RAWLS' JUSTICE AND CLASSICAL LIBERALISM: ETHICS AND WELFARE ECONOMICS

RAWLS‘ JUSJ/C€ AND CLASSICAL LIBERALISM:

ETHICS AND WELFARE ECONOMICS

DANIEL ORR AND WOLFHARD RAMMI University of California, San Diego

By and large, those in the world who placed freedom above equality have done better by equality than those who placed equality above freedom, have done by freedom.

- Shimon Peres

The way to secure a great vogue for a book upon ethics is to invent a plausible argument, or even one that is not very plausible, for believing that which most people already believe. . . .

- Edward C. Hayes

During the era of cardinally measurable and interpersonally comparable utility, attempts were made to discover the conditions under which competitive market allocation is “ethically best,” as well as most efficient.’ With the ordinalist refinement of utilitarian reasoning, those attempts were seen to be sterile; a focus on issues of efficiency came to dominate the “new” welfare economics, and the ethic of distribution has received very little attention during the past fifty years.

Within the profession there has hardly been a year when one writer or another has not expressed dissatisfaction with that elevation of efficiency to a primary role and relegation of equity to a subsidiary one;* and in recent years especially, disenchantment with economics as a tool of social analysis seems to be on the rise, both inside and outside the profession. We are exhorted to build a new ethical base for our discipline; Benthamite utilitarianism is not sufficient.

Economists have stressed efficiency and equity as the two most important attributes of economic organization. In addition, a small group of contemporary economists, whom we will call the classical liberals, have continued to assert the importance of yet another primary social good,j liberty. Their emphasis is older than the utilitarianism of Bentham and his

*Stanley Moore provided useful detailed comments on an earlier draft. Discussions with Ed- mund Phelps, John Riley, and members of the law and economics workshop at UCLA (Harold Demsetz, proprietor) have been illuminating.

1. A brief review of the attention given to the question by Benthamite utilitarians is found in Samuelson [ 241 Ch. VIII.

2. The writings of a mainstream figure like Frank Knight, for example, reflect significant dissent from the dominant positivist outlook; see especially the reprinted essays [ 15 1 and prefaces of the various editions and reprintings of [ 161.

3. Primary social goods are defined and discussed by Rawls in the book under review, in 0 11.

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378 ECONOMIC INQUIRY

followers; it is a legacy (via the Whigs of the Scottish enlightenment; Hume, Smith, McCulloch, Ferguson, e t al.) of Locke. Their views are con- ditioned by two facts: first, that Benthamite utilitarianism has been thoroughly demolished by the ordinalist revolution; and second, that liberty could not be deduced as an important social good from the axioms of that doctrine, even if it were alive and well.4 If the state, by depriving you of liberty, causes you a small pain but also yields me a large pleasure, then that action increases the sum total of utility. in a system where such tradeoffs are admissible, liberty, as the right to avoid a small personal cost by denying a large private benefit to another, will not be viewed as unam- biguously a social good. The best resolution, perhaps, is to follow Locke, and take liberty itself to be a natural right of individuals (i.e., to make it an argument of ordinal individual utility functions).

Some contemporary proponents of classical liberalism hold that much of today’s evaluative commentary on market institutions is misguided and misdirected.’ The efficiency of competition (established by the use of such constructs as “perfect competition” and “equilibrium”) has been overemphasized, while the liberty-enhancing aspects of a decentralized private property system has received very little attention.6 That type of criticism of economics harkens to the moral philosophy out of which economics grew.

In much of their recent work, these writers in the classical liberal tradition focus upon a widely perceived conflict between liberty and equality (or perhaps more properly, between liberty and security). The popular perception of this conflict has been cultivated by such egalitarian interventionists as Hobhouse, Laski, and Tawney, whose emphasis has shifted toward equality or security (as measured by the economic outcomes that befall different individuals) and away from liberty (the absence or min- imization of the coercive constraint of individuals within a social order).

4. Robert Paul Wolff [32] has provided a forceful (and exaggerated) assertion of Mill’s lack of success in rationalizing liberal and utilitarian sentiments in On Liberty (Wolff is not a classical liberal).

5. See, for example, Hayek’s essay “The Meaning of Competition,” in [ l o ] .

6 . Milton Friedman [91 suggests a relationship between a private-property competitive market economy and liberty. Nso, “[Adam] Smith’s chief concern was not so much what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. . . The main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. . . Their aim was a system under which it should be possible to grant freedom to all, instead of re- stricting it, as their French contemporaries wished, to ‘the good and the wise.”’ From “lndivi- dualism: True and False,” in [lo!. But perceptions such as these can be called “strong informal and unanalyzed commitments to some aspects of freedom” by Kenneth Arrow [ 2 ] ; and while that designation would be more accurate if it read “strong informally analyzed commitments to liberty,” it does serve to call our attention to the fact that the controversy is one with substantial ideological-ethical content.

O R R AND RAMM: RAWL’S JUSTICE 379

The liberty-equality conflict is fueled by different perceptions of how different economic orders can be expected to function; and particularly among noneconomists it remains one of the central issues in the discussion of economic systems and economic institutions. It is quite possible the most significant issue that any comprehensive welfare economics deserving of the name must confront.

A Theory of Justice, a recent book by the moral philosopher John Rawls, has been hailed as “the most important work on philosophy bearing on practical politics for several decades at l e a ~ t . ” ~ In thrust and content, Rawls’ book is a prolegomena to the study of the kind of welfare economics that we have been discussing here. Rawls seeks the principles that economic and social arrangements must meet if they are to be considered “just.” Because his subject is important and of particular interest to economists, because his ideas are interesting and deserving of attention, and because his book is attracting a large audience, we herein undertake to analyze its message for a highly specialized segment of Rawls’ potential audience. *

I . RAWLS’ TWO PRINCIPLES OF JUSTICE

“Justice is the first virtue of social institutions, as truth is of systems of thought” (p. 1). Rawls’ opening sentence is an epigraphic legacy to many future writings. Continuing in his words: the “principles of social justice . . . provide a way of assigning rights and duties in the basic institutions of society and they define the appropriate distribution of the benefits and burdens of social cooperation” (p. 4).9 The undertaking that Rawls sets for himself is to define those principles in such a way that they will not only have sufficient appeal to find a strong concensus of support as an ideal for society, but will be operationally viable as well. The am- bitiousness of that undertaking needs no comment but must be kept in mind in judging the outcome.

Based on an ingenious social contract argument that we will examine in detail later on, Rawls asserts that two principles of justice will win nearly unanimous acceptance as a basis for evaluating the workings of economic, social or political institutions. These principles offer a criterion

I . By Ronald Dworkin, in the Sunday Times, London, June 4, 1972. 8. In the profession, a very brief notice is given to earlier work by Rawls on the problems of

social justice in Buchanan [ 5) and Sen [ 251. Others, notably Phelps [23], Alexander [ 11, and Arrow [ 21 have provided additional elaboration and criticism of Rawls’ work.

9. The emphasis is striking when compared to that in an older work on the theme of justice. See Smith [ 281. The contrast with Lowi [ 181 is also notable. Lowi holds that the central issue of economic justice is to find an impartial means of resolving the question “who shall be poor?”


of justice in much the same way that the Pareto condition offers a criterion of efficiency.

“First: each person is to have an equal right to the most extensive basic liberty compatible with a similar liberty for others” (p. 60).

“Second: social and economic inequalities are to be arranged so that they are both (a) to the greatest benefit of the least advantaged, and (b) attached to positions and offices open to all under conditions of fair equality of opportunity” (p. 83).

With regard to these two principles, it is important to note that Rawls holds them to be lexical (lexicographic): actions taken to promote gains in accord with the second (egalitarian) principle are not to be admitted if they lead to reductions in liberty as a consequence. Thus, the principles are a striking attempt to find the best resolution of the conflict between liberty and equality.

Both principles, the second much more than the first, require interpre ta tion.

The first (liberal) principle asserts that the liberty of particular individuals may be abridged only if to do otherwise would entail even larger loss of liberty for the parties themselves who are affected. The liberty of Mr. B is never to be abridged to provide a gain in liberty for Mr. A, unless B’s liberty exceeds A’s, and B’s must be reduced to enable A to achieve equal liberty.”

To appreciate the intent of the first principle, of course, we must cast a wary eye over Rawls’ definition of liberty: is his view consistent with the classical liberal definition, or has he embraced a narrower view, sum- marized in the term “civil liberties”? His treatment of this question in $32 of Justice should be satisfactory to a classical liberal. Rawls asserts that a liberty can be explained by reference to three items: a person or agent who is free, the restrictions or limitations from which he is free, and the actions that he may freely take. The extent of liberty within a society and its distribution among individuals can then be ascertained by an examination of the restrictions that exist, the persons to whom they apply, and the actions that they proscribe, An important point is that liberty is viewed by Rawls as a property of social arrangements; we read no waffle about gravity, or dependence on oxygen, or inability to fly at the speed of light being restrictions on freedom. Nor, given the overall struc-

10. A brief treatment which reconciles criminal punishment with the first principle is provided in 0 38 ofJustice.

ORR AND RAMM: RAWL’S JUSTICE 381

ture of the two principles, are we invited to glide into a Rooseveltian (“freedom from want”) conflation of liberty and security.

The second (egalitarian) principle recognizes that the elimination of all economic and social inequality may harm the interests of all in the society if abilities and talents are distributed unequally within the society. Eco- nomic and social differences sufficient to promote the efficient use of talents are in order. However, nothing like the suggestion that justice implies a wage equal to the value of marginal product is endorsed. The goal, rather, is best synopsized in the ideal that human talents, and their distribution among persons, constitute an asset of the society at large, to be used in a way that is beneficial to all members of the society.

Part (a) of the second principle, which Rawls refers to as the “difference principle,” is meant to reflect that ideal, In fact, the operational significance of the difference principle is not easy to fathom. The statement of the principle seems to suggest that changes in the structure of the society which affect the degree of inequality within the society must produce outcomes from which the economically and socially least advantaged derive more benefit than anyone else, but that view is later explicitly rejected ( 6 13). Thus, while it is easy to comprehend the ideal that the difference principle is meant to capture, it is not easy to derive or construct criteria of compliance. (We will return to this problem in Section 3 below.)

However they are interpreted, Rawls’ two principles of justice are by no means mere aphorisms to be acknowledged by all but to affect nobody. For example, if the difference principle became a canon of social criticism, it would be doubtful whether “environmentalism” would be able to qual- ify its programs (including plans for clean water and air)-certainly, not in the existing framework of allocative institutions, and possibly not under any institutional framework.

Part (b) of the second principle requires fair equality of opportunity in access to positions and offices to which inequalities are attached. The idea of fair equality of opportunity, Rawls tells us, requires more than the mere absence of overt or tacit barriers between certain individuals and certain positions. It requires action directed specifically at the removal of meliorable competitive disadvantages to some individuals which stem from the circumstances of their birth or accustomed station in life.

Justice is a long book: its length is due not to the complexity of Rawls’ theoretical system, but rather to the detail of argument by which he seeks to establish its desirability; to the length of the discussion of its practicability; and to the extent that he analyzes the difference between his system and older ideas of fair division in a just society. We turn a critical eye to his discussion of the first two of those topics and offer a supple- ment to his discussion of the third.


I I . THE ARGUMENT FOR DESIRABILITY

Welfare economists might well be content to view the two principles of justice as primary ethical intuitions which are to be accepted as axioms of a system of social design; the inclination would be to let any question of the desirability of those axioms rest on their intrinsic merit as judged by the reader and on their usefulness as an aid in proposing policies. Rawls feels it necessary to establish and defend the two principles in a more formal way, however; and he proceeds to d o so via a revised theory of social contract.

The shortcomings of any traditional form of the contract argument in defense of Rawls’ principles are that an individual who found himself in any group but the most disadvantaged might rationally view the second principle as too great a concession: he would be unwilling to contemplate arrangements which so favor the least favored. Rawls proposes accordingly that the “state of nature” be modified in such a way that every subscriber sign the contract without having specific information regarding his own time of entry or his own role in the society after entry. The outcome of such a thought experiment, Rawls contends, will be concurrence in the desirability of his two principles of justice. By this device he seeks to establish the two principles of justice as the choice of rational persons, and his theory of justice (including the mechanism whereby the two principles are adopted by the society’s individual members) as a part of a theory of rational choice.

The restrictions that are imposed on the information available to every man in the initial position (where criteria are to be chosen for evaluating the justice of society) deprive men in that position of the information necessary to make personal expected utility calculations. Rawls, we believe, succeeds in imposing that restriction on information; but he falls into the error of supposing that the only remaining recourse, once expected utility cannot be maximized with any precision, is to fall back upon the maximin choice behavior stipulated in the two principles. He overlooks a wealth of alternative choice strategies, including minimax regret, or utility maximization based upon weak information, with or without a minimum income constraint.”

Thought experiments like Rawls’ contract from the original position have never been fashionable or found useful in economics (at least, not

11. Edmund Phelps pointed out that Rawls also develops an argument that self-respect is a primary social good; to grant his least advantaged fellow citizens the maximum degree of self-respect, a person viewing society from the perspective of the initial position will want to institute the second principle of justice. It seems to us that the indicated argument (which is found in 5 29 of Justice) is equally supportive of the minimax regret criterion, and in fact is not hard to rationalize in terms of any criterion.


since the days of cardinalist introspection); and perhaps it is just as well, for it is difficult to judge that such arguments add plausibility or appeal. The goal of the experiment is that every reader will “discover” for himself what is good for him and for the society and will be led to accept arrangements for the good as “right.” Yet it is easy to imagine individuals, in the state of ignorance about their own prospects that is stipulated by Rawls, who would honestly discover some alternative to the maximin strategy of the two principles as being equally worthy on moral grounds. Any individual who subscribes wholeheartedly to Rawls’ two principles, or to some reasonable interpretation thereof, will not need to project himself into the process of forging a social contract, while a dissenter will not likely be swayed by having done so.

The two principles of justice may be viewed as an attempt to codify the best ideas from two traditions: the British classical liberal tradition of the period 1690-1 895, which matured during the Scottish enlightenment, and the tradition of rationalist constructivism which now dominates social thought.I2 Rawls’ emphasis on liberty as a preeminent social good, and his definition of liberty, and his emphasis on the openness of stations in society to all individuals, are classical liberal outlooks. But his theory con- tains two important elements of rationalist-constructivist thought which depart significantly from the classical liberal view. The notion of “fair equality of opportunity,” which appears in the second principle, requires that society structure its institutions in such a way that opportunity is in no way limited by undeveloped ability. And the stipulation that the least advantaged must benefit in a significant way from any action taken is a constraint that would appeal immediately to any of the rationalist-con- structivists in the French tradition, a tradition which elevated equality and fraternity to equal status with liberty, at least at the sloganeering level. l3

Most readers will applaud Justice: a synthesis of the noblest liberal and egalitarian sentiments is a worthy and difficult goal. We do not view his

12. Choice of terminology is difficult. The divergence between rationalist constructivism (a term used by Gladstone to describe the social engineering mentality, according to Hayek [ 131 ), and the earlier traditions of classical liberalism, is clarified by Hayek [ 101 ; the rise of the rationalist-constructivist movement is also traced by Hayek Ill]. Briefly, that movement is an outgrowth of the French enlightenment; a heavy emphasis on and a firm faith in the perfectibility of human in- telligence characterizes the movement, and the direction in which it seeks to move us is toward centrally directed programmatic solutions to social problems. Much utilitarian thought since the time of J. S . Mill’s Principles would be counted as rationalist-constructivist in outlook. Any indi- vidualist-socialist work in the Lange-Lerner tradition, for example, would fall into this category.

13. The difference principle is offered by Rawls as a principle of justice which “matches the underlying idea” of fraternity. “The difference principle does seem to correspond to a natural meaning of fraternity; namely to the idea of not wanting to have greater advantages unless this is to the advantage of the less well off” (Jusrice, p. 105).

ECONOMIC INQUIRY 384

argument for the desirability of his version of that synthesis to be a success; but as Rawls recognizes, the question of success hinges on demon- strating the viability of the synthesis, as well as its desirability.

I l l . THE PRACTICABILITY O f A ”JUST” SOCIETY

Rawls does come to grips with the issue of implementation; his undertaking would have been less complicated and his book shorter (and perhaps more appealing as an ideological testimonial) had he been content to leave it to “the experts” to decide how his two principles can be used.

The two principles of justice can be presented as part of a formal system for appraising social policies, and a formal treatment illustrates the prospects for successful implementation. We shall be concerned with the question: are there elements inherent in Rawls’ two principles whieh make it unlikely that any program based on them can meet success? In an attempt to answer that question, we will construct formal models of Rawls’ system.

The objectives that Rawls sets for social policy can be modeled in several different ways. One straightforward representation is developed here. Let’ A be a finite set of possible institutional settings. Each element of A , generically denoted by (xi, is a distinct and complete enumeration of all the laws and other institutions which affect individual liberty, opportunity or sense of well-being and which are subject to control or alter- ation by society’s members through the mechanisms of government.

Let 2 be a finite set of all states of the world. The elements uk of I: comprise distinct and complete enumerations of all factors which are not subject to control through the mechanisms of government but which affect individual liberty, opportunity or sense of well-being. Included in the (Jk would be enumerations of customs, traditions, belief systems, etc.

The state of the world cfk that eventuates will depend on the institutional setting a+ that is chosen. The conditional probability of uk given q is denoted @ k i .

An individual among the N members of society is indexed by the sub- script j . Three indicators characterize the individual for purposes of analysis. These are uj , his “utility” in the classical cardinally measurable sense,I4 pi his “opportunity,” and Ri the degree of liberty that he enjoys.

14. Rawls upon occasion refers to these utilities as “expectations,” but the expectations of an individual in his analysis fdl the role of utilities in economic theory. Apropos( of this exercise, recall Knight’s admonition:

“It is absurd to say that there can be no interpersonal comparison of ‘utilities’ or needs. All social problems arise out of conflicts of interests, and every judgment touching on social policy involves such comparisons.” ([ 161, p. Ivi).

ORR AND RAMM: RAWL'S JUSTICE 385

The indicators pi and Qj may be thought of as lists of opportunities and liberties that are open to individual j . The outcomes p i , Qi and uj will depend on the institutional setting and state of the world: hence the notation p j k , i , u jk9i and Qikpi.

There are, then, probabilities and outcomes associated with a choice of institutional setting: for individual j ,

where k is an index ranging over all possible states of the world. Similar mappings exist for every individual in society. If the number of distinct elements of the set Z is K , then there are 4NK relevant mappings determined by the choice of ori.

To implement the Rawlsian principles of justice, it is necessary to define a least advantaged individual. We do this: the individual N is least advantaged in the institutional setting i if and only if

that is, the least advantaged individual is the one whose utility expectation across states of the world is smallest. This definition of least advantaged would presumably be a matter to be agreed upon in the initial position;" it is an issue that Rawls does not recognize, since in his system states of the world are exactly or deterministically related to institutional settings, not stochastically related as we have it here.

If the institutional setting 04 is just, Rawls' criteria first require that

(a) f i k > ' = ~ m k , i j , Pn = I , . . . , N; O k E z ; 4 k i f O

The conditions (a) and (b) stringently render the first principle of justice. Moreover, the justice of ai requires that

15. Alternative definitions of "least advantaged" are of course possible. Consider: The individual N is least advantaged in the institutional setting ai if

Min k, i=Min Min k,i k ' N j k u j -

Adoption of this changed definition of least advantaged would have little or no bearing on the points that we make in the ensuing discussion.


a strict rendering of the difference principle in accord with our conven- tional definition of “least advantaged;” and

(d) p i k J i > J = 1, . . . , N; CXi, CX,.€A; O k € x ; @ k i f 0,

k ’ i j, m = Q, . . . , N; aid,’ GLEE; 4 k i f 0. P m (e) p i k , i =

If the conditions (a-e) hold, then the society’s choice of institutional setting is just.

If one or more of the conditions (a-e) is violated, we may sketch considerations by which to judge the desirability of altering an institutional setting thus:

If (f) or (g) holds for all j and m and all admissible i-k and r-k combi- nations, then there is a gain in liberty, or a gain in the equality of its distribution, in a move from aj to ar. Similar conditions can be written for the difference principle and the equal opportunity clause.

A formal modeling of the two principles of justice serves several purposes. It may expose lapses in the logic or coverage of a purely verbal discussion; it makes explicit the informational conditions that must be fulfilled if a society is judged to be just; and it enables the social scientist accustomed to working with models to speculate on possible institutiona1 and legal arrangements or procedures that will keep the society function- ing justly .I6

The model suggests immediately that some important difficulties will be encountered in implementing Rawls’ principles. First, there will be an enormous problem of ranking society’s individuals in the requisite manner. To meet this problem, Rawls suggests a taxonomy of representative individuals. Each representative individual is ranked by the effective liberty that he enjoys; the career and other life opportunities open to him; his

16. By analogy, systems of equations have enabled economists like Walras, Wald and Arrow to speculate on the success of market exchange in attaining and maintaining an allocation process that is Paretoefficient. The model, of course, does not dictate the variables that must be measured: in a model of general equilibrium, a price system combined with behavioral assumptions obviates the need to measure individual utilities, for example. We should also note that recent work by Donald Katzner [ 171 opens the possibility that analytical work can proceed without the measurement of variables; Rawls’ system offers a natural application of Katzner’s methods.


income; the power that he can exercise; and any other “bases of self respect” that are his to enjoy. Each person in the society is represented by at least one representative individual. The constraint is imposed that no action shall abridge the liberty of one representative individual, even if that action would enable another to enjoy the benefits of greater liberty. Similarly, no constraints are imposed on the access of any representative individual to positions of power, except that access may be refused on the ground of inadequate fully developed ability. Finally, income is taken as a surrogate for the remaining primary social goods, which constitute the “bases of self-respect.”

The process, then, is to divide individuals into two or more income classes and to prescribe that any social policy action must conform to the above constraints and must enhance the income of the representative individual in the lowest income class.

The drawbacks of such a procedure are numerous and obvious. Even disregarding differences in preference, we know that measured income alone offers a poor picture of the life prospects of an individual (is he young or old? propertied or not? urban or rural? educated or not [don’t forget the ‘‘poor’’ graduate student household]? What is his life cycle earning pattern?). Second, policy actions, which on the balance are enormously beneficial, may fail to benefit the lowest income group. For example, consider an action which drastically reduces the size of that group by upgrading the elderly poor: if the working poor are by the same measure very slightly injured, the action may be blocked by its failure to fulfill the difference principle. Conversely, no doubt, examples can be found in which the poor are arguably injured, but an action passes the “representative individual” text. And finally, the second principle, if im- plemented in accord with Rawls’ suggestion, is distinctly ascriptiue: the assignment of perquisites among individuals would to an increasing extent be explicitly based upon group or class membership. Group action (which will usually mean political action) will be more highly rewarded than in the past. Membership in the low income class will be made less unattractive, and a strong impetus will be given to the cultivation of class solidarity. The outcome could easily replicate the British class schism.

Finally, we note that if the idea of “representative individuals” is to be taken seriously in the processes of social choice, then the categories or groups to be represented must also be chosen in “the original position,” as must the individual “typical” of each group.

These considerations all bear on the desirability of Rawls’ system, as well as on its practicability. The emphasis on class membership, in particular, is dismaying to any proponent of the classical liberal idea that the individual is the repository of all good in society and individuals should


1

9 U I =50

U I =50 04.

2 3

~ 2 = 2 0 ~ 3 ~ 1 0

~ 2 = 1 0 ~ 3 = 2 0

ORR A N D RAMM: RAWL’S JUSTICE 389

in a radically different way.” Comparisons could be made between different individuals who happen to be least advantaged in the relevant alternative social states. Thus, in the above example, the relevant comparison might be between u3i and u2j , instead of between u j i and u j j , the comparison we drew in suggesting the possibility of cycling. If interpersonal and intertemporal comparisons are admitted, a simple argument for the existence of a Rawlsian Social Optimum can be constructed using this second (nonRawlsian) interpretation. We assume that the set of actions is finite, and so the set of admissible actions is finite. If society considers and takes all admissible actions, the set of admissible actions will be narrowed continually by the set of conditions like (0 and (g) by which an improvement is judged. Thus an optimum should be reachable via a sequence of choices of institutional setting, all of which are admissible at the time when they are taken.

However, if we change the specification so that tradeoffs are permitted between p and u in the social welfare function or so that the number of possible institutional settings is not finite, then the foregoing simple argument for the existence of a “just society” disappears.

Rawls admonishes us that Justice is concerned with evaluating the “basic structure of society, the arrangement of major social institutions into one scheme of cooperation” (p. 54). He rules out from consideration issues of “strategy,” involving questions of how an institution shall be used at a particular time or in reference to particular circumstances. The significance of this limitation should be explored.

In point of fact, it is difficult to see how an institution can be judged, apart from an examination of how it has been used; and it is difficult to see how an institution can be improved without significant conjecture as to how it will work after changes are made. Can Rawls’ theory of justice offer useful guidance in forming social policy: does it redirect our in- tuitively based actions in a constructive way? It is useful to rephrase that question this way: The Pareto condition has been useful in developing a theoretical evaluation of voluntary exchange; it has also clarified thought on the problem of social choice and on such concrete issues as tariff policy. Is there any reason to hope that the Rawls principles will offer guidance in appraising the justice of alternative arrangements in the way that the Pareto condition has guided thought regarding the efficiency of alternatives? We reluctantly conclude that for the present the answer is no.

17. The argument by which Rawls seeks to avoid cyclic problems of the type suggested here are very weak (Justice 5 13). He assumes that the society is “chain-connected.” The effect of this assumption is that any benefit to the least advantaged will also benefit everyone else.


To explore our conclusion, suppose that the issue is approached first from the concrete. A state government considers removing its five percent sales tax from food. As a part of the same bill, it is proposed that a state- funded job retraining program will be terminated. Here we have an in- stance of a specific “strategic application,” and we are admonished not to consider the details of that application in light of Rawls’ principles. Rather, we are to examine the underlying institutions. But what are these institutions? From more to less concrete, we can name: the job program, the five percent sales tax on food, the sales tax itself, the state’s overall tax program, its expenditure program, the legislative process of logrolling, the institutions (such as a minimum wage) that make the job program appear desirable, the market system, and the processes of representative democracy. Doubtless many others can be thought of also. Rawls cannot mean that our hypothetical tax and expenditure bill must be referred back to the issue of whether the market system and the legislative system are just, nor can the issue be simply resolved by asking whether the poor gain more from the removal of the tax than they lose in retraining benefits (because, among other reasons, that calculation completely ignores the lexically primary issue of liberty). Many such concrete issues as our hypothetical tax and expenditure bill will have to be assessed in any evaluation of the workings of the social-political-economic order; but if we cannot say anything decisive about any single one of those issues, what (be- yond the ideological maunderings which for years have been a t our dis- posal) will we be able to say about the workings of the overall system?

Even if our social critique is based upon a highly abstract perspective, the two Rawls principles are of dubious utility: the lexicographic order of the principles greatly limits their applicability, since an action which restricts liberty is declared inadmissible; and most government actions under existing institutions, such as taxation to finance the provision of public goods, will restrict liberty. Thus, strict application of the principles might dictate a withering away of government services. The objection to existing institutions would be less important if other just fiscal institutions could be developed. Rawls (p. 282) suggests that the Wicksell rule of ap- proximate unanimity is such an institution. However, even if one ignores the two important problems of ascertaining true individual preferences and preventing strategic voting behavior, which are inherent in the Wick- sell and Lindahl approaches to just public expenditure and taxation,” it is not obvious that just institutions can realistically be hoped for. The

18. The relevant portion of Wicksell‘s work has been translated into English and appears in Musgrave and Peacock [22] as “A New Principle in Just Taxation.” Lindahl’s contribution appears in the same volume as “Just Taxation-A Positive SoIution.” Their work is also discussed in Musgrave [ 21 1 , Shibata [ 27 1 and Milleron [ 19 1 .

O R R A N D RAMM: RAWL’S JUSTICE 391

equilibrium allocation which results from any voluntaristic institutional framework must be in the core of the economy. Hence, if the framework of fiscal institutions is just, it must impute within the core, since the enforcement of imputations outside of the core would restrict the liberty of those individuals who otherwise could and would want to block the imputation. l9

It has been shown that the set of competitive equilibria are in the core of a pure private goods economy and that the set of Lindahl equilibria are in the core of an economy with pure public goods.20 It has also been shown that as the number of participants in a competitive private goods economy is appropriately increased, the core of such an economy will shrink to the set of competitive equilibria. This is an important result, since it indicates that an allocation which can be enforced without coercion can be attained by the competitive mechanism. It is consistent with the importance that Rawls assigns (pp. 270-274) to market institutions as an allocative mechanism that will be consistent with the preservation of liberty.

However, in the case of economies with pure public goods it has been shown that as the size of the economy is enlarged, the core will not nec- essarily shrink to the set of Lindahl equilibria.*’ There thus will be room for disagreement and bargaining on decisions regarding the provision and financing of public goods, even when the Lindahl mechanism is used. The enforcement of a particular cost-sharing scheme or Lindahl equilibrium may thus require coercion, which would violate the first Rawls principle. The existence of a core of an economy, given a set of fiscal institutions, thus appears to be a necessary, but not a sufficient, condition for justice.

Moreover it is not obvious that core allocations exist if certain types of externalities are a feature of the economic environment. Davis and Whinston [71 have noted that a core may not exist when there are re- ciprocal externalities or other feedback effects among individuals in the economy. More recently Starrett [ 301 has shown that the impersonality

19. Starrett [20] shows that the conditions under which an individual or coalition can block an imputation will depend on the character of property rights in the society, as well as its fiscal institutions (which are the objects of study).

In our following discussion, we assume that each individual has an equal right to common resources; common resources may be used by an individual only if all affected individuals give their consent. Such a specification is certainly consistent with Rawls’ first (equal liberty) principle; whether a social order could survive for long under such a rule for allocating common resources is another question entirely (particularly if “common resources” are specified in such vague or portmanteau terms as “the environment”).

20. Starrett [30] shows, however, that the Lindahl equilibrium may exist but not be in the core, if “personal externalities” are present. (An externality is impersonal if the idenity of its pro- ducer does not matter.)

21. See Milleron [I91 and Muench [20] ; a similar point is made by Shibata [27] .


of externalities is essential for the existence of core imputations. Starrett also notes that a core may not exist if there are nonconvexities in the economy and that many externalities imply the existence of nonconvexities. Thus, a core may not exist when the economic environment is characterized by conditions which are commonly interpreted as defi- ciencies requiring government action to correct. Fiscal institutions for dealing with such situations, which satisfy Rawls criteria of justice, may then simply not exist (unless a new definition of liberty can be found which excludes the condition of voluntary acquiescence on the one hand without destroying the concept that it defines on the other).

For these reasons, it appears that Rawls has not resolved the long- standing liberty-equality conflict that has been such a problem to analysts of the political, economic and social orders. Nor are his principles in their present form offered to an economist who wants stronger criteria than the Pareto condition to evaluate policies. With respect to the two social goods of liberty and equality, we still face tradeoffs in our policy actions; and these tradeoffs must still be judged on the basis of intuition.**

IV. RATIONALIST CONSTRUCTIVISM IN RAWLS‘ ANALYSIS

Classical liberals have found themselves swimming against a powerful current of rationalistic constructivism for more than a century. For a brief period, which spanned roughly the years 1 690-1895,23 the English liberal tradition surmounted rationalist demands for socio-political design, and focused instead on a “system of natural liberty” which apparently oper- ated in a spontaneous, undirected and decentralized manner, but which in reality required a delicately structured and finely balanced framework of law and tradition within which to operate. With such a framework, the system of natural liberty demonstrably brought widespread social benefit and rapid progress. The doctrine, of course, finds its immortal interpretation for economists in The Wealth of Nations. 24

22. Discussions of the libertyequality tradeoff can be criticized for their informality and ideological content. Some progress has been made in formalizing the topic, however. Sen [ 25 J finds a fundamental conflict between liberty and efficiency in the presence of externalities.

23. The ideas, of course, are more important than the dates; but 1689 marked the printing of Locke’s Two neutises, and 1894 the dissolution of Gladstone’s last cabinet: perhaps the first “pure” articuiation and the last “pure” implementation of liberal thought.

24. And a fresh and compelling modern restatement in Hayek [12]. The System of Natural Liberty was frequently misrepresented, in the writings of Herbert Spencer and other 19th century anti-interventionists, as a spontaneous and incomprehensible manifestation of God’s will, and not to be tampered with by man. That view overlooks the importance of proper laws and social institutions to a smooth-working and beneficent social order, an issue that Adam Smith empha- sized heavily. We also want to acknowledge that contemporary writers in the classical liberal tradition have undertaken to propose necessary reforms of contemporary institutions, much in the spirit of Rawls’ work, but without adopting Rawls’ implicit view that rebuilding should naturally proceed from the ground up.

ORR AND RAMM: RAWL’S JUSTICE 39 3

There are today a number of economists who seek to restore the classical liberal doctrines to the vigor and standing that those doctrines enjoyed before they were undermined by rationalist-constructivist impulses. The most forceful, persuasive and clearcut recent statement of their views is to be found in Hayek [ 121, a book that economists can profitably read in parallel with Rawls’. The two books embody consequential congruences, or at least they can be read as embodying such congruences. Rawls’ cate- gorical stress on the importance of liberty is certainly, for this day and age, a forceful endorsement of classical liberalism’s central idea. But in treating liberty as merely the most important of the primary social goods, instead of treating it as a necessary antecedent of the others-“the soil required for the full growth of other values” (Bay [31, p. 19)-Rawls leaves the door open to the social engineers. In effect, they are enjoined to assure us of the liberty-enhancing quality of their schemes, as well as the material-utopia-hastening aspects; but after providing those assurances, they are absolved to proceed however they like.

Rawls does not follow earlier writers, notably Hobhouse [14] or Tawney [ 3 1 1 , in resolving the equality-liberty conflict by simply declaring some kinds of liberty, the types that are seen to imply specific inequalities, to be socially bad. Any program can satisfy Rawls’ principles if we simply add the injunction: the liberty that is sacrificed in the name of equality is not true liberty. The problem that emerges from Rawls’ analysis is not that he advocates so sleazy and issue-begging a device as that injunction; the problem is deeper. Even in the face of his admonition that his pnn- ciples are not devices for measuring the justice of specific policies, we will predictably be treated to the ministrations of numerous social engineers, purveying modifications of institutions in the service of poorly articulated and vaguely defined social priorities, with little consideration for the costs of those modifications. Following Rawls (probably without having read him), they will want to optimize benefits to the poor, subject to constraints which maintain “full liberty” and “equal opportunity.” It is easy to foresee that Tawneyesque corruptions of the idea of liberty will be reinvented to help them speed their great work along.*’

To a classical liberal, then, Rawls’ argument, as a statement of the pri- macy of liberty and the importance of equal opportunity, is a strong and appealing one; but his insistence on modifying legal, political and social

25. The issue that we see as arising out of the behavior of social engineers can be rephrased in more general terms. Can an organic or holistic conception of the state, such as the one Rawls proposes in Part Two of Justice, be made consistent with the maintenance of full liberty? Is the mere caveat that full liberty shall be maintained sufficient protection, when a branch of government has as its duty the enforcement of the difference principle; and it discharges that duty in accord with some perception of the rational (not the revealed) needs of the citizenry?


institutions to bestow maximum benefits on the disadvantaged carries with it old and still dismaying connotations. Dismay arises, not because modern proponents of classical liberalism are adverse to helping the poor; a Spen- cerian view of the Irish potato famine, for example, would not find any substantial following today.26 Rather, dismay arises out of the perception that it is one thing to aid the disadvantaged, and quite another t o pretend that one is developing political and social institutions that increase economic equality without imposing reductions in liberty and perhaps also efficiency. Classical liberals maintain a heavily reinforced skepticism regarding the ability of men to design social institutions which solve widely perceived problems; that skepticism must extend to the uses that will be made of Rawls’ theory, in light of the issues raised in our discussion of practicability (Section I11 above).

V. A LESS AMBITIOUS PROGRAM?

In an analysis of the liberty vs. equality dilemma that one of us had undertaken before reading Rawls,” far weaker rules for policy action than those implicit in A Theory of Justice were proposed. The proffered rules were (and after reading Rawls, still are):

A policy shall not be adopted if it reduces both liberty and equality. If an existing policy can be shown to reduce both liberty and equality, then that policy shall be discontinued.

If the classical liberal assessment of the unwisdom of much collective action is anywhere near correct, then the application of those more cau- tious rules can produce much of the benefit that Rawls hopes for from the application of his principles. For what he seeks is an open society of self-respecting individuals, living under the rule of just law, and enjoying maximum effective liberty. Liberty is constricted and less meaningful, and self-respect is harder to achieve, in a society where inequality of opportunity is tolerated or where some individuals, because of the circumstances into which they are born, do not have an equal opportunity to compete on the basis of ability. However, as Rawls doesn’t adequately acknowledge, a remedy for that last difficulty has eluded the numerous and vigorous efforts of several decades; indeed, misfortune has on occasion resulted from hastily prepared “remedies” for persistent inequality. By contrast,

26. Hayek’s [ 12) definitive modern statement of classical liberalism affirms the need for maintenance of the disadvantaged; and the most conspicuous popular treatment of the doctrine, Fried- man 191, initiated a widespread continuing discussion of the best means whereby that goal can be achieved.

27. In drafts of a perpetually forthcoming textbook (Orr).

ORR AND RAMM: RAWL’S JUSTICE 39 5

much might be accomplished in service of the goals espoused by Rawls if we were content to examine in greater detail the impact of existing social programs on liberty and equality.

For example, programs such as farm price supports and other industry subsidies clearly reduce both liberty and equality without increasing efficiency. Other programs, such as urban renewal, are certified on the basis of some cost-benefit version of “efficiency” but do serious violence to the liberty and well-being of affected individuals (Downs [ 81 ). Social security, while possibly increasing intergenerational equity, is clearly inequitable within any given generation (Campbell [ 61 ). There are numerous other clearcut (and a still larger number of debatable) programs that should be reexamined. The same careful scrutiny should be made as we deal with the inevitable future stream of major social engineering responses to social problems.28

The problem of balance between liberty and equality is both important and persistent. Rawls’ phrasing of the problem and his proposed solutions are attracting a wide and influential audience. If economists are to maintain credibility, that big issue cannot be shrugged aside on the ground that it is a problem for the moral philosopher; for one of the most influential among the moral philosophers rightly feels called upon to comment at length on economic organization in his attempts to deal with it. The les- sons of experience with the programmatic approach to social problems,

28. Kenneth Boulding in recent years has stressed the importance of nonexchange relationships in the processes of resource allocation. Rawls’ proposals in Jusrice may be viewed as a plea for more attention to what Boulding has called the “integrative” or status-determined allocative system, a system which includes intra-household allocation decisions as well as private charity and government transfers. (See Boulding [ 41 for discussion and references.) Society faces the problem: can new integrative relations be promiscuously fostered by acts of policy without the disruption of exchange relations and existing, spontaneously evolved integrative relations? Can the role of the integrative system, or of the state within the integrative system, be expanded in a way that preserves and enhances liberty and equality, and efficiency?

Frank Knight had long been pessimistic about the prospect of finding successful programs for resolving these issues. In the preface of the 1957 edition of his mngnum opus, he wrote:

“It is my conviction that any great extension of state action in economics is in- compatible with political liberty, that ‘control’ will call for more control and tend to run into complete regimentation-calling also, before it goes very far, for regimentation of thought and expression-and finally into absolutism, with or without a destructive struggle for power. Moreover, aggrandizement of the state must be at the expense of the family and all voluntary and institutional groups. . . ,

“On the other side, there is an undeniable natural tendency toward increasing inequality and concentration of power under free enterprise itself, which political action seems the only way of counteracting. The vast material and intellectual progress under the short era of liberalism threatens to be its own undoing. . . . For the visible future, the problems of modern civilization are to be solved only through striving for the best possible compromise among conflicting goods and associated evils. . . .”


and the dangers latent in a rationalist-constructivist outlook, are frequently lost on economists29 and yet are probably better understood by economists than by any other disciplined group. It would be a human- itarian service of the first magnitude if economists persistently sounded and patiently clarified those dangers, and the significance of that experience, to the creative thinkers of other disciplines and to the intellectuals.

29. See Spender 1291 for a well-developed view of the damage wrought in recent decades by the attitude that the social order is man’s creation and can be changed at will.

REFERENCES 1. Alexander, S. S., “Social Evaluation Through Rational Choice,” unpublished. 2. Arrow, K. J., “Some Ordinalist-Utilitarian Notes on Rawls’ Theory of Justice,” Harvard Insti-

tute of Economic Research, Discussion Paper No. 287, April 1973 (unpublished). 3. Bay, C., The Structure of Freedom, Stanford, 1958. 4. Boulding, K., The Impact of the Social Sciences, New Brunswick, 1966, Essay 3. 5. Buchanan, J., Public Finance in a Democratic Process, Chapel Hill, 1967. 6. Campbell, C. D., “Social Insurance in the United States: A Program in Search of an Expla-

nation,” Journal of Law and Economics, 12, 1969, 249-66. 7. Davis, 0. A., and Winston, A., “Externalities, Welfare, and the Theory of Games,”The

Journal of Political Economy, 70,1962, 241-262.

8. Downs, A., “Uncompensated Nonconstruction Costs Which Urban Highways and Urban Re- newal Impose Upon Residential Households” in Julius Margolis (ed.), The Analysis of Public Output, New York, N.B.E.R., 1970.

9. Friedman, M., Capitalism and Freedom, Chicago, 1960. 10. Hayek, F. A., Individualism and Economic Order, Chicago, 1948. 11. ___ , The Counter-Revolution of Science, Glencoe, Ill., 1955. 12. ~ , The Constitution o f Liberty, Chicago, 1960. 13. ___ , Studies in Philosophy, Politics and Economics, Chicago, 1967, Ch. 5. 14. Hobhouse, L. Z., Liberalism, London, 1911. 15. Knight, F. H., The Ethics of Competition and Other Essays, New York, 1935. 16. ~ ,Risk, Uncertainty and Profit, New York, (reprint), 1958. 17. Katzner, D., Analysis Without Measurement, 1973 (unpublished). 18. Lowi, T. J., The End of Liberalism, New York, 1969. 19. Milleron, J.-C., “Theory of Value with Public Goods: A Survey Article,” Journal of Economic

20. Muench, T. I., “The Core and the Lindahl Equilibrium of an Economy with a Public Good:

21. Musgrave, R. A., The Theory o f h b l i c Finance, New York, 1959.

Theory, 5,1972,419477.

An Example,” Journal of Economic Theory, 4, 1971, 241-255.


22. Musgrave, R. A., and Peacock, A. T., eds., Classics in the Theory of Public Finance, New York, 1967.

23. Phelps, E. S., ‘Taxation of Wage Income for Economic Justice,” Quarterly Journal of

24. Samuelson, P. A., The Foundations of Economic Analysis, Cambridge, Mass., 1948. 25. Sen, A. K., “The Impossibility of A Paretian Liberal,” Journal of Political Economy, 78,

26. - , Collective Choice and Social Welfare, San Francisco, 1970. 27. Shibata, H., “A Bargaining Model of the Pure Theory of Public Expenditure,” Journal of

28. Smith, A,, Lectures on Political Justice, Revenue and Arms, edited by E. Cannan, Oxford,

29. Spengler, I. J . , “Social Science and the Collectivization of Hubris,” Political Science Quar-

30. Starrett, D. A., “A Note on Externalities and the Core,” Econometrica, 41, 1973, 179-183. 31. Tawney, R. H., Equality, London, 1931. 32. Wolff, R. P., The Poverty of Liberalism, Boston, 1968.

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RAWLS' JUSTICE AND CLASSICAL LIBERALISM: ETHICS AND WELFARE ECONOMICS

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