Living the legislated life

In Australia, capitalism is often referred to as "economic rationalism". This term appears to be unique to Australia; no one else in the world uses it. The pejorative use of the word rationalism reminds me of Mr Spock from the old Star Trek series. Spock was always rational and never emotional. When things were going well, the crew always bowed to his logical mind. But when the Klingons attacked, and enemy phasers rocked the Starship Enterprise, fear and loathing swept the crew and Spock’s ice-cold rationality was condemned as inhuman. As, of course, it was.

Critics portray rational economics, especially free markets, in a similar way. Markets are inhuman, they claim. Markets have no empathy or compassion, and they leave some people worse off than others.

Yet, the market consists of people freely interacting with one another. If the market is unfair, heartless or cruel, then it must reflect our human weaknesses. After all, the market is only the sum total of our individual choices.

But, you might say, what if the outcome of free market activity leaves some very rich and others poor? Surely, such unequal outcomes make it obvious that markets are unfair, and that more legislation is needed to ensure a just outcome.

To show the fallacy in this view, I turn to a thought experiment proposed some years ago by Robert Nozick. I have modified it slightly for our times.

Imagine a society of one thousand persons each of whom has an identical total wealth of $10,000. One member of this society happens to be Kylie Minogue. Suppose she decides to stage a concert. Any member of this society is free to attend, or to stay home. Those who choose to attend will be charged $100 each for a ticket. The exchange is purely voluntary. Those attending give up what they value less for a concert that they value more. As it turns out, everyone decides to hear Kylie sing. At the conclusion of the concert, this society, which once had perfect equality of wealth, now has massive inequality. Kylie is more than ten times richer than everyone else.

Now, here is the point. If the initial state of affairs in this society was just, because everyone had equal wealth, and if it is also just to allow people to voluntarily exchange their money for something they want (assuming their desires are not harmful to others), then it follows that the final unequal distribution of wealth is also just. It is really difficult to find the unfairness.

So, why do critics argue that inequality in wealth is unfair, no matter how it arises?

The usual answer is jealousy. Those with less envy those with more. This may be the reason why so many critics of free markets prefer to measure relative poverty rather than to define poverty in absolute terms. In relative terms, some people will always fall at the bottom of the income scale. They may have homes, cars, mobile phones and colour televisions but they are still less well off than those who have more. Defining poverty in relative terms permits critics to argue that free markets are always unfair, no matter how much prosperity they produce.

According to Robert Nozick, again, many wordsmith critics oppose capitalism because of formative experiences in their school days. His hypothesis goes like this. Wordsmith intellectuals in capitalist societies feel entitled to the highest rewards available in society and they are unhappy because, by and large, capitalist societies do not honour intellectuals.

Why do wordsmith intellectuals consider themselves so deserving? According to Nozick, it starts in school. The wordsmiths were verbally facile, wrote better than their classmates, and were rewarded for their performance in the school system. Prizes, scholarships and the chance to make the valedictory address are not distributed by a market mechanism. When they graduate, intellectuals find that the skills that were so prized in school are not nearly as valuable in the market-driven world. Charm, humour, athletic prowess, affability, aggression, dedication, enthusiasm, hard work and most of all, luck, count as much or more than good marks at school. This is not exactly news. As written in the Book of Ecclesiastes:

… the race is not always to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.