When I say "contracts," I am especially interested in their role as instruments in bringing about a certain pattern of social cooperation and the corresponding distribution of incomes. In the state of nature (in which social cooperation takes place without help or hindrance by the state), the freedom to contract has the effect that production and people's shares in the product are simultaneously determined by causes subsumed under such categories as the state of the art, tastes for goods and leisure, capital and people's capacities for various types of effort. (The reader is no doubt alert to the fact that this account of distribution glosses over formidable problems. Enterprise, what Alfred Marshall called "organization," and labour are all put in the pot labelled "capacities for various types of effort." Explicit mention of the supply of labour and, above all, of the conceptually treacherous "stock of capital" is avoided, as is that of the production function, though covertly both continue to lurk in the wings. Happily, the course of our argument does not oblige us to face these difficulties.) People in the state of nature "get what they produce," more precisely they get the value of the marginal product of whatever factor of production they contribute. Instead of "contribute," it is often more instructive to think of the factor they "could but do not withdraw." Either expression must be supplemented to allow for the quantity of the factor contributed or "not withheld." The capitalist, then, gets the marginal product of capital in proportion to the capital he owns. The entrepreneur, the doctor and the machine-minder get the marginal products of their various kinds of effort in proportion to their exertions. If under a
regime of free contracts, all potential contracting parties follow their interest (or if those who do not-the rational altruists or the simply irrational-do not weigh too heavily), factor prices will be bid up or down to marginal value-products (and the nearer each market approaches perfect competition, the more closely will they correspond to the values of their marginal physical products).
But once we leave the state of nature, we confront an irreducible complication. The state, to live, takes a share of the total final product. Hence, outside the state of nature, marginal productivity theory can at best determine the pre-tax incomes of its subjects. Post-tax distribution becomes in part some function of the pre-tax one and in part that of the political process, the latter determining what the state shall get from each of us.
In particular, distribution will be shaped by two major activities of the state: its production of public goods (understood, broadly, to include law and order, public health and education, roads and bridges, etc.), and its production of social justice through income redistribution. On some definitions, the production of social justice becomes part of the production of public goods; this gives rise to difficulties we can safely and advantageously leave on the side. (There is a not too far-fetched sense in which the production of any public good at public expense is ipso facto redistributive, if only because there is no unique, "right" way of apportioning the total cost to be borne, among members of the public according to the benefit derived by each from a given public good. Some can always be said to get a bargain, a subsidy, at the expense of others. Thus, the distinction between the production of public goods and explicit redistribution must be a matter of arbitrary convention.) Even the pre-tax pattern of distribution is, however, upset by the feedback effect which the post-tax one exercises
upon it. Factors of production will, in general, be more or less readily supplied according to the price they can command and the situation of their owners (technically, the price- and income-elasticities of supply), so that if one or both are changed by taxes, there should be repercussions on output and on marginal products.
Apart from recognizing their logical possibility and indeed their likely importance, I have nothing specific to say on these repercussions. (In any case, they are difficult to come to grips with empirically.) I would, nevertheless, note a plausible a priori supposition regarding capital. Capital, once it has been accumulated and embodied in capital goods, cannot quickly be withdrawn. It takes time to "decumulate" (what Sir Dennis Robertson liked to call "disentangle") it by the non-replacement of capital goods as they lose value due to physical wear and obsolescence. The short-period supply of capital goods must, therefore, be rather insensitive to the taxation of rent, interest and profit. The suppliers of effort may or may not "retaliate" against taxes on earned income by withholding their efforts. The suppliers of capital cannot, in the short period, retaliate against the taxation of unearned income, and it is the short period that is relevant to short-tenure politics. No immediate harm, then, is done to the economy by such measures as an excess profits tax, or rent control-an apartment block, once built, will not readily get unbuilt. It will fall down only after many years of non-maintenance. Though its neighbours might wish that it did so sooner, the resulting urban decay is at a politically safe distance away in the future.
Thus while the state can take the side of the many against the few and of the poor against the rich on the strength of arguments about the balance of total happiness or social justice, it can also favour
labour over capital on grounds of economic expediency. It can, on the same ground, find arguments for favouring capital over labour as well. The availability of a diversified set of reasons for taking sides, even when some of them cancel each other out, is a great comfort to the state in assembling the system of rewards for consent upon which reposes its tenure of power. While these reasons may be regarded as mere excuses, as pretexts for doing what has to be done anyway to obey the imperatives of political survival, I think it would be wrong to suppose that for the rational state, they must be pretexts. The ideological commitment of the state may be perfectly sincere. In any case, it does not matter in the least whether it is or not, and there is no way of telling, as long as the ideology is the right one-by which is simply meant that it tells the state to do what the attainment of its ends calls for.
2.5.10 Classes which adopt an ideology telling them to do things contrary to their interest are said to be in a condition of "false consciousness." It is, in principle, quite possible for this to happen to the state as well, and historical examples can be found where the condition of the state fits this description. "False consciousness" is, in particular, liable to mislead a state to relax repression in the illusory belief that it can obtain a sufficiency of consent instead, such misjudged relaxation being probably a frequent source of revolutions. Were it not for false consciousness or ineptitude or both, governments would probably last forever, states might never lose tenure. Plainly the broader, the more flexible and the less specific is an ideology, the less likely it is that false consciousness will bring to grief the state adhering to it. The liberal ideology with its malleability and plurality of ends is, from this point of view, a wonderfully safe one, in that adherence to it will rarely call for the state to stick its neck out and adopt a thoroughly risky line of conduct for its political survival. It is an ideology which typically offers many diverse "options," each about as liberal as every other.
Reverting, after this digression about the concordance of ideology and rational interest, to the distributive shares which people, in entering into contracts, award to each other, there is of course no presumption for shares arrived at in this manner to be equal. The presumption for equality arises precisely out of the absence of valid reasons for inequality. If there are no reasons why people's shares should be such and such, or if we deny these reasons (so goes the egalitarian argument based on symmetry, on the avoidance of randomness), then they should all have equal shares. Theories of distribution, such as the marginal productivity theory, however, are coherent sets of such reasons. It is a very awkward condition for an ideology to incorporate both a positive theory of distribution and a postulate of equal shares.
Early liberal ideology, invented by T. H. Green and Hobhouse and mass-marketed by John Dewey, had not at first broken either with natural right (involving respect for existing relations of property for no other reason than that
they were lawfully arrived at) or with classical and neo-classical economics (involving a disposition to consider wages and profits as any other price, a proximate effect of supply and demand). By and large, it accepted as both empirically true and morally valid, a set of reasons why the material well-being of various persons was what it was. At the same time, it was developing the thesis that relative (if not absolute) material well-being was a question of justice; that its actual distribution could be unjust; and that the state had somehow obtained a mandate to ensure distributive justice. The "ought" was obviously destined to override the "is."
As it matured, the liberal ideology progressively emancipated itself from its early respect for the reasons that make distributive shares unequal. If these reasons are invalid, they cannot constrain distributive justice. Its doctrine can go where it will in all freedom. At the outset, however, this was far from being accomplished. Liberal thought sought both to accept the causes of relative well-being and to reject their effect. This tour de force was performed by T. H. Green, with his doctrine of a contract capable of being apparently free but really unfree.*69
There are, in the marginal contribution type of theories of distribution, three reasons why one person's material well-being is different from another's. One is capital: some people, as a matter of historical fact, own, and contribute to the productive process, more of it than others.*70 Another is personal endowments, whether innate or acquired by education, self-improvement and experience.*71 A third is work, effort measured in some way which can distinguish between various kinds of it. "Organization" (in Marshall's sense), "enterprise" (in Schumpeter's) might fit into the "effort" category, though perhaps not very comfortably, while the reward for risk-taking must accommodate itself alongside the reward of the capital that is being risked. Taking these in reverse order, liberal thought even today (let alone a short century ago), does not strongly contest the justice of unequal shares due to unequal efforts, provided this is understood in the sense of "hard work," carrying a connotation of pain. "Hard work" in the sense of fun, or of passionate dedication, on the other hand, is a very much disputed ground for higher than average rewards.*72
Personal endowments are a yet more controversial matter, for there has always been a strain of thought which implied that God
given talents, grace and beauty or the poise and assurance derived from a privileged background, were undeserved while advantages acquired by dint of application were deserved. By and large, however, earlier liberal thought did not seek to deny that people owned their qualities (though everybody was said to be entitled to equal opportunity to acquire at least those that education makes accessible to the ordinary plodder; there could be different views on what opportunities ought in equity to be provided for the brilliant person who gets more benefit out of the "same" education-should he be taught less?-but those were relatively peripheral doubts). Their differential qualities, if they owned them, had to be reflected in differential rewards if marginal productivity theory, implying equal rewards to equal contributions, was to make sense. Finally, capital merited its remuneration, and though vast incomes accruing to the owners of vast amounts of capital were hard to swallow, it seemed harder yet at first to say that property is inviolable when you have only a little of it but can be violated when you have a great deal.*73 The temptation to gnaw at the edges of the principle of property's inviolability could not long be resisted. Property had to be socially responsible, it had to provide work for people, its fruits (let alone the principal!) ought not to be dissipated in extravagant spending.
T. H. Green himself rather approved of industrial capital whiledetesting landed property, and many liberals were inclined to feel that though capital was owned by particular individuals, it was really held in trust to society, a feeling seldom offended by the archetypal turn-of-the-century capitalist who saved and reinvested all but "the interest on the interest."
2.5.16 Capital and personal endowments were thus, albeit grudgingly, admitted as legitimate causes for one person ending up with a bigger bundle of goods than another; yet the justness or otherwise of the relative bundles nevertheless became subject to public review, with the state legitimately proceeding to the adjustments deemed appropriate from such review. However, it was not the legitimate causes of inequality that produced the injustice-this would have been a patent absurdity-but the fact that some apparently free contracts were in reality (in T. H. Green's phrase) "instruments of disguised oppression," hence their terms were capable of producing unjust distributive shares.
How to pin down this Hegelian distinction? At first sight, it looks as if it referred to the unequal status of the contracting parties. A contract between the strong and the weak is not really free. Reflection shows, though, that this will not do. When is a worker weaker than a capitalist? He must surely be weaker when he is unemployed and badly needs a job? Does it then follow that when there is a severe labour shortage, it is the capitalist who badly needs workers who is weaker? If this is the wrong symmetry to employ, what else can we say but that the worker is always weaker than the capitalist? Employment contracts are thus always unequal and it is always wages that are too low and profits that are too high.
As liberal thought did not really mean this, however, what did it mean? The more we try permutations of economic and social status, bargaining power, market conditions, the business cycle and so forth, the clearer it becomes that the operative distinction between "strong" and "weak" contracting parties is that the person making such distinction considers the terms agreed as too good for the one and not good enough for the other. No other ground is available for this diagnosis than his sense of justice. The injustice of a contract, in turn, serves as sufficient evidence that it was entered into by unequal parties, that it was an unequal contract. If it was unequal, it was unjust, and so we go around in circles.
When, then, is a contract unfree, an "instrument of disguised oppression"? It is no good answering "when it produces unjust distributive shares," i.e. when profits are excessive and wages are inadequate. This would stop us from saying "distributive shares are unjust when they are produced by unfree contracts." If we are to escape circularity we must find an independent criterion either for unfree contracts (so we can spot unjust shares) or for unjust shares (so we can identify unfree contracts). Pursuing the early liberal approach calls for the former, for an independent definition of the unfreedom of contracts, so we can argue from unfreedom to injustice.
The tautological criterion of the unfreedom of a contract is that it was agreed to under duress. But for such a contract to pass as apparently free, the duress must be unseen. If everybody could spot it, it would not be "disguised oppression," it could not be mistaken for free. It takes a discerning eye to detect it.
The next best criterion for disguised duress, then, is that the discerning eye recognizes it as such. This, however, only defers our difficulties, for now we need an agreed independent criterion for identifying whose eyes are discerning. Who, in other words, shall have the quality of judging that a contract involves disguised duress, i.e. that it is really unfree? It is this kind of conundrum which arose in national socialist Germany over the muddled attempts in the Nuremberg laws to define who is or is not Jewish, and which Hitler is reputed to have cut through by declaring: "Wer ein Jude ist, das bestimme ich!" (I shall decide who is a Jew!).*74
It would seem, therefore, that for lack of independent criteria, interpersonal justice relies on the same intuitionist solution as interpersonal utility. Whoever commands power for mending the arrangements of society, and uses it, may be deemed to have assessed the effects on the utilities of all concerned, compared them and chosen the arrangement maximizing his estimate of interpersonal utility. It is meaningless to assert that he has not done so, or that he has falsified his own estimate, finding one result and acting on another. His choice will "reveal his preference" in two equivalent senses: putting it simply, his preference for the gainers over the losers; putting it more awkwardly, his assessm
ent of the utilities of the prospective gainers and of the prospective losers respectively, and his way of comparing the two.
This account of the finding of the balance of utilities goes, mutatis mutandis, for the discovery of distributive justice by finding the balance of interpersonal deserts. Whoever is using coercion to put constraints upon the terms contracts are allowed to have, and to tax and subsidize so as to correct contractual outcomes according to the just deserts of the parties, can be deemed to have sympathetically observed contracts, to have detected the instances of disguised oppression of the weak and, in overriding such really unfree contracts, to have given effect to deserts and maximized justice as much as was politically feasible. It is futile to deny that he has done so, as it is to argue that he was not led by his true conception of justice. The standard liberal view is that the state which behaves as if it acted on interpersonal comparisons of utility or deserts or both, should be doing so in a framework of democratic rules so that there should be a popular mandate for its coercing the losers.
It is always comforting to ascribe coercion to a popular mandate, for everybody tends to approve more easily of a choice if "the people wanted it" than if "the despot wanted it." There are, however, morally more ambiguous possibilities. Instead of the state's interpersonal preferences being the result of popular mandate, causation can be thought to run the other way. In a political system resting mainly on consent of the "headcount" (electoral democracy) type, it is plausible to think of the state as organizing a popular mandate for its tenure of power by manifesting interpersonal preferences and promising to act in favour of selected people, groups, classes, etc. If it is successful in so doing, it can obviously be seen as balancing interpersonal utility or deserts and dispensing distributive justice along lines yielding the required result.
The State by Anthony de Jasay Page 14
