Is Distribution According to Contribution Fair?

In a recent article on “The Income Gap,” economist Mark Thoma asks whether the distribution of income is fair.  To answer this question, he adopts (at least for the sake of argument) the neoclassical view of income distribution.  Assuming a perfectly competitive market economy, “each person in society receives an income equal to their contribution to national output.”  Thoma admits that judgments of fairness are best left to society as a whole rather than economists, but says that “if we adopt the simple notion that every person has a right to a share of output equivalent to their contribution to it… then a competitive economic system does produce a justifiable outcome, at least in theory.”  Thoma’s criticism of this view is that it relies on “a whole host of assumptions,” and that when these idealized conditions (such as perfect competition) don’t hold, “there is nothing that says the resulting outcome necessarily accords with the ‘every person gets what they deserve’ properties of perfect competition.”  I assume Thoma is right about that, but I think he’s giving far too much credit to the idea that distribution according to contribution is a plausible principle of justice.

To be fair, he just calls the principle of distribution according to contribution “simple,” not reasonable or plausible, and then says ‘if we accept it, such and such follows.’  Still, talking about the “everyone gets what they deserve properties of perfect competition” is dangerously misleading.  To show that distribution according to contribution is not distribution according to individual merit or deservingness,  I would like to appeal to two well known radical egalitarians, Milton Friedman and Friedrich Hayek.

“Though much of the inequality of income produced by payment in accordance with product reflects ‘equalizing’ differences [as in the case of inequality due to different preferences over leisure and consumer goods – sunset lovers vs. HD TV watchers] or the satisfaction of men’s tastes for uncertainty, a large part reflects initial differences in endowment, both of human capacities and of property” (Milton Friedman, Capitalism and Freedom, 163-4).  “Most differences of status or position or wealth can be regarded as the product of chance at a far enough remove.  The man who is hard woking and thrifty is to be regarded as “deserving”; yet these qualities owe much to the genes he was fortunate (or unfortunate?) enough to inherit” (166).

In other words, how much one produces depends partly upon the luck of the natural lottery, and partly on the property one starts out with, neither of which individuals do anything meritorious to deserve.  Friedman defined the capitalist principle of distribution as “to each according to what he and the instruments he own produces.”  He said it was difficult to justify accepting this principle or rejecting it in favour of any other principle.  Friedman concluded that distribution according to contribution “cannot in and of itself be regarded as an ethical principle… it must be regarded as instrumental or a corrolary of some other principles such as freedom.”

Ok, but apart from the effects of the natural lottery, and apart from the effects the historical distribution of property –  apart from those factors the market rewards merit, doesn’t it?  To an extent, yes; those who regularly work hard will on average do better than those who laze about.  However, given the limits of our knowledge (for example about the evolution of tastes and technology), there will always be a great deal of conscientious effort that is not (well) rewarded, and that cannot be rewarded if the market is to perform its function of giving individuals signals about the relative scarcity of things, and so directing people to their most productive activities.  This is where Hayek comes in.  Consider what he says about the correlation between merit and reward within and between occupations:

“I am on the whole inclined to believe that within any one trade or profession the correspondence between individual ability and industry is higher than is commonly admitted, but that the relative position of all the members of a particular trade or profession compared with others will more often be affected by circumstances beyond their control and knowledge” (The Mirage of Social Justice, p.73).

In Hayek’s view, the fact that market remuneration depends in part on “pure accident” (p.81) is a feature, not a bug (I think I found that phrase applied to Hayek on prices signals somewhere else – maybe Elizabeth Anderson’s post on Hayek, but I can’t see it now).  Prices set by supply and demand are not “aiming” to reward past virtue but to indicate what is now in short or abundant supply, in relation to preferences as they are now, providing incentives to shift resources in ways that will maximize production of what people (with money) want.  The value of what people produce and hence how much income they receive depends upon how much other people want what they produce, as compared to other things.  When resources or preferences or technology change in unpredictable ways, however, people’s relative rewards will also shift, even if they are working just as conscientiously as before, and can’t at all be faulted for not accurately predicting the future.  Again, reward will deviate from anything that looks like individual merit.  Distribution according to the value of what one and one’s instruments produces to others is not a basic ethical principle; it is a rule justified, if is justified, because it makes everyone better off, as compared to more egalitarian alternatives.  Now where have I read that before?