Michael MungerPPE ProgramDuke University

Fleeming Jenkins

A Chinese teen has allegedly gone to the ultimate extreme in his quest for the latest in Apple technology. The International Business Times is reporting that a 17-year-old high school student named Xiao Zheng sold one of his kidneys to purchase an iPad 2 tablet. Zheng, who lives in China's Anhui province, connected with an organ-selling agent on the Internet who offered him cash for a kidney. Then the teen reportedly traveled to the city of Chenzhou in Hunan province, where the kidney is said to have been removed at a hospital under the supervision of three "middlemen." "I wanted to buy an iPad 2 but could not afford it," Zheng told Shenzhen TV, according to Shanghai Daily. "A broker contacted me on the Internet and said he could help me sell one kidney for 20,000 yuan [roughly $3,084.45]."After being discharged from the hospital, Zheng returned home with both a brand-new laptop and an iPhone, but quickly began experiencing complications from the surgery, according to the Telegraph. When his mother discovered the products and forced her son to reveal how he could afford them, she immediately notified local police, Global Times is reporting. "When he came back, he had a laptop and a new Apple handset," his mother, identified as Miss Liu, is quoted by the Telegraph as saying, "I wanted to know how he had got so much money and he finally confessed that he had sold one of his kidneys." Chenzhou 198 Hospital, where Zheng allegedly had his surgery, has no qualifications for kidney transplantation, and has since denied any knowledge of the operation because the department that did the surgery had been contracted to a Fujian businessman, Shanghai Daily reports. Police are continuing to investigate the case.

1. Why are some transactions ruled out, even though the transaction makes both parties better off? And even though the actual good or service can be exchanged, just not for money or other thing of value?Prostitution, organ sales, ice after a hurricane?

2. Why are some transactions illegitimate, even though denying the very worst off access to “capitalist acts between conssenting adults” maroons them at their inferior prior position? Is it really true that poor people are better off without sweatshops, for example?

3. How can a series of transactions that make both parties better off be a justification for redistribution? If each transaction in the chain is just, how can the result be unjust?Where the other two questions were micro, this is macro: is inequality, in and of itself, unjust, even if every transaction that led up to it is individually just?

EUVOLUNTARY OR NOT, EXCHANGE IS JUST. Social Philosophy and Policy, 28 (2011): 192-211

So now the second question, which was Nozick’s question: Can the state regulate capitalist acts between consenting adults? New concept: “Euvoluntary” exchange

Some things the state says we can’t have or sell…

Some Drugs Endangered Species Automatic Weapons Plutonium

In such cases, it’s the commodity itself that we are outlawing….In that case, outlawing a black market makes logical sense

But sometimes, the commodity is okay. The ONLY problem is the sale….

ProstitutionOrgan SalesPrice-gouging: 1. Tickets for Sports/Concerts2. Ice after a hurricane in RaleighHaving, or giving, these things is not a

problem. The problem is the SALE

Spheres of Justice, analogous to claims by Michael Walzer

My question: In what spheres of human interaction is always, sometimes, and never appropriate to use market exchange and contracts to decide how scarce resources will be allocated.

…we cannot give the term 'social justice' a precise meaning… There can be no test by which we can discover what is 'socially unjust' because there is no subject by which such an injustice can be committed, & there are no rules of individual conduct the observance of which in (markets) would secure to the individuals & groups the position which as such… would appear just to US. It does not belong to the category of error but to that of nonsense, like the term 'a moral stone'. (Hayek, 1978)This is why it matters that individual exchanges are (un)just. If not, there has to be a separate aggregate category. Hayek thinks it is not legitimate to use the same word.

If inequality is immoral, then the state is justified in taking money from the haves to give to the have not, in the name of justice.

Suppose that inequality derives from the aggre-gate effects of myriad individual transactions.

Suppose each transactions is allowable… Then what is the justification for state action to “correct” disparities that have no detectable unjust origins? Why punish, when no unjust action has taken place?

1. Can selfish actions be moral? What are the conditions under which self-interested exchange is allowed? Relatedly, what individual mutually beneficial exchanges should be outlawed?

2. GIVEN the answer to #1, under what circumstances are the aggregate consequences of such exchanges a problem?

“The laws and conditions of the production of wealth, partake of the character of physical truths. There is nothing optional, or arbitrary in them... this is not so with the distribution of wealth. That is a matter of human institution solely.

The things once there, mankind, individually or collectively, can do with them as they like.” (Mill, Collected Works, 1965, emphasis mine).

The roots of the English word “monger,” a common merchant or seller of items are quite old. In Saxon writings of the 11th century, described in Sharon Turner’s magisterial three-volume History of the Anglo-Saxons (1836), we find a very striking passage where a merchant (mancgere) defends himself on moral grounds.

“I say that I am useful to the king, and to ealdormen, and to the rich, and to all people. I ascend my ship with my merchandise, and sail over the sea-like places, and sell my things, and buy dear things which are not produced in this land, and I bring them to you here with great danger over the sea; and sometimes I suffer shipwreck, with the loss of all my things, scarcely escaping myself.”

“What things do you bring to us?”“Skins, silks, costly gems, and gold; various garments, pigment,

wine, oil, ivory, and orichalcus, copper, and tin, silver, glass, & suchlike.”

“Will you sell your things here as you brought them here?”“I will not, because what would my labour benenfit me? I will sell

them dearer here than I bought them there, that I may get some profit, to feed me, my wife, and children.”

1. Incentive problems, “Supply Side” considerations

2. How can the sum of many individually moral actions be immoral in the aggregate? In other words, how can the sum of many positives be negative? How can differences in wealth that result from exchanges that in every instance leave the other party better off be a justification for coercive policies designed to correct the inequity?

Not talking about taxes for public goods. Taxation for the sake of reducing inequality, solely.

Nozick’s “Chamberlain” example does not actually do the work he wants for it.

In fact, invoking Chamberlain is just appeasement toward the egalitarians!

Need to ask whether the product of many individually just transactions can create injustice, without conjuring a magic giant like Wilt Chamberlain

1. Euvoluntary exchange is always just

2. Exchange that is not euvoluntary is nonetheless often welfare-enhancing. Objections to exchange are generally misplaced objections to disparities in the pre-existing underlying distribution of wealth and power, which exchange actually mitigates.

(1)conventional ownership by both parties(2)conventional capacity to transfer and

assign this ownership to the other party(3)the absence of post-exchange regret,

for both parties, in the sense that both receive value at least as great as was anticipated at the time of the agreement to exchange

4. Absence of uncompensated externalities5. neither party is coerced, in the sense of being forced to exchange by threat

6. neither party is coerced in the alternative sense of being harmed by failing to exchange.

In the political world, “power” is measured by the capacity of one person or a group to impose his, or its, will on others through the threat of violence. That is the sense of “coercion” in number 5 above.

In the economic world, power in an exchange relationship is measured by the disparity in outcomes if no exchange is agreed upon. More simply, economic power is the disparity in welfare at the reversion points, or the best alternative to a negotiated agreement.

Let’s call this the “BATNA” for short. This concept of the “Best Alternative to a Negotiated Agreement,” or BATNA, comes from Fisher and Ury, 1981.

Imagine Jane and Bill are considering an exchange of a product for a sum of money. Jane has power over Bill if Bill suffers more from a failure to exchange than Jane does. In some sense, each has a voluntary choice to make: Jane can sell or not sell, and Bill can buy or not buy. But if the consequences of failing to consummate the transaction are wildly different, then the exchange is not euvoluntary.Economists call the state of the individual in the absence of an exchange the “Best Alternative to A Negotiated Agreement,” or BATNA for short. One might think of the value of the BATNA as the level of welfare of the person without access to exchange.

So, formally, Jane has power over Bill, and Bill’s exchange decision is not euvoluntary, if:

Value (BATNAJANE) – Value (BATNABILL) ≥ (DT)

DT: Disparity ThresholdBATNA: Best Alternative to a Negotiated Alternative

The exact level of the “disparity threshold” where this difference implies exchanges are not euvoluntary is arbitrary. But at some level, if Jane is indifferent between exchanging and not exchanging, and Bill must exchange or else suffer great harm, then Jane has power over Bill.This concept of the “Best Alternative to a Negotiated Agreement,” or BATNA, comes from Roger Fisher and William L. Ury. Getting to Yes: Negotiating Agreement Without Giving In (Boston, MA: Penguin Books, 1981).

Suppose I go to buy a bottle of water. If I am in a grocery store, and notice that the price is $1,000 per bottle, I laugh and push my cart along. I’ll buy the water somewhere else, or get some from the tap, or choose any of many alternatives. I am almost indifferent, in fact, between buying water at Kroger or buying it at Food Lion, for the market price of $0.90. I have choices. And, I have money, and we all agree that I own that money and can transfer, and we all agree that each store owns the water, and can transfer it. Finally, the water is not poisonous, and tastes good, so I won’t regret purchasing it, if I choose to do so. So the exchange is euvoluntary.

Now, let’s suppose instead that I am far out in the desert, and am dying of thirst. I’m rich, and I happen to have quite a bit of cash on me, but I can’t drink that. A four wheel drive taco truck rolls over the hill, and pulls up to me. I see that the sign advertises a special: “3 tacos for $5! Drinks: $1,000. 3 drinks for only $2,500”

I argue with the driver. “Have a heart, buddy! I am dying of thirst!” He asks if I have enough money to pay his price, and I admit that I do. The driver shrugs, and says, “Up to you! Have a nice day!” and starts to drive off.

I stop him, and buy 3 bottles of water for the “special” price of $2,500.

Was the exchange euvoluntary?

It was not. The exchange violates part 6 of the definition, relative equality of BATNAs. My BATNA was death, from thirst. The driver was little affected by whether a deal was consummated (though he got a bit richer), while I was enormously affected. Even though in most important senses the exchange was voluntary (I could have said no), it was not euvoluntary. The precise definitional line between almost equal BATNAs (and therefore euvoluntary exchange) and unequal BATNAs (and therefore not euvoluntary exchange) may be hard to draw, but I hope the distinction is clear enough for analytic purposes.

Many examples that seem like power are not coercive in the usual sense of political power.

I have a gun, and you have a wallet. Now, I have a wallet AND a gun. Unjust?

But a sweatshop is different. The “reserve army of the unemployed” is different. The source of power there is not coercion, but a disparity in BATNAs.

North Carolina's Anti-Gouging Law in 1996(General Statutes 75-36) (a) It shall be a violation of G.S. 75-1.1 for any person to sell or rent or offer to sell or rent at retail during a state of disaster, in the area for which the state of disaster has been declared, any merchandise or services which are consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or comfort of persons or their property with the knowledge and intent to charge a price that is unreasonably excessive under the circumstances.

(Later amended to be even more restrictive, outlawing price changes reflecting cost increases up the supply chain, August 2006, SL2006-245, GS 75-38).

They clapped. Appeared to be happy.

What is the objection?Why do so many states have these

laws? If I wanted to offer ice for sale for

$12 per bag today, could I do it?

Definition of “market”: a large collection of institutions for reducing the transactions costs of impersonal exchange

1. Same endowments, different preferences

(I have apples and bananas, and so do you. But you like apples better, and I like bananas better)

2. Same preferences, different endowments

(I have apples, you have bananas, we both like fruit salad)

Actually, each of those first two is trivial, and not important. Only one real origin of markets, as we now think of them:

3. Non-linearities in cost/economies of scale in the production function resulting from division of labor.

The origin and expansion of markets, whether in a village or across the globe, does not, emphatically does not, depend on either absolute or comparative advantage, as innate features of production.

Division of labor is the cause of globalization, and it is one of the most powerful, and corrosive, forces the world has ever known.

Chapter 3, Bk I, of the Wealth of Nations:

“That the Division of Labor is Limited by the Extent of the Market”

Several important elements there.

What causes division of labor to increase productivity?

Tool use, dexterityPractice, knowledge, development of

techniques, patents

What nation “lost” the most manufacturing jobs between 1990 and 2000?

Blacksmith Interdependence, creation of

communitiesExtension of communities, push

boundaries of nations

What is the proper sphere of markets, then?

Division of labor is corrosive. It dissolves boundaries, and destroys differences in policy.

Can one nation maintain policies based on “social justice,” such as wage regulation, hours rules, vacation, safety, pensions? Or will competition from improved foreign productivity sweep those away?

Ice in the hurricane Prostitution Markets for organs Scalped TicketsHere’s the thing: All of these exchanges

are morally, or at least legally, okay if we insist that no payment is made for the service.

So, it’s not the service or commodity that’s the problem, it’s the payment. May even be morally estimable to provide the service or commodity, as long as it is for free.

Theory of "complex equality“1. The metric of just equality is not some

single material or moral good, but rather that egalitarian justice demands that each good. be distributed according to its social meaning

2. No good (like money or political power) be allowed to dominate or distort the distribution of goods in other spheres.

I want to try to argue that anyone who actually believes in the difference principle must prefer free market exchange.

Biggest improvement in the welfare of those least well off.

Problem of profits: not a theory of desert, but rather a consequentialist theory. Profits are like noise pollution.

The verger: luck and awareness. But Mill is wrong…cannot assume “the things once there…”

Not original; several have argued this.Loren E. Lomasky (2005). Libertarianism at Twin Harvard. Social Philosophy and Policy 22 (1):178-199.David Gordon, “Going Off the Rawls,” American Conservative, July 28, 2008 Issue Will Wilkinson is the foremost “Rawlsekian”, but in general “Liberaltarians” are sympathetic

The pieces of the synthesis1.Rawlsian objectivesLiberty principleDifference principle2.Hayekian understanding of economics, particularly the role of prices and organizing3.Public Choice understanding of limits of ability of government to correct market failures. Scope, Coherence, and Information

In the final statement of the Difference Principle, Rawls (1971) sets out these requirements: Social and economic inequalities are to be arranged so that they are ...(a) to the greatest benefit of the least advantaged; and (b) attached to offices and positions open to all under conditions of fair equality of opportunity. (p. 302).An inequality of opportunity must enhance the opportunities of those with the lesser opportunity…General Conception: All social primary goods—liberty and opportunity, income and wealth, and all the bases of self-respect—are to be distributed equally unless an unequal distribution of any or all of these goods is to the advantage of the least favored. (p. 303; emphasis original).

There are two kinds of security: the certainty of a given minimum of sustenance for all & the security of a given standard of life, of the relative position which one person or group enjoys compared with others. There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision. It is planning for security of the second kind which has such an insidious effect on liberty. It is planning designed to protect individuals or groups against diminutions of their incomes. (Hayek, 1944/2007; emphasis added.)

So we might (with both Hayek and Rawls) endorse a move from hypothetical institutional state (a: pure equality) to a realized institutional state (b: market system with social safety net to protect the least well off). And the extent of the social safety net would be a matter of public agreement, in a way to be made clear in a moment. What is impermissible is to justify a coerced move to third state of the world (c), where further redistribution / punitive tax policies are undertaken to “fix” the realized society of position (b). The reason this is impermissible in the Rawlsian framework is self-evident: it is only after we know our status in the realized society that we wake up one morning and decide that position (b) is not what we (the least well off) wanted after all.

The problem is that if voluntary transactions are to be allowed, income inequalities will recur over time. A continuous process of readjustment ( not just (c) but then (d) and before long (e) ) would be required, based on information we could not possibly have possessed behind the veil of ignorance. These adjustments would be motivated not by the initial agreement about fairness, but self-interested information about just income differences resulting from procedurally fair voluntary transactions.

This more dynamic version of the Difference Principle is inconsistent with Liberty. And that is just the criticism that Robert Nozick (1974; p. 163) was making when he said:To maintain a pattern, one must either must continually interfere to stop people from transferring as they wish to, or continually (or periodically) interfere to take from some persons resources that others for some reason chose to transfer to them. (But if some time limit is to be set on how long people may keep resources others voluntarily transfer to them, why let them keep these resources for any amount of time? Why not have immediate confiscation?)

  Lottery α Lottery β Lottery β′Least Well

Off$1,000 with

p=1.0$800 with

p=0.10$9,800 with

p=0.10Wealthy n/a $100,000

with p=0.90

$99,000 with p=0.90

Expected Value of Lottery

$1,000 $90,080 $90,080

  Lottery α Lottery β Lottery β′Least Well Off $1,000 with p=1.0 $800 with

p=0.10$9,800 with p=0.10

Wealthy n/a $100,000 with p=0.90

$99,000 with p=0.90

Expected Value of Lottery $1,000 $90,080 $90,080

1. Empirically, people choose β, not α2. Not a problem, since β’ is feasible with redistribution, still Pareto3. Problem would come if someone who turns out to be one of the LWO

then uses specific information of the ex post realized distribution of income to demand further redistribution.

4. Difficulty: There are plenty of egalitarians who would say β’ is inferior to α. If not for .9 to .1, then for some p-value (.05 to .95?)

In selecting institutions, the question is not how to ensure that there are no rich people, but rather how to ensure that the welfare of the poor is put first. A critic of the market system of institutions is obliged to propose an alternative lottery, call it γ, that people would unanimously prefer to β′ behind the veil of ignorance. Otherwise, a choice made in the original position (choose the institution that maximizes total average income, with a generous redistributive policy to help those least well off) is immune from further adjustment based on self-interest, by the very logic of Rawls’s original position.

NOT Ayn Rand style worship of the hero capitalist. May indeed be some advantage for individual self-realization in business.

But the REAL advantage, if there is one, is consumer sovereignty. If consumers want something, businesses try to produce it better and at lower cost.

Smith’s baker example

Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind. (Gordon Gecko, WALL STREET (1))

The argument for markets has to be that the consequence of greed is good for consumers, under some circumstances

If exchange is euvoluntary, yes What if exchange is NOT euvoluntary? Wallet and the gun Our intuition is that markets are unjust,

transactions are unjust, & outcomes are unjust if too much disparity in BATNAs. If a wealthy woman became a prostitute, we might think it odd, but not nearly as much a problem as if a poor woman does the same thing. Psychological problem, not desperate financial need.

But then what is the role of profits?Mancgere Itinerant PadreVerger

The entrepreneurs are neither perfect nor good in any metaphysical sense. They owe their position exclusively to the fact that they are better fit for the performance of the functions incumbent upon them than other people are. They earn profit not because they are clever in performing their tasks, but because they are more clever or less clumsy than other people are. … If the grumbler knew better, why did he not himself fill the gap and seize the opportunity to earn profits? It is easy indeed to display foresight after the event. In retrospect all fools become wise. (von Mises, “Profit and Loss”)

Euvoluntary exchange exists only in fairly narrow circumstances

Even if exchange is not euvoluntary, however, objections to markets rely should be directed to the pre-existing distribution of wealth and power

AND, that understood, denying access to markets imprisons the poor in their inferior BATNA, like a cage. Transactions may be their only way out

So, the solutions for the desperate person cannot be to isolate him/her from the only means available to escape. Rather, either we must find a way to ease the disparity in BATNAs, or accept that markets are the best feasible means, given empirical realities.

Finally, profits, and significant differences in wealth, are side effects, not unlike noise pollution, of a valuable process of improving the lot of the least well off.

What about a contract that says this: “If I die accidently, my kidney goes to ____ corporation, which will resell it.” And, I am paid $1,000 per year for this contract, provided I take good care of my kidney. What is the objection? (Note: could be an insurance company, obtaining organs at lower cost for its customers. Not true that sold to highest bidder on spot market).

As it stands, a huge shortage of organs, because we can’t pay. People who would donate don’t, because they can’t be paid. People who would pay, die. And they clapped……

Earlier, I said that suppose you have a wallet, and I have a gun. Then, I have a wallet AND a gun, and you have nothing but your life.

Is that allowed? It is a voluntary transaction, after all.

The problem seems to be that we object to the lack of real “voluntary” entry into the contract. The man with the gun is using force. The man with the wallet should get to keep it, for free.

I have claimed that our objections to markets are really objections to inequalities. And those underlying inequalities are real.

Then, though, as a second best solution, we deny poor people access to market processes that they seem to think would make them better off.

If I work in a sweatshop, voluntarily, am I different from the guy with the wallet? Is my work really voluntary, or is it slavery? I can work, or starve.

But YOU are making an assumption. Suppose the guy with the gun is a policeman. The guy with the wallet is a thief, who stole the wallet from its real owner. All I said was, “the guy has a wallet.”

We make assumptions about the distribution of wealth and power that we happen to observe.

The people with wealth must have earned it.

Two problems with this approach, which is nearly universal.

1. We do not address the underlying inequality problem. Outlawing ice sales as “gouging” do not increase the amount of ice available. And, if more ice were brought in by the state, then “gouging” would be impossible, as price would fall.

2. Then, we deny the benefits of market processes to people who say markets as their only way out, their only way to improve their lots.

I can’t buy ice, after a hurricane. Women who work as prostitutes are enslaved to a pimp, because police harrass them rather than protect them. Kidneys, livers, and lungs, are buried or cremated, instead of going to save the life of someone who would gladly pay for them.

What we face is a problem we need to recognize, and act on, rather than just seeing what happens passively.

Division of labor corrodes borders, morals, and social conventions. Large inequalities make it seem as if markets are creating the injustice.

But the only way to balance moral claims, and navigate these ethical shoals, is to recognize markets cannot be suppressed. The solution is to solve the fundamental inequalities in power and wealth that actually underlie our primitive perceptions of the (in)justice of exchange.