higher. The annual influx into both countries may be about 80,000.

The economic effect of illegal immigration is on balance probably positive, though it is controversial in countries with high unemployment, such as Germany, France, and Italy. It can hardly be disputed, though, that without illegal immigration from Mexico, the U.S. would not have had its spectacular growth of recent years, and the notion that illegal immigrants steal the jobs of whites in Europe comes from voodoo economics. Illegal immigration hurts, not economically, but because it is resented as a loss of control by a society of whom it will admit into its midst—a loss that is easily accepted when the colored immigrant population is yet small, but becomes fearsome when the cumulative weight of decades of uncontrolled illegal entry starts to change the ethnic and cultural profile of a country. The Netherlands is arguably the most tolerant country in Europe, but with 1,700,000 nonwhite inhabitants, it has recently become violently nervous about the future and slammed on immigration controls that are draconian by Dutch standards.

The European Union is budgeting to give 18 billion euros over seven years to help African economic development (a flagrant example of hope prevailing over experience for the umpteenth time), on the understanding that African governments will do their share in reducing the flow of illegal migrants. Many other initiatives are being taken to strengthen frontier controls, to restrict the legalization of illegals, and to deport some to their countries of origin as a deterrent to would-be illegals. None of these attempts seems to have much of an effect seriously to reduce the influx of unwelcome immigrants. Only quite radical measures might stem the tide, for whose severity current European opinion has, understandably enough, no stomach.

NO-MAN’S-LAND OR FAMILY HOME?

Classical liberals have a bad conscience about immigration controls, let alone severe ones. The liberal mind has always disliked frontiers and regards the free movement of people, no less than those of goods, as an obvious imperative of liberty. At the same time, it also considers private property as inviolable, immune to both the demands of the “public interest” (as expressed in the idea of the “eminent domain”) and the rival claims of “human rights” (satisfied by redistributing income to the poor who have these rights). Private property naturally also implies privacy and exclusivity of the home.

One strand of libertarian doctrine holds that it is precisely private property that should serve as the sole control mechanism of immigration. Immigrants should be entirely free to cross the frontier—indeed, there should be no frontier. Once in the country, they should be free to move around and settle in it as if it were no-man’s-land, as long as they do not trespass on any part of it that is someone’s land, someone’s house, someone’s property of any sort. They can establish themselves and find a living by contracting to work for wages and to find a roof by paying rent. In all material aspects of life, they could find what they need by agreements with owners and also by turning themselves into owners. Owners, in turn, would not object to seeing immigrants get what they had contracted for.

A very different stand can, however, be defended on no less pure liberal grounds. For it is quite consistent with the dictates of liberty and the concept of property they imply, that the country is not a noman’s-land at all, but the extension of a home. Privacy and the right to exclude strangers from it is only a little less obviously an attribute of it than it is of one’s house. Its infrastructure, its amenities, its public order have been built up by generations of its inhabitants. These things have value that belongs to their builders and the builders’ heirs, and the latter are arguably at liberty to share or not to share them with immigrants who, in their countries of origin, do not have as good infrastructure, amenities, and public order. Those who claim that in the name of liberty they must let any and all would-be immigrants take a share are, then, not liberals but socialists professing share-and-share-alike egalitarianism on an international scale.

MORE NONSENSE ON STILTS

MR. BENTHAM IS AT IT AGAIN*

“Nonsense on stilts” was about the least rude of the many rude expressions Bentham used to pour scorn and contempt on the newfangled “rights of man” that were proclaimed at the end of the eighteenth century. These were not the contractual rights, backed by obligations which parties to contracts had assumed to honor, that figured in common and civil law and helped commerce to flourish. Rather they were flights of rhetorical fancy and pious wishes—as he put it, the letter was nonsense and beyond the letter there was nothing.

However, in promoting his rival notion of utility, which he thought was hardheaded, down-to-earth, unsentimental, and amenable to cool calculation, Bentham acted much like the pot that had called the kettle black. His “greatest happiness of the greatest number” is a model of strictly meaningless rhetoric if ever there was one. Nevertheless, his utilitarianism had a century-long run of intellectual dominance until it was toppled in the 1930s by Lionel Robbins and others, and even after losing its academic prestige, it remained politically influential to our day. It is its amazing ability to bounce back in unexpected forms that this article is about.

The great point of utilitarianism was that it raised “practical reasoning” to near-divine rank with final authority over what was to be or not to be. It treated it as agreed, established truth that an impartial observer can tell whether the utility gain of one person is greater or less than the utility loss of another. Hence he can also tell whether a policy—say, taxing Peter and giving the money to Paul—is a good thing or not. Goodness was the vernacular for utility maximization. The calculus of utility opened up a glorious vista for endless policy changes, each of which would increase the utility of the gainers by more than it reduced the utility of the losers. Coupled with the supposition that the marginal utility of income was diminishing, this doctrine provided the “scientific” justification of progressive taxation.

Bentham himself was perfectly aware that aggregating the utilities of different persons, e.g., to subtract from the gains of some the losses of others, is just as nonsensical as taking four apples out of seven oranges. He privately conceded that such arithmetic was really impossible. Yet he pleaded for its use, because without it “all practical reasoning is at a stand.”2 Clearly, it would have been unbearable for him to stop telling society where to seek its advantage and how to procure the greatest happiness for the greatest number, for he had no doubt that this was what he was dong.

The thought is unbearable to the modern economist, too, except that the last two generations of them are sophisticated enough to handle “interpersonal comparisons” (or, more accurately, interpersonal aggregation) with care. Most will now say that when they recommend a policy, they do not mean to say that Peter’s utility gain would be greater than Paul’s loss, hence society’s total utility would demonstrably increase. They would instead allude to a sort of value judgment they share with most right-thinking and informed observers, a more modest stance that disclaims science, though its modesty is sometimes a sham, meant coyly to convey that science in fact cannot be far behind.

Now and again, however, dyed-in-the-wool utilitarianism does make a comeback where it is least expected. Progressive taxation, once universally approved by all thinking men on the ground that getting a dollar gives more happiness to the poor than losing it causes unhappiness to the rich, has in recent decades lost some of its intellectual supremacy. Some of its side effects—perverse incentives, brain drain, capital flight, a wasteful cult of tax avoidance—have begun seriously to blur the nice calculation of Peter’s utility gain exceeding Paul’s utility loss. Top rates of income tax have been reduced in practically all developed countries. It was time for Bentham’s spiritual successors to mount a counterattack. The most recent one is of stunning audacity.

Lord Layard, the distinguished British labor economist, has now moved to the borderland between welfare economics and ethics and produced a theory relating taxation to happiness that is a classic of confident utilitarian reasoning Bentham himself could not surpass.

Layard’s opening salvo is that neuroscience now gives us sufficient knowledge of what goes on in our heads to enable our happiness to be objectively measured. He insists that what he can measure is not passing sensations of pleasure and pain, but lasting contentment, overall satisfaction with our lives—well, in one word, happiness. He then, plausibly enough, explains that one source of unhappiness is not poverty, deprivation, unsatisfied wants, but rather a relative worsening of our condition compared to that of our peers. What irks and depresses us is not that we are not rising fast enough, but that our neighbor is rising faster than we do. This, of course, is reminiscent of the theory of poverty as relative deprivation, i.e., as something that cannot be cured by the whole society getting richer without getting more egalitarian. It also recalls the well-known argument that the pain suffered by the envious is a legitimate reason for levelling down, for chopping off the heads of the “tall poppies.”

The novelty of Layard’s twist is the parallel he draws with pollution. A fast-rising man’s success saps the happiness of the plodder just as surely as the polluter’s pesticide, exhaust gas, or noise saps the happiness of those around him. Pollution is a “negative externality” that imposes a cost, i.e., reduced happiness, on the victims. Everybody agrees that to “internalize the externality,” the polluting activity ought to be taxed. The tax forces the polluter himself to bear the cost, inducing him to lower pollution to the socially optimal level. If this is true of pollution, it must also be true of getting richer or being promoted faster than the rest of us. The man who is doing too well for our peace of mind shall be discouraged by a tax on success.

Anyone can spin a tale from this auspicious beginning. Successful Jones is punished for his zeal by a tax. This reduces his happiness. It also reduces his zeal, making him less successful, which decreases Plod-der Smith’s unhappiness. One of them supposedly gains more than the other loses. Layard would have us believe that it is Plodder Smith who gains more, and after all he can check this by sounding the brains of both. Moreover, the new tax paid by Jones can be used for many good purposes, adding to Everyman’s happiness which, too, can be measured by interrogating certain receptors in his brain. The result must be added to the score so far. The story then goes on; while Jones’s reduced zeal relieves some of Smith’s unhappiness, it also puts a brake on the growth of GDP, and Mrs. Average will enjoy fewer goods than she could otherwise have done, which might well make her a little less happy. However, the interpersonal score is still incomplete.

All agree that pollution by smoke, chemicals, or noise is bad, hence all should accept that pollution by success is bad by analogy. All agree, too, that drug addiction is bad. Layard tells us, again quite plausibly, that shopping and buying ever more expensive consumer goods is addictive. To feed the habit, we work too much. A tax on effort would make it more expensive to indulge our addiction to consumer goods we do not really need, and would make work less attractive and leisure more. “Kicking the habit” altogether by giving up excess consumption would help us adopt the balance between work and leisure that would be most conducive to happiness.

That increment, too, must be added to the score. However, the bottom line may still be some way off. For leisure, let alone idleness, may be addictive, too. Some of the characters in this story might end up growing lazy, doing less work than the amount that would make them happiest. And some people would have to go without the goods these characters would have produced if they had not been idling. That, too, must be duly accounted for.

Once all these entries are made, the stocktaking of happiness can move on to the echoes and the ricochets, the secondary and tertiary effects of primary changes engineered to enhance that most bizarre of entities, aggregate social utility. Second only to God, the latter-day Benthamite is all-seeing and up to the task. After some passing discouragement, he is confidently at it again, and as long as he is, there is hope for our greater happiness.

RISK, VALUE, AND EXTERNALITY*

The “social” in social justice would always deserve to be put in quotation marks, for on close inspection it is far from evident that the adjective really fits the noun and “social” justice is really justice in any but a sloppy sense of the word. However, I will resist the temptation of the quotation marks, which could well be accused of subliminally prejudging the issue.

This essay is a bird’s-eye review of some attempts to make social justice intellectually respectable by reconciling it with justice in general. I cannot explain why, but I find it truly striking that all these attempts massively resort to economic theory of one sort or another. With the exception of orthodox Marxism, they all aim at performing an almost acrobatic feat: justifying the placing of the burden on the better-off of redressing an alleged injustice suffered by the worse-off, without making any sort of case that the better-off are guilty of it.

1.

CHARITY AND OBLIGATION

There is a moral intuition, strong in some and weak in others, that tells the better-off to give to the worse-off. The same sort of intuition sometimes tells some people to persuade, browbeat, or force the better-off to give to the worse-off. The result is charity. The donor may be wholly voluntary, wholly coerced, or in-between, but the recipient is not entitled to what he gets; the matter is not one of justice in any proper sense of the word.

Justice is a property of acts. Just acts conform to certain rules, unjust ones violate them. A state of affairs is just if it is the outcome of just acts. If we want to claim that a state of affairs, say, a particular distribution of material advantages, is an injustice, it is incumbent upon us to show that it results from unjust acts. Otherwise, talk of injustice is just talk. This is where the problem of the identification of social justice as supposedly a branch of the general body of justice must be faced.

Stripped of rhetoric, an act of social justice (a) deliberately increases the relative share (though it may unwittingly decrease the absolute share) of the worse-off in total income, and (b) in achieving (a) it redresses part or all of an injustice. (Note that “income” is used in a broad sense to include stocks and flows of all material goods or claims on same that are transferable.) This implies that some people being worse-off than others is an injustice and that it must be redressed. However, redress can only be effected at the expense of the better-off; but it is not evident that they have committed the injustice in the first place. Consequently, nor is it clear why the better-off should be under an obligation to redress it, even though if they do not, no one else is left to do it.

We seem to have stepped between the horns of a dilemma. Either the better-off are under an obligation to help the worse-off although the unjust condition of the latter is no fault of theirs. Clearly, it would be defective justice to place the obligation of redressing an injustice on those who have not committed it. Or no obligor is found, no obligation is imposed, but then the right of the worse-off to redress turns out to be empty verbiage; there is no social justice, only a recommendation of charity. Yet if charity must be made compulsory by brute force on donors (though the recipients are not entitled to claim it), the weight of another injustice will press upon the situation.

It is to extricate social justice from this type of dilemma that fragments of economic theory that we would not normally expect to be incorporated in theories of justice find a part to play.

2.

THE MISDEEDS OF LUCK

The better-off are better-off for a reason, or indeed a long string of reasons. Genetic endowments may be responsible for native intelligence, tenacity, cunning, and will. Upbringing may foster a sense of duty, discipline, effort, thrift, the respect of rules, the capacity to adapt one’s conduct to that of others and to the facts of life. Education may teach the art of acquiring knowledge. Inheritance may provide capital, social position may attract the influential friends one needs, and so forth. All this is a matter of luck, directly or at one remove. On top of it all comes sheer fluke, chance encounters, being in the right place at the right moment. If the better-off have an above-average income, it is because they have above-average luck in the widest sense, and the inverse must be true of the less-than-average income of the worse-off.

It is thus possible both to profess the neoclassical theorem of income distribution—that incomes are determined by marginal factor productivity and factor ownership—and at the same time to hold that when social justice is fully satisfied, all incomes are equal. For if all differences in productivity and ownership are ultimately due to luck, a distribution purged of luck is an equal one. The acts of injustice that make some better off than others are the acts of Nature, who spreads fortune and misfortune blindly, randomly across the economy. The better-off bear no responsibility for the injustice that strikes the worse-off. Nature is the guilty party. It is her misdeeds that cause the injustice that social justice must rectify. However, putting the burden of redressing the injustice on the better-off who have not caused it is not doing them an injustice for the simple reason that it only deprives them of the excess income, the lucky windfall they would never have had if it had not been for the injustices committed by Nature.

Since Nature never stops throwing good luck at some and bad luck at others, no sooner are such injustices redressed than some people are again better off than others. An economy of voluntary exchanges is inherently inegalitarian (even if economies of a more regimented type may conceivably but somewhat improbably be less so). Striving for social justice, then, turns out to be a ceaseless combat against luck, a striving for the unattainable, sterilized economy that has built-in mechanisms (or, as some like to put it, “framework institutions”) for offsetting the misdeeds of Nature.

3.

SHELTERING FROM RISK

Two contractarian theories seek to show that no injustice is being done to the better-off by asking them to help the worse-off, because they have agreed, in a hypothetical but prima facie sane contract, to bear this burden in their own interest.

One of these theories is Rawls’s “justice as fairness,” whose huge popularity must be a perpetual source of wonderment. Since ultimately all income differences are due to luck, the better-off shall in fairness enter into a hypothetical position where they wish to conclude the contract of permanent distribution that would seem rational to them if they ignored how luck has in fact served them so far. Under these conditions they would agree to a distribution that always favored the worst-off, because their dread of risk was so great that they would prefer “maximin,” the distribution that favored the worst-off, just in case that they happened to find themselves in that unlucky position. (We may note that people must have a very peculiar motivation to make them adopt a “maximin” strategy, i.e., to maximize the worst outcome at the cost of all the better alternatives, no matter how much better they might be.)

The other, far less convoluted, theory is the contractarianism of Buchanan and Tullock. Here, the better-off agree to bear the burden of at least partly redressing what is widely, but contestably, called social injustice. They do this because they see their future through a veil of uncertainty, and fear the risk of some turn of the wheel of fortune that would put them among the worse-off. Since they think that a distribution that improves the relative position of the worse-off may at some future time turn out to be in their interest, they voluntarily assume the cost of bringing about such a distribution. This, for them, is the cost of sheltering from risk.

For this sort of insurance to be rational, the expected “utility” of their and their heirs’ risk-sheltered future income must exceed that of the unsheltered one, and this after allowing for the “cost of the shelter” (i.e., the extra taxation on the better-off that is needed to improve the share of the worse-off to the extent agreed in the hypothetical contract). Needless to say, this condition is wholly formal. The only way to ascertain the likelihood of its being satisfied is to have recourse to revealed preference: if the better-off vote for tax and welfare laws that transfer their income to the worse-off, the theory is at least not falsified. It is of course not verified. (The Rawls version of contractarian social justice, which has arguably no descriptive content, is not subject to any such validity test.)

4.

ORTHODOX MARXISM

The theories reviewed in Section 2 enlist the economics of prudential choice to try and justify a view of social justice (and not of charity) that will make sense even without imputing unjust acts to anyone (except implicitly to Nature). In this view, it need not be the fault of the better-off that the worse-off are worse-off. The former find it in their interest to offer redress for an injustice that in a strict sense is not one. It should cause no surprise that theories constructed in this way are to some degree tenuous and rely on eccentric assumptions.

Orthodox Marxism is in its essentials simpler and blunter. Since all value is created by labor, the share of the product appropriated by capital accrues to the better-off as a result of unjust acts of exploitation. Justice requires that all income should accrue to the workers. This is accomplished by expropriating the capitalists and taking the means of production into some, albeit poorly defined, form of common ownership. This theory hardly calls for further discussion, except to remark that despite (or is it rather because of ?) the appalling economics that underlies it, the idea of surplus value rightfully belonging to the workers and due to be returned to them still has a strong hold on the popular subconscious.

5.

NEOSOCIALISM: FRAMEWORKS, NETWORKS, TISSUES

What I here call neosocialist thought either ignores or rejects the marginal productivity theory of factor rewards. Incomes are not determined by what a competitive market is willing to pay for factors that promise a given marginal contribution to the product. The reason proffered is that the market is not competitive, and even if it were, no one would have much idea of what a factor could contribute to the product. Under complex division of labor, the marginal product is a fictitious mental construct that lacks proper meaning. Nevertheless, the distribution of incomes is not simply indeterminate. Rather, it is systematically shaped in ways that render it unjust, opening the way to arguments about social justice and redress.

Neosocialism is somewhat formless and often less than lucid. One can discern several strands of thought within it, some of which could be condemned for double-counting.

One such strand puts forward the idea of the “framework” to which everything else is owed. Property and contract exist and markets function only if and when the economy is solidly embedded in an institutional framework upheld by a collective will and effort. Without a political authority that is both lawgiver and law enforcer, society would be a shambles and its total product derisory. Hence the product really belongs to society as a whole and not to its individual members. Its distribution among them is ultimately a matter for the political authority to decide. If some get more than others (perhaps because their group or class has undue influence), a question of justice arises.

The idea of the network is at the center of a rather different strand of neosocialist thought. Success and income are to a large extent the fruits of membership in networks. The successful have better access to better networks, therefore they become even more successful. Income differentials deepen in a cumulative process. The greater are the inequalities of income and of network membership, the greater is the inequality of opportunities. This gives the cumulative process another push. Finally, distribution today is largely prejudged by distribution yesterday, for those who are already better-off have greater bargaining power and can negotiate bargains that make the already worse-off even worse-off. It is not that the rich actually act unjustly, yet their advantage inflicts injustice on the poor.

Perhaps the simplest, and also the most radical, of neosocialist notions appeals to the “social tissue.” Each individual is part of the “social tissue,” not only of institutions, frameworks, and networks, but of an infinitely elaborate matrix of inputs and outputs. Whatever he achieves and produces is in reality achieved and produced by all his ancestors and all his contemporaries, each of whom has contributed something to enable the efforts of others to bear fruit. (Neosocialism blandly passes over the fact that everyone has already been remunerated for what he has contributed, so that to say that they are owed for what they have brought to others is double-counting.)

Everything is produced collectively by one great holistic entity, i.e., the entire society. None can claim any particular share in it, because nobody has contributed a particular share. Everyone has contributed to every part of the total product; everyone is a beneficiary of a general externality generated by everybody else.

In this perfectly socialist scheme of things, there is by definition one just distribution of incomes: that which society collectively chooses. Any redistributive measure decided by the democratic political process must, also by definition, count as the redress of a social injustice—not because it conforms to some objective criterion of justice, but because just is what society decides. Here, a shaky notion of social justice converges to a woolly notion of collective preference.

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[* ]First published by Liberty Fund, Inc., at www.econlib.org on April 7, 2003. Reprinted by permission.

[1. ]This and subsequent data are taken from Eurostat Yearbook 2002: Statistical Guide to Europe—Data 1990-2000 (Luxembourg: Office for Official Publications of the European Communities, 2002).

[* ]First published as part 1 of “The Seen and the Unseen: On the Economics of Protecting Employment,” by Liberty Fund, Inc., at www.econlib.org on December 6, 2004. Reprinted by permission.

[1. ]Frédéric Bastiat, Selected Essays on Political Economy, ed. George B. de Huszar (1964; reprint, Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995).

[* ]First published as part 2 of “The Seen and the Unseen: The Costly Mistake of Ignoring Opportunity Costs,” by Liberty Fund, Inc., at www.econlib.org on January 10, 2005. Reprinted by permission.

[1. ]The concept of opportunity cost was first formally defined by one of the founding fathers of the Austrian school of economics, Friedrich von Wieser, in 1876. A generation earlier Bastiat made it clear to the ordinary reader in his brilliant essay “What Is Seen and What Is Not Seen,” in Frédéric Bastiat, Selected Essays on Political Economy, ed. George B. de Huszar (1964; reprint, Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995).

[* ]First published by Liberty Fund, Inc., at www.econlib.org on November 1, 2004. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on October 3, 2005. Reprinted by permission.

[1. ]Alexis de Tocqueville, Journeys to England and Ireland, trans. George Lawrence and K. P. Mayer, ed. J. P. Mayer (New Haven: Yale University Press, 1958).

[* ]First published by Liberty Fund, Inc., at www.econlib.org on August 7, 2006. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on April 24, 2003. Reprinted by permission.

[1. ]The Works of Jeremy Bentham, Edinburgh, 1833, William Tait, vol. 2, 53.

[2. ]Elie Halevy, The Growth of Philosophical Radicalism (London: Faber, 1956), 495, quoted by Lionel Robbins, Politics and Economics: Papers in Political Economy (London: Macmillan, 1963), 15.

[* ]First published as part 1 of “Economic Theories of Social Justice,” by Liberty Fund, Inc., at www.econlib.org on May 3, 2004. Reprinted by permission.