After the little dustup over at the League of Ordinary Gentlemen about my post on the middle class lifestyle, I wrote this and asked E.D. Kain if he would be willing to run it as a guest post. I wouldn’t have been surprised if he said no, but I was a bit surprised that he didn’t respond at all. Perhaps my ungentlemanlike nature actually fit there better than I had believed.
Anyway, much of the criticism of my argument centered around the question of whether the current distribution of wealth is fair, which I think some of the folks over there may mistakenly conflate with the question of whether a free-market distribution is fair. For whatever it may be worth, here’s my reply.
In the thread where Jason Kuznicki discussed my argument that the middle class isn’t doing too badly, it was claimed that I was assuming that the current distribution of wealth is fair. In fact that was incorrect, as I will explain shortly, but what struck me was the irony that the critic seemed to assume the current distribution of wealth is unfair, but without clearly explaining why. The fairness argument seems to rest simply on one of two ideas: either that when the disparity reaches a certain degree it is simply unfair as a matter of definition; or that a disparity that gets to be too great is sufficient evidence that the system underlying it is unfair. I suspect some people hold to the one point, some to the other, and some hold a mixture of the two.
The purpose of this lengthy post is not to make an argument that I think everyone “has to” accept. I just want to lay out the (or a) libertarian argument clearly enough (I hope) so that people can more accurately understand it. It’s certainly fair to hold an opposing viewpoint, but reasonable debate depends on each side actually understanding each other, and it’s my considered opinion that liberals and libertarians mostly don’t understand each other’s points of view at all, although each side seems to think so. Having shifted to libertarianism from a left-leaning stance (I used to be registered with the Green Party!), I think I am in a better position than many to understand both sides.
Let’s deal first with the “unfair by definition” argument. Personally I agree with legal scholar Alexander Bickel that “the highest morality almost always is the morality of process,” so of course I reject the definitional claim of unfairness. I think the definitional approach is too vague to be meaningful. Unless we can distinguish, on some logical basis and with something reasonably approaching precision, just what degree in disparity constitutes the breakpoint between fair and unfair, between a wealth distribution that should be left alone and one that justifies ameliorative action through public policy, this approach is, on a practical level, useless. And I think it is vague because it is based not in a coherent principle but in intuition borne out of sympathy. And while neither sympathy nor intuition by themselves are bad things, neither is complete in and of itself, nor do the two become complete when joined. They are only a starting point for logical analysis—they indicate to us that something is worth investigating, but they aren’t in themselves proof that something is wrong. And if we stop with the intuition and don’t complete the logical analysis, we have no sound basis for judgment.
But what if we had perfect disparity of wealth, a Gini coefficient of one? As it turns out, even I’d be pretty sure something was wrong. But would it be inherently unfair, or would it be an indicator of unfairness in the system? Let’s conduct a thought experiment. Assume I build a monastery on some land I own and invite religious people to give up all they own to come live there and meditate. I’ll provide them with food, shelter, and clothing as long as I am pleased with their conduct, but it is understood that they do not own their clothing or their shelter, and they have no contractual right to food—all is given at my pleasure. Some religiously minded folk accept the deal. I own everything in this community, and they own nothing. Is that unfair? I argue that it’s not.
It’s far-fetched, to be sure, but philosophical thought-experiments often are. The point is that if we can come up with a scenario that is fair, then mere disparity of wealth cannot, by itself, be proof of unfairness. I imagine some will say, “but that’s not what’s going on in the U.S.” To which my response is, thank you for supporting my argument that it’s “what goes on” that determines what’s fair, rather than the mere distribution itself.
The second argument is that there must be something wrong with the system. “The System”–such a deliciously vague and ominous-sounding concept! But I agree that if there is such a thing as unfairness, that is where it resides, in the system, or as Bickel put it, in the process. And I argue that if there is no theft, fraud, or coercion, the distribution system is fair.
So the question is, is there systemic/procedural unfairness in our system of wealth distribution? I believe that there is, but I want to clarify first what is not an indicator or symptom of systemic unfairness—the corporation. Corporations are, at their basic level, a generally, if not perfectly, fair system. (To be clear, I don’t believe in perfection in human systems, so to say something is not perfectly fair is only to say that it is the product of humans, not gods.)
Consider the origins of corporations—individuals joining together for the purpose of investing in merchant ship ventures. It took a lot of money to buy or charter a ship, then supply it with trade goods, and the return was very uncertain due to the danger of pirates and ships foundering. So various investors put in various amounts, and if the venture is successful, got back a return proportionate to what they put in. It’s nothing more than a contractual arrangement.
Say they do this several times, and then realize it would be easier if they owned their own ship(s). But with a large number of investors the contractual arrangements get complex and time consuming, creating high transaction costs. So they simplify by forming a joint stock company. The company owns the ships, and they own shares in the company. As economist Ronald Coase explained, in discussing the nature of the firm, people form joint-stock ventures because the costs of operating through that kind of organization are less than the costs of trying to operate by formal contracts for all matters. There’s nothing nefarious, no theft, fraud, or coercion, so it’s fair.
And that’s where corporate personhood really comes from. Instead of every owner having to negotiate and sign a contract to purchase a new ship, the manager can do it in the name of the firm. While corporate personhood has a bad name—because it is not well understood, I think, rather than from some deep insight about it—let’s not forget that all kinds of non-profits have corporate personhood, too, from the private college I work for to United Way to Doctors Without Borders. Are these organizations all nefarious, or do they simply find incorporation a more efficient mode of operation?
Now let’s say our joint-stock trading firm wants to buy some new ships, but needs more money to do so. They can get more money by asking other people to invest, and in exchange for their money giving those people a piece of paper that declares them to be part owners in the company—i.e., the investor has bought stock in the company. The investor has no say in how the company’s run, but he’s ok with that. He doesn’t want a say, he wants a return on his investment. Again, no theft, fraud or coercion.
Now let’s say that investor dies and his grieving widow inherits the stock. One day when she is 90 years old, a drunk captain of one of the company’s ships runs into a ship from another company, sinking it, destroying its cargo, and drowning all aboard. Lawsuits follow. How culpable is grieving widow for all this? Should the company that lost its ship and cargo, and the survivors of all the victims, be able to sue her directly as one of the company’s owners, possibly putting her out of house and home? If you oppose limited liability, that’s what you’re proposing. Limited liability exists only to protect investors from losing more than the value of their investment in the firm. It does not protect the firm itself—the shipping firm can be sued, and could potentially be forced out of business by the sum it has to pay in judgment. So, again, there’s no theft, fraud or coercion, so the system is fair.
Now if that’s all there was to the story, whatever distribution of wealth resulted would consequently be fair because the system/process is itself fair. At no point was anyone the victim of theft, at no point was anyone defrauded, and at no point was anyone coerced.
So there’s nothing inherently unfair about corporations and the resulting distribution of wealth. But there is unfairness in our system because there is theft, fraud, and coercion. Let’s begin with theft and fraud.
Sometimes greed leads people to steal from or defraud others. The resulting change in the distribution of wealth is unfair because the process of creating that change was unfair. One of the few roles of government that libertarians see as legitimate is having a legal system to rectify these unfair actions.* Corporations do sometimes defraud people and steal from them. But corporations are no more likely to do this than individuals, because ultimately corporations are just managed by individuals. They may have a legal identity distinct from any particular individuals, but they do not have mental or cognitive identity distinct from particular individuals, so they do only what individuals decide to do. In a real sense, corporations don’t defraud, individuals managing corporations do. That’s why limited liability does not extend to protecting managers who commit fraud or otherwise break the law.
There is, in fact, somewhat less incentive for a corporation to defraud people than there is for an individual businessperson to do so. The corporation has made huge investments on which they want a return and is (normally) looking to survive for the long term, so actions that harm their reputation are very risky. A private individual with minimal investment may not face that same incentive, particularly one who does not need to worry about reputation effects (beware traveling salesmen!). That’s not an argument that corporations don’t ever commit fraud; we all know they do sometimes. It’s just an argument that it’s not “corporateness” that leads to fraud, but short-sighted greed, an unfortunately common characteristic of humans. (And government, being composed of humans, is of course not immune to fraud, either, and looked at globally may be even more likely to commit it—the great achievement of the American bureaucratic state is the creation of a bureaucratic culture that minimizes corruption.)
Now let’s consider coercion. Of course theft sometimes comes in the form of coercion—“your money or your life.” But we’ve already considered theft, so let’s look at legitimated coercion; coercion through government’s monopoly on the legitimate use of force (Max Weber’s definition). Do corporations use government to coerce people? They sure do. Every time you buy a bag of sugar at the store, or any item containing sugar, or any item containing a sugar substitute, you have been coerced by the government on behalf of sugar cane companies in Louisiana and Florida and the corn syrup-producing Archer Daniels Midland Corporation of Illinois. That’s because there is a tariff on imported sugar that increases its price, so that U.S. grown sugar and substitutes like corn syrup will be more cost-competitive.
Here’s the irony—liberals who dislike free trade between nations like tariffs. But tariffs are just a consequence of corporations using the power of government to create a coercive distribution of wealth. There’s an actual net loss of consumer welfare, which is captured by the sweetener corporations. Of course some of it is also captured by those companies’ laborers, which to many people is the whole purpose of tariffs. But that’s still a coercive distribution of wealth—you and I are being coerced into shifting some of our wealth to workers in politically powerful industries.
There are many other tariffs, subsidies, and protective regulations that coercively shift wealth from consumers to corporations and their owners. Public financing of sports stadiums, for example, almost always leads to welfare losses for the public and coercively created gains for the sports team owners. The National Forest Service spends more money to build roads for logging companies than it receives in timer sales. The Department of Agriculture subsidizes the cost of foreign advertising of American products like Chicken McNuggets, Dole Pineapples and Pillsbury muffins. Libertarians regularly criticize these under the catch-all term “corporate welfare.”
But, importantly, those unfair distributions of wealth do not result from a free market.** Those processes by which corporations and their owners get an unfair proportion of the wealth result from them using government to take money from you and me and direct it to themselves. Consequently, moving towards freer markets will improve the fairness of the distribution of wealth.
*Some people, particularly libertarians, like to emphasize the doctrine of caveat emptor. But as a legal doctrine, that covered only defects unknown to the seller. If the seller actively concealed defects or otherwise purposely misled the buyer, it can be treated in law as a case of fraud. Many libertarians, unfortunately, don’t understand that limitation. Feel free to mock and scoff at them.
**OK, what is a “free” market? It is not a market that is entirely free from regulation and constraint. As noted above, fraud prevention and resolution is a legitimate role for government. So free markets do not mean an unlimited ability for Dell to assure you it’s selling you a computer, then sell you a time bomb instead, or for McDonalds to sell you french fries high in saturated fats while falsely claiming they are diet food (or to lie to Muslims and Jews about whether they’re using animal fats for frying). Restrictions on pollution are entirely legitimate in a free market because pollution is an externality, an imposition of costs on other people. What free market means is the government is not telling people what they can and cannot freely exchange for (OK, before someone says it, that does not include murder for hire). When government has no rules against the apple orchard outside my town setting up a roadside stand, that’s a free market. When they say the apple orchard can’t lie to me about what types of pesticide they’re using on their apples and whether they’ve washed them before selling, that’s still a free market. When they say they can’t set up a roadside stand but must sell their apples to an apple co-op, which then resells them to grocery stores, that’s not a free market.