Dries Glorieux

Thoughts about politics, philosophy & economics

Category: Uncategorized

The discussion on the ‘Sovereign Myth’ continues

The Crooked Timber blog responds to the Sovereign Myth piece by Jacob Levy

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Edwin Van De Haar on classical liberalism and international relations

Van De Haar got his PhD from Maastricht University on this topic

Political theorist Jacob T. Levy on the ‘Sovereign Myth’ over at the Niskanen Center

In this essay Levy touches on a number of subjects I also discuss in my post on egalitarianism

My post with the text

Cécile Fabre and Eric Mack on self-ownership

Link to the video on Youtube

International Relations theory: John Mearsheimer discussing Morgenthau’s realist opposition to neoconservatism and the Iraq war

Throwback to 2004 when Mearsheimer delivered this lecture on the centenary of Morgenthau’s birth

Jeffrey Hummel reviews ‘The curse of cash’ by Kenneth Rogoff

The review is published in a journal called Econ Journal Watch which provides comments on published work in scholarly economics

Egalitarianism as the primacy of politics: classical liberalism and the Polanyian legacy

(This essay will appear as a chapter in the forthcoming book ‘Egalitarianism: Fair and Equal?’ published by the Independent Institute)

Introduction

 

The fallout of the global financial and economic crisis has seen the rise of a veritable industry of books about the crisis. For every possible aspect there is a plethora of books that claim to get to the bottom of things, uncovering what is actually wrong with the world we are living in. Very few however will have any sort of lasting impact. Not so with what could arguably be called French economist Thomas Piketty’s magnum opus: Capital in the Twenty-First Century. The hype surrounding the English translation of Capital in the Twenty-First Century was the zenith of the growing sense of disillusionment with the economic system that arose in the wake of the global financial and economic crisis.

The accomplishment of Piketty’s book is not so much that it espouses a sort of novel or waterproof egalitarian theory[1] but that it contains multitudes of actual data that give credence to the widely perceived notion that inequality is the foremost problem of modern times[2]. This has spurred policymakers and academics worldwide to reinvigorate the quest for a more egalitarian society. A recurring theme in this egalitarian revival is a desire to go back to the post-World War II decades, a time frequently cited as the golden age of capitalism[3]. A time when a rising tide lifted all boats and not just those of the 1%. A time when liberalism was embedded[4][5] and the ‘neoliberalism’ of the 80’s still years away.

Why this nostalgia for times long past? Have we not progressed materially since then? Is there something missing in 2016 that was present around, say, 1960? The root of this nostalgia clearly isn’t material as much as it is political. When reminiscing about this golden age of capitalism emphasis is put on the way in which the post-World War II West was perceived conceptually, namely as a system of Democratic Capitalism. Wolfgang Streeck defines Democratic Capitalism as “… a political economy ruled by two conflicting principles, or regimes, of resource allocation: one operating according to marginal productivity, or what is revealed as merit by a ‘free play of market forces’, and the other based on social need or entitlement, as certified by the collective choices of democratic politics.” (2011, p. 7).

 

Double movement

 

This distinction between government and market as two different organizing principles isn’t novel. As far back as 1848 John Stuart Mill makes the distinction between laws of production, which he sees as natural, and laws of distribution, which are to some extent socially constructed[6][7]. In the golden age of capitalism, it is said, the proverbial pendulum was firmly on the distribution (Democratic) side. This is the source of the political nostalgia: a golden, more egalitarian past. A time when capitalism had a ‘human face’.

Although the basic idea goes back to Mill the most influential statement of a divide between economics and politics was made by Karl Polanyi in 1944 when he theorized that capitalism naturally gave rise to a so-called ‘double movement’:

“It can be personified as the action of two organizing principles in society, each of them setting itself specific institutional aims, having the support of definite social forces and using its own distinctive methods. The one was the principle of economic liberalism, aiming at the establishment of a self-regulating market, relying on the support of the trading classes, and using largely laissez-faire and free trade as its methods; the other was the principle of social protection aiming at the conservation of man and nature as well as productive organization, relying on the varying support of those most immediately affected by the deleterious action of the market – primarily, but not exclusively, the working and the landed classes – and using protective legislation, restrictive associations, and other instruments of intervention as its methods.” [emphasis added] (2001, pp. 138-139).

This division is the base for the oft heard truism that capitalism is desirable for its capacity to generate wealth but undesirable for its tendency to concentrate it and generate massive inequality. In order to correct these undesirable traits and save capitalism from itself as it were politics needs to assert its primacy over economics. The post-World War II West did just that by an enormous expansion of the social and economic responsibilities of the state, influenced on the one hand by the Keynesian analysis that a high unemployment equilibrium was possible under capitalism and that government had to step in because private investors could not be counted on to make the necessary investments[8][9][10][11] and on the other hand a politicized version of the Phillips curve[12].

So what changed? What made the pendulum swing the other way? What made capitalism gain a (much) larger share of society? Answering this question requires us to understand the reason why western societies leaned more towards distribution in the post-World War II period than in the present day. Sociologist Zygmunt Bauman explains it as follows:

“There was something more – the myth of an alternative society. It was generally believed that communist society had shed the troubles with which the capitalist West was struggling to no avail. It was feared that unless something is done to mend the holes in the social situation in the world of capitalist democracy, people would revolt in support of that alternative. This is the way in which communism attempted to impose an agenda upon the rest of the world: The undertaking of such tasks as the struggle against misery, humiliation and impairment. Compensation for the role of the working class in the process of creating wealth, the right to education for all, and health care. The capitalist rest of the world undertook these tasks with the aid of social democracy, which forged ahead in this direction with far greater success than communism itself (not so much in order to pave the way for communism as to block its path).” (2013, p. 4).

Simply put: post-World War II capitalism had to be coerced by the threat of communism to implement egalitarian schemes because otherwise it would have never delivered the goods for the common man. In this story the end of the Soviet-Union took away capitalism’s shackles and marked the renewal of unfettered capitalism and the primacy of economics and its trademark inequality. This narrative pits politics and economics against each other in a tug of war where the ‘victor’ gets to organize a larger share of society according to its own internal logic[13]. The neoliberal shift in the 80’s and the fall of communism can thus be said to have taken back considerable turf from politics and integrating it into the economic side.

If conceptualized in this way – a strict dichotomy between capitalism and democracy, economics and politics – capitalism will always be suspect in the sense that when given the choice between marginal productivity or social need and entitlement as guiding principles in society, the latter will almost always be chosen because of its intuitive appeal. Consequently, if the excesses of unfettered capitalism are to be restricted again we need to take back lost ground and politically impose a more egalitarian normative ideal[14].

 

Shifting the debate

 

It should seem clear by now that this dualist perception provides an unsatisfactory base for anyone attempting to mount a defense of capitalism. For one the moral high ground is obviously located on the side of democracy, making sure the odds are stacked against you from the beginning. A successful refutation of egalitarianism requires a shift away from the narrowing view of capitalism as a purely economistic counterpart of social and ethical politics.

This however raises an equally important issue: even if one succeeds in shifting the debate towards a more holistic conception of capitalism, the question still remains whether its proponents are capable (and willing?) of going beyond a purely economistic approach? James Buchanan rightly points out that

“Few would dispute the suggestion that an animating principle is central to the whole socialist perspective. But many professing classical liberals have seemed reluctant to acknowledge the existence of what I have called the soul of their position. They seem often to seek exclusive “scientific” cover for advocacy, supplementing it occasionally by reference to enlightened self-interest. They seem somehow to be embarrassed to admit, if indeed they even recognize the presence of, the underlying ideological appeal that classical liberalism as a comprehensive weltanschauung can possess. Although this aloof stance may offer some satisfaction to the individuals who qualify as cognoscenti, there is an opportunity loss in public acceptance as the central principles are promulgated to the nonscientific community.” (2000, p. 113).

Conveying a coherent, intuitive and multifaceted message to a broader public is extremely important in any intellectual defense of capitalism as economics is distinct from the natural sciences in the sense that, unlike laws of nature, it produces seen and unseen effects[15]. Denying gravity leads to immediate and seen effects and doesn’t require anything else for public acceptability. Denying economics leads to seen effects and, arguably as important, unseen effects. Communicating this requires more than the scientific label of an economist or economics department.

The practical implication of a failure to communicate these ideas effectively with a broader public is the rise of the already mentioned dichotomous view that maintains a technocratic perspective on capitalism that is open to egalitarian imposition. Only if we succeed in changing the terms of the debate will calls for political intervention on behalf of one or another external normative ideal recede because “It is only through an understanding of and appreciation for the animating principles of the extended order of market interaction that an individual who is not directly self-interested may refrain from expressive political action that becomes the equivalent of efforts to walk through walls or on water (for example, support for minimum wage laws, rent controls, tariffs, quotas, restrictive licensing, price supports, or monetary inflation).” [emphasis added] (Buchanan, 2000, p. 114).

In other words egalitarian schemes will lose (part of) their intuitive appeal if we communicate what Buchanan calls the soul of classical liberalism[16]. What does this soul entail precisely? It acknowledges the primacy of the individual above any collective entity or goal and the belief in their competence to make their own choices. This cuts right to the core of the egalitarian credo because as Milton Friedman already knew back in 1962 the crux of the dispute between proponents and opponents of capitalism isn’t efficiency, whether free markets can produce more than alternative systems, but a general lack of belief in the idea of freedom itself[17].

The remainder of this paper sets out the beginning of an alternative case by rejecting the identified separation between normative ideals and a capitalist system. It will be argued that classical liberalism as a normative weltanschauung and an economic system based on private property rights and freedom of transaction are two sides of the same coin and heralded what Deirdre McCloskey has called the ‘Great Enrichment’[18], delivering the goods for more than anybody else the common man.

 

The Great Enrichment

 

The major problem that the critiques of capitalism and classical liberalism identify is the lack of a consciously construed theory of distribution. If the free market is left to its own devices, it is said, this will give rise to situations that are grossly out of proportion[19] because free transactions between people will always result in people falling between the cracks and seeing as how there is no theory of distribution this cannot be remedied. Surely the existence of great wealth disparities that result from free transactions are unethical and must be corrected? Enter egalitarianism.

A defining trait of any form of egalitarianism is that it rejects the results that are obtained as a result of free transactions between people. Egalitarianism by definition needs a standard by which to judge people or situations because if not there is no way to establish what passes as excessive and what not. In establishing a standard however, “Egalitarianism forces persons who exceed the average, in the respect deemed by the theorist to be relevant, to surrender, insofar as possible, the amount by which they exceed that average to persons below it.” [emphasis added] (Narveson, 1997, p. 288). In this sense all forms of egalitarian redistribution are what are called, in Nozickian terminology, ‘end-state’ theories of justice.

The problem with these end-state theories of egalitarianism is that they have taken the standard model of economic equilibrium as a fait accompli, something that has been conclusively established. This is one of the main reasons why a defense of capitalism on the grounds of textbook marginal productivity as a kind of distribution will fail to convince laymen because it is an atomistic principle that does not involve any ethical notions. So in order to properly state the case for capitalism one should steer clear of it and use a different way of understanding the economics of capitalism. This is where the entrepreneurial theory of the market process as developed by Israel Kirzner comes along.

 

Market process theory

 

The entrepreneurial theory of the market process takes disequilibrium as its starting point. This state of disequilibrium is marked by widespread ignorance on the part of market participants.[20] The thing to be examined therefore is how, despite the ignorance, a move towards equilibrium can be achieved. In answering this the theory of the market process emphasizes the crucial role played by entrepreneurs as being the trailblazers that diminish ignorance in the market. The way that this is done is by entrepreneurs contributing to a process of cumulative learning that improves market outcomes: “Entrepreneurial discovery is seen as gradually but systemically pushing back the boundaries of sheer ignorance, in this way increasing mutual awareness among market participants and thus, in turn, driving prices, output and input quantities and qualities, toward the values consistent with equilibrium (seen as the complete absence of sheer ignorance).” (Kirzner, 1997, p. 62).

Entrepreneurial discovery, as pointed out, is a process of cumulative learning in which success or failure provide the feedback necessary to adjust or follow through on the chosen path. Success will signal to possible competitors that a certain endeavor is potentially profitable and that they should follow suit. One can thus say that trailblazing can potentially lead to pure entrepreneurial profit which acts as the symbolic drop of blood in the water that attracts the competitors.

Kirzner himself has developed a so called ‘finders-keepers’ defense of this pure entrepreneurial profit that is based on this notion of ‘discovery’[21] in the market-process. Kirzner’s ‘finders-keepers’ defense of pure entrepreneurial profit consists of an extension of the framework set out by Robert Nozick in his 1974 book ‘Anarchy, State, and Utopia’. Nozick, in defending the free and voluntary transactions between individuals, differentiates between justice in acquisition and justice in transfer. Consequently, the process by which one arrives at a situation of justice in holdings can be stated quite easily (1974, p. 151):

  1. A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to that holding.
  2. A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding.
  3. No one is entitled to a holding except by (repeated) applications of 1 and 2.

It follows logically from this process that just ownership is established through just acquisition. Based on the entrepreneurial theory of the market process however, Kirzner points out another source of ownership: “The framework of Nozick’s definitions sees things as being held either as the result of original acquisition from an unheld state, or else as the result of acquisition by transfer from a previous holder. Our discussion has pointed out a third possibility: that of a thing being held as the result of the holder’s having, in the relevant sense, “created” it ex nihilo – i.e., by finding it.” (Kirzner, 1978, p. 21). A logical consequence of this ‘ownership by creation’ is that until something has been discovered (i.e. created) the thing did in fact not exist and could not have been owned. The trailblazing entrepreneur discovers a hitherto unknown profit opportunity (and in the process reduces ignorance) and thereby establishes ownership, legitimizing the profit[22].

The nature of this pure entrepreneurial profit is intimately tied to the disequilibrium nature of the market because as Mises correctly points out profit and loss are inherent traits of the disequilibrium market economy because adjustment towards equilibrium is never fully completed and changes in the underlying wants and needs of the consumers generate new discrepancies open to new discovery (2008).

So in contrast to the traditional egalitarian perspective of distributing a given pie more evenly, the entrepreneurial market process emphasizes the continual discovery and thus creation of new pie. Kirzner rightly points out that “A finders-keepers rule is not a distributive incentive procedure cleverly devised to draw the most out of given resources with given productive capacity; it is a procedure with the incentive potential of stimulating discoveries that could otherwise in no way be predicted.” (1989, p. 125).

 

Bourgeois ethics

 

Up until now we have dealt with the economic understanding of capitalism. We have pointed out the dynamic nature and implications of the entrepreneurial market process as opposed to the static equilibrium understanding. This shift in economic understanding in and of itself however needn’t imply a different ethical understanding. Even if one concedes that the creation of larger pies is a desirable thing, there is still room for doubt why this would benefit society as a whole. Finders-keepers suggests that if an entrepreneur has created additional pie he or she is entitled to the profits that flow from this discovery. This will result in the much loathed concentration of wealth that only egalitarian schemes can address.

I shall claim however that the act of discovery in the market process is, in Buchanan’s words, a crucial ‘animating principle of the extended order of market interaction’ that not only provides an adequate basis for the economic defense of pure entrepreneurial profit in capitalism as spelled out in Kirzner’s finders keepers theory but simultaneously has far-reaching ethical implications that thus far have remained unrecognized (even by Kirzner himself)[23].

It is often said that someone who is engaged in entrepreneurial activities cannot be considered virtuous for the simple reason that he or she is seeking returns beyond what is considered necessary for basic provisions in life. In the Kirznerian sense the entrepreneur will receive these excess returns (pure entrepreneurial profit) if he or she manages to discover that what is actually valuable to the consumers: “The entrepreneur “sees” the future more accurately than others do. Because others see the future inaccurately, there is generated a gap between the present market value of resources and the (discounted) market value of output (as it will, in fact, turn out to be in the future). The entrepreneur, in seeing the future more accurately, in effect sees this gap. (Indeed, it is the  very prospect and incentive of gaining from such perceived gaps which concentrate and focus the entrepreneurial vision to more accurately glimpse the future.).” (Kirzner, 1995, pp 38-39).

In order to see and act on future opportunities better than possible competitors and thus ultimately anticipate what consumers want an entrepreneur will have to cultivate what Netle and Munger call a character of alertness (2014). Rather than just acting upon discrepancies in prices an entrepreneur imagines ways to appeal to consumers that simply have not been thought of. As previously mentioned this is the trailblazing done by entrepreneurs who, if they succeed in finding new and desired products and services, can earn supernormal profits[24]. The economist Deirdre McCloskey has argued that these supernormal profits are the result of what she calls trade tested betterment (as opposed to mere trade tested supply which earns normal profits).

This begs one very important question: What determines the amount of discovery being done in a society? It follows logically from the discussion above that the more discovery being done the more ignorance is reduced and the more consumer’s preferences will be satisfied. Yet this raises a problem: if we accept Kirzner’s idea from the previous section that the entrepreneurial market process has the potential to transcend a mere optimalization of given resources with given productive capacities than the basic facts of most of recorded human history appear as a complete mystery. Entrepreneurs have probably always existed in human history yet despite their presence economic conditions remained stationary throughout virtually all of history up until approximately 1800 when an impressive liftoff took place that continues to this day (with a shift in geographical concentration from Western countries to other parts of the world)[25].

This mystery can be addressed if we look at the logical yet largely unexplored connection between the amount of discovery being done in a society, and thus creation of supernormal profits and economic betterment, and the rise to prominence of classical liberal ideas: “The double ideas of liberty and dignity, summarized as Scottish equality – being political liberalism in a mid-nineteenth-century definition – mattered as causes of the Great Enrichment more than any fresh material incentives, real or fancied. The new ideas mattered more than wars or trade or empire or financial markets or accumulation or high wages or high science. The Bourgeois Revaluation ushered in a Bourgeois Deal: “Let me creatively destroy the old and bad ways of doing things, the scythes, ox carts, oil lamps, propeller planes, film cameras, and factories lacking high-tech robots, and I will make you-all rich.” (McCloskey, 2016, p. xxxiii)[26].

Whereas before 1800 entrepreneurship was looked down upon after 1800 it got an ethical revaluation. It was understood that commerce was not vulgar but beneficial[27]. Entrepreneurial discovery manifested itself as trade-tested betterment which saw a decline in price due to the entry of competitors that caught wind of the profit opportunities available if they followed on the path set out for them by others.

Whereas previously a rise or decline in the number of entrepreneurs in society could not make a sustained impact the revaluation made it possible for a much larger number of individuals from a variety of social backgrounds to add to the discovery process and they did. Deirdre McCloskey describes it fittingly: “The attitude towards trade and betterment is central. Image an ancient Rome in which most males were fascinated by gadgets, in which work by hand or abacus was viewed as honorable (honestus), in which the occupiers of aristocratic status and other nonworking positions were commonly portrayed as lazy and stupid, in which engineers and inventors were heroes, in which entrepreneurial millionaires had admiring biographies of wide circulation written about them – and you are imagining a Rome that would have had a Great Enrichment.” (2016, p. 435).

 

Conclusion

 

As mentioned before this paper is modest in its objective: providing some counterweight to the prevailing ideas about the relation between politics and economics by sketching the almost completely overlooked classical liberal understanding of the interaction between individual actions and collective outcomes. What motivated it was the observation that the demand for (a more) egalitarian distribution by way of political schemes is actually just one of many ways in which this way of conceptualizing a separation between politics and economics hugely influences debates in just about every conceivable issue. Few, I believe, for the better.

Rejecting this separation between moral politics and amoral economics by putting the spotlight on the beneficial effects of entrepreneurial activity for society as a whole and the role ideas play in promoting it does not mean politics doesn’t come into the equation. It is crucial to emphasize that entrepreneurship can be beneficial but needn’t be. There is a well-established literature that talks about the importance of policy in encouraging rent-seeking instead of profit seeking[28],  or, to put it in Baumol’s words, how policy affects the allocation of entrepreneurship instead of the supply of entrepreneurship (1990).

Communicating this beyond academe (the cognoscenti, in Buchanan’s words) has the potential to influence policy in ways that do not reflect an attempt to try to gain ground for political action predicated on moral grounds that eventually ends up being the political equivalent of defying gravity. Something we can surely applaud.

 

References

 

Bowles, S. & Gintis, H. (1982). The Crisis of Liberal Democratic Capitalism: The Case of the United States. Politics & Society, 11(1), 51-93.

Bastiat, F. (1995). What Is Seen and What Is Not Seen. In G.B. de Huszar (ed.), Selected Essays on Political Economy. Irvington-on-Hudson: The Foundation for Economic Education.

Bauman, Z. (2013). 150 Years of German Social Democracy. Social Europe Occasional Paper 2.

Baumol, W.J. (1990). Entrepreneurship: Productive, Unproductive, and Destructive. Journal of Political Economy, 98(5), 893-921.

Buchanan, J. (2000). The Soul of Classical Liberalism. The Independent Review, 5(1), 111-119.

Buchanan, J. & Wagner, R. (2000). Democracy in Deficit. The Political Legacy of Lord Keynes. Indianapolis: Liberty Fund.

Cox, W.M. & Alm, R. (1998). The right stuff: America’s move to mass customization. Federal Reserve Bank of Dallas Economic Review, 3-26.

Friedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press.

Garrison, R. (1992). Keynesian splenetics: From social philosophy to macroeconomics. Critical Review, 6(4), 471-492.

Hayek, F. (1948). The Intellectuals and Socialism. The University of Chicago Law Review, 16, 417-433.

Kalecki, M. (1943). Political Aspects of Full Employment. The Political Quarterly, 14(4), 322-330.

Keynes, J.M. (1960). The General Theory of Employment, Interest and Money. New York: Macmillan.

Kirzner, I. (1978). Entrepreneurship, Entitlement, and Economic Justice. Eastern Economic Journal, 4(1), 9-25.

Kirzner, I. (1985). Discovery and the Capitalist Process. Chicago: University of Chicago Press.

Kirzner, I. (1989). Discovery, Capitalism, and Distributive Justice. New York: Blackwell.

Kirzner, I. (1990). Discovery, Private Property, and the Theory of Justice in Capitalist Society. Journal des Économistes et des Études Humaines, 1(3), 209-224.

Kirzner, I. (1993). The Morality of Pure Profit: the Logic and Illogic of a Popular Phobia. Journal des Économistes et des Études Humaines, 4(2-3), 315-328.

Kirzner, I. (1995). The Nature of Profits: Some Economic Insights and Their Ethical Implications. In R. Cowan & M. Rizzo (Eds.), Profits and Morality (pp. 22-47). Chicago: The University of Chicago Press.

Kirzner, I. (1997). Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach. Journal of Economic Literature, 35(1), 60-85.

Leeson, R. (1997). The Political Economy of the Inflation-Unemployment Trade-Off. History of Political Economy, 29(1), 117-156.

McCloskey, D. (2014). Measured, unmeasured, mismeasured, and unjustified pessimism: a review essay of Thomas Piketty’s Capital in the twenty-first century. Erasmus Journal for Philosophy and Economics, 7(2), 73-115.

McCloskey, D. (2016). Bourgeois equality: how ideas, not capital or institutions, enriched the world. Chicago: The University of Chicago Press.

Mill, J.S. (1848). Principles of Political Economy with some of their Applications to Social Philosophy. London: John W Parker.

Narveson, J. (1997). Egalitarianism: Partial, Counterproductive, and Baseless. Ratio, 10(3), 280-295.

Netle, J.P.C. & Munger, M. (2014). The “Character” of Profit and Loss: Entrepreneurial Virtues. PPE Working Paper. Evanston: Northwestern University PPE Series.

Nozick, R. (1974). Anarchy, State, and Utopia. New York: Basic Books.

Polanyi, K. (2001). The Great Transformation. The Political and Economic Origins of Our Time. Boston: Beacon Press.

Rognlie, M. (2015). Deciphering the fall and rise in the net capital share. Brookings Papers on Economic Activity.

Ruggie, J. (1982). International Regimes, Transactions, and change: Embedded Liberalism in the Postwar Economic Order. International Organization, 36(2), 379-415.

Schumpeter, J. (1942). Capitalism, Socialism and Democracy. New York: Harper & Row.

Streeck, W. (2011). The crises of Democratic Capitalism. New Left Review, 71, 5-29.

Tollison, R.D. (1982). Rent seeking: a survey. Kyklos, 35(4), 575-602.

Vallier, K. (2010). Production, Distribution, and J.S. Mill. Utilitas, 22(2), 103-125.

Von Mises, L. (2008). Profit and Loss. Auburn: Ludwig Von Mises Institute.

 

[1] Piketty limits himself to a number of policy proposals, most notably a global wealth tax.

[2] Many critiques and nuances have since been published, see especially Rognlie (2015) and McCloskey (2014).

[3] I am aware that the use of the term capitalism is contested (most notably by Deirdre McCloskey) but for the purpose of this essay I will use it in the way it is usually used: a system of private property rights, freedom in transaction and equality before the law.

[4] The term embedded and concept of embeddedness is of course in reference to Polanyi (1944).

[5] For an application of the concept of embeddedness on the post-World War II order see Ruggie (1982).

[6] “It is not so with the Distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms.” (p. 199).

[7] For an extensive discussion of the Millian difference between laws of production and laws of distribution see Vallier (2010).

[8] In this context Keynes foresaw a ‘socialization of investment’, a state of affairs which “… would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” (1960, p. 375).

[9] On the relationship between Keynes his social philosophy and his economics see Garrison (1992).

[10] A similar analysis of private versus public investment was laid out in Kalecki (1943).

[11] For the political consequences see Buchanan & Wagner (2000).

[12] For a historical overview see Leeson (1997).

[13] “The juxtaposition of liberal democracy and capitalism itself introduces a contradictory element into the reproduction of the social relations of production, because of the discrepant forms of political participation supported by each. Capitalism structures practices through rights in property, to be exercised by owners or their representatives, while liberal democracy vests rights in persons, formally independent from ownership. As a consequence, popular struggles in liberal democratic capitalist societies typically attempt to apply the rules of the game based on person rights to contests within the sphere of capitalist production, where their application directly confronts and contests the power of capital. Capital, conversely, has historically attempted to apply the rules of the game based on property rights to the policies and structure of the state.” (Bowles & Gintis, 1982, p. 52).

[14] Arguably the most well-known is the ‘Justice as Fairness’ theory put forth by John Rawls in his 1971 book ‘A Theory of Justice’.

[15] The seen-unseen distinction was off course made by Frédéric Bastiat: “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.” (1995).

[16] Communicating this will require a much more dispersed group of people than simply academics speaking truth to power. For instance Hayek points out the role of intellectuals in this process (1949).

[17] Friedman (1962).

[18] See McCloskey’s trilogy ‘The Bourgeois Era’.

[19] As illustrated perfectly by consecutive Oxfam reports about the global wealth inequality.

[20] Kirzner (1997).

[21] Kirzner (1985), Kirzner (1989), Kirzner (1990), Kirzner (1993).

[22] For a more extensive treatment see Kirzner (1989).

[23] This is not to say that his defense of pure entrepreneurial profit doesn’t contain an ethical defense, it does, but that it is limited to justifying entrepreneurial profit and not capitalism as such.

[24] For specific examples and their economic impact see Cox and Alm (1998).

[25] Often called the hockey stick of human development.

[26] This of course is reminiscent of the concept of creative destruction as popularized by Joseph Schumpeter, see Schumpeter (1942).

[27] This is not to say that opposition to commerce in general and the ‘bourgeoisie’ specifically has disappeared.

[28] For a survey see Tollison (1982).

Creation and rectification in Nozick’s entitlement theory: towards a defense of entitled inequality

(This essay won second prize at the 2017 Radmacher Essay Contest sponsored by the German Hayek Society and Hayek Foundation, republished in full on this blog)

“These issues are very complex and are best left to a full treatment of the principle of rectification. In the absence of such a treatment applied to a particular society, one cannot use the analysis and theory presented here to condemn any particular scheme of transfer payments, unless it is clear that no considerations of rectification of injustice could apply to justify it.” [emphasis added] (Nozick, 1974, p. 231).

 

Introduction

 

Since the publication of John Rawls’ magnum opus A Theory of Justice in 1971 an enormous amount of literature has arisen on the subject of redistribution. Arguably the most influential contribution to the debate, besides Rawls’ his own works, appeared only three years later when Anarchy, State, and Utopia by fellow Harvard philosopher Robert Nozick was published. Taking a libertarian point of view, Nozick advanced an entitlement theory of distributive justice that was distinctively different from other theories: “The entitlement theory of justice in distribution is historical; whether a distribution is just depends upon how it came about. In contrast, current time-slice principles of justice hold that the justice of a distribution is determined by how things are distributed (who has what) as judged by some structural principle(s) of just distribution.” (1974, p. 153). Nozick consequently made a more general distinction between his historical principle of distributive justice and all other non-historical principles which he referred to as end-state principles.

In order to assess the justness of a given distribution that follows from the entitlement theory a three-fold criterion must be met (p. 151):

  1. A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to that holding.
  2. A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding.
  3. No one is entitled to a holding except by (repeated) applications of 1 and 2.

The historical nature of the entitlement theory naturally leads Nozick to consider past violations of the first two principles of justice in acquisition and justice in transfer as undermining the legitimacy of contemporary distributions: “The existence of past injustice (previous violations of the first two principles of justice in holdings) raises the third major topic under justice in holdings: the rectification of injustice in holdings. If past injustice has shaped present holdings in various ways, some identifiable and some not, what now, if anything, ought to be done to rectify these injustices?” (1974, p. 152).

It is clear that the principle of rectification is crucial for the theoretical coherence and thus viability of the entitlement theory for the simple reason that without the possibility of rectification an unjust distribution will spread and potentially contaminate otherwise just distributions in the future[1]. This violates Nozick’s basic premise that a distribution can only be just if it arises out of a prior just distribution.

Although of paramount importance both Nozick and subsequent generations of philosophers have not given rectification anywhere near a satisfactory treatment[2]. This is unfortunate because as of late income inequality and redistribution have become some of the most pronounced topics in the public arena[3]. It would be worthwhile to further examine the idea of rectification of past injustices to see what bearing it potentially has on these contemporary debates about redistribution and equality, especially given Nozick’s statement in the opening quote that the entitlement theory is not suitable as a standard against which to judge redistributive measures without incorporating rectification.

It is beyond the reach of this paper to present an entire theory of rectification of past injustices. I will instead focus on the calls for (a larger) redistribution of resources in the specific case of billionaires. The reason for focusing on this most extreme form of wealth inequality is because they exemplify perfectly what Mack (1995) calls world-interactive agents and they are arguably at the forefront of discussions about inequality today.

The article will proceed as follows: the second section will introduce the concepts of entitled and unentitled inequality and situate them against a background of demands for fairness. The third section will elaborate the concept of entitled inequality by discussing its foundations and the fourth section will apply this concept to the current debate about wealth inequality.

 

Inequality and unfairness

 

The argument that will be developed is situated against the backdrop of scientific research that has shown that most people don’t care about inequality as such but whether the inequality has arisen as a consequence of unfairness (Starmans, Sheskin & Bloom, 2017). Nozick’s entitlement theory seems exactly fit to capture this important moral distinction due to its emphasis on the historical nature of any distribution rather than solely judging the eventual outcome. If inequality arises out a previously just (but possibly already unequal) distribution this can be seen as morally acceptable because “… historical principles of justice hold that past circumstances or actions of people can create differential entitlements or differential deserts to things.” (Nozick, 1974, p. 155).

Put in a more broader sense we can say that people find the preconditions of inequality of significant importance. Again this resonates with Nozick’s entitlement theory in that in order to reach a just distribution (defined as any possible kind of distribution, unequal or otherwise) one is forced to categorically follow the two preconditions of justice in acquisition and justice in transfer[4]. The straitjacket the entitlement theory imposes on distributions is uniquely fit to encapsulate both concerns about fairness and preferences for justified inequality. For simplicity’s sake we will refer to this specific kind of inequality engendered by a correct application of the entitlement theory as entitled inequality.

It is clear that inequality can and has arisen by disregarding these steps, thereby giving rise to what will be called unentitled inequality. In fact most of the debate about compensation for historical injustice today starts from the premise of unentitled inequality. The point being made is that although no direct injustice was committed by those on the upper end of the income distribution they still benefit from injustice committed by their predecessors[5]. This opens up possibilities for redistribution of resources because “… agents can acquire rectificatory obligations through involuntary benefitting from acts of injustice.”[6] (Butt, 2007, p. 130).

The question that this essay will deal with is whether it is indeed the case that rectification of past injustices involves a generalizable claim to redistribution of resources in today’s world from the top of the income distribution to the bottom. This question is of particular relevance for libertarians because

“By forming the judgement that the worst-off are unjustly deprived of resources, the rich libertarian does not appeal to non-libertarian considerations. Rather he accepts the logic of his own principles of historical entitlement and makes a reasonable judgement about what kind of rectification for violations of the principles of acquisition and transfer is appropriate in current circumstances. The theory requires him to acknowledge the influence that historical injustice has had on current property holdings and to find a way in which ugly legacy of historical injustice can be neutralized.” (Macleod, 2012, p. 79).

It will be argued that the entitlement theory provides a good starting point for thinking about this issue but in and of itself is insufficient for reaching conclusions about which specific situations require rectificatory redistribution. Expanding the theory to accommodate the distinction between entitled and unentitled inequality will shed light on which situations do not warrant a redistribution of resources because no injustice was involved in bringing about the inequality.

 

The concept of entitled inequality

 

The concept of entitled inequality rests on two separate but ultimately reinforcing lines of thought. On the one hand the market process theory as developed primarily by Israel Kirzner which provides the economic foundation and the self-ownership proviso elaborated by Eric Mack. The following two sections will briefly introduce these two strands of thought and comment on some of their implications after which they will be applied to the specific case of billionaires.

 

1.     Market process theory

 

Market process theory takes economic disequilibrium as its starting point. This state of disequilibrium is marked by widespread ignorance on the part of market participants.[7] The thing to be examined therefore is how, despite the ignorance, a move towards equilibrium can be achieved. In answering this the theory of the market process emphasizes the crucial role played by entrepreneurs as being the trailblazers that diminish ignorance in the market. The way that this is done is by entrepreneurs contributing to a process of cumulative learning that improves market outcomes: “Entrepreneurial discovery is seen as gradually but systemically pushing back the boundaries of sheer ignorance, in this way increasing mutual awareness among market participants and thus, in turn, driving prices, output and input quantities and qualities, toward the values consistent with equilibrium (seen as the complete absence of sheer ignorance).” (Kirzner, 1997, p. 62).

Entrepreneurial discovery, as pointed out, is a process of cumulative learning in which success or failure provide the feedback necessary to adjust or follow through on the chosen path. Success will signal to possible competitors that a certain endeavor is potentially profitable and that they should follow suit. One can thus say that trailblazing can potentially lead to pure entrepreneurial profit which acts as the symbolic drop of blood in the water that attracts the competitors.

Based on the entrepreneurial theory of the market process Kirzner points out another source of ownership that complements the entitlement theory: “The framework of Nozick’s definitions sees things as being held either as the result of original acquisition from an unheld state, or else as the result of acquisition by transfer from a previous holder. Our discussion has pointed out a third possibility: that of a thing being held as the result of the holder’s having, in the relevant sense, “created” it ex nihilo – i.e., by finding it.” (Kirzner, 1978, p. 21). A logical consequence of this ‘ownership by creation’ is that until something has been discovered (i.e. created) the thing did in fact not exist and could not have been owned[8].

This represents a sharp break from the standard neoclassical perspective in the sense that

“Neoclassical economics asks us to rule on the justice of the method through which or the pattern in which a given (known-to-be-knowable) pie is distributed among the potential claimants to it. This may be seen as a pie of given output; or, in more sophisticated versions, it may be seen as the yet-to-be-determined pie to be baked out of given inputs. This “given-pie” framework for discussion of economic justice restricts us to considering the justice of capitalist earnings or receipts in regard only to already existing goods (including already existing inputs with the capability of generating alternative outputs).” (Kirzner, 1997, p. 75).

In contrast to the traditional neoclassical perspective the entrepreneurial market process emphasizes the continual discovery and thus creation of new pie. It is more than simply an exercise in means-ends thinking as it holds the promise of discovering ends that have not even been conceptualized yet[9].

This has potentially radical implications for thinking about entitled inequality. Entitled inequality based on profits derived from entrepreneurial discovery cannot be subject to rectification for injustice in acquisition because the profit opportunity did not exist at the time the injustice was being committed simply due to the fact that nobody was aware of it. Rectification of injustice can obviously only apply to known information at the time of the injustice and not to profit opportunities discovered and knowledge gained afterward. Simply put: one cannot reinstate the original situation before the injustice took place by redistributing profits based on information only known after the fact[10][11].

 

2.     The self-ownership proviso

 

Our discussion in the previous section was built on an implicit assumption, namely that the source of contemporary wealth inequality is largely a result of economic forces non-traceable to an unjust initial acquisition of natural resources[12]. In other words the wealth inequality today is seen as not stemming from a breach of the Lockean proviso according to which one must leave ‘enough, and as good’ for others in the process of initial acquisition. For instance philosopher Jan Narveson says that “We should also note that initial holdings of “natural resources” account for virtually none of the inequality in today’s world: to attribute Bill Gates’ or Oprah Winfrey’s current eminence to “unfair initial distribution” of material resources is bizarre. …. Unless you have in mind the “natural resources” that we consist in, the initial-distribution theory is utterly wrong.” (Narveson, 1998, p. 16).

In order to adequately assess the justice of entitled inequality we will have to establish that entitled inequality does not require the intertemporal maintenance of a state of nature where everyone can acquire a stretch of land. In order to do this I will draw on insights from Eric Mack’s self-ownership proviso which I believe supports this point.

The self-ownership proviso expands the standard Lockean proviso by looking at the enablement capabilities of different forms of property regimes, e.g. do different property regimes enable the exercise of what Mack calls the ‘world-interactive powers’ of individuals such as talents and energies? These world-interactive powers are intimately bound up with the outside world and the capability of transforming this outside world in accordance with one’s own insights. It is in this dependence on an extra-personal environment that a possible breach of the proviso lies:

“For this reason, an agent’s rightfully held world-interactive powers can be negated by noninvasive means as well as by invasive ones. By invasive means, e.g., by assaults upon the agent, an individual’s powers can be destroyed or appropriated; but an agent’s world-interactive powers can be comparably negated – I shall speak of nullification and disablement – by noninvasive means. This can be done by negating (to a sufficient extent) the presence of an extra-personal environment open to being affected by that agent’s powers.” (Mack, 1995, p. 186).

The next section will argue that in the case of entitled inequality the inequality in fact serves as a way to expand the world-interactive powers of individual agents by allowing them to have a larger impact on their extra-personal environment, thus legitimizing the inequality.

 

Application

 

It is generally accepted that in order to act on your own talents and insights you will need a certain amount of goods and services in order to fulfill your goals. In a state of nature this means being able to access land through which you can acquire food, shelter, tools and all sorts of other amenities in order to survive. Access to these things raises the potency of individual’s world-interactive powers. Without them the individual would surely die an untimely death.

Historically however there has been a mass movement towards privatization of land that has effectively ended this state of nature. This has been the basis for criticism about the unjust consequences of unequal initial appropriation of land[13]. Some will inevitably lose out in the game of appropriation thereby diminishing their capacity for engaging with the outside world to further their own interests[14].

Mack’s critique is that although this state of nature will not be preserved in subsequent (private) property regimes this is not a reason to think that individuals will suffer a diminution in their world-interactive powers: “The pre-property state of nature offers a particular form of hospitality to human world-interactive powers. It offers unowned objects for use – at least insofar as they are not currently being used by other agents. There is no reason to privilege (as they say) this form of hospitality, this particular mode of receptivity to world-interactive powers.” (1995, p. 212).

The key to justifying entitled inequality lies in the fact that, on net, a properly functioning market economy expands rather than diminishes the world-interactive powers of individuals through the workings of the entrepreneurial market process. A profit opportunity that was previously unnoticed and subsequently discovered by the creation of a good or service that is desired by consumers will lead to an expansion of the possibilities consumers have to engage with their surroundings, i.e. improving their world-interactive powers.

What is crucial is that, specifically in the case of billionaires, there is a large disparity between the private and social distribution of the gains made by the discovery of the profit opportunity. Research by Nordhaus (2004) suggests that only 2,2% of the total surplus is captured by individuals and firms engaging in innovative activity. In other words the wealth inequality in the case of innovative billionaires is minute in comparison to the possibilities it offers to individuals for furthering their purposes. Entitled inequality indeed.

 

References

 

Atkinson, A., Piketty, T. & Saez, E. (2011). Top incomes in the long run of history. Journal of Economic Literature, 49(1), 3-71.

Butt, D. (2007). On Benefitting from Injustice. Canadian Journal of Philosophy, 37(1), 129-152.

Cohen, G.A. (1995). Self-Ownership, Freedom, and Equality. Cambridge: Cambridge University Press.

Davis, L. (1982). Nozick’s Entitlement Theory. In J. Paul (ed), Reading Nozick: Essays on Anarchy, State, and Utopia (pp. 344-354). Totowa: Rowman & Littlefield.

Kavka, G. (1982). An Internal Critique of Nozick’s Entitlement Theory. Pacific Philosophical Quarterly, 63(4), 371-380.

Kirzner, I. (1978). Entrepreneurship, Entitlement, and Economic Justice. Eastern Economic Journal, 4(1), 9-25.

Kirzner, I. (1997). Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach. Journal of Economic Literature, 35(1), 60-85.

Lippert-Rasmussen, K. (2017). Affirmative Action, Historical Injustice, and the Concept of Beneficiaries. The Journal of Political Philosophy, 25(1), 72-90.

Litan, R. (1977). On rectification in Nozick’s minimal state. Political Theory, 5(2), 233-246.

Mack, E. (1995). The Self-Ownership Proviso: A new and improved Lockean Proviso. Social Philosophy and Policy, 12(1), 186-218.

Macleod, C. (2012). If you’re a libertarian, how come you’re so rich? Socialist Studies/Etudes Socialistes, 8(1), 68-81.

Morris, C. (1984). Existential Limits to the Rectification of past Wrongs. American Philosophical Quarterly, 21(2), 175-182.

Narveson, J. (1998). Libertarianism vs. Marxism: Reflections on G.A. Cohen’s “Self-Ownership, Freedom and Equality”. The Journal of Ethics, 2(1), 1-26.

Narveson, J. (2009). Present Payments, Past Wrongs: Correcting Loose Talk about Nozick and Rectification. Libertarian Papers, 1(1), 1-17.

Nordhaus, W. (2004). Schumpeterian Profits in the American Economy: Theory and Measurement. NBER Working Paper No 10433. Cambridge: National Bureau of Economic Research.

Nozick, R. (1974). Anarchy, State, and Utopia. New York: Basic Books.

Piketty, T. & Saez, E. (2003). Income Inequality in the United States, 1913-1998. Quarterly Journal of Economics, 118(1), 1-41.

Piketty, T. (2014). Capital in the Twenty-First Century. Cambridge: Harvard University Press.

Starmans, C., Sheskin, M. & Bloom, P. (2017). Why people prefer unequal societies. Nature Human Behaviour, 1(4), 1-7.

Tebble, J. (2001). The tables turned: Wilt Chamberlain versus Robert Nozick on rectification. Economics and Philosophy, 17(1), 89-108.

 

[1] Nozick himself concedes that a redistribution à la Rawls might be in order to approximate the principle of rectification of injustice: “For example, lacking much historical information, and assuming (1) that victims of injustice generally do worse than they otherwise would and (2) that those from the least well-off group in the society have the highest probabilities of being the (descendants of) victims of the most serious injustice who are owed compensation by those who benefited from the injustices (assumed to be those better off, though sometimes the perpetrators will be others in the worst-off group), then a rough rule of thumb for rectifying injustices might seem to be the following: organize society so as to maximize the position of whatever group ends up least well-off in the society.” (1974, p. 231).

[2] For some exceptions see Litan (1977), Davis (1982), Kavka (1982), Tebble (2001) and Narveson (2009).

[3] Mainly based on economic studies such as Piketty & Saez (2003), Piketty (2014), Atkinson, Piketty & Saez (2011).

[4] Nozick comments that “No doubt people will not long accept a distribution they believe is unjust. People want their society to be and to look just. But must the look of justice reside in a resulting pattern rather than in the underlying generating principles?” (1974, pp. 158-159).

[5] Nozick himself acknowledges this by pointing out that those in the most well-off and least well-off groups in today’s society will most likely be the descendants of the groups having done the actual injustice and having suffered the injustice respectively.

[6] In this context Lippert-Rasmussen uses the terms innocent beneficiaries and innocent victims of historical injustices and gives the following definition of these terms: “By being an ‘innocent beneficiary’ or an ‘innocent victim’, I mean being such that one is not responsible for having received the relevant benefit or being subjected to the relevant harm.” (2017, p. 74).

[7] Kirzner (1997).

[8] At this point it is necessary to stress that the entrepreneurial profit made by the discovery of previously unknown profit opportunities is distinct from the return one gets from factors of production.

[9] As Kirzner explains: “An opportunity for pure profit cannot, by its nature, be the object of systematic search. Systematic search can be undertaken for a piece of missing information, but only because the searcher is aware of the nature of what he does not know, and is aware with greater or lesser certainty of the way to find out the missing information. In the economics of search literature, therefore, search is correctly treated as any other deliberate process of production. But it is in the nature of an overlooked profit opportunity that it has been utterly overlooked, i.e., that one is not aware at all that one has missed the grasping of any profit.” (1997, p. 71).

[10] My point here has some parallels to the argument developed in Morris (1984).

[11] An example to illustrate this point: the profit opportunities associated with the development of apps for mobile devices were completely unknown during the time of European colonization of Africa in the late 19th and early 20th century. What was known however is the profit opportunities associated with the extraction of natural resources and the fact that Africa had both large proven and unproven reserves of these natural resources. Forcing Travis Kalanick (co-founder and CEO of Uber) to hand over part of his vast wealth to compensate African countries for the unjustified acquiring of these natural resources by European countries seems morally unjustified.

[12] Some advocates of redistribution for correcting historical injustices claim that although this might be true there is still the matter of benefitting indirectly from the historical injustice. This is a distinct view that claims that even people who are not direct descendants of those who did the actual injustice still benefit from the injustice. For example Caucasian students that have attended prestigious universities such as Oxford, Harvard and Yale which were at one time financially supported by slaveholders and/or supporters of slavery could said to have benefitted from the historical injustice of slavery. As this essay is limited in space this issue will not be addressed here.

[13] For instance see Cohen (1995).

[14] Perhaps the most infamous critique is Karl Marx’s description of the laborer being forced to sell his own labor in order to survive because it’s the only thing he owns.

Cross reference blog post on neoliberalism

Quite an entertaining piece criticizing frequently heard analyses of neoliberalism

Kenneth Minogue on democracy

An article of the late professor Kenneth Minogue (LSE) in New Criterion