Do people deserve their market prices and wages?

by on January 31, 2005 at 7:16 am in Economics | Permalink

Elizabeth Anderson says no, Henry Farrell and Brad DeLong concur. They argue that a Hayekian ought not to regard market prices as reflecting justice or merit...

Here is part of Anderson’s argument:

Let’s consider first Hayek’s claim that prices in free market capitalism do not give people what they morally deserve. Hayek’s deepest economic insight was that the basic function of free market prices is informational. Free market prices send signals to producers as to where their products are most in demand (and to consumers as to the opportunity costs of their options). They reflect the sum total of the inherently dispersed information about the supply and demand of millions of distinct individuals for each product. Free market prices give us our only access to this information, and then only in aggregate form. This is why centralized economic planning is doomed to failure: there is no way to collect individualized supply and demand information in a single mind or planning agency, to use as a basis for setting prices. Free markets alone can effectively respond to this information.

It’s a short step from this core insight about prices to their failure to track any coherent notion of moral desert. Claims of desert are essentially backward-looking. They aim to reward people for virtuous conduct that they undertook in the past. Free market prices are essentially forward-looking. Current prices send signals to producers as to where the demand is now, not where the demand was when individual producers decided on their production plans. Capitalism is an inherently dynamic economic system. It responds rapidly to changes in tastes, to new sources of supply, to new substitutes for old products. This is one of capitalism’s great virtues. But this responsiveness leads to volatile prices. Consequently, capitalism is constantly pulling the rug out from underneath even the most thoughtful, foresightful, and prudent production plans of individual agents. However virtuous they were, by whatever standard of virtue one can name, individuals cannot count on their virtue being rewarded in the free market. For the function of the market isn’t to reward people for past good behavior. It’s to direct them toward producing for current demand, regardless of what they did in the past.

Now, I am torn between "strict philosopher" and "common sense morality" views.  In the former, I am a metaphysical determinist who doesn’t think much of desert arguments — whether pro-market or not — in any context. 

But for purposes of argumentation, let’s put on the common sense hat.  I then think that most voluntary transactions — at least in democratic market economies — are in fact reasonably just.  The biggest problem is fraud — Enron and the like — and that cannot be blamed on Hayek.  The share price of Enron — when it counted as the seventh largest firm in terms of capitalization — was a Hayekian obscenity if judged as an information aggregator.  The problem was that prices were tricked by inflated earnings estimates and did not perform their Hayekian duties properly. 

Another fairness problem is that some people are born into terrible neighborhoods and face unfair odds in life.  But the information aggregation function of prices is again far from the leading culprit in those cases.  In fact price floors and ceilings usually make poverty worse and less fair.

The complex concept of merit encompasses many values.  One of those values — but not the only one — is how much other people are willing to pay for what you have to offer.  Let’s start with that as a workable concept, and modify it whenever deviations will serve the general welfare.  Nozick goes wrong in thinking that no other notion of merit can override a prescription for laissez-faire, but consenting acts between capitalist adults should serve as the proper default.  If I buy a wonderful stinky cheese for $10, barring fraud, most likely all is well in the moral universe in this case.

Now the critiques are well-known.  Marginal products are determined in a broader social and economic context, plus the distribution of wealth may be unfair.  But the American public comes close to having the correct view here.  On one hand, it is widely recognized that taxation to finance public goods, including some degree of social insurance, is morally legitimate.  At the same time, people are seen as deserving what they earn, again fraud aside.  We ought to think twice before treating earned incomes as a "social pie" purely up for grabs.

But those judgments are piecemeal rather than foundationalist.  Few people agree with Robert Nozick in treating property rights as absolute.  More generally, we cannot justify all distributions, prices, and incomes from some set of first principles.  Rather we start with what we have and go from there.  And then the $10 for the cheese does in fact represent justice.  Furthermore we can believe this while admitting that the child born in the South Bronx does not receive a fair shake.

Anderson also confuses the manner in which prices are forward-looking.  A measured price for a consummated transaction reflects supply and demand from the past.  To the extent that a person’s merit was reflected by what she can get others to pay, this is OK.  There is no contradiction between backward-looking and forward-looking perspectives.  It remains true that such prices will not reflect, say, the purity of a person’s heart.  But this point stands without worrying about time frames.  Anderson writes as if "information aggregation" is some independent, ex ante functional purpose which causes prices to move in morally undesirable directions.  In reality information aggregation is an ex post property of a competitive bidding process, it does not on its own drive prices away from some pre-existing benchmark of moral merit.

Some of Anderson’s statements are hard to parse:

"the function of the market isn’t to reward people for past good behavior. It’s to direct them toward producing for current demand, regardless of what they did in the past."

OK, but past rewards will have come from efficacious past behavior in satisfying consumer demands.

Anderson also argues that even a productive and meritorious person cannot insure adequately against all possible future disasters.  It is well-known that markets do not produce many kinds of long-term insurance and indeed this remains a puzzle.  But here a dose of more Hayek — not less – would seem to be in order. 

The bottom line: A coherent notion of moral merit includes more than just your ability to serve others through the marketplace.  So market returns won’t coincide with personal merit, even putting aside the dilemmas of determinism.  But voluntary transactions — in many settings — provide a rough but non-absolute starting point for what is fair.  And if we are looking for causes of unfairness, the Hayekian informational role of prices is simply not a major culprit. 

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