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Gauthier on Rights and Economic Rent

Published online by Cambridge University Press:  13 January 2009

Eric Mack
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Extract

David Gauthier's Morals by Agreement is an impressive — indeed, daunting — exercise in contractarian moral and political philosophy. The primary purpose of his treatise is to explicate practical rationality as constrained maximization and morality as compliance with these constraints. Gauthier offers an account of which constraints on straightforward utility maximization each rational individual will be prepared to accept and comply with on the condition that other individuals also will accept and comply with them as well as an explanation of why compliance with those constraints counts as morality. However, although Morals by Agreement is in the great tradition of Hobbesian moral and political theorizing, Gauthier's morality by agreement does not begin with the Hobbesian state of nature. Gauthier does not start by envisioning a Hobbesian war of all against all which has been generated by rational individuals, each pursuing his own maximum utility, and then asking what constraints on this no-holds-barred utility maximization would be mutually advantageous and therefore mutually rational.

Type
Research Article
Information
Social Philosophy and Policy , Volume 9 , Issue 1 , January 1992 , pp. 171 - 200
Copyright
Copyright © Social Philosophy and Policy Foundation 1992

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Footnotes

*

Work on this paper has been supported by grants from the Murphy Institute of Political Economy at Tulane University and the Earhart Foundation. I have benefited greatly from a discussion of this paper at a colloquium of the Social Philosophy and Policy Center at Bowling Green State University and from comments from this volume's editors.

References

1 Gauthier, David, Morals by Agreement (Oxford: Clarendon Press, 1986).Google Scholar All bracketed citations in the text are to Morals by Agreement.

2 This is the strategy of Narveson, Jan, The Libertarian Idea (Philadelphia: Temple University Press, 1988).Google Scholar Left absolutely to their own devices… people will perform actions that lead to a [Hobbesian] condition that will make their lives immeasurably worse than if they were instead subject to restrictions: namely, restrictions on just the sort of actions that have that effect. [136]

3 Gauthier persists in this way of speaking, despite recognizing that Smith's “obvious and simple system of natural liberty” requires that each “not violate the laws of justice” [83, 85].

4 The term “Lockean Proviso” is introduced by Nozick to refer, in the tradition of Locke's requirement that private acquisition from nature leave “enough and as good” for others, to a moral restraint on people's private acquisitions and subsequent holdings to ensure that, in some specified way, the institution of private property does not worsen any individual's circumstances relative to his situation in a pre-property state of nature. Compare Nozick, Robert, Anarchy, State, and Utopia (New York, Basic Books, 1974), pp. 174–82.Google Scholar

5 The constraints of Gauthier's Proviso only apply among individuals who stand to benefit from cooperation. Gauthier often writes as though whatever ban there is on the initiation of force derives from the need for such a ban as a condition for positive cooperation.

It is rational for utility-maximizers to accept the proviso as constraining their natural interaction and their individual endowments, in so far as they anticipate beneficial social interaction with their fellows…. Without the prospect of agreement and society, there would be no morality, and the proviso would have no rationale. [193]

This suggests that there would be no rationale for the proviso among two individuals between whom a nonaggression pact would be mutually advantageous, but for whom there are no other potential benefits from interaction or cooperation. Hence, there would be no ban on aggression between these individuals. But elsewhere [115, 132], Gauthier indicates that a nonaggression pact between these two individuals would itself count as a bit of cooperation “in order to avoid mutually destructive conflict.” Thus there is a rational basis for a ban on aggression even in this case. But note that here the ban is “the product of rational agreement” and not, as the ban within the proviso is supposed to be, “a condition that must be accepted by each person for such agreement [on positive cooperation] to be possible” [16].

6 Strictly speaking, the idea that individuals have no right to noncoercively derived rents is a feature of the state of nature theory that is generated by Gauthier's Proviso, while the positive prescription of the distribution of rents in accordance with minimax relative concession is the object of rational agreement.

The principle of minimax relative concession requires that the cooperative surplus be divided so that the greatest relative concession experienced by any one of the cooperating parties be less than that relative concession would be under any alternative division of the surplus. An agent's relative concession is the degree to which his actual allotment from the surplus represents a concession from his demand for as much of the surplus as it is possible for him to receive (without driving others away). See Gauthier, pp. 136–46.

7 There seem to be two distinct, although closely related, conceptions of rent at work in this passage. First, there is the conception of economic rent as “by definition a return over and above the cost of supply.” Second, there is the conception of economic rent as a return over cost of supply in virtue of the scarcity of the factors controlled by the recipient. Thus, later in Morals By Agreement, Gauthier declares that

rent is determined by factor scarcity; it is the premium certain factor services command, over and above the full cost of supply, because there is no alternative to meet the demand. [272]

It seems that the two notions need not be extensionally equivalent. For something other than the scarcity of the item brought to market may account for a seller's returns exceeding the costs of supply. For instance, the seller may receive rent because buyers are ignorant of how little this seller and his competitors would be willing to accept.

Note that we shall subsequently refine the notion of rent so that the smidgen a seller receives over cost to motivate his choosing to sell will not count as economic rent.

8 Gauthier, of course, recognizes that among the payments needed to bring certain skills to market (for example, Chamberlain's basketball skills) are the payments needed to induce individuals with various natural talents to identify and cultivate those native capacities. The payments necessary to motivate individuals to develop their respective skills do not count as rent. Yet (as Ellen Paul has suggested to me) doesn't the very recognition that individuals develop their respective skills, that they chose to cultivate this or that natural talent — sometimes precisely because of the anticipated scarcity of the resulting skill — cast doubt on Gauthier's idea that the scarcity of an agent's skill will (always) be “entirely accidental from her standpoint”?

9 Nozick, Anarchy, State, and Utopia, pp. 160–64.

10 More precisely, the rent is not the difference between the payment that would now induce Chamberlain to play and the $250,000. Rather, it is the difference between the amount needed both to elicit Chamberlain's development of his skills (in light of his uncertainty about whether he will “make it”) and to draw forth his current supply of those developed skills, and the $250,000. See note 8.

11 Unfortunately, as Jeffrey Paul has pointed out to me, Gauthier's discussion ignores the allocative function of rents. Chamberlain will play basketball for anyone for $30,003 if no greater payment is possible. But, especially at that price, lots of coalitions of fans are eager to purchase his services. How is he to determine whether to play for the fans in Los Angeles, in Philadelphia, or in Shreveport — each coalition of which easily comes up with S30,003? Should Los Angeles be allowed to tempt Chamberlain away from Shreveport with its beachfront communities, or should Shreveport be allowed to add a special hardship component to its salary offer? Is the ultimate choice of employer even Chamberlain's choice to make? If we allow equalization of bids by allowing, for example, Shreveport to add some extra monetary payment to compensate for the charms of Los Angeles and do not permit any competitive bidding among the aspiring employers, we fully eliminate net return to Chamberlain as an allocative device and, in the (intentionally?) ominous words of one economics text, “some other technique would have to serve this function” ( University Economics, Alchian, A. and Allen, W. [2nd ed.; Belmont, CA: Wadsworth, 1967], p. 99).Google Scholar Whether or not this shows that a blanket prohibition on rent infringes upon Chamberlain's market freedom, it certainly seems to show that it infringes upon the market freedom of would-be competitors for his services. In light of the rationing function of rents, it is certainly false that “market interaction is not affected by the distribution of the surplus represented by rent” [273].

12 The term “surplus” is not normatively neutral. When part of someone's holdings is described as a surplus, there is a strong suggestion that there is no significant moral barrier to the redistribution of that holding and, furthermore, that there is some good reason in support of that redistribution. Nevertheless, the term is ubiquitous. It cannot readily be avoided. Occasionally I allow myself to mark the non-neutrality of the term by the use of scare quotes.

13 Though one way of reading Gauthier here is that he is employing a third and much more encompassing notion of rent — namely, rent is whatever one receives beyond what one would have received as Crusoe. Tyler Cowen pointed out to me this third possible use of “rent.” It may be through such an all-encompassing sense of rent that Gauthier seeks to assimilate rents and cooperative surpluses.

14 I am told that if perfect competition is defined in terms of all sellers being price-takers (that is, they are unable by any bargaining to affect their selling price), then profit (and rent?) is possible under perfectly competitive conditions. It is not clear to me (unversed in these matters as I am) that this is so. For it is not clear to me how, if the conditions for sellers not being price-takers to any extent are satisfied, sellers will be able to elicit more for their goods or services than the cost of their supply (plus the smidgen needed to induce them to bring those goods or services to market). In any case, Gauthier does not characterize perfect competition in terms of all sellers being price-takers.

15 Such actual, entrepreneurial competition is therefore much more like the competition between diverse cultures with different perceptions of the world and different technologies as this larger-scale competition is described by Gauthier himself. The “old ways” of the North American natives “were highly effective adaptions to an environment that the native inhabitants were unable to transform.” The Europeans did not engage in incrementally better versions of those adaptions. Rather,

European technology rendered these adaptions obsolete. The problems with which the natives grappled were dissolved by that technology — to be replaced, to be sure, by new and different problems, but related to a more advanced level of human development…. The effect of the European incursion was to turn cultural practices that had been necessary to survival into a form of play. [296]

The parallel to the distinction between biological evolution conceived as incremental improvements in existing forms of adaption versus enterprising (albeit randomly induced) leaps to new modes and directions in biological adaption is evident.

16 Entrepreneurial profits then turn out to be rents on the entrepreneur's unique (perhaps only temporarily) knowledge.

17 The classic reference, of course, is to Joseph Schumpeter's discussion of the “creative destructiveness” of market economies. See Capitalism, Socialism and Democracy (3rd ed.; New York: Harper and Row, 1950), ch. VII. Schumpeter's own weary sense that the rate of technological, informational, and preference change was diminishing contributes to his conclusion that, in the future, a bureaucratic structure that simulated the actions of a perfectly competitive market would be feasible and adequate to that more static world. See Schumpeter, chs. XVI and XVII.

18 See Hayek's, F. A. “Competition as a Discovery Procedure” in his New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 179–90CrossRefGoogle Scholar and, more importantly, “The Meaning of Competition” in his Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 92–106. Israel Kirzner is pre-eminent among those currently developing the Hayekian insights. See, e.g., his Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985), chs. 1–4.

19 In suggesting an ironic similarity between Gauthier's and Marx's commitment to homogeneously conceived labor units, I do not, of course, mean further to imply that Gauthier is like Marx in thinking that the value of the products of this labor is due to the value of that labor.

20 We leave aside questions that arise about how many more people would be willing to pay to see Chamberlain play at this new, lower, price.

21 The consumer surplus captured by the fans might be due simply to Chamberlain's imperfect knowledge about the strength of their preferences. Had Chamberlain, on the basis of perfect knowledge about the strength of their preferences, credibly committed himself not to play for less than $300,000, he would have received that $300,000. (Or the costs to Chamberlain of creating that credible commitment or of transacting the $300,000 agreement might be too large for that agreement, on net, to be worthwhile.) But the consumer surplus captured by the fans might also be due to the relative scarcity of the fans. Had there been even more fans comparably eager to see Chamberlain pay, the price per ticket would have been bid up. The consumer surplus would have been less and Chamberlain's rents would have been all the greater. On this account of the consumer surplus, the rent extracted by the fans (in the form of $300,000 of basketball viewing pleasure received in return for bringing a supply of money to market, the cost of which was only $250,000) would have been due to their oligopsony, their quasi-monopoly as buyers. (Fred Miller reminded me of the language of monopsony and, hence, of oligopsony.)

If, in accordance with Gauthier's definition [98], any return over cost of supply counts as economic rent, then any consumer surplus is rent — even if it is not due to any monopsonistic departures from perfect competition. If, on the other hand, the net over cost must be due to scarcity in order for it to count as economic rent, then rent occurs in the latter situation, but not the former. See note 6.

22 The need for this further discussion was pressed on me by Kenn Cust.

23 Here, again, Gauthier may be operating with an enormously broad notion of rent: namely, rent as anything one receives beyond what one would have received as Crusoe (that is, rent as any gain due to social interaction).

24 Compare L.T. Hobhouse's approving report of the following view:

[Site] value the land nationalizer contends is not created by the owners. It is created by society…. Directly or indirectly, the community creates the site value…. The land nationalizer… denies the justice of this [private ownership] arrangement, and he sees no solution except this — that the monopoly value should pass back to the community which creates it. Accordingly, he favors the taxation of site value to its full amount.

Although Hobhouse also points to the positive externalities generated by such social arrangements as the reliable enforcement of property rights as further arguments for the “social” nature of property, he seems quite willing to rely entirely on the social creation of the value of that land as his justification for the confiscation of all rent. See Liberalism (Oxford: Oxford University Press, 1964), p. 53.

Although Henry George was the figure best known for endorsing such a confiscatory tax (the famous “single-tax”) — and he fully accepted the argument cited by Hobhouse — his own endorsement of this taxation was more centrally motivated by his belief in a fundamental natural right of all to the use of the land. See George, Henry, Progress and Poverty (New York: Robert Schalkenbach Foundation, 1955), p. 344.Google Scholar

25 Note the curious suggestion that a prohibition on retaining all the benefits from a forced exchange could only flow from a standing requirement to better the situation of the party subject to the seizure.

26 Calabresi, Guido and Melamed, A. Douglas, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral,” Harvard Law Review, vol. 85, no. 6 (April 1972), pp. 1089–1128 Google Scholar, especially pp. 1106–10. Calabresi and Melamed cast liability rules in terms of the payment of “an objectively determined value,” in contrast to an actually “agreed upon” value.

27 Thus, if one wants to hold that the violation of A's right to X as such provides at least some justification for violator B's punishment, one must take that right to be of the sort that is protected by a property rule. Otherwise, the forced transfer of X from A to B could call for no more than B's making due compensation to A. B's forced taking, no matter how intentional, would remain only a tort, not a crime. Note how rights viewed as entitlements protected by liability rules provide no basis at all for principled anti-paternalism.

28 But notice that, on the perfect competition model, the difference between full compensation and market compensation is vanishingly small. It is hard to credit that this is the only difference Gauthier means to mark with the contrast between “rights in” and exclusive “rights to.”

29 Complications are introduced by Gauthier's claim that rights to one's body and powers and rights in the products of one's labor exist in “the pure state of nature” while (apparently) rights to the products or to land do not exist in “the pure state of nature” [211]. It seems that what Gauthier has in mind with respect to land is something like the following. Certain deployments of land by Evan will impose costs on Ellen that improve the (subsequent) terms of trade for Evan and worsen them for Ellen. Subsequently, when trade ensues, it is through this cost imposed by Evan on Ellen that Evan gains as much as he does. Thus, the combination of Evan's disposition of the land and the subsequent trade violates the Gauthier Proviso. [See 211–14, where the relevant “land” is fish.] Thus, an isolated disposition of land that does not itself violate the Proviso does not a “right to” make. But Gauthier's discussion of Eve's right to the land she cultivates does not at all show this concern for whether Eve's acquisition of this land unfairly improves the terms of trade she subsequently enjoys with others. Hence, whatever the significance of the claim that rights to products or land do not exist in “the pure state of nature,” it does not seem to touch upon the argument for Eve's right to her cultivated land.

The idea that the warrant for exclusive “rights to” is contingent upon their benign effects on the terms of trade should, I think, be much more troubling to Gauthier than it is. For doesn't the possession by a highly skilled, strong, and energetic Crusoe1 of an exclusive right to his powers (which is innocent enough in itself) unfavorably affect the terms of trade with an unskilled, weak, and lazy Crusoe2 who possesses an exclusive right to his puny powers? Doesn't this endanger Crusoe1's rights over his own powers?

30 Suppose, however, that Eve through Yvonne each consensually return their own land to common use. If Gauthier is correct, as he surely is, about the bountiful effects of private ownership, then these convergent free choices about their respective holdings will significantly worsen the position of the one remaining property holder, Zelda. From being in the position of a private property holder in Switzerland, she has been moved by their choices into the position of a private property holder in Albania. Mustn't we conclude then, if we are guided by Gauthier's Proviso, that these choices of Eve through Yvonne jointly worsen Zelda's situation impermissibly? For Gauthier, since the rights to private property depend on the mutual utility of private property, there can be no systematic legitimate abandonment of private property — unless the content of everyone's utility function changes to give pride of place to intrinsically communal preferences.

31 Gertie's relation to Eve is like that of Columbus, who joins the natives in their common use of the land. Columbus's “arrival worsens their situation; it creates greater population pressure on the land.” But this Columbus does not violate the Proviso, because he “does not profit in any way from the presence of the original inhabitants,… he does not better his situation in relation to what he would expect were they absent” [292].

32 Perhaps this restorative worsening would violate the Proviso when combined with the nonbenign effects it would have (for Eve) on the subsequent terms of trade between Gertie and Eve. (See note 29.) But Gertie, who gains utility by deprivatizing the world, is not a likely candidate to rush to exploit her (now more favorable) terms of trade vis-à-vis Eve. Similarly, the Columbus of the previous note is assumed to be “entirely self-sufficient.”

33 How unfair is it to suggest that this is the argument of the (non-self-deluded) date rapist?

34 An entitlement protected by an actual (that is, an imperfectly competitive) market compensation liability rule might have considerable protective value. But to move toward such a rule, one would have to reject the regulative status of the perfectly competitive, anti-rent model.

35 Recall the language of Calabresi and Melamed in characterizing the position of an entitlement holder under a liability rule.

Whenever someone may destroy the initial endowment if he is willing to pay an objectively determined value for it, an entitlement is protected by a liability rule. This [socially determined] value may be what it is thought the original holder of the entitlement would have sold it for [or what he would have sold it for in a perfectly competitive market]. But the holder's complaint that he would have demanded more [or would have gotten more even in perfectly competitive exchange] will not avail him once the objectively determined value is set. [p. 1092, my emphasis]

36 Compare Rawls, John, A Theory of Justice (Cambridge, MA: Harvard University Press, 1971), especially pp. 245–54.CrossRefGoogle Scholar

37 Ibid., p. 311. Compare pp. 101–2.