Front Page Titles (by Subject) RISK, VALUE, AND EXTERNALITY * - Political Economy, Concisely
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RISK, VALUE, AND EXTERNALITY * - Anthony de Jasay, Political Economy, Concisely 
Political Economy, Concisely: Essays on Policy that does not work and Markets that do. Edited and with an Introduction by Hartmut Kliemt (Indianapolis: Liberty Fund, 2009).
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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.
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.
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.
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.)
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.
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 as part 1 of “Economic Theories of Social Justice,” by Liberty Fund, Inc., at www.econlib.org on May 3, 2004. Reprinted by permission.