Markets, Chance, and Moral Desert

The global intellectual climate is resolutely against free market economics at the moment in the wake of the worst economic recession since the Great Depression.   As someone generally well disposed to free market economics, I believe much of the criticism against market economics is unwarranted.  I acknowledge that certain sectors of the economy, such as health care and the military, should not be run on a free market system, but the vast majority of economic activity should take place within a competitive market.   What contemporary economic populists wrongly believe is that the market itself is the cause of Enron scandals and catastrophic financial disasters.  Human nature is the cause of corruption and greed.  Now that I have sufficiently distanced myself from the lynch the bankers crowd, I would like to advance a different ethical objection to the market.  My objection concerns the under-appreciated role of chance in determining winners and losers in a market economy.

I believe that any proper justification of the vast economic inequalities generated by a market must rest on two key principles.  First, individuals have a right to the property, wealth, and power they legitimately acquire through fair and free market transactions.  Second, the distribution of economic  fortunes sufficiently reflects differences in ability or work ethic to be consistent with a limited degree of equality of opportunity.  A clarification of the second principle: the strictness of this standard will vary depending on one’s economic philosophy, but I take it as a given that most people will support the goal of limited interference in our economy to keep it meritocratic.  If you don’t believe the government has an obligation to uphold the second principle at all; consider the implications of abandoning public education, legally permitting companies to promote employees based on sexual favors, or allowing landlords to discriminate based on race.

Here’s the problem:  so much of what happens in a market economy is determined in large part by chance.  I was inspired by this problem while reading two recently published books that explore the role of randomness in our lives: The Drunkard's Walk by Leonard Mlodinow and The Black Swan by Nassim Nicholas Taleb.  Both are informative, interesting, and well worth a read.  Although each book approaches the role of uncertainty differently, they agree on the point that people’s economic outcomes in large part are determined by chance.  The problem is that the market economy rewards people’s efforts based on a small sample size that is often not statistically sufficient.  For example, JK Rowling was not exceptionally skilled at writing fantasy novels, she was incredibly lucky and made a fortune while similarly talented writers never found a publisher or attracted the unpredictable taste of a mass audience.  The filmmakers who produced The Blair Witch Project for $60,000 were simply incredibly lucky to raise $140 million in domestic box office revenue instead of next to nothing.   As a result, the connection between a person’s efforts/talents and the outcomes he/she receives is weaker than we generally like to admit.  It becomes far more difficult to accept the vast economic inequality in our society once we realize how much people’s differing outcomes are based on chance.

Perhaps the best response to this objection would be that individuals choose to accept different levels of risk in their lives based on the occupations and investments they pursue.  If this is the response, however, it seems prone to the objection that societies should be allowed to insure themselves against the whims of chance by implementing a strong social welfare state that redistributes wealth.  This line of reasoning would naturally extend John Rawls’ justification for a more interventionist state.  In A Theory of Justice, Rawls argues that if people were put behind a viel of ignorance that entirely hid their identities (meaning they were unaware of their social class, natural abilities, etc) these people who choose a strongly redistributionist state to protect themselves against the worst poverty. If a just society tries to smoothe out the unearned differences in economic standing resulting from the luck of birth, then the importance of luck in determining market fortunes would augment the justification for redistribution.  Just as Rawls believes we are not morally entitled to our natural and social endowments, we have only a weak claim to deserving our varying economic fortunes given the important role of luck in a market economy.