Friedman on Capitalism vs. Poverty

October 21, 2015

In a previous post, I wrote about Hayek’s claim that capitalism reduces economic inequality. Milton Friedman makes the same claim about capitalism and inequality in “Free to Choose.”  This claim was quite plausible in the early 70s, less so today.  There’s an irony here, which is that the data upon which Friedman and Hayek relied to show that capitalism reduced or didn’t exacerbate inequality were taken primarily from the post-war period of strong unions and active government, the very economic phenomena they were trying to curtail.

Anyway, even if they’re wrong about inequality, Hayek and Friedman can still claim that capitalism benefits the poor – the claim taken up recently by so-callled bleeding-heart libertarians such as John Tomasi and Jason Brennan.  Here’s Friedman, from Free to Choose:

The main bit:

“I do not know any exception to the proposition, that if you compare like with like, the freer the system, the better off the ordinary poor people have been.”

Is that true?

Inspired by Friedman, the Fraser Institute started to measure economic freedom across the globe, and to relate such freedom to other economic variables, such as the income level of the worst off. In their 2015 Annual report, they provide this table that describes the relationship between economic freedom and the economic fortunes of the worst off, across the globe:

Economic Freedom and Income of Poor

The freer a country is, in economic terms, the higher the income of the country’s poorest citizens.

What do the data themselves look like?  Here’s a graph I did for 2005 – I chose an earlier year because there isn’t data for every country for each year, so I wanted to be able to use data from an earlier or later year, whichever was closest. The measure of income is from the World Bank’s Development Indicators.


So there is an association – and if you’re prepared to consider a curve as opposed to a straight line, then past some mid-level of economic freedom the income of the bottom 10% takes off!

However, one thing that leaps out (well, it would leap out if the data points weren’t so close together, and if my country labels weren’t idiosyncratic) is that the bottom tail is composed of very poor countries, countries that do poorly on economic freedom because they also have weak rule of law (protection of property rights). For example, here are the countries with the lowest economic freedom rating, along with their component ratings on “Legal System and Protection of Property Rights” for 2005 (max score = 10)

Angola – legal / property score = 3.15

Congo (Republic) – legal / property score = 2.35

Venezuela – legal / property score = 2.77

Central African Republic = 2.81

Congo (Dem. Repub.) = 1.75

By way of contrast, Canada scored an 8.08 on legal / property rights in 2005.

There is no doubt in my mind that the impartial, predictable enforcement of known property rights is a component of economic freedom. Security of property rights goes along with rule of law, and and rule of law I presume is a key factor that explains economic growth. But the fact that rule of law raises up the worst off is not necessarily a reason for thinking that shrinking government is good for the poor, or that reducing regulation is good for the poor.  These are some of the other components of the Economic Freedom of the World Index (along with openness to trade and low inflation / convertible currency). It might be that rule of law is essential to growth and raising up the worst off, but that once some level of legal and economic development is attained, government spending is good for the poor.  So let’s look at the top part of the chart.  I more or less arbitrarily truncated at $8000 per capita GDP (this is all quite rough, I admit):


Clearly I should have truncated a bit higher to get rid of troublesome Croatia and Slovenia, which are threatening to give a positive slope. To compensate, I’ve very subtly circled in GREEN Sweden et al, and in RED the anglo-saxon countries.  The point is that if one thinks that these countries are the ones that are truly comparable, it looks like more economic freedom is associated with the worst off doing worse, in absolute terms. (I think the main story here is that the countries in green, while being highly open to trade, have larger shares of their economies going through the hands of government.  Will Wilkinson has recently suggested that it may be in part because citizens there are more protected from the ups and downs of the market economy that they are willing to tolerate such openness to foreign competition. If I’m not mistaken this is essentially Geoffrey Garrett’s thesis,in Partisan Politics in the Global Economy).

There are lots of complexities here, in the data, and in the inferences we might want to make about causal mechanisms, but as this is the second post in one day, I will leave it at that.

Friedman vs. Knight

October 21, 2015

This week in my course on liberalism we’re reading Milton Friedman. I’m really enjoying watching the PBS documentary “Free to Choose.” Here is a bit where Friedman discusses gambling, and the benefits of risk-taking:

The corresponding text from the book Free to Choose:

“Still another facet of this complex issue of fairness can be illustrated by considering a game of chance, for example, an evening at baccarat. The people who choose to play may start the evening with equal piles of chips, but as the play progresses, those piles will become unequal. By the end of the evening, some will be big winners, others big losers. In the name of the ideal of equality, should the winners be required to repay the losers? That would take all the fun out of the game. Not even the losers would like that. They might like it for the one evening, but would they come back again to play if they knew that whatever happened, they’d end up exactly where they started?”

Of course one issue is that people choose to visit Las Vegas and play Baccarat; they don’t have a similar choice about whether to play the economic game, in daily life. Also they don’t necessarily start out with equal piles of chips, if children are being raised in private families. In addition, however, people may object to competition itself, to economic life being organized so that they have to compete against others in order to flourish. Milton Friedman’s teacher Frank Knight captured this sentiment in a very nice passage from his essay “The Ethics of Competition”:

“Turning to look for motives attached to production as an activity rather than to the product, the most obvious is its appeal as a competitive game. The desire for wealth takes on more or less of the character of the desire to capture an opponent’s pieces or cards in a game. An ethical criticism of the industrial order must therefore consider it from this point of view. In so far as it is a game, what kind of game is it? There is no doubt that a large amount of radical opposition to the system arises in this connection. The propertyless and ill-paid masses protest not merely against the privations of a low scale of living, but against the terms of what they feel to be an unfair contest in which being defeated by the stacking of the cards against them is perhaps as important to their feelings as the physical significance of the stakes which they lose. In a higher social class, resentment is aroused in the hearts of persons who do not like the game at all, and rebel against being compelled to play it and against being estimated socially and personally on the basis of their successor failure at it.”

That’s from pp.603-4 of the version that’s in the Quarterly Journal of Economics, Vol. 37, No.4, 1923.

Knight was no fan of socialism, but he showed a keen understanding of the sources of opposition to capitalism.

Grad course on “Social Justice and Desert”

June 16, 2015

Here is the draft course description for a course I’m teaching in Winter 2016:

Social Justice and Desert

One of the standard criticisms of the welfare state is that social provision of income, housing, etc. rewards the imprudent, the irresponsible, the feckless, the lazy – in short, the undeserving. Recent increases in high-end inequality have raised similar questions about whether the market system itself rewards the undeserving; what have the top 1% done to deserve their enormous share of total income and wealth? Are CEOs today really so much more deserving than they were in the 1970s? The association between justice and desert has a long history, and is an important part of common sense thinking. However, the main political theories of the 20th century assign little or no fundamental importance to desert. The classical liberalism of Friedrich Hayek and Milton Friedman, the libertarianism of Robert Nozick, and the egalitarian liberalism of John Rawls – none of these views hold that in order to be just institutions must match shares with individual merit. The purpose of this course is to get a better understanding of this disconnect between theory and common sense. The first part of the course covers the free market critique of the “just deserts” interpretation of marginal productivity, Rawls’s rejection of the common sense position on desert, and the criticisms this rejection led to on the part of people such as Miller, Nozick, and Sandel. The second part of the course examines theories that attempt to accommodate the intuitions about desert that motivated the critique of Rawls and the welfare state without explicitly appealing to desert. So-called luck egalitarians emphasize the importance of responsibility, and of people “paying the costs” of their choices. An interesting alternative is to appeal to the idea of reciprocity, connecting liberal egalitarianism with social democratic thinking from the first part of the twentieth century. The final part of the course will focus on specific issues that present challenges for a theory of justice-as-reciprocity: disability, global justice, and economic incentives.

Reading that over, I see that it might suggest that Rawls was a welfare-state liberal, as if his theory would be satisfied by the formula ‘laissez-faire + enough social provision so that the poor don’t starve and the system remains stable’. Will have to work on that.


November 5, 2014

Mankiw on Just Deserts

May 12, 2014

From Greg Mankiw’s “Joe the Plumber” essay (see also his “Defending the One Percent“) on alternatives to utilitarianism:

“Let me propose the following principle: People should get what they deserve. A person who contributes more to society deserves a higher income that reflects those greater contributions. Society permits him that higher income not just to incentivize him, as it does according to utilitarian theory, but because that income is rightfully his. This perspective is, I believe, what Robert Nozick, Milton Friedman, and other classically liberal writers have in mind. We might call it the Just Deserts Theory.”

Mankiw goes on to say that a competitive market equilibrium is not just efficient but fair, since it gives people what they deserve:

“[T]he Just Deserts Theory… gives a new normative interpretation of the equilibrium of a competitive market economy. Under a standard set of assumptions, a competitive economy leads to an efficient allocation of resources. But we economists often say that there is nothing particularly equitable about that equilibrium. Perhaps we are too hasty in reaching that judgment. After all, it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services. One might easily conclude that, under these idealized conditions, each person receives his just deserts.”

But that’s not at all what Nozick or Friedman said! I want to set the historical record straight.

First, a preliminary about Friedrich Hayek.  Hayek was a noted classical liberal, and he rejected “just deserts”.  Hayek distinguished merit from value.  Merit and value diverge because of luck.  No one can predict with any precision how the distribution of tastes and technology will evolve, but we each make choices about career, investment, where to live, etc. and some are luckier than others.  Two people could work equally hard, with exactly the same degree of diligence and prudence and responsibility, but one gets lucky and the other doesn’t.   The price signals in a free market reward such luck (and punish bad luck), and must do so if they are to send the right signals i.e. the signals that will shift resources to where they can be best used.

Nozick cited Hayek’s rejection of desert approvingly, but argued that Hayek didn’t go far enough.

“Hayek argues that we cannot know enough about each person’s situation to distribute to each accord to his moral merit (but would justice demand we do so if we did have this knowledge?)… Hayek concludes that in a free society there will be distribution in accordance with value rather than merit: that is, in accordance with the perceived value of a person’s actions and services to others [without regard to merit, e.g. how much or how little effort the person in question put in – ADL]… Distribution according to benefits to others is a major patterned strand in a free capitalist society, as Hayek correctly points out, but it is only a strand and does not constitute the whole pattern of a system of entitlements (namely, inheritance, gifts for arbitrary reasons, charity, and so on) or a standard that one should insist a society fit” (Anarchy, State, and Utopia, p.158)

Nozick’s point is that even distribution according to value is not justice.  Justice in holdings, accruing to Nozick, is simply a function of just initial acquisition of unowned resources followed by just transfer, indefinitely iterated (leaving rectification of injustice to one side).

So Nozick wasn’t a believer in Just Deserts.  What about Friedman?

In the chapter on the distribution of income in Capitalism and FreedomFriedman examined the “the ethical principle that would directly justify the distribution of income in a free society,” which was  “‘to each according to what he and the instruments he owns produces’.”   The “ownership” bit is crucial, but leave that aside for today.  Friedman directed most of his critical fire against the common view that there is an important moral difference between inequalities in inherited talents and inequalities in inherited wealth.  “Is there any greater ethical justification for the high return to the individual who inherits from his parents a peculiar voice for which there is high demand than for the high returns to the individual who inherits property?”  But Friedman recognized that this inconsistency could be resolved either by saying that there is nothing wrong economic inequalities that are due to fortunate family circumstances, or that there is something wrong with economic inequalities due to innate talents – or at least no positive reason to think that such inequalities are fair, in and of themselves.   It is perhaps for this reason that Friedman concluded that distribution according to productive contribution “cannot in and of itself be regarded as an ethical principle… [but] must be regarded as instrumental” (165).  In other words, the reason for having institutions that distribute income more or less according to productive contribution (and hence in part according to natural talent and social class at birth) is not that the result is fair or unfair but that it is efficient in allocating resources and hence in generating wealth.

Friedman’s final remarks express a remarkable degree of scepticism about “deservingness.”

“Most differences in status or position can be regarded as the product of chance at a far enough remove.  The man who is hard working and thrifty is to be regarded as ‘deserving’; yet these qualities owe much to the genes he was fortunate (or unfortunate?) enough to inherit” (165-6)

Friedman even notes that inequalities that are perceived as being due to chance are more easily tolerated than those that are perceived as being due to merit (166), an issue Rawls would confront in his discussion of the objection that his (Rawls’s) theory would lead to a “meritocratic” society (Section 17 of A Theory of Justice, p.91 Revised Edition – meritocracy being an objection! Rawls cites Michael Young’s 1958 The Rise of Meritocracy; Hayek also cited Young on this point, in The Constitution of Liberty, though he said that he hadn’t yet read Young’s book).

So: Nozick and Friedman (and Hayek) all explicitly reject “just deserts” as a theory of just distribution.  In particular, they deny that distribution according to productive contribution is a matter of justice.  Mankiw’s idea of “just deserts” can’t be what they had in mind.


Is Distribution According to Contribution Fair?

February 15, 2012

In a recent article on “The Income Gap,” economist Mark Thoma asks whether the distribution of income is fair.  To answer this question, he adopts (at least for the sake of argument) the neoclassical view of income distribution.  Assuming a perfectly competitive market economy, “each person in society receives an income equal to their contribution to national output.”  Thoma admits that judgments of fairness are best left to society as a whole rather than economists, but says that “if we adopt the simple notion that every person has a right to a share of output equivalent to their contribution to it… then a competitive economic system does produce a justifiable outcome, at least in theory.”  Thoma’s criticism of this view is that it relies on “a whole host of assumptions,” and that when these idealized conditions (such as perfect competition) don’t hold, “there is nothing that says the resulting outcome necessarily accords with the ‘every person gets what they deserve’ properties of perfect competition.”  I assume Thoma is right about that, but I think he’s giving far too much credit to the idea that distribution according to contribution is a plausible principle of justice.

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Review of Gaus’s Order of Public Reason

January 18, 2012

I’ve written a longish review of Jerry Gaus’s The Order of Public Reason (CUP, 2010).  The review is called “The Classical Tilt of Justificatory Liberalism,” because I raise some doubts about whether justificatory liberalism does incline in favour of classical liberalism, as against social justice liberalism.  However, the main purpose of the essay is just to lay out Gaus’s overall argument about how the authority we claim over each other’s conduct in ordinary social morality can be justified.  The answer, perhaps not surprisingly given the title of the book, is “only if this morality is publicly justifiable,” (where “publicly justifiable” has its technical sense of “being acceptable to each and everyone one of a range of reasonable but conflicting points of view,” rather than the ordinary meaning of “being justifiable in public, without need for (noble) lies”).  The book also argues that, correctly understood, our everyday moral practices (e.g. feeling and expressing resentment, indignation, forgiveness, and so on) presuppose a recognition of others as free and equal persons.  And the book reconciles the explanatory / evolutionary / Humean perspective on morality with the justificatory / Kantian perspective on morality.  All that for the low price of CDN $60.78 (low on a per page basis, that is; it’s 549 pages long, not counting appendices etc.).  This is a very ambitious book because it aims to synthesize a wide range of material from diverse fields in the service of a general argument that unfolds over the course of the whole book (comparable to A Theory of Justice, in that respect).  My main aim was to state that overall argument in a radically condensed form.  And of course to question the classical tilt.


October 14, 2011

Not me.  But I do live in Ottawa.

Public Reason vs. Social Justice?

July 5, 2011

One of the things I’ve done this year is to rework the main portions of my paper “Public Justification and the Limits of State Action“, as a chapter for my book manuscript about public reason and political community. This chapter addresses a common objection to Rawls’s “political liberalism,” which is that if reasonable disagreement about the nature of the good life requires the state not promote or discourage any of these rival conceptions, but there is room for reasonable disagreement about justice as well as about the good life, then the state may not implement controversial conceptions of social justice, or do much of anything.
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Hayek on Inequality

June 24, 2011

In the second volume of his Law, Legislation and Liberty, which is entitled The Mirage of Social Justice, Hayek makes the following claim:

Though it might seem reasonable so to frame laws that they will tend more strongly to improve the opportunities of those whose chances are relatively small, this can rarely be achieved by generic rules. There are, no doubt, instances where the past development of law has introduced a bias in favour or to the disadvantage of particular groups; and such provisions ought clearly to be corrected. But on the whole it would seem that the fact which, contrary to a widely held belief, has contributed most during the last two hundred years to increase not only the absolute but also the relative position of those in the lowest income groups has been the general growth of wealth which has tended to raise the income of the lowest groups more than the relatively higher ones. (p.131, emphasis added)

In the footnote to this paragraph, Hayek adds:

The chance of all will be increased most if we act on principles which will result in raising the general level of incomes without paying attention to the consequent shifts of particular individuals or groups from one position on the scale to another… It is not easy to illustrate this by the available statistics of the changes of income distribution during periods of rapid economic progress. But in the one country for which fairly adequate information of this kind is available, the USA, it would seem that a person who in 1940 belonged to the group whose individual incomes were greater than those of 50 per cent of the population but smaller than those of 40 per cent of the population, even if he had by 1960 descended to the 30-40 per cent group, would still have enjoyed a larger absolute income than he did in 1940. (p.188, emphasis added).

I think Hayek is comparing the mid-point (average income) of the 50-60 decile with the mid-point of the 30-40 decile. I couldn’t find data for 1940 on deciles, but the data on quintiles for the U.S. are readily available back to 1947. The picture they present is very interesting.
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