Justice in Economics
A paper presented to the School of Philosophy and Economic Science Justice and Equity Conference, 2011
Dr Peter Bowman. London, UK
Introduction
In the world today there is a strong recognition both nationally and internationally of the importance of justice in many areas of human affairs but whereas justice is referred to frequently in the areas of criminality and social reform its appearance in the realm of economics is much rarer. In the indices of standard university texts on the subject such as Begg[1] and Lipsey and Chrystal[2] the word justice does not occur. The branch of economics known as positive economics which has modelled itself on the mathematical sciences is regarded as amoral and independent of ethical considerations. Even in normative economics utility maximization and efficiency are preferred to justice as the guiding principles.
Justice as a Virtue
What is justice? There are two ways to address this question. One way is to attempt to define it, the other way is to categorize it. The second approach is easier. Justice is a virtue. Together with courage, temperance and wisdom it is one of the four cardinal Platonic virtues.[3] Of these virtues it is the one that deals with the relationships between men in society and also between men and their provider and so is the most appropriate for consideration in economics. The Platonic virtues are not really separate and independent. They work together. To recognize what is just requires wisdom and to ensure that what is just is enacted usually requires both temperance and courage.
Although virtue is usually associated with the conduct of the individual it can equally be applied to an institution.[4] Justice in economics is concerned primarily with the institutions that regulate the production and distribution of wealth, access to natural resources including land, the availability of credit and the collection and allocation of public revenue.
The subject of economics began as an aspect of moral philosophy since it is concerned with the very fundamental question of how one should act. Within moral philosophy or ethics three distinct approaches have developed. In consequentialism actions are judged by their outcomes. The utilitarianism that underlies modern economics with its emphasis on maximizing utility belongs to this category. In addition there is the deolontological school. In this approach actions are based on a set of rules, for example in Christianity and Judaism there are the Ten Commandments. Rules such as “Thou shalt not steal” and “Thou shalt not bear false witness”, underpin the social order upon which the effective running of our economy depends. Justice as a virtue is found in the third, namely virtue ethic
This school was the most prevalent up to the Enlightenment but then went out of fashion. The rise of science produced a more naturalistic basis to the consideration of morality within economics and the other social sciences. Fortunately, in recent years interest in this aspect of moral philosophy has begun to revive.[5] Virtue is not concerned with the outcome of actions and it is more than following a set of rules. It even goes beyond right action. It is deeper than that, since it is more about a way of being than about doing. Aristotle described three aspects of virtue which provide useful indicators of its full implications. The Greek terms he used do not easily translate into English but provide a useful basis for getting a feel for what virtue is about.
Arête could be translated as virtue or excellence. It implies more that just a tendency to act in a particular way, more than a habit, more than a single-track disposition. It is something that “goes all the way down” to the depth of being. It is not just concerned with actions but also with perceptions, values, choices, desires, attitudes, interests, expectations. It requires a whole-hearted acceptance of a certain range of considerations as a reason for action. It implies that virtue is much more than a character trait, it is a way of living. Any institution that aims to be just must recognize this. Within the individual the cultivation of virtue is something that is usually developed by degree. It is not something that can be assessed by the ticking of boxes.
The second aspect of virtue which is relevant here to a consideration of justice is phronesis, which could be translated as “practical wisdom”. What is called virtue can sometimes actually be its opposite, for example the courage of the desperado; the compassion for a loved one which, through the desire to protect, leads to dishonesty; Shylock’s demand for justice that turns out to be a thinly disguised desire for violent retribution. A factor is needed that goes beyond mechanism and shows a full appreciation of a situation, the ability to recognize what features of a situation are of most significance, an understanding of what is truly important. This is phronesis. When it is applied it secures real benefits effectively.
The third aspect is eudaimonia, translated as “happiness” or “flourishing”. This is not the superficial happiness associated with pleasure and sensual gratification but a true and substantial happiness, a well-being. It arises naturally from the practice of virtue and is a mark of its presence.
This presentation of the nature of virtue may appear so fine that to enshrine it in the institutions that govern the economy is seem as an impossibility. However, to quite a large degree the criminal and civil justice system developed in England has succeeded for almost a thousand years of institutionalizing the enactment of the virtue of justice in the areas of its jurisdiction. Hence an example is available. All that is required is to extend this to the economic realm. Moreover an irony of the territorial expansion of Britain overseas during its years of empire was that, although it may have been of questionable justice in itself, it did provide for the transmission of this successful form of institutionalized justice over much of the globe
Definition of Justice: Justice as rendering each his due.
The nature of virtue as described above is such that it is not readily reducible to a formula. This makes it not easy to define. However, in order to consider what economic justice means in practice it is useful to have a definition. There is one formulation that has stood the test of time. In the dialogue of Plato[6] that is devoted to the question of justice and its playing out in government of states the first serious definition put forward is that of Simonides: to render each his due. A thousand years later when Justinian, one of the most successful of the later Roman emperors produced his famous codification of law the maxims laid down at the start of the work carried the same statement. His three maxims of law were to live honestly, hurt no-one and render each his due.
Fifteen hundreds years after Justinian when Leon McLaren, founder of the School of Economic Science, spoke on Justice in Economics[7] he also returned to this time-honoured definition. “In what does justice consist?” he asked. “It consists in rendering to every man his due:” and to show how this applied in the economic arena added: “So that he who pays, pays willingly and he who receives, receives no more than is owed to him.”
If this traditional definition is accepted it gives rise to two questions, namely:
What is due to each? How is it rendered?
An answer to the first question was formulated and consented to by almost all humanity on the 10th December 1948 when all the members of the United Nations signed up to the Universal Declaration of Human Rights. This included a number of statements on what each human could expect to be rendered to him simply by virtue of his humanity. Two in particular were pertinent to the field of economics:
Article 23.
(1) everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.
(2) Everyone, without any discrimination, has the right to equal pay for equal work.
(3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented if necessary by other means of social protection.
Article 25.
(1) everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary food and social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.
Here is a recognition that an adequate standard of living is an entitlement for all. This shows a marked advance on the reasoning of the classical economists such as Malthus and Ricardo who had come to the conclusion that an impoverished underclass was an inevitable aspect of economic progress.
These articles relate to the two fundamental economic processes, the production of wealth and its distribution. In considering the first question of economic justice, namely what is due to each, it is important not to be restricted just to the question of the distribution of wealth. When that happens justice can easily be replaced by charity. Poverty is not a natural condition. It is not the beginning from which the journey to prosperity starts. It is the outcome of the injustice caused by depriving people of the opportunity to contribute. In the words of Plato: “the mark of a just society is that each should be able to practice that to which his nature is best adapted[8].
Justice in a free market economy
Now for the second question. If, as Plato says, the mark of a just economy is that each should be able to practice that to which his nature is best adapted then such a specialization could not happen without exchange. Each contributes what they are best able and in return receive what they need to live and hopefully live well. How is that which is due rendered to each? In our present economy the mechanism that has arisen to preside over this distribution is that of the market. Is this just?
If to live justly is to render each his due then it implies putting consideration of the other person first. By contrast what is generally accepted as the basis of our present market system is the exact opposite. As expounded by Adam Smith it is the ideal of self-love, summarized in his phrase: “Give me that which I want and you shall have this which you want.”[9] His hope was that somehow through a mutuality of self-interest this underlying motive of selfish gain would somehow lead to benefit for all
In the liberal economic tradition the market institution that was supposed to bring this about was not just any market but a free market, implying a self-regulating market i.e. one free from any external regulation.
It is a remarkable and unique aspect of our society that it has consented to delegate the responsibility for the regulation of the production and distribution of all its wealth and services including even the most essential such as food, water and fuel to such a headless chicken.
What is a market? It is essentially just a meeting place for the purpose of buying and selling where the presiding law is supply and demand and the governor of distribution is nothing other than price. What is a free market? This implies a market[i] that is free from any outside interference, particularly from government, making the economy by definition an institution separate from the political one. Moreover to be fully self-regulating demands that ultimately nothing in society is outside the market’s compass, it demands that ultimately the society becomes subsumed within it and that all transactions are money transactions. If the market is to be fully free and fully self-regulating then this implies there must be no external limit upon it. In practice such a utopian ideal has proven highly destructive of society and unworkable. The economic and social history of the last two hundred years are a testament to this, essentially consisting of a struggle between this liberal ideal and a human society striving to maintain its existence in its midst.
Looking across the evidence is that, despite its aspirations, the effects of the present way the free market experiment has been conducted are grossly unjust. Material gain and well-being for a few happens alongside deep poverty and hunger for the many. Very few have the opportunity to practice their special talent. Of those who have work, the majority are forced into a wage slavery having to work long and hard at unsatisfying and unfulfilling tasks to earn sufficient to cover their basic needs. Even the so-called “well-off” increasingly struggle under a burden of debt that was acquired in parallel with their material possessions.
The possibility of justice prevailing in a system based upon the opposite motive of selfish gain seems rather remote. The option of destroying the system and replacing it by something else will not be considered here. Given that a fully self-regulated market system is in reality totally impractical, the approach taken will to be to consider what the limitations are on a market system where justice prevails.
The major difficulties and injustices in the market system have not been in relation to the trade in commodities but have occurred when the concept of the market has been extended beyond this natural limit to the primary elements of the economy, namely to land, labour and money/credit. Before the Industrial Revolution all these factors were outside the market system and each was governed by its own traditional regulations. The injustices in the market economy can be traced back to the incorporation into the market system of these fundamental elements which are patently not commodities, forcing the pretence that they were essentially no different to manufactured goods and so could be treated in the same way.[10]
Free market in land
In economics what is termed land, has a distinct and unique character. It is the element that has been provided by nature so is by definition not man-made. Although the distinction is clear in principle, in practice separating the natural provision from the man-made modifications may not be so easy. For example, in English law, the concept of “property” makes no distinction between the land supplied by nature and the man-made buildings etc. erected upon it.
In the context of justice in economics and the appropriate limit for the market, it is important to consider the ethical basis for distinguishing land as an economic element. From this perspective the distinction lies in what the basis of ownership should be. Taking the view of Locke[11] the just basis for ownership of a good lies in the work done to produce it. This work-based claim may be established directly or transferred through a process of exchange. No such basis of a claim to ownership can be made to land for by definition it is not man-made. All claims to property in land therefore that have been passed on historically must go back to an initial unjust claim through some form of appropriation.
The main technical differences that distinguish land from man-made artifacts (termed “wealth” in economics and including “capital”) are its fixedness and the uniqueness of each portion of it. This makes its overall supply inelastic and also prevents its transportation from one location to another. Given these characteristics, when land is bought and sold as if it were a commodity, the laws of supply and demand and hence the price and distribution of it, will be very different from manufactured goods.
The third distinguishing feature of land in relation to justice in economics is that it is a necessary pre-requisite to economic activity. Either as the source of raw materials or the location where work takes place, without land nothing happens in the economic sphere. This means that having property in land is very different from owning a man-made object. Strictly speaking “property” is not the thing owned but the relationship a person has with the thing. Having property in land bestows upon the possessor much more than exclusive access to a passive object. This can be most easily seen when proprietors choose not to use pieces of land themselves but let someone else use it. In conditions where private ownership of land is upheld by the force of law and there is no free land, since it has all been taken, anyone wishing to engage in economic activity has no choice but to rent land. Collectively the landowners have an effective monopoly and will charge the maximum they can. In practice this rent will have two components, one a charge for use of the man-made modification, the buildings etc, and another, a charge for the use of the land. It is the second aspect that is considered here. This stream of income will vary with the different advantages particular locations enjoy. In agriculture the advantages will be mainly to do with natural aspects such as soil fertility, and in extractive industries with the mineral content etc. However in human communities the advantages will be not be to do with the site itself but its surroundings, its location. The advantages of the location that determine the size of the rent are of two types – protective and empowering[12]. The protective aspects include legal protection providing security of tenure and the more general protection of the armed forces and law enforcement officers of the state. Empowering aspects include access to essential services, transport and also the resources peculiar to a particular industry. Both these are provided to each site from without largely by the government but also by other citizens. The extraordinary injustice of the situation where land has been commoditized and is regarded as private property is that it is the proprietor of the land who receives payment for these from his tenant rather than the supplier of the services. For an owner-occupier, having paid for the privilege to the previous owner, he receives all these services free of charge.
This woeful injustice is compounded by the fact that there is an unquestioned expectation that these services will be provided and they have to be paid for by some means or other. The usual recourse of government is taxation – arbitrary levies, supposedly from those who are most able to pay but in practice taken from those for whom it is most convenient to extract them.
Free market in labour.
Once land becomes a commodity the attractive financial opportunity arises of using it to make money not by using land but simply by acquiring it, holding it whilst the work of others around it increases the rental value and then selling it on with the sale price corresponding to the capitalized value of several years’ rent. This produces a strong drive for all available land to come into private ownership. This happened in the UK through the sale of Church lands and then through land enclosures, and the latter process was then repeated in the huge swathes of overseas territories the British later colonized. A highly significant effect of this grabbing of land was to produce a large landless class of poor whose only choice was between working for someone else on the employer’s terms or living off state handouts. With the coming of industrialization this class became available to provide the labour in the factories and mills. Again the pattern seen in England was repeated in the colonies. With industrial production and large scale agriculture labour was treated effectively as just another input for the manufacturing process and wages rather than being a just reward for effort were simply a cost of production. With the rise of limited liability companies and shareholdings a drive to maximize profits produced pressure to minimize costs and this included wages. Labour was effectively under the laws of supply and demand and an excess of it, i.e. a pool of unemployed is regarded as actually useful as it helps to drive wages down. A free market in labour divorces wages from two things. On the one hand they have no connection with the value added by the work put in by the worker and on the other no necessary connection with what was required to live a decent life. The major injustice here is the dehumanizing effect. In practice when this gets too bad the state or some other charitable institution is forced to step in and introduce regulations and social support. Although this social safety net is of the utmost importance in preventing the level of depravity going to inhuman depths, it serves as charity rather than justice, and does not tackle the underlying injustice that produced the situation in the first place. The welfare also comes at a cost. This cost is born by the economy through additional taxation.
Over the years the costs of funding social welfare has grown in western European countries so that there is a considerable tax burden. Although it ameliorates social conditions it gives rise to further injustices. It renders many businesses that would be otherwise viable, not viable, and although intended to fall on those most able to pay, in practice falls on those not able to avoid paying and gives rise to a culture of avoidance. In addition the combination of social welfare and the tax required to finance it brings such distortions to the market that any justification for the system as a whole in terms of a free market mechanism is rendered meaningless.
Money as a commodity.
In a genuine self-regulating market the money system would be based on a particular commodity such as silver or gold. In practice this has proved impractical for two reasons. In an expanding industrial economy there is just not sufficient of the chosen commodity to supply the needs. This is particularly the case where land is privately owned and so commoditized. Where land prices approximate to several years’ rent in fully developed urban communities the sums involved become far greater than the amount of metal available can sustain. Secondly with foreign trade the deflationary effect of the movement of gold out of a country to balance imports is so destructive to domestic businesses that support is required. Historically, in both cases the support came from banks. Commodity-based money has been gradually replaced with money created by banks in the form of bank credit/debt. In relation to economic justice this has had two significant effects.
The first is a subtle but highly significant change in the role of money in the economy. This can be summarized as a change from “a means of exchange” to “purchasing power”. In a market economy with specialization and division of labour where the assumption is that all wealth and hence claims of wealth arise from some sort of work, the idea is that money just facilitates exchange. When the situation changes and money can be created from nothing without any accompanying material wealth then the role of money changes. It becomes “purchasing power” an expression that indicates that claims on wealth can be acquired by means other than doing useful work.
The second effect which seems to have gone largely unnoticed is that Government has effectively surrendered its duty to issue the money the economy needs. Although it still issues notes and coins in the present situation where most money is transferred electronically this now is a negligibly small contribution. In practice the issuance of money is now in the hands of privately owned banks. The injustice of this lies in that all the advantages of producing money now fall into the hands of a few rather than being shared by all. This advantage is enhanced by the situation that all the money is issued as interest bearing debt. This could be regarded as the commoditization of money. It is produced (out of nothing) and then sold at a price as a “loan”. For long term loans such as domestic mortgages the interest demanded frequently exceeds the original sum. As well as being totally unjust this is a very unstable arrangement. Since there is, overall, no money available to meet the interest payments, the only way they can be made is through the creation of further loans. This has a huge perverting effect on the whole economy driving constant growth. Another insidious effect of the system is that the loan-issuing banks have effectively laid claim to ownership of almost all the money in circulation.
In addition the market of foreign currencies rather than being a means of regulating the balance of trade between countries has become an end in itself. Such has become the increase in size and power of the financial markets that rather than them servicing the real economy there is now a situation where their requirements have become primary and the real economy has become their servant.
Restoring Justice.
If the injustices in the market economy lie in the incorporation of the fundamental elements of land, labour and credit into the market system, then the solution that could not only restore justice but also save the market system from the self-destructive tendencies that inhere in its present form would be to remove these elements from it. The lessons of history tell us that superficial remedies that affect only a part of the system frequently have repercussions which produce other injustices elsewhere. Any significant redress has to be at a fundamental level. So far attempts at saving society from the worst effects of the market system have centred mainly on the labour market. Attempts to ameliorate the worst effects of a free market in labour have been made by introducing such reforms as labour legislation, minimum wage and extensive welfare support. One example of the unfortunate and unintended consequence of these reforms has been the creation of a dependency culture with a helpless underclass trapped in a situation of dependency on the state. Although material requirements are provided for it produces a deprivation of a more subtle type.
Can it be possible to remove the primary factors from the market in such a way that does not just introduce artificial constraints and lead to further unseen injustices? Consider first land. The value of privately owned land, particularly in an advanced economy, lies not in the pieces of ground themselves but in the advantages their situations command in terms of protection and empowerment. This is what determines the value of the rent, and it is control of that income stream wherein the value lies. This applies whether it is enjoyed by the owner directly or whether he chooses to let the site to a tenant and collect the cash equivalent instead. The injustice of this obviously lies in the fact that what produces the value is not supplied by the owners themselves but the rest of the community that surrounds the site. Although the law and common practice does not demand this, surely what justice demands is that those who claim exclusive ownership of pieces of land repay the community for the privileges they receive from such exclusive occupation.
This requirement is alluded to in the Declaration of Human Rights which in one place at least recognizes where there are rights there must be corresponding duties.
Article 29: Everyone has duties to the community in which alone the free and full development of his personality is possible.
Unfortunately the glaring omission here is that there is no statement of what the duty is.[13] The assertion here is that the primary duty for the occupier of a piece of land is to pay to the community the full price of the privileges enjoyed by occupying land. Obviously this implies a duty on the part of government to collect the payment on behalf of the community. If this were implemented, the effect on the free market in land would be marked. Given that the value in property in land is access to the rent, when the rent was paid back to the community there would be no longer any value in holding land for its own sake. The only value in occupying land would be to make use of it for productive purposes. For the most advantageous sites, those with the highest rents, it would only be worth holding sites if they were put to very good use. The free market in land would disappear; the required de-commoditization of land would be achieved.
Such a reform would have huge effects throughout the whole economy. Probably of most significance would be the effect on the money supply. In our present debt-based system the significant proportion of the basis of the loans is for land – taking in the large land component of both domestic property and commercial assets. If land were no longer a commodity a considerable proportion of the assets which are the collateral for the loans that are the basis of the money supply would disappear. Given the injustice of the present system this would not necessarily be a bad thing. What would be required is an alternative source of money. This would be the opportunity for government to re-establish in full its natural duty to issue money on behalf of its people. This would go some way to taking money and credit out of the market and restoring their status to that of tools that serve the market rather than part of the market itself.
The de-commoditization of land and credit promoted by government taking up its proper monetary and fiscal duties of issuing money and charging for public services at the point of use would have a significant impact on the condition of labour. Hodgkinson[14] describes the combined access to land and credit as “two arms of a pair of scissors cutting the knot of poverty”. The change in conditions would act as a strong incentive for men and women to work for themselves making use of their natural talents. Premises would be more readily available since the incentive to hold them out of use for speculative purposes would be gone and also, with no incentive for banks to lend for land speculation credit they might be left with no choice but to direct credit towards useful enterprise. The shift of taxes off wages and enterprise would also facilitate honest endeavour. These effects would give much greater freedom for self-employment and small business, raising the status of labour and decreasing the availability of low paid wage earners. This in turn would help the shift in the concept of wages from a cost of production to a reward for production. When this happens labour as well as land and credit will be de-commoditized and the foundations laid for a market economy based upon justice.
[1] D. Begg, Economics, 7th ed, McGraw Hill, 2002.
[2] R. Lipsey & A. Chrystal, Economics, 11th ed OUP, 2007
[3] Plato, The Republic, J. Jowett trans. OUP/
[4] N, Preston, C, Sampford, C, Connors Encouraging Ethics and Challenging Corruption: Refoming Governance in Public Institutions Federation Press, 2002
[5] R. Hursthouse: Virtue Ethics Stanford Encylopaedia of Philosophy, revised 2007
[6] Plato ibid
[7] L. McLaren Economic Justice
[8] quoted in B. Hodgkinson A New Model of the Economy Shepheard-Walwyn 2008
[9] A. Smith The Wealth of Nations Penguin edition 1976
[10] K. Polanyi The Great Transformation Beacon Press, 1957.
[11] J. Locke Two Treatises of Government, 1689.
[12] http://www.rockridgeinstitute.org/research/lakoff/progressive-taxation-some-hidden-truths/
[13] F. Harrison, The Silver Bullet, the IU, 2008.
[14] Hodgkinson, ibid.