Free markets and exploitation

|The Volokh Conspiracy |

An exploitative transaction is one in which the economic values of items (goods or services) voluntarily exchanged for one another are not equal. For those who entertained an objective conception of economic value such as cost of production, e.g. the classical economists including Marx, it was relatively easy to imagine that such transactions are possible. But for modern neoclassical economists whose conception of economic value is subjective—who believe that a voluntarily exchanged item's value is equal to the most that anyone would be willing and able to pay for it—the occurrence of exploitative transactions in free markets seems to be impossible. Why would rational persons pay more, or accept less, for an item than they believe it is worth?

Classical liberals and libertarians, as supporters of voluntary exchange and, hence, of free markets, find the possibility of transactions being exploitative only in markets that are unfree: markets that are subject to various forms of state-imposed restriction on the terms of trade between transactors, such as tariffs, licensing requirements, sales taxes, social security payments, etc. Such restrictions represent the state's appropriation of entitlements—claims, liberties, powers, or immunities—that would otherwise comprise the property rights of private individuals. Those entitlements would be components of what economists refer to as those persons' endowments. It is such imposed endowment reductions that create opportunities for some persons to exploit others.

Thus, I might wish to sell a good or service, and you might be willing and able to pay up to $100 for it. But if the state imposes a 10% tax on that sale, you would have to pay $110 to make that purchase—an amount you are unwilling to spend. However there is someone else who is willing and able to purchase it for $90 and to pay the additional $9 in sales tax. If I sell it to her (because there is no one else willing and able to pay as much as $90), the imposition of that sales tax has cost me $10: the difference between your $100 and her $90. I have been exploited to the tune of $10, and she has gained $10 of surplus value. And this is due to the state's appropriation of the power to determine the terms under which you spend your $100.

However, not all exploitation-generating imposed endowment reductions are due to the state. Thus, suppose again that you were willing and able to pay me $100 but that, before you could do so, someone robbed you. The robber thereby reduced your endowment to the point where you could afford to pay me only $80. So, as in the previous case, someone else gets to purchase my good or service for only $90, and I've again been exploited to the tune of $10.

And, indeed, a similar exploitative outcome can occur if I myself am the person who gets robbed. In this case, we'll suppose that, prior to the robbery, my reservation price for the sale of my good or service is $95: I would be unwilling to sell it for less than $95. (We'll also assume that, in this case, you're not interested in purchasing my good or service.) Having been robbed—having had my endowment forcibly reduced—my reservation price drops to $85: that is, the budget constraint on my indifference-curve map shifts in a southwesterly direction. Then, if $90 is the most that someone is willing and able to pay, I accept that. But I have been exploited to the tune of $5.

In all these cases, I have been exploited by virtue of an imposed endowment-reduction—a rights-violation—suffered by either a third party or by myself. Moreover, that exploitation implies that I myself will not be willing and able to offer as much as I would have done, for the goods or services of others who may, in turn, be thereby exploited. Exploitations compound.

Exploitation is normally considered unjust. Should we see the exploitations in the above cases as unjust? That surely depends on whether the endowments involved, prior to those rights-violations, were themselves just. Were their owners—you and I—justly entitled to them? Our having been legally entitled to them in no way implies that those entitlements were just. And, indeed, we know as a matter of historical fact that many of today's legal property titles are descended from prior unredressed violations of property rights that libertarians deem to be just, and from the exploitations thereby generated. So what is to be done?

Well, one part of the required remedy must be to support private law actions to pursue redress on behalf of those current persons who would have been better off had those injustices not occurred—and to seek that redress from those current persons who are the beneficiaries of those past injustices. Another part is to be clear about the sorts of property right that libertarians can deem to be just. And, in that regard, many left-libertarians have argued that property rights derived consistently from basic libertarian principles can include neither a power of bequest nor unencumbered ownership of land and the natural resources it encompasses. The estates of dead persons and the rent of land are items to whose value every person has an equal claim.

It seems very likely that failures to redress past injustices, and to properly tax bequests and landownership, are major contributors to prevailing levels of economic inequality. So we might reasonably surmise that, unless and until the profile of a society's set of legal property rights reflects those requirements, it would be unrealistic to expect much relaxation of state restrictions on the operation of free markets. This because, however mistakenly, many politicians view such regulation as an appropriate means of offsetting at least some of the effects of gross economic inequalities.

Hillel Steiner is a Fellow of the British Academy, Emeritus Professor of Political Philosophy in the University of Manchester, and Research Professor in Philosophy and the Freedom Center, University of Arizona. He is the author of An Essay on Rights (1994) and co-author, with Matthew Kramer and Nigel Simmonds, of A Debate Over Rights: Philosophical Enquiries (1998). He is co-editor, with Geraint Parry, of Freedom and Trade (1998); with Peter Vallentyne, of The Origins of Left-Libertarianism: An Anthology of Historical Writings, and Left-Libertarianism and Its Critics: The Contemporary Debate (2000); and with Ian Carter and Matthew Kramer, of Freedom: A Philosophical Anthology (2007). His current research includes projects on the concept of 'the just price' and on the application of libertarian principles to global, and to genetic, inequalities.