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Don’t Expect the Market to Pay Just Deserts

Ryan Bourne

In a post on Tim Montgomerie’s new website, Unherd,
Charlotte Pickles highlights polling
from the US and UK showing
which groups of rich people the public believe are “deserving” of
wealth.

The results are perhaps unsurprising: high-skilled engineers and
scientists, inventors of new products and services, owners of
technology firms and founders of manufacturing companies were all
regarded as deserving; sports stars, pharmaceutical companies,
Hollywood actors and senior bankers were seen as undeserving. The
results for chief executives and real estate investors were
ambiguous.

What should we make of this? On one level, the results are an
interesting reflection of what “society” views as just deserts. But
this becomes much more problematic when the implied reaction is
that “something must be done about it” from a policy
perspective.

That’s because we should not expect market transactions to
follow claims of moral desert. Yet it does not follow that setting
maximum wages, fixing pay ratios with others or redistributing
large amounts of income in that pursuit would be good for society
or produce just outcomes either.

As Friedrich Hayek wrote in Law, Legislation and
Liberty
, “the manner in which the benefits and burdens are
apportioned by the market mechanism would in many instance have to
be regarded as very unjust if it were the result of deliberate
allocation to particular people. But this is not the case.” In a
free market, the distribution of income depends not on what an
individual “deserves” but the value of particular activities as
determined by supply and demand.

That is the main problem with the way many people on the
political Left judge market outcomes and inequality – they assume
that a market judgment is akin to a moral one. “Surely it is
morally wrong that a footballer earns so much more than a teacher
or a nurse?” is a frequent lament. And to be fair, some on the
political Right make this same mistake too, seemingly claiming that
all returns to labour or investments are deserved or just and that
those on low incomes deserve their relative misfortune.

Both views are misguided. In fact, prices and wages are
important not because they reflect desert, but because they provide
information to producers about which products, services, individual
skills and attributes are desired. Prices reflect the aggregation
of individual transactions, and the supply and demand decisions of
millions of individuals across different sectors, which
subsequently lead to the commitment of new investments and shifting
resources to areas where they are most valued.

The arguments against fixing people’s wages or seeking to
redistribute vast amounts of income are therefore nothing to do
with assuming the status quo reflects “just deserts” or the
inherent morality of market outcomes. No, the argument against
having government or some central planner, or even majority opinion
in this case, determining who gets what, is based on the
unachievability of, and inefficiency caused by, central planning to
achieve “just” income levels.

First, by fixing or ignoring prices, resources will be
misallocated away from where they are most productively used,
making us all poorer overall. Second, the state faces a huge
knowledge problem – it is virtually impossible for it to judge how
much success or failure is attributed to skill, wise or bad
investments etc as opposed to luck and, hence, how to redistribute
accordingly. Even if we set out to link pay or at least post-tax
incomes with “desert”, we could not. And, third, the state would
have to make vast intrusions against economic liberty and our
freedom to pursue our own wants and desires in any attempt to
structure economic outcomes according to desert.

All this is not to say that a form of social insurance would be
unacceptable given the ebbs and flows of capitalist activity. Hayek
himself argued for a basic safety net. But attempting to make
income and wealth outcomes reflect a majoritarian view of “desert”
would be both unattainable in practice whilst inflicting vast
economic damage.

Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute