The public outcry against executive pay and compensation
followed disclosures of insider trading, double dealing,
and outright fraud. But even honest and productive
entrepreneurs often earn more money in one year than
Albert Einstein did in his entire life. This strikes many -
especially academics - as unfair. Surely Einstein's
contributions to human knowledge and welfare far exceed
anything ever accomplished by sundry businessmen?
Fortunately, this discrepancy is cause for constructive
jealousy, emulation, and imitation. It can, however, lead
to an orgy of destructive and self-ruinous envy.
Such envy is reinforced by declining social mobility in the
United States. Recent (2006-7) studies by the OECD
(Organization for Economic Cooperation and
Development) clearly demonstrate that the American
Dream is a myth. In an editorial dated July 13, 2007, the
New-York Times described the rapidly deteriorating
situation thus:
"... (M)obility between generations - people doing
better or worse than their parents - is weaker in
America than in Denmark, Austria, Norway, Finland,
Canada, Sweden, Germany, Spain and France. In
America, there is more than a 40 percent chance that if
a father is in the bottom fifth of the earnings'
distribution, his son will end up there, too. In Denmark,
the equivalent odds are under 25 percent, and they are
less than 30 percent in Britain.
America's sluggish mobility is ultimately unsurprising.
Wealthy parents not only pass on that wealth in
inheritances, they can pay for better education, nutrition
and health care for their children. The poor cannot
afford this investment in their children's development -
and the government doesn't provide nearly enough help.
In a speech earlier this year, the Federal Reserve
chairman, Ben Bernanke, argued that while the
inequality of rewards fuels the economy by making
people exert themselves, opportunity should be "as
widely distributed and as equal as possible." The
problem is that the have-nots don't have many
opportunities either".
Still, entrepreneurs recombine natural and human
resources in novel ways. They do so to respond to
forecasts of future needs, or to observations of failures
and shortcomings of current products or services.
Entrepreneurs are professional - though usually intuitive -
futurologists. This is a valuable service and it is financed
by systematic risk takers, such as venture capitalists.
Surely they all deserve compensation for their efforts and
the hazards they assume?
Exclusive ownership is the most ancient type of such
remuneration. First movers, entrepreneurs, risk takers,
owners of the wealth they generated, exploiters of
resources - are allowed to exclude others from owning or
exploiting the same things. Mineral concessions, patents,
copyright, trademarks - are all forms of monopoly
ownership. What moral right to exclude others is gained
from being the first?
Nozick advanced Locke's Proviso. An exclusive
ownership of property is just only if "enough and as good
is left in common for others". If it does not worsen other
people's lot, exclusivity is morally permissible. It can be
argued, though, that all modes of exclusive ownership
aggravate other people's situation. As far as everyone, bar
the entrepreneur, are concerned, exclusivity also prevents
a more advantageous distribution of income and wealth.
Exclusive ownership reflects real-life irreversibility. A
first mover has the advantage of excess information and of
irreversibly invested work, time, and effort. Economic
enterprise is subject to information asymmetry: we know
nothing about the future and everything about the past.
This asymmetry is known as "investment risk". Society
compensates the entrepreneur with one type of asymmetry
- exclusive ownership - for assuming another, the
investment risk.
One way of looking at it is that all others are worse off by
the amount of profits and rents accruing to owner-
entrepreneurs. Profits and rents reflect an intrinsic
inefficiency. Another is to recall that ownership is the
result of adding value to the world. It is only reasonable to
expect it to yield to the entrepreneur at least this value
added now and in the future.
In a "Theory of Justice" (published 1971, p. 302), John
Rawls described an ideal society thus:
"(1) Each person is to have an equal right to the most
extensive total system of equal basic liberties compatible
with a similar system of liberty for all. (2) Social and
economic inequalities are to be arranged so that they are
both: (a) to the greatest benefit of the least advantaged,
consistent with the just savings principle, and (b) attached
to offices and positions open to all under conditions of fair
equality of opportunity".
It all harks back to scarcity of resources - land, money,
raw materials, manpower, creative brains. Those who can
afford to do so, hoard resources to offset anxiety
regarding future uncertainty. Others wallow in paucity.
The distribution of means is thus skewed. "Distributive
justice" deals with the just allocation of scarce resources.
Yet, even the basic terminology is somewhat fuzzy. What
constitutes a resource? what is meant by allocation? Who
should allocate resources - Adam Smith's "invisible
hand", the government, the consumer, or business? Should
it reflect differences in power, in intelligence, in
knowledge, or in heredity? Should resource allocation be
subject to a principle of entitlement? Is it reasonable to
demand that it be just - or merely efficient? Are justice
and efficiency antonyms?
Justice is concerned with equal access to opportunities.
Equal access does not guarantee equal outcomes,
invariably determined by idiosyncrasies and differences
between people. Access leveraged by the application of
natural or acquired capacities - translates into accrued
wealth. Disparities in these capacities lead to
discrepancies in accrued wealth.
The doctrine of equal access is founded on the
equivalence of Men. That all men are created equal and
deserve the same respect and, therefore, equal treatment is
not self evident. European aristocracy well into this
century would have probably found this notion abhorrent.
Jose Ortega Y Gasset, writing in the 1930's, preached that
access to educational and economic opportunities should
be premised on one's lineage, up bringing, wealth, and
social responsibilities.
A succession of societies and cultures discriminated
against the ignorant, criminals, atheists, females,
homosexuals, members of ethnic, religious, or racial
groups, the old, the immigrant, and the poor. Communism
- ostensibly a strict egalitarian idea - foundered because it
failed to reconcile strict equality with economic and
psychological realities within an impatient timetable.
Philosophers tried to specify a "bundle" or "package" of
goods, services, and intangibles (like information, or
skills, or knowledge). Justice - though not necessarily
happiness - is when everyone possesses an identical
bundle. Happiness - though not necessarily justice - is
when each one of us possesses a "bundle" which reflects
his or her preferences, priorities, and predilections. None
of us will be too happy with a standardized bundle,
selected by a committee of philosophers - or bureaucrats,
as was the case under communism.
The market allows for the exchange of goods and services
between holders of identical bundles. If I seek books, but
detest oranges - I can swap them with someone in return
for his books. That way both of us are rendered better off
than under the strict egalitarian version.
Still, there is no guarantee that I will find my exact match
- a person who is interested in swapping his books for my
oranges. Illiquid, small, or imperfect markets thus inhibit
the scope of these exchanges. Additionally, exchange
participants have to agree on an index: how many books
for how many oranges? This is the price of oranges in
terms of books.
Money - the obvious "index" - does not solve this
problem, merely simplifies it and facilitates exchanges. It
does not eliminate the necessity to negotiate an "exchange
rate". It does not prevent market failures. In other words:
money is not an index. It is merely a medium of exchange
and a store of value. The index - as expressed in terms of
money - is the underlying agreement regarding the values
of resources in terms of other resources (i.e., their relative
values).
The market - and the price mechanism - increase
happiness and welfare by allowing people to alter the
composition of their bundles. The invisible hand is just
and benevolent. But money is imperfect. The
aforementioned Rawles demonstrated (1971), that we
need to combine money with other measures in order to
place a value on intangibles.
The prevailing market theories postulate that everyone has
the same resources at some initial point (the "starting
gate"). It is up to them to deploy these endowments and,
thus, to ravage or increase their wealth. While the initial
distribution is equal - the end distribution depends on how
wisely - or imprudently - the initial distribution was used.
Egalitarian thinkers proposed to equate everyone's income
in each time frame (e.g., annually). But identical incomes
do not automatically yield the same accrued wealth. The
latter depends on how the income is used - saved,
invested, or squandered. Relative disparities of wealth are
bound to emerge, regardless of the nature of income
distribution.
Some say that excess wealth should be confiscated and
redistributed. Progressive taxation and the welfare state
aim to secure this outcome. Redistributive mechanisms
reset the "wealth clock" periodically (at the end of every
month, or fiscal year). In many countries, the law dictates
which portion of one's income must be saved and, by
implication, how much can be consumed. This conflicts
with basic rights like the freedom to make economic
choices.
The legalized expropriation of income (i.e., taxes) is
morally dubious. Anti-tax movements have sprung all
over the world and their philosophy permeates the
ideology of political parties in many countries, not least
the USA. Taxes are punitive: they penalize enterprise,
success, entrepreneurship, foresight, and risk assumption.
Welfare, on the other hand, rewards dependence and
parasitism.
According to Rawles' Difference Principle, all tenets of
justice are either redistributive or retributive. This ignores
non-economic activities and human inherent variance.
Moreover, conflict and inequality are the engines of
growth and innovation - which mostly benefit the least
advantaged in the long run. Experience shows that
unmitigated equality results in atrophy, corruption and
stagnation. Thermodynamics teaches us that life and
motion are engendered by an irregular distribution of
energy. Entropy - an even distribution of energy - equals
death and stasis.
What about the disadvantaged and challenged - the
mentally retarded, the mentally insane, the paralyzed, the
chronically ill? For that matter, what about the less
talented, less skilled, less daring? Dworkin (1981)
proposed a compensation scheme. He suggested a model
of fair distribution in which every person is given the
same purchasing power and uses it to bid, in a fair
auction, for resources that best fit that person's life plan,
goals and preferences.
Having thus acquired these resources, we are then
permitted to use them as we see fit. Obviously, we end up
with disparate economic results. But we cannot complain -
we were given the same purchasing power and the
freedom to bid for a bundle of our choice.
Dworkin assumes that prior to the hypothetical auction,
people are unaware of their own natural endowments but
are willing and able to insure against being naturally
disadvantaged. Their payments create an insurance pool to
compensate the less fortunate for their misfortune.
This, of course, is highly unrealistic. We are usually very
much aware of natural endowments and liabilities - both
ours and others'. Therefore, the demand for such insurance
is not universal, nor uniform. Some of us badly need and
want it - others not at all. It is morally acceptable to let
willing buyers and sellers to trade in such coverage (e.g.,
by offering charity or alms) - but may be immoral to make
it compulsory.
Most of the modern welfare programs are involuntary
Dworkin schemes. Worse yet, they often measure
differences in natural endowments arbitrarily, compensate
for lack of acquired skills, and discriminate between types
of endowments in accordance with cultural biases and
fads.
Libertarians limit themselves to ensuring a level playing
field of just exchanges, where just actions always result in
just outcomes. Justice is not dependent on a particular
distribution pattern, whether as a starting point, or as an
outcome. Robert Nozick "Entitlement Theory" proposed
in 1974 is based on this approach.
That the market is wiser than any of its participants is a
pillar of the philosophy of capitalism. In its pure form, the
theory claims that markets yield patterns of merited
distribution - i.e., reward and punish justly. Capitalism
generate just deserts. Market failures - for instance, in the
provision of public goods - should be tackled by
governments. But a just distribution of income and wealth
does not constitute a market failure and, therefore, should
not be tampered with.