Mr. Kelley is a freelance writer living in New York.
"Why does a movie star earn more than a doctor? Why does a writer of thrillers earn more than a first-rate novelist?" These may be interesting questions of fact for the economist; but in politics they are rhetorical questions, popular expressions of a deep-seated feeling that our free market system is inherently unjust. It is assumed that a person’s income should be proportional to the value of what he does, or to the ability or merit he exhibits in doing it. On this assumption, the income differences mentioned above are inequitable: the doctor and the novelist deserve more than the actress and the writer of thrillers. Since differences of this nature are supposed to be common in a free market system, the system as a whole is unfair. Capitalism is a den of inequity.
In reply, many defenders of the market accept the indictment as true, but irrelevant. The moral basis of the market, they say, is not justice but freedom. Freedom is necessary to the pursuit of any good end, but it also allows the pursuit — occasionally successful —of bad ends as well. Justice, outside the sphere of legal justice, is the concern of individuals and groups in their private capacities. It cannot be enforced by the government; and it cannot be pursued by the government without the kind of controls that institutionalize much worse forms of injustice.
This reply is certainly valid, on both counts: freedom is the overriding and sufficient basis for the market; and injustice does sometimes occur within that system. But we do ourselves a disservice —and the market an injustice — if we allow the leftist charge to stand unchallenged. For morality is of a piece, and although justice is a subsidiary issue, it would be unfortunate if the most moral political system were the seat of flagrant injustice. Fortunately, this is not the case: critics of the market, falsely interpreting the requirements of justice, have greatly exaggerated the market’s shortcomings. What we need, then, is an examination of the charges, and a juster appraisal of capitalism.
To begin with, the government is responsible for a good deal of inequity visible in the economy today. Two policies are especially interesting, since they illustrate very clearly the unjust — as opposed to uneconomical — effects of government intervention. The first is the policy of licensing the professions. The implication of licensing is that the ability and integrity of every professional man are suspect, regardless of past record. The consequence of licensing is that every member of a profession is given the same sanction, regardless of individual differences. Thus consumers are given the illusion that they need not exercise their own judgment in choosing professional services. Anyone will do, because the government would not let any incompetent person practice, would it?
The best stand to lose, because they cannot stand on their reputation; the worst gain a sanction, and an income, they would not otherwise receive) This is unjust. The second policy is the labor law, which has a similar effect on wage-earners. Unions have the power to enforce uniform wage rates for certain types or work, regardless of variations in the skill and efficiency of individual workers; again rewarding the worst at the expense of the best."
Another example of government-sponsored injustice is the teacher’s salary, often presented as the greatest shame of the free market. For not only are teachers licensed by the government, but most of them work for the government in public schools. The consequences are manifold. Since public schools are tax-supported, most parents cannot afford private education for their children; public schools have a captive clientele, which they did not have to win by excellence. And since public schools are public, parents cannot exercise much control over the sort of teachers their children will have. Thus the government prevents the market from rewarding teachers in accordance with their abilities. There is no way of telling what the free market salaries of teachers would be — salaries in private schools tell us nothing, since they are distorted by the fact that private schools must compete with public — but presumably the salaries of good teachers would be bid up considerably by the tremendous value parents place on education for their children.
So far we have merely scratched the surface of the inequity caused by government. Anti-trust laws punish successful businessmen precisely for being successful3; minimum wage laws prevent less competent workers from receiving the more modest wages they might otherwise earn; the list is endless. But even in a completely free market, income differences of the sort usually complained of would still occur. Thrillers would continue to outsell difficult masterpieces; scientists would probably make less than popular singers; fashion designers would still cash in on popular whims. And the market would still be taxed with the charge of injustice.
The first step in analyzing income from a moral point of view is to set the terms of the analysis. For the terms of analysis proposed by the left are utterly fallacious. Justice is an attribute of judgments and actions concerning other people. If incomes are to be considered as just or unjust, therefore, they must be seen as the result of action. And if incomes are to be compared, on the grounds of justice, they must be the result of action by the same agent. This, of course, is how all collectivists do see the matter. In their view, society is a single entity, which engages in production as a unit, and which is then faced with a "social product" that must somehow be distributed. Now if this were the case, then perhaps it would be obligatory, or at least nice, for society through its agent the government to distribute in accordance with some criterion of merit. But this is not the case. This "tribal premise," as Ayn Rand calls it,4 is false. The government is not the source of income; it is a sink much rather. Income arises from diverse sources, from countless individual actions and interactions. In order to apply any principle of justice to income, therefore, we must locate these actions; we must find the agents responsible for income.
How Income Is Earned
Now the primary agents of income are the people who receive it. With few exceptions, people do something for their money. The primary actions responsible for income are the actions of people producing, discovering, investing in short, creating value. If this were all, there would be no question of justice. There would only be a question of cause and effect —What actions yield what return? — as if every individual were alone on a desert island. But in fact, most incomes arise in trade with other people, and at this point the concept of justice becomes applicable. For the critics of the market complain that people are not always paid in accordance with the value they create. The other side of the interaction, the consumer, distorts the situation by his irrational preferences. Very well: let us turn to the consumer.
Is it because of irrational consumer preference that a movie actress can make more than a doctor? I am a consumer, and I do not pay any actress, even my favorite, more than I pay my doctor; and if my income shrank, I would give up the former before the latter. I expect the same is true of most people. Is it because of irrational consumer preference that the manufacturer of hula-hoops made more than the publishers of most newspapers? I am a consumer, and I paid much less for my hula-hoop than I do for newspapers. I expect the same is true of most people. The point is that between different categories of goods, most people seem to allocate their incomes in a fairly rational way, reflecting a just appreciation of their relative importance. The reason that the actress and the hula-hoop king make so much money is that while no one pays very much for a movie or a plaything, many people want to see the same movies, or have the same playthings; whereas they prefer different doctors and newspapers. But that is no injustice. I as a consumer, proud of my preferences, am hardly in a position to say that others are irrational for wanting the same things that I want.
But another charge is often laid at the feet of the consumer. Within a single category of goods, it is said, consumers usually prefer the less valuable items, thus rewarding the purveyors of second- or third-rate goods more than the first-rate producers; and this is unjust. But these critics overlook a distinction, drawn by Ayn Rand,5 between the philosophically objective and the socially objective value of a product. A first-rate novel, for example, will have a greater philosophically objective value — a greater intrinsic literary value — than a thriller. But this measure of value does not determine a product’s return on the market; nor should it. Monetary return is a measure of value in exchange with other people, a measure of socially objective value. And the author of the masterpiece may have created something of less value in exchange than the writer of thrillers. Fewer people can derive value from the masterpiece, because the capacity of individuals to appreciate literature is limited. To them, within the context of their own interests and abilities, the thriller is of more actual value: at least, they can get something out of it. Hence it is not unjust on their part to choose the thriller over the novel; nor is there any inequity if the author of the former earns more money than the author of the latter. He has created more social value, as measured by the number of people for whom his work is of value.
The two principles illustrated by these examples show that consumer demand is not so irrational as the enemies of freedom would have us believe. People do, of course, pursue false values on occasion. That is true in any society, with any system of political economy. But the existence of such income disparities as are typically used to impugn the free market does not in itself show anything about the rationality or irrationality of consumer demand.
Even if the critics absolve consumers of the charge of injustice, however, many of them still feel that the system by which consumer preferences are transformed into the incomes of producers is unjust. Indeed, most critics speak as if there were no system, as if the market (a single entity) arbitrarily bestows riches on some and subsistence wages on others. They treat incomes as the result of pure, inexplicable chance, calling out for the government-enforced order they would like to introduce. But there is an order in the market.
The Source of Wages
Consider wages, the most common form of income. If consumer preference is the ultimate source of wages, the immediate source is the employer. And no employer determines the wages he will pay on the basis of whim. He does not determine wage levels at all — the market does. And the principles by which the market sets these levels may tell us something about the justice of the situation.
Wages, like any other price, are determined on the free market by supply and demand. Now some would say that it is unjust for one person to earn more than another merely because there are fewer people who do his sort of work —i.e., because the supply of that sort of labor is more limited. But who is guilty of injustice here? Not the worker himself, so long as he is not coercively preventing others from competing with him. Not the employer, or the consumer: they would prefer a larger supply and lower wages. Nor is it plausible to accuse those most directly responsible for the short supply, the people who might have taken up that sort of work, but chose not to. They are under no obligation to even out disparities in the supply of labor. What a short supply and a high wage usually indicate is not any injustice, but the difficulty of the job: the degree of skill necessary for it, the amount of training and preparation it requires, the effort and initiative involved. These are rewarded on the market, and it is fitting that they are.
Nor is it unjust of an employer, when the supply of labor is large, to pay less than he would be willing to pay for a given job. Justice consists in acting toward others in accordance with one’s judgment of their worth. This appraisal can be itemized: in acting to gain any specific value from others, one should act on the basis of one’s judgment of them with respect to that value. Now people place different values on specific goods, including their own time and effort, because they act for different purposes, in different contexts. It is this fact which makes trade possible, and it also renders invalid any concept of a just price or wage, viewed as an absolute amount of money. Justice applies to the situation only in a relative way, and only from the standpoint of a particular actor in the market place. For a given employer, with specific needs for labor, the part of justice is to seek the best possible in the market as it exists. If the supply is such that he can get labor for less than he would be willing to pay, or for less than he would have had to pay at some other time or place, it is no injustice for him to do so. His relative priorities remain intact: he still trades with and for the best in other people.6
So much for supply. But what about the demand principle? Here the market system tends toward an order that can only be described as striking; an order that goes beyond what is actually called for by any principle of justice. The employer’s demand for labor is set by the marginal productivity of that labor. "The upper limit of [the entrepreneur's] bidding is determined by anticipation of the price he can obtain for the increment in salable goods he expects from the employment of the worker concerned." The employer is willing to pay a worker the worth of what couldn’t get done without him. Given the competition among employers to obtain labor, wages tend to rise to this level. Thus the worker tends to be paid the value (in exchange) of what he himself produces. This happens automatically — he need not pay any dues in order to get his due — and it happens only with the price mechanism of a free market.
In the case of the other major source of income, profits, there is nothing more to be said. For profits arise directly from consumer preference, which we have already discussed. There is no intermediary between consumers and those who receive profits, as there is between consumers and those who receive wages. The amount of profit which a given item will bring is not the result of anyone’s intention. It is a natural fact, arising from differences between the price at which it will sell and the cost of producing it. The entrepreneur predicts that he will make a certain profit, but what he predicts is that the profit will be created by a certain natural process. It is no one’s will, but the facts which determine profit. And it is invalid to say of a fact either that it is or that it is not just; only actions are just or unjust.
The market, then, contains much less injustice than many people, including some of its defenders, assume. We know that there is no such thing as a just wage — fixed in absolute terms —for any kind of work. Money is a relative measure of value. And we have seen that simple comparisons between the incomes of different people reveal nothing; to demand a correlation between income differences and differences in the intrinsic value of the product, or the effort or skill involved in producing it, is to assume a collectivist model of society. It ignores the fact that income is determined by the actions of individual people, not by Society. And in examining the general features of economic interaction among people, we have found very few loci of inequity in the market. On the contrary — we have found that the market tends much more toward justice.
On a closer look, moreover, it does not seem that the leftist critics of the market really do have justice as their object. In his book Inequality, Christopher Jencks gives a wealth of statistical evidence that incomes are determined more by individual initiative and competence than by any advantage deriving from one’s family background. But instead of concluding that we live in a society that is just as well as free, he goes on to advocate — in the name of equality — a program that is as unjust as it is coercive. In order to obtain equality, he says, we would have to devise "insurance" systems… which break the link between vocational success and income. [Income and status differences] could only be prevented if we abandoned the notion that an individual’s wages and working conditions should depend solely on his value to the employer.8
We know that equality can only be pursued by coercion, that equality is incompatible with freedom. We see here, in Jencks’s desire to break the link between the values a man has to offer and his income, that it is also incompatible with justice. We need not fear, then, that a concern for justice will lead us away from freedom and the free market. Freedom and justice stand together, jointly opposed to collectivism.
1Alan Greenspan, "The Assault on Integrity," in Ayn Rand et. al., Capitalism: The Unknown Ideal (New York: New American Library, 1967).
2These policies create tendencies, not absolute effects. Good doctors still tend to receive higher incomes, despite licensing; some employers do pay more in order to get the best workers.
3Cf. Judge Learned Hand’s opinion in the ALCOA case, quoted in A.D. Neale, The Anti-Trust Laws of the U.S. (Cambridge: Cambridge Univ. Press, 1968), p. ¹¹4.
4Ayn Rand, "What is Capitalism?" in Capitalism: The Unknown Ideal. 5 Ibid., pp. 247.
6Here again we are indebted to Ayn Rand’s theory of objective value; cf. "What is Capitalism?"
7Ludwig von Mises, Human Action (Chicago: Henry Regnery Co., ¹949), p. 594.
8Christopher Jencks et. al., Inequality (New York: Harper and Row, ¹97³), pp. 9. 197