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Utilitarian Marginalism (Nozick, Rawls, Justice, and Welfare)

Author(s): Abba P. Lerner

Source: Eastern Economic Journal, Vol. 4, No. 1, Justice, Nozick, and Rawls: A Symposium (Jan.,
1978), pp. 51-65
Published by: Palgrave Macmillan Journals
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Utilitarian Marginalism
(Nozick, Rawls, Justice, and Welfare)
Abba P. Lerner*

One purpose of this article is to show the division, or sharing, of the social income among
relationship of Robert Nozick's "Entitlement" the different members of society, and
and John Rawls' "Justice" to the utilitarian productive efficiency in the allocation of the
marginalism that derives from the classical different productive resources among their dif
economic approach to the distribution of ferent uses and of the different consumer goods
income.1 Nozick and Rawls claim to derive among the different consumers of the incomes
guides for income distribution from general so divided, and their relation to the capitalistic
principles of justice. But general rules for the and socialistic principles of economic organiza
distribution of income cannot be derived from tion.
abstract principles of justice because "justice" More logical terms would be "division" of the
has no objective meaning. For any individual, social income and "allocation" of the different
justice is what he considers fitting, or just goods and services, but the traditional separa
fitting the situation. It has been used to defend tion of economics into "production" and
the traditional, like slavery; the inevitable or "distribution" is far too well established. We
natural, like death and genetic differences; the shall occasionally, however, find it convenient
expected, like hanging for stealing a sheep; the to speak of "allocative" efficiency to refer both
unexpected, like catastrophes called "acts of to the different factors of production and the
God"; and the satisfaction of revenge, some different consumption goods and services.
times called just punishment or punishment to
fit the crime. It is hard to think of any I. "Entitlement"
inhumanity?one is tempted to say injustice?
that has not at some time been defended as Nozick claims that his theory of "Entitle
ment" is rooted in "the laws of nature." In his
Demanded by Justice. I shall try to show that
"state of nature" individuals have perfect
Nozick's and Rawls' suggestions for the
desirable distribution of income are in fact freedom to order their actions and dispose of
their possessions as they think fit within the
based fundamentally, if not correctly, on bounds of the laws of nature. This freedom
nothing but (utilitarian) claims that they would
requires the state to be minimal, its function
yield higher levels of satisfaction.
limited to the provision of a justice system for
A second purpose of this article is to examine
the enforcement of contracts and the protection
the interdependence between two aspects of
of its citizens against violence, theft, and fraud.
social efficiency?distributive efficiency in the
The entitlement theory states that a person is
Queens College, CUNY and FSU. justly entitled to any holdings bestowed on him
^he references are to Robert Nozick, Anarchy, by nature or justly acquired by inheritance, or
State and Utopia (New York: Basic Books, 1974) and
John Rawls, A Theory of Justice (Cambridge, Mass.: by free exchange for justly acquired holdings,
Harvard, 1971). i.e., when their acquisition has not violated any


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individual's natural rights. If any natural rights taken, in that it can only benefit the parties to
have been violated in the acquisition or the it so that the changes brought about may be
transfer of holdings, such injustice should be called just, he goes on to attribute this virtue of
rectified. Thus, whether a distribution is just the change to the total situation after the
depends on how it came about. change?to the new distribution of income and
Nozick advances the usual economic argu wealth-and declares that too to be just.
ments about the advantages of the division of This assumes that the distribution was a just
labor, specialization, comparative advantage, distribution before the exchange, and therefore
and free exchange. Cooperation comes about could not be improved upon (made more just?)
through contract and exchange among but only worsened by any redistribution. The
individuals. Since the resulting distribution of application of this argument must ultimately
income and wealth depends on the exchange credit "nature" with providing the initial
ratios or prices at which the exchanges are inheritances in some just manner. But we have
made, justice depends on the prices being no reason to presume that "nature" somehow
"fair." The prices in free exchange are judged knows what it is doing and therefore distributes
as "fair" because people freely choose to make initial endowments of property and of abilities
exchanges, and to transfer entitlements, with according to some concept of justice. Professor
no restrictions on the freedom to trade with Israel M. Kirzner (in his article in this volume
any other party on mutually acceptable terms. "Entrepreneurship, Entitlement, and Economic
There can be no serious objection to Nozick Justice") is more consistent than Nozick in
calling free exchange, and its effects, "just." attributing the virtues of an act of free exchange
Nobody is harmed by a free exchange and so to the distribution of income and wealth in a
there is at least nothing "unjust" about it. On regime of free exchange. He seems to defend
the other hand, redistribution of income or the distribution "brought about" by free ex
wealth by the government (in taxing some to change (i.e., in existence after some free ex
provide income or services to others) is declared change) as just, and therefore not to be
by Nozick to be coercive and therefore disturbed by any redistribution, even if the
"unjust." Nozick's "justice" therefore requires previous distribution is known to have been
that redistributive actions by the government unjust.
be limited to what cannot be avoided in Nozick's attribution of justice to the distribu
financing the justice system. tion existing in a free exchange economy seems
But although the word "justice" is not very to be based on a misunderstanding of the
meaningful to me (and I remember that for a significance of "marginal product" for
large part, perhaps a majority, of the world's economics. There were one or two economists
population free exchange is criminal rather than who claimed that paying a factor its (his?)
just) I am in agreement with the substance of marginal product is "just" because that is "what
Nozick's argument. The situation after a free he (it?) produces." But almost all economists
exchange is preferable (on utilitarian grounds) reject this argument. Accepting it would indeed
to the situation before the exchange. There is a made them the "apologists for capitalism" that
net gain. Some have benefited from the Marxists accuse them of being. In this context
exchange and none have been harmed. Nozick, paying "what he produces" means paying a
however, draws a quite different conclusion. person the value of the marginal product, either
His conclusion is that the set of holdings after of his own personal activity or of the land or
the exchange is a just one. In his enthusiasm capital goods which he happens to own. There
for the net gains from exchanges freely under is certainly not much to the argument that a

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person deserves (is "entitled" to) what is the regime of free exchange and free enterprise for
result of his good fortune in inheriting these a generation or two.
either legally or genetically. The proposition is
an empty one from which no moral conclusion II. Maximin
can be drawn. Nozick's attempts to bolster the Rawls comes very much closer to an
proposition by reference to natural law do not
economist's treatment of the subject. In his
make it any less vacuous.
"difference principle" he implicitly recognizes
There is, indeed, a powerful social reason
the emptiness of "justice" and, by the device of
why the price paid for the use of a factor
redefinition, replaces it by "fairness." His basic
should be equal to the value of its marginal
principle is "Justice as Fairness." Fairness is the
product. But it is based not on justice, and not
attribute of judgments made with no special
even on any concern at all as to who is going
preference for benefits to the judge himself.
to receive that payment, as we shall see below. It is the absence of bias. Rawls dramatizes this
Its purpose is to serve the productive (allocative)
most strikingly by his use of the concept of the
efficiency of the economy by getting the factor
"original position." In the imagined "original
to go to that use where the value of the marginal
position" one is asked to choose between
product is greatest, and not to a less important
possible worlds into which to be born without
use where the value of its marginal product is
knowing one's status, wealth, abilities,
preferences, or luck. There is no possibility of
The distribution of income and wealth is, of
distinguishing between oneself and others, and
course, affected by the degree of freedom of
consequently one can only choose in a
exchange, but it also depends on the distribu
completely impartial way. Other writers in this
tion before the exchange; and that is the result field have defined the word "moral" in the same
of history. History is also a part of nature.
way that Rawls defines "just," namely, as
And history is full of much that can certainly
unbiased or impartial. A "moral preference" is
not be called just. To take seriously Nozick's
thus a preference for what is good for people in
final principle that rectification is called for
general with no special consideration for what
where some injustice has been perpetrated, we
is good for oneself or one's friends.2
must look into all the bloodshed, the invasions,
I find myself in complete sympathy with
the massacres, the oppressions, the enslavements
Rawls' "moral" or "fair" approach to the
throughout the history and prehistory of man
problem of the distribution of income, but in
kind. We would find very little justice left in
applying it he makes the opposite error from
the distribution to be protected by the that of Nozick. Whereas Nozick claims too
minimalist state. Nozick's recommended
much for the benefits from the equalization of
"rectification" would call for just that kind of
relative marginal utilities by free exchange,
governmental intervention and redistribution
extending these virtues to whatever distribution
that he rejects as "coercion."
happens to exist (giving the credit to "nature"),
We could claim that free exchange will yield
a just distribution only by following Kirzner in 2Adam Smith defined moral rules of behavior as
completely disregarding both history and nature what would be recommended by an "impartially
sympathetic observer." Professor John C. Harsanyi
and "let the dead past bury its dead." This argues that "a value judgment would show the
would require us to believe that all the inequali required impersonality if the person who made the
judgement had to choose ... in complete ignorance of
ties of inheritance of property as well as of
what his own position (and the position of those near
human capacities would have been rendered to his heart) would be within the system." (Journal of
insignificant by the current benefits from a Political Economy, October, 1953: pgs. 434-435.)

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Rawls pays too little attention to the possibili This is only just (i.e., fair) because it brings the
ties of marginal adjustments. distribution closer to what would be chosen if
One of the functions of economists, and there were no bias, namely, what would be
indeed one of their persistent burdens, is to chosen in the "original position."
keep on reminding people that there are Rawls also says that the better off in society
degrees of almost everything. Thus, most make transfers to the worse off in order to gain
recently, public interest in the environment has and maintain their cooperation. This argument
raised a cry for the abolition of various kinds of can be turned around. One can just as logically
pollution, and economists have had to try to argue that the worse off give rewards to the
teach that there is an optimum degree of almost better off to induce them to cooperate and
every kind of pollution. And for such improved make the worse off not as badly off as they
adjustments we need the discrimination of otherwise might be. But this argument is not
marginal analysis. really basic to Rawls' model of the impartiality
Rawls distinguishes only between the "worst or morality of the choice in the "original
off" group in society and everybody else, giving position." It is, of course, a fact that there are
no indication of the probabilities of being in transfers from the rich to the poor in the actual
one or another group, or of the level of income world, but that is not because of a widespread
of the rest of the population and its distribution acceptance of Rawls' maximin principle. It is
among them. He naturally comes to the more due to the partial but very general
conclusion that anybody who is deciding into acceptance of the utilitarian arguments with the
which kind of world he would rather be born marginal analysis which Rawls plays down.
would protect himself by choosing that kind of It would seem that Rawls avoids marginal
world in which its worst off are not so badly analysis because of an over-reaction to the
off. It would, of course, be more desirable to Nozick type of error?his misuse of marginalism
be born into a world where one had a better to defend the final distribution of income in a
chance of being better off, or of being much competitive free exchange economy as morally
better off rather than not so much better off. justified?and he throws out the baby with the
But this marginal analysis is played down by bathwater. But by combining marginal analysis
Rawls, and in its absence any rational person, if and utilitarian theory with the principle of
he is forced to be "moral" or "just" (in the "fairness" (with or without the dramatic device
sense of "unbiased") by being put in the of the "original state") we can improve on
"original position," would indeed follow Rawls' Rawls' analysis even though in some cases we
"maximin" principle. He would maximize the get the same conclusions.
minimum income by choosing to be born into
that kind of world in which the worst off group
III. Distributional and Productive Efficiency
is better off than the worst off group in any
other of the possible worlds. In Bentham's utilitarianism, the general
Rawls views the initial or "natural" distribu satisfaction of the community is measured by
tion of material assets, as well as of natural the sum total of the individual satisfactions or
abilities, as "morally arbitrary," so that no utilities. It is democratic and egalitarian, each
person has a moral claim to any particular individual's satisfactions receiving equal weight.
product share. Those who would be better off Because of some philosophical difficulties in the
(if paid the value of the marginal product of meaning of total utility, some economists have
their work and of the material factors they instead spoken of maximizing average utility.
owned) should make transfers to the worse off. But this too involves adding the total utilities

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of individuals, and philosophical difficulties to the amount given to the other.) This is the
remain. It is possible to avoid all these difficul condition for the efficient distribution of
ties by speaking instead of marginal utility to income.
individuals from the consumption of goods and Distributional efficiency, the principle
services. To compare the marginal utilities of governing the efficient division of income
individuals we do not have to go into the much among the different individuals, is exactly
more troublesome issue of measuring, or even parallel to productive efficiency, the principle
estimating, any individual's total utility.3 governing the efficient allocation of resources
If a gain in utility by an individual to whom a among their different possible uses. That is
dollar of income is transferred is greater than obtained by shifting every resource from any
the loss of utility by the individual from whom point where the value of its marginal product is
the dollar is taken (i.e., the marginal utility of less to where it is greater. Only when these are
income is greater to the first individual than to equalized everywhere, and such further shifts
the second), then the shift of the dollar is an are therefore no longer possible, is the efficient
improvement because the gain is greater than allocation of resources achieved. The same is
the loss. If it is considered desirable to distrib true of the allocation of a consumer's income
ute a given total income most efficiently-to among the different consumption goods avail
provide a larger rather than a smaller marginal able to him. Its efficient allocation requires the
utility wherever possible?this objective is equalization of the marginal utilities (which are
achieved only by a distribution of income the marginal products) of his different
which makes all the marginal utilities of income expenditures on the different consumption
equal. (It has to be a given total income so that goods. This is included in our "productive
the amount of income taken from one is equal efficiency."

3 Having discovered that ordinal welfare functions ask how keenly I feel the total temperature of the
are sufficient for microeconomic welfare theory in water-whether my zero is Celsius' or Fahrenheit's or
explaining market behavior in terms of observed acts Kelvin's.
of choice that reveal individual preferences, economists The resistance to the comparison of marginal
have rejected cardinalism, which had been used to utilities is very strong, and it seems to rest on the
explain market behavior in terms of unobservable feeling that it is our duty to choose between ordinality
individual utilities (although it can also be used and cardinality, and while ordinality does not permit
exactly like ordinal utility). such comparisons, the more permissive cardinality is
Comparing the marginal utilities of income of an itself outlawed. But for the comparison of marginal
individual at different income levels (in discussing utilities, we do not have to assume full cardinality.
diminishing marginal utility of income), does not mean What we need is a less forbidding name for that part of
resorting to cardinality. Cardinality does imply the cardinality which is assumed in the comparison of
possibility of such comparisons, but the converse is marginal utilities. I find "marginalism" to be an
not true. It is true that if we could compare the adequate name, but that may be only because I was
marginal utilities throughout the whole possible range never properly trained in symbolic logic so that I am
of income, we would be able to reconstruct the whole not tempted to call this cardinality. That may also be
cardinal utility function and to measure the total why the argument as put forward by me in 1934 was
utility. But the comparison of total utilities does very slow of acceptance-even frowned upon as an
indeed suffer from the meaninglessness that has unfortunate flaw in my Economics of Control- while
improperly been attributed to all utility comparisons. Harsanyi's use of it in 1953 and 1957 was hailed by
The comparison of marginal utilities is not meaningless. Paul Samuelson as a "rehabilitation of cardinal utility"
The measurement of temperature has often been which constituted "a rare quantum-jump breakthrough
suggested as an analogy to the measurement of utility. in welfare economics." But it is not really a rehabilita
But I have never been accused of meaninglessness when tion of cardinal utility (even though Harsanyi himself
I said that I feel more keenly the difference between says he might as well call it that). It is a smaller jump,
60? and 65? in the swimming pool than that between and as such, even more to be admired as an important
65? and 70?. However, it does not make any sense to breakthrough.

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Allocative efficiency is reached automatically enjoy income would be such, as to make the
in a free competitive market. If any factor of marginal utility of income to all the different
production has marginal products of different individuals anything like equal. Equalization of
value in different uses, it would pay somebody the marginal utilities can therefore be achieved
to shift some of the factor from where the value only by transferences of income from those
of the marginal product is less to where it is with smaller marginal utilities of income to
greater. The difference would be a net gain or those with greater marginal utilities until the
profit. But the market does not in the same way marginal utilities had all become equal.
way equalize the marginal utility of income. In Some of such transferences are voluntary
a free competitive market it is the owner of gifts (charity) to those whose needs seem
every factor who is paid the value of the greater (i.e., who seem to have a greater
factor's marginal product. Each individual's marginal utility of income). These gifts
income is equal to the marginal product of each diminish the inequality but clearly they do not
factor multiplied by the number of units of that eliminate it. Further equalization of the
factor that he owns. His income is represented marginal utility of income can therefore come
by the area of the rectangle (OE) in the diagram. about only by government redistribution of
The height of the rectangle (SE) shows the price income?denounced by Nozick (and Kirzner) as
or pay per unit of the factor, while its length coercion and contrary to "justice" since it
(OS) shows the quantity he owns. There is no interferes with the complete liberty of the state
reason for assuming that the distribution of of nature.
ownership, and consequently of income, would We have considered these objections to at
be such, and that the capacity of individuals to tempts to combine distributive with allocative

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efficiency, and there are some more hurdles, but income (the marginal utility of income) is less if
I shall try to show that these can all be his original income is greater.4 (This can be
overcome. represented by a downward sloping curve of the
We have seen that distributive efficiency-the marginal utility of income.)
optimal division of income-is obtained only if The establishment of the principle of
the marginal utility of income is equal for all diminishing marginal utility of income is of
individuals. In trying to achieve this by crucial importance. If indeed consumers spend
re-distribution of income we immediately come their income in a way that maximizes their
up against a serious difficulty. There is no way satisfaction, the things bought give a greater
of discovering whether any individual's marginal satisfaction than the other things that could
utility of income is greater than, equal to, or have been bought instead with the same income,
less than, that of any other individual! Every but were not bought for this very reason. It
individual could declare that he has an therefore follows that if income were greater,
exceptionally high capacity for satisfaction and the additional things that would be bought
so the marginal utilities of income could be would be "next best"-the things that are
equalized only by giving him more income than rejected when incomes are smaller because they
anybody else; and there is no way of testing the give less satisfaction. And if income were
validity of such claims. greater still, even less satisfactory things would
be bought. The greater the income, the less
satisfactory are the additional things that remain
IV. Income Equalization-Maximizing
Probable Gain to be bought with the additional increase in
income. That is all that is meant by the
Nevertheless it is possible to redistribute in principle of diminishing marginal utility of
come so as to maximize the probable gain. The income.
probable gain from any redistribution is I further invoke three more assumptions
maximized by dividing the income equally. which somewhat complicate the issue and
This proposition rests on the following assump might seem to cast some doubt on the
tions: (1) other consumers besides me are principle of diminishing marginal utility of
capable of feeling satisfactions; (2) every indi income. I will show that even if these three
vidual gets more satisfaction from a larger additional assumptions are not warranted, the
income than from a smaller income; (3) when general conclusion still holds. Initially I assume
ever a consumer can choose among two or more further (5) that the different satisfactions
alternatives he chooses the one that yields the
greatest satisfaction; (4) the satisfactions 4 My initial statement on the principle of the
diminishing marginal utility of income appears in
experienced by different people are similar, so Abba P. Lerner, The Economics of Control (New
that it is not meaningless to say that the York: The Macmillan Company, 1944, Chapter 3).
satisfaction which one individual derives from In that work I discuss both distributive efficiency and
productive efficiency but I do not adequately
an additional unit of income is greater, or that it integrate them, leaving the implication that a com
is less than, the satisfaction that would be promise between two contradictory principles is re
derived from it by another individual. quired i.e., that both principles have to be com
promised. In the present article I argue that this is
From these assumptions (essentially, that not the case. It is possible for only distributive
others have feelings, and some rationality, like efficiency to have to give way, while productive
efficiency is untouched; the limitation to the full
me) it follows that the marginal utility of achievement of distributive efficiency is due not to the
income is diminishing. The extra satisfaction necessity of satisfying the basic condition for
the individual gets from a given increase in his productive efficiency, but to quite different forces.

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obtained by a person from the consumption of I shall now consider the complications
different goods are independent of the size of mentioned above. The argument for dimin
his income and therefore of the other goods ishing marginal utility of income holds strictly
consumed. Initially I assume (6) that the throughout every individual's whole income
experience of having a larger or smaller income range only on the assumption (assumption 5)
does not develop or dull a person's tastes or that the satisfactions than an individual derives
capacities for enjoying income. Initially I from the consumption of different goods are
assume (7) that an individual derives more independent of each other. If these utilities
satisfaction from an extra $1.00 of income for
have complementary relationships it is possible
himself than from an extra $1.00 of income for for the marginal utility of income to increase
anyone else. with increased income instead of diminishing.
Consider a transfer of income from a richer to
Items that are rejected and not bought at one
a poorer individual. If both individuals have income level may nevertheless be bought at a
the same overall capacity for deriving satisfac greater income not just because they are
tion from income (which would be represented "next best" although less satisfying than what
by identical downward sloping curves of the is bought at a lower income, but because other
marginal utility of income) such a transfer things are now being consumed by the individual
would yield a net gain. For in that case the and these increase the utility of the new items.
poorer individual has a higher marginal utility Complementarities can, however, be either
of income. (The identical marginal utility of positive or negative, and negative complemen
income curve is higher at the point corre tarity reinforces the principle of diminishing
sponding to the smaller income.) marginal utility of income. Only positive
Such overall equality of capacities for satis complementarity tends to mitigate, and may
faction cannot, however, be assumed to be occasionally even reverse, the diminishing
necessarily the case. The richer individual may marginal utility of income. It does this by
have either a greater or a smaller capacity than creating a kind of discontinuity which, if it is
the poorer one (a higher or a lower marginal powerful enough, can raise a "bump" on the
utility curve). If the poorer person has the marginal utility curve, possibly making a portion
greater capacity, the gain is increased on that of the curve slope upward with increasing
account. If the richer person has the greater income.
capacity, the gain is diminished on that ac But the "bump" always has a second side
count. It may even be converted into a loss. which, when the complementarity effect has
The possibility of an increase in gain offsets the been exhausted, must make the curve fall more
possibility of a diminution of gain since these than it rose (if it actually did rise). The marginal
are equally likely to occur in any particular utility of income will still be diminishing with
case. The net gain (which is a certainty in the the same average intensity but will be subject to
case of equal capacity) then becomes only a irregularities. The principle of diminishing
probable gain on account of the possible marginal utility therefore reduces to a proba
increase or diminution of the gain which arises bility. But this is all that we needed anyway.
with unequal capacities. Every transfer of A similar answer can be given to the objection
income from a richer to a poorer individual that many decisions are foolish or hasty or
therefore shows a probable gain. From this it based on insufficient or faulty information, so
follows that the rational procedure is to keep that they do not result in that expenditure
shifting from richer to poorer until the income being chosen which yields the greatest satis
differences have disappeared, i.e., to divide a faction. The results of such decisions are a
given total income equally. matter of luck or chance. But as long as a

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significant part of the decisions are based on that of the rich who are supposed to have
deliberate judgement and reliable information, acquired a greater sensitivity to income. Greater
our conclusion still holds. These decisions will sensitivity to diminutions of income would
lead to desired results more often than the merely lead to the conclusion that redistribu
opposite, and their results in any particular case tion should be gradual. It would still follow
will probably be preferable to the results of the from our analysis that no income above the
deliberately rejected choices, so that the results average should be increased and that no member
of every actual choice will still probably be of the new generation should be given an
preferred to the results of the rejected choices; income above the average, so that the acclimati
and that again is all that we need. zation to high income should not arise in the
Another problem arises if we relax assumption first place. But where it has arisen, the speed of
(6). The experience of having a larger income redistribution of income from rich to poor must
may develop a person's tastes and capacities for be limited to the rate of redistribution at which
enjoying income so that the marginal utility the harm by the change itself is just great
curves of rich people would be higher than enough, at the margin, to offset the gain from
those of poor people. An ideal distribution of the improvement in the distribution of income.
income would then give more to people who A more rapid rate of redistribution would do
have been richer. The converse of this too may more harm than good at the margin, while a less
be argued with about the same plausibility. A rapid rate of redistribution would mean the
person with high income gets used to luxuries abandonment of some benefit from improved
so that he hardly notices items that would give distribution that is greater than the harm that
a great thrill to a poor man unused to them. would be done by the greater rate of change.
This would reverse the first argument and A qualification might appear to be necessary
strengthen the case for equalizing incomes. for differences in income due to greater effort.
However even if the first consideration were When an individual applies himself more
known to outweigh the second, and even if of assiduously to his work this might be held to
the two arguments only the first were found to indicate that he has greater use or need for the
have validity, there would still be a probable extra income derived from the extra effort.
gain from an egalitarian division of income. Some might contend that such an individual
But this would now be true only in a longer should receive a larger income. This does not
run. If experience of higher income really had follow. A person works hard only when the
the effect of raising the curve of marginal wage plus the attractiveness of the work itself
utility of income, it would be best temporarily (or minus the irksomeness of the work), in
to leave more than the average of income with relation to the opportunity cost of the alterna
those whose levels of income has been higher. tive leisure forgone, is greater than for others.
This still does not alter our conclusion. It only But there is no more reason for believing that a
addresses itself to how rapid should be the person works harder because an additional
transition from a previous unequal to an ideal dollar is worth more to him than that he works
egalitarian distribution of income, and to the harder because the marginal disutility of work
importance of avoiding the establishment of or the marginal utility of leisure is less for him.
inequalities of income in the first place. We know only that these are less in relation to
Some might argue that a person feels a the marginal utility of consumption goods. But
greater increase in satisfaction from a given it is all of these marginal utilities combined that
income increment than he would feel from the constitute the marginal utility of income and
same-sized income decrement. But this comes there is no reason here for believing that that is
down to the same problem already considered? higher or lower than for others.

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Assumption (7) is that each individual derives Examples of this could be a condition of ab
more satisfaction from an increment to his own solute plenty (sometimes called "full com
income than from the same increment to the munism") where productivity (capitalist or
income of others. If the poor derive more socialist) has outstripped the desire for goods
satisfaction from seeing the splendors of the rich and services (perhaps as a result of a philosophy
increase by $1.00 than from the alleviation of of simpler living) or a condition of absolute
their own poverty by $1.00, our argument shortage of land, tools and materials to work
might be upset, but then they could, and with-as in a besieged fortress (or in other cases
would, donate some of their income to the rich of catastrophic overpopulation). We have never
until this were no longer the case. Conversely, experienced absolute plenty, when there would
the pain that even those who are not poor get be no distributive problem anyway, and in cases
from the existence of poverty, and the envy that of extreme shortages, when total income is more
the poor feel for the rich, would tend to or less given, income inequality has usually been
strengthen the argument for equality. diminished, in real terms, by egalitarian ra
Sometimes the spectacular expenditure of the tioning. This indicates a general recognition of
rich is identified with cultural values. Because the distributive efficiency of egalitarianism and
cultural values are relative within a society this its dominance where productive efficiency be
appears an extremely precarious thesis. In any comes unimportant.
event, our primary theorem remains intact. The (It is of interest to note that on the assump
rule for the most efficient distribution of any tion of a given total income to be shared, the
given income is to distribute it equally. maximin principle also yields the same result as
the utilitarian marginal analysis. This is because
V. Material Incentives the average income is then also the maximin
It might seem that this conclusion, no matter But we live in a world where productive ef
how inescapable it is to all but those who have ficiency is of the utmost importance. For the
the arrogance to deny our basic assumptions richest countries it can be argued that greater
that others, besides them, have feelings and productivity alone would merely raise "keeping
some rationality, is rendered practically worth up with the Joneses" to a higher intensity while
less by its complete dependence on the as speeding up the depletion of the planet's natural
sumption of a given income, i.e., that the resources, and that only an increase in distribu
amount of income to be distributed is inde tive efficiency could improve the condition of
pendent of how it is distributed. But there man. But for most of the world even the com
would certainly be less income produced if plete equalization of income would merely
there were no material incentives for work and spread the misery from the vast majority to all.
for efficiency. Payment for work equal to its Only an increase in output (per capita, of
marginal productivity is also a very important course) could bring significant relief.
part of the general rule for productive Since material incentives are necessary to in
efficiency?that the price paid for every factor duce productive efficiency to increase the out
of production should be equal to its marginal put?the income available to be distributed?the
product. Thus, there appears to be a funda rule for the efficient distribution of a given in
mental conflict between distributive and come seems supremely irrelevant.
productive efficiency that would be absent These issues present no problem for Nozick.
only in extreme situations where the value of His assumption of the justice of the distribution
the marginal product of all kinds of human of holdings in a regime of free exchange re
effort has fallen to zero. moves any concern for efficiency of distribu

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tion, while his implied assumption that "nature" out reducing anyone else's income must be ac
continually updates the laws that define prop cepted as a pure gain. Utilitarian marginalism
erty rights so as to eliminate all externalities, here leads to the rule that the price paid for
thus maintaining productive efficiency through anybody's extra (marginal) effort should be
the automatic competitive equalization of the equal to the extra (marginal) product, bringing
prices of all factors to the changing value of us back to the principle of allocative efficiency
their marginal social products. -the efficient allocation of time between work
Rawls, however, recognizing that changes in and leisure. The marginal effort will then be
property rights and other social arrangements undertaken by everybody as long as this is bene
affect both the size and the distribution of the ficial to him, while there is just as much product
social income, is constrained by his maximin left for everybody else. There is a net gain.
principle to approve of changes which increase Some are better off and none are worse off,
output only if they improve the condition of even if none of those in the worse off group are
the "worst off group (or in case of a tie, of the among the beneficiaries.
next-worst-off group). Utilitarian marginalism If, as seems very likely, an increase in total
also recognizes that differences in property income and wealth eases transfers from rich to
rights and other social arrangements affect the poor and there is an increase in such transfers,
size and distributions of the social income, but we have an improvement in both productive
it leads to Rawls' maximin conclusion only on and distributive efficiency. But is it possible to
the assumption of a universal absolute and over work more systematically toward achieving
riding risk aversion. Absolute risk aversion both types of efficiency?
would still lead a perfectly unbiased person to
declare that he would have chosen the maximin
VI. Unnecessary Payments
world to be born in. But it would not make it
moral for him to choose that for others unless This appears to involve a fundamental conflict
he could assume that every one else suffers of mutually inconsistent principles. The rule
from the same absolute risk aversion. Further called for by the principle of distributive effi
more, it raises the doubly difficult philosophical ciency stands squarely on a given or fixed in
question whether the unborn judge in the "orig come to be distributed. The rule called for by
inal position" should be supposed to know the principle of productive efficiency rests
what his risk aversion or risk preference is (or roundly on an augmentable income, maximised
would be?). by paying the worker the value of his marginal
Rawls claims, however, that he does not base product. How can this circle be squared?
his maximin principle on marginal analysis and The circle can be squared to the degree that
absolute risk aversion but on everybody, includ some of the marginal product need not be paid.
ing those in the "worst off group, having That part can then be treated as belonging to a
some "common property rights" in whatever given "surplus" which can be subjected to the
can be produced in society, and so also in any distributive efficiency rule of equal distribution.
increases on output. But this, if I understand it (This use of the surplus, though possible, is of
correctly, is a complete departure from his course not necessary. Surplus has been ap
basic idea of Justice as Fairness, as guaranteed propriated throughout the ages for all sorts of
by the "original position," and is close to some other purposes.)
Nozick-like notion of "entitlement." Until recently, it was not uncommon for
Since the equal income theorem applies only economists to argue that income taxes and in
to the distribution of a given total income, any heritance taxes could improve distribution with
thing which increases somebody's income with out interfering with production. As long as the

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marginal tax is less than 100%, it was argued, not apply to marginal production, the effect is
the point of maximum profit is not moved, and again purely distributional. It has no effect on
production is not affected. This has now gone productive efficiency. Farmers in Israel (and
out of fashion. Income is not pure profit and elsewhere) are given a certain amount of water
income taxes reduce the incentive to earn in at much below cost. But as long as this supply
come. Only lump-sum taxes are seen as neu is not enough fully to satisfy the demand, and
tral, and they are not practical and are con they buy additional water (at a price that covers
sidered a theoretical curiosum. Also half the marginal cost) up to the point where the
forgotten is an older unpractical theoretical price is equal to its marginal product, and if the
museum piece?the "faculty tax"?for eliminat farmers would be operating in any case, there is
ing income inequalities from work (inherited again a pure lump sum subsidy?a transfer of in
income having perhaps already been dealt with come that does not interfere with productive
by progressive taxation of inheritances). The efficiency?that may be a contribution to dis
"faculty tax" is a lump sum tax equal to a tributive efficiency.
person's ability to earn income (his "earning The general principle underlying the possibil
faculty") minus the average income. (If one's ity of increasing distributional efficiency with
"earning faculty" is less than the average in out diminishing productive efficiency is illus
come, his tax becomes a negative tax?a sub trated in our accompanying diagram, which
sidy.) shows the number of hours worked (OS) and
The impracticability of the "faculty tax," like the wage rate (SE), E being the equilibrium
the popular demand for abolishing pollution or point at which supply is equal to demand. The
Rawls' exclusive concentration on the "worst rectangle (OE) represents, in its area, the price
off" group, can be alleviated by bringing in (SE) times the quantity (OS), the total amount
the economist's all-purpose solvent?their grad paid.5
ualness, continuity, or marginalism. What can In this figure the supply curve shows that
not be done in one fell swoop can be done by smaller amounts would be supplied at lower
degrees; and in fact it is being done by degrees prices. The shaded area within the rectangle
all over the place by lump sum taxes in various (lying above the supply curve) thus represents
guises?or is it disguises? payments over and above what is necessary to
The telephone user pays a lump sum tax (in make the supply available. Only the unshaded
this case a negative one?a subsidy) in the form part of the rectangle, (that part of it which lies
of getting a certain number of calls free. As below the supply curve) represents the "neces
long as he uses more than this number of calls, sary" payment that the suppliers have to get to
what he is charged per call by the telephone be willing to make the supply available. The
system could be the marginal cost, which is the rest is "surplus" or "unnecessary payment."
proper degree of discouragement. The "small The full-price (SE) is what has to be paid for the
business" may get some loans at specially low marginal unit, but all the other units could be
rates of interest, but if it still has to borrow obtained for less. This is shown by the supply
some more money at the current rate, this does curve being lower to the left of E.
not cause it to use any of the capital ineffi Paying for all the units at the same marginal
ciently. Here again is a hidden lump sum sub rate, may seem natural or even necessary, but
sidy. When a fixed amount of gas is sold by the this is only because it is our habit to start count
producers to the distributors at less than the
5The development of this diagram appears in Abba
market price, the difference in money received P. Lerner, "The Economics and Politics of Consumer
is exactly equivalent to a lump sum tax paid by Sovereignty," Proceedings of the American Economic
the former to the latter. But as long as this does Association, (May 1972): 261.

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ing from zero. But this procedure is arbitrary. because it would interfere with productive ef
The count could begin at any other point?at, ficiency. It is unpractical only because the
say, half the standard number of hours. If the population is not prepared to accept such ex
standard number of hours of work in a particu treme equality of income. The supplier will not
lar industry is 6 hours, then counting the hours be willing to supply his services unless the pay
for the purpose of computing the pay would he gets for his "paid" hours covers the "neces
begin only after 3 hours of work. sary payment for all the hours he works." The
"lump sum" tax that takes the form of the "un
paid" hours must not be too great.
VII. Degrees of Socialism
If L in our diagram represents the point at
The later this count begins, i.e., the greater which we start the pay, the total pay will be
the number of "unpaid" hours, the more of the shown by the area of the smaller rectangle LE.
product would be left as a part of the "given" If the area LE is less than the unshaded part of
social product available for "free income" to be the larger rectangle OE, he will not willingly
distributed in accordance with distributive ef supply the "free" hours of work for the sake of
ficiency, and the greater will then be the degree the earnings of the "paid" hours that follow.
to which the society could be said to be If L is the point at which these two areas (LE
socialistic. and the unshaded area of the larger rectangle
This looks rather like a trade-off between OE) are just equal, then starting the pay at any
allocative and distributive efficiency, but that is point between 0 and L would provide varying
not the case. As long as the marginal units of degrees of distributional efficiency but would
factor services are paid their marginal product retain complete allocative efficiency through
any increase in "unpaid" hours, and the conse out. Starting the pay later, between L and S,
quent decrease in "paid" hours, is not at the ex would not work. It would be "too socialistic."
pense of productive efficiency. The objective of trying to achieve as much
Coming back to our diagram, consider the distributive efficiency as possible without sacri
possible vertical lines, like that at L, which ficing any allocative efficiency can thus be ex
could be drawn parallel to the ordinate as points pressed as trying to move L, the point from
from which we begin to count the "paid" hours. which the pay begins, as far to the right toward
If we start at 0 on the extreme left, paying all S as possible. But the area LE cannot be re
the units at the marginal rate, we have the pure duced below the "necessary payment." What
free exchange system with the allocation favored determines the necessary payment?
by Nozick and honored by him as "natural." The payment that is necessary to obtain the
Moving the vertical line all the way to the right use of a factor for a particular purpose is what
up to the point of intersection E, would mean the factor could get in the best paid alternative
having no "paid" hours at all with the whole of use. In a society organized with the social pur
the output available for distribution in accord pose of maximizing both kinds of efficiency,
ance with allocative efficiency. This is the other the alternative marginal rate of pay is technically
limiting case of pure socialism via the lump sum determined by the value of the alternative
"faculty tax" and the equal distribution of in marginal product. But the L point in the al
come. ternative occupation, the point at which the
pay begins, is under the central government's
VIII. Resistances control. The total alternative earnings, and thus
the necessary payment, can thus be made very
A close approximation to such complete low indeed. The L point can be shifted quite
equalization of income is unpractical, but not far toward S. This is limited only by the re

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maining options that cannot be government It would improve both allocative and produc
controlled. These are the myriad devices that tive efficiency, while at the same time acclima
can be invented by workers who do not feel tizing the public to more egalitarian and more
that they are being treated fairly or justly and socialistic distribution.
which will ultimately force the authorities to As this develops, the L point can be moved
grant conditions that eliminate such resentment. further to the right, and the "unpaid" hours
High among these resistances to "too much and the "free income" increased. But all the
socialism" are the established traditions of time the increase in distributional efficiency
inequalities of pay for different occupations. does nothing to diminish productive efficiency.
It is these feelings of the propriety of certain What limits the degree of distributional effici
income differences that constitute the resistance ency and the speed with which additions to it
to the "socialistic" distributional efficiency, are achieved is not the protection of productive
and it is these that have to be weakened if efficiency, but the traditions of legitimate in
greater distributive efficiency is to be attained equalities, the political power of pressure
while protecting maximum productive effi groups, the threats of strikes, and, most of all,
ciency. the inefficiencies from apathy in work which
Another possible approach would be to set the often cannot be distinguished from the con
L point at the same number of "unpaid" hours scious or unconscious sabotage of productive
for everybody, with all workers free to work efficiency that grows out of feelings of resent
more hours and be paid the value of the marginal ment at whatever is deemed "unjust."
product for the additional hours, or to work Such a development of increased distribu
fewer hours and be docked the value of the tional efficiency can properly be said to make
marginal product of the reduced hours from society more socialistic. But whether it makes
their "free income." This would induce the it less capitalistic is not so clear. It has to be so
high marginal product workers to increase their if capitalism stands for income inequality or
efforts and their hours of work, and their al distributional inefficiency?as it certainly has
ready high total pay, until the increased mar come to mean for many people. But if capital
ginal disutility of work rose to equality with ism stands for making use of free exchange and
the marginal utility to the worker of the high competition in markets for the purpose of
marginal pay; and conversely it would induce maximizing productive efficiency, then there is
the low marginal product workers to cut down nothing anticapitalist in the socialism of greater
their efforts and their hours of work, and their distributional efficiency through "unpaid" in
already low total pay, until the marginal dis framarginal hours of work (and other produc
utility of the work is reduced to equality with tive factors) and "free income."
the marginal utility of the low marginal pay. While such redistributions are usually given
Work with high value of marginal product names with socialist connotations there are
would then become doubly attractive and equally appropriate capitalistic words. Instead
conversely work with very low value of marginal of being called "social grants" or "welfare pay
product would become doubly unattractive. ments" or even the hybrid "negative income
Workers would then be induced to move from tax," one could declare every citizen to have
work with low marginal product to work with become a capitalist?to have inherited shares in
high marginal product. Both of these responses "The Grand National Corporation," or even in
would tend to equalize the marginal product as specific local or multinational corporations,
well as the marginal pay, the distribution of and the "free income" to be nothing but the
marginal effort and the number of hours dividends he is entitled to because they are
worked, and thus also the individual incomes. earned by the shares he owns.

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IX. Summary The basic distributive theorem of utilitarian

marginalism?that distributive efficiency calls
I have presented three recipes for desirable for income equality?is strictly applicable only
income distributions, each claiming to yield for a given total social income. Since the total
higher levels of human satisfaction. But only social income is not given but depends on hu
my argument about the tandem nature of allo man effort, a compromise has to be made. The
cative and distributional efficiency and the equality theorem must be adjusted to induce
diminishing marginal utility of income is based individuals to cooperate in exercising their full
clearly on an analysis of the expected effects capacities. But it is argued that within a wide
on human satisfactions. range the equalizing redistribution of income
Nozick's theory of entitlement justifies the can take place without reducing total output.
distribution reached in a free exchange economy, This is shown in an analysis of "necessary" and
presuming that all factors are "naturally" paid "unnecessary" payments which is illustrated in
the value of their marginal product, and that our diagram.
such payments are "just." Rawls' Maximin Utilitarian marginalism points the way to a
principle can be derived on utilitarian principles, combination of the maximization of productive
from an imagined choice in "the original posi efficiency, given the degree of perfection and
tion" only on the assumption of an overriding competitiveness of the market, with a simul
absolute risk aversion. It can also be reached taneous maximization of distributional effi
from a concern limited to the welfare of the ciency, constrained only by social, conventional
"worst off or by jettisoning Rawls' Justice as and political resistances to extremes of egali
Fairness (together with his "original position") tarianism. My colleague at Florida State
and subscribing to a belief in some Nozickian University, Professor E. Raymond Canterbery
"entitlement" of the "worst off to a share in has suggested that this policy be called the pur
any increase in total social income. suit of the Maximax.

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