Sunday, April 1, 2012

Rawls and classical political economy


John Rawls's A Theory of Justice is highly relevant to the ways we think about our economic system.  If we just read the citations, Rawls seems to be primarily influenced by "modern" economics -- Samuelson, equilibrium theory, game theory, and marginalist theory.  And so we might suppose that his moral worldview reflects a neoclassical vision of economy and society.  However, his thought actually seems to reflect a recognition of the intellectual tension between classical political economy and “modern economics”.  In some ways his framework for thinking about our contemporary economy seems to be closer intellectually to Mill, Ricardo, and Marx than it is to Pareto and Samuelson.

Classical political economy was premised on the labor theory of value—the idea that there is a concrete, economically meaningful measure of value that guides economic organization. Further, there was the idea that the economic needs that individuals had were also concrete—the consumption goods that permitted life to proceed. These goods included items like food, clothing, shelter, medicines, and perhaps schooling. So economic activity, according to the classical economists, was about something objective.

Neoclassical economy, by contrast, rejected even the idea of utility as a concrete or objective human reality. Instead, modern economics bracketed the reality of needs in favor of a metaphysics of subjective preference.  Economists no longer needed to think about what people needed, but rather simply what they preferred; so the utilities "consumers" ascribed to outcomes could be discovered by the quasi-experiments of “revealed preference.” Welfare was then defined as the extent to which the individual can satisfy the range of subjective preferences he or she happens to have.  So classical and modern economic paradigms differ substantially on what economic activity ought to achieve: satisfaction of material needs, for the classical economists; and satisfaction of subjective preferences, for the modern economists.

A major thrust of the critique of neoclassical economics arises at just this point. Development organizations like the Dag Hammarskjöld Foundation and economists like Amartya Sen have put forward fundamentally different ideas about human wellbeing.  The basic needs approach disputed that the goal of economic development in poor countries should be defined in terms of subjective preferences or utilities.  These thinkers argued instead for achieving a decent minimum for whole populations in the satisfaction of basic needs. A 1975 report from the Dag Hammarskjöld Foundation to the United Nations (What Now – the 1975 Dag Hammarskjöld Report on Development and International Cooperation; link) is illustrative; it emphasized the idea of basic needs within the discussion of development priorities.

Amartya Sen went a step further, by introducing a more adequate theory of the human person in terms of capabilities and functionings, and argued for a conception of wellbeing that is defined in terms of the ability of individuals and populations to realize their capabilities. Sen advanced these ideas in many places, including On Economic Inequality and Development as Freedom.  (Earlier posts have discussed the capabilities approach; link, link.)  These are objective criteria of wellbeing, not simply summations of subjective preference satisfaction.  And these frameworks of thought present a major challenge to the foundations of modern economic thought.

In light of these observations, it is very interesting to observe that Rawls defined the foundation of his theory of justice, the original position, in terms that are strikingly classical.  In the original position, representative individuals are asked to deliberate behind a veil of ignorance about what principles of justice they would choose to regulate their social cooperation and competition.  Individuals are presumed to be mutually disinterested, and their sole concern is to adopt principles that they can live with in the resulting society.  But what are their interests?  Rawls says that the participants in the OP are interested in a set of primary goods: material resources and liberties, essentially. These are "things which a rational man wants whatever else he wants" (TJ:92).

So Rawls's definition of the situation of deliberation within the original position is one that focuses on primary goods, not subjective utilities. And this sounds much closer to a classical assumption about economic interests and the human good than it does a modern assumption.  It offers an objective and realistic assumption about what people need in order to live decent lives.

This line of thought is supported by a second feature of Rawls's philosophical orientation.  The most basic substantive moral position that Rawls takes is his rejection of utilitarianism as a general principle of justice.  Just institutions are not defined as those that "create the greatest good for the greatest number."  Instead, they are defined as those that can be assured to provide fair circumstances of life for every citizen.  This is established by the unanimity rule.  Choice within the original position must be unanimous; and this means that it needs to support the interests of every participant.  In order to make the idea of the OP an intelligible one, Rawls needs to specify a decision rule for the participants. He argues for the maximin rule over the expected utility rule: the participants will each choose the path that has the least-bad worst outcome.  This choice of decision rule, it should be emphasized, does not reflect an assumption about risk-averse psychology, but rather a compelling reason for choosing this rule.  The stakes are too high to do otherwise. So when participants deliberate among institutional alternatives from the perspective of the maximin rule, they will choose a governing norm like the difference principle. And this too seems to be an implicit rejection of the foundations of modern economics, including the theory of subjective utility and the idea that the only thing that matters from a moral point of view is maximizing "welfare". Here Rawls draws on Kant, to recognize that the way that social outcomes arise is morally as important as the value of the outcomes themselves.  Rights based on justice can be in tension with overall maximum utility.

So I'm inclined to argue that the greatest contribution Rawls made to contemporary economics is his strong and philosophically convincing case for primary goods and his definition of a good life. His rationale for primary goods is that a person’s ultimate goals are set by his or her conception of the good, and there is no reason to expect there to be a common agreed-upon standard for the conception of the good. It is logical, however, to observe that there are some goods that every individual requires in order to pursue any conception of the good: access to material resources and liberties. This seems like a nod towards the moral worldview of classical political economy.

(See a post on "property-owning democracy" for more discussion of the institutional implications of Rawls's reasoning.)