Impractical Equality

Richard Epstein from the October 2000 issue

(Page 2 of 2)

Note too that this objection as to community boundaries cannot be lodged with equal force against any political theory that does not see redistribution as a fundamental task of government. Practically, of course, the choice of territorial boundaries remains critical: The more coherent the aspirations of individuals governed by a single sovereign, the more likely it is that the community will be able to settle on a set of public goods. Furthermore, so long as state power is not directed toward redistribution, a rich person has less to fear from being included in the same community as a poor one.

The point is not just one of idle theory. The ill-conceived Clinton Health Security Act of 1993 foundered in part because of the impasse over the territorial accounting units for the national plan. The upshot in Illinois, for example, was that a suburbanite would have had to pay far less if grouped with other suburbanites only, but far more if placed in a larger territory with Chicago included. By contrast, a world that does not treat social insurance as a disguised form of wealth distribution effectively parries that difficulty by basing the premium on actuarial risk, rather than social groupings. Each person contributes the same amount to the pool regardless of the geographical pooling.

For the moment, however, assume that community boundaries are as Dworkin sets them on his island: How then to best achieve his ideal of equal resources for all? For Dworkin the answer lies in some vaguely sketched auction in which all islanders are given a standard unit of currency–clamshells–to bid on the material resources sold by the state. Dworkin prefers this auction to the traditional first possession rule–dominant in both common law and civil law countries–which assigns the ownership of land to the first occupant, the ownership of chattels to the first person who takes it, and the ownership of wild animals to the first person who captures them. Dworkin’s objection to these Lockean rules stems from the unequal and quirky distributions of material wealth they foster.

But Dworkin’s egalitarian bias blinds him to the decisive practical advantage of the first possession theory, at least in some states of nature. The auction that Dworkin champions presupposes at a minimum a group of individuals that arrives at the same place at the same time–in other words, his desert island. In contrast, the necessities of nature require that ownership claims be settled between rival tribes who arrive at different times at the same location, speaking quite different languages.

In those cases, a first possession rule provides a convenient focal point that helps limit (nothing will prevent) deadly conflicts between rivals, just as a system of established territories helps limit conflict between territorial animals. An auction is next to useless in these circumstances. Once the latecomer arrives, no auction will be able to make the appropriate offsets for the local improvements generated by members of the first group at their own expense. More generally, the slow diffusion of human beings across unoccupied territories lends itself far better to a first possession rule than a general auction rule, which in turn works better for efficiency reasons in allocating the spectrum for personal communications systems.

The comparison with telecommunications auctions points to another difficulty with Dworkin’s system that applies with equal force to Hayek’s overambitious theory of spontaneous order. Any system of resource allocation works better within an established social order than it does in establishing the basic rules of the game. In the typical auction, the seller plots to receive the highest value for the goods up for sale. Auctions generally work best for discrete works that are easily reduced to separate ownership, like paintings or collectibles. Dworkin’s auction is a far more ambitious affair in which the seller does not seek to maximize wealth but only to allocate all external resources in one fell swoop subject to Dworkin’s exacting "envy condition," such that each individual at the conclusion of the bidding is at least as happy with the lot he receives as he would have been with the lot received by anyone else.

But how can this auction take place? A successful auction requires that there be no shortage or surplus of clamshells at the end–a condition that applies to no normal auction. How can we be sure such a condition is satisfied? In addition, the sequence through which the resources are auctioned off could easily influence the ultimate allocation of resources, and thus offend the envy constraint. Perhaps these difficulties could be overcome, but Dworkin does not tell us which of the many variations on auction rules–English auctions, Dutch auctions, second-bidder auctions (whereby the highest bidder receives the item at the price bid by the second highest bidder) should be used, or why.

Worse still, this political auctioneer has to do far more than his compatriot at Christies or Sothebys. Land, water, and wildlife are hard to inventory; the auctioneer has to be able to decide where Blackacre begins and Whiteacre ends; he has to make provision for unexplored mineral rights; he has to design an allocation system for water rights; and today, he would have to develop a system of property rights for patents, copyrights, trade secrets, and trade names. Yet as Dworkin rightly notes, our political auctioneer does not have at his disposal even the elementary background rules of trespass and nuisance to guide his inquiry. At this point, it seems likely that the auctioneer will have to decide what comes within the bundle of rights out of whole cloth, or resort to the customary practices that have emerged when property is acquired under some variation of the first possession rule that Dworkin rejects in principle.

Once Dworkin’s hardy community has run its hypothetical auction, however, the ultimate goal of resource equality still lies far off in the distance. As Locke noted a long time ago, 99 percent of the value of raw land depends on the labor of those who have cleared it. Dworkin’s ideal of equality is faced with the following unhappy dilemma: Either he tolerates differences in wealth that are ultimately attributable to natural abilities and temperaments, such that the auction does little to correct the long-term imbalances in wealth and fortune that so trouble the egalitarian, or he tries to include these intangibles in the mix and is faced with the intolerable question of what reduction in material resources is needed to offset a particular combination of natural abilities and talents. Dworkin’s ostensible equality of resources thus has to tolerate either massive inequalities in utility, or equally significant intrusions into the lives of ordinary citizens.

Worse still from Dworkin’s point of view is that any equality of resources, however defined in the initial position, will prove unstable as individuals experience the vicissitudes of fortune, as they make inevitable choices about consumption, investment, and trade over time, or as new people are born, old people die, and individuals move into and out of the community. As Robert Nozick pointed out in Anarchy, State and Utopia, any "patterned theory" of justice has to engage in redistribution not once but repeatedly in order to prevent the actual distribution of wealth from deviating from its chosen ideal.

Dworkin, of course, recognizes this problem but is not able to offer any solution that meets it head-on. The best he can do is propose a form of progressive taxation that continues the process of redistribution on an ongoing basis, and which supports systems of universal health care and unemployment insurance. In so doing, he relies on hypothetical insurance markets to supplement hypothetical auctions. He plausibly claims that risk-averse people would be prepared to trade away their economic highs to cushion against their economic lows.

However, he wholly fails to demonstrate even hypothetically that a universal insurance market could cover these risks. That demonstration requires showing that the rates charged could cover the risks of moral hazard and adverse selection, as well as the administrative costs of running the plan. If the costs of the system exceed its gain, then the market shuts down even in theory–just as it often does in reality for earthquake insurance–leaving the foundation of Dworkin’s redistributionist scheme in rubble. The state program Dworkin theoretically supports is likely to run at large deficits made up from general tax revenues, and would create weird cross-subsidies from the younger poor to the older rich–a situation that roughly describes Medicare today.

Progressive taxation, of course, could survive for modest purposes even if Dworkin’s strong egalitarian agenda breaks down. But he would have done far better then to have forgotten his elaborate social theory and to have consulted instead the extensive economic social-welfarist public finance literature, which seeks to reconcile the desire for a greater equality of wealth with the efficiency concerns of higher levels of output. That literature outlines the key assumptions needed to make the progressive tax work: rapidly diminishing value of wealth coupled with high labor inelasticity (the nonresponsive nature of effort to higher taxes).

If these assumptions are met, then any net utility gains have to be large enough to justify the extensive system of administrative control necessary to prevent the shifting of income across tax periods and across individuals, and the system has to take into account the serious public choice risk that the legislature will set the tax too steep for its own good, prompting in response the political proliferation of dubious tax loopholes. The upshot may be some compression of wealth, but far less than is needed to create the equality of resources that Dworkin defends.

There is, however, a silver lining to all this. Given the difficulties in Dworkin’s system, it is certainly respectable to defend a conception of government that speaks of the equal liberties of all individuals to use their natural talents to the fullest, except insofar as it does not involve the use of force and fraud against others. That idea in turn invites a conception of equal (i.e. proportionate) taxes to share the costs of government needed to enforce these basic liberties and to provide the classic forms of infrastructure. Within this spare legal framework, one could then discuss what Dworkin never mentions, which is how various programs–price supports, acreage restrictions, protective tariffs, minimum wage laws, safety laws, antidiscrimination laws, family leave laws, etc., etc.–limit the options of the least well-off, and propose, as Dworkin never considers, the repeal of legislation that simultaneously injures liberty, equality, and prosperity. Finally, one could ask how best to fix the deficits in such stalwart programs as Social Security, Medicare, and welfare programs generally.

But Dworkin doesn’t face these challenges. First, he never argues against a coherent, systematic, and complete version of the rival laissez-faire, limited-government theories that he criticizes, and second, he never explains with the requisite level of institutional detail the legal and political structures needed to implement his own egalitarian program.

We all owe a debt to Dworkin for reminding us so forcefully that redistribution of wealth remains an important question on the political agenda, no matter how much libertarians might wish it away. But Dworkin owes a greater debt to the rest of us to explain how his unrelenting concern with equality of fortune can be implemented by the clumsy devices that modern government has at its disposal. As Shimon Peres said long ago: "The friends of liberty have done better by equality than the friends of equality have done by liberty."

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