The Efficiency and Social Justice of Markets: A Discourse on Adam Smith's Invisible Hand, Apuntes de Economía

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Public Finance and Public Policy

Responsibilities and Limitations of

Government

Arye L. Hillman

Bar-Ilan University, Israel

published by the press syndicate of the university of cambridge The Pitt Building, Trumpington Street, Cambridge, United Kingdom

cambridge university press The Edinburgh Building, Cambridge CB2 2RU, UK 40 West 20th Street, New York, NY 10011-4211, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia Ruiz de Alarc ´on 13, 28014 Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa

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©C (^) Arye L. Hillman 2003

This book is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press.

First published 2003

Printed in the United States of America

Typefaces Times Ten 10/13 pt. and Helvetica System LATEX 2ε [TB]

A catalog record for this book is available from the British Library.

Library of Congress Cataloging in Publication Data

Hillman, Arye L. Public finance and public policy : responsibilities and limitations of government / Arye L. Hillman. p. cm. Includes bibliographical references and index. ISBN 0-521-80641-0 – ISBN 0-521-00114-5 (pb.)

1. Finance, Public. 2. Economic policy. 3. Taxation. I. Title. HJ141 .H54 2003 336–dc21 2002031203

ISBN 0 521 80641 0 hardback ISBN 0 521 00114 5 paperback

• 1. MARKETS AND PROPERTY Preface page xi
  • 1.1 A First Account
  • 1.2 Property Rights and the Rule of Law
  • 1.3 Life under Maximal Government
• 2. COLLECTIVE BENEFITS
  • 2.1 Public Goods
  • 2.2 Information and Public Goods
  • 2.3 Public Finance for Public Goods
• 3. VOTING AND PUBLIC GOODS
  • 3.1 Majority Voting and Public Goods
  • 3.2 Political Competition and Public Spending
    • Government Bureaucracy 3.3 The Implementation of Collective Decisions by
• 4. MARKET CORRECTIONS
  • 4.1 Private Solutions for Externalities
  • 4.2 Public Policy and Externalities
  • 4.3 Prohibition of Markets
• 5. SOCIAL JUSTICE
  • 5.1 Social Welfare and Social Insurance
  • 5.2 Entitlements and Incentives
  • 5.3 Social Justice without Government
• 6. POLITICS AND REDISTRIBUTION
  • 6.1 Voting and Redistribution
  • 6.2 Political Behavior and Public Policy
  • 6.3 Public Policy and Rent-Seeking Behavior
    • 7. TAXATION viii Contents
      • 7.1 Personal Taxation
      • 7.2 What to Tax?
      • 7.3 Refusal to Pay Taxes
    • 8. USER PRICES
      • 8.1 User Prices for Public Goods
      • 8.2 User Pricing and Crowding
      • 8.3 User Pricing and Natural Monopoly
    • 9. HOW MUCH GOVERNMENT?
      • 9.1 Multiple Government
      • 9.2 Cooperation and Trust as a Substitute for Government
      • 9.3 Growth of Government and Constitutional Restraint
• 10. HEALTH, EDUCATION, AND RETIREMENT
      • 10.1 Heath Insurance and Health Care
      • 10.2 Education
      • 10.3 Providing for Retirement
  • Postscript: Why Views Can Differ
  • Supplements - 1A The Efficiency of a Competitive Market - 1B The Efficiency of a Competitive Economy - 1C Why Choose Collective Property? - 1D A Labor-Managed Firm - 2A Efficiency with Public and Private Goods - 2B Group Size and Voluntary Collective Action - 2C Income Distribution and Voluntary Collective Action - 2D Sequential Voluntary Financing of Public Goods - 2E Income Effects and the Excess Burden of Taxation - 2F Empirical Measurement of the Excess Burden of Taxation - 3A Political Competition with Many Candidates - 4A The Tragedy of the Commons - 4B An Impediment to Replicating Missing Markets - 4C Protection of Dolphins - 5A An Impossibility Theorem for Social Aggregation - 5B Measurement of Income Inequality - 5C Social Status and Private Charity
  • 6A Probabilistic Voting Contents ix
  • 6B A Case of Extreme Corruption
  • 6C Theoretical Models of Rent Seeking
  • 6D Rents and Protectionist International Trade Policies
  • 7A Measuring the Size of the Shadow Economy
  • 7B Tax Evasion and the Value-Added Tax
  • 7C Tax Evasion through Expense Accounts
  • 8A Public Finance and Private Supply
  • 8B User Pricing and Prisons
  • 8C Supplemental User Pricing
  • 8D Privatization
  • 10A Employer-Provided Health Insurance
  • 10B Markets and Publicly Financed Health Care for the Elderly
  • 10C Costs of Medical Education and Training
  • 10D Administrative Expenses of Providing for Old Age
  • 10E Intertemporal Markets
• Subject Index
• Author Index

A First Account 3

A First Account

The most important question that can perhaps be asked in economics is when should we forgo the personal decisions of markets, where we choose how we earn and spend income, and instead rely on decisions of government. This book addresses this fundamental question. The background for our study is the existence of markets. Markets allow people voluntarily to buy and sell. Assigning responsibilities to government in general requires taxes, which are not voluntary. We shall be happy with markets, if markets achieve two basic objectives: (1) efficiency and (2) social justice. We shall presently more precisely define these objectives. If markets cannot achieve these objectives, we need to consider re- placing the private decisions made in markets with the collective decisions of public finance and public policy made through government. We shall begin our investigation with markets where neither public finance nor public policy is present. From this starting point without government, we shall investigate whether or how public finance and public policy can improve outcomes of private, individually made, market decisions.

1.1.1 The market and efficiency

A case for the virtue of private market decisions without government can be traced back at least to the writings of Adam Smith (1723–90). On a number of occasions, Smith, who was a professor of moral philosophy, 1 referred in his writings to an invisible hand that guides personal self-interest to outcomes that benefit an entire society. Voluntary market decisions are necessarily personally beneficial, since a person who believes that a market decision is not in his or her best interest can simply choose not to buy or not to sell. The invisible hand, according to Adam Smith, ensures that personally beneficial market decisions are also socially beneficial. 2 The social benefit provided by the invisible hand can be identified as efficiency. The invisible hand does not promise social justice. The invisible hand, according to Adam Smith, allowed virtuous men and women to pursue self-interest through markets without feelings of guilt. We see elements

(^1) Adam Smith first studied at Glasgow University in Scotland and then at Oxford University in England. After his studies, he returned to Glasgow to take a position as professor of logic; in the following year, he became professor of moral philosophy. (^2) The idea of the invisible hand appears in Smith’s book The Theory of Moral Sentiments first published in 1759 and also makes an appearance in his book An Enquiry into the Causes of the Wealth of Nations first published in 1776. The invisible hand has become part of the folklore of economics. For accounts of Smith’s intentions when using the idea of the invisible hand, see Macafie (1959), Rothschild (1994), and Grammy (2000). Overviews of Smith’s writings and ideas include Reisman (1975) and Tribe (1999).

4 Markets and Property

of moral philosophy in this suggestion: People who pursue self-interest through markets should not feel guilty for not having broader social objectives because the invisible hand will direct their personal self-interest to the good of all soci- ety. That is, through markets people do social good by doing personal good for themselves. Adam Smith also pointed out that social good achieved through the invisible hand is unintentional. People do not purposefully set out to do social good when making self-interested market decisions. The absence of intent to do social good was seen by Adam Smith as a virtue because hypocrisy could be absent from market decisions. Smith wrote (1776/1937, p. 423):

I have never known much good done by those who affected to trade for the public good.

Adam Smith would thus advise us to be wary of persons who, when offering to buy or sell, claim to have objectives other than their own personal self-interest. We should be cautious when offers to buy or sell are accompanied by claims of altruistic motives. The saying, “do not look a gift horse in the mouth,” advises us not to examine too closely the quality of a gift that we are offered. 3 In a market, however, gifts are not given. Rather, money and goods change hands. Adam Smith advised us to beware of gifts or bargains in markets. To achieve both private and social good, people need only profess to seek their own personal benefit when they offer to buy or sell.

Efficiency in a competitive market There is no formal proof in Adam Smith’s writings that personal self-interest ex- pressed through market decisions benefits a society. In the centuries since Smith’s writings, various ways of more formally confirming the social benefit of markets have become available. The simplest means of proof is to look at a single compet- itive market, as in Figure 1.1, where market demand expresses marginal benefit of buyers through willingness to pay, and market supply expresses the marginal cost of sellers.^4 In a competitive market, individual buyers and sellers do not in- fluence market prices. Buyers choose quantities to buy by setting the market price equal to their personal marginal benefit MB. Sellers choose quantities to sell by setting the market price equal to their marginal cost of supply MC. Since the mar- ket price is the same for all buyers, all buyers have the same realized personal MB from their purchase decisions. Market demand in Figure 1.1 thus reflects the equalized personal MB of all buyers. The market supply function likewise reflects the common MC of sellers. At point E in Figure 1.1, the total quantity demanded by all buyers is equal to the total quantity supplied by all sellers, and the price that buyers are willing to pay is equal to the price that sellers require in order

(^3) Examination of the condition of the teeth of a horse will reveal the age and health of the horse. (^4) More elaborate proofs of the efficiency of markets are provided in Supplements 1A and 1B.

6 Markets and Property

Figure 1.2. The competitive market adjustment mechanism. The competitive adjustment mechanism moves the market to the equilibrium output QE.

where demand and supply are equal. The outcome at point E in Figure 1.1 is therefore efficient and is, moreover, the only efficient outcome. 6 The shaded area AEO is the maximal value of W = B − C that the market can offer. 7 If the market is not at the efficient point E but somewhere else, a competitive adjustment mechanism will bring the market to point E. Once at point E , the market will stay there. The competitive adjustment mechanism is illustrated in Figure 1.2. The price that buyers are willing to pay for additional output is shown as PB. This price is determined from the demand function. The price that suppliers require to provide additional output is PS. This price is given from the supply function. At quantity Q 1 in Figure 1.2, the price PB that buyers are willing to pay for additional output exceeds the price PS that suppliers require to supply additional output. Since buyers are willing to pay a higher price than sellers ask to supply more output, output supplied increases from Q 1. Output supplied continues to increase until the efficient output QE at point E is reached. At output QE , the price PB that buyers are willing to pay and the price PS that suppliers require in

(^6) A second-order condition is satisfied at point E. See Supplement 1A. (^7) The area under the demand function measures the total benefit B for any quantity of output provided to buyers by summing MB s from quantities of output. The area under the supply function measures the total cost C of supplying a quantity of output by summing MC s of supply. Therefore, W = B − C is the difference between the areas under the demand and supply functions. This difference reaches a maximal value at point E. We shall often use the area under the demand function to measure total benefit and the area under the supply function to measure total cost. The area under the demand function is an approximation for total benefit. The approximation is in general reasonable. See Robert Willig (1976).

A First Account 7

order to supply are equal to the price PE. Output now stays constant. E is therefore the point of market equilibrium.^8 With market supply originally the quantity Q 2 shown in Figure 1.2, buyers’ willingness to pay for additional output PB (given from the demand function) is less than the price PS (given from the supply function) that sellers require to provide more output. Buyers are therefore unwilling to pay the price that suppliers require to maintain supply at the quantity Q 2 , and output supplied falls. The output decline stops at the equilibrium output QE at point E. Whether the market begins from an output such as Q 1 less than QE or from an output such as Q 2 greater than QE , the competitive adjustment mechanism thus brings the market to the efficient output QE at the equilibrium point E. 9 We have now shown that the equilibrium of a competitive market is efficient. The market could be for a product or service supplied for consumption, or it could be for a factor of production. Buyers and sellers make self-interested decisions (buyers choose quantities to purchase according to P = MB and sellers choose quantities to supply according to P = MC ), and the market adjusts to the efficient equilibrium if not already at the equilibrium. We have therefore confirmed Adam Smith’s proposal that the market is guided to efficiency by individual self-interest as if by an invisible hand, and that buyers and sellers have no reason to feel guilty about making personally self-interested decisions, provided the decisions are made in competitive markets and provided that the social objective is efficiency. 10

A first responsibility of government: competition The efficiency achieved through markets requires that markets be competitive. A first responsibility of government is thus the preservation and protection of com- petitive markets. 11 This responsibility of government requires an antimonopoly or

(^8) During adjustment to the market equilibrium, price is changing. Since no individual buyer or seller can influence a market price in a competitive market, we might ask how prices ever change. Calling on the “invisible hand” to change market prices is not an adequate answer. The condition that no buyer or seller can influence price is a characteristic only of the market equilibrium. When the market is not in equilibrium, individual offers to buy or sell influence market prices. See Supplement 1A on how prices change in a competitive market. (^9) From Figure 1.2, we also confirm that nonequilibrium outputs such as Q 1 and Q 2 are not efficient outputs. At quantity Q 1 , there is a loss equal to HEF from the market not being at the efficient point E. At the quantity Q 2 , there is a loss equal to GEA. (^10) Adam Smith did not use the ideas of supply and demand to make his case for the virtue of the market. Alfred Marshall (1842–1924) much later introduced the ideas of market supply and demand. Marshall resolved a problem that had been debated for centuries, which is whether the price (or value) of a good is due to the cost of production or reflects personal benefit expressed in willingness of people to pay. Marshall showed that neither cost nor benefit alone caused value. Rather market price (or market value) was determined by supply and demand interacting simultaneously in markets. (^11) The responsibility of government to ensure competition includes international free trade. A foreign supplier may offer buyers the lowest price or the best quality, or a foreign buyer may offer a better price than is available in a seller’s home market. International free trade permits buyers and sellers to take advantage of all market opportunities when making decisions to buy or sell. See Supplement 1B. Adam Smith included the benefits from free trade in the benefits from markets. More formal statements of the gains from free trade followed, for example Murray Kemp (1962).

A First Account 9

For example, there is spontaneous order at a fruit and vegetable market. Farm- ers arrive at the market with produce for sale. Farmers independently make in- dividual supply decisions for the produce that they bring to the market, without coordinating their personal decisions. The government has issued no directives about the types of products and the quantities that should be brought to the mar- ket. Buyers also arrive at the market to make their purchases. In the course of a day, numerous transactions take place between farmers and buyers. At the end of the day, the farmers will have left their stalls, their produce sold, to return the next day with new supplies. Buyers also return the next day to purchase the produce that they seek. Spontaneous order is present. Every buyer and seller knows “what to do” without instructions from anyone else. Spontaneous order extends to market relations among different goods. Produc- ers supply goods not only for consumption but also to other producers, who use the purchased inputs in the stages of their own production activities. In the web of market interdependence, foreign producers supply imported goods, and domes- tically produced goods are sold in foreign countries. Foreign producers might use these goods as inputs to produce goods that are exported back for consumption or for use by other domestic producers. Spontaneous order in the market is made possible by the information about value revealed by market prices. When all individual buyers set their personal MB equal to the price revealed in the market and likewise all individual sellers set their personal MC equal to the market price, we have

MB = PE = MC (1.3)

at the market price where demand equals supply. This ensures that net social benefit W = B − C is maximized. Spontaneous order is thereby achieved through voluntary independent personal decisions that establish the equality between MB and MC required for market efficiency. Moreover, to participate in markets for their own advantage, individuals need only to know their own personal MB or own personal MC.

1.1.4 Responsibilities of government: why the market

may not be enough

Governments have the responsibility of certifying private ownership and protect- ing lives and property through the rule of law. In Section 1.2, we shall elaborate on this responsibility of government. The two responsibilities of overseeing com- petitive markets and ensuring the rule of law define a minimal government. A minimal government is usually not enough. Markets may fail to achieve efficiency. In that case, government has a responsibility to correct the inefficiencies. In the chapters that follow, we shall identify market efficiencies from a number of sources. We shall see that markets are inefficient or ineffective when spending benefits a number of people at the same time. Such collective benefits arise in many cases that range from spending on roads to national defense to disease prevention.

10 Markets and Property

Markets also do not ensure efficiency when individual market decisions affect others, whether adversely or beneficially. For example, there may be damage to the environment. Societies may also decide to prohibit particular markets. Questions also arise concerning social justice. If markets do not ensure social justice, a society may decide that government has a responsibility to amend market outcomes by taxation and income redistribution.

1.1.5 Normative and positive questions

As we investigate the responsibilities of government, we need to ask both norma- tive and positive questions. A normative question enquires whether a public policy can improve on markets, or whether public finance is socially beneficial. Positive questions seek explanations and predictions, without judgments about whether policies or outcomes are desirable. The distinction between normative and positive questions is in particular impor- tant for studying political processes that redistribute income. We need to consider whether political decisions about public finance and public policy are consistent with normatively justifiable objectives. The normative and positive distinction is also important for questions about taxes. Normative questions ask about the taxes that ought to be imposed. Positive questions ask why different taxes are imposed, about the effects of the different taxes, and about why taxes are sometimes not paid. To ask and answer normative questions, we require norms that allow us to judge whether an outcome or a change is justified as efficient or as socially just.

1.1.6 Pareto efficiency

Normative questions about efficiency can be posed by using the criterion that an outcome is efficient if net social welfare W = B − C is maximized. This is the procedure we followed when we enquired about the efficiency of a competi- tive market. We can also use an alternative definition of efficiency, called Pareto efficiency , after Vilfredo Pareto (1848–1923). Pareto efficiency for production is achieved when no more of any one good can be produced without giving up some quantity of another good. Pareto efficiency for consumption is achieved when an allocation of goods or income among people cannot be changed to make someone better off, without making someone else worse off. Pareto efficiency therefore defines absence of waste. No more can be produced without giving something up. No person in society can be made better off unless at the expense of someone else. Decisions to buy and sell in a competitive market are Pareto efficient. We have seen that competitive markets result in outcomes where W = B − C is maximized. At the same time, since individual decisions to buy and sell are voluntary, no one can be worse off as a consequence of a personal market decision. Since there are

12 Markets and Property

on actual compensation of losers would have made the introduction of personal computers contingent on identifying all gainers (i.e., all people who gained from using a personal computer) and determining how much each gained. It would have also been necessary to identify all people who lost income as a consequence of the introduction of the personal computer and to establish how much they lost. An administrative office would have been required to implement the compen- sating income transfers from the gainers to the losers. If compensation had been required, the personal computer would never have been introduced. These examples show that administrative and information costs of making com- pensating payments can be too high to make compensation to losers feasible. When the identities of the gainers and losers and the values of the gains and losses are clear, we might however insist that the gainers compensate the losers. The com- pensation to the losers might be paid by the government on behalf of the gainers. For example, in the case of the road, we would not expect each gainer individually to compensate the owners of the house. The administrative costs of such individ- ual compensation could be prohibitive. We would not expect the owners of the house to place a toll booth or electronic monitor where the house had been. The government would provide the compensation to the owners of the house through an income transfer financed by taxes. The compensation is not designed to ensure efficiency. A public policy is ef- ficient if, in principle, the gainers can compensate the losers and still be better off. That is, a public policy is efficient if, for society as a whole, W = B − C is maximized. A desire to provide actual compensation reflects a concern for so- cial justice. Compensation may be socially just. When some people lose from an efficient policy and compensation is not possible or is prohibitively costly, a soci- ety faces a conflict between the objective of efficiency and the objective of social justice. Insistence on actual compensation to losers would have resulted in public poli- cies banning both steam technology and the personal computer, and many other new technologies that have, on the whole, benefited society. As another example, new awareness of damage to the environment may lead to a decision to close a factory that is polluting a lake because ongoing production in the factory is not warranted once the damage to the environment has been included in costs. That is, with the damage to the environment included in costs, total benefit B from the factory’s output is less than total cost C. If the factory was constructed before social concern about pollution, should the owners be compensated because new awareness of the harm inflicted by pollution has resulted in the closing of the fac- tory? Most people would agree that if the owners of the factory have lost because of a change in society’s environmental standards, the owners of the factory should be compensated. Should the employees who lose their jobs also be compensated? Should people who have incurred a loss through a decline in the value of their houses because of reduced demand for housing after the closing of the factory be compensated? Should suppliers who supplied inputs used by the factory be compensated? Should

A First Account 13

the advertising agency that had the account for the factory be compensated? Should consumers with a special liking for the products of the factory be compen- sated? At some stage in the list of people who have lost, a society that seeks efficiency may decide to forego the actual compensation required to satisfy the Pareto cri- terion that no one lose because of a change. A judgment might be made, for example, that the advertising agency should not be compensated for the closing of the factory. Such judgments involve considerations of social justice. The closing of the factory is justified because for society the costs C of the existence of the factory exceed the benefits B. The benefits lost by the closing of the factory include the former gains of the advertising agency that had the account for the factory’s products. A society that emphasizes efficiency might choose to adopt a general rule that a public-policy decision is justified when W = B − C > 0 increases. Such a society does not investigate the distribution of the benefits B and costs C among the population. The intention is that, by proceeding with all changes and public policies that increase W = B − C , all people over time will come to benefit, even if on some occasions some people lose.

1.1.7 Social justice

We have two quite precise ways of expressing the social objective of efficiency, through the net social benefit criterion W = B − C and through Pareto efficiency. Social justice, the other objective that societies seek, is a more elusive concept to express than efficiency.

Social justice through actual compensation One way to express the objective of social justice is insistence on actual compen- sation whenever somebody loses from a public policy. Many of the fundamental disagreements that arise in economics, and in politics, can be traced to differ- ent positions on whether social justice through actual compensation for losers is required before a government can proceed with efficient public policies.

Social justice through competitive markets Do competitive markets provide incomes that are socially just? A competitive market provides individuals with incomes according to the value of personal con- tributions to production. 14 As a result, personal incomes earned in competitive markets are consistent with social justice, if we make the judgment that people should be rewarded according to the value of their personal contributions to a

(^14) We can express profits of a competitive firm as P · Q ( L ) − wL , where P is the competitively de- termined price, Q is output, w is the competitively determined wage paid to labor, and L is the amount of labor employed. The output Q depends positively on L. The firm maximizes profits by hiring labor so that P ∂ Q /∂ L = w , so that the wage received by labor is equal to the value of labor’s marginal product, which is the value of the marginal contribution of labor to production.

A First Account 15

The view guided by social justice defined as equality is that the water should be divided. Dividing the water results in equality of outcomes, even though neither person has enough water to survive. 16 The alternative view is that the person who has possession of the water should drink the water. In that case, a Pareto-efficient outcome is achieved, since one person alive is preferable to no one left alive. 17 We should note that the issue was not whether one should give up one’s own life for the life of another. 18 Sharing the water saves no one’s life. Rather, the question is whether the person with the water should give up his or her own life, when the only purpose is to satisfy a principle of equality. 19

Social justice and equal opportunity Social justice can also be defined as equal opportunity. Using a lottery to determine who receives the water is socially just in terms of providing equal opportunity if the lottery assigns the water with equal probabilities. After the outcome of the lottery is known, one person has all the water, which is efficient. The use of a lottery to assign the water presupposes that neither person owns the water in the first place. If the water were owned by one of the travelers, the lottery would require the owner of the water to donate the water as a prize in the lottery. In the circumstances of the two persons in the desert, one person owns the water, and so an obligation to offer the water as the prize for a lottery contradicts rights of ownership. A lottery is a socially just way of assigning the water only if there is no identified owner of the water.

Social justice and “survival of the fittest” Consider two people in a desert without water. They see a flask of water lying ahead of them, and both set off in a run to be the first to reach the flask. The faster runner will reach the flask first and claim the water. Because the amount of water in the flask is only enough to allow one person to survive, it is efficient for one person to have all the water. Is it however fair, or socially just, that the faster runner has been able to claim the water? Alternatively, if one of the two travelers has better eyesight than the other, or is more perceptive by nature, this person

(^16) The reason given for this view was that it is better that both should drink and die than that one should witness the death of his fellow. This was the view of Ben-Petura. (^17) This was the view of R. Akiva (c.50–135). The term “Pareto efficiency” was of course not used. This was before Pareto’s time. (^18) The different views are alternative interpretations of the principle that we should care about others and not only care about ourselves. (^19) Adherents to Ben-Petura’s position might counter that personal benefit should include the feeling of sharing a common fate by sharing the water. R. Akiva’s position was that this type of suicide was not desirable behavior, and that your life takes precedence over your fellow’s life. So, if you have the water and the water can save only one life, you should use the water to save yourself. R. Akiva was sensitive to the plight of the poor. He had been a shepherd and had married the daughter of a wealthy man, who disowned his daughter for marrying below the status of her family. After beginning his studies at the age of forty by learning the alphabet together with his young son, R. Akiva went on to become one of the most prominent of scholars.

16 Markets and Property

will see and claim the water before the other traveler is aware of the presence of the water. Is it fair or socially just that the more alert person, or the person with better eyesight, obtains the water? When different abilities determine who claims the water, the rule is survival of the fittest. Because differences in initial abilities influence who succeeds in obtaining the water, equality of opportunity is not present as it was in the case of a lottery. One person might have the water through prior claim based on original owner- ship or through success in a lottery, and the second person might steal the water or appropriate the water by physical force. The outcome is again determined by the principle of survival of the fittest and is again efficient. The means whereby the water was obtained are now evidently not socially just. The principle of survival of the fittest does not, however, seek to accommodate social justice.

Social justice as the right of possession Another definition of social justice is the right to possess what one rightfully owns. In the case of the water in the desert, use of the water by a person who owns the water is by this definition socially just, as well as efficient. On the other hand, there can be disputes about rightful ownership. An example of such a dispute is provided by a problem that confronted Solomon, king of Israel some 3,000 years ago. In his court in Jerusalem, Solomon was confronted by two women who both claimed to be the mother of the same baby. Both women had given birth around the same time, but only one baby had survived. We see that in this case there is an indivisibility, as in the case of water in the desert. Babies cannot be divided. There was no evidence to support either woman’s claim that she was the mother of the living child. Solomon faced a problem of asymmetric information. That is, he did not know the identity of the true mother, although each of the two women did know who the true mother was. Solomon decreed that, unless one of the two women renounced her claim to the baby, the baby would be cut in half and divided between the two claimants. The true mother thereupon renounced her claim, but the false claimant did not. Solomon decreed that the baby should be given to the woman who had renounced her claim to save the life of the child, and the true mother thereby received her child. The outcome was efficient since the baby was not divided, and the outcome was also just when justice is defined, not as equal division, but as right of possession by a true owner. The two women who claimed the same baby are identified as harlots. We might ask why this identification was necessary, or important. An answer is that, since a harlot had low status in society, we are shown that all persons should be provided with equal access to justice without regard for their social status. In receiving the harlots and judging their case, Solomon demonstrated the principle of equality for all persons before the law.

Envy An anecdote describes two farmers in different societies looking at the well-kept cow of a neighbor. In one society the farmer thinks to himself: “What a beautiful