Compensating Variations

The British Parliament was debating how much slave owners should be compensated for their losses, 20 million pounds as it turned out, when a furious John Stuart Mill rose to his feet thundering, "I should have thought it was the slaves who should be compensated."

I am reminded of this story, which is probably apocryphal, whenever I hear about how we must compensate "the losers" from globalization.  Really?  Why should they get any compensation at all? 

Imagine that transportation costs fall so that Joe buys his shoes from China.  Why do lower transportation costs impose an obligation on Joe to compensate Mary, a U.S. shoe maker?  If transportation costs rise (say because the price of oil increases) does Mary have an obligation to compensate Joe?

Or imagine that tariffs have long protected the shoe industry and now the tariffs are lifted allowing Joe to save some money.   Why does this impose an obligation on Joe to compensate Mary?  Indeed, shouldn’t Mary have to compensate Joe?  After all because of the tariffs for many years Joe had to labor extra hours to buy shoes – shouldn’t Joe be compensated for this injustice?

Think about it this way: Suppose the mafia threatens to do you harm if you don’t buy at over-inflated prices from Guido’s Supplies.  For many years you buy but one day the mafia is forced out of business.  Now you are free to buy from any supplier.  Must you compensate Guido for his losses?

Of course, I understand that we might have to compensate the losers from globalization because without compensation they won’t allow us to trade.  My question is different.  It might be expedient to compensate slave owners but is this justice?

 

Addendum: It was Benjamin Pearson not Mill (see my comment below for citations).

Comments

This is just silly! Nobody is suggesting that the Chinese should compensate America for being a “loser† in globalisation (which is of course a silly premise to start with).

Mary may be owed compensation from her own political community because she was made dependent on artificially high shoe prices by her state (through its trade restrictions and policies) and then when there was much more money to be made by opening trade the world was changed around her by forces she could not control. This happened very quickly giving her little time to adapt and the money made by this change of rules did not flow to her.

Mary’s accepting a job in a shoe factory cannot be equated with her responsibility for the way the world is organised by elites. If you want to change the rules of the game fine, but calculate in equitable transfers of the profit from the start.

As for which way the compensation should flow at the global scope, it should flow from those that have used military power to impose terms of trade that harm the world’s poor (where these exist).

alex, your argument is 100% correct. note that the reasons the two commenters give of abruptness and change of rules without advance warning could be applied to teh mafia example as well. fact is the question of compensating globalizations's losers have little to do with logic and more to do with getting a buy-in and out of a sense of moral compunction.

"Mary may be owed compensation from her own political community because she was made dependent on artificially high shoe prices by her state"

The recipient of monopoly profits must be compensated for their loss? Doesn't this just turn welfare economics on its head?

Yes, Guido should be compensated - for the losses incurred in the interim of adjustment, not his continual loss relative to his former profits.

If you feel that this is outrageous, then there's your "moral compunction" acting.

Um. I think the underlying justification is pretty obvious and not at all incoherent: a prioritarian/egalitarian concern for the worse off. No one would be pushing for "compensation" if all of the winners were poor and the losers rich.

Maybe you don't want to call this "compensation", but as far as I'm concerned that's a second-order issue.

I just dont understand why we need to compensate trade's losers in a relatively free market context. If it is true that "FREE" trade or commerce without the consent of political actors leads to the MOST efficient allocation of SCARCE resources, then why would we need to compensate anyone for their short run pain? We have chosen the most socially optimal path precisely because we are playing in a system that does a GREAT job of sorting out the winners and losers. That is the beauty of the system, even though there will be losers in the short run they will still be better off in the long run because the most efficient producers are succeeding. What the losers need more of is better allocative efficiency, not transfer programs that will only aid in the VERY short run.

Years of rents collected as a result of political action ought to be enough to compensate Mary, frankly. The cynic in me says those who think Mary should be otherwise compensated are 1) economically ignorant and 2) unable to properly understand the relevant moral community.

“Sound economic policy advocates strong property rights, not ‘justice’.†

More silly nonsense! What counts as sound, maximizing economic output, maximizing freedom, maximizing the income of the poorest, etc? Soundness instead of justice is simply code for ‘me and my buddies all agree on what is right so we are not prepared to discuss it,’ unless of course what you mean by soundness is that hyper inflation is not a good thing (in that case thanks for the tip).

Property rights are important because of the outcomes for people that live in systems with strong property rights, and it is how the economic system serves those that live within it that a theory of justice cares about. There is no such thing as “sound economics† independent of its affects on people.

“The recipient of monopoly profits must be compensated for their loss? Doesn't this just turn welfare economics on its head?†

The point I was making was that at a very minimum when regulation generates monopoly profits there are clear reasons to transfer resources from those that greatly profit by controlling regulation for their own ends to those that simply enjoyed a low paying job among a large set of low paying “career† paths they could have chosen. It does not make much sense to claim that the person who chooses to work in a shoe factory that has been operating for 30 years instead of selling shoes should be held responsible for the insecurity of the sector produced by big business and the government through their rent seeking efforts. And the worker made insecure by the larger society’s public policy has a clear claim to some compensation for creating those conditions.

Changing the policy for an overall welfare gain for the community (i.e. in the form of a dollar off on all t-shirts) can be justified to those who will loose their livelihoods by saying, ‘well we won’t leave you high and dry’. I guess the logic behind such transfers even makes sense in welfare economics.

“abruptness and change of rules without advance warning could be applied to teh mafia example as well†

My argument would amount to Soldati within the “family† business having claims against the Bossess. I think that was pretty clear in the original post.

It's bribes. If there was justice, there wouldn't be any restrictions on trade. The best form of "compensation", if necessary, would be to phase out the tariffs.

This is a perfect example of why libertarians are crazy. Alex writes a post that explicitly compares the position of a moderate-low skilled laborer in a tariff protected industry to a slave owner. And nobody even blinks.

Mary doesn't owe Joe anything b/c Mary hasn't made any extra money due to rent collection. Aaron and others have already made this argument quite effectively. The guy who owns the company Mary works for has probably made quite a bit of money, but he can just take the assets he has accumulated and reinvest them elsewhere. Mary is just another moderate-low skilled laborer who chose to develop her minimal skills in that line of work b/c there was a shoe factory in her town instead of something else. She would have made the same wages developing a similar skill level in whatever factory existed in her town. When the shoe factory closes, she loses her investment in developing that particular skill and has to start over- when she is older and has more liabilities.

I know why libertarians don't like compensating Mary for her loss- b/c they dumb people should be punished. But compensating Mary for her loss does not even create the market inefficiencies that maintaining a tariff to protect a previously existing industry does. (which is a harder to defend practice and should have been the actual topic of this post). Capital plays at rent-seeking by taking advantage of protected industries, but non-union labor certainly does not. Given that libertarians are on some level aware of the cruelty of their philosophical position, they try to turn things around by comparing the powerless Mary to slave owners and the mafia. It might appear expedient to make this comparison, but will anyone actually fall for it?

This argument cuts both ways. Imagine the government seizes your property for some other use, whether economic or otherwise. The Libertarian (read "anti-government") crowd would be the first to demand market compensation for the property owner. And, clearly were "slaves" not just legal property at the time?

Yes, it does serve justice to compensate slave owners... and peace and tranquility to boot. Slaves in the U.S. system were, by law, property. Any change in policy, that would have granted freedom to slaves, should have included compensation to the holders of that property. Had we pursued such a policy in the U.S. we may have averted a war that claimed over 600,000 lives. So for justice sake and for practical reasons the slave owners should be compensated.

Is "compensation" even at issue?

So far as I follow the general discussion, the intent is to do things so that the structurally unemployed can re-join the work force.

I don't even know how one would figure out compensation.

So I look at job retaining and such as strictly in my own self-interest (as one of the employed) who would like to get as many people back to work being useful and paying taxes etc.

I think that the viewpoint that the losers should be compensated comes right back to Economics 101. In this type of course, students are told that "trade can make everyone better off". However, I've only worked for one particularly astute professor who was careful to distinguish "potentially Pareto improving" (gains to winners are larger than losses to losers, so a transfer can make everyone better off) from "actually Pareto improving" (no losers). Trade is potentially Pareto improving, since the gains to consumers are larger than the losses to producers. This is generally where economists stop, but I can see how people would take this the extra step to think that the losers deserve some sort of compensation since it doesn't drive any other party into an overall loss. Empirically, people care a decent amount about fairness as opposed to pure self-interest, so compensation may be unavoidable.

I think that the viewpoint that the losers should be compensated comes right back to Economics 101. In this type of course, students are told that "trade can make everyone better off". However, I've only worked for one particularly astute professor who was careful to distinguish "potentially Pareto improving" (gains to winners are larger than losses to losers, so a transfer can make everyone better off) from "actually Pareto improving" (no losers). Trade is potentially Pareto improving, since the gains to consumers are larger than the losses to producers. This is generally where economists stop, but I can see how people would take this the extra step to think that the losers deserve some sort of compensation since it doesn't drive any other party into an overall loss. Empirically, people care a decent amount about fairness as opposed to pure self-interest, so compensation may be unavoidable.

I have no idea why Mary, if she winds up losing her job, should be treated differently from anyone else who loses a job. There are many, many reasons, difficult or impossible to anticipate, why people can be laid off on little notice.

The plant could install robots. The plant's primary wholesale distributor could fail because of its own inadequacies, leading stores to purchase from distributors selling the competitors' shoes. The plant could get hit with a massive tort verdict, causing it to close. The company's officers could lose millions on financial speculations. The company's seniority system could be ruled discriminatory by the EEO, so that white employees have to be discharged. The company's designers could fail to provide sufficiently stylish or durable shoes, so customers shun the products.

Why should foreign competition be singled out? Why shouldn't Mary be given the same benefits that any laid off employee gets (unemployment compensation for a while, access to vocational training, etc.)?

The world is full of many risks. In the market system, risks and benefits are intimately tied together. If we compensation everyone for every possible bad outcome, our economy will grind to a halt.

Ak-Mike, I think you make an extremely good point. Trade picks winners and losers. Capitalism, in general, picks winners and losers for MANY REASONS beyond trade. There seem to be two debates going on here, one philosophical and the other economic. I would argue that a political system that reimburses the losers would not make much economic sense in the long run and therefore be rather unethical for EVERYONE.

“I have no idea why Mary, if she winds up losing her job, should be treated differently†

Well if you live in a country with decent unemployment insurance then I would agree.

In general the argument that individual workers should be compensated for public policy choices that significantly worsen the terms of trade for the sectors they are dependent on is part of a larger set of arguments for a system of employment insurance (i.e. the publicly funded redistributive kind).

“What exactly is the point of achieving a new surplus of wealth as a result of increased allocative efficiency due to free trade? If part of the new capital stock is going to be taxed away from the efficient sectors then why would this be considered socially optimal policy?†

Ha ha, taxed away from an efficient sector to an inefficient sector. The only problem is that the inefficient sector that you are terminologically abstracting away from is really inefficient people. People with services that are not longer needed. The point of redistributing resources to them is to make sure everybody can lead a minimally decent life.

It seems to make good sense in terms of a reasonable distribution of welfare to soften the blow of large scale economic change by way of unemployment insurance for people that will need to move from one sector to another. Especially for the sake of people at the bottom of economic hierarchy who are much more vulnerable to change and less able to quickly adapt (due to a lack of savings for example).

Systems of unemployment insurance will make an economy less productive because workers will be in a better bargaining position and because of the transfer of some capital from those that could produce more with it to those that produce less with it. This is a choice for a more humane economic system over maximizing economic output. Lots of countries do it and I have yet to hear any compelling argument on this site by anybody ever for why choosing a little less productivity for the sake of making sure everybody has a minimally decent living standard is “unethical for EVERYONE.†

Just consider what happens when millions of Marys get laid off with no compensation. Then all your fine sounding libertarian theories will find themselves on the pointy end of a pitchfork. THAT's why it makes perfect sense to compensate workers who, through no fault of their own, find themselves destitute at an age where they have kids, mortgages, obligations, and little to no chance of getting a similarly paying job.

There's nothing more dangerous than people with nothing left to lose...

You got the question right. Do we need to do this for stability? The answer is a deafening "no" if a supermajority of people recognize their own self interest. I'd like to think that this idea of compensating the losers of globalization is just a more polite refinement of questioning people's patriotism for driving Toyotas (as opposed to questioning their sense of style, which will always be OK ;-). But instead, I think it's progressives looking for a problem to solve. Simply call them out on it and point to all the things we have today that we did not have 20 years ago because of globalization.

The story is apocryphal. The 20 million pounds compensation was part of the 1833 abolition of slavery in the British Empire. John Stuart Mill was a member of parliament 1865-1868.

fustercluck,

You are right that in many cases people prefer freedom to slavery. However, I doubt that slaves were often and regularly whipped and tortured as lore would have us believe. If they were bought as an investment, the master would only punish to promote hard work and most reasonable investors/managers understand that punishment does not produce as efficient an output as incentives do(such as an extra meal, more firewood etc...in those days).

Many slaves, if interviewed may have not openly stated their acquiescence to being enslaved but by virtue of their behavior, they indicated consent. After all they were owned and the responsibility and burden of choice was removed; much like a child unwilling to leave the protection of his/her parents. Today's equivalent is the welfare system's beneficiaries and those who constantly rotate back into (or remain in) the prison system.

If slavery were entirely voluntary, mass revolts and social unrest would have forced the collapse of most slave-holding regimes. Slave owners justly deserved compensation when the legal system re-designated slavery.

The freedom of “wanting† to be a slave, the true face of libertarianism is revealed.

What this amounts to is that because someone would prefer slavery to not starving slavery is morally justified.

If you want to read a good article on what is wrong with the libertarian’s perverted notion of what freedom is see Samuel Freedman’s “Illiberal Libertarians: Why Libertarianism I Not a Liberal View† (Philosophy and public Affairs 30, no.2).

Here is a longer quote from the article on why the slavery Barbar advocates is not what any reasonable person would consider freedom.

“One party to the arrangement enters the public and political realms to demand, as a right, that others recognize and respect a private agreement bestowing ownership in another person. Society is called upon to adopt publicly a parallel attitude and to treat a person, not as a being with rights due moral consideration and respect, but as property, an owned thing. Alienation of basic rights, if politically recognized, imposes duties not just upon the transferor, but also upon society and its members to respect and uphold such transactions. We are called upon to ignore the moral fate and political status of others as equals, and to participate in their civic and moral debasement. Moral and legal duties of mutual respect, protection from unwanted harm, and mutual assistance of others in distress are suspended, and society’s members are obligated to apply their collective force to compel another’s ‘property’ to comply with contractual obligations. By embracing alienation agreements as matters of enforceable public right, we accept a mandate to coerce and harm certain people against their will, and to regard and respond to them as if they were things.

Liberalism holds that consenting adults do not have the rights or powers to impose such extraordinary duties upon others as a result of their private agreements. Beneficiaries of servitude pacts and other bargains alienating basic rights cannot ask government to recognize and enforce them. It may be in an agent’s interests at the time to alienate her basic rights; nonetheless, the private demand to publicly recognize this agreement as a binding contractual relationship conflicts with others moral duties and interests (as liberals perceive them). Moreover, it conflicts with the public interest in maintaining the status of persons as free and equal, and the moral quality of civic relations. Liberals refuse to use public laws to treat people as objects without rights, even if people want to be treated this way. There is no place within the liberal conceptual order for the political or legal recognition of people as property or as anything less than persons with basic rights† (p.112-113).

Also, the fact that white people almost never elected to become slaves, while black people chose to remain slaves with great frequency, is strong evidence of innate differences between different racial groups, no matter what the politically correct thought police might tell you.

Revealed preference, dude.

OK sorry, I for one am just joking, I can't believe people spout this stupid nonsense either. The parody is essentially indistinguishable from the real thing.

Consider the case of a government policy that adds rent value to some sort of property. It might be a farm best suited for a particular crop, a New York taxi medallion, or job skills in a particular industry. The people who own the property at the time the policy or law is instituted get a windfall. Anyone that enters the field afterwards doesn’t: the price they pay for the farm, medallion, or skills includes the expected present value of that rent. Over time, new owners or workers replace those who got the original windfall.

If the policy has been in place long enough for people to make substantial investments based on the expectation that the policy will continue indefinitely, that does create a case for some sort of compensation or consideration if they lose the value of their investment because of a change in the policy.

aaron m,

You quote a leftist defense against voluntary slavery. Though I may not necessarily agree with you, I can respect your liberal views. However The question here is whether compensation to slave owners is justice. Assuming that slavery, voluntary or otherwise is immoral. When the legal framework sanctions such a practice then decides to change its mind, slave owners that have abided by the law and purchased slaves legally should not now have their property taken away without due compensation. If government decides tomorrow that cars are morally wrong because they contribute to global warming, would it be right to confiscate people's cars without compensation while many of them are still making loan payments on that car?

That mafia/slave analogy is simplistic.

Joe had the freedom to become a top-wage shoemaker, but chose otherwise. That means that a social optimum existed before, (as long as Mary was not in a monopoly position.)

Compensation to Joe would be unjust.

aaron m,

If the laws are changed through a political process (i.e. by an act of congress) then the government is responsible for bearing the cost of the change of heart, which means that the public/taxpayers bear the cost. When a government intervenes to change a social order, it must bear the cost to indicate respect for property rights thus ensuring its legitimacy. Society today is paying for programs such as affirmative action.

If slavery is abolished through revolt and violence, then the legal structure fails entirely and I don't know if there would be compensation to the owners. This has to mean that the political elite are changed completely and the economic elite (assuming they survive) have found a way to placate or ignore the slave owners without harm to their own economic welfare.

Chairman Mao,

You assuming what needs to be shown; namely that the fact that having slaves and profiting from slaves is deeply morally wrong does not affect the principle that sectors hurt by large changes in public policy have claims to compensation from the rest of political society.

Nazi Germany allowed business to use Jews as slave labour. Were they owed compensation from somebody when the lost that opportunity?

Mao,

You are employing a set of transparent techniques to avoid the normative point I suggested you address. As it stands you have no argument whatsoever in support of compensation and I am increasingly unsure of what your argument would be given that what you do say seems to point in the opposite direction.

First the distractions:

Pointing out that Germany’s policy was changed because they lost the war is a distraction used to avoid the main normative point. I could simply change the example and say ‘imagine the Germans were not defeated but that through internal political change the policy on slave labour was changed.’ The relevant question is whether profiting from a deeply immoral yet legal public policy can still lead to a legitimate claim to compensation when the law is changed.

Likewise your introduction of the Marshall Plan payments is not relevant because we all know that it was not in the least bit designed to offer a fair compensation to German businesses that has lost access to Jewish slave labour. There was certainly a clear and general pragmatic interest in re-building Germany along with the rest of Europe so as to create the economic conditions that would help prevent future European wars. But our question is a normative one and the Marshall Plan is not an indication of anybody accepting the idea that slave owners are owed, base on the fair terms of social cooperation, compensation when slavery it outlawed. Furthermore, even if the Marshall Plan was partly based on this principle I do not see how this would count as a reason for us to think that such a view is a morally correct view. Simply noting that some state had that policy does not amount to an argument for that policy.

Second the arguments against compensation:

You claim that the changed conditions in Germany simply represented a situation were labour costs went up because the terms of trade on the market for labour were changed. For this reason compensation was not owed. The suggestion seems to be that the German case is one about labour costs were compensation is not owed and that the US slave case in one about property were compensation is owed!!!! But the fact that you make people your property in order to keep labour costs as low as possible cannot be a reason in favour of compensation. What this would amount to is the idea that the more morally abhorrent your treatment of labour the more you are entitled to compensation when this treatment is made illegal.

Finally you say “Some policies can be so morally reprehensible that there is a duty to disobey, to resist or to refuse to participate. It is a duty, not an option. Failure to act means that you are complicit in those policies whether you like them or not.†

I assume you think slavery is something we have a duty to resist. If so what you say seems to suggest that compensation is not owed to jilted slave owners.

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