Elizabeth Warren’s non sequitur about taxes

People tend to think that theoretical and philosophical stuff can be left to professors, to the kind of people ready to write 100 page papers to argue a minor point (or no point at all). Common people tend to think that no harm may come from theory, even very bad theory. Unfortunately, it is not so. Ask the Germans, ask the Russians.

Elizabeth Warren, an American politician in the Obama administration, and also a Harvard law professor, made use of the arguments about taxes and ownership that professors Murphy and Nagel presented in their book The Myth of Ownership (Amazon). Here is Elizabeth Warren repeating the argument:

I have dedicated seven posts to the analysis of that very deficient argument: 
Murphy, Nagel, Sunstain, and Dworkin on property rights
Murphy, Nagel, and Lenin, on ownership
Rhetorical devices in The Myth of Ownership
Murphy, Nagel, and Marx on surplus value
Philosophers on the efficiency of Taxes and Welfare
Nagel and Hayek on government and wealth
Who needs a replacement for Marxism?


The main book, the most extensive defense of the fallacy, the source where everyone who wants to justify higher taxes goes for inspiration is The Myth of Ownership. But it is not the only source, as I mentioned in the posts cited above. Cass Sunstein, Obama’s regulation Tzar, has adopted it too. So has done Ronald Dworkin, a law professor whose influence extends even to Argentina, where I was born and live. Argentines in high positions have a peculiar taste for unsound ideas.

What prompted me to publish the posts about the issue was the astonishing fact that, with the exception of a reviewer, nobody seemed to have contradicted the main argument of The Myth of Ownership, now repeated by Elizabeth Warren. And I have learned that when very bad ideas, presented by famous professors, praised by other professors, by reviews and newspapers, when these ideas meet little or no resistance, they become undeniable truths –the kind of truth that only ignorant people ignore, and half-educated people don't dare to question. Professor Sunstein feels that it is safe to write that those who refuse to accept the argument are “comically implausible”.

Elizabeth Warren is merely repeating an idea that has reigned almost unchallenged in the academia. Certainly, I have read that some journalists have attempted to defend Warren’s argument by diluting the poison in it. She doesn’t argue for collectivism, they say, only for higher taxes. But how high? And more importantly: on what grounds? For the grounds on which the higher taxes are justified will define the limits of the State that will impose them (or whether any limit will remain).

The grounds are collectivistic. As I have tried to show -see the second post on the issue- the argument runs against the most fundamental ideas that define property rights and contractual liberty, against the assumptions we share when we buy a car, start a company, or collect our salary. That is to say, it runs against the way we live our lives.

Who needs a replacement for Marxism?

This is the last article on the theories defended by Murphy and Nagel in the book The Myth of Ownership

At the end of The Myth of Ownership, Murphy and Nagel put their own ideas in historical context: “In the aftermath of the century during which the Marxist conception of equality played itself out, at enormous cost, the question is whether a different kind of egalitarian social ideal, one no intrinsically incompatible with capitalist economic institutions, can take hold in the Western democracies”.[1] Certainly Marxism has lost a considerable part of the luster it enjoyed for too long. But there is hardly a need for a replacement.

Actually, Marxism played itself out as a theory long before it was tried on people. Its many mistakes had been clearly demonstrated by the Austrian economist Eugene Böhm-Bawerk before the XIX century had come to an end (link to his article on the Marxist system). It was not necessary to try the poison on people. But it was tried. Then again, once it had produced the famines, the massacres, the show trials, the Gulag system of forced labor, it was not necessary to wait for decades till it finally crumbled in a pile of shame, to reach the conclusion that it was dead wrong. It was so from the start to those who suffered under it.

To many of those educated in the universities of the West, at long last, Marxism starts to look slightly less convincing; a bit less obviously true –though a poll conducted in Britain by BBC 4 in 2005, on its audience, gave Marx as the most important philosopher in history, well ahead of the rest. In other countries, large numbers of people adhere to Marx’s theories about exploitation and class struggle, but without caring about the origins of their ideas. In the US, however, the results of a poll similar to the one conducted by the BBC would have been different.

Marx thought that he had found a fundamental economic objection against capitalism. Against a system that was creating wealth and increasing population as never before in history, Marx did not use altruism and moral arguments (as, for instance, John Ruskin did). Marx thought that socialist production would be more efficient and avoid the contradictions he thought he had discovered in capitalism. Since Bohm-Bawerk’s article on the Marxian system, every informed economist knows that Marx had deluded himself –and misguided millions of people. Nevertheless, many economists and philosophers try to succeed where Marx failed: they try to show that capitalism is inefficient and must be corrected by the exercise of political power. They write theses that would prove that they have unearthed inefficiencies in the form of services wanted but not provided, public goods, free riders, natural monopolies, and a host of justifications for increasing intervention. It has become the surest path to a Nobel Prize in economics.

Murphy and Nagel think that their proposals could be accepted even in the US. They say that their theory is compatible with capitalism, or at least with some sort of capitalism. After all, they write “there is no natural or ideal market. There are many different kinds of market system, all equally free, and the choice among them will turn on a range of independent policy judgments”. Here, “independent” means: the decision should be taken independently of the value one may see in having a market system.

But what are the different free markets they have in mind? We must remember that highly praised thinkers would allow considerable latitude in the choice of the different kinds of market system: as said, John Rawls thought it natural to assume that free markets may or may not have private ownership of the means of production.[2] We do not know whether Murphy and Nagel would share Rawls’s view: their words about what must be left in private hands for the system to qualify as free market are vaguer than that of the master. But vagueness about “hindrances” and “conditions” is not a way to reconcile their theory with capitalism. At the very least, we must remember that Murphy and Nagel admit the morality of private property only in the form of a Hegelian minimum.

When we consider compatibilities and contradictions, we must understand that we are not assessing whether capitalism would survive a single day after theories like those of Murphy and Nagel are adopted, or would fall immediately. Of course, if all means of production are taken by the government, the market is killed –and Rawls’s assertion to the contrary will not keep it alive a single second. But there is also a slow death caused by “conditions” and “hindrances” incompatible with freedom. When we say, for instance, that heavy drinking is incompatible with a career in sports, we do not say that a successful sportsman will fail the day after he starts drinking too much. A very gifted individual may overcome some of the worst consequences for some time. But there is nevertheless a contradiction, something that drags him down, and it would be better for the drinker to recognize it as such. To be sure, a mangled market would work, some capital would be accumulated under the worst conditions, and inventiveness would fight bureaucracies for a long time. But, as with the sportsman, things would never be what they could have been.

It is worth noticing that Hegel himself did not suggest that property should be divided between a minimum that deserves full legal protection as a right, and another larger portion that lacks it. There is nothing in Hegel’s justification of property rights that restricts it to some portion of goods. Anyway, it would be of historical interest to discuss whether it is fair to attribute to him that distinction but, of course, it would not settle the question whether it makes sense.

For their part, Murphy and Nagel assume that the distinction is quite obvious, and tell us that the right to do whatever we want with a minimum of personal belongings does not cover “the freedom to engage with minimal hindrance or conditions in significant economic activity of the sort that drives a market economy”.[3] Now, what is capitalism if we take from it the freedom related to the significant activity that drives it? Steve Jobs would have been allowed to drive his car, but not Apple; Cornelius Vanderbilt would have been allowed to do what he wanted with a small boat, but not with his ship company.

Murphy and Nagel trace a line: any encroachment upon the Hegelian minimum would need exceptionally strong justification from the government, but not if it applies to property that is larger than that: “Some forms of personal discretion –including the basic Hegelian right to hold personal property– are at the core of the self, but unimpeded economic freedom is not one of them”.[4] They repeat it: “While the protection of some form of private property is an essential part of human freedom, the overall structure of the system of property rights should be determined largely on other grounds”.[5] That is to say, they are not part of human freedom.

Again we recognize that lack of perspective that we encountered in the discussion about incentives for work. It may be true that personal property like a comfortable house, a good salary paid by a prestigious university, a car, a personal library, and a few other things may be enough to allow a philosopher to pursue happiness. But Henry Bessemer –the inventor of mild steel– needed smelters; and Henry Ford needed production lines; and Robert Noyce –of INTEL– needed semiconductors. A Hegelian minimum would have not been enough for them, and the rest of us is no worse for that.

Certainly, what the debunkers of ownership have in store for capitalism is described in very general words: what is the kind of “hindrance” in the economic decisions of entrepreneurs that the government can impose without need of any strong justification (which would be needed if it affected an undefined Hegelian minimum)? We would not know until it has been imposed. In fact, we cannot expect anything more precise because the decisions that may be necessary to adopt cannot be known in advance, as proper legal rules are and must be. Friedrich Hayek explained long ago that a government that sets about deliberately distributing wealth, taking from some and giving to others, cannot tie itself to rules known in advance.[6] A government that directs its action mostly to the enforcement of general rules leaves to individuals the responsibility of deciding what is best for them according to present and future conditions, as they judge them.  But a government that tries to redistribute wealth must treat people differently, and in order to be effective it must take into account their changing needs. It must decide questions “on the merits”, that is, taking into consideration individual circumstances. It must watch the evolution of the economy, decide who is to get what now, and decide it again next year.

Nothing of that can be asserted in advance. Unless, of course, it is framed in vague words like “fair allocation”, and “reasonable payment” (and “hindrance”), with the usual provisions that “exceptional circumstances” (as judged when they present themselves) may justify distinctions. So, in a way it is not always true that collectivistic politicians and thinkers hide their plans from us in order to avoid resistance. Even if they wanted to be precise about what they will do to us (which is seldom the case) they could not do it.

Capitalism –even of the kind we have, which includes considerable government intervention– will be seriously affected if the theory that guides its course states, like Murphy and Nagel do, that “Evaluation must decide how 'mine' and 'yours' ought to be determined; it cannot start with a set of assumptions about what is mine and what is yours. The right answer will depend on what system best serves the legitimate aims of society with legitimate means an without imposing illegitimate costs”.[7] That evaluation, inevitably, will be left to the government –the legitimate means will be determined in the same way. What is crucial is that to justify or reject the decision –the authors declare– we “cannot appeal, at the fundamental level, to property rights.”[8]

However, we must realize that property rights that are secured against the changes in the “evaluation of what is mine and yours” are a fundamental requisite for capitalism. Murphy and Nagel’s theory is not really compatible with it. Indeed, if such redefinitions of mine and yours were possible, the rule that protects private property in the 5th Amendment of the US Constitution would mean nothing. Nevertheless, professor Waldron writes “The slogan that property is a human right can be deployed only disingenuously to legitimize the massive inequality that we find in modern capitalist countries”.[9]

Murphy and Nagel call the basic tenets of capitalism, “extreme libertarian”,[10] and sometimes, “everyday libertarianism”.[11] This is highly inaccurate. Libertarian-anarchism has never been implemented in the US, and it is not against the remote chance that it would ever be adopted that Murphy and Nagel argue. They reject the usual and general notion of ownership, they call for redistribution of wealth through cash transfers, and they claim that governmental “hindrances” on entrepreneurship do not need strong justification. Their objections apply really to capitalism.

 The tenets of collectivism

As Marxists and Socialists before them, Murphy and Nagel do not see any relevant difference between general rules under which individuals follow different roads (some successfully, some not), and a system that treats individuals differently in order to reduce a gap between their incomes or to achieve some other social goal.

At the end of the day, we are told, both systems are no more than different ways of allocating resources. One of them generates differences of wealth among individuals, the other generates more equality. The main difference lies in the effects. That these effects are the result of free competition or of government’s coercion is an irrelevant detail of no moral significance. After all, if it is true that taxes are imposed on individuals and that they cannot resist them, it is also true that success is imposed on them by luck, social factors, and even genetics. All of that is, in one way or another, external to people.[12]

Moreover, is it not true that coercion is used to prevent and punish robbery? Certainly, welfare payments put money in the pockets of some people after taking it from others –by force if necessary. But policing the streets and punishing criminals makes it possible for money to remain in the pockets of people, who would have been robbed otherwise. It is argued that these are just two ways of using the force of the state. We cannot say that one is substantially different from the other in any respect, apart from the different distribution of wealth that results from them.

Using this strategy, Cass Sunstein rejects the distinction between negative and positive rights. Just to remind the reader: classic rights like ownership and freedom of trade are often called “negative rights” because people exercise them by themselves; laws may protect them against violence and fraud but no law is necessary to exercise them. In contrast, positive rights consist in help that people are entitled to get from the government. Why are they called “positive”? Because their exercise requires, not merely the absence of harm, but a positive transfer of goods and services.

Now we return to Sunstein. There is no essential difference, says he: welfare payments cost money, but so does the justice system. In both cases the government has to spend money.[13] Someone receives help from the government in the form a cash transfer, and another by being defended against robbers and murderers. Of course, the comparison obscures the fact that those who receive cash transfers are also protected against criminals. But if one forgets it, one may be led to think that we just have two different ways of helping different people.

These arguments are seriously presented as a proof that our common understanding of the issues involved rests on mere prejudice. However, even a child recognizes that there is a big difference between begging his mother to carry him in her arms, and walking on his own legs. You may try to convince the child that there is no essential difference, and point out that when he struggled with uncertain steps trying to reach the other side of the room for the first time, mommy was there ready to stop an unruly brother from tripping his legs. You see, there is no real difference, there was help in both cases –there was a condition anyway. If you abandon your childish myths you would realize that being carried or walking yourself are just two different means of locomotion.

A child would not be convinced of that, but an adult might think that he cannot rationally reject the suggestion that ownership is a myth, as it is claimed in books hailed by experts as masterpieces; books brimming with references and lengthy examinations of what people would decide if they were not themselves. The reader of these books might have the vague feeling that there was something wrong somewhere in the arguments, that big and important things have disappeared from his eyes without him knowing how. I have tried to show by what means they disappear.

What Murphy and Nagel dismiss as mere myth, as entirely imaginary, as “morally irrelevant”[14] are some of the basic principles of capitalism. In the past, collectivism used to be forced upon us with the claim that it was historically inevitable. If you wanted to avoid being looked as a hick, you had to acknowledge that property rights and such were myths, part of a superstructure made for the defense of capitalism –which was a contradictory system. Only thick-headed people could delude themselves into thinking that they could answer these arguments.

Today you are told that your attachment to your property is merely a foggy notion that would not resist a thorough philosophical examination. Your resistance is proof of your lack of understanding. Your must avoid to be caught being –in Cass Sunstein words– “comically implausible”. However, again and again, we find that the theories that are hailed as fundamental contributions to our knowledge are really based on reasoning that is shockingly weak. And we find that the “myths” that are to be destroyed are the most fundamental principles that define the modern world. They are those that explain the difference between the age of the Pharaohs and our age.

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[1] Pages 188-189.

[2] A Theory of Justice, pages 57 and 137. Harvard University Press. Revised Edition 1999. Also in Distributive Justice: Some Addenda, in Collected Papers, page 159. Harvard University Press. Paperback edition 2001.

[3] P. 64.

[4] P. 66.

[5] P. 45.

[6] The Road to Serfdom, Chapter 6.

[7] P. 75.

[8] Same page.

[9] The Right to Private Property, p. 5.

[10] P. 65.

[11] P. 36.

[12] At the base of many justifications of redistribution lies the odd idea –assumed but never discussed– that individuals must not be considered as individuals (defined as such by their qualities and defects and judged according to them), but as ghosts that later on will receive their own personal characteristics. These are not essential or defining of anything, but accidents that ghosts –the true object of political theory– suffer in their transit to this world. Ghosts must be protected from the morally irrelevant accident that makes them individuals.

[13] The Second Bill of Rights, p. 197. In Argentina, Roberto Gargarella, a law scholar who blends Marxism with constitutional law, repeats Sunstein’s arguments to reject the distinction between negative and positive rights: Carta Abierta sobre la Intolerancia, 51 Siglo XXI Editores 2006.

[14] P. 99.

Nagel and Hayek on government and wealth

This is the sixth article on the theories defended by Murphy and Nagel in the book The Myth of Ownership

Government as the creator of wealth

As we have seen with the examples of prominent defenders of capitalism, they have always admitted the importance of institutions and of the rule of law. To be precise, theirs has never been a reluctant admission: it has been one of the main theses of, among others, Friedrich Hayek. However, we must understand that it is one thing to say, as Hayek did, that failure to uphold the rule of law is a serious obstacle for the creation of wealth, and quite another to say that it is governments that create wealth. It is one thing to say that protection against violence and fraud allow individuals to dedicate their efforts to the creation of wealth, and quite another to say that it is that protection that explains why some individuals are richer than others: they must have received more protection than the poor. Murphy and Nagel’s do not try to prove this second thesis. Instead, they suggest that we may take it as roughly true.

Before we go to their argument it is useful mention that their position is different from that of traditional socialism. If you prove, as Marx tried to do, that value comes only from the collective and indistinct labor of workers, leaving nothing to the ownership of machines and enterprises, of inventions and formulas, and individual skills, then it may sound logical for a while to argue that the soviets of workers are entitled to define “who owns what”. This is because they –the workers collectively– produced it. If that is true, ownership is a myth created to rob them of what is theirs collectively.

However, Murphy and Nagel’s focus is not on the worker’s creative power, but on that of the government. They argue as if the prevention of crime and the enforcement of contracts were the cause of the wealth not destroyed by crime, and the creator of the commercial abundance not prevented by fraud. Then they apply the same justification to redistribution, and try to prove that it is needed for efficiency reasons.

They draw momentous conclusions from the fact that governments (sometimes) protect rights. They assert that without government people would return to a state of nature, which Hobbes, they write, “aptly described as a war of all against all. And in such state of affairs, there is little doubt that everyone's level of welfare would be very low and –importantly– roughly equal. We cannot pretend that the differences in ability, personality, and inherited wealth that lead to great inequalities of welfare in an orderly market economy would have the same effect if there were no government to create and protect legal property rights and their value and to facilitate mutually beneficial exchanges”.[1] Already there are many objections to these assertions, but let’s follow the authors’ argument: “If the relevant baseline for the assessment of benefit is the very low level of welfare, roughly the same for everyone, that people would have in the absence of government, then we can use people’s actual levels of welfare, with government in place, as a rough measure of the benefit conveyed to them by government”. 

Rather than a rough measure, that is a false measure. It would mean that Thomas Alva Edison received more benefits from the government than his neighbor, who never invented anything and lived within a modest income. Applying the theory, we would say that, roughly speaking, the government benefited Edison in proportion to his wealth. His neighbor received far less benefits. The proof is as simple as it is false: Edison’s skills and inventiveness would have been wasted if his skull had been crushed in a tribal war in a lawless country. His neighbor, in contrast, would have lost much less in such a situation. What could have he lost of value to him? Maybe just his only house, or merely his life, but nothing more.

Throughout the book, Murphy and Nagel assume that government services benefit the rich more than the poor. Their only attempt at an argument for that fundamental premise of their theses is the one transcribed in the previous paragraph: if a man is richer, he must have received –roughly speaking– more benefits from the government. The argument is an indirect rejection of personal skill, abilities and creativeness. However, we all know by personal experience that skilled and unskilled people produce different results under the same situation, and that includes people who receive the same benefits. If we reject that, we reject the very notion of ability.

The truth is that Edison and his neighbor received more or less the same help from the government –if there was a difference, it was surely accidental and of no importance. After all, they lived in a country that provided equal justice under the law, where no group was entitled to receive special help from the government. That changed only after Edison’s age. Murphy and Nagel’s explanation obscures the difference between the production of wealth and its redistribution: they say, if one man ended up with more than the other, he must have received more from the government.

Following the same line of argument, Cass Sunstein thinks it prudent to remind those who protest against high taxes about the perils of the state of nature[2] –as if the tea parties of the XVIII or of the XXI centuries had ever suggested disbanding the police.

By the way, we must see that it is not true that we would be equal in some sort of “state of nature”. The war of all against all is an unnatural situation, possible only in very special circumstances, as in a city under siege, just before the final onslaught –and even in sieges, the war of all against all is surely a rarity. Even in the most primitive of circumstances there is a tribal chief, and ceremonies, and rules –some of which become obstacles to the creation of wealth. Primitive government must not be confused with less government. Tribal hierarchies are much more oppressive than most modern governments. People are not roughly equal in them, as Murphy and Nagel tell us. It is true that all tribe members are miserable and are the victims of diseases that pose no threat to us. A simple infection in the chief’s mouth may kill him, or pain him for years without relief. But there are big differences, even in poverty. The chief and his family would eat a little more, and this probably would keep them alive just another year. A man that possesses a cow is immensely rich when compared with a man with not a single one. The difference may mean that the poorer man’s only child will not survive the next winter. And there is no bigger difference than that.

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[1] P. 17.

[2] The second bill of rights, p. 206.

Philosophers on the efficiency of Taxes and Welfare

This is the fifth article on the theories defended by Murphy and Nagel in the book The Myth of Ownership


Progressive taxes as a matter of efficiency

Murphy and Nagel believe that their ill defined notion of reserve price can be used for another purpose: to prove that if we do not want to disappoint the rich, we have to tax them more. That involves not merely a matter of fairness to the poor –they insist– but of efficiency in regard to rich people’s interests. The argument is this: rich people would pay large amounts of money to have, say, a reliable defense against attacks from other countries. However, it might well happen that poor people cannot afford to pay as much. Therefore, if people were taxed equally, there would be less defense than that for which the rich are willing to pay.

This argument for progressive taxes does not imply a comparison between different scales of utility, though there is always a temptation to engage in it –maybe implicitly– to “reinforce” the point. Certainly, it is one thing to say that the government is right in taking a dollar from a rich man who would like it to be spent on defense rather than on any other thing, and quite another to say that the government is right in taking the dollar from a rich man because a poor one would use that dollar for a good higher on his scale. In the first case we compare values for the same individual; in the second we conflate two scales of values.

As said, if we try to justify progressive taxes using the first comparison, we must avoid sliding inadvertently into the second (always, unless we want to deceive ourselves). Nothing in the first comparison implies that defense is more valuable to the rich. History provides many examples of poor people that have given everything they had to defend their small farms; we know that poor fishermen have died defending their huts; we know that poor people –as anyone else– do not like to see soldiers taking away their goods and abusing their daughters.

That first comparison alone (i.e. among the priorities of the same individual) might allow Murphy and Nagel to deduce that progressive taxes are more efficient from a rich taxpayer’s point of view. However, we must bear in mind the conditions that would make it true –and realize that without them, the conclusion is false.

As the conditions are not taken into account by Murphy and Nagel, we would do well in having a look at them: if there are some services that are in a bad situation according to the views of rich taxpayers, and if higher taxes were to be used to improve the services that the rich want to see improved (as distinct from redistribution, etc.), and if the poor were uninterested in it (or interested but unable to pay more), then it would be a matter of efficiency, from rich taxpayers’ point of view, to make them pay more. However, even then, this would not prove that the tax has to be more than slightly higher for the rich, or strictly proportional, or progressive. It would only discard (under those conditions) a tax that would take the same amount of money from each individual, regardless of income.

The whole argument about the efficiency of higher taxes reminds me of a humorous Brazilian saying: “you have proved your point, but it is only a small point, and then only a meaningless point”. Efficiency could be an issue if we suspected that rich people want to be taxed more heavily. If there are rich people who think that taxes are too low and would like to pay more, they have been very quiet.

We may add more meaning to the argument if we make a shift and start comparing the choices of different people. Of course, it would require dropping the claim that we are talking of efficiency from the point of view of rich taxpayers. Murphy and Nagel slide occasionally into this second strategy, but the change in the meaning of “efficiency” is not always clearly indicated to the reader. This second strategy is in fact the same that gave something resembling a justification to the notion of a surplus value: we would compare different people’s preferences. Of course, when we say “we would compare…” we must understand that the government will do it for us.

Murphy and Nagel write “The more money you have, the less a marginal dollar is worth to you”.[1] That seems to imply –and must imply if the assertion is meant to justify their theses–  that an extra dollar is less useful to a rich man than to a poor man. But all we can sensibly say is that both the rich and the poor man would use an extra dollar for the item that is one step lower than the last item that is already covered in their list of priorities. The poor man’s list may be shorter and that would mean that his last item is closer to the top.

Now, if being higher in anyone’s list were an objective reason for the claim that it is more efficient to use an extra dollar for that purpose, then we could say that higher taxes for the rich are a matter of efficiency.[2] In that case, we would have demonstrated that there is a fundamental dilemma between efficiency and respect for ownership. Perfect efficiency would be reached when all earn the same. And if authorities cannot achieve that ideal, then they might try to approach it by using taxes, cash transfers, subsidies, etc. But the argument is wrong: it would prove that another glass of beer provides a more efficient opportunity for spending than another street map for an expensive mobile phone. Why? Because the extra glass is the last unattended priority in some poor man’s scale.

So this is the second strategy to prove that higher taxes for the rich are more efficient –interpersonal comparison of utility–, and it fails. The poor man would have to drink a lot of beer before he starts calling an extra glass “mere efficiency”.

Minimum wages and welfare payments as a matter of efficiency

After dealing with progressive taxes and concluding that they are efficient from the rich taxpayer’s point of view, Murphy and Nagel try to convince us that a government that imposes minimum wages and social welfare is not really redistributing wealth but only being efficient, even from the rich taxpayer’s point of view. They write: “Such programs are usually regarded as redistributive, but the alternative to a decent social minimum is a society with real poverty, which often results in higher rates of crime, drug addiction, and single motherhood, all of which impose their own costs not only on the poor but on everyone. To be grim about it, the cost of subsidizing wages for unskilled labor to make them sufficient to support a family might well be balanced by savings in the costs of prisons and law enforcement that such a change would produce, not to mention the value for everyone of the change in social environment”.[3]

The alternative between government provided welfare and poverty is misleading: most countries on Earth have both. They have minimum wages and rising crime; welfare payments and single motherhood; redistribution and drug addiction. They have had them for half a century –at the very least. It is already very difficult to claim that this system is in the interest of poor people; it is impossible to claim that it is efficient from a rich taxpayer's point of view.
In a very well known book about welfare Losing ground, Charles Murray has shown that the assumption that welfare expenditure improves the condition of the poor is not necessarily true. Moreover, examining long series of statistics he has argued that the assumption is often wrong, and that welfare often worsens poverty.
Murphy and Nagel deal with these objections as they do with all others that might contradict their theses. They avoid all reference to them.

But even if we disregard the experience we have about the inefficacy of redistribution to prevent crime, single motherhood, and drug abuse, and if we decide that the expectations governments had in the sixties and seventies were right but failed for some unknown reason, we could not deny that we are redistributing wealth, i.e. benefiting some people at the expense of others. Nevertheless, that is exactly what Murphy and Nagel deny: “The reduction of social and economic inequality is in this way seen as a public good, paid for according to its monetary value to different individual taxpayers. This case differs from that of national defense, for example, in that it makes no sense to tax the poor for some of the costs of raising their spendable income. But it is still driven by efficiency, not fairness –a direct appeal to the interests of each, with no sacrifice being imposed on anyone. There are obvious political advantages in portraying social welfare policies in this way, but that doesn’t mean there is nothing in it”.[4]

Actually, there is nothing in it, apart from the political and rhetorical advantages. If redistribution is good, if it prevents social problems, it is still redistribution. If the government taxes some people to give money to other people, we have already a loss for those who pay, and an advantage to those who receive. Therefore, even if we assume with Murphy and Nagel that redistribution has the effect of reducing crime, etc. a reduction that equally benefits both sides on the redistribution scheme, then we still have the original loss and advantage involved in it.

There would be a balance if we assumed that only –or mostly– the rich get advantages from the prevention of crime, single motherhood, and drug abuse. Of course, that is not true; more than that, it is rather the opposite. Poor people are the first victims of crime,[5] a thing that many law scholars tend to forget when they treat crime as if it were a war of the poor against the rich. Stories do not replace statistics, but they may show things statistics cannot tell. I remember the case of a poor woman living in a shanty town in Argentina. She complained in this way: I have saved money to buy a TV set. Only, I cannot get it into my house. No bus enters the shantytown where I live. I could afford a taxi this once, but no driver would run the risk, he would leave me outside the shantytown. I am a strong woman, I could carry the TV set myself for some blocks. But I know I wouldn’t reach my house with it in my hands.

The limitations imposed by crime, the daily fear, the petty harassments, the exactions, all of that beats poor people everyday. They might not actually benefit from redistribution, but they surely benefit from the prevention of crime.

Murphy and Nagel must have a surmise that efficiency is not a good argument for redistribution. Just in case rich people do no like their arguments, they have others: “if, for whatever reason, the well off are not unhappy to live in a society full of poor people (it solves the servant problem) then we have to consider the question of distribution independently”.[6] As always, when they say “we have to consider…” they do not refer to unconvinced rich taxpayers, but the government.

If efficiency fails as an argument, our philosophers would base redistribution on some moral standards and public duties that we (that is, the government) think can be reasonably imposed on people. There we have more choices than with efficiency, so we might think that “appropriate foreign aid”[7] for poor countries is one of the duties we can impose on people. We the government, of course.

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[1] P. 82.

[2] Even then, we are leaving aside the question: who earned it? But the argument does not hold water even if we evade that essential question.

[3] P. 87.

[4] Same page.

[5] The robbery rate for persons in households with annual incomes of less than $7,500 is 7 times higher than for those with incomes of more than that amount. US Bureau of Justice Statistics http://bjs.ojp.usdoj.gov/index.cfm?ty=tp&tid=92..

[6] P. 88.

[7] P. 94.

Murphy, Nagel, and Marx on surplus value

This is the fourth article on the theories defended by Murphy and Nagel in their book, The Myth of Ownership


A new theory of the “surplus value”

So far, we have examined three arguments presented to sustain the claim that ownership is a myth: 1) that (most) governments create conditions that make industry and commerce possible –or at least safer; 2) that it is the market that generates differences in wealth; and 3) Ronald Dworkin’s attempt to portray the creation of wealth as accidental possession or accidental delay. The first one results in a non-sequitur; the second is –at best–  an inaccurate way of speaking. The third one…it is difficult to say anything about the third one.

Murphy and Nagel present another way to justify the main thesis of their book. They use for this purpose the notion of a “surplus value”[1], which sounds similar to Marx’s theory, but is quite different. However, there is a link between the two: both are part of efforts to prove that, in some odd way, the rich do not pay fully for what they get. According to Marx, they get work without paying the full value they get from it. According to Murphy and Nagel, the rich buy goods without paying the full value they get from them. Both theories share another characteristic: they are wrong.

The theory of surplus value was the cornerstone of Marx’s description of the relation between capitalists and workers. It provided also the motive for Marx’s prediction of capitalism’s doom. Marx believed that value is only determined by work, not by capital; therefore, what capitalists gain is actually taken from the workers, who receive enough to survive and reproduce, leaving the rest, the “surplus value”, to the capitalist. There, said Marx, lies the inner weakness of capitalism: competition leads capitalists to use more and more capital (machines and such) and less labor. But then their profit will diminish, because labor –and not capital– is the source from which they take their surplus. More machines and fewer workers mean a smaller surplus value for the capitalist. Certainly, Marx himself was aware that his theses were against the facts everyone knows to be true, and spent most of his life trying to fill this enormous hole below the waterline of his theory. Anyway, the whole explanation was proved wrong by Eugene Böhm-Bawerk, already in 1886.[2]

Murphy and Nagel do not attempt to revive Marx's “surplus value” theory, but they come up with something that would also (if true) show that the rich do not really pay (in some way) for what they get. They call this pernicious characteristic of capitalism, a “surplus” collected by the rich, and they conclude that it is only fair that the government pares it off. They explain that the market “automatically creates a large surplus –the difference between actual price and reserve price– for people who have lots of money. Poor people benefit from this surplus only with very cheap private goods like salt an digital watches. To them, most things do not feel cheap or costless, because most purchases are close to their reserve price”.[3]

In this explanation, our philosophers compare two prices: the actual market price people pay for a good –say a computer– which is the same for rich and for poor; the other is the highest price each individual buyer would be disposed to pay for that good: this is the reserve price. Of course, that highest price is different for each person. It varies according to his means, his views about the utility he expects from the good, his opinion about future prices, etc. There is also a minimum price for each seller, below which he will not sell: that is the reserve price of the seller, and it also varies according from person to person. And, for the same person, it may change several times following his changing views and needs.

Murphy and Nagel’s assumption that the reserve price is always higher for those with higher income is absolutely unwarranted. In auctions, the highest bidder is not always the richest person in the room. People who are always disposed to pay the highest price are not likely to remain rich –or become rich. Of course, if we leave the realm of real life and build instead imaginary situations (a favorite method in modern philosophy known in older times as “Jesuitism”), we may puzzle the reader for a while, and even convince him that what he knows to be false might be true –at least true in untrue situations. Let's tailor a very odd situation (maybe even impossible) to prove our thesis on it, and pretend that we may extend our conclusions to the real world.

Say we are in a lifeboat, and there is a shortage of water. Never mind that in such a case there would be rationing. We can always imagine things if it helps to prove our theses, and we can postulate that there is no rationing. Water is sold to the highest bidder. In such situation, a billionaire would be willing to pay billions for a single glass of water. Nevertheless, in every modern city we may see that the same rich man pays only cents for the same glass. Is that fair? If we take the price he would have been disposed to pay in an extreme situation as his reserve price, we might say that his gain is enormous. Now let’s compare that with the situation of a poor man in a lifeboat. At most he could offer some hundreds of dollars for the glass of water, but not millions. Therefore his reserve price is lower, and his gain is lower when he buys water for a few cents.

See, rich people get a surplus all the time. The richest of them get billions of surplus every single minute of their lives. Governments can dig in that immense heap of utility and give part of it to those whose surplus is smaller.

As common sense would lead us to suspect, there is a fundamental mistake in the above reasoning. If there is one fallacy in economics that is worse than all the others, it is that in which the utility of goods is assigned in the abstract to a genera ("water", "gold", "corn") and not to a concrete piece of it, for a concrete individual, in concrete circumstances. If we think in terms of the value of nourishment as compared to that of ornament, then we would conclude that people should pay more for bread and water than for gold and for the most beautiful pieces of art. But that is only true if we are starving, and it would be unsound to exchange a Rembrandt for a bar of chocolate –except in very unusual circumstances. 

For sure, practical men rarely disregard the circumstances in which they make their choices; nevertheless, theoreticians have been often deluded by paying attention only to the abstract utility of a good, the utility of the whole genera. Böhm-Bawerk called it a wrong turn in economic theory.[4] It misled economists for a long time, but it has been corrected more than a century ago. Today we know that it is nonsensical to ask whether iron is more useful than gold and water more useful than iron, all taken as genera. Of course we can live –though miserably– without iron tools but not without water. It does not prove that I do right in paying more for a glass of water than for any tool made of iron. And, unless we live in starving conditions, or labor without tools, I may do right in buying a gold ring for the woman I love. These are basic notions that should be explained and learned in the first lesson of economics.

Now we can return to Murphy and Nagel and their claim that, for the same price and article, rich people collect a larger surplus than the poor. To prove that, they must assume that the price a man would pay in an extreme situation is his reserve price in any other situation, which is wrong. If instead what they claim is that in normal circumstances the more money a man has the higher would be the price he is willing to pay for the same good, that is plainly false. On the other hand, if their claim is that a rich man would pay millions for the last glass of water on a lifeboat, then the only thing that they are saying is that a rich man is able to spend more money than others in those goods he considers more important in each circumstance. But they are not saying (let alone proving) that all rich men –in all circumstances– consider a glass of water of immense value. That is true only on the lifeboat. It is hardly a proof that the rich man gets a larger utility –more for the same money– than the poor one when both buy a glass of water in a restaurant.

Murphy and Nagel write that “With a public good [from roads and defense to subsidies to the arts] individuals can’t obtain different amounts of it and there is no need to charge everyone the same, so there is no automatic radically unequal allocation of surplus. The question for the state then becomes what single amount of the good to provide to everybody, and to what separate price for each?” They think that governments acting in this way can be compared to monopolies: “The government must operate more like a price-discriminating monopoly. It needs to figure out how much the public good is worth to each individual and charge each of them accordingly”[5] (I have added the bold italics for reasons that will be clear in the next paragraph).

All this is wrong: merely a page before these words, the authors had acknowledged that public goods (say defense against foreign attacks) are worth the same for the rich and for the poor. They admit that “The main reason for this difference in value is not that some people care more about the dangers of military invasion than others, but that some people have more money than others, so that a dollar more taken from them to be spent on defense, does not mean a dollar less for basic necessities, but only for something less important”.[6] If we think about the consequences of this caveat, we must realize that what the authors call “reserve price” does not show or say that a good is always more valuable to the rich buyer; it only says that he can afford it. Unfortunately, Murphy and Nagel create the impression that the good is worth more for those who could afford it. The authors themselves seem to be convinced of that in one page –but also of the opposite in another page. Public goods are worth more for the rich and they are not worth more for the rich.

As in the automatic “generation” of differences among individuals by the market, in the theory of the surplus we find again what we may call the fallacy of the “forgotten caveat”. Of course, caveats are legitimate defensive weapons in theoretical warfare, but only if what is acknowledged in them has a real role in the theory. If not, they are better called “contradictions”.

Shifting between cardinal and ordinal numbers

The notion of a “reserve price” is very apt to lead to confusion, and that can be seen in Murphy and Nagel’s use of it. Of course, a reserve price is not a price. It is not paid or offered by anyone. It is just a way of saying that we –or a bureaucrat– think that someone would have been disposed to pay a higher price –either in real life or in a lifeboat. It is a loose way of referring to someone’s valuation of a good, his expectations of future prices, and a host of other things, but not to a price. Unfortunately, the notion makes the shift between cardinal numbers and ordinal numbers seem natural and unobjectionable.

Here it may be useful to make a short comment about the difference between ordinal and cardinal numbers as they are used in economics. Individuals may put their priorities in a list and assign numbers to them, but these are ordinal numbers. They express priorities: this first, that second, etc. It makes no sense to add, multiply, or do any arithmetic with them, other than saying: first of all I must have the roof repaired, and then buy a new pair of shoes, etc. If a new pair of shoes is in the second place in my list of priorities, then two new pairs do not equal the utility I expect from the roof that is first in my list. Furthermore, ordinal numbers have meaning only within the choices of an individual: I cannot say that the item that is topmost in my buying list is for that reason more important than the item that is second in yours –more important to whom?

Prices are cardinal numbers. It makes sense to add prices, to multiply them, etc. And I can compare prices offered and paid by different people. When I say that this computer’s price is twice as much as that other one, I am using cardinal numbers. I know that ten hammers will cost me ten times the price of a single hammer. But when I say that a computer is of more value to me than to you I am engaging in comparisons between choices of different people. I am using (or rather misusing) ordinal numbers.

Apart from wrongly assuming that a reserve price must be “automatically” higher for rich people, Murphy and Nagel misuse the notion of the “reserve price” to implicitly engage in comparisons between scales of utility for different people, which is wrong and radically different from comparing real prices. As we have seen, they suggest that governments have to establish how much a good is worth for different people –i.e. according to the “reserve prices” they would pay, as established or guessed by some government’s bureaucrat. However, it is one thing to compare the price of computers offered in two stores, and quite another to compare the utility that a computer has in your scale of priorities as against the priority it has in the scale of your rich neighbor. To say that the eleventh element in my scale should be considered more valuable than the twentieth in yours is nonsense. To acknowledge that truth we do not need to endorse relativism: it is enough to realize that value is always value for an individual. Most readers of this article do not plan to buy a pneumatic hammer, and that does not mean that they deny that it may be useful to those who buy it.

 We often hear that one dollar more is of less marginal value for a rich taxpayer than to a poor one. That assertion is at the base of many arguments in The Myth of Ownership. It is a confusing way of saying that, if that dollar is taken from him, the rich taxpayer would have to give up the satisfaction of an item that is many steps down on his present scale of utility. It would be the last one, say one more drill bit to be used in one of the hundreds of bench drills in his mill. If a dollar is taken from a poor taxpayer –say a plumber– he too will be forced to give up his last item, which actually might be a similar drill bit. Our plumber would have used it with his only hand drill. We must understand that nothing of that means that we are justified in saying that one more bit is more valuable for the plumber than for the industrialist (more valuable to whom?). We cannot build an “impersonal” scale from all the others and assume that there is any meaning in it. Relative positions have meaning within an individual’s scale.[7] If we forget it, we would be led to think that it is wise to say that the good at the 21st place in Smith's scale of utility (a new subscription to a science magazine) is of less value than the good at the 20th place in Johnson's scale (a new subscription to a porn magazine).

In short: it does not seem that the notion of a “surplus” value collected automatically by all the rich is anything more than another rhetoric device of the kind Murphy and Nagel so justly condemn. And the notion of a “reserve price” does not improve their justification of higher taxes, unless we take the price of goods in lifeboat situations to be the reserve price in normal times. Furthermore, we should not be led to forget for a minute that conflating individual scales of utility is meaningless.

As an aside, it is useful to remember that at the first steps of the production of new goods, they are usually sold to the rich and that they often pay exorbitant sums for that privilege. The first books, cars, and computers were very expensive, and only the rich –sometimes with a love for novelty and experiments could pay for them. In a way, and contrary to the suggestion that the rich get a surplus that is denied to the poor, the rich finance the development of products that initially could not be made for the mass market. Of course, no rich person would think it sensible to say that the poor owe him anything for it. And that is fair. We do not have to pay for all the consequences that have been made possible by rich people –or by governments.

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[1] Pages 82-83.

[2] Böhm-Bawerk, E: Marx and the close of his system. The essay can be downloaded freely from www.mises.org/books/karlmarx.pdf. Concerning Marxism, as with many other issues, the Internet removes the excuse of ignorance.

[3] P. 83.

[4] Positive Theory of Capital. Libertarian Press, p. 138

[5] P. 83.

[6] P. 82.

[7] And we must also bear in mind that individual preferences and choices are not fixed for life but change daily, not necessarily because of whim, but because we have to face different conditions.