What a STAD!

n this fourth installment on my series about Justice, we are leaving behind the lofty heights of philosophy and get down, way down, not even stopping at the street level of normal human conduct, no, we will plunge head first right into the smelly underbelly of civilization, right into the sewage that is modern politics.

Let’s get political!

Ok, politics is probably not as bad as that at all times and at all places, but whoever said “Laws are like sausages. It’s better not to see them being made” had a point.

I deeply respect the idea of democratic participation and understand that the democratic process necessarily has to deal with compromise.

“Politics is the art of the possible, the attainable — the art of the next best”” Otto von Bismarck

Nevertheless, I think today’s instantiation of the democratic process is corrupt. The institutions we inherited are probably not well suited for the challenges of the 21st century. There is a little bit of hope in the fact that some politicians use social media as a gauge for their ideas and are responsive to feedback, but I think this informal process should be enshrined in the institution.

Feedback every 4 years in a VUCA-world sounds like any developer’s nightmare. No engineer working today would be stupid enough to design a system like that. Not even for a frickin’ toaster!

Rawls already realized certain problems with how much participation existing democracy allow and we will have a look at this in the next installment of this series. I think that will be a great opportunity to also talk about what I believe to be valuable experiments towards superior modes of democracy.

But let’s not get ahead of ourselves and focus on what institutions Rawls envisioned for the government. And oh boy did he really want to have a STAD! Ok, that pun doesn’t really fly, but let’s say he argues for 4 new branches of government: the stabilization, transfer, allocation and distribution branch.
Each of these branches is constituted by various institutions, which can be implemented, tested and iterated individually to get to better results. And I will talk about a few candidates for those institutions in the future.

Assumptions that will put your hair on fire

To make any sense of these institutions, I’ll have to ask you to allow yourself a little bit more fantasy than you normally show. I know, you want to resist some of these ideas here, I know that you don’t like all of it, but just follow along. It’s better than you think.
Grant me some bold assumptions: The citizens have a constitution that grants them equal rights, they have liberty of conscience, freedom of thought, they can participate in their democracy – more than in name only – and there are real alternatives to choose from for governmental programs. Let’s also assume there is a fair equality of opportunity for education and occupations, as explained in a previous post. Almost outlandish, isn’t it? But wait for this! This hypothetical state is also policing the conduct of firms by preventing the creation of monopolistic barriers to the more desirable positions.
“That will never work!”, I can almost hear you saying. But now we’ll swing for the fences: let’s further assume the state guarantees a social minimum, either by family allowances of by more systematic programs like a negative income tax. “Socialist! Communist! BernieBro!” Well, I am nothing of that kind.
These assumptions are actually quite in line with neo-classical economic theory. Just as an example, have a look at Mas-Colell’s “Mircoeconomic Theory”: “Let us now hypothesize that there is a process, a benevolent central authority perhaps, that, for any given prices p and aggregate wealth function w, redistributes wealth in order to maximize social welfare” [MAS-COLELL, p.117].
In other words: everybody agrees that markets aren’t magic.

They are, however, magnificent tools in the right circumstances. But it’s up to us to make sure the circumstances are right.

There is something to the idea of power in negotiations. Not having an alternative to taking a job and experiencing existential dread (I can almost hear my libertarian younger self saying: “But they do! They can choose to starve!”), does not look like a market with willing participants or a parity of power to me. Similarly, the fear of losing everything does not look like a great motivation for entrepreneurs and might paralyze a lot of people, who’d be great entrepreneurs.
Anyway, I am not alone in thinking that this might be a good idea and we will look into instruments for that in the future.
Back to the world, where citizens are treated decently.

You would like your government to provide certain services to the population. These are organized in branches, which we’ll look at now.

Stabilization branch

The description of the stabilization branch sounds rather boring:

The stabilization branch strives to bring about reasonably full employment in the sense that those who want work can find it and the free choice of occupation and the deployment of finance are supported by strong effective demand. [RAWLS, p.276]

Nevertheless, this branch of government has an important role.
It tries to dampen damaging oscillation in the market. I think, without evidence, that Rawls envisioned that as some sort of a central bank, that injects credits into the system our actively buys certain assets with newly printed money, if there is a depression.
I am no economist, so never take any financial advice for me. But my lack of expertise won’t hold me back from talking about stabilizing reforms for the financial sector that look promising to me in a separate post.

Transfer Branch

The social minimum is the responsibility of the transfer branch. […] The essential idea is that the workings of this branch take needs into account and assign them an appropriate weight with respect to other claims. A competitive price system gives no consideration to needs and therefore it cannot be the sole device of distribution. […] Competitive markets properly regulated secure free choice of occupation and lead to an efficient use of resources and allocation of commodities to households. They set a weight on the conventional precepts associated with wages and earnings, whereas the transfer branch guarantees a certain level of well-being and honors the claims of need. [RAWLS, p.276]

This branch is the answer to a few of Marx’s most stinging criticisms: wage slavery and neglect of the poor in a market.
A competitive pricing system is a tool that efficiently balances production capacities and demand. We are all familiar with Uber’s “surge pricing”. Most people hate it, but it works. When demand explodes due to bad weather, higher prices will entice more drivers to get on the road or make passengers car pool more often. Higher prices for face masks during the current COVID19 crisis make companies shift their production to make them.

I'd rather have a mask for $7.50 and feel "ripped off", than not have one for $0.58 and feeling righteous.

And if you can get such outrageous profit margins, you will increase supply tremendously.

At least that's the idea.

— Martin Lukas (@realMartinLukas) March 31, 2020

The downside: when you’re dirt poor, you can’t demand anything on the market. You don’t have purchasing power. From a market’s perspective, you are worthless.
There might have been a time, where our production capacities were so small that there was real scarcity of certain basic goods and we had to tolerate this; I don’t think we still live in that time anymore. If I am wrong about that, I will be right about it soon. Technology will make sure of that.
So there is actually a need for a lot of basic goods, but it doesn’t show up anywhere as demand. Additionally, there is something like a vicious cycle, where poor people have to work in labor intensive industries, because they can only demand the low wages that are paid there, that are additionally pressured by international competition from (other) poor countries, and have lower than average wage growth. To put it with Rawls’ words: “There is with reason strong objection to the competitive determination of total income, since this ignores the claims of need and an appropriate standard of life.” [RAWLS, p. 277]

So how would the introduction of transfer payments change that?

But once a suitable minimum is provided by transfers, it may be perfectly fair that the rest of total income be settled by the price system, assuming that it is moderately efficient and free from monopolistic restrictions, and unreasonable externalities have been eliminated. Moreover, this way of dealing with the claims of need would appear to be more effective than trying to regulate income by minimum wage standards, and the like. It is better to assign to each branch only such tasks as are compatible with one another. Since the market is not suited to answer the claims of need, these should be met by a separate arrangement. Whether the principles of justice are satisfied, then, turns on whether the total income of the least advantaged (wages plus transfers) is such as to maximize their long-run expectations (consistent with the constraints of equal liberty and fair equality of opportunity). [RAWLS, p. 277]

In other words: Use the market for what it is great at, namely the allocation of goods according to demand and use society’s most potent tool, the state, to make sure that people have the resources to make the demands for their basic needs.

Allocation Branch

The allocation branch, for example, is to keep the price system workably competitive and to prevent the formation of unreasonable market power. […] The allocation branch is also charged with identifying and correcting, say by suitable taxes and subsidies and by changes in the definition of property rights, the more obvious departures from efficiency caused by the failure of prices to measure accurately social benefits and costs. To this end suitable taxes and subsidies may be used, or the scope and definition of property rights may be revised. [RAWLS, p. 275-276]

The allocation branch might be something Cass Sunstein is dreaming about. At least is praise of risk-aware regulators in his fantastic book “The Cost-Benefit Revolution” makes me belief that. A market doesn’t manage, what it doesn’t measure. This can lead to rather dangerous situations, like our current discussion about climate change indicates.That is the reason why I have argued previously for a carbon tax.
There are a lot of externalities, like particulate matter, safety on e-scooters, fertilizer in the drinking water, etc. that are sensible to look at from a cost-benefit perspective and might be possible candidates for corrective action from the allocation branch.
Sunstein argues that cost-benefit analysis is in a sense a foreign language that helps us to avoid some of the known cognitive biases of the human psyche.
There are a lot of things that cost us more than we would intuitively expect. We might choose to tolerate the costs, but we should form more than halfpinions and form proper opinions by looking at both sides of the scale. The allocation branch makes sure that happens. It also looks not only at monopolistic powers in a market, huge market shares are enough to have a look at a situation, and breaks them up, before they can stifle the market. We all like competitive markets, don’t we?

I’d like to emphasize, how radical Rawls is on this point.

Changing the scope and definition of property rights is a major step. But while reflecting about it, there is a whole list of things, i.e. rights of way, property on land, intellectual property, mining rights – on land, under the sea and maybe soon on asteroids, moons and planets -, property on company shares, intergenerational debt, etc., where the traditional definition of property might lead to undesirable consequences. I think we should at least be open to small experiments with new rules for this. I’d be surprised to find out that our conception of property, born probably somewhere in the Roman court rooms, is ideally suited for the challenges of the nuclear-fueled robotic space age.
But it might be.

Distributive Branch

The distributive branch will probably be your least favorite. It’s the branch of government that determines taxes. And as if that was not bad enough, it has two different tasks in doing so. Let’s start with the more problematic one:

First of all, it imposes a number of inheritance and gift taxes, and sets restrictions on the rights of bequest. The purpose of these levies and regulations is not to raise revenue (release resources to government) but gradually and continually to correct the distribution of wealth and to prevent concentrations of power detrimental to the fair value of political liberty and fair equality of opportunity. [RAWLS, p. 277-278]

“PUNITIVE TAXES! ENVY! HATRED FOR SUCCESS!” The objections are almost deafening. I cannot speak for other people, but I am neither envious nor hateful of success and least of all I want to punish people for success.
The reason is rather simple: I don’t want a child to be punished for the crimes of her mother. Likewise, I don’t think it’s a good idea to award children for the success of their predecessors. I think it’s important to combat nepotism – Francis Fukuyama talks about societies’ historical attempts to get rid of it extensively in “The Origins of Political Order” and “Political Order and Political Decay“. From eunuchs running the imperial court in China to slaves in the highest positions of power in the Ottoman empire, it’s amazing with what people came up to prevent nepotism from ruining their systems. Taxes seem like a less intrusive way to get to the same result. In my opinion, dynasties of power, influence and wealth are anathema to the very idea of democracy. And I like democracy.

Rawls might have put it somewhat more elegantly:

As earlier defined, fair equality of opportunity means a certain set of institutions that assures similar chances of education and culture for persons similarly motivated and keeps positions and offices open to all on the basis of qualities and efforts reasonably related to the relevant duties and tasks. It is these institutions that are put in jeopardy when inequalities of wealth exceed a certain limit; and political liberty likewise tends to lose its value, and representative government to become such in appearance only. The taxes and enactments of the distribution branch are to prevent this limit from being exceeded. Naturally, where this limit lies is a matter of political judgment guided by theory, good sense, and plain hunch, at least within a wide range. RAWLS, p. 278

The second task of the distribution branch is probably less controversial. It’s collecting the resources that the state needs to arrange for the necessary background institutions, social goods and the social minimum. There are probably not a lot of people that like taxes. And I’d be surprised to find a lot more people that like (paying) progressive income taxes. So maybe you are pleasantly surprised by this:

This problem belongs to the distribution branch since the burden of taxation is to be justly shared and it aims at establishing just arrangements. Leaving aside many complications, it is worth noting that a proportional expenditure tax may be part of the best tax scheme. For one thing, it is preferable to an income tax (of any kind) at the level of common sense precepts of justice, since it imposes a levy according to how much a person takes out of the common store of goods and not according to how much he contributes (assuming here that income is fairly earned). Again, a proportional tax on total consumption (for each year say) can contain the usual exemptions for dependents, and so on; and it treats everyone in a uniform way (still assuming that income is fairly earned). [RAWLS, p. 278]

But as we are concerned with real word improvements and not theoretical purity, progressive rates are of course not of the table for all possible circumstances:

It may be better, therefore, to use progressive rates only when they are necessary to preserve the justice of the basic structure with respect to the first principle of justice and fair equality of opportunity, and so to forestall accumulations of property and power likely to undermine the corresponding institutions. Following this rule might help to signal an important distinction in questions of policy. And if proportional taxes should also prove more efficient, say because they interfere less with incentives, this might make the case for them decisive if a feasible scheme could be worked out. […] It does not follow that, given the injustice of existing institutions, even steeply progressive income taxes are not justified when all things are considered. [RAWLS, p.279]

Final thoughts

Wow, that was a long and controversial post!
If all it did was make you think about why you favor the current version of our democratic or economic institutions and come to an answer that satisfies yourself, I’m glad you read it. I know that some of the concepts might still be or appear to be fuzzy. I hope to be able to flesh them out a little bit more in future posts.
If you felt agitated at any point, I’d like to ask you a favor: please reflect on your anger for 1 minute. Analyze what triggered it. I’d be really interested to hear, where it comes from. Did I violate any assumptions you deem sacred?

I’d like to end with acknowledging the superiority of practice of theory, when dealing with balancing claims.

In practice we must usually choose between several unjust, or second best, arrangements; and then we look to nonideal theory to find the least unjust scheme. Sometimes this scheme will include measures and policies that a perfectly just system would reject. Two wrongs can make a right in the sense that the best available arrangement may contain a balance of imperfections, an adjustment of compensating injustices. [RAWLS, p.279]

Sources:

[MAS-COLELL] MAS-COLELL, A., M. D. Whinston et al. (1995) Microeconomic Theory, New York: Oxford University Press.

[RAWLS] RAWLS, John. A Theory of Justice (Oxford Paperbacks 301 301). Harvard University Press. Kindle-Version.