Rawls, Adam Smith, and an Argument From Complexity To Property-Owning Democracy

Abstract

This paper foregrounds one argument in Rawls's work that is crucial to his case for one, determinate, form of political economy: a property-owning democracy.1 Section one traces the evolution of this idea from the seminal work of Cambridge economist James Meade; section two demonstrates how a commitment to a property-owning democracy flows from Rawls's own principles; section three focuses on Rawls's striking critique of orthodox welfare state capitalism. This all sets the stage for an argument, presented in section four, from the complexity of economic interactions to the strategy of making markets fair in the only feasible way that they can be made fair, namely, by “patterning” their effects. Section five concludes by asking whether any scheme of this general type is a realistic form of utopianism for a society such as ours.Many early readers of A Theory of Justice took Rawls to be advocating a form of “Keynesian capitalist liberalism.”2 However, if we define a capitalist society as one where people who do not own capital work for wages paid to them by capitalists (those who exclusively hold property and other forms of capital), then Rawls's conception of a property-owning democracy would involve the rejection of capitalism. James Meade, the proximate influence on Rawls's ideas, was indeed a Keynesian. However, given the working definition of a capitalist society that I have noted, it seems that liberal Keynesianism can reasonably be characterized as anti-capitalist in both Meade's and Rawls's variants.Meade's conception of a property-owning democracy emerged when he sought new avenues for egalitarianism in Britain given that the achievements of the Attlee government of 1945 were receding into the past.3 His aim was to combine Keynesian demand management with the public ownership of natural monopolies and the institutions of a property-owning democracy. Meade further proposed educational reform, a publicly funded unit trust, and state investment funds to supply an unconditional basic income. In a break with the policies of the then Labour government, Meade believed that welfare state redistribution was a threat to overall economic efficiency. Furthermore, relying on trade unions to redress the balance between labour and capital generated constant inflationary pressure in a way that explained the perceived “failure” of post-war Keynesian demand management: [G]radually, as in our imperfectly competitive society separate groups learned to press their monopolistic bargaining powers to obtain each for itself the best possible share of the available income, the system broke down.4 Meade's new strategy for redressing the balance between labour and capital was to rely on market prices to protect individual liberties and economic efficiency, but to increase the bargaining strength of labour by giving workers capital: If private property were much more equally divided we should achieve the mixed citizen—both worker and property owner at the same time—to live in the ‘mixed economy’ of public and private enterprise. The ownership of private property could then fulfill its useful function of providing a basis for private enterprise and for individual security and independence without carrying with it the curse of social inequality as it now does.5 Rawls's adaptation of Meade's ideas contains a cleaner break with welfare state capitalism, particularly in his late, summative statement of his views in Justice as Fairness where welfare state capitalism is unequivocally described as unjust.6 In the first edition of A Theory of Justice Rawls stated that: The aim of the branches of government is to establish a democratic regime in which land and capital are widely though not presumably equally held. Society is not so divided that one small sector controls the preponderance of productive resources.7 The branches of government dealing with the economy are the Allocative branch that deals with externalities, competition, and anti-trust. The Stabilisation branch is the most Keynesian branch of government, concerned with demand management and full employment. The Transfer Branch ensures the payment of a decent social minimum compatible with economic efficiency overall, via a negative income tax. Finally, the Distributive Branch raises money for transfer and for the regulation of the top end of distributions via a flat rate expenditure tax and the imposition of inheritance tax.The upshot, then, is this: in Rawls's ideal property-owning democracy, markets operate in a context structured pervasively by fairness. The state intervenes not only to supply public goods and to counter negative externalities, but also to impose that which Rawls called “adjusted procedural justice.” Some effects are the unintended outcomes of intended behaviour; the “invisible hand” part of Rawls's view is that the market, of its nature, decentralises economic power and protects freedom of occupational choice. It does the former by protecting free association and free equality of opportunity and does the latter by giving rise to differential earnings.8The main difference between Rawls's and Meade's version of property-owning democracy, then, concerns the strategic role of progressive taxation. In the first edition of A Theory of Justice, Rawls states that steeply progressive taxes may very well be justified “given the injustice of existing institutions.”9 But in ideal theory the role of progressive taxation is minimal. Equally striking is the residual “invisible hand” role, in both Meade's and Rawls's ideal, played by markets. This is an important point to which I will return below. In order to explain why progressive taxation plays such a marginal role in the ideally just society we need a better grasp on how a property-owning democracy is justified by Rawls's principles interpreted as working together as an interlocking group.Which of Rawls's principles make the case for a property-owning democracy? All of them, but in different ways. One of the most interesting aspects of Justice as Fairness is that in his comparison of a property-owning democracy and welfare state capitalism, to the detriment of the latter, Rawls interprets the build up of private concentrations of wealth permitted in welfare state capitalism as a potential threat to basic liberty. In his earlier work, Rawls had indeed conceded that on any view that has permissible inequality, the equal basic liberties would be of different worth to different people. But that thought was not troubling if people had a broadly comparable fair value in their political liberties: their ability to hold office and to participate, broadly, in the political determination of office. The political liberties, here, are the gatekeeper for the liberties as a whole.10 Martin O'Neill has objected that this argument is overdone: there are a variety of insulation strategies that a liberal democracy can pursue that can prevent accumulations of private wealth influencing the political process. So if Rawls objects to welfare state capitalism not because of bad effects that it brings about directly, but on the grounds of a general exposure to a political risk that it does not prevent, that part of his argument is implausible.11This is not the place to discuss my disagreement with O'Neill in any detail, but in fact I think that Rawls was not only right to emphasise this argument, but also that he needed to do more within the ambit of his own theory to address it.12 The measures he actually suggests to protect the fair value of the political liberties are disappointingly thin. My answer, unsurprisingly, is that Rawls is here demonstrating that his first principle of equal basic liberty, if it is to be implemented in conjunction with the fair value proviso for the political liberties, demands implementation in a property-owning democracy. The latter is the only way to prevent the concentration of private wealth that will lead to illegitimate interference with the political process.13What of the first part of the second principle, governing equality of opportunity? Here the case for a property-owning democracy is even clearer when one notes that “property” in this phrase is standing in for capital as a whole, and human capital counts as a form of capital. Fair equality of opportunity requires an adequately funded and free public education system that brings everyone's marketable talents up to their full potential, given that education is a public good not likely to be promoted in an unconstrained capitalist market. This measure, if fully implemented, would have a transformatory effect on the labour market by substantially increasing the supply of qualified labour, thus reducing the unearned rents currently accruing to the limited supply of labour for particular occupations.14I think it is important to bear in mind that this restructuring of the labour market by the full implementation of measures genuinely designed to protect the fair value of the political liberties, liberty as a whole, and the fair equality of opportunity forms the context for the introduction of the difference principle.15 The distinctive way in which Rawls makes the labour market fair, namely, by structuring the context in which it operates in order to pattern its effects has been very insightfully highlighted by Paul Smith: The idea that the equalization of property ownership would transform the labour market, by equalizing bargaining power and eliminating the economic coercion to accept drudge jobs at low pay and thus forcing employers to make all jobs attractive, all things considered, is crucial to Rawls's idea that, in a competitive labour market located in a just basic structure, income inequalities would tend just to compensate the costs of different jobs, that is, tend to equality, all things considered.16 Smith believes that this explains some of the distinctive features of Rawls's egalitarian strategy: Economic equalization is more likely and reliably to be effected, as Rawls thinks, by institutions and policies that equalize bargaining power than by an egalitarian ethos restraining the exercise of unequal bargaining power (and egalitarian institutions and their distributional results are what, if anything, could produce an egalitarian ethos).17 I will say more about this Rawlsian strategy and its underlying rationale below. But the basic idea is to structure the labour market so that what looks like the introduction of special incentives under the difference principle works under a set of macro-economic arrangements that make such incentives tend to be merely compensatory.18 This is crucial to any response to the concern that introducing such incentives encourages motivations within individuals that run counter to justice and lead to Rawls's theory as a whole becoming unstable.19This takes me back to my original point about the lexical ordering of Rawls's principles; the case for a property-owning democracy is over-determined. I would argue that it is required directly by the first principle, but, even if it were not and it only arrived on the scene with the principle of fair equality of opportunity, these two prior principles would be threatened by an unconstrained difference principle that did not operate in a context structured by the dispersion of capital implemented by a property-owning democracy. That is why, in spite of G. A. Cohen's disdain for the traditional Marxist argument that liberalism guarantees only a formal equality that is then undermined by substantial material inequalities, his own critique of Rawlsian incentives can naturally be extended in that way.20 The introduction of the difference principle would rebound to undermine the first principle and the complementary “fair value proviso” for the basic liberties. That is why, in order to resist Cohen's well-known critique of Rawls, we ought to see all three principles as operating as a connected package, as being mutually reinforcing, and making an over-determined case for a property-owning democracy.So much, then, for the positive case for a property-owning democracy from within Rawls's own ideas. But was he right? Was Rawls right, in particular, about the normative superiority of a property-owning democracy to the welfare state capitalism with which we are most familiar?Rawls's critique of welfare state capitalism runs as follows: Welfare-state capitalism … rejects the fair value of the political liberties, and while it has some concern for equality of opportunity, the policies necessary to achieve that are not followed. It permits very large inequalities in the ownership of real property (productive assets and natural resources) so that the control of the economy and much of political life rests in few hands. And although, as the name “welfare-state capitalism” suggests, welfare provisions may be quite generous and guarantee a decent social minimum covering the basic needs, a principle of reciprocity to regulate economic and social inequalities is not recognized.21 I think this passage contains an interesting mix of normative claims and a critique of existing social arrangements. The normative issue highlights the ambivalence of the republican values that underpin the idea of a property-owning democracy which have, surprisingly, made it attractive across the whole range of the political spectrum from conservatism to socialism.22Underpinning the idea of a property-owning democracy is a republican connection between the holding of private property, in the specific form of capital, and virtue. Because the connection here is vague, it has been left open to various different interpretations, and these help to classify the “Left wing” and “Right wing” appropriations of the ideal of property-owning discourse. Aristotle's view was that the secure holding of private property underpinned the virtue of self-sufficiency. Throughout the history of political philosophy some traditions have justified private property via its connection to personal flourishing, but in the specific case of holdings of capital the connection is, rather, with security of status and the qualities of mind that that security of status, in turn, permits. That aspect of the ideal clearly extends through to Meade and to Rawls. One aspect of “security” that is particularly worthy of note is not simply the positive benefit to the worst off involved in holding property, but also the security that it affords them in protection from the debt that is a standing risk for those wholly dependent on income. In our own, far from Rawlsian, societies it is the worst off who are disproportionately vulnerable to chronic debt at punitive interest rates. The worst off, here, include not just those receiving welfare payments, but also the “working poor.” As James Baldwin famously remarked, “anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.”This is a case where the difference between actual world and ideal world theorizing is salient. One line of criticism of welfare state capitalism is that it encourages long-term welfare dependency and the formation of a welfare underclass. That critique seems harsh in a currently existing, unjust, society where those who are worst off, and receiving benefits, are usually in that position through no fault of their own. Given that these people are without fault, it is harsh to impose workfare regimes justified by the fact that long-term welfare dependency leads to de-skilling and social exclusion. However, those sympathetic to Rawls's views take it that the proper object of comparison is a just society that has implemented his principles in the form of a property-owning democracy. Above the level of the payment of the social minimum required solely to make a citizen a fit subject of distributive justice at all, what role is there for welfare state re-distribution in such an arrangement? Rawls sees none other than social security in its core sense of providing security. He believed that there was no intrinsic good to welfare state arrangements as such and that the wider context in which they operate is unjust because it permits excessive concentrations of wealth in private hands. A property-owning democracy, on the other hand, engages in the pre-emptive dispersal of such concentrations of wealth just as republican political economies aim to do.23Welfare state capitalism permits an unjust context and, I would add, a politically dangerous one. There are clearly many ways in which a society might refuse to make a democratic transition to a society that is just by Rawls's lights. But I think Rawls is right to worry about a society containing an unholy electoral alliance between the very wealthy, and a larger group of the comfortably well off, who take their consciences to be eased by the existence of widespread, and even well funded, welfare state provisions. Rawls's ideal of a society of free and equal citizens is not compatible with the existence of a multi-generation underclass of marginalized and excluded citizens who are not contributing members of any co-operative scheme for mutual advantage, nor likely ever to be so, even if they are recipients of a decent social minimum. This is Rawls's charge that welfare state capitalism involves the “neglect of a principle of reciprocity.”24 The worst off under welfare state capitalism live in a society that is both structurally unjust and structurally unlikely ever to become just via any feasible democratic process.I would like to take one step back from Rawls's specific arguments to focus on an issue of argument strategy. There is a very interesting strategy in Rawls that does not focus on a property-owning democracy in particular, but on a general way of implementing justice that is going to lead to a property-owning democracy, or something very much like it. What I have in mind are those Rawlsian arguments that infer from the scale and complexity of a modern economy that the implementation of principles of justice can realistically work only by structuring the context in which market transactions occur so as to impose a pattern on their effects.In Justice As Fairness Rawls contrasts his own “Ideal Social Process View” with a libertarian “Ideal Historical Process View.”25 Views of the latter general kind set up fair initial conditions, and rules for fair individual contracts, and assume that all outcomes over the long run are thereby made fair.26 By contrast, Rawls argues that this view neglects the background conditions to individual agreements that may seem fair, but which are actually undermined by concentrations of wealth that are “likely” to undermine “fair equality of opportunity, the fair value of the political liberties, and so on.”27 That is why, in order to “preserve these conditions,” we appeal to “pure procedural background justice.”28 This characterises an “Ideal Social Process View” of which Rawls claims justice as fairness is one version: Justice as fairness focuses first on the basic structure and on the regulations required to maintain background justice over time for all persons equally … we rely on an institutional division of labor between principles required to preserve background justice and principles that apply directly to particular transactions between individuals and associations. Once this division of labor is set up, individuals and associations are then left free to advance their (permissible) ends within the framework of the basic structure, secure in the knowledge that elsewhere in the social system the regulations necessary to preserve background justice are in force.29 There is a deeper point about complexity underpinning this argument: I take it Rawls is implying we do not face a realistic choice between, on the one hand, re-structuring the context in which a market operates in order to make its effects fair, and the libertarian examination of each transaction in a market one at a time to reach the same result. Our choice is a forced one: libertarianism faces an insuperable epistemic obstacle.Geoffrey Brennan has recently argued that Adam Smith was right to identify the value created by exchange as generated by the underlying specialization of economic roles in society that exchange makes possible.30 This specialization, however, ineluctably enmeshes any individual in a highly complex network of mutual dependence. Smith himself describes the network of relations in which a person stands in economic society as “exceed[-ing] all computation.”31 Economic society, a “co-operative venture for mutual advantage,” is best explained as grounded in the specialization of roles that leads both to increased productivity and in progressive returns to scale. Smith also takes the differential talents and abilities involved in this system as endogenous: products of education and training.32The normative consequences that Brennan infers from Smith's ideas are that it is impossible to isolate individual productive contributions. The income that you derive from marketing your socialized talents is an output from a ramified network of complex social dependencies. He endorses Elizabeth Anderson's remark that “every product of the economy is jointly produced by everyone working together.”33 The problems for an alternative, libertarian, outlook that Brennan envisages are tracking through the voluntary consent of everyone involved in a transaction that is simply a node in a network of dependence.34 This line of argument seems to me supportive of the particular form that Rawls's egalitarian strategy takes: it is simply not feasible to regulate individual market transactions because the very idea of an individual market transaction is a false abstraction. That is why Rawls believed that the only way to make a market fair is to make its effects fair. You achieve that goal by structuring the context in which that market operates to pattern its consequences.35 That is precisely how a property-owning democracy works.I think a misunderstanding of this aspect of Rawls's overall strategy lies behind G. A. Cohen's critique of Rawlsian special incentives to which I have already adverted.36 Cohen takes this strategy to make Rawls a latter day Mandeville who, in his notorious ‘Fable of Bees,’ seemed to imply that a commercially successful society that brought the greatest collective benefit to all would do so as the unintended collective effect of intentional behaviour by individuals that was greedy and selfish. I think that is a major interpretative mistake if put forward as an interpretation of Rawls: the point is that if this macro-level restructuring of the market is the only feasible way to be an egalitarian then there is no feasible alternative way to apply a conception of justice as fairness. Individuals willingly participate in a political economy structured in this way and their motivations in marketing their labour presuppose this commitment to justice and do not discount it.37 That is reflected in the phrase in the quotation from Rawls where he notes that individuals are left free to pursue their permissible ends within a just structure.This also leads on to another major point of convergence between Rawls and Smith, namely, their treatment of externalities. Markets can have positive externalities that are not intended by any participant in the market. I use the phrase “invisible hand” with caution given neo-liberal exploitation of Smith's use of this phrase that is misleading taken out of context. But Rawls, like Smith, clearly believes that markets involve a mix of externalities, positive and negative, some intended, some not. In particular Rawls sees a connection between his first principle guaranteeing the basic liberties, plus equality of opportunity, and the operation of a suitably regulated market.I think this point is important as it has a bearing on the choice between a property-owning democracy and a (liberal) market socialism. Rawls documented his own interest in Mill's ideas about political economy and, in particular, Mill's sympathy towards an economy of worker-owned firms. One of the major choice points in evaluating Rawls's choice between property-owning democracy and liberal socialism is whether the latter is superior to a property-owning democracy as it offers greater democratic control over workplaces. Several critics of Rawls's proposal for a property-owning democracy focus on this point as decisively favouring a liberal socialist regime. Rawls was sympathetic to Mill's idea that there was an educative function to exercising civic virtue in the workplace and the spread of the democratic ideal into a place where, for good or ill, we spend most of our lives.This line of argument seems to me flawed. Rawls is quite right to ask the question of why, if Mill was right, an economy ought not to be made up entirely of such firms given that they are such attractive places to work. The answer is to be found in the connection that Rawls makes between the regime of liberty guaranteed by his first principle and market externalities. It seems to me that Krouse and Macpherson are also correct that, if worker owned firms have positive externalities for society as a whole, there is a rationale for giving them tax breaks to encourage their further development and spread beyond the margins of a modern economy.38However, they were equally correct to emphasise that given competitive pressures and a regime of liberty, we can expect that some people will trade democratic control of their workplace for other benefits. Given that Rawls is a political liberal with sympathies for the Roman strand of republicanism (that Rawls calls “civic humanism”) then he is opposed to the idea that political participation is itself a privileged part of the good life.39 People do not have to lead lives in which political participation is one of their ends; they simply have to give their role as citizen a certain kind of priority when it comes to matters of public reason.On this view, it does not matter, then, if a person works in a workplace that does not encourage democratic participation provided there is adequate compensation in the wider context of society as a whole. Clearly, neither the republican nor the political liberal wants people to work in workplaces that degrade their capacity for civic virtue, but it is not clear that a mixed economy of both worker managed and non-worker managed firms need have this result. Furthermore, there is another unintended externality in a property-owning democracy noted by Paul Smith, namely, that employers are going to have to compete more strongly for employees given the increased supply of talented labour and the flattening out of incentives. Potential employees in a property-owning democracy will not be attracted on to the market by drudge jobs, and as part of making jobs attractive workplaces will have to increase respect for autonomous decision making at work or make adequate financial compensations if they do not.The connection that Rawls makes between a regime of liberty and the market via externalities explains why, as Krouse and Macpherson predict, we can expect a property-owning democracy to contain a mixture of firms of both kinds. I am not appealing here to competitive pressures as Rawls accepts Mill's argument that a society as a whole could become a “stationary society” and not solely concerned with generation upon generation of capital accumulation. Under a regime of liberty we can expect people to trade other values for the value of democratic control of his or her workplace. Doing so does not, in my view, violate any of the norms of either political liberalism or civic republicanism. People do not want political participation all of the time, nor even democratic control of where they work. If they elect to trade this value away, this is not to say that it is not a value, but that the regime of liberty established by Rawls's first principle permits them to do so. There need be no overall dwindling of the stock of civic virtue if it is exercised elsewhere, notably in schools, civil society, and associational life more generally.Not only is this issue of worker ownership not a decisive choice point between a property-owning democracy and market socialism, it also seems to me a point in favour of property-owning democracy. This is because the secure control over capital given to each citizen in the latter might encourage people to take more risks in where they choose to work and, with their dependence on income from labour reduced, more likely to elect to work in a firm that gives them greater democratic control.40I would like to conclude by considering one important objection to the idea of property-owning democracy and a positive proposal as a remedy for it. The objection is that since, realistically, all that can be meant by an expanded property-owning democracy is either giving people a stake in owning their own housing or owning more shares, we are simply exposing everyone to the risks of the next financial crisis. It is salutary to note that the current financial crisis originated in politically motivated proposals to extend home ownership to those with poor credit ratings, in other words, a failed attempt at wider capitalisation. The problem, then, is this: capitalizing every citizen simply increases everyone's exposure to the volatility of the stock market.The first point to make is that this view significantly underestimates the role played in a property-owning democracy by human capital. It ignores the way in which the operation of the principle of equality of opportunity requires the development of high levels of educated skills. So a property-owning democracy is not just about home ownership and share ownership. But, even if it were, there is the question of whether the proposal to implement a property-owning democracy just exposes all citizens to wider risk and, indeed, to the cyclical risks of unrestricted capitalism.Part of the answer lies in that very word “unrestricted;” Rawls's Allocation department is in the regulatory business and, since we are working here in ideal theory, it will be free from the pressures generated on the politics of regulation from the very concentrations of wealth that a property owning democracy seeks to pre-empt.41 The role played by a failure of regulation in the recent financial crisis is a documented fact. The next response to this genuine concern is that part of Meade's proposal was a publicly owned unit trust that spread share ownership across the whole of the stock market thus affording a degree of protection from its inherent risks.42 However, my main response is simply that it is not clear who is going to do any better in hedging against capital volatility and that most of us are in this position already. Gar Alperovitz notes the large scale of many of the public employee pension funds in the USA, notably CALPERS, and Meade's proposal bears a striking similarity to how the capital assets of some of us are already being managed and hedged against risk.43 In fact, I think focusing on pension provision is the most realistic way to take steps to make a property-owning democracy a reality.I would like to conclude with a positive proposal, aimed very much at the real world that would take the first steps towards a property-owning democracy. The United Kingdom saw some tentative steps in this direction with the introduction of the Savings Gateway and the Child Trust Fund, but both of these were abolished in 2010. My proposal is much more ambitious and comparable to Ackerman and Alstott's radical proposal for a no-strings payment of $80,000 to every eighteen year old.44 My proposal is similar, but in one way more restrictive and in another way more practicably fundable. A matured Individual Development Account in the USA is a way of “nudging” people to save by matching their savings with a contribution from a mixture of government, charity, and private money. Interestingly, when the account matures its uses are restricted to pursuing post-secondary education, purchasing a first home, or starting or expanding a small business.In looking for a capital holding that is inalienable I think a good place to start is with the pension provision in most countries that do not allow you to sell your pension on the open market before maturity. The first step is to make a “public option” state pension legally compulsory for all. Most of us already hold an inalienable capital holding, invested for us by various unit trusts operated by pensions schemes.45 This capital is, however, locked up until after retirement. My proposal is simply to remove the compulsory retirement age as part of a plan to upfront the potential benefits of a property-owning democracy for all. So, at age 18, the state would give every citizen a capital advance on their state pension corresponding to Ackerman and Alstott's $80,000. This capital advance, however, like a matured IDA would take the form of vouchers only usable for limited purposes. These might include, for example, paying education fees, funding enterprise start-ups, the purchase of a first property or, as a back up, re-investment in a standard annuity. The catch is that while Ackerman and Alstott simply require you to repay the money at death, this up front capitalization on a future asset will see that future asset reduced by an inflation-adjusted amount. In my proposal, you are being up fronted part of your own underlying pension asset in the belief that you will be adequately compensated by the increased security and opportunities it brings you over the course of your lifetime before you elect to receive your pension. The cautious can simply convert their capital vouchers straight back in to an investment annuity, either partly, or in full. The less cautious will have all the benefits of a capital holding at a time when it can still make a difference to whether they ever start a business or own property. (It will also afford them a degree of protection from unserviceable debt.) In combination with the full implementation of Rawls's principles, this measure will both make a property-owning democracy a practical reality and also address the pressing question of how a measure like this is to be funded.