Justice in Economics

School of Economic Science Annual Economics Lecture, 2013

Dr Peter Bowman, Head of Economics, School of Economics Science

Introduction

This evening I would like to turn our attention to the fundamental issue which has become the basis of everything we do in the Faculty and that is to consider the role of Justice in Economics.

Hierarchy

To give a context to this I will refer to the representation of human society which we have made use of in the economics courses now for may years and which has served us well in that respect.

This diagram can be looked at in different ways. It represents the different levels on which human society operates. It also has an inner aspect and can be regarded as representing the different levels of influence that operate within each of us. The ultimate unit for economic consideration is the family which accounts for all individuals bound together with love, affection and sacrifice. The family resides in a community which serves the families within it by providing the basic needs of food, water, sanitation, and basic services including health and education.

Humanity

Civilisation

Culture

Nation

Society

Community

Family

Communities in turn are served by the next level of organization which provides services on a larger scale such as banking, insurance and provision for international trade. These three constitute the economic organism. The next level represented here by the word ‘nation’ is the level of regulation. This works through the system of law and religion as well as through the government.

Beyond this is the level of culture. This represents the level of ideas which inform all the levels below and its influence should not be underestimated. As John Maynard Keynes remarked:“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

Thus in Economics one of the most powerful influences which continue to shape what happens at the levels below is the thinking of Adam Smith. Smith was not working in isolation. He was part of the movement which grew up in the late seventeenth and early eighteenth century known as the Enlightenment. This developed a particular way of thinking that had a number of aspects which have helped to shape our present culture. Empirical knowledge and the scientific method are held in high regard, nature is regarded as mechanical and subservient to man. Human society is regarded as a collection of individuals prevented from returning to its previous state of anarchy only by the rules imposed by government, which exist particularly to preserve the institution of private property. Its ethics are strongly influenced by Bentham’s utilitarianism which seeks the greatest happiness of the greatest good and judges actions by their outcome. This Enlightenment culture is not without merit and has a strong influence on shaping the modern world but it does not provide any fundamental insight into the nature of justice. Where would this come from?

Our diagram shows us that there is a level deeper than culture – that of civilization.

From this comes knowledge of the most fundamental nature, reminding us of the natural order of things, the fundamental purpose of human life and the highest ideals of conduct. Our present civilization, in this part of the world has its roots in the confluence of the Ancient Greek and Judaeo-Christian traditions and it is to these roots that I would like to delve back into if they can offer fresh insight on the subject of Justice and its place in our economic affairsPlato

At the heart of Greek Civilisation is the philosophy of Plato. He gave much consideration to the question of justice and the conclusions he comes to can be unexpected and surprising. In Book IV of the Republic, after a long and multifaceted inquiry in which a number of definitions of justice are entertained and then rejected, he comes to a simple and profound answer: it is when each part of the soul, whether ruling or being ruled, is doing its own business.

“In reality justice, being concerned not with the outer man but with the inward, which is the true self and concernment of man, for the just man does not permit the several elements within him to interfere with one another, or any of them to do the work of others, he sets in order his own law and is at peace with himself and when he has bound together the three principles within him…and is no longer many but has become one entirely temperate and perfectly adjusted nature, then he proceeds to act if he has to act always thinking and calling that which preserves and co-operates with this harmonious condition, just and good action, and the knowledge which presides over it, wisdom.”

On the other hand Plato would say that injustice is the strife that arises between the three principles when they pull in their own separate ways.

This conception is reflected in Plato’s idea of how justice appears in society. He says: “that each man should practice one thing only – the thing to which his nature was best adapted – now this is justice or a part of it.”

The greatest significance of this idea of justice as each doing his own business is in relation to the different sections of society as a whole. Plato warns that the greatest injustice and hence the greatest harm comes about when the members of the different classes start to meddle with each other’s affairs and interchange their functions

Justice as rendering each his due

The Platonic view of justice is primarily of a virtue, it indicates a state of being rather than a rule of action. Plato describes justice as an harmonious state of the soul in which the different aspects are not in conflict but have become part of an integrated whole. His view of the just state is a reflection of this state of the soul in which now the different components of society are working together in mutual support.

How does this play out in the world of action? How would Plato’s just man interact with his fellow men in society so that this inner harmony is not disturbed? What are the conditions that would support the maintenance of this harmony?

To attempt to answer these questions I would like to consider the nature of justice in the way it was defined in the early Christian era. The simple message of Christ was to love God and love your neighbour as your Self. Historically, the early days of Christianity coincided with the Roman Empire and it was a long slow process for the Empire to come to accept his teaching. The definition of justice that has come down to us from that time is the formulation of Justinian, the sixth century Christian Emperor of the Eastern Empire. His famous maxim was to live honestly, hurt no one and render each his due. Seven hundred years later St Thomas Aquinas, the Medieval Christian philosopher, used the same idea in his formulation. He framed it thus: Justice is a habit whereby a man renders to each one his due with constant and perpetual will. Conversely injustice is what happens when what is due to a man is denied him.

It is important to note that these definitions of justice are not complete in themselves. They presuppose that there is a basis on which something is due to a man. There are two approaches to determining what this basis is. One consideration would be in terms of action so it would see justice as the reward or retribution for actions undertaken, both good and bad.

The other approach is to recognize that there is something due to us because of what we are in ourselves, to see that all of us are essentially spiritual beings who will their own perfection. From this consideration we recognize that there is something that is due to us all simply for what we are regardless of what we do. In our Economics with Justice course we formulate what is due like this: a fair portion of knowledge, happiness, health, freedom and prosperity

Aquinas and three forms of justice in society

Now here in the School we equate the study of economics with the study of the laws governing the relations between people in society. What are these relations within which arise the obligations a just man is required to fulfil?

I recently discovered that at the end of E F Schumacher’s famous book on economics Small is Beautiful there is an epilogue in which he describes the importance of the four cardinal virtues. He refers to essays written by Josef Pieper, a German Catholic Scholar, who wrote in the 1950s. Pieper was very effective in re-connecting with the writing of St Thomas Aquinas in a way that made his teaching relevant to the present age. He wrote aseries of essays on the four cardinal virtues – prudence, courage, temperance and justice. According to Pieper Aquinas distinguished three basic relations between men in which justice operates in society and his criterion for judging when justice prevails in a society is whether all three are disposed in their proper order.

They can be represented in a simple diagram, which, as is often the case in Economics is in the form of a triangle.

The first thing to notice about this diagram is that it recognizes that there is such a thing as society. So it does not recognize the view that society is just a collection of individuals and nothing more. Margaret Thatcher famously expressed this other view in an interview with Woman’s Own in 1987 when she stated,“There is no such thing as society.” That was not the only thing of note she stated in on that occasion and I will come back to her later. The view this diagram represents is also contrary to the collectivist view that sees only society as a whole and does not recognize the freedom of the individual. It recognizes both the importance of the individual and the importance of the whole.

The Common Good

To help to bring out the fullness of what this word “society” represents in this context two words needed to be added at the top. The first is Government since it is Government that acts on behalf of society; and the second is the Common Good (or bonum commune as Aquinus called it in Latin). There is quite a lot that could be said about this and it is a hopeful sign that this phrase is coming back into general use. Going back to Plato (Republic, Book V 462), what he has to say about it is that the principal aspect of the Common Good is unity. He says it is evident when all the citizens are glad or grieved on the same occasion. This was very evident last year in the Jubilee Celebrations and the Olympics and in previous years on the occasions of Royal Weddings and indeed Royal Funerals. Such occasions draw out very strong feelings of unity. We can contrast these occasions with others where the same event produces rejoicing in one part of society and grief in another (for example, which political party has won a bi-election or the news that house prices have gone up. Those of us who have them shout “hooray” and feel wealthier whereas our grown up children who find them even less affordable become even more despondent as the possibility of ever owning their own home becomes more remote).

On top of this underlying unity the Common Good includes everything that nature provides as free gifts. For any society this is first and foremost the territory they occupy and then the natural resources contained therein. It is also that portion of the wealth that has arisen by virtue of the community working together. It is in fact more than the material goods but the entire provision of society: the language, the culture, the system of laws the pervasion of civility. Once we recognize that there is a Common Good then we recognize that it must be the role of Government to protect and administer this in a just way.

The diagram connects the idea of the relations between men in society with the Justinian idea of justice by showing three distinct directions of obligations that need to be followed if each is to be rendered his due.

The first of these is the obligations between citizens. This is termed ‘commutative justice’ in the sense of commute as exchange. The second is the obligations of each to society as a whole termed ‘general justice’ and the third is the obligation of government as the instrument of society as a whole to each of its citizens which is referred to traditionally as ‘distributive justice’

Commutative Justice

In the economic sphere commutative justice operates when individuals interact with each other through trade. Our present economics system has evolved into a fully trading economy where almost everyone produces not for their own consumption but to exchange in the market in return for what they need. It is a system of extraordinary potential that can enable the possibility of each of us being able to specialize in what we have a particular talent for (which is one of Plato’s descriptions of justice).

The beautiful thing about trade is that when both participants are free and equal the exchange can leave both feeling better off than before. In such a bargain “he who pays pays willingly and he who receives takes no more than is owed to him”. We could regard this as the mark of a just exchange. It is a win-win situation.

All transactions take place over a certain period of time and this needs to be catered for. In many cases there is a considerable time lag between the beginning and ending of a deal. To undertake any productive activity the raw materials always need to be paid for before the new product can be sold. For large-scale projects such as major buildings the time span between the start of the project and its completion can be considerable – several years. The natural means to overcome this time bridge is essentially trust or faith. In economics it is called credit. On the basis of trust the finance can be supplied at the start of the project and then paid back on completion. It is therefore natural that the debtor-creditor relationship should arise to span this time gap. It is only natural that economic activity will consist in the obligation of debt being incurred and then the equilibrium being restored when the obligations are repaid.

So where does it all go wrong? What I have said so far has a very idealistic tone. What about reality? We could look at commutative justice operating in the economic sphere as a system that is continually moving out of balance and then back to equilibrium. When someone takes without giving in return or takes more than is due them or a debt is incurred which cannot be repaid, then the balance is disturbed in such a way that it cannot be restored, that is injustice.

It is important to see that what we have in these trades are essentially relations between people in society which are human interactions. Andrew Haldane of the Bank of England addressed the Occupy Movement recently and gave consideration to the various factors that had contributed to the Crash of 2008.He noted that the City of London had changed considerably in the previous twenty years. The way he described it was a change from a time when business was based on relationships to the new order where relationships were replaced by transactions. This different way of doing business has moved beyond the financial sector. In everyday life it is epitomized by the purchase of a ready-made meal at the automated checkout of the supermarket. Compare that with a purchase from the farm shop where you actually talk to the person who raised the animal that went into the pie and who tells you what type it was.

In the light of this let us go back to the diagram and consider what is meant by the word “person.” In our present economic arrangements a significant proportion of the economic agents are no longer real persons but corporations. These are institutions that have many of the legal privileges of real people such as the ability to conduct business in their own name, to employ people, to enter into contracts and to own property but are free from the principal sanction for breaking the law, namely loss of freedom through imprisonment

These corporations vary immensely in size and the type of business they undertake. They have become the dominant institution in the economy. They can be helpfully distinguished into two types, the small and medium enterprises (SMEs) that are typically single enterprises and the multinational corporations (MNCs) that are categorized by a complex structures comprising many legally distinct subsidiaries with a significant amount of trade taking place between these. It is not so easy to have a just trading relationship with these institutions as it is with real people.

In relation to commutative justice Aquinas said that justice is simply between those who are simply equal but where there is no absolute equality between them neither is there justice.

In our present conditions we see that there are significant imbalances that disturb the natural justice. For example let us consider the three basic economic relationships that a typical citizen encounters in the area I have called commutative justice:

1) The relationship we have with our employer, if we are employed.

2) The relationship we have with the supplier of our housing and/or place of business, either vendor or landlord.

3) The relationship we have with our provider of credit, i.e. our bank.

And let us ask if the arrangements will be bargains between free and equal participants or whether the inequality means that one party will be in such a stronger position that they are going to take more than they give in return.

Given the absolute necessity to have somewhere to live and conduct one’s business combined with a perpetual shortage of housing in economically viable locations, and we are left with the situation where the tenant is going to have to pay as much as he can afford and the owner takes as much as he can get.

Again, given the perpetual shortage of employment opportunities leading to a surplus of unemployed people available for work and in general the employee finds himself in a situation where what the has to take tends towards the least he is willing to accept while the employer pays the least he can get away with.

In the modern state this state of affairs is complicated by the intervention of the state. The effect of this is that the state subsidizes low wages by paying benefits.

In a similar way if a person needs credit then the balance is such that he approaches the supplier of credit, the bank, very much on the terms of the lender. This means that what the person has to pay, in terms of interest as the price of credit, will tend towards the most he can afford. We also see that when there is collateral available, which is almost always in the form of landed property, then the credit tends to be more forthcoming but for those with a genuine need for credit to instigate the production of new wealth there is great reluctance to lend and so if credit is forthcoming there is a very high price to be paid. In present arrangements whether credit is forthcoming is now based on the ability to provide collateral rather than the worthiness of the recipient.

The situation is summed up in some circles by the term “the squeezed middle.

Taxation

But it does not end there because in addition to these imbalances our squeezed citizen also has to deal with the burden of taxation. In our present system the economic interpretation of general and distributive justice is through taxation and public spending but this is not based firmly on principles of justice

Taxation basically amounts to the expropriation of a portion of the citizen’s wealth in a way that is often arbitrary since what is taken from them is not related to what they receive in return. Principles such as “ability to pay” are stated but do not in practice match up. When taxation is not based on just principles it can have a corrosive effect on society. Here is JR McCulloch first professor of political economy at UCL talking about the effect of income tax introduced at the time of the Napoleonic War but which still rings true today.

‘The tax would fall with its full weight upon men of integrity, while the millionaire of “easy virtue” would well nigh escape it altogether. It would, in fact, be a tax on honesty, and a bounty on perjury and fraud; and, if carried to any considerable height – to such a height as to render it a prominent source of income – it would undoubtedly generate the most barefaced prostitution of principle, and would do much to obliterate that nice sense of honour which is the very foundation of national probity and virtue.’

In addition to undermining the moral fibre of society taxation puts a drag on the economy. Everything that is for sale has its price inflated by the tax that the producer has to pay and everyone in the market wanting to purchase has their disposable income reduced by the tax they have had to pay. There is a deadweight loss that reduces efficiency and increases unemployment.

The overall effect on government is that it cannot raise enough in taxation to cover expenditure and so has to resort to borrowing at interest. Who does it borrow from? The rich and powerful who now become even richer as they are extracting more from the common good through the interest payments they receive. The worse things get the higher the price they extort

General Justice

To understand the underlying reasons for these imbalances we need to look more carefully at the two sides of the triangle – the parts that relate to the society that according to Mrs. Thatcher doesn’t exist. The general justice deals with the obligations persons, both real and legal, have to the society as a whole. The principle behind this was given, I believe, by Mrs. Thatcher in that same interview I mentioned earlier (although she may not have meant it in this way). She said: “It’s our duty to look after ourselves and then, also to look after our neighbour. People have got the entitlements too much in mind, without the obligations. There’s no such thing as entitlement, unless someone has first met an obligation.”

I will take that by entitlement she meant privilege. In the civil realm this idea of obligations and entitlements going together is quite well established. If we want the entitlement to go about our business in peace we are under the obligation not to disturb the peace of others. If we want our property to be safe we are under the obligation not to take the property of others and so on. Note that infringements of these obligations are not regarded as civil matters, they are not a matter of one person against another they are regarded as crimes. The tradition in out legal system is that acts such as theft and assault are offences against society as a whole and are prosecuted on our behalf of us all by the agents of the state.

In the economic sphere the essential privileges and corresponding obligations I have assumed Mrs. Thatcher was referring to are not so well recognized. Here are three examples of entitlements for which there must be corresponding obligations that relate to the examples I gave earlier. Firstly there is the entitlement or privilege of having exclusive access to land and natural resources supported by law. Secondly there is the entitlement or privilege granted to banks to make loans in the way they do which effectively produces the money supply. Thirdly there are the privileges associated with limited liability that are granted to corporations.

There is probably only time to deal in any detail with the first of these. The privilege of exclusive rights to access to land is of the utmost importance in economics. It gives control not just for the land itself but of any wealth-producing and even potential wealth-producing activity that takes place upon it. Under the present arrangements it provides a mechanism of appropriating a portion of the common good simply by virtue of ownership and not by virtue of contribution. Such activity consists essentially in using economic privilege or entitlement to expropriate a portion of the common good far in excess of what is contributed. To put it bluntly this is unjust. The converse is that those who do not have this entitlement are not able to receive their due in relation to their contribution. Those who enjoy the privileges deprive them of it.

So what is the obligation that Mrs. Thatcher demands must be met before the entitlement of holding land can be justly granted? I suggest that providing an answer to this question was the great contribution to economics that was made by Henry George and refined by those who followed him.

George’s analysis was simple and rigorous. He brought clarity and precision to the ideas of the classical economists – Smith and Ricardo who had preceded him. The key concept was the economic rent of land. To go into the technical detail of this we would define it as the potential wealth-producing capacity of each location in excess of the marginal site i.e. the least productive site in use in a community.

The brilliance of this analysis is that it provides in principle a means of distinguishing the portion of the wealth-producing capacity of each location that can be attributed to the resident labour and capital from the portion that is due to the combination of natural provision and the various advantages brought by the community working together which I earlier termed the common good.

If we recognize that this is the portion of wealth that we attribute to the community working together and not the individual’s own effort, then what we have here is a means of actually quantifying the obligation required from each claimant to land as to the amount they should give back to the community in return for that privilege. Other entitlements, such as those given to banks would generate similar obligations.

.Distributive Justice

Once these obligations are recognized the place of the third side of the triangle, termed distributive justice, starts to become clearer. If we see that there is something called the common good then we see that there is a duty of government to protect this and in particular to ensure that it is not unjustly misappropriated by powerful vested interests. Rather there is a duty on government to ensure its fruits are justly distributed to all, as we would say, ensuring a fair portion of knowledge, happiness, health, freedom and prosperity. In general this requires firstly the fulfillment of the economic obligations of the citizens in respect of the economic entitlements they receive. This would give rise to a flow of wealth from the citizens to the society as a whole. Secondly this wealth needs to be distributed in a way that is just and ensures the prosperity of all.

 Conclusion

I have attempted to have a fresh look at the place of justice in economics. I noted the Platonic view of justice as a virtue, a state of inner harmony of the soul reflected in society as a condition where the different parts of society stick to their own proper function. I then considered the three fundamental relations between people in society and the corresponding obligations that go with these. Firstly, there is commutative justice which is found in the dealings between individuals and I suggested that there can be justice when the exchanges are between free and equal participants. Secondly, there is general justice which deals with the relation between individuals and society as whole. For economic justice it is necessary to recognize that with entitlements there are corresponding obligations and just economic arrangements require that these obligations be fulfilled. The example I gave was in relation to land. For those who are given access to land and natural resources protected by law there is the obligation to return the rent to the community. Finally, we see that if these obligations are fulfilled then there is the possibility of distributive justice where the obligations of society as a whole to each individual can be fulfilled so each can receive a fair portion of knowledge, happiness health, freedom and prosperity.