Download Is the Perfectly Competitive Market a Morally Free Zone?

The London School of Economics and Political Science:
Department of Philosophy, Logic and Scientific Method
Is the Perfectly Competitive Market a
Morally Free Zone?
Dana Andreicut
Word Count: 7,000
MSc Economics and Philosophy 2010/2011
Table of Contents
1 Introduction................................................................................................................. 2
2 Morals by Agreement ................................................................................................. 4
2.1 Gauthier’s Thesis ................................................................................................... 4
2.2 Background Assumptions ...................................................................................... 6
2.2.a) Pareto Efficiency ........................................................................................... 6
2.2.b) Welfare Economics and Market Failure ....................................................... 7
2.2.c) The Initial Endowments ................................................................................. 8
2.3 The Perfect Market as a Morally Free Zone ........................................................ 10
3 A Critical Analysis .................................................................................................... 14
3.1 Pecuniary Externalities ........................................................................................ 14
3.2 The Limits of the Market ..................................................................................... 19
3.3 Voluntary Market Participation ........................................................................... 21
3.4 Multiple Equilibria............................................................................................... 25
4 Pareto Optimality...................................................................................................... 28
5 Concluding Remarks ................................................................................................ 31
Bibliography .................................................................................................................. 33
1
1 Introduction
Economics often treats the perfectly competitive market as a space in which moral
judgement is not necessary. The efficiency of markets culminates in the achievement of
optimality, a state in which often divergent interests are elegantly reconciled by the
invisible hand. Going back to Adam Smith, economics endorses the view that
individual pursuit of self-interest ensures a maximum gain for each participant to
market activity.1 In the realm of free market economics, morality appears to be
superfluous.
In chapter four of Morals by Agreement (1986), David Gauthier puts forward
the idea that free market activity, in the absence of market failures, brings about
optimal outcomes for the participating individuals. He goes on to argue that a perfectly
competitive market (PCM henceforth) is a morally free zone. This paper will critically
assess Gauthier’s claim. It will challenge his view and show that his argument is
problematic. Furthermore, it will suggest that his reliance on Pareto optimality, for the
assessment of the moral neutrality of an outcome, is inadequate.
This paper will proceed as follows. Section 2 will begin by discussing
Gauthier’s overall aims in Morals by Agreement. The latter part of the section will
provide the background assumptions that Gauthier is using in his analysis. It will then
proceed with the author’s depiction of the PCM. Section 3 will offer a critical analysis
of the argument, by presenting four objections against Gauthier’s thesis: the existence
of pecuniary externalities, the limits of the market, the voluntary nature of market
participation and the possibility of multiple equilibria.
1
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Kathryn Sutherland,
(Oxford: Oxford University Press, 1998), p. 22
2
The paper will then analyse whether Pareto efficiency is a necessary and
sufficient condition for the moral neutrality of a market outcome. This will be done in
Section 4, which will argue that multiple equilibria question the sufficiency of Pareto
efficiency. Its necessity in turn is challenged by the existence of pecuniary externalities
and involuntary exchange. Two further points will be raised to strengthen this
argument. The paper will conclude that Pareto efficient allocations are often not neutral
and that the PCM is not a morally free zone.
3
2 Morals by Agreement
Before analyzing the PCM and the morally free zone, it is important to understand how
these concepts fit into Gauthier’s overall aims in Morals by Agreement.
2.1 Gauthier’s Thesis
Gauthier sets out to derive morality from rationality. He believes that an individual is
acting rationally if and only if she pursues “her greatest interest or benefit.”2 She does
this by maximizing her utility in line with her preferences, “whatever the content of
those preferences.”3
In his derivation of morality, Gauthier provides a contractarian account of why
it can be rational to control the pursuit of one’s self interest. According to
contractarianism, moral norms acquire a normative force from a contract or mutual
agreement between individuals.4 These norms are artificial5 moral constraints to the
pursuit of self-interest.6 They are necessary because the pursuit of one’s self-interest
often leads to suboptimal outcomes, such as prisoners’ dilemmas or market failures.
Prisoners’ dilemmas occur when individual utility maximization results in outcomes
2
David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986), p. 7
David Gauthier, ‘Morals by Agreement – Reply to Wolfram-,’ Philosophical Books, Vol. 28, No. 3
(1987), p.135
4
Ann Cudd, ‘Contractarianism,’ The Stanford Encyclopedia of Philosophy, ed. Edward N. Zalta,
http://plato.stanford.edu/archives/fall2008/entries/contractarianism/ Accessed on 16/07/2010.
5
Peter Danielson, ‘ The Visible Hand of Morality,’ Canadian Journal of Philosophy, Vol. 18, No. 2
(1988), p.358
6
David Gauthier, ‘Morals by Agreement – Reply to Wolfram-,’ Philosophical Books, Vol. 28, No. 3
(1987), p. 138
3
4
that leave all parties worse off than they would have been had they cooperated.7 Market
failures will be addressed in more detail in Section 2.2.b).
If it were possible for individuals to come together and bargain about the terms
of their interaction, Gauthier suggests that they would agree to enforce moral
constraints.8 Starting out with rights over their body and mind, individuals gradually
acquire rights to material goods, provided they abide by what he calls the Lockean
Proviso. The Proviso prohibits making oneself better off by making someone else
worse off. It also establishes the initial endowments that the parties bring to the
bargain.9
The principle which is to guide the bargaining process is that of ‘minimax
relative concession.’ According to it, the distribution that comes about as a result of
cooperation should minimize “the largest relative concession made by any of the parties
to the cooperative enterprise.”10 The optimal outcome is achieved when the parties have
made concessions that are equal to each other.11
While moral constraints are necessary in the presence of market failures and
prisoners’ dilemmas, there is one space where they are not required. This is the
perfectly competitive market. The PCM is defined by the absence of externalities and
public goods, perfect information, certainty and price taking behaviour. In this realm,
7
Dan W. Brock, ‘Critical Notices,’ Philosophy and Phenomenological Research, Vol. 49, No. 1 (1988),
pp. 157-158
8
David Gauthier, ‘Morals by Agreement – Reply to Wolfram-,’ Philosophical Books, Vol. 28, No. 3
(1987), p.136
9
David Gauthier, Morals by Agreement, (Oxford: Clarendon Press, 1986), p. 205
10
Ibid., p.158
11
Jean Hampton, ‘Can We Agree on Morals?’ Canadian Journal of Philosophy, Vol. 18, No. 2 (1988),
p.333
5
utility maximizing action leads to Pareto efficient allocations.12 Because the allocations
are efficient and are achieved through free exchange, Gauthier concludes that the PCM
is a morally free zone.
2.2 Background Assumptions
To get a better grasp of Gauthier’s argument, it is useful to consider some of the
background assumptions that he is working with. These are Pareto efficiency, the tools
of welfare economics and the initial endowments.
2.2.a) Pareto Efficiency
The author uses the notion of Pareto optimality as formulated in microeconomics. “A
feasible allocation x is a weakly Pareto efficient allocation if there is no feasible
allocation x’ such that all agents strictly prefer x’ to x. A feasible allocation x is a
strongly Pareto efficient allocation if there is no feasible allocation x’ such that all
agents weakly prefer x’ to x, and some agent strictly prefers x’ to x.”13 Strong Pareto
efficiency implies weak Pareto efficiency.
For the purpose of Gauthier’s argument, it is not necessary to distinguish
between weak and strong efficiency. I will therefore use Pareto efficiency (or Pareto
optimality) to describe an outcome in which the only way to make someone better off
involves making someone else worse off.
12
Dan W. Brock, ‘Critical Notices,’ Philosophy and Phenomenological Research, Vol. 49, No. 1 (1988),
p. 158
13
Hal R. Varian, Microeconomic Analysis (New York: W.W. Norton & Company, 1992), p. 323
6
2.2.b) Welfare Economics and Market Failure
Gauthier is also relying on the First Fundamental Theorem of Welfare Economics. This
states that any competitive equilibrium is Pareto efficient.14 Figure 1 illustrates such an
efficient allocation. It depicts a simple economy with two consumption goods and two
individuals (A and B), with well-behaved indifference curves. The latter are convex and
differentiable, guaranteeing an interior solution to the utility maximization problem.
The point of tangency (E) between the indifference curves constitutes the competitive
equilibrium, which is Pareto efficient.
Figure 1:
Good 2, Mr. A
OB
Good 1, Mr. B
E
Good 1, Mr. A
OA
Good 2, Mr. B
When market failures occur, the competitive equilibrium is no longer efficient.15
This can happen in the presence of externalities. Externalities represent “the imposition
of noncompensated harms or benefits on parties who are not primary participants in
14
Wyn Morgan, Michael Katz and Harvey Rosen, Microeconomics (Berkshire: McGraw Hill Education,
2006), p. 433
15
Jean Hampton, ‘Can We Agree on Morals?’ Canadian Journal of Philosophy, Vol. 18, No. 2 (1988),
p.334
7
exchange.”16 An example is a cement producer who pollutes the air around his factory
by emitting CO2.
Another cause of market failure is the existence of public goods. These are
commodities whose consumption is non-rival. Non-rivalry implies that consumption of
a unit by one individual does not preclude the consumption of the same unit by another
person.17 Clean air and national defence are well-known examples of such goods.
Failures also occur if individuals or firms do not act as price takers (for instance,
if a firm can set prices)18 or when there is asymmetric information, which involves one
party to the market exchange being better informed than the other.19
2.2.c) The Initial Endowments
The initial endowments are taken as given by the market. However, Gauthier stresses
that the fairness of these endowments is important and he explains how they come
about.
Prior to the emergence of the market, people are in a state of nature. This state is
defined by Gauthier as one where there are no moral or political constraints, and in
which individuals “advance whatever seems best to” them.20 At this point, people
possess rights over their mental and physical capacities only. They begin from an initial
bargaining position that is non-coercive and which comes under the scope of the
16
James M. Buchanan, ‘The Gauthier Enterprise’, Social Philosophy and Policy, Vol.5, No. 2 (1988), p.
90
17
Wyn Morgan, Michael Katz and Harvey Rosen, Microeconomics (Berkshire: McGraw Hill Education,
2006), pp.674-657
18
Ibid., p. 442
19
Ibid., p. 443
20
David Gauthier, ‘Moral Artifice,’ Canadian Journal of Philosophy, Vol. 18, No. 2, (1988), p. 388
8
Lockean Proviso. The Proviso only allows worsening someone’s situation if “this is
necessary to avoid worsening one’s own position.”21
The worsening and bettering of someone’s position need to be judged relative to
the situation this person would be in, if another participant to the exchange were not
present. Consider an example. You are walking past a river and see someone drowning
in it. If you do not save that person, you are failing to better their position. This is not
prohibited by the Proviso. If you however pushed that person into the river yourself,
and then do not save her, you are violating the Proviso.22
People gradually move from owning their mental and physical capacities to
owning material goods. This is made possible by the first appropriator, who Gauthier
calls Eve. She encloses a piece of land, which can be of any size provided she does not
leave others worse off than they would have been in her absence.23 Gauthier argues that
Eve’s action determines others to start appropriating as well. This enables a more
efficient use of resources. Thus, even though she acts out of a desire to better her own
position, Eve does others a favour by commencing the process of appropriation. Eve
benefits most from the process, as she takes the best portion of the common resources.
Despite this however, she leaves others at least as well off as they were before
appropriation began. Therefore “advantage is not taken, but equality is not assured.”24
21
David Gauthier, Morals by Agreement, (Oxford: Clarendon Press, 1986), p. 203
Ibid., p. 204
23
Ibid., p. 205
24
Ibid., p. 217
22
9
2.3 The Perfect Market as a Morally Free Zone
We can now turn to Gauthier’s argument for the PCM. In this space, each individual,
while having in mind her own gain, ends up promoting the interest of society.25 The
PCM presupposes the absence of force and fraud26 and has the following defining
features:
1. Individuals choose their actions by taking the actions of other individuals as
given.
2. They have complete information and make their decisions under certainty.
3. They derive utility from consumption and have diminishing marginal utility
from it (each additional unit of consumption gives them less utility than the
previous unit). 27
4. All products and factors of production are privately owned. Private
consumption has two components: private goods and mutual unconcern. The
latter implies that individuals do not have an interest in the interests of those
they exchange with.28
5. Externalities and public goods are ruled out. Prices are determined by the
market and are taken by the individuals as given.29
6. Each individual is defined by his utility function and factor endowments,
which determine their preferences and capacities.30
25
Ibid., p. 89
Ibid., p. 85
27
Ibid., p. 85
28
Ibid., p. 87
29
Ibid., p. 88
30
Ibid., p. 86
26
10
7. There is an initial allocation of endowments, which is taken by the market as
given.31
Having defined the PCM, Gauthier argues that “the presupposition of free activity is
independently necessary”32 before he can conclude that the market is morally neutral.
Gauthier illustrates this by means of an analogy focused on Robinson Crusoe. While
alone on her island, Crusoe can direct her capacities to the service of her preferences.
She can stop her efforts when she foresees that the costs incurred will be greater than
the benefits.33
The PCM gives individuals in the market a freedom equal to that of Robinson
Crusoe, while offering them the benefits of “exchange and the division of labour-and
also, in the long run,” those of investment.34 Individuals bring their fairly acquired
endowments to the market. These initial conditions fall under the scope of the Lockean
Proviso.35 Just as Crusoe enjoys the full benefits of her labour, similarly the parties to
market interaction also receive a marginal product that is equal to their marginal
contribution.36 The market provides an improvement on the no trade baseline, while
ensuring that individuals engage in voluntary activity.
Given the previous seven assumptions and the free nature of market exchange,
Gauthier concludes that the market reaches an equilibrium state.37 Each individual is
able to choose his optimal consumption bundle, given the prices on the PCM, his
preferences and his endowment. Furthermore, the competitive equilibrium that emerges
31
Ibid., p. 94
Ibid., p.90
33
Ibid., p. 90
34
Ibid., p. 90
35
Ibid., p. 205
36
Ibid., p. 91
37
Ibid., p. 89
32
11
is Pareto efficient. Gauthier argues that while many outcomes can be Pareto efficient,
“the actual one” that comes about is given by the initial factor endowments.38 He is thus
suggesting that the there is a unique Pareto optimal outcome.
Gauthier interprets laissez-faire economics as stating that the coincidence of
equilibrium and optimality, resulting from free activity, serves as a justification of each
person’s pursuit of their own interest. The outcome is efficient and gives each
individual a marginal benefit equal to their marginal contribution. Interfering with the
actions of individuals implies preventing the optimal outcome from coming about,
hence leaving some individual better off at the expense of another.39
While defenders of laissez faire economics may argue that a Pareto optimal
outcome is morally right, Gauthier states that morality plays in fact no role in the PCM.
Morality would be “a constraint on the individual pursuit of utility.”40 This constraint is
unnecessary, since the market outcome is already optimal. Gauthier concludes that the
traditional moralist has no tasks to fulfil.41
Gauthier appears to be suggesting a narrow view of morality. He believes that
moral judgement is not necessary if we are dealing with a Pareto optimal outcome,
which came about through free exchange in the PCM. Moral judgements are only
appropriate when some individuals are harmed for the gain of others. His notion of
‘harming others’ however is very specific, as harm is only inflicted when Pareto
inefficiencies arise.
38
Ibid., p. 94
Ibid., p. 93
40
Ibid., p. 93
41
Ibid., p. 91
39
12
To conclude this section, let us consider a summary of Gauthier’s argument for
the moral neutrality of the PCM. This will allow us to see where the points of
contention lie and how they affect the final conclusion that the author draws.
1. The PCM is defined as above.
2. Individuals engage in free and voluntary activity, assuming that:
a) Initial endowments are fair.
b) The market makes them better-off relative to the no trade baseline.
3. Given points 1 and 2, the market moves to an equilibrium condition.
4. By the First Fundamental Theorem of Welfare Economics, the competitive
equilibrium is Pareto efficient.
5. The Pareto efficient outcome is unique.
6. If an allocation is Pareto efficient, this implies that it is morally neutral, as
individuals get a marginal benefit equal to their marginal contribution.
Given points 1 to 6, Gauthier is now able to draw the following conclusion:
The Pareto efficient outcome is a result of the market process and therefore not
contingent, but necessary. The social planner has no choices to make, hence the
PCM is morally free.
13
3 A Critical Analysis
In what follows, this paper will proceed by considering four objections to Gauthier’s
claim. These will target specific points and omissions in his argument and will render
his conclusion that the market is a morally free zone questionable.
3.1 Pecuniary Externalities
The first objection argues that there is a certain category of externalities, which
economic theory legitimately disregards, but which morality should be concerned with,
even in the PCM. The objection thus targets assumption 6, as it questions the moral
neutrality of Pareto efficient outcomes.
Economic theory classifies externalities into two categories: non-pecuniary and
pecuniary. Non-pecuniary externalities directly have an impact on either the utility
function or the production function of a party that does not participate in the exchange
in question. An example of non-pecuniary externalities is that of CO2 emissions.
Pecuniary externalities on the other hand arise from actions that affect third parties and
come about when the terms of trade or prices change.42
Consider the economic intuition behind this. Take a scenario in which two firms
interact in the market. Firm 1’s production function is given below43:
q1 = f ( x1 , y1 ,...; q2 , x2 , y2 ,...)
42
James M. Buchanan, ‘The Gauthier Enterprise,’ Social Philosophy and Policy, Vol.5, No. 2 (1988), p.
91
43
Randall G. Holcombe and Russell S. Sobel, ‘Public Policy toward Pecuniary Externalities’, Public
Finance Review, Vol. 29, No.4 (2001), p. 306
14
In the above, qi represents the level of output of firm i, and x and y represent the inputs
used in the production process. A non-pecuniary externality is said to arise when firm
2’s actions have an impact on the physical output of firm 1, while holding the input
level of firm 1 constant.44 More specifically, firm 2’s actions directly affect the
production function of firm 1, in the sense that either q2, x2 or y2 impact q1.
Now consider firm 1’s profit function, defined as the difference between its total
revenues and its total costs:
π 1 = g (q1, x1 , y1 ,...; q2 , x2 , y2 ,...)
Profits are a function of output choices, which in turn depend on the inputs, x and y.
The profits of firm 1 do not only depend on its own decisions, but also on the inputs
used by firm 2 and on its output decisions. Pecuniary externalities can directly affect
the firm’s profits. If the actions of firm 2, through its choice of either q2, x2 or y2, affect
π1, then we are dealing with a pecuniary externality. This happens because the profits of
firm 1 (π1) are affected, while its production function (q1), is not.45
Disregarding pecuniary externalities is the engine of what Schumpeter called
the process of ‘creative destruction’. The term captures the nature of the market system:
for economic progress and growth to ensue, sometimes old industries will suffer and
jobs will go out of existence.46 Competition inevitably brings along pecuniary
externalities.47 Moreover, it is precisely the freedom of new firms to enter an industry
44
Ibid., p. 306
Ibid., p. 306
46
Joseph A. Schumpeter, Capitalism, Socialism and Democracy (London: Routledge, 1992), p. 83
47
Randall G. Holcombe and Russell S. Sobel, ‘Public Policy toward Pecuniary Externalities’, Public
Finance Review, Vol. 29, No.4 (2001), p. 309
45
15
and impose pecuniary externalities on old firms that makes it possible for efficiency to
arise in competitive markets.48
Gauthier assumes that the PCM is dynamic. While discussing utilitarianism, he
argues that the market is constantly changing, as “technology is not static, and market
competition accelerates its growth.”49 Pecuniary externalities can therefore arise in the
PCM. Since harm only occurs in the presence of Pareto inefficiencies, pecuniary
externalities do not harm individuals, according to Gauthier’s understanding.
Pecuniary externalities are not only prominent in interactions between firms, but
can also impact the everyday lives of individuals. Hausman illustrates this with the
example of a hand weaver, who produces cloth.50 One day power looms are invented
and stream-powered weaving factories become available. The hand weaver’s labour is
rendered valueless, even though no non-pecuniary externality occurred.51
Despite the fact that the weaver loses his job, the PCM should automatically
redirect him to a new position. However, even if he obtains a new job, can we conclude
that the weaver is indeed not made worse off as a result of this change? His
consumption may be lower under the new job, even though he is still receiving a
marginal benefit equal to his marginal contribution. Let us consider this in more detail.
If all Gauthier is concerned with is maintaining the identity between an
individual’s marginal contribution to the market and his marginal benefit (‘the merit
principle’ henceforth), pecuniary externalities do not create any problems for his
argument. Two issues arise at this point. On the one hand, we could argue that the merit
48
Ibid., p. 305
David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986), p. 91
50
Daniel M. Hausman, ‘When Jack and Jill Make a Deal,’ University of Wisconsin-Madison Website,
http://philosophy.wisc.edu/hausman/papers/jack-and-jill.htm, Accessed on 20/12/2010
51
Ibid.
49
16
principle is legitimate, provided initial endowments are fair. The fairness of the
endowments will be addressed in the Section 3.3. On the other hand, we can challenge
whether giving individuals a marginal benefit equal to their marginal contribution is a
good principle to begin with, even granting fair starting points. Let us focus on the
second point.
The argument for the merit principle appears to be rooted in libertarianism, even
though Gauthier chooses not to use this label. Libertarianism accepts negative rights,
such as the right to life, liberty, and property, which only imply “noninterference with
the possessor of these rights.”52 These are consistent with giving individuals a benefit
equal to their contribution. Positive rights, which include rights to food, housing and
healthcare, among others, are rejected. The argument against them suggests that their
provision can infringe someone’s liberty. This is the classic libertarian argument
against taxes, which are levied “under a coercive threat.”53
A core idea underpinning libertarianism is that human beings are naturally
capable of “autonomous self-direction.”54 From this, it is inferred that one should not
interfere with people’s liberty in any way. A similar argument appears to legitimise the
merit principle. Autonomous self-direction enables individuals to contribute to the
market. This should result in a benefit at least equal to that contribution. Interfering
with this outcome implies tampering with individual liberty.
It is not entirely clear that the conclusion of non-interference follows from the
premise of a natural capacity for autonomy.55 The fact that individuals possess a natural
52
Richard Hudelson, Modern Political Philosophy (London: M.E. Sharpe, 1999), p.97
Ibid., p. 97
54
Ibid., p. 103
55
Ibid., p. 103
53
17
capacity for something does not establish that capacity as desirable. This in turn
suggests that the claims of libertarianism are not unambiguously established.
To see why the merit principle is also problematic, consider the following
example. After falling ill, an individual in the PCM is unable to contribute to the
market. According to Gauthier, since his marginal contribution is now zero, his
marginal benefit should also be zero. Should we allow this individual to starve? This
seems to be a serious moral issue. We may wish to impose moral constraints on the
utility maximizing actions of individuals in this society, if this can prevent such an
outcome. This hints at a need for redistribution, which implies a transfer of resources
by some means, such as taxation.56 This solution however goes against Gauthier’s
narrow view of morality.
If we accept that the merit principle has a weak foundation, we could question
whether Gauthier can push aside the moral significance of pecuniary externalities.
Gauthier has to argue that when the weaver obtains a new job, he deserves his new
wage. This might be acceptable. However, what if the weaver’s new wage only allows
him to live below subsistence level? This could be in line with his new contribution to
the market, but still one could question whether the weaver deserves this. Whatever the
answer to this question is, it does not change the fact that the question is a moral one.
56
Christian Barry, ‘Redistribution,’ The Stanford Encyclopedia of Philosophy, ed. Edward N. Zalta,
http://plato.stanford.edu/archives/fall2011/entries/redistribution/ Accessed on 16/07/2010.
18
3.2 The Limits of the Market
A discussion of what goods can be sold is essential to the definition of the PCM. The
second objection aims to reveal a gap in Gauthier’s argument. The author merely
argues that the realm of the PCM is the zone of private goods. He does not however
clarify what goods belong to this category. The choice of which commodities one can
trade is a moral one and requires prior ethical deliberation, as will be highlighted by the
following discussion. This will be also used as a starting point for the argument of
Section 3.3, which will illustrate how, by commodifying everything, the PCM may
coerce people into involuntary exchanges.
Defining a commodity is difficult. Commodification implies that a certain good
can be bought and sold.57 The commodification of children, the sale of blood and
organs, as well as that of sexual services, are all highly contentious issues.58 Whether
the market system is an appropriate mechanism for these goods has been widely
debated.
Sandel puts forward two arguments against commodification, namely corruption
and coercion. The argument from corruption holds that certain goods are incompatible
with market exchange59 and suggests that it matters where one draws the limits of
markets. Coercion involves people being forced by circumstances, such as poverty, into
agreeing to sell things that they normally would not sell.60
57
Margaret Jane Radin, ‘Market-Inalienability,’ Harvard Law Review, Vol. 100, No. 8 (1987), p. 1859
Ibid., pp. 1856-1857
59
Michael J. Sandel, ‘What Money Can’t Buy: The Moral Limits of Markets,’ The Tanner Lectures on
Human Values (Delivered at Brasenose College, Oxford, May 1998),
www.tannerlectures.utah.edu/lectures/documents/sandel00.pdf, Accessed on 10/03/2011, p. 94
60
Ibid., p. 94
58
19
Sandel’s points are illustrated by the case of surrogate motherhood. A surrogate
mother is a woman who receives monetary compensation for bearing a child for other
individuals and who gives up her parental rights.61 The main worry is that surrogate
motherhood can corrupt certain moral goods, such as pregnancy or parenthood.62
Contract pregnancy can furthermore be argued to turn both children, as well as
women’s labour, into commodities, thus undermining important values such as the
autonomy of women and parental love.63
Returning to the coercion worry, women may feel forced, due to poverty, to
become surrogate mothers. Sandel illustrates this by means of an example from the
imperfect market. In India, a baby is delivered to a British couple every 48 hours. This
enables a financially beneficial transaction for the surrogate mother. Sandel hints at the
possibility that women may in fact be forced by circumstances to accept a contract
pregnancy.64
By choosing not to address the debate about the limits of the market, Gauthier
disregards an important ethical discussion. The outcome in the PCM may be optimal
from the Pareto point of view, yet it may still conceal troubling moral issues that are not
being addressed. This can only be resolved by providing a clear definition of what a
commodity is.
61
Elizabeth Anderson, Value in Ethics and Economics (Cambridge, Massachusetts: Harvard University
Press, 1993), p. 168
62
Michael J. Sandel, ‘What Money Can’t Buy: The Moral Limits of Markets,’ The Tanner Lectures on
Human Values (Delivered at Brasenose College, Oxford, May 1998),
www.tannerlectures.utah.edu/lectures/documents/sandel00.pdf, Accessed on 10/03/2011, p. 100
63
Elizabeth Anderson, Value in Ethics and Economics (Cambridge, Massachusetts: Harvard University
Press, 1993), p. 168
64
Michael J. Sandel, ‘Morality in Politics,’ (Lecture 2, the Reith Lectures, delivered for BBC Radio 4,
June 16th, 2009), Market Design, http://marketdesigner.blogspot.com/2009/06/michael-sandel-onmarkets-and-morals.html, Accessed on 11/07/2011
20
3.3 Voluntary Market Participation
The assumption that market participation is voluntary is crucial for Gauthier’s
argument. To what extent one’s participation in the market is entirely free is debatable
however. The third objection targets assumption 2, according to which market
exchange is voluntary. It aims to make two points. It will first argue that Gauthier’s
definition of fairness, in the context of initial endowments, is debatable, thus
challenging assumption 2a), which states that initial conditions are fair. It will then go
on to suggest that even if we grant this fairness, the PCM may still bring about coercive
trade. Both points will question the voluntary nature of exchange.
Hausman addresses the voluntariness of market exchange and argues that one
can be seen as voluntarily engaged in market relations if one had the choice of
participating in the market in the first place. “Since this is not a real option,” Hausman
writes, an individual’s “decision to participate in markets seems little more voluntary
than is his decision to hand over his wallet to an armed robber.”65
It is difficult to endorse Hausman’s definition however. One could argue that
while there is little choice involved in the case of theft, one can at least freely choose
the extent of one’s participation in the market. There are different degrees of
involvement and if one does not like the idea of market exchange, one can minimize the
number of one’s market interactions.
While it is not entirely clear whether we could escape market interactions in
reality, Gauthier’s argument is not theoretically threatened by this criticism. His thesis
however relies heavily on the appropriate initial conditions. In what follows, I will
65
Daniel M. Hausman, ‘When Jack and Jill Make a Deal,’ University of Wisconsin-Madison Website,
http://philosophy.wisc.edu/hausman/papers/jack-and-jill.htm, Accessed on 20/12/2010
21
argue that these conditions could be unfair. I will then suggest that even if we grant
their fairness, they may still be insufficient in order to prevent coercive exchanges on
the PCM.
According to Gauthier, an initial endowment is fair if it comes about without
violation of the Lockean Proviso. He acknowledges the fact that the more talented will
end up benefiting more from appropriation, but argues against any redistribution. He
suggests that “one’s natural capacities determine what one gets, given one’s
circumstances, in a condition of solitude. One’s natural capacities are what one brings
[…] to market […] interaction. Why should a principle determine impartially how
persons are to benefit in interaction except by taking into account how they would or
could benefit apart from their interaction?”66
This statement is problematic. The initial endowments are compatible not only
with huge inequalities in resources, but also with major discrepancies in talents.67 This
could render their fairness disputable. Gauthier’s notion of fairness, just like his notion
of morality, appears to be very narrow.
Additionally, Gauthier’s argument rests on the crucial assumption that there is
no significant difference between solitary existence and market interaction and that the
only change occasioned by the transition from the one to the other is given by improved
trade between the parties. Doesn’t this trade also bring along the possibility of
redistribution? Gauthier’s claim that the two states of affairs are similar is debatable.
These worries question the fairness of the endowments.
66
67
David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986), p.220
Ibid., p.220
22
Gauthier does not find the presence of inequalities troubling and believes that
the market can protect individuals from certain differentially unfavourable exchanges,
which arise due to a lack of better options.68 An example of this could be Man Friday
selling himself into slavery to Crusoe. Gauthier suggests that the market rules these
interactions out, as Man Friday would no longer benefit to the extent of his
contribution.69 His argument is not entirely compelling though.
While Gauthier believes that, given his starting points, the PCM cannot lead to
involuntary exchanges, the following discussion will illustrate that there are exchanges
from which the PCM cannot protect individuals. Thus, even if we grant Gauthier the
fairness assumption and the analogy between solitary existence and market exchange, a
problem still remains. This problem arises if we accept that certain goods should not be
commodified. If individuals find themselves in financial difficulties and decide to trade
these goods, the PCM will allow it. Exchange of this type can be perceived to be
involuntary. An example will clarify this point.
Consider Gauthier’s discussion of Eve’s initial appropriation once more. As was
discussed in Section 1, her appropriation indirectly makes other individuals better off,
as they can now make more efficient use of resources.70 However this does not mean
that everyone will be as well off as Eve. Huge inequalities may still arise. What
Gauthier believes however is that people will still be better off than in a no trade
scenario.71
68
Ibid., p.97
Ibid., p.97
70
Ibid., p. 205
71
Ibid., p. 205
69
23
Now imagine that Eve is extremely rich, following fair appropriation of the
common resources. Adam however finds himself in financial difficulties, yet this
situation came about without the violation of the Proviso. Assume that this happened
because Eve was one of the first appropriators, while Adam was one of the last.
Additionally, Eve is naturally more talented than Adam. As Adam needs to provide for
his family, he sees no route out of his problem other than selling his kidney to Eve, who
needs a transplant. They carry out the exchange and Adam receives monetary
compensation.
Gauthier would argue that this is a voluntary exchange. Both parties started out
from fair initial conditions and Adam was willing to engage in this exchange. Suppose
one believes that kidneys should not be traded, but that the market allows one to
commodify everything. Then the initial endowments, as depicted by Gauthier, by
offering Adam minimal financial resources, can determine him to sell his kidney. In
this sense, the initial endowments are not constraining market exchange sufficiently,
even though they fall under the scope of the Lockean Proviso. While being fair along
Gauthier’s lines, they do not provide individuals with sufficient resources to prevent
them from selling morally contentious goods, such as organs. Gauthier would have to
argue that the exchange remains voluntary nonetheless. This is problematic however. If
financial difficulties can lead individuals to sell morally contentious goods, then these
transactions should be seen as involuntary.
The above discussion hints at a more general idea that goes beyond the
commodification of organs. No matter where one draws the line with respect to
commodification, provided there exists at least one good that should not be traded, then
24
involuntary exchange can arise in the PCM. This is due to the fact that the initial
positions are compatible with severe inequalities and limited resources. Therefore they
do not constrain the transactions enough.
At this point, Gauthier could do one of two things. He could provide an
argument about which commodities can be traded. This would rule out certain
exchanges straight away and the PCM would not coerce trade anymore. This would
however impose a moral constraint on market activity. Alternatively, he could provide
the participants to market exchange with starting points that make it impossible for
coercive transactions to take place. To do so, he would have to guarantee a minimum
level of subsistence for all individuals. The Lockean Proviso cannot ensure such an
initial endowment.
3.4 Multiple Equilibria
The fourth objection targets point 5, which states that the Pareto efficient outcome,
which emerges from a given set of initial endowments, is unique.
According to general equilibrium theory, the set of Pareto efficient allocations
of an economy form its contract curve. By definition, any point on the contract curve is
Pareto efficient.72 Usually, if we take the initial endowments as given, we have a unique
general equilibrium, which also corresponds to a unique Pareto efficient point.
72
Wyn Morgan, Michael Katz and Harvey Rosen, Microeconomics (Berkshire: McGraw Hill Education,
2006), p.425
25
As Hausman suggested however, the competitive equilibria need not be unique
in a PCM.73 In general equilibrium theory, multiple equilibria usually arise if one starts
out from different endowments. However, multiple equilibria can arise even if one
keeps initial endowments fixed. This can also occur in Gauthier’s PCM.
The presence of wealth effects (an increase in spending that comes along with
an increase in perceived wealth) can lead to the emergence of multiple equilibria. Two
effects arise when the price of a good changes. On the one hand, “the relative
attractiveness of various commodities changes” (the substitution effect), on the other,
“the wealth distribution of individual agents is altered” (the income effect).74 The two
can offset or reinforce each other, making it possible for more than one set of prices to
represent an equilibrium.75
Bergstrom et al. illustrate the possibility of multiple equilibria by means of a
simple two consumer, two goods economy. The two consumers used in their model
have quasi-linear utility functions. This implies that individuals derive linear utility
from one of the goods, while the utility from the second good comes in a different
functional form, such as a logarithm or an exponential function. The two utility
functions are given below:76
U1 ( x, y ) = x + f1 ( y )
U 2 ( x, y ) = f 2 ( x ) + y
73
Daniel M. Hausman, ‘Are Markets Morally Free Zones?’ Philosophy and Public Affairs, Vol. 18, No.
4 (1989), p. 327
74
iReference.ca, ‘General Equilibrium Theory’, Online Reference Site and Encyclopedia,
http://www.ireference.ca/search/General%20equilibrium%20theory/, Accessed on 01/08/2011
75
Ibid.
76
Theodore C. Bergstrom, Ken-Ichi Shimomura, Takehiko Yamato, ‘Simple Economies
with Multiple Equilibria,’ The B.E. Journal of Theoretical Economics, Vol. 9, Issue 1 (2009), p.2
26
Functions f1(y) and f2(x) are concave, continuous and differentiable.77
Bergstrom et al. assume that each consumer starts out with an endowment of only one
good, namely of the good from which they derive linear utility. There are strong
income effects acting in the opposite direction of the substitution effects for each of the
consumers. This interaction results in an aggregate excess demand function “increasing
in price over part of its domain.”78 Excess demand is defined as the difference between
a consumer’s endowment and her demand for the specific good. This particular
interaction between income and substitution effects makes it possible for multiple
equilibria to arise. The findings of Bergstrom et al. can be used to support the objection
against Gauthier’s argument.
Since there is no reason to assume that an exchange economy will always have
a unique equilibrium point, the natural question then arises: which equilibrium do we
choose? Different equilibria may favour different groups of individuals, while all
equilibria will be Pareto efficient.
An answer along Gauthier’s lines can be given to this objection. Since all
outcomes are Pareto efficient, and assuming the initial endowments were fair, it does
not matter which outcome is chosen. Judging by Gauthier’s standard, they are equally
good. So it could be claimed that we are going beyond Gauthier’s narrow view of
morality if we advocate the use of a mechanism by which to choose an outcome.
Nonetheless, the objection raises an important point, as it challenges the sufficiency of
Pareto optimality. The principle may not be able to serve the important role that
Gauthier ascribes to it. We will return to this point in the next section.
77
78
Ibid., p.2
Ibid., p.1
27
4 Pareto Optimality
The objections raised by multiple equilibria, pecuniary externalities and voluntary
exchange also target the notion of Pareto optimality. This notion is crucial for
Gauthier’s argument and represents the baseline by which he assesses the moral
neutrality of outcomes. This section will use the prior objections, together with two
additional arguments, in order to show that Pareto efficiency is neither necessary, nor
sufficient for moral neutrality.
Let us first consider the sufficiency of Pareto optimality. The multiple equilibria
objection raised the point that one may be confronted with more than one Pareto
efficient outcome. Thus in the absence of an additional mechanism, one has no
standards by which to choose the appropriate outcome. If one believes that the choice
of the final allocation matters, then Pareto efficiency needs to be supplemented by some
other principle.
Consider now whether Pareto efficiency is necessary for a morally neutral
outcome. The necessity of the principle has been questioned by the pecuniary
externalities and voluntary exchange objections. The pecuniary externalities objection
showed that if Pareto efficiency relies on the merit principle, it is not obvious that the
outcome given by the market is morally neutral. Furthermore, involuntary exchanges
can also result in outcomes that are Pareto efficient from the point of view of the
market. This however, does not make them morally acceptable. In what follows, I will
present two further arguments against the necessity of Pareto optimality.
The first argument aims to question the view that Pareto optimality is a
requirement of rationality. The claim is that “rational individuals necessarily consent to
28
a Pareto improvement.”79 But this need not be the case. Consider the following
dynamic interaction between agents A and B.
At move M1, they move from state 1 to state 2. As a result, A makes a gain,
while B is just as well off as before. Future moves M2 and M3 follow. If B’s potential
gains from subsequent moves such as M2 and M3 “will be lessened due to the fact that
B did not gain in M1 while A did, then the rational strategy for B may be to refuse to
consent to M1.”80 Hence it is not immediately obvious why Pareto optimality is a
necessary requirement of rationality.
Secondly, the necessity of the principle has been contested due to its disregard
of inequality. From the point of view of Pareto efficiency, it can be optimal that
individual A owns all the resources in society, while individual B owns nothing. The
only way to redistribute resources would be to take away some of A’s endowment and
give it to B. Removing even an infinitesimally small amount of A’s endowment would
make A worse off, and the Pareto criterion would disallow this. If we find this outcome
troubling, we may ask whether the principle is necessary to begin with.
This lack of concern for equality however is completely in line with Gauthier’s
argument. He suggests that “the rich man may feast on caviar and champagne, while
the poor woman starves at his gate. And she may not even take the crumbs from his
table, if that would deprive him of his pleasure in feeding them to his birds.”81 Unless
one can show that the Lockean Proviso or the minimax relative concession principle
were violated at some point, Gauthier cannot condemn the outcome.
79
Allen Buchanan, Ethics, Efficiency and the Market (Oxford: Clarendon Press, 1985), p. 12
Ibid, p. 13
81
David Gauthier, Morals by Agreement (Oxford: Clarendon Press, 1986), p. 218
80
29
Gauthier furthermore argues that “equality is not a fundamental concern in our
theory […] Since no one is in a position to take advantage of any other person, pure
market inequalities no more reflect unfairness than do inequalities among isolated, noninteracting individuals.”82 This point has been challenged earlier, when it was argued
that we may have reasons to perceive a significant difference between solitary existence
and social interaction.
Sen suggests that the underlying disregard for inequality exhibited by Pareto
optimality does require justification.83 He acknowledges that the mere fact that equality
is valued in society, does not establish it as a supreme value. Nonetheless, going from
valuing equality above other concerns to not valuing it at all, as appears to be the case if
we fully rely on Pareto optimality, requires some explanation.84 Sen makes a valid
point. If the market outcome is to remain morally free, Gauthier needs to give an
argument of why inequalities are morally neutral.
As has been argued so far in this paper, there may be many instances in which
the PCM delivers an outcome, which while Pareto efficient, is far from morally neutral,
if by moral neutrality one understands more than Pareto optimality. The outcome may
still be morally neutral along Gauthier’s lines. The real question is however whether we
can accept such a narrow view of morality, or whether we want to go beyond Pareto
optimality, when assessing the outcomes delivered by the market. The Pareto principle
appears to be neither necessary, nor sufficient for this purpose.
82
Ibid., p. 270
Amartya Sen, ‘The Moral Standing of the Market,’ Social Philosophy and Policy, Vol. 2, (1985), p.10
84
Ibid., pp.12-13
83
30
5 Concluding Remarks
In Morals by Agreement, Gauthier attempts to offer a contractarian account of morality,
deriving the latter from rationality. Gauthier argues that the PCM is a morally free
zone, and that only when market failures arise, is morality required to constrain the
actions of utility maximizing individuals. Free market activity leads to the emergence
of Pareto efficient allocations, which Gauthier believes are morally neutral.
This paper sought to show that the PCM need not be morally free. Sections 1
and 2 presented Gauthier’s overall aims and his depiction of the PCM. Section 3 raised
four objections against Gauthier’s argument. Firstly, we considered pecuniary
externalities. This objection led to a discussion of whether individuals should be paid
their marginal contribution to the market. We concluded that the merit principle is
problematic and that pecuniary externalities bring up important moral issues.
We then looked at the limits of the market, and argued that Gauthier chooses not
to provide an account of what a commodity is. This has significant implications. Not
only do the limits of the market raise a moral question that needs to be discussed, but
they also have implications for the voluntariness of market exchange. This worry was
addressed by the third objection, which raised two points. The first point suggested that
the fairness of the initial conditions is not as straightforward as Gauthier deems it to be
and concluded that unfair starting points can lead to involuntary exchanges. The second
point argued that even if we grant the fairness that Gauthier ascribes to the initial
endowments, these conditions do not constrain market exchange in an appropriate way,
making it possible for the PCM to allow involuntary trade.
31
Gauthier furthermore disregards the possibility that the market may deliver
multiple Pareto optimal outcomes, and that the choice of an outcome may have
important moral implications. The objection from multiple equilibria targeted both the
uniqueness of Pareto optimal points, as well as the sufficiency of Pareto efficiency.
In Section 4, we questioned the necessity and sufficiency of Pareto optimality.
This worry was endorsed by the multiple equilibria, pecuniary externalities and
voluntary exchange objections. Two more arguments were then presented to illustrate
the necessity worry. We thus argued that the principle is not a requirement of rationality
and that it can tolerate significant inequalities. Even though it is not immediately
obvious why equality should matter, if Gauthier wants to disregard it, he needs to
provide a compelling argument of why inequality is not important. The discussion of
Section 4 thus challenged the overall function of Pareto optimality. Putting this worry
together with the objections of Section 3, we may conclude that the PCM is not a
morally free zone.
This paper did not only aim to show that Gauthier’s argument is problematic. It
had the broader purpose of illustrating how ethics inevitably comes into play in
economics, even in the realm of the PCM. Morality cannot be dismissed so easily and
moral constraints are necessary even in idealized conditions.
32
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