Just deserts

In the world of Greg Mankiw (and of most neoclassical economists), the inequalities of capitalism can be described as “just deserts.”

The basic idea is that a free-market system allocates incomes according to (a) the marginal productivity of the factors of production (such as labor and capital) and (b) how much of those factors individuals choose to sell to enterprises (in the form of labor hours and savings). So, wages represent the return to not being lazy (and therefore working to earn an income), and profits the return to not being piggy (and therefore setting aside savings from income for future consumption).

Therefore, in the world of neoclassical economics, individuals get what they deserve.*

A reader reminded me of a classic essay by Amartya Sen, in which he challenges the theory of just deserts as expounded by P. T. Bauer. (Unfortunately, the essay is behind a paywall. But I was able to use my university library to retrieve the full text.)

Bauer has long been known as a critic of egalitarianism and of any and all schemes (especially in the context of Third World development) to use government policies to move toward more equal economic arrangements. Sen identifies four arguments Bauer uses to challenge egalitarianism: the economic differences that exist in society are

1. deserved (in the sense that they are the result of people’s capacities and motivations)
2. procedurally justified (because they are the product of voluntary arrangements)
3. instrumentally useful (since they lead to higher living standards for all)
4. better than the alternative (which is coercive measures on the part of governments)

 

Sen then proceeds to dismantle Bauer’s arguments, one by one. For the purposes of this post, let me focus on just one of them.

both the argument about who is deserving and the procedural argument ultimately turn on Bauer’s description of the process of production: that is, a rich person produces correspondingly more than a poor person. This description plays a crucial part in Bauer’s economic analysis—both of inequality within a country and of inequality across national boundaries, including the claims of the so-called third world. I shall call Bauer’s position here the “personal production view.”

Sen’s argument is that the personal production view is difficult to sustain in cases of “interdependent production.”

Production is based on the joint use of different resources, possibly provided by different people, and it is not in general possible to separate out who—or even which resource—produced how much of the total output. There is no obvious way of deciding that “this much” of the output is owing to labor, “that much” to raw materials, “that much” to machinery, and so on. In economic theory, a common method of attribution is according to “marginal product,” i.e., the extra output that one incremental unit of one resource will produce given the amounts of other resources. This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products only under some further special assumptions.

But even when all these assumptions have been made—quite a tall order—it is still arbitrary to assert that each resource’s earnings reflect the overall contribution made by that resource to the total output. There is nothing in the marginalist logic that establishes such an identification. Marginal product accounting, when consistent, is useful for deciding how to use additional resources so as to maximize profit, but it does not “show” which resource has “produced” how much of the total output. The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others.

Furthermore, when incomes generated by the production of different goods are compared, relative incomes depend on relative prices of the products, and this introduces an additional element of arbitrariness in the personal production view. You and I may continue to produce the same two goods in unchanged amounts in exactly the same way, but a change in the relative prices of our respective products (caused, say, by changing demand conditions having to do with the functioning of the rest of the economy) can make our relative incomes change without any change of anything that you and I are, in fact, doing or producing.

Finally, there is the need to distinguish between what a person produces and what is produced by resources that he happens to own. The moral appeal of giving more—in Bauer’s words—to “those who are more productive and contribute more to output” does not readily translate into giving more to “those who own more productive resources which contribute more to output.”

Note that this is a critique of the “personal production” theory of the distribution of income—a view shared by both Bauer and Mankiw, and with many other neoclassical economists—by a Nobel Prize-winning neoclassical economist. Sen’s conclusion is that

The personal production view thus confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources.” These ambiguities are crucial to its moral appeal. The personal production view, it must be concluded, is richer in powerful rhetoric than in substance.

Sen’s critique is a classic case of the neoclassical theory of income distribution, which underlies its social Darwinism, receiving its just deserts.

* Aside from market imperfections and externalities, the extent of which serves as the basis of argument between conservative and liberal neoclassical economists. The existence of public goods is how, within such a neoclassical world, Mankiw argues for progressive taxation and transfer payments to the poor—provided, that is, the rich actually value such public goods, i.e., they benefit more from them than others in society.