Welcome friends!
I could be wrong, of course, but I have the sense that for many conservatives the greatest of the many dire threats posed by liberals is that some of them support policies that would redistribute resources in some cases. I have the idea for many conservatives the notion of government redistributing resources is pretty much tantamount to communism. I must say I find this somewhat ironic since in neoclassical economic theory, that ostensible demonstration of the optimality of free markets so adored by economic conservatives, the answer to any and all ethical concerns one might have about the touchy issue of what ends up being produced and for who is simple: redistribute resources. Uh, yeah, sure, try it some time! (Oh, sorry Ms. Thistlebottom, but I just don’t believe in using the word whom. What am I? An encyclopedia of ancient language?)
Now, of course, there’s no contradiction in upholding the supposed optimality of perfectly competitive markets and also approving the status quo distribution of resources. (Heck, economists do it all the time, although I don’t think some of them like to talk about it too much.) No, really, I think reasonable people can argue about the ethics of the status quo distribution of resources, and I’m sure I’ll have plenty to say on that issue in later postings. No problem there. No, what particularly sets me off is the pseudo-economic argument one hears from some conservatives in which neoclassical economic theory is thought to show one shouldn’t interfere with market institutions and also one shouldn’t interfere with resource distributions since they are the result of market institutions. Whoa! Bad logic alert! I think you need a few more value premises in there buddy. You’re not going to get there with just the economic concept of utility!
I suppose the idea that the current distribution of resources must be ethically unobjectionable because it is simply a corollary of having a free market system might be based on the notion that labor is simply an input of production like any other and an efficient use of an input of production means it should go to the most valued use and for whatever people are willing to pay for it. Thus, at first glance, I suppose one might draw the conclusion that changing the relative compensation of various sorts of labor would generate production inefficiencies thereby reducing overall utility. Sounds OK to me except for one small detail: labor is clearly not an input of production like any other.
First, we have the curious feature that the most valued use of an input of production is determined in part by the existing distribution of resources (which determines the overall pattern of demand) so we’re actually determining the most valued use in part by how we compensate various types of labor. If we ever developed a particularly problematic distribution of resources the most valued use of an input might very well be, say, building third vacation homes for the well to do, or producing Faberge eggs, or who knows what. However, that doesn’t necessarily mean that would be the best use of those resources in any global ethical sense.
Second, I think most people have some ethical concerns about people they don’t have about wrenches or other inputs of production. (Well, most people who aren’t conservatives, anyway.) If one doesn’t need a particular wrench any more because technology has changed or whatever one just throws it on the junk heap. No problem. However, many people might hesitate to throw another human being on the junk heap. More generally, one might have ethical theories about what people deserve under various conditions but one probably doesn’t have ethical theories about what different wrenches or other inputs of production deserve under different conditions. And of course economic theory is no exception in that respect: the ethical propositions contained in that theory are based on the notion of maximizing utility and compensation to labor is one of the factors that generates utility. (Of course they fall down when it comes to thinking about utility across people, when it becomes all too apparent they’re not really dealing with a complete system of ethics, but they have half a one anyway and that’s more than they have for wrenches.)
Third, I think it’s quite plausible to suggest social stability and cohesion in human societies depend in part on distributional issues such as perceived fairness, equity of relative compensation, and the overall distribution of wealth. Obviously, this factor is not really relevant for other inputs of production. (Interestingly from a scientific perspective these types of concerns don’t seem to be a uniquely human characteristic. Apparently it’s a trait we share with other primates: it seems even monkeys can get rather huffy if they feel they are not being compensated fairly. Actually that’s a pretty interesting article; I’ll jot that down for a future post.)
Fourth, I think the entire concept of a free labor market is even more problematic than the idea of a free market in general. Just to take a few random examples. First, we have all manner of power and information asymmetries at play in the labor market. A person needs income or wealth to survive and a certain amount of wealth to be able to retrain or relocate or even gather information on potential job leads or employers. Second, the behavior of other people can have a big effect on one’s own choices in the labor market so it’s not just a matter of individual workers interacting with some great machine, although it may sometimes seem that way. Consider a purely hypothetical example. Say some billionaire CEO of a corrupt financial firm takes advantage of lax Republican oversight (if not outright patronage), makes reckless bets with other people’s money to amass even more riches for himself or herself, and ends up causing a speculative bubble that leads to a huge recession. Now that person’s decisions will have a huge effect on the available choices that other people face in the labor market say, for example, young people with few resources who are just entering the labor market. So does it make sense to view the income of those young people as simply the result of their participation in a free market for labor as though the only things that were relevant were their own labor decisions and the value of their productivity? Third, since people are people and not wrenches, many factors that affect how people actually do in the labor market bear little relationship to factors that would be meaningful for non-human production inputs, and I don’t just mean whose Daddy (or Mommy) owns the firm, but who knows who, who went to what school, who gets along with who, who is psychologically and physically suited to what kind of work, etc. Fourth, since people are people and we have ethical concerns relating to people all real labor markets are hedged about with regulations of various kinds: worker safety rules, fair employment rules, child labor laws, etc. So clearly we do not have an entirely free market for labor in the US or in any other advanced society and one wonders whether anyone would actually support such a thing. Or do we want to play the game of including the regulations we like in our notion of a free market for labor so we’re really playing a sort of parlor game of definitions? Don’t get me wrong, I like parlor games as much as the next person, but at the right time and in the right place.
Of course, I don’t mean to suggest when we think of the potential costs and benefits of redistributing resources we should just ignore the role relative compensation in the labor market plays in encouraging people to do the things that need to be done or that benefit us all. No, I think incentives are important, and they are definitely something we need to keep in mind. However, I don’t necessarily agree that every difference in compensation we observe under our current system has an important role to play in our overall pattern of incentives.
Let’s have an example. In 2009, hedge fund manager David Tepper apparently earned $4 billion, making him the highest paid hedge fund manager of the year. (By the way, I’m not trying to pick on Mr. Tepper. I don’t know the guy, he didn’t make the rules, and who can blame someone for trying to make a buck? But you have to talk about someone if you’re going to do an example.) According to the US Census Bureau the average income for households in the US in 2009 was a little less than $50,000. This means Mr. Teller’s income for that year was equal to the combined income of 80,000 average American households (not individuals mind you; households). So we’re talking about a pretty big incentive here. The natural question that comes to mind is, what do we expect would have happened if in 2008 we had changed something having to do with relative compensation that would have resulted in Mr. Teller earning less than $4 billion in 2009? Would he never have gotten involved in the whole hedge fund managing business? Sounds a little far fetched to me. Are there a lot of other jobs out there that would have been more worth his while? And if $4 billion were actually the level of compensation necessary to draw his talent into this field and the change led him to sit it out on the sidelines, what exactly would have been the net social loss? A foregone recession? Nor do I think this consideration applies only to hedge fund managers. Think of some other random bigwig, I don’t know, say Mark Zuckerberg who at age 26 has reportedly earned about $7 billion thus far from his role in developing the Facebook social networking site. Now don’t me wrong, I think it’s great he helped to develop that site. (I’ve personally never had any use for it but I know plenty of other people who like it quite a bit.) However, again, I can’t help but wonder what role this extraordinary incentive played in terms of actual market outcomes. I wonder, did it play any role at all in his decision to develop the site? What if, as a young college kid, he thought he might end up earning, I don’t know, a mere $1 million from developing the website? Would he not have bothered? I doubt it. I could go on but I think I must be beating a dead horse by now.
OK, so relative compensation in the labor market may sometimes have an important social role to play in providing incentives to get people to do things that benefit us all but maybe not all of the differences in compensation we observe in our society actually serve this function. Maybe sometimes it’s just a matter of people doing what they know, or what they’re good at, or what they love, or what they can, and being in the right place at the right time. So what? Is this just another case of the green eyed monster on the prowl? No, I don’t think so. I’m not saying I should be making $4 billion a year either. I’m just saying setting up a system in which one person earns an income equal to the combined incomes of 80,000 average households with no convincing economic rationale for doing so is fine and dandy unless you perceive some tradeoffs, such as having 80,000 households suffering from relative economic deprivation or having potential social repercussions from immense wealth and power disparities of this type, in which case I think some people might reasonably want to consider the costs and benefits of that particular arrangement and possibly make a few minor adjustments.
To make a long story short, no, I’m afraid it doesn’t really make a huge amount of sense to me to contend that all the ethical issues associated with distributing scarce resources are resolved by simply having a free market system. Or to be more precise, maybe our status quo resource distribution is ethically optimal and maybe it isn’t, but one thing is certain: you have to go beyond neoclassical economic theory (and the sort of utility used in that theory) to make that call. But that’s a story for another day.
References
Anderson, Richard. Masters of the universe: meet the world's best-paid men. BBC. February 2, 2011. http://www.bbc.co.uk/news/business-11942117.
U.S. Census Bureau. Income, Poverty, and Health Insurance Coverage in the United States: 2009. http://www.census.gov/prod/2010pubs/p60-238.pdf.
Frommer, David. Mark Zuckerberg Is Now Richer Than Steve Jobs! September 22, 2010. http://www.businessinsider.com/mark-zuckerberg-now-richer-than-steve-jobs-2010-9.
Markey, Sean. Monkeys Show Sense of Fairness, Study Says. National Geographic News. September 17, 2003. http://news.nationalgeographic.com/news/pf/38265675.html.
