Equality, State, and Utopia

1. Clarifications

First, we must define a Rawlsian moral theory. Initially outlined by the late Harvard philosopher John Rawls in his 1971 treaty on liberalism as a political philosophy A Theory Justice, Rawlsianism starts out with a thought experiment.

Suppose one were to look behind a “veil of ignorance”, one would not know their sex, nationality, race, economic status, etc., yet from a selfish point of view, one must restructure society, how would one do so? Rawls formulates two principles behind the veil of ignorance, which he defines here:

1. Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all

2. Social and economic inequalities are to be arranged so that they are both:

(a) to the greatest benefit of the least advantaged, consistent with the just savings principle, and

(b) attached to offices and positions open to all under conditions of fair equality of opportunity.

Rawls essentially takes a lexical minimum position beneath the veil, stating a Pareto efficient outcome holding that the welfare of the worst-off is appropriately maximized. Inequalities must not just improve the welfare of the worst-off, no, that could lead to classical liberalism or even libertarianism, instead, they shall only be justified if they maximize their well-being or some other criteria.

Rawlsianism is historically important because it is the first famous conception of liberalism as distributive justice using Kantian contractarian thinking and borrowing the veil of ignorance from utilitarian academics such as John Harsanyi. Indeed, whether or not Rawlsianism is the great contractarian moral theory or its significance in philosophy does not have much bearing on this first essay, instead, I shall focus on considerations to prescribe Rawlsian outcomes and policies to support that outcome.

2. Considerations on the “least advantaged”

We can first ignore the first principle dictated by Rawls and focus on the second one, i.e. the difference principle, fundamentally one based on a desired normative outcome for greater economic equality. Let’s start by defining some basic terms, consumption, saving, and their sum — income. Denoting them by the respective variables C, S, and I, we can define S as equal to C minutes I, getting the identity I = C + S.

When trying to define an outcome where we “maximize” the “benefit” of the “least advantaged”, the simple thing to do would be to maximize the minimum utility, that is, apply a maximin rule behind the veil of ignorance. However, even assuming one has a cardinal utility function (which requires one’s preferences to adhere to the von Neumann–Morgenstern axioms of rational choice), this function is not interpersonally comparable nor is it one-to-one with one’s preferences, making utilitarian numerical calculation essentially worthless.

To look for an outcome compatible with the difference principle, and the policies to maintain such an outcome, we further need to define who counts as the “least advantaged”. For the sake of avoiding excruciating calculation, and given that the principle is fundamentally an economic one, we shall define them as those in some nth percentile of socioeconomic status, with n defined to be between 5 and 20 as a good heuristic for Rawlsian goals. Additionally, we need to define what one should use to define socioeconomic status (SES) whether it be consumption, income, or wealth. Since we already defined the first two, we shall now define wealth, which I simply state as net worth, i.e. assets minus liabilities.

There are quite a fair bit of problems with using this as our SES target. Imagine a scenario with two reasonably intelligent people, Lydia and Gwen, neither of whom has a utility function (notice keyword “people”). Lydia and Gwen are both employed, make the same annual income, and work equal hours, however, due to different preferences and other factors, Lydia saves a lot more than Gwen and ends up wealthier than her. Both have equivalent reported rates of life satisfaction and well-being, however, Rawlsian principles (assuming wealth in place of utility), which fundamentally ought to be Kantian in nature, dictate some redistribution from Lydia to Gwen, which could arguably violate Kant’s famous formulation of humanity, and is opposed to reasonable moral intuition required behind the veil of ignorance, not even considering the lost economic efficiency redistribution would impose.

In addition, would any reasonable person say that a broke college graduate with a lot of debt is worse off than a malnourished African kid who has Malaria but also owns a watch and has no debt?

Let’s provide another hypothetical against using wealth as a heuristic: Robert Nozick, another famous Harvard philosopher known for his 1974 defense of minarchism Anarchy, State, and Utopia, gives out his “Wilt Chamberlain argument” as a critique of egalitarian thinking.

The argument goes as follows:

Imagine a society where wealth is initially distributed according to a pattern of justice, such as equal distribution.

Now suppose that Wilt Chamberlain, a famous basketball player, enters this society and demands that people pay him a small fee to watch him play basketball.

Because Chamberlain is so popular, millions of people willingly pay him the fee, and he accumulates a vast amount of wealth.

As a result, the initial pattern of wealth distribution is disrupted, and Chamberlain ends up with much more wealth than others, violating the original pattern of justice.

Everyone in this scenario is better off, and any tax on Chamberlain’s wealth can cause increased deadweight loss and an arguable violation of Chamberlain’s liberty.

Empirically, wealth is far harder to redistribute and even assess compared to income and consumption, which leads us to them by elimination. Given that’s equal to consumption plus saving, income runs into the same problems wealth does, leaving us with the most intuitive choice as a heuristic for identifying the “worst-off”: consumption. Even better would be to look at other factors: IQ, disabilities, disorders, parental SES, opportunities, etc., which can be classified as exogenous, however, this runs into problems of lacking sufficient data and how one can redistribute any genetic predisposition.

Given that we’ve found our target, let’s give further clarifications. The present value of lifetime consumption is better than annual consumption as an indication of well-being. Furthermore, if two people, Bob and Jay, have equal ability and equality of opportunity, but Bob has a lower PV of lifetime consumption due to his choice of working less for lower total wages, we cannot strictly that Jay is better off than Bob in terms of economic outcomes.

In addition, we are trying to seek not just what a maximin rule desires, but what a leximin rule desires as well. In other, words given what the difference principle sets, we still need to find a state that is Pareto optimal (or at least second best).

3. Considerations on Economic Efficiency

From the first two theorems in welfare economics, we know that the first states that in economic equilibrium, a set of complete markets, with complete information, and in perfect competition, will be Pareto optimal

The second maintains that a Pareto efficient outcome can be achieved with any initial set of endowments. However, any change in the initial condition can cause a deviation from the Pareto optimal outcome.

If the previous two paragraphs are not clear enough, let’s take a trip back to 1945, when Friedrich Hayek, a Nobel-Prize-winning economist, published the academic article The Use of Knowledge in Society.

In the article, Hayek emphasized the role of prices in conveying information and coordinating economic activity, arguing that prices in a competitive market serve as signals that convey information about supply and demand conditions, helping individuals make informed decisions about resource allocation. He further argued that attempts to manipulate prices through central planning would distort these signals and result in inefficient resource allocation.

However, there are times when markets fail: times when rational self-interests collide toward an outcome that is not socially optimal. Consider a state where allocative efficiency is maximized, where the sum of consumer and producer surplus is at its peak. We can start looking at things from the producer’s point of view. Let’s start with a basic model of one input and output, we can assume that returns are strictly increasing and are also diminishing. Using basic high school calculus, in order for a producer to maximize returns given these conditions, we must set the first derivative of surplus equal to zero. Since this means marginal surplus is set to zero, we derive the equation marginal revenue = marginal cost. Replace “revenue” with “utility” and we have arrived at the utility maximization conditions for consumers.

We may now look at where markets fail to deliver on such conditions. Consider the case of externalities: social costs and benefits that are not accounted for through free-market pricing. Without considering the Coase theorem, a standard solution would be to impose Pigouvian taxes/subsidies to move towards an optimal outcome. But externalities, aren’t the only market failures. Monopolies, free-rider problems, the tragedy of the commons, etc. are all examples of market failures, i.e., when markets fail to maximize allocative efficiency. Further, research in behavioral economics showcases examples of humans deviating from standard models of rational choice. Indeed, an ideal Rawlsian prescription given our non-ideal world says that we should not just move people to act not just in the best interest of society (or at least help the worst-off) but also to move in their own interest in the long run.

4. Some Empirical Considerations

Rawls may have been a socialist, but it is not evidently clear that socialism would help achieve an outcome close to the principles he himself initially outlined. Indeed, Hayek, who is often known for advocating for classical liberalism through consequentialist reasoning, does not find any incompatibility between the two principles and his preferred set of policies. Socialist countries tend to have lower rates of life satisfaction, consumption per capita, and democratic policies. Indeed, the top 10 countries in the world happiness report have relatively high rates of economic freedom.

From a global perspective declines in child mortality and absolute poverty seems to coincide with increased globalization and more democratic and egalitarian political institutions. It shouldn’t be hard to draw a causal mechanism from here; simple 2x2 matrices illustrating comparative advantage can suffice for our intuition. Further, this lines up perfectly with the predictions of new institutional economics by Daron Acemoglu and James Robinson. outline in their book Why Nations Fail. The book seeks to create a monocausal outline of history through the lens of institutions. Nations fail through extractive institutions, i.e. ones that only serve the interest of special-interest groups, versus inclusive ones, where everyone is granted a basic set of economic and civil rights. Acemoglu and Robinson go through the excruciating process of showing why geography, culture, etc. do not explain the great differences in prosperity among nations. It’s the institutions, stupid.

Consider the case of North and South Korea, two countries, that share the same language, have similar geography and resources, and share similar facets, of culture, yet one is rich and the other is not. It is because one is a communist dictatorship and the other is a vibrant liberal democracy. The book goes through its major themes in the first five chapters, reiterates its main talking points through the next five via historical context, and gives prescriptions on what to do in the last five. Even without looking through an institutional lens of history and politics, countries that have inclusive civil and economic rights tend to prosper more than countries that don’t.

Thus, it shouldn’t be surprising that an outcome of political liberalism is a society that is politically liberal.

5. Prescriptions for a Rawlsian State

Democracy

If one were to truly create a society where all have a say, no matter its problems, democracy would be the great equalizer. Indeed, there exists no empirical evidence of another policy that allows for greater political rights to the disadvantaged, and further their right to choose economic freedom.

Free Markets

Without the ability to obtain and trade private property, incentives to create wealth do not exist. Markets allow consumers and producers to allocate towards a maximally efficient outcome and create freedom and incentives for greater civil rights. Without such a system, the ability of the disadvantaged to escape poverty gets worse, and more extractive institutions get implemented.

Free Trade

Equity is often looked at from a domestic perspective. We often think of helping those who are not just disadvantaged, but also close in proximity. The veil of ignorance doesn’t take this perspective; it allows for a more cosmopolitan view. In line with the beliefs of most economists, free trade increases economic efficiency to the benefit of the global poor. Sure, it creates winners and losers, but Kaldor-Hicks improvements can be converted into Pareto improvements. And from a contractarian viewpoint, would you want your trade limited?

Land Value Taxation

In order to fund the government, one needs to consider what means of taxation should be employed. Since we are aiming for a lexical minimum rule, efficiency and equality should be of foremost consideration. Since the supply of land is inelastic, land value taxes (LVT) produce no deadweight loss, causing no disruption to economic efficiency. And considering that the median landowner is wealthier than the median non-landowner, LVT should cause a more equal economic outcome.

Pigouvian Taxation

Using the leximin rule, we find that driving outcomes toward increased allocative efficiency given no sacrifice of the well-being of the worst-off is desirable. Pigouvian taxes, through imposing taxes on goods that impose externalities, can move the market towards greater allocative efficiency. The revenue generated by such taxes could fund redistributive programs. Indeed, such a policy is already widely supported by over 3,500 economists. So it shouldn’t be hard to recommend this no matter your ethical views.

Social Insurance

Concluding with just a single policy is a disservice, but instead, we should end with an outline for greater equality and prosperity. Inclusive economic institutions, while creating great wealth, create great inequity. The idea of a welfare state, a setup where those who are not gifted can still enjoy the fruits of a liberal society, seems attractive from a risk-averse view behind the veil of ignorance. Indeed Rawlsianism is far more than just a dollars-and-cents ideology, it seeks to provide the disadvantaged with more than what they deserve, but what the better-off are more obligated to give. Whether through basic income, EITC, wage subsidies, unemployment insurance, or universal catastrophic care, the welfare state is a favorite tool of modern-day Rawlsians. It is through this tool, we can create a society that is not just economically liberal, but politically liberal as well.

5. Conclusion (for now)

Notice the use of the repeated use of the word “some” I’ve had in this article. It would be absurd to end such an essay with such minimal recommended actions. Depending on the feedback I receive, this should be part I of multi-part series. This essay was mainly focused on the second Rawlsian principle taken at a global scale; indeed prescriptive actions were not even distinguished between developed and developing countries. It also did not address the first principle nor did it argue for or against either, in fact, this essay is mostly positive in content. The broad plan towards a Rawlsian outcome is still intact but the details have not been specified. After all, it should take more than one essay to state what is needed for equity, or for liberalism, or for utopia.