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What Is Fair?

In a market economy the ability of people to obtain goods and services depends, with some exceptions, on the marginal productivity of the resources they hold. The most important resource is a person's ability to work (human capital) but others are ownership of natural resources and capital. Those who hold resources that are highly valued will earn large incomes, whereas those who hold no valuable resources earn little or no income. This unequal distribution of income that a market system produces raises questions of whether or not a market system is fair.

Fairness is a normative issue, which means that it involves judgments about what is good and what is bad. As a result, economists cannot claim special expertise on this issue. They often rely on arguments from philosophers when they discuss fairness, and they hold widely diverse beliefs. There are, however, some insights from economics that can be useful when one discusses issues of fairness.

Because people have different goals, unequal incomes do not necessarily mean that the mechanism for producing those incomes is unfair. Some people have goals that can be met only if they earn high incomes, whereas others have goals that require less income but more leisure. A fundamental trade-off that people face is a leisure-income trade-off. If Mike Fleming wants more income, he must work more, which means he sacrifices leisure. People who value their leisure time highly will earn less income than people who put little value on leisure, all things being equal. In a world in which everyone had equal abilities but different goals, people will earn unequal incomes.

Of course, we do not live in a world of equal abilities. Some people are smarter, more athletic, more social, or in some other way more talented than others. Some people--whether through bad genes, bad nutrition, or bad cultural environment--cannot cope by themselves in a complex world. Hence, even if everyone had the same goals, people would earn unequal incomes.

If you look at a situation and decide that it is unfair because one person has too much and another has too little, you probably are making a judgment that compares goals. The judgment says that the person with too much is satisfying goals that are less worthy than those of the person with too little. We commonly make this sort of normative judgment; our decision to give money to one charity rather than another indicates that we find some goals more deserving than others. Our decision to give at all suggests that we decide that the goals of someone else are more worthy than our own "selfish" goals.1

Economic analysis suggests that people earn different amounts of income both because they have different goals and different abilities (or resource endowments, to use a more comprehensive but also more abstract term). From this starting point, we can examine a few common judgments on fairness.

One view is that fairness means everyone should have an equal opportunity to succeed. In this view, process matters--not results. This position sees economic life as a race. In any race, some people are faster than others. As long as all contestants face the same rules, the race is fair even though some win and others lose. Some people fail in the economic game and have low incomes because they made mistakes or were unlucky or did not have enough ability. Yet their failure does not mean that the system is unfair, provided that no one erected obstacles in their path. This view is sympathetic to a market system

A completely different view is the egalitarian position, which judges results--not process. It argues that more equality of income is always better than less, and that the best of all possible worlds is one of complete equality. John Rawls has developed an influential justification of egalitarian positions using the notion of the social contract, an idea that Thomas Hobbes and John Locke made famous in the 17th century. Rawls asks what rules we would agree on if we were designing a society that we then had to join, assuming that we had no knowledge of how successful we would be in that society. He argues that most of us would want to join a society that ensures a great deal of income equality because we are afraid of risk. The egalitarian view tends to be unsympathetic to market systems because they generate very unequal incomes.

Both these views have internal inconsistencies. Obtaining equal results requires the use of government power, and only some will be able to wield this power. Those who have the jobs of equalizing incomes will have more power than those who do not; equal income results in unequal political power. Obtaining a system of completely equal opportunity is impossible because the results that one generation obtains help determine the starting points of their offspring. People who do well in the economic game will try to help their children succeed by giving them a good childhood environment, a good education, and inherited wealth.

A third viewpoint suggests that income should be determined on the basis of need. Though this view is often associated with socialism, it has a very long tradition in Christian thought, which is where the socialists, a product of the 19th century, found it. A position that equal work deserves equal pay, which is a position consistent with the opportunity approach, is inconsistent with the need approach.

To implement the need approach there must be some way of measuring need. This measurement is most practical in small-group situations, that is, within groups where members know each other well and where members have the same goals. It is hard to implement in large groups of strangers who do not know each other well and who may disagree radically about which goals are worth attaining. One escape from this problem has been to assume that everyone's needs are identical, which collapses this point of view into egalitarianism.

Modern societies have taken aspects of all three viewpoints and established them as public policy. Income taxes are progressive; that is, they take greater percentages of income from those with big incomes than from those with small incomes. This policy can be justified from an equal results point of view.2 Employment laws require equal pay for equal work. The employer is prohibited from taking factors such as personal need of an employee into account in establishing pay. These laws make sense from an equal opportunity point of view. Finally, tax laws and some transfer payments favor families with more children and higher medical bills. The need viewpoint can justify this aspect of taxes.

In addition to income distribution, social mobility and status may shape views on fairness. For example, would you rather live in a society with a great deal of inequality but with a lot of social mobility, or in one with less inequality but also less mobility? As for status, would you rather have an income of $30,000 and live in a society in which this income put you at the top of the social pyramid, or would you prefer another society in which you would be in the middle and earn $45,000? Economics cannot tell you what view of fairness is correct; you must make up your own mind about how important various characteristics are.

Many people think the government should try to promote fairness by redistributing income.

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1 The argument in this paragraph may overstate the case. We often give to charities not because we think they are worthwhile, but because of social pressure. When the neighbor's child rings the doorbell selling candy for a fund raiser, we most often buy because we want to maintain good relations with the neighbor, not because we want to help the cause. The pressure can be more intense--giving to the United Way is sometimes almost compelled by employers.

2 If one believes that status is important, one can justify progressive taxes without reference to need or egalitarianism. Those who enjoy high status in a society do so at the expense of those who are low status. It is not unreasonable to expect those who obtain high status to pay for it just as people pay for other goods. Though this line of argument can justify a progressive income tax, it works much better for a progressive consumption tax.

Copyright Robert Schenk