Distributed Wealth-Enabling Conditions and Collective Entitlement

In a chapter from this book, Jerry Mashaw from Yale Law lays out a prime piece of welare statist reasoning with great lucidity, and it got me thinking.

Mashaw says that an economic system characterized by a wide division of labor and well-functioning legal and civil society institutions:

Our capacity to support ourselves depends critically on others’ willingness to engage with us in a complex system of productive activity.

In any such system of market capitalism there is typically a considerable dispersion in individual returns to economic participation. Those returns depend on the public’s demand for particular services and goods. People who work or risk their capital in endeavors whose demand proves strong will be well-off economically; people in enterprises for which demand proves weak will not do well at all. Luck also plays a role: being born into a family of wealth and education often brings lifelong advantages. And market returns depend critically on well-functioning government institutions, police, civil and criminal courts, laws against fraud and deception, to name but a few. Some substantial portion of the nation’s output–of income from both labor and capital–is, therefore, a societal rather than an individual creation. But the return of that collective enterprise will end up in some individuals’ pockets and not in others. In order for this dispersion of economic rewards to be acceptable–for the system to maintain its legitimacy–variations in incomes must be seen to be “fair.”

Now, I think there is something to this argument. But I think there is less to it than Mashaw, Elizabeth Anderson, or the Leaugue of Eminent Rawlsians might think. It is too fast, even if you fill in the missing steps.

This part of the argument is true: in a market-based society, our well-being is radically interdependent. Our ability to become wealthy in a market libreal order depends crucially on the maintenance of certain set of beliefs, expectations, behavioral norms and various state and non-state institutions. Our interests are complexly interrelated and mutually supporting. This is why it is total nonsense to characterize the market as a morality-free zone of self-interested atomized individuals jockeying to step on each others’ heads on their way up. It is especially incoherent when welfare liberals accuse markets of involving BOTH radical cooperative interdependence, such that much of a society’s wealth is a “social product” to which individuals have no moral claim independent of some rule of distibutive justice, AND a kind of radically fragmented free-for-all state of nature war of all against all. Mashaw doesn’t make this mistake, but it’s just stunning how often you see it.

Have you ever seen this: On the market we’re so interconnected that what’s “yours” can’t truly be yours. And, besides, without the state binding us together through corrective coercive redistribution, we’d be so radically disconnected that we’d barely count as a society.

What I’m interested in is the argument that goes from the social, legal, and political enabling conditions of the market to the conclusion that some “substantial portion of the nation’s output . . . is . . . a societal rather than an individual creation” and that, therefore, this portion should be understood as a kind of common asset that must be distributed according to some principle of just division, even if it is already distributed among the members of society and considered by the laws to be individual property.

If we take the reasoning strictly, it seems that we ought to run a bunch of regressions and try to isolate what norms and institutions account for how much of the national output. So, suppose that having good police matters a lot. Say 3% of our national output can be attributed to having efficient, uncorrupt police. The police, however, internalize only a tiny fraction of those gains. So doesn’t fairness/justice demand that we redistribute much of this wealth back to the police? Suppose 5% of the national product comes from a widespread norm of trust and trustworthiness. More or less, everyone in society in contibutes to the effectiveness of the norm, so why not take 5% of the national product and divide it up as even shares for each citizen?

If you think that the rich guy’s benefitting from the norm, but the poor guy’s not. But consider how much poorer the poor guy would be without the prevailing norms of trust. (Compare: lowest 5% in US & lowest 5% in Brazil.)

Of course, it also generally true that the wealthier the capitalist, the smaller the percentage of the positive economic externalities he is able to internalize. Bill Gates has been able to internalize only a miniscule fraction of the wealth he has created. Does Bill Gates get a raw deal? But I digress.

Let’s think about the relationship between background enabling conditions and desert. Suppose I am the only person in the world who likes jelly donuts. I derive huge pleasure from jelly donuts. But I cannot make them. Nor can anyone else, because there’s no money in making jelly donuts, so its not worth knowing how to make them. Now, suppose that 1000 people came in on a boat and moved into my community, all of whom love jelly donuts. So now there is demand for jelly donuts and a jelly donut shop opens up, and now I can happily pig out.

Question: is it wrong for the donut shop owner to internalize all the money I paid for my donuts? I mean, the donut shop owner is not respsonsible for the demand that brought the donut shop into existence, and neither am I. I owe the existence of the shop to the 1000 boat people. Shouldn’t some of the cooperative surplus created by my exchange with the donut shop go to them, since the existence of their demand for donuts confers benefits on me and the donut shop, but neither of us had anything to do with it?

The intuitively obvious correct answer is, no, I don’t owe the boat people anything, even though I am, in effect, free riding off the existence of their demand. So the question is: does Mashaw have to deny that this is in fact the intuitively correct answer, or that our intuitions are screwy? Is the benefit I internalize from the existence of complementary preference orderings, like in the jelly donut case, different in principle from the benefits I internalize from the existence of norms of trust? From the existence of legal institutions?

In general, then, is there really any plausible principle that can tell us why it should be the case that some portion of the cooperative surplus in certain exchanges must be forfeited by the parties to the exchange because there are enabling conditions to the exchange that neither party is directly responsible for?

Or try this. Suppose gravity works only if a team of powerful telekinetic dwarves sit in a room together and concentrates really hard. It turns out that a lot of them just like doing this and do it for free, or else like to do it if they’re given a hot dog each day, which are happily supplied by Oscar/Mayer for public relations purposes. You and I walk from opposite ends of the street, meet in the middle, and hug, which makes us very very happy. How much do we owe the dwarves?

Author: Will Wilkinson

Vice President for Research at the Niskanen Center