Mankiw on Just Deserts

From Greg Mankiw’s “Joe the Plumber” essay (see also his “Defending the One Percent“) on alternatives to utilitarianism:

“Let me propose the following principle: People should get what they deserve. A person who contributes more to society deserves a higher income that reflects those greater contributions. Society permits him that higher income not just to incentivize him, as it does according to utilitarian theory, but because that income is rightfully his. This perspective is, I believe, what Robert Nozick, Milton Friedman, and other classically liberal writers have in mind. We might call it the Just Deserts Theory.”

Mankiw goes on to say that a competitive market equilibrium is not just efficient but fair, since it gives people what they deserve:

“[T]he Just Deserts Theory… gives a new normative interpretation of the equilibrium of a competitive market economy. Under a standard set of assumptions, a competitive economy leads to an efficient allocation of resources. But we economists often say that there is nothing particularly equitable about that equilibrium. Perhaps we are too hasty in reaching that judgment. After all, it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services. One might easily conclude that, under these idealized conditions, each person receives his just deserts.”

But that’s not at all what Nozick or Friedman said! I want to set the historical record straight.

First, a preliminary about Friedrich Hayek.  Hayek was a noted classical liberal, and he rejected “just deserts”.  Hayek distinguished merit from value.  Merit and value diverge because of luck.  No one can predict with any precision how the distribution of tastes and technology will evolve, but we each make choices about career, investment, where to live, etc. and some are luckier than others.  Two people could work equally hard, with exactly the same degree of diligence and prudence and responsibility, but one gets lucky and the other doesn’t.   The price signals in a free market reward such luck (and punish bad luck), and must do so if they are to send the right signals i.e. the signals that will shift resources to where they can be best used.

Nozick cited Hayek’s rejection of desert approvingly, but argued that Hayek didn’t go far enough.

“Hayek argues that we cannot know enough about each person’s situation to distribute to each accord to his moral merit (but would justice demand we do so if we did have this knowledge?)… Hayek concludes that in a free society there will be distribution in accordance with value rather than merit: that is, in accordance with the perceived value of a person’s actions and services to others [without regard to merit, e.g. how much or how little effort the person in question put in – ADL]… Distribution according to benefits to others is a major patterned strand in a free capitalist society, as Hayek correctly points out, but it is only a strand and does not constitute the whole pattern of a system of entitlements (namely, inheritance, gifts for arbitrary reasons, charity, and so on) or a standard that one should insist a society fit” (Anarchy, State, and Utopia, p.158)

Nozick’s point is that even distribution according to value is not justice.  Justice in holdings, accruing to Nozick, is simply a function of just initial acquisition of unowned resources followed by just transfer, indefinitely iterated (leaving rectification of injustice to one side).

So Nozick wasn’t a believer in Just Deserts.  What about Friedman?

In the chapter on the distribution of income in Capitalism and FreedomFriedman examined the “the ethical principle that would directly justify the distribution of income in a free society,” which was  “‘to each according to what he and the instruments he owns produces’.”   The “ownership” bit is crucial, but leave that aside for today.  Friedman directed most of his critical fire against the common view that there is an important moral difference between inequalities in inherited talents and inequalities in inherited wealth.  “Is there any greater ethical justification for the high return to the individual who inherits from his parents a peculiar voice for which there is high demand than for the high returns to the individual who inherits property?”  But Friedman recognized that this inconsistency could be resolved either by saying that there is nothing wrong economic inequalities that are due to fortunate family circumstances, or that there is something wrong with economic inequalities due to innate talents – or at least no positive reason to think that such inequalities are fair, in and of themselves.   It is perhaps for this reason that Friedman concluded that distribution according to productive contribution “cannot in and of itself be regarded as an ethical principle… [but] must be regarded as instrumental” (165).  In other words, the reason for having institutions that distribute income more or less according to productive contribution (and hence in part according to natural talent and social class at birth) is not that the result is fair or unfair but that it is efficient in allocating resources and hence in generating wealth.

Friedman’s final remarks express a remarkable degree of scepticism about “deservingness.”

“Most differences in status or position can be regarded as the product of chance at a far enough remove.  The man who is hard working and thrifty is to be regarded as ‘deserving’; yet these qualities owe much to the genes he was fortunate (or unfortunate?) enough to inherit” (165-6)

Friedman even notes that inequalities that are perceived as being due to chance are more easily tolerated than those that are perceived as being due to merit (166), an issue Rawls would confront in his discussion of the objection that his (Rawls’s) theory would lead to a “meritocratic” society (Section 17 of A Theory of Justice, p.91 Revised Edition – meritocracy being an objection! Rawls cites Michael Young’s 1958 The Rise of Meritocracy; Hayek also cited Young on this point, in The Constitution of Liberty, though he said that he hadn’t yet read Young’s book).

So: Nozick and Friedman (and Hayek) all explicitly reject “just deserts” as a theory of just distribution.  In particular, they deny that distribution according to productive contribution is a matter of justice.  Mankiw’s idea of “just deserts” can’t be what they had in mind.


Hayek on Inequality

In the second volume of his Law, Legislation and Liberty, which is entitled The Mirage of Social Justice, Hayek makes the following claim:

Though it might seem reasonable so to frame laws that they will tend more strongly to improve the opportunities of those whose chances are relatively small, this can rarely be achieved by generic rules. There are, no doubt, instances where the past development of law has introduced a bias in favour or to the disadvantage of particular groups; and such provisions ought clearly to be corrected. But on the whole it would seem that the fact which, contrary to a widely held belief, has contributed most during the last two hundred years to increase not only the absolute but also the relative position of those in the lowest income groups has been the general growth of wealth which has tended to raise the income of the lowest groups more than the relatively higher ones. (p.131, emphasis added)

In the footnote to this paragraph, Hayek adds:

The chance of all will be increased most if we act on principles which will result in raising the general level of incomes without paying attention to the consequent shifts of particular individuals or groups from one position on the scale to another… It is not easy to illustrate this by the available statistics of the changes of income distribution during periods of rapid economic progress. But in the one country for which fairly adequate information of this kind is available, the USA, it would seem that a person who in 1940 belonged to the group whose individual incomes were greater than those of 50 per cent of the population but smaller than those of 40 per cent of the population, even if he had by 1960 descended to the 30-40 per cent group, would still have enjoyed a larger absolute income than he did in 1940. (p.188, emphasis added).

I think Hayek is comparing the mid-point (average income) of the 50-60 decile with the mid-point of the 30-40 decile. I couldn’t find data for 1940 on deciles, but the data on quintiles for the U.S. are readily available back to 1947. The picture they present is very interesting.
Continue reading Hayek on Inequality