What Is Fair?
In a competitive 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
peoplewhether through bad genes, bad nutrition, or bad
cultural environmentcannot 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 mattersnot 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
resultsnot 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. Although 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.
Because economists are interested in fairness, they have developed ways to measure how evenly or unevenly income is distributed.
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 intensegiving 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. Although this line of argument can justify a
progressive income tax, it works much better for a
progressive consumption tax.
Copyright Robert Schenk