Melançon Enterprises  Maurice Institute Library > Book reviews > John Isbister, Capitalism and Justice

Capitalism and Justice: Envisioning Social and Economic Fairness

by John Isbister

John Isbister, Capitalism and Justice: Envisioning Social and Economic Fairness (Bloomfield, Connecticut: Kumarian Press, Inc., 2001).

To use a quotation my mother said she had on her college dorm door: “Interesting, but irrelevant.”

That’s hard for me to say because this is subject-wise the kind of book I want to write, and I want it to have an impact.

The Structure of Capitalism

Isbister gives a description of capitalism:

{Pages 30-31.}

You might consider this a fair characterization, describing what actually is, and think it fair that other systems, notably communism, be dealt with the same way.  But this method is not quite that reasonable.  First of all, Isbister described what exists and called it capitalism Capitalism is global, Isbister wrote: a viable alternative or replacement might also have to be global.  (See The End of Capitalism As We Know It by J. K. Gibson-Graham for the opposite view, that capitalism coexists with many other systems and need not be conquered globally, but can be increasingly replaced locally: it is something we can fight.)  Capitalism is massively subsidized by other methods of production, in particular the raising of children in families.

Financial wealth is not real

Almost all financial wealth represents an asset to some people and a liability to others.  For example, if my company sells a bond to you, the bond is your asset and my liability: it represents what you own and what I owe.  Since bonds, stocks and similar pieces of paper are both assets and liabilities, they do not add to the net wealth of a country.  The true wealth of a country consists only of its real assets.

{Page 33.}

I don’t know to what extent this is true; I’ll have to learn more about wealth, finance, and such.

****Potential THESIS tie-in****

Capitalism grows because firms have to grow

Capitalism, as many have observed, is an engine of growth.

Capitalism has to grow because of the competition between firms: most firms are constantly in danger of losing market share to rivals.  They must do everything they can to improve their products and attract more customers; if they fail to do this they are likely to find themselves defeated or devoured by firms that are more aggressive.  One consequence is that many firms invest heavily in research and development of products.  In addition, governments in most copitalist countries support basic scientific research as well as applied technological research.  Technology is constantly improving, therefore, spawning new products and improved products and allowing more output to be produced with cheaper and fewer inputs.

{Page 37}

****Potential THESIS tie-in****

Capitalism is Inherently Unstable because the market is

I agree that capitalism (as we know it) is uneven, but I flat-out disagree with the reason Isbister gives for this.  I’ll present reasons someday, but for now call me a market fundamentalist.

Capitalist economies know periods of surging advancement as well as periods of stagnation and decline.  [...]  We understand now that governments can influence the stability of a capitalist economy, but they cannot permanently insulate it from ups and downs.  The reason is that capitalism is a global, decentralized system.  It consists of millions of people making decisions that are uncoordinated but that affect each other.  To a large extent, perhaps even miraculously, the market can mold these separate decisions into a smoothly running whole, but it cannot prevent every catastrophe.

{Page 38.}

Isbister’s explanation is silly.  Uncoordinated decision-making might cause chronic waste and inefficiency, but it doesn’t follow that such random interactions would lead to the “ups and downs” and “periods of stagnation and decline” he singles out as the problem of instability leading to “catastrophe”.  The very catastrophes he refers to are caused, in my humble opinion, by inequality.  I would attribute the productivity and growth of capitalism to the fact that .  Those with the most power in those uncoordinated market decisions, organized as corporations, want everyone else to spend but do not want the same everybody else to earn.  Hence the problem.  With relative equality of wealth, several relevant conditions would be different.  There would not be people with a disproportionate interest in having other people spend and a disproportionate power to bring it about (although corporations could fill the same role anyway).  More important, no one would have the ability to force down others’ earning power.  Also, people even without work would have the resources to continue to spend on things they need.  If corporations still exist in their present form and laid off people because they have excess capacity, more people would have more resources to start new enterprises producing something of value for other people, and those other people would have the resources to buy it.  If corporations existed in a relatively equal world, they couldn’t sit on unsold merchandise and unused plants, waiting out the downturn and buying up cheap assets from smaller competitors.  The decentralized wealth would already be flowing to productive uses that would threaten to make their operations obsolete.  Periods of stagnation and decline are not due to the market, but to inequality.

Government Participation

In the United States, governments at all levels are responsible for almost one-third of the country’s output, and government regulations influence the way in which the remaining two-thirds is produced.

{Page 39.}

Friedman’s Defense of Capitalism

Milton Friedman, as paraphrased by John Isbister:

Capitalism creates individual freedom, according to Friedman, because it decentralizes economic power.  In socialism, fascism, or other noncapitalist forms of social organization, economic decisions are made centrally, by the state or by a small group of pople.  Because ordinary people do not own or control property, they lack the freedom to pursue their own goals.  They are completely subject to the whims of the people who control the resources.  In a system of decentralized markets with private ownership of property, on the other hand, people are free to do what they want.  They can enter into any market they want or withdraw from it, since exchange in free markets is voluntary.  They engage in market transactions, therefore, only to the extent that they believe they will benefit from those transactions.

{Page 41.}

I couldn’t agree more.  And the more decentralized economic power is – meaning the more equal everyone’s wealth – the more people have the freedom to pursue their own goals and the less they are subject to the whims of the people who control the resources.  Where Friedman’s logic breaks down is in his binary (on-off) view of voluntary exchange.  ‘Give me your wallet or you die’ blends into ‘Give me your labor or your children starve’ and reaches at the other extreme ‘Give me overtime if you want the money to buy that boat’ and ‘Give me $2.39 for a loaf of bread.’  When is an exchange truly voluntary?  When it is between people of equal power.  Relatively equal wealth approaches equal power closely enough in the case of market exchanges to make them voluntary and free.

Isbister also criticizes Friedman on the grounds that “participation in capitalist markets is involuntary.  Since we have no alteranative but to participate in capitalist markets, it is incorrect to assert that markets necessarily expand our freedom of choice.  For such an assertion to make sense, we would have to have an alternative to markets, and we do not.”  {Page 42.}  More broadly, I must add, we don’t have an alternative to society either.  (I think enough good land should always be set aside for those who do want to withdraw from modern society and technology and everything; it should at least be a viable choice which it isn’t now; but that hardly absolves society of the responsibility, being the only true option, to be the best we can become.)  Society therefore has an obligation to provide as much diversity in its organization as practible and to provide freedom and justice to the fullest extent possible.

Incidentally, unlike Friedman, Isbister takes equality as a foundation value.  For me, freedom and justice both require (relative) equality.  Liberty and justice are the foundation principles, and equality merely a corollary.

Alternatives to capitalism

Isbister attacks all alternatives to capitalism of them as inferior or impossible.  His argument is unpersuasive and largely depends on calling the countries that experienced communist revolutions socialist, and discrediting socialism on their record.  “On the whole, our experiences with the dream [of “postcapitalism”] — and they have been extensive — have been nightmares.”  Page 50.

I think what this record proves is not the impossibility of good non-capitalist economies, but the need for non-violent change even though, as the same record also shows, only violent revolution will probably be able to effect huge changes (because the defenders of the status quo will respond with violence).  That is, the twentieth century proves that violent revolutions can go violently wrong, not that economies without private property and markets are inherently evil.  I say this as someone who disagrees with fundamental tenets of socialism, as someone who believes that private property and markets would be central parts of the best possible economic system (I just think that relatively equal wealth is also necessary).

Isbister’s side comments about the electoral unpopularity of socialists is outside his analysis and frankly beneath him; the major problem with capitalism or any bad system is its control over society, via bias in the media and in government including direct repression when something like socialism starts to get popular anyway.  See much of the nineteenth century and such things as the actions of U.S. President Woodrow Wilson during and after World War I (e.g., jailing Eugene Debs, invading Russia) for examples.

Capitalism changed hugely in order to survive.  In my opinion governments of powerful countries had to create a huge middle class in their own countries in order to stay in power, leaving the extra workers that allows tremendous exploitation in other countries which are mostly not controlled colonially, but with military and economic intervention to keep one exploitation-assisting elite or another in power.  Capitalism remains my favorite form of exploitation, but I’d rather not have any.  My point is that given the huge changes in capitalist countries themselves; given the disturbing similarities among authoritarian-government capitalist-economy Czarist Russia, authoritarian-government, “communist” (centrally controlled) -economy Soviet Union, and a authoritarian-government, capitalist-economy Russia under Putin; and given the smooth transition in China without even changing the one political party— the countries that call themselves communist are not necessarily any more communist than they are democratic (which most of them also claim to be).

In Russia, after the 1917 revolution finally broke the power of the Czars, worker control of industry was crushed by Lenin already, and Stalin’s evils are infamous.  To say that anything approaching people power has been violently repressed, such as with the Paris Commune, or even subverted, is far from saying that non-capitalist economies are impossible or inevitably “nightmares.”  History and external pressure, for example put on Russia, can explain some of the nightmare of “the dream,” but the main point is that people did not acheive real power and that revolution, invasion, and World War II may have removed some of the balances that even the czars faced as the evil Josef Stalin created a power base for himself.

As it has existed, especially today, the dividing the communist and capitalist along those lines makes less sense than viewing them all as degrees of fascism (government intervention in or control of economy and society for the benefit of business).  Any serious attempt at describing the world, though, must look at attributes of government on several levels (such as democratic or oligarchic control, influence by whom, repressiveness in the country, imperialism abroad) and of economies also on several levels (extent and character of government direct control and regulation, concentration or diffusion of private power), rather than using any such labels.

****Possible THESIS tie-in****

Income [and wealth] Distribution

I rest my case on what would happen in a market economy with relatively equal wealth here.  Isbister claims that a market will necessarily create severe income inequality

I also put forth that the following facts strongly suggest that concentrated wealth is very inefficient.  I conjectured, before I had first learned the following facts from any source, that poorer people would on average get more productive value out of each dollar of their wealth even despite the exploitation inherent in inequality. 

According to calculations by the World Bank, in fifteen industrialized countries, including much of western Europe plus Canada, the United States, and Australia, the bottom quintile [20%] of households earns an average of about 8 percent of the national income, while the top quintile earns around 39 percent.  Of those countries, the United States has the most skewed distribution of incomes, with the lowest and highest quintiles earning 5 percent and 45 percent, respectively.  [...]

Uneven as these figures for household income are, they are egalitarian compared to the figures for the distribution of wealth in the United States (income is what you earn [or rather receive], while wealth is what you own.)  According to data compiled by Edward N. Wolff, the share of wealth held by the top quintile was 85 percent at last count.

{Pages 55-56.}

Isbister, using a combination of rough statistics, guesses, logic, and assumption (which I am prone to and particularly bad at, whenever the results can be checked, but which I have fortunately never applied to this topic) comes up with a salary ration of 8:1 as reasonably equitable range of incomes.  {Page 65 and preceeding.}  In his discussion of justice, he says that people’s incomes should not be proportional to the contributions they make to production.  He believes that we only deserve “compensation for the autonomous use of our will.”  {Page 65; also chapter 1.}  It’s a nice point in theory, and probably helps justify the taxation of incomes, but I find the practical value, in terms of both economic incentives and justice, to be nil.  Natural talent, the results of upbringing, and free will cannot be distinguished in the real world (and maybe only just barely even philosophically).  Rather, I take the view that with relatively equal wealth (giving external influences a shot at being equal) combined perhaps with competition-promoting restrictions on contracts and appropriate forms of democratic, co-operative, productive, and other organizations, people’s natural equality will result in incomes far more equal than they are now.  In any case, earned income would no longer be of dire importance to anybody; and rewarding on the basis of contributions to others welfare (whether due to one’s own “autonomous will” or other factors) makes the most sense.

Isbister also argues fairly persuasively that, to have capital distributed efficiently, we can’t put any set limit on incomes: society should never confiscate all earnings above a certain point.  He makes the same point with regard to innovation, and says that freedom also requires no ceiling, although progressive taxation he supports.  Pages 66 to 69.

In making the point about innovation, though, he chooses an example that shows the immense shallowness of his (and my) approach to economic fairness and efficiency.  He says that if Bill Gates’ income were capped at $160,000 (the top of his 1 to 8 spread) he would not have the incentive to innovate.  First of all, Gates has never contributed anything to technological innovation.  He is a very clever monopolist, and he put together an organization that allows and perhaps even fosters innovation within it (although note that Microsoft had to buy the company that made the NT operating system; Gates’ company apparently did not produce the innovation to come up with a sufficiently improved version of Windows within the company).  For the latter he certainly deserves some form of financial reward.  Unfortunately, the monopoly part of it has played a crucial role in stifling innovation that people get to use, and captured huge portions of the value to society that Microsoft software does provide.  Virtually any form of standards, with open source, would have served society better than a Microsoft monopoly (I write this as the LoveSan worm shuts down 15% of computers in many organizations, August 2003).

In any system that allows such immense monopoly power to be wielded by a few individuals, equality will be made a mockery.  The Microsoft case shows the importance of democratic organizations for standard-making to play a part in the economy.  It shows even more strongly the need for good property rights, in this case drastically revised intellectual property rights, to the fair and efficient functioning of the economy (not to mention the importance to the freedoms of people in the society).  Isbister actually gets to something like this point a little later:

The Market Can’t Do Everything

There are many things the private market cannot do on its own, including protect the environment, build highways, enforce workplace safety standards, and avoid severe business cycles.  For these and many other purposes we turn to governments to constrain, guide, and supplement the market.  If we are to have any chance of moving in the direction of a just income distribution, government intervention is the main tool we have.

{Page 75.}

(I say that exploitation is inevitable because with unequal wealth workers have far less bargaining power and investors far more than with equal wealth.  Thus, workers contribute more value than they are paid and stocks – representing partial ownership of a corporation – return on average per year 12 to 20% of their value to those who can afford to own them).

Just Taxes and Just Income Distributions

Libertarians and almost everyone else, including economists, think it is illegitimate to use taxes to change the distribution of income.  On the other hand, people almost unanimously want taxes to be fair; and many are not averse to using government transfer payments to improve the distribution of income.  {Page 84.}

The view that taxes should be fair implicitly assumes that the underlying “market-generated” income distribution is fair.  {Page 85.}

Efficiency Principle

The problem addressed by the efficiency principle is that taxes generally have side effects; they induce people to change their behavior as they try to avoid or minimize the tax.

Inefficiencies caused by taxation include the possibility that income taxes will cause people to reduce their working hours and that taxes on savings will cause people to reduce their savings.  The empirical studies tend to show that such effects, while they exist, are relatively small.  The main way that the current American tax system could be made more efficient is by closing the numerous loopholes in the personal and corporate income taxes that induce people to engage in tax-avoiding rather than productive activity.

{Page 86.}  (Emphasis added.)

Isbister argued against what he called Robert Nozick’s libertarianism, typified by the example of Wilt Chamberlain: Chamberlain, the owner of his basketball team, and the fans all acted ethically and did as they wanted, so the state is not justified in taking away any of Chamberlain's income.  Isbister provides several rebuttles:

Pages 82 to 83.

Nozick’s position is that if you act legally, according to the standard rules, you may keep everything you have.  To overstate his view only a little, as long as you stay out of jail you are in the clear.

Page 83.

Isbister’s best and best-argued reason that a person doesn’t have total claim to his or her income and wealth is that he or she doesn’t control a huge number of their contributing causes.  He gives himself as an example:  he earns his income from teaching, being productive at something,

but exactly what I earn depends on many factors for which I can claim no credit.  My earnings depend partly upon my good fortune in living in a rich country, the quality of the schools I went to, population growth in my state, political decisions made by the legislature, thee investment successes of my institutionr’s treasurer, the popularity of my particular field, and much more.

[...]

How can I say that I deserve every cent of my income when I have no control over so many of the factors that are responsible for it?  I earn perhaps twenty times the salary of a professor in Russia, not because I am twenty times as meritorious but because of the accident of location.

I am, of course, partly responsible for my income and my assets.  I have worked for them.  I am not completely responsible, however, because so many other people and factors — besides my own efforts — have contributed to my holdings.  It follows, therefore, contrary to what Nozick asserts, that society — acting through the agency of the democratic state — may change my holdings, in order to bring them closer to what I really deservne, that is, in order to improve the quality of social justice.  It may not, however, completely confiscate my holdings because I am partly responsible for them.

Pages 83 to 84.

The talk about responsibility for one’s income made me think that, incidentally, the fact of being responsible for one’s own income and assets is hardly related to justice either.  The person or corporation that creates a monopoly, threatens competitors out of business, or buys politicians to boost their incomes have done it themselves, but don’t deserve it. Thomas Paine wrote in 1795 in his pamphlet Agrarian Justice:

Land ... is the free gift of the Creator in common to the human race.  Personal property is the effect of society: and it is as impossible for an individual to acquire personal property without the aid of society, as it is for him to make land originally.  Separate an indivudual from society, and [...] he cannot be rich. ...  All accumulation, therefore, of personal property, beyond what a man’s own hands produce, is derived to him by living in society; and he owes on every principle of justice, of gratitude, and of civilizatio, a part of that accumulation back again to society from whence the whole came.

Isbister, page 83.

(the "..." without brackets probably indicate that Isbister left something out, the [...] in brackets are places that I left stuff out.)

Redistributive Taxation

The market allocates incomes to some people that are insufficient to provide a decent life, and it allocates incomes to others that are so lavish as to far exceed any reasonable need or desert.  These are injustices, not just regrettable occurrences.

The tax system should redistribute incomes so that the after-tax distribution is more just than the pre-tax distribution, if not completely just.  Taxation is the only tool we have for changing the entire distribution.  Transfer payments can correct the worst injustices at the bottom of the distribution, but they are powerless to adjust the excesses at the top.  The principle that should inform taxation is not ability to pay but justice.  Taxation should bring more equality to the incomes that we receive, it should do this while respecting people’s liberties, and it should not create disincentives that make the economy inefficient.

I disagree that “Taxation is the only tool we have for changing the entire distribution [of income]”: moving wealth or otherwise giving people more equal power will limit the extent to which the wealthiest can benefit from the labor of others.  Power can be made more equal in many ways: protecting the right to organize and even fostering organization among people as workers and consumers; even by giving everybody an equal share of pollution taxes (on carbon dioxide and sulphur and ozone-depleting emissions and other such things that affect everyone) would mean that people could no longer be forced to work for extremely low wages, more people could take middle-class “profession” paths to higher incomes, and profits would go down.  These to me are the best ways to ‘change the entire distribution’ of income; and these ideas are an important part of my conception of justice.

Tax Reform

In order to see how taxes can be used to redistribute incomes, we need to know something about [who bears the burden ..] of different taxes[.]  This turns out to be difficult because some taxpayers are able to shift the burden of a tax.  For example, economists suspect that the property tax, while paid by property owners, is often shifted to renters in the form of higher rents.  Economists are divided on whether the corporate profits tax is shifted, and therefore whether it is a burden on the stockholders of corporations or on the consumers of goods produced by corporations.  [...]

The personal income tax is progressive[, but because of deductions or loopholse less progressive than its published rates make it appear (this is pre- Bush II).]  Still, there is little opportunity for people to shift the personal income tax onto the backs of others.  According to estimates made by Richard and Peggy Musgrave, the payroll tax — the tax that supports Social Security and Medicare — is progressive at the low end of incomes and regressive at the high end[: ] it is imposed disproportionately on middle-income people.  Its high-end regressivity is a consequence of two factors: that it is imposed only on wage, not investment, income and that it is not imposed on annual wages above a cutoff level, currently [2001] $76,200.  The sales tax is clearly regressive, since poor people spend a high proportion of their incomes on consumer goods and save little, while higher-income people save a higher proportion of their income and consume a lower proportion.  Sales and excise taxes together take about 7 percent of the incomes of the lowest 10 percent of taxpayers, but only 2 percent of the incomes of the upper 10 percent.  [(also pre-BushII.  I wonder about the middle.)

{Pages 91 to 92.}

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