Karl Marx was neither the first, nor the last, critic of capitalism. However, he is by far the greatest critic of capitalism. Marx left no doubt that in his opinion an economy where private ownership of the means of production was abolished, workers managed themselves, and the “anarchy” of markets was replaced by democratic planning, was a far superior way for humans to organize our economic activities – even if he wrote precious little about the specifics of how a “socialist,” much less a “communist” economy might function. However, Marx was trained in the Hegelian philosophical tradition in which social criticism is presented very differently from how arguments are structured in twenty-first-century moral philosophy. Consequently his “critique” of capitalism was not presented as a moral criticism, and consequently, is anything but straightforward for most who discuss distributive justice today.
For example: Marx pointed out that in general workers do receive the full “value” of the labor power they sell according to his theory, even though he argued that only if the rate of exploitation of labor was positive can the rate of profit be positive. Marx famously chastised Proudhon for arguing that “property is theft.” Marx often belittled “utopian socialists” for making a moral, rather than a “scientific,” critique of capitalism. And Marx did much to make social scientists aware of the fact that what people consider to be fair or unfair is greatly influenced by the economic system in which they live. In short, Marx’s methodology rejected any clear distinction between “positive” and “normative” theory, and kept him from making what people today would consider straightforward moral arguments about economic justice and injustice.
Piero Sraffa, and most prominent Sraffians who have further developed the theory he pioneered, have confined themselves to “positive” economic theory and eschewed “normative” theory. Sraffians have been largely content to let readers draw their own conclusions about whether income distribution under capitalism is just or unjust. For example, in 2012 the Cambridge Journal of Economics devoted a special issue entirely to new developments in Sraffian studies with contributions from a “who’s who” list of prominent Sraffian economists. While the issue is a “must read” for anyone wishing to keep abreast of ongoing research in the field, not a single one of fifteen articles addresses normative issues as such.
This chapter departs from the belief that in the twenty-first century the moral aspect of income distribution should not be sidestepped through methodological artifice, as Marx did, nor avoided, as Sraffians have largely done. There is an urgent need to address the moral aspect of income distribution head on, as do most modern philosophers writing about distributive justice, and as most citizen-activists do as well in a post-occupy environment. But since neither Marxists nor Sraffians have provided a moral critique of capitalism along these lines, we must deduce implicit critiques in each theory, and extrapolate from them before we can compare them.
It would only be a slight exaggeration to say that everything Marx ever wrote was a critique of capitalism, and everything he ever did was aimed at helping workers organize to replace capitalism – a system in which they were a subordinate class – with socialism – a system in which they become the new ruling class. Indeed, his unapologetic political advocacy is what prevents some economists from treating him seriously as a contributor to “positive” economics.
Marx wrote about how capitalism turns human beings into a commodity he called “labor power,” and thereby “alienates” us from what makes us a unique species; “alienates” us from one another as we lose sight of the relations between people which the trade of commodities implies; and “alienates” us from the products we produce (Marx 1970). Marx wrote about how capitalism deskills and dehumanizes workers. And he argued that exploitation of labor is intrinsic to capitalism since it is the sine qua non for positive profits.
But for all of the power and poignancy of Marx’s critique, he never provided an explicit argument for why profit income is unfair. And while he subjected various claims by apologists that profits are deserved to ridicule, he never provided serious rebuttal. In his defense, Marx would be the first to stipulate that he doesn’t “do” moral critique, and point out that anyone looking for an explicit moral critique of capitalism in his work obviously did not understand his intellectual project. Nonetheless, specifically with regard to distributive justice, Marx’s critique of capitalism does not satisfy standards of twenty-first-century moral philosophy.
There are many Marxists who claim this as a virtue. And I will not dispute that here. I will simply observe that I agree with many today who expect a critical evaluation of capitalism to include a straightforward presentation of the case that capitalism systematically distributes income unfairly, including compelling rebuttals to various arguments to the contrary. While Marx himself declined to provide this, as explained in chapter 2, Michio Morishima proved a theorem in 1974 that many Marxists consider to be the definitive word on the immorality of income distribution under capitalism. As already explained, according to Morishima’s fundamental Marxian theorem, if and only if the rate of exploitation of labor is positive will the rate of profit be positive. Modern Marxists take it that the implication is perfectly clear for anyone who insists on thinking in moralistic terms: If profits necessarily come from exploiting labor, profits must be unfair, and capitalists’ profit income must be unjustified.
Sraffians have traditionally insisted on sticking to “positive” economics – analysis, explanation, and prediction – and shied away from “normative economics” – evaluating outcomes as desirable or undesirable. But unlike Marx and Marxists, who make abundantly clear that they find capitalism seriously flawed and socialism overwhelmingly superior, Sraffians have largely kept their “political opinions” to themselves. Sraffa himself was a friend and political ally of Antonio Gramsci, leader of the Italian Communist Party – providing Gramsci with books and writing materials when Gramsci was imprisoned by Mussolini from 1926 to 1935. And other prominent Sraffians have openly sympathized with the socialist cause. However, many prominent Sraffians are not anti-capitalist or pro-socialist, and all have gone to great lengths to keep their political views separate from their work as Sraffian economists.
As we have seen, the basic Sraffa model provides a logically consistent and rigorous theoretical explanation of the relationship between wages, profits, and prices in capitalist economies. However, while the theory tells us there are an infinite number of combinations of average wage and profit rates that are possible in any capitalist economy, and therefore that there is a great deal of “wiggle room” for the bargaining power of capitalists and workers to affect where any particular capitalist economy will fall on the wage-profit frontier determined by its technological capabilities {A, L}, as traditionally presented there is no moral dimension to the Sraffa model. In other words, the model does not tell us that some pairs of wage and profit rates are equitable while others are not. In particular, it does not tell us if capitalists are unfairly exploiting workers whenever the rate of profit is above zero.
Since a major goal of Sraffa and many of his followers was to point out inconsistencies, ambiguities, and logical flaws in neoclassical “positive” economics, it was no doubt tempting to initially avoid muddying waters unnecessarily by introducing a “normative” component to their theory. But with the benefit of hindsight it appears to have been a strategic mistake to maintain silence on the obvious moral implications of their analysis. While a few intellectually honest neoclassical theorists have acknowledged that elements of the Sraffian critique are “technically” correct, it has led to no major reworking of mainstream microeconomic theory, and is acknowledged in footnotes in mainstream graduate economic texts with decreasing frequency.
While eschewing normative implications won little recognition from economists in the mainstream of the profession, unfortunately it rendered Sraffian economics unattractive to many political economists who were understandably reluctant to abandon a theory that linked profits to the exploitation of labor for a “bloodless” framework, even if it was devoid of technical flaws. This is most unfortunate because the analysis using the basic Sraffa model not only avoids logical inconsistencies and misleading predictions in the Marxian explanation of price and income determination, the fundamental Sraffian theorem (FST) points toward a more straightforward moral critique of capitalism than the fundamental Marxian theorem (FMT) as well.
As explained in chapter 2, the fundamental Sraffian theorem (FST) says: If and only if there is a physical surplus of goods after wages have been paid will profits be positive. In other words, if and only if those who produce goods are deprived of some of the surplus goods they produce can capitalists have positive profits. Clearly there is an obvious, moral critique of capitalist profits implied by the FST.
The issue is not whether one of the “fundamental” theorems is true and the other is false. Both theorems are true – that is, there is no error in their proofs. Moreover, as mentioned in chapter 2, it can be proved that if the FST is true the FMT must also be true, and if the FMT is true then the FST must be true, i.e. FMS ↔ FMT (see theorem 22 in Hahnel 2017). But this does not mean there is nothing to choose between the two theorems. Is the moral critique implied by the FST more or less straightforward and compelling than the critique implied by the FMT?
First of all, notice that the FST uses no concepts which are not familiar to all economists today. Goods are measured in appropriate physical units. The economic surplus is defined in physical units of goods. And prices and the rate of profit are defined exactly as they are in standard economics. In contrast, the FMT analyzes the economy in terms of labor values, and hinges on a ratio defined in terms of labor values. Since the labor theory of value is foreign to all who are not Marxist economists, the FST has a clear advantage regarding ease of communication. If a point could not be made without defining concepts beyond the usual arsenal of concepts, there would be no alternative. But clearly this is not the case since FMS ↔ FMT.
What does the FMT say? The FMT “proves” that profits are only possible if the rate of exploitation is positive. But while the word “exploitation” certainly implies that workers have been treated unfairly, what is labeled the “rate of exploitation” in Marxian theory is in fact simply a technical ratio defined in terms of labor values, (1−Vb)/Vb. Absent an explicit argument that when (1−Vb)/Vb > 0 workers are unjustly harmed the moral critique of profits implicit in the FMT rests entirely on Marx’s choice of a name, or label, for the ratio (1−Vb)/Vb – rate of exploitation. In effect, we have conviction via semantics. How do Marxists respond if someone asks: Why is it unfair if (1−Vb)/Vb > 0?
What does the FST say? The FST “proves” that profits are only possible if those who produce a surplus of goods are deprived of some of those goods they produced. As in the Marxian formulation, saying something rigorously requires formal precision: In this case, profits are only possible if dom[A+bL] < 1. And it is also true that conviction via the FST hinges on the word “deprived.” But in this case the word is true to common usage, it is not a pejorative label placed on a technical ratio. If something is taken away from those who produced it, it is consistent with common usage to say they were “deprived” of part of what they produced, and assume we have a clear prima facie case of injury, or injustice. Again, someone might ask: Why is it unfair to deprive someone of part of what they produced? And below I will argue that we do need to answer this question, rather than simply assume the answer is obvious. We need to consider whether people who did not produce goods may have a legitimate moral claim on them nonetheless. Even so, it seems that the prima facie case that profits imply that workers have been unjustly treated is more straightforward and compelling in its Sraffian formulation than in its Marxian formulation.
In sum, the Sraffa model makes clear that it is the economy that is productive, and when capitalists who do no work receive profits, employees who do all the work necessarily receive less than what they produced. There is no need to elaborate a labor value theory of prices to make this point; no need to define a complicated technical ratio defined in terms of labor values, (1−Vb)/Vb; and no misleading identification of one input to production in particular that holds the key to the origins of profit, when in fact every input could be used to tell the same story. The surplus approach identifies the actual goods and services workers produce which capitalists manage to appropriate. In an era experiencing the most rapid increase in economic inequality in history it seems appropriate to present the case that capitalists are parasites simply and boldly. And if it can be done without resort to introducing concepts like the labor theory of value that are unfamiliar to most economists today, all the better.
However, having done so we should now proceed more cautiously. While Sraffian theory may provide the strongest prima facie case that capitalists are parasites living off what others produce, and therefore should be sufficient to bind them over for trial, the accused still have a right to a formal trial where they are represented by competent counsel and presumed innocent until proven guilty. Even if capitalists do none of the work, is it possible that they “contribute” something else that merits reward? Is it possible that they make some “sacrifice” that deserves compensation? Moreover, are we sure we have arrested all those guilty of the crime of economic injustice? Is it possible that not only capitalists but also some workers we have implicitly exonerated by calling them “producers” are also guilty, and belong in the dock along with capitalists?
Capitalists have long had the finest legal defense team money can buy to argue their case. And because it is obvious, and therefore undeniable, their attorneys stipulate that capitalists do no work, but argue that their clients “contribute” to the social endeavor in other ways that merit compensation. The capitalist defense team has argued that their clients merit reward because they “contribute” innovation, because they “contribute” the plant and machinery where their employees work, because they abstain from consumption in order to “contribute” the wage fund workers need while working, and because they take risks and merit compensation for doing so. Failure to offer direct rebuttal to these arguments weakens the moral case against capitalism, and might lead a jury to put aside the prima facie case and vote for acquittal.
The Marxist critique sidesteps the main argument in defense of capitalist profits by implicitly defining “contribution” as “contribution to the value of goods produced.” Since “value” in the Marxian framework is hours of labor done embodied in goods and services, those who do no labor cannot possibly contribute “value.” In short, Marxism convicts capitalists of the crime of exploitation on the basis of a clever tautology. However, the critique based on the fundamental Sraffian theorem also assumes away the moral case for capitalist profits through semantics. While more direct and to the point, and therefore arguably more compelling than the Marxist critique, nonetheless by implicitly assuming that the act of working is solely responsible for producing goods, any possibility that non-workers might contribute in other ways, and therefore merit reward, is assumed away by semantics, rather than addressed directly. In the history of economic thought we can find several theories which attempt to justify the moral legitimacy of profits on grounds that capitalists do contribute something of importance which merits reward, even if they do none of the actual work to produce goods and services.
Joseph Schumpeter, for example, defended profits as reward for innovation. There is no call to dispute that the major reason a large surplus of goods and services can be produced by workers is precisely because of technological changes which increase labor productivity introduced over many, many years, which have been incorporated into the economic structure to continually increase economic productivity. However, the question is whether capitalists deserve credit for this highly valuable “contribution,” and if profits are truly payment for innovations that increase labor productivity.
Here it is important to distinguish between different roles, since sometimes the same person plays more than one role in the economy. “Inventor” is our name for the “creators” of technological change, and “royalty” is the customary name for payments to inventors. Capitalists, on the other hand, are owners of firms, and “profit” is the name for payments to capitalists. If a capitalist happens to also be an inventor, then the same person will receive both kinds of income. But that does not mean that profits are a payment for invention. On the other hand, if the inventor is an employee of a capitalist the inventor will be paid a salary, and perhaps a bonus by her capitalist employer who presumably still receives profits. If there is no patent the capitalist will receive temporary super profits from using the invention of his employee, but these super profits will be competed away as the innovation is copied by other capitalists. If there is a patent the capitalist will receive super profits for longer, and/or royalties if he licenses others to use the invention of his employee, which, as her employer, he owns.
However, super profits and royalties are clearly different from the normal, or uniform, rate of profit capitalists receive. To demonstrate, suppose there are no new inventions and therefore ρ(l) = 0. Would capitalist profits be zero? The simple Sraffa model makes clear that even if there are no innovations, as long as the economy was productive after wages are paid the rate of profit will be positive. So the profits we are in search of a justification for have nothing to do with payments for the creative labor that yields productive new innovations.
The argument that all “factors of production,” including “capital,” deserve payment according to the value of their marginal revenue product is often associated with J. B. Clark. There are two problems with this argument which other economists have pointed out. Joan Robinson pointed out the first problem when she observed that however “productive” a machine may be, its productivity hardly constitutes a moral argument for paying anything to its owner. Robinson’s point can be applied to any argument in any production function. Just because adding another unit of some input will increase the value of output by some amount does not mean that the owner of the input, even should the owner be the worker herself, deserves a payment of precisely that magnitude – neither more nor less.
Sraffa and his followers raise a second problem. Sraffians argue convincingly that any attempt to define and measure a marginal product for something called “capital,” as distinct from the marginal products of particular heterogeneous capital goods, is doomed to failure. The problem, as well as the explanation for why it is irresolvable, was succinctly stated by Kurz and Salvadori:
The notion of a production function requires that a single level of output be associated with any given amount of productive resources employed. However, with capital goods represented by their value in the production function, with different levels of the rate of profit the value of the same set of capital goods would generally also be different. This however runs counter to the uniqueness of the relation between output and the amount of productive resources used as inputs. The criticism reported is derived from the fact that relative prices, and thus also the prices of capital goods, generally depend on income distribution.
(Kurz and Salvadori 1995: 445)
This argument applies to production functions for particular goods as well as an aggregate production function, which was the initial subject of debate in the Cambridge capital controversy. Only in models where there is a single produced good, which serves both as the sole consumption good and the sole “capital good,” does this problem not arise.
The argument that profits are a justifiable reward for “abstinence,” or “waiting” on the part of capitalists is commonly attributed to Nassau Senior. However, it can be found in the work of Jevons, Bohm-Bawerk, Walras, Wicksell, and Marshall as well. In essence the argument is this: (1) If workers have no income, wages must be advanced from a “wage fund” for them to be able to work and produce anything at all. And when workers are equipped with more means of production they are more productive than when they have less. (2) If nobody saved – i.e. if nobody “abstained” from consuming all their income – there would be no “wage fund” and no investment goods produced, and productivity would cease (absent a wage fund) or decline (as capital goods depreciate). (3) Ergo, by saving and investing part of their income capitalists make possible production of a larger surplus than would otherwise occur, and therein lies their valuable “contribution” deserving reward.
What would happen if nobody saved any of their income during a year? In this case all production would take the form of consumption goods and no investment goods would be produced at all, leaving workers only that part of capital stocks which did not depreciate to work with the following year. Clearly their productivity would suffer, and we might well conclude that anyone who saves – so investment goods can be produced along with consumption goods – is a hero deserving some appropriate reward. But then the conclusion should be that anyone who saves out of their income deserves some appropriate reward, not that profit income is deserved because capitalists save part of it.
Suppose we were trying to explain why a worker deserves her wages. Would we do so by arguing that because she saves part of her wages her wages are deserved? In which case, would we then concede that if she fails to save, her wages are undeserved? Would we conclude that only the part of her wages she saves are deserved, while the part of her wages she consumes are undeserved? In case it is not obvious that income is not justified on the basis of what one subsequently may choose to do with it, consider a group of pirates who out and out plunder from others this year, but then save part of their plunder. Would we say these pirates deserve their plunder because they save part of it, and thereby allow the economy to produce investment goods along with consumption goods?1 Just as pirate booty cannot be justified by what pirates may choose to do with it, capitalist profits cannot be justified because they save part it. The fact that capitalists abstain from consuming all of their profit income has nothing to do with whether or not that profit income was deserved in the first place.2
Finally, it is sometimes argued that profits are a residual, which means that unlike others whose incomes are presumably contractually guaranteed, capitalists bear risk, and not only require, but deserve compensation for doing so. In the real world there is uncertainty, and therefore risk. In the real world some businesses, and perhaps some industries, are riskier than others – giving rise to a spectrum of profit rates. Differences in profit rates among capitalists due to differences in the risks they incur are not only predictable, but we can even stipulate that they are morally justifiable on grounds that an expected value of $100 with a variance of $50 is not as valuable to most humans as a 100% probability of $100. And if profit income is less certain than wage income on average, then an average rate of profit somewhat greater than zero can be justified on similar grounds. But this does not provide either an explanation or a moral justification for an average expected rate of profit that is not only positive but in excess of what is required to compensate for its greater uncertainty than other forms of income.
The Sraffa framework can help us distinguish between profits which are due to the fact that profit income is less certain than wage income, and profits that have nothing to do with risk. Unlike the real world, in a Sraffian framework there is no uncertainty, and therefore there is no risk! In a Sraffian framework if the rate of profit exceeds zero it cannot be because capitalists are incurring risk. In a Sraffian framework as soon as dom(A+bL) < 1 capitalists will receive an r > 0 with as much certainty as the w > 0 workers receive. And it is that r > 0 which requires a justification. In sum, what the Sraffian framework makes clear – in this case because of its very simplicity in abstracting from uncertainty – is that there are profits in real capitalist economies which have nothing to do with risk, and therefore cannot be either explained or justified as reward for risk.3
In sum, there is no need to deny that risk deserves some reward. There is no need to deny that if workers had no income to live on while working they would produce very little indeed, absent a fund to pay wages in advance. There is no need to deny that if workers had no capital goods to work with they would produce only a paltry amount. What is asserted is that once the economy is sufficiently productive and wages remain sufficiently low, there will be profits in excess of what can be either explained or justified as reward for risk. What is disputed is that capitalists deserve to have the funds they use to advance workers their wages and equip workers with machines to work with in exchange for profits.4 In sum, what is disputed is the claim that there is something meritorious in the behavior of capitalists that justifies the great bulk of their profits. Moreover, nothing capitalists choose to do with their profits can retroactively provide a justification for why they received them in the first place.
Of course if someone owns the wage funds, machines, and technologies – if they are someone’s legal property, to use and contract over their use as they please – their owners will often be able to secure a payment from others who lack some form of wherewithal without which they cannot work productively. But in this case the compensation capitalists receive is tribute they are in a position to extract from those who work, and as explained below, the size of the tribute they will be able to extract will largely be determined by how much less fiercely they must compete among themselves for employees than workers must compete among themselves for employment – none of which has anything to do with “just deserts.”
At this point it is useful to ask what a philosopher might say about our evidentiary hearing and how the formal trial has proceeded so far. Because philosophers would be likely to ask what theory of distributive justice was the basis for the trial, and therefore what testimony was relevant or irrelevant, and what criteria the judge was going to instruct the jury to consider when deliberating over guilt and innocence. Philosophers would no doubt point out that so far both the prosecution and defense have implicitly assumed that the relevant criterion is contribution – who contributes to production and who does not, and how much anyone contributes. Philosophers – notorious sticklers for questioning first principles – would point out that there is another possibility: Namely, that the amount of goods and services one deserves depends on what sacrifices one makes in producing goods and services, not on how much one contributes to the value of goods and services produced. Considering arguments for and against three different simple maxims is a useful starting point once the issue of relevant criteria has been raised.
Maxim 1: Payment according to the value of the contribution of one’s labor and the contribution of the productive property one owns
The rationale behind maxim 1 is that people should get out of an economy what they and their productive possessions contribute to the economy. If we think of the goods and services, or benefits of an economy, as a giant pot of stew, the idea is that individuals contribute to how big and rich the stew will be by their labor and by the productive assets they bring to the kitchen. If my labor and productive assets make the stew bigger or richer than your labor and assets, then according to maxim 1 it is only fair that I eat more stew, or richer morsels, than you do.
While this rationale has obvious appeal, it has a major problem we might call the Rockefeller grandson problem. According to maxim 1 the grandson of a Rockefeller with a large inheritance of productive property should eat 1000 times as much stew as a highly trained, highly productive, hardworking son of a pauper – even if Rockefeller’s grandson doesn’t work a day in his life while the pauper’s son works for fifty years producing goods or providing services of great benefit to others. This will inevitably occur if we count the contribution of productive property people own, and if people own different amounts of machinery, or what is the same thing, different amounts of stock in corporations that own the machinery, since bringing a cooking pot, or better yet a stove, to the economy “kitchen” increases the size and quality of the stew we can make just as surely as peeling potatoes and stirring the pot does. So anyone who considers it unfair when the idle grandson of a Rockefeller consumes more than a hardworking, productive son of a pauper cannot accept maxim 1 as their theory of distributive justice. But what if those with more productive property acquired it through some greater merit? Would not the income they accrue from this property then be justifiable? If some people acquire more productive property than others through inheritance, luck, force, or fraud it is relatively easy to explain why the extra income they receive as a result is unfair (see Hahnel 2005). But what if people come to have more productive property because they use income they earned fairly to purchase more productive property than others?
There is a moral problem regarding income from productive property even if the productive property was purchased with income we stipulate was fairly earned in the first place. Labor and credit markets allow people with productive wealth to capture part of the increase in productivity of other people that results when others work with the productive wealth. Moreover, the share captured by wealthy employers as profits, and wealthy lenders as interest, is determined by forces in labor and credit markets with no claim to yielding fair shares: It is determined by the laws of supply and demand and bargaining power. So whether or not and to what extent the profit or interest owners of productive wealth receive is merited must be carefully examined.
Even if we stipulate that some compensation is justified by a meritorious action that occurred once in the past, there is a problem: Labor and credit markets allow those who own more productive property to parlay it into permanently higher incomes which increase over time with no further meritorious behavior on their part.5 This creates the dilemma that ownership of productive property even if purchased with income that was justly acquired, and even if deserving of some compensation, generally gives rise to additional income that becomes unfair at some point, and increasingly so, as time proceeds.6
In sum, if unequal accumulations of productive property were the result only of meritorious actions, and if compensation in the form of profits and interest ceased when the social debt was fully repaid, calling property income unfair would seem harsh and unwarranted. On the other hand, if those who own more productive property acquired it through inheritance, luck, or unfair advantage, or because once they have more productive property than others they can accumulate ever more with no further meritorious behavior by participating as employers in labor markets or lenders in credit markets, then calling the unequal outcomes that result from differences in wealth unfair seems perfectly appropriate. We discuss what studies of empirical evidence reveal about what part of wealth today is derived from these different sources below.
Maxim 2: Payment according to the value of one’s personal contribution only
When substitution between legitimate arguments in production functions is assumed, marginal physical products for inputs can be calculated. The valid Sraffian case against the positive neoclassical theory that when markets are competitive what neoclassicals call “factors of production” will receive payments equal to their marginal revenue products is based on two arguments: (1) While a particular machine may be a proper argument in a production function, and therefore have a positive marginal revenue product, “capital in general” is not a proper argument in production functions, and therefore the marginal revenue product of “capital” cannot be deduced from production functions, much less be equated with the rate of profit. (2) Because there is an economic “surplus,” income distribution cannot be deduced solely from marginal revenue products of inputs which are proper arguments in production functions.
To illustrate: If we assume that competition among capitalists is so fierce that it compels capitalists to continue hiring inputs as long as the rate of profit from doing so remains positive, we get the standard neoclassical conclusions: (a) the rate of profit will be driven down to zero, (b) all inputs, including every category of labor, will be hired up to the point where its marginal revenue product is equal to its price, and therefore (c) every input will be paid its marginal revenue product. But notice that these conclusions derive from the assumption that competition among capitalists is so fierce that they compete away any share of the economic surplus, no matter how large that surplus may be. If instead we assume that competition among capitalists is somewhat less fierce so they do not entirely compete away any share in the economic surplus, i.e. competition only compels capitalists to accept some rate of profit, r, greater than zero, the conclusions become rather different: (a’) the rate of profit will only be driven down to some rate greater than zero, (b’) in which case all inputs, including every category of labor, will be hired up to the point where its marginal revenue product is equal to its price times (1+r), and therefore (c’) every input will be paid r/(1+r)MRP less than its marginal revenue product.7
In other words, the positive neoclassical marginal revenue product theory of payments to inputs in production does not address, much less solve, the question of what the “normal” or “long-run” rate of profit will be. What rate of profit capitalists will be compelled to accept, and why, is not answered by the marginal productivity theory of what different physical inputs in production will be paid. The answer to that question hinges on how fierce the competition among capitalists for employees is, and therefore how large or small their collective share of the economic surplus will be; compared to how fierce the competition among workers for employment is, and therefore how large or small their collective share of the economic surplus will be. Differences in marginal productivities among workers will affect how labor’s share of the economic surplus is distributed among workers, But it is the relative fierceness of competition among workers and among capitalists that will determine the share of the economic surplus each group captures, and the marginal productivities of legitimate arguments in production functions tell us nothing about this whatsoever.
What the Sraffa model brings to this discussion is the helpful reminder that irrespective of whatever all inputs’ marginal productivities may be, as long as dom[A+bL] < 1 the rate of profit will be positive. In other words, the question of how high r will be for any given technology, {A,L}, reduces to the question of how high b, the hourly real wage bundle, will be. To summarize, and with the proviso that we are speaking in broad generalities: The relative fierceness of competition among capitalists and among workers will decide how the economic surplus is divided between capitalists and workers, while differences in marginal productivities of different categories of labor affect how labor’s share of the surplus is divided among workers.
Before proceeding to evaluate maxim 2 it is worth clearing up one last common confusion. What maxim 2 proposes is fair is payment according to the value of the contribution of one’s labor. While it is common to equate the “value” of the contribution of labor to the marginal revenue product of labor, it is not necessarily the case that the social value of the increase in output from another hour of someone’s labor is the same as their marginal revenue product. Marginal revenue product, MRP, is equal to marginal physical product, MPP, times price, P. And while MRP is therefore the increase in an employer’s revenues from hiring another hour of someone’s labor, it is not the same as the increase in social value if the market where the output is sold is non-competitive, or if there are externalities associated with producing or consuming the good.
Whenever there are externalities or goods markets are non-competitive market price systematically misestimates the benefit to society of producing another unit of a good. If the market for a good is less than perfectly competitive its price will exceed its marginal social benefit, and consequently the MRP of all inputs used to make it will exceed their marginal social product, MSP. Similarly, if there are negative external effects associated with producing or consuming a good its market price will exceed its marginal social benefit, and the MRP of inputs used will exceed their MSP. While if there are positive external effects marginal revenue products will fall short of marginal social benefits, and the MRP of inputs used will be less than their MSP.
In sum, there are multiple reasons that labor will not be paid an amount equal to its marginal social product in capitalist economies: All workers will be paid [r/(1+r)]MRP less than their MRP. The MRPs of workers in non-competitive industries and industries with negative externalities will exceed their MSPs. While the MSPs of workers in any industries with positive externalities will exceed their MRPs. But the issue here is whether payments equal to marginal social products are fair, not whether capitalist economies will pay people according to their marginal social products – which they will not for all the reasons just explained.
Having clarified all this, we are finally ready to consider maxim 2: As long as substitution between different legitimate inputs in production is possible, we can in theory measure their marginal social products, including the marginal social products of different categories of labor. Are payments equal to the marginal social product of one’s labor fair and just? While those who support maxim 2 find property income unjustifiable, advocates for maxim 2 hold that everyone has a moral right to the “fruits of their own labor,” i.e. payment equal to the marginal social product of one’s labor. The rationale for this has a powerful appeal: If my labor contributes more to social wellbeing, i.e. my marginal social product is higher, it is only fair that I receive more. Not only am I not exploiting others, they would be exploiting me by paying me less than the social value of my personal contribution.
First of all, the marginal product, or contribution of an input to production, depends as much on the number of units of that input used, and on the quantity and quality of other, complementary inputs, as on any intrinsic quality of the input itself – which immediately undermines the moral imperative behind maxim 2. But besides the fact that the marginal products of different kinds of labor depend very much on the number of people in each labor category in the first place, and on the quantity and quality of non-labor inputs available to them, most differences in people’s personal productivities are due to intrinsic qualities of people themselves over which people have little control. No amount of eating and weight lifting will give an average individual a 6 foot 9 inch frame with 380 pounds of muscle. Yet professional football players in the United States receive hundreds of times more than an average salary because those attributes make the value of their contribution outrageously high in the context of US sports culture. Just as Joan Robinson argued that however “productive” a machine or piece of land may be, that hardly constitutes a moral argument for paying anything to its owner; one can argue that however “productive” a 380-pound physique or a high IQ may be, that doesn’t mean the owner of this trait deserves more income than someone less gifted who works as hard and sacrifices as much. The bottom line is that the “genetic lottery” influences how valuable one’s personal contribution will be. Yet the genetic lottery is no more fair than the inheritance lottery, which implies that as a conception of economic justice maxim 2 suffers from the same fatal flaw as maxim 1.
In defense of maxim 2 it is frequently argued that while talent may not deserve reward, to make talent productive requires training, and those who undergo extra training deserve extra reward. In this vein it is frequently argued that doctors’ high salaries are justifiable compensation for all their extra years of education. First of all, it is important not to confuse the cost of someone’s training to society – which consists mostly of the trainer’s time and energy, and scarce social resources like books, computers, microscopes, libraries, and classrooms – with costs borne by the trainee. If teachers and educational facilities are paid for at public expense – that is, if we have a universal public education system – and if students are paid a living stipend – so they forgo no income while in school – then the only cost borne by the student consists of their discomfort from time spent in school. But even the personal suffering we endure as students must be properly compared. While many educational programs are less personally enjoyable than time spent in leisure, comparing discomfort during school with comfort during leisure is usually not the relevant comparison. The relevant comparison is with the discomfort of others in the same age cohort experience who are working instead of going to school. So to the extent that education is paid for publicly rather than privately, students receive a living stipend, and the personal discomfort of schooling is no greater than the discomfort others incur while working, the claim that those with higher social marginal products due to greater education deserve higher reward because they underwent extra training does not hold up under scrutiny.
In sum, we might call the problem with maxim 2 the doctor–garbage collector problem. If education were free all the way through medical school, how could it be fair to pay a brain surgeon who is on the first tee at his country club by 2pm even on the four days a week he works, ten times more than a garbage collector who works under miserable conditions forty plus hours a week? Which brings us to a third distributive maxim.
Maxim 3: Payment according to effort, or the personal sacrifices one makes in work
Whereas differences in personal contribution will be due to differences in talent, training, job assignment, luck, and effort, the only factor that deserves extra compensation according to maxim 3 is extra effort. By “effort” is meant personal sacrifice in work for the sake of the social good. Of course effort can take many forms. It may be working more hours. It may be performing less pleasant tasks. It may be working in more dangerous or unhealthy work environments. Or it may be working at greater intensity, i.e. what is commonly called exerting more “effort.” It may also consist of undergoing training that is less gratifying than the training experiences of others, or less pleasant than time others spend working who train less. The underlying rationale for maxim 3 is that people should eat from the stew pot according to the sacrifices they made to cook the stew. According to maxim 3 no other consideration, beside differential sacrifice, can justify one person eating more stew than another.
One argument for why sacrifice deserves reward is that people have control over how much they sacrifice. I can decide to work longer hours, or work harder, whereas I cannot decide to be 6 foot 9 or have a high IQ. It is commonly considered unjust to punish someone for something she could do nothing about. On those grounds paying someone less just because she is not strong or smart violates a fundamental precept of fair play. On the other hand, if someone doesn’t work as long or hard as the rest of us, we don’t feel it is inappropriate to punish her by paying her less because she could have worked longer or harder if she had chosen to. In the case of reward according to effort, avoiding punishment is possible, whereas in the case of reward according to contribution it often is not.
Nor is there any reason for society to frown on those who prefer to make fewer sacrifices as long as they are willing to accept less economic benefits to go along with their lesser sacrifice. There is no reason that just because people enter into a system of equitable cooperation with others this precludes leaving the sacrifice/benefit trade-off to personal choice. Maxim 3 simply balances any differences in the burdens people choose to bear with commensurate differences in the benefits they receive. This is perhaps the strongest argument for reward according to sacrifice. Even if all were not equally able to make sacrifices, extra benefits to compensate for extra burdens seems fair. When people enter into economic cooperation with one another, for the arrangement to be just should not all participants benefit equally? Since each participant bears burdens as well as enjoys benefits, it is equalization of net benefits, benefits enjoyed minus burdens borne, that makes the economic cooperation fair. So if some bear more of the burdens justice requires that they be compensated with benefits commensurate with their greater sacrifice. Only then will all enjoy equal net benefits. Only then will the system of economic cooperation be treating all participants equally, i.e. giving equal weight or priority to the interests of all participants. Notice that even if some are more able to sacrifice than others, i.e. even if “sacrifice” is to some extent “conditioned” and not entirely “freely chosen,” the outcome for both the more and less able to sacrifice is the same when extra sacrifices are rewarded. In this way all receive the same net benefits from economic cooperation irrespective of any differences in their abilities to contribute or to make sacrifices.
Many who object to maxim 3 as a distributive principle raise questions about measuring sacrifice, or about conflicts between reward according to sacrifice and economic efficiency. But measurement problems, or conflicts between equity and efficiency are not objections to maxim 3 as an appropriate conception of what is fair, i.e. they are not objections on equity grounds. To reject maxim 3 because effort or sacrifice may be difficult to measure or because rewarding sacrifice may reduce efficiency is not to reject it because it is unfair. No matter how weighty these arguments may prove to be, they are not arguments against maxim 3 on grounds that it somehow fails to accurately express what it means for the distribution of burdens and benefits in a system of economic cooperation to be just, or fair. Moreover, even should it prove that distributive justice is difficult to achieve because it is difficult to measure effort accurately, or costly to achieve because to do so generates inefficiency, one presumably would still wish to know exactly what this elusive or costly distributive justice is.
Even for those who reject contribution based theories of distributive justice like maxim 1 and 2 as inherently flawed because people’s abilities to contribute are often different through no fault of their own – as do all modern egalitarian philosophers – there is still a problem with maxim 3 from a moral point of view that we might call the AIDS victim problem. Suppose someone has made average sacrifices for fifteen years, and accordingly consumed an average amount. Suddenly they contract AIDS through no fault of their own. In the early 1990s a medical treatment program for an AIDS victim often cost close to a million dollars. That is, the cost to society of providing humane care for an AIDS victim was roughly a million dollars. If we limit people’s consumption to the level warranted by their efforts, we would have to deny AIDS victims humane treatment, which is hard to defend on moral grounds. Of course this is where another maxim comes to mind: payment according to need. Whether taking differences of need into consideration is required by distributive justice, or is required instead for an economy to be humane is debatable. However, at the risk of scandalizing professional philosophers, as long as we conclude that ignoring either differences in sacrifice or differences in need is morally unacceptable, can’t we conclude that the issue has been reduced to a question of semantics?
The fundamental Sraffian theorem arguably provides a more straightforward and compelling prima facie case that capitalists are parasites than does the fundamental Marxian theorem. However, that charge, like the implicit critique of capitalist profits in Marxian theory, was also based on a contribution-based theory of distributive justice. In both theories the presumption is that how much people are entitled to should be determined by how much they produce. In the Marxian formulation workers are wronged because capitalists deny them the full “value” of what they produce each hour, i.e. because Vb < 1, while in the Sraffian formulation workers are wronged because capitalists deny them all the actual goods and services they produce each hour, i.e. because dom(A+bL) < 1. In both formulations capitalists get more than they deserve if they get anything at all, because they produce nothing – neither “value” in the Marxian formulation, nor actual goods and services in the Sraffian formulation. However, if the critique of contribution-based theories presented above is valid, does not this imply that a jury might acquit capitalists upon reconsideration?
After considering all of the arguments for and against the three maxims suppose the judge presiding over our trial ruled in favor of maxim 3. In other words, suppose the judge ruled that in her courtroom contribution was not the relevant consideration. Suppose she ruled that henceforth only evidence regarding reward compared to sacrifice was relevant testimony. And suppose she instructed the jury to consider only sacrifice and ignore contribution when judging whether or not anyone was guilty of being a parasite. What would our trial look like?
Now the prosecuting attorney must argue that capitalists receive profits greater than their sacrifices, while workers on the whole receive wages less than their sacrifices warrant. It no longer matters who contributes more or less. It does not matter what form anyone’s contribution takes. What matters is only who gets more than they sacrifice, and who gets less than they sacrifice. What matters is only if compensation is commensurate with sacrifice, exceeds sacrifice, or falls short of sacrifice.
In our mock trial if the defense team for capitalists wants to argue that capitalists deserve profits they must explain concretely what sacrifice capitalists have made. If the rate of profit is positive and they cannot produce credible evidence of any sacrifice, their client will be found guilty, as charged. And even if the capitalist defense team produces evidence of some sacrifice on the part of their client, they must demonstrate that their client’s profits, which accrue at a compound rate indefinitely, do not exceed the magnitude of whatever sacrifice capitalists made once only by “abstaining” from consuming part of what is usually a considerable income in an initial year.
Most economists who have studied the causes of unequal wealth believe that differences in ownership of productive property which accumulate within a single generation due to the behavior of individuals themselves are small compared to the differences in wealth that develop due to inheritance, luck, unfair advantage, and accumulation that is without merit. Lester Thurow (1996) estimated that between 50 and 70% of all wealth in the US is inherited. Daphne Greenwood and Edward Wolff (1992) estimated that 50 to 70% of the wealth of households under age fifty was inherited. Laurence Kotlikoff and Lawrence Summers (1981) estimated that as much as 80% of personal wealth came either from direct inheritance or the income on inherited wealth. A study published by United for a Fair Economy in 1997 titled “Born on Third Base” found that of the 400 on the 1997 Forbes list of wealthiest individuals and families in the US, 42% inherited their way onto the list; another 6% inherited wealth in excess of $50 million, and another 7% started life with at least $1 million.
These are examples of the kind of testimony that the prosecution would now bring to our trial of capitalists and rentiers as parasites. Surely the prosecutor would introduce all 685 pages of Thomas Piketty’s Capital in the Twenty-First Century in evidence as well. But I can think of no better choice to give the prosecution’s final argument than Edward Bellamy, who put it this way over a hundred years ago:
You may set it down as a rule that the rich, the possessors of great wealth, had no moral right to it as based upon desert, for either their fortunes belonged to the class of inherited wealth, or else, when accumulated in a lifetime, necessarily represented chiefly the product of others, more or less forcibly or fraudulently obtained.
(Bellamy 1970: 113)
At the end of such a trial the jury might not find all capitalists guilty. However, it is difficult to imagine that a jury selected at random would not find most capitalists guilty on this basis. Moreover, a sound basis for a trial of workers, some of whom might also be guilty of consuming more than their efforts or sacrifices warrant, would have been established.
1 Note that whether or not we think the pirates deserve some reward for abstaining from consuming part of their plunder, even though it is stipulated that the entire plunder was holy undeserved in the first place, is a different question.
2 Joan Robinson dismissed this argument with a clever quip in a lecture titled “The Theory of Value Reconsidered” delivered at University College, London in November 1968: “Income from property is not the reward of waiting, it is the reward of employing a good stockbroker.”
3 Another way to make this point would be to present the argument in terms of expected values as follows: Stipulate that a profit rate of 10% with probability 0.500 is not equivalent to a profit rate of 5% with probability 1.00, but instead is only equivalent to a profit rate of 4% with probability 1.00. In which case it is this “certainty equivalent” profit rate of 4% that the Sraffian framework demonstrates will exist in any economy that is sufficiently productive, and whose real wage is sufficiently low, that requires justification – and cannot be justified as reward for risk. For those concerned about the difference between knowable and unknowable uncertainty, and therefore the difference between insurable and uninsurable risk, the Sraffa framework offers an environment in which neither kind of uncertainty exists, and yet positive profits logically emerge if labor productivity is sufficiently high and wages are sufficiently low.
4 Put differently, what is asserted is that workers only lack a wage fund and machines to work with because capitalists deprived them of part of what they produced in the past.
5 Thomas Piketty’s exhaustive review of data on inequality of income, capital, and wealth in many countries over long periods of time in Piketty (2014) drives this point home quite clearly.
6 For a simple model that illustrates these important issues see Hahnel (2006).
7 For r > 0 employers will stop hiring more of an input when its MRP reaches (1+r) times its price, which implies that inputs will receive [r/(1+r)]MRP less than their marginal revenue product. So, for example, even if labor markets are competitive, if the rate of profit in the economy is 10% a worker whose MRP is $10 per hour will only be paid $10 − [.10/1.10]$10 = $9.09 per hour, and a worker whose MRP is $20 per hour will only be paid $20 − [.10/1.10]$20 = $18.18 per hour. Clearly differences in worker productivities still lead to differences in wage rates among workers, but as long as r > 0 all workers will be paid less than their MRPs in a capitalist economy. However, regardless of how inputs will be paid in a capitalist economy, the question addressed in this section is whether or not inputs to production, including labor, should be paid an amount equal to their MRP, i.e. whether or not MRP payments to the owners of inputs to production are fair and just.