Markets - Equity Aspects

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Discussion

Judging markets from an equity point of view

http://www.zmag.org/books/pareconv/parefinal.htm

How ethical are markets? Here are excerpts from a critique by Michael Albert, founder of the Participatory Economics movement, who has also written an extended blueprint of how such a society would be governed.

1. Short version, fron an interview with Michael Albert

URL = http://www.zmag.org/content/showarticle.cfm?SectionID=26&ItemID=8902

"What a market is, is a particular kind of institutional arrangement, in which people compete by buying and selling and trying to get as much return as they can when they buy, and trying to buy as cheaply as they can, and sell at as high prices they can. They try to extract advantage, and they do it competitively. And that process, systematically, with lots of actors involved, leads to a relative valuation of everything, which is to say prices for everything. And that method of determining prices, and of organising activity and of motivating people, with much more discussion than we are doing right this instant, I find abhorrent. It produces not just individualism, but a selfish and a greedy individualism that is oblivious to the implications of one's actions to others. That's one problem.A second problem is that markets get prices wrong. Market exchange takes into account the buyer and the seller, but not other people who are affected beyond the buyer and the seller. So markets do not account for the desires of people affected by pollution, for example, or by by-products, whether positive of negative. As a result, the prices markets arrive at are wrong. Markets impose on workplaces a need to compete and to cut costs in a manner detrimental for the people who work there, and that produces class division between them and managers. Markets have all sorts of negative implications, I think. But this last is the way it came up in our thinking, after we thought about how would we organize workplaces in a good society, in a good economy, so that they were equitable and just, so that there were no class divisions, and so that workers could manage themselves. How would we do it so that the distribution of income was desirable and equitable, so that workers and consumers had appropriate decision making influence. After we thought about all that, we then said ourselves: OK, can you have the institutions that we have described to accomplish an equitable and classless workplace, and then join all workplaces together and join them to consumers with a market? And what we discovered was: no, you could not do that successfully. The market would subvert what we had sought as the desirable workplace institutions! So we had to find up a new form of allocation, to complete the economic system that we were advocating. And that was called participatory planning."

2. Long version, from the book on Parecon

"Markets undeniably often permit buyers and sellers to interact conveniently for mutual benefit. In fact, taking into account only their own immediate circumstances, market exchanges nearly always benefit both buyer and seller. But unfortunately, immediate convenience and relative short-run benefit for both buyer and seller do not imply immediate equity or efficiency, much less a positive social interaction over extended periods. In these wider dimensions market exchange aggravates inequities, generates grossly under- estimated inefficiencies, and disastrously distorts human relations. To judge markets regarding equity we need some shared framework of beliefs about how markets affect people's attributes and people's attributes in turn affect the operations of markets. We propose the following:

Proposition 1: People have different abilities to benefit others and different abilities to secure a favorable share of the benefits from exchange. We are not all alike in these (or any) respects.

Proposition 2: Very few, if any, of the many abilities people may have to benefit others or to secure benefits for themselves bestow a rightful moral claim to benefit more or exercise more decision-making authority than those of lesser ability.

Proposition 3: Market exchanges permit those with greater abilities to benefit more and exercise greater economic power than do those with lesser abilities. These inequities occur even with fully informed exchanges in perfectly competitive markets, much less in markets as we know them in real economies with advertising, unequal bar- gaining power, etc.

If these propositions are true, then clearly markets cannot provide a morally justified allocation of income and will therefore fail to uphold the values we arrived at in the last chapter. But are the propositions true--and moreover, are they true not merely in existing historical circumstances for existing and arguably contingent market arrangements, but true intrinsically and unavoidably for all market economies due to the very nature of market exchange? The first part of p one is that people have different abilities to benefit others. This is self-evident. Mozart obviously had greater ability to please music lovers than his "rival" Salieri. Michael Jordan had greater ability to please basketball fans than other NBA players. A skilled brain surgeon has greater ability to benefit her patients than a garbage collector to benefit his "clients" (except when New York City is in day twenty of a sanitation workers' strike). In short, people are born with unequal "talents" for benefiting others, and differences in education and training or even just location can instill in people different abilities to benefit others even even when they do not have significant genetic differences. We should note, however, that as evident as proposition one is, there are nonetheless people who reject it, at least emotionally. They presumably feel that once one admits such differences one is on an inexorable slide toward justifying economic inequality. Their opposition to economic inequality is so great it causes them to deny that genetic and training differences exist in a prophylactic move to prevent what they deem inevitably correlated inequality before the fact. They think that to assert that people have differential talents and abilities is "elitist."

However, two problems with this attitude arise: (1) To deny the existence of different abilities is obviously out of touch with reality. Imagine a society that refused to give glasses to people with poor eyesight or gave lower incomes to people with poor eyesight. Some might respond to this obvious injustice by denying that people's genetically determined attributes were different. But this would be silly. Wishing it so doesn't make it so, and anyway, there's no reason why social or economic inequality is a necessary consequence of inequality in people's eyesight. What needs to be challenged is not the fact that people differ in their eyesight, but the social practice that rewards people differently based on their eyesight. But (2), imagine that there were no differences in talents, abilities, etc.--what a boring world it would be if each and every person had the same talents, no one was exceptional in any respect, and each was able to develop capabilities only just like those that everyone else had already developed. Sometimes aspirations for equality lead justice-advocates down strange intellectual paths. In any event, other than for well-motivated people who worry about its implications and who will in any event be freed from these feelings by the rest of our arguments, the first part of proposition one is not controversial, so we move on.

The second part of proposition one is that when operating in the context of markets, people will have different abilities to secure a favorable share of the benefits of exchanges. This is equally self-evident, but less often noted. Different abilities to secure a greater share of benefits from competitive exchange can result, for example, from differences in people's abilities to withstand failure to reach an agreement. A single mother with a sick child and no other means of securing health insurance is at a disadvantage negotiating with a large corporate employer compared to someone with many options who can hold out for better terms, even if the two have identical skills. A peasant with no savings is at a disadvantage negotiating a loan for seed and food with a rural moneylender compared to a corporation able to withstand delays. Different abilities to benefit from competitive exchange can also result from more accurate predictions about uncertain con- sequences or from differential knowledge of the terms of exchange (which in turn could stem from genetic differences in this particular "talent" or differences in training or, more often, from different access to relevant information). Or differences could stem from personality traits that make some more willing or able to drive a hard bargain than others, or to abide the pains risked or, more often, the pains imposed on others. The truism that in our society nice guys finish last attests to this last point. If you cannot abide hurting others or at least ignoring the hurt endured by others, in a competitive context you are at a severe disadvantage when it comes to your own self-advancement. Differences in social values could (and do) prevent some people from seeking maximum advantage at the expense of others, even as they encourage others to do so. Different opportunities and/or willing- ness to disobey the golden rule to do unto others as you would have them do unto you and to instead obey the rule of the marketplace, to do others in before they do you in, make for different abilities to garner benefits in the context of competition. And unfortunately, competition--the famous harmonizer of the private and public interest--by systematically weeding out the less devious and aggressive actors, enforces lowest common denominator consciousness regarding willingness to invert the golden rule. So, in the ways listed above and others that could be enunciated as well, the second half of proposition one also proves true. And once it is clearly stated, about this there is virtually no dissent. After all, a large part of contemporary economic activity involves precisely trying to get ahead by utilizing such differences.

As compared to proposition one, the issue addressed in proposition two is more philosophical and complex, but luckily already navigated in the last chapter. What reasons for differential compensation are morally compelling and what reasons carry no moral weight? Our earlier discussion of values established that only acts under our control and not owing to luck and circumstance provide moral justification for income differentials, which makes proposition two true, with associated controversies having been dealt with in the last chapter. You do this and I do that so that the total of what we both do is greater than if, instead, we reversed it and I did that and you did this. Who gets the gain? Proposition three points out that those with greater abilities to capture the benefits of market exchange will obviously capture a greater share of the efficiency gains from a division of labor in a market economy. And any student of the laws of supply and demand knows that the greater the benefit a commodity affords a buyer, the higher the price a seller will receive, other things being equal. So those with greater ability to benefit others will also benefit to a greater extent than those less able to benefit others.

Two actors or agents meet in a market exchange. This occurs over and over, with partners changing, rotating, and otherwise varying in an unpredictable pattern. Those who can benefit others better can demand more in return; those who can accrue more of the benefits that exchanges make available can accrue more in return. Since both these differentials among those playing the roles of buyer and seller exist, differential outcomes arise. Since having greater wealth confers further advantage, the differentials steadily enlarge. In time, therefore, there emerge people who make substantially more and people who make substantially less. More formally put, taken together propositions one, two, and three spell out the case that market economies will subvert equity whether combined with private or public enterprise:

1 People have different abilities to benefit others and to capture the efficiency gains from market exchanges.

2 As established last chapter, neither greater innate nor learned ability either to benefit others or to capture benefit for oneself earns the more able any moral right to a greater share of the benefits of economic cooperation. Only greater effort or sacrifice merits greater reward. But in fact ...

3 Markets will permit those with greater abilities of either kind to reap greater economic rewards than those of lesser abilities will receive, even when those with greater abilities exert less effort and sacrifice. (And any effort to offset this with tax policies will subvert the proclaimed efficiency of markets.)

More simply put, in a market economy the big strong cane cutter gets more income than the small weak one regardless of how long and how hard they work. The doctor working in a plush setting with comfortable and fulfilling circumstances earns more than the assembly worker working in a horrible din, risking life and limb, and enduring boredom and denigration, regardless of how long and how hard each works. To earn more due to generating more valuable output despite contributing less effort and enduring less sacrifice goes against the values that we settled on last chapter but is a defining feature of market remuneration. Is this there is for our critique, or are there additional equity problems?

First, it is instructive to note that even if rewarding according to the social value of contribution were regarded as fair, which our values deny, market valuations of workers' contributions systematically diverge from an accurate measure of their true social contribution for two reasons:

1 In market systems we vote with our wallets. The market weighs people's desires in accord with the income they muster behind their preferences. Therefore the value of contributions in the marketplace is determined not only by people's relative needs and desires but by the distribution of income enabling actors to manifest those needs and desires. Thus, as measured in the marketplace the contribution of a plastic surgeon reconstructing noses in Hollywood will be greater than the value of the contribution of a family practitioner saving lives in a poor, rural county in Oklahoma --even though the family practitioner's work is of much greater social benefit by any reasonable measure. The starlets have more money to express their desires for better looks than the farmers have to keep alive. If you pay more, it will cause what you pay for to be "valued" more highly. An inequitable distribution of income therefore will cause market valuations of producers' outputs to diverge from accurate measures of those outputs' implications for social well-being. Plastic surgery trumps saving malnourished children not because reversing malnourishment is less valuable then cosmetic surgery, but because Hollywood stars have more cash to express their preferences than do those who suffer starvation. It follows, then, that even those who urge remunerating according to output shouldn't be market advocates, because markets don't measure the value of outputs in tune with the outputs' true social benefits.

2 Moreover, markets only incorporate in their valuations the wills of immediate buyers and sellers. The preferences of the auto consumer and the auto dealer are well accounted for (assuming we ignore income differentials distorting the weights they are accorded) when the former buys a car from the latter, but others in society who are neither buying nor selling the car but who breathe the auto pollution the car generates, have no say at all in the transaction. The price of a car negotiated by buyer and seller doesn't reflect the impact of the car's pollution on the broader populace since the broader populace isn't involved in the direct transaction and their views on the matter are never "polled." Sometimes such broader impact is positive--a person becomes enlightened by buying a book and in turn benefits others. The positive benefits to others did not affect the initial purchase price. Sometimes broader impacts are negative: a person drinks excessively and eventually spouses and friends and the broader society suffer lost productivity, increased costs of health care, and the horrors of abuse and drunken driving. The negative by-products did not impact the initial purchase. The point of this is that the market over-values some goods by not accounting for their negative "external" effects beyond direct buyers and sellers, and undervalues others by not accounting for their positive "external" effects beyond direct buyers and sellers. This mis-valuation of transactions that have implications beyond immediate buyers and sellers implies in turn that those who produce goods or services with negative unaccounted effects will have the value of their contributions over-valued in market economies, while others who produce goods or services with positive unaccounted effects will have the value of their contributions undervalued. So again, even those who believe in remuneration according to output (rather than according to effort and sacrifice, as we favor) ought to disavow markets, since even the freest markets don't properly measure social costs and benefits. They remunerate according to contribution, but they mis- measure contribution in systematic and socially harmful ways. Using markets to reward contribution to output is more or less as if we believed that people ought to be paid for how much they weigh, and we then adopted an elaborate system to find this out, but the system that we chose for the task involved a scale with additional bags of sand added to one side or the other, thus increasing the weight of some and not others. Obviously the whole weight norm in the first place is immoral, as we believe remunerating for output is. But, in addition, if one does advocate the weight norm, it would make no sense for anyone to also advocate a set of institutions that in fact systematically misrepresent it--unless, of course, there were other things about that system one greatly liked and the rhetoric about the weight norm was mere window dressing that one didn't take seriously.

To return to our own standards, it is very important to note that the problem of some people receiving higher wages and salaries than others who make greater personal sacrifices cannot be corrected in market economies without creating a great deal of inefficiency. The issue is both intrinsic to markets and also intractable under their sway. Even at their very best, in market transactions, labor is paid what is called its "marginal revenue product"--the valuation of its contribution to output--which, as we have seen, can differ significantly from a true valuation of output, much less from effort expended. But suppose we realize the injustice of this basis for remuneration and decide to correct it by keeping markets otherwise unchanged while legislatively substituting "effort wages" (i.e. just wages) for "marginal revenue product (unjust) wages." Can't that ameliorate this particular problem? We keep markets, generally, but we correct market wages. What is there to dislike? To a degree this would ameliorate one problem, yes, but it would also lead to inefficient uses of scarce labor resources, thereby offsetting any gains made. The point is this: while our morals lead us to want to remunerate labor according to effort and sacrifice and not the true value of labor's output, on the other side of the allocative coin, we want to use the true value of output in deciding how much labor should be apportioned to different tasks. For example, you do not want to value something more and thus put more resources into it merely because it takes more effort to produce. Instead, you only want to produce more of something if the product's worth to people actually warrants it. So suppose we pay labor according to effort and sacrifice in an otherwise market driven economy. As a result the markets will operate as though the value of the product of work is measured in large part by the effort and sacrifice that was expended in its production, but this in turn reduces attention to the impact of the product on recipients. In other words, while we do not want to pay the surgeon according to the value of the surgery to society for moral reasons having to do with what we believe people should earn, we also do not want to say that the value of the surgery should be determined solely by effort and sacrifice involved in it. Instead, the value of the surgery depends largely on the benefits it bestows. A good allocation system has to remunerate in accordance with our preferred values of effort and sacrifice, of course, but it also has to allocate in light of full true social costs and benefits. Since in a market system labor costs form a substantial portion of total production costs of most goods and services, if wages are forcibly made just, with markets this would distort the valuation of the products of that labor, in turn causing the entire cost structure and price system of the economy to deviate substantially from reflecting true costs and benefits. The adapted system would then have products valued according to what was being paid to labor for its effort and sacrifice but not according to the amount that the products are desired by their consumers. To use the terminology of economists: in a market system with effort-governed wages, goods made directly or indirectly by labor whose effort wages were higher than their marginal revenue product would sell at prices higher than their real costs, while goods made directly or indirectly by labor whose effort wages were lower than their marginal revenue product would sell at prices lower than their real costs. Since prices in a market economy help to determine not only what laborers get paid but also how much of what items are produced, any attempt to make wages more equitable while retaining market exchange must cause a systematic misuse of scarce productive resources. More of some items and less of others will be produced than proper valuations of their social benefits and costs would dictate. In other words, if left to their own devices, market economies distribute the burdens and benefits of social labor unfairly because workers are rewarded according to the market value of their contributions rather than according to their effort or personal sacrifice. But if we correct this problem by enforcing wages that are better correlated to actual effort and sacrifice, then the adapted market economy will misvalue products and misallocate productive resources even more than otherwise. In addition, why would the economically advantaged in any market economy not translate their advantages in resources and leisure into disproportionate political power with which to defend market wage rates against critics? Why would they not use their disproportionate political power to obstruct attempts to correct wage and salary inequities? Of course, the answer is the advantaged would take both these paths, and very effectively, as we have seen throughout history. Moreover, people naturally tend to rationalize their behavior so as to function effectively and respect themselves in the process. The logic of the labor market is: he or she who contributes more gets more. When people participate in the labor market, in order to get ahead they must defend their right to a wage on the basis of their output. The logic of redistributing income to attain more equitable wages, however, runs counter to rewarding output. So participation in markets (with or without private ownership) not only does not lead people to see the moral logic of redistribution, it inclines them to favor the argument that everyone gets what they contributed, so redistribution is unfair. Participation in markets empowers those who oppose redistributive schemes and intellectually and psychologically impedes those who would benefit from them.

In conclusion, while of course the degree of inequity is far greater in private enterprise economies wherein people can accumulate ownership of means of production and a flow of profits from that property, income inequalities due to unequal human talents and abilities, though smaller, are inequitable for the same reason. When payment is based on the value of contribution to output, unavoidable unequal distribution of human or non-human talents, abilities, and tools will lead to morally unjustifiable differences in economic benefits. Moreover, whereas it is theoretically possible to equalize ownership of non-human assets (like training or tools) through their redistribution, it is not possible to do so in the case of unequal human assets (innate talents, size, etc.). The only conceivable way to eliminate "doctor versus garbage collector" inequities of the sort discussed last chapter is to base benefits on something other than contribution to output and this is not possible in any kind of market economy. "