Justice in Compensation
Profitability itself may often be an indication of distributive justice.
By Erik W. Matson.
I recently had the opportunity to discuss a portion of John Bates Clark’s 1914 monograph Social Justice Without Socialism with a group of students participating in a research fellowship in religious liberty and American civics. They ranged from advanced undergraduates to early-stage graduate students, studying law, philosophy, literature, rhetoric, and politics.
Clark, as I have discussed before at The Freeman, had socialist sympathies in the early phase of his career. He moved, however, away from his socialist leanings toward the end of the 19th century. Part of the reason for his movement had to do with his development of the economic analysis of income distribution.
Clark argued that when the forces of competition are unimpeded by misguided regulations (and aided by what Clark deemed to be a few constructive ones), employers and employed—capital and labor—will each enjoy incomes commensurate with their productive contributions to total economic output. The employer’s income will correspond to the marginal revenue product of his energy, insight, and capital; the employee’s income will correspond to the marginal revenue product of his labor. Clark enthusiastically proclaimed these theoretical insights as heralding a “beatific vision” of a just, harmonious society. Total economic output grows by virtue of innovation and capital accumulation; so long as competition is left free, the gains of increased output will naturally be distributed according to what justice would demand. A rising tide lifts all boats, and each earns according to what he produces. From each according to his ability, you might say.
After I presented Clark’s position, a student raised his hand. “I’m not convinced,” he said. There are several aspects of Clark’s argument that one might take issue with. Clark’s vision is clearly utopian and overly enthusiastic. He pays insufficient attention to the nature of the political process; his ideas about proper regulations (most of which pertain to monopolies) have a spotted history; his claim that there are fundamental laws in economics in the same way that there are fundamental laws in physics is contestable. But the student did not mention any of these issues. Instead, he explained that he was unpersuaded by the core ethical proposition of Clark’s argument. He did not believe that it is presumptively just to pay workers according to their marginal productive contribution to economic output.
His intuition was roughly as follows. From a Christian perspective—all of us gathered were Christians of one kind or another—we each have moral obligations to charity and generosity. We are to love God and to love our neighbors as ourselves. A business owner should therefore view his or her workers or potential workers not simply as inputs into a production process to be compensated in accordance with their dollar value, but as fellow dignified human beings created in the image of God. A business owner should not look to gain the most from his workers, but to give the most. Simply compensating workers for what they produce does not come close to satisfying the demands of justice.
The student’s intuition is a normal one. It aligns with my sense of how many intelligent and well-intentioned people think about the world. It accords with people’s (misguided) tendency to contrast a commitment to “people” and “profits.” But the student’s intuition rests on faulty logic and, moreover, a somewhat underdeveloped understanding of the nature of our moral obligations.
In some cases, it might conceivably be virtuous to pay an employee more than his or her marginal revenue product. A successful business owner, for example, might decide to hire a young, unskilled worker with no job experience and decide to pay her more than she is worth on paper. Such a decision could evidence generosity. It may well be virtuous. It might also simply be a wise investment. The employer might shrewdly perceive that, with a bit of training and experience, the young worker will soon be much more productive than she is at the moment. But payment above marginal revenue product cannot be the norm or the presumptive standard of just compensation.
One reason for this has in fact more to do with arithmetic than with ethics. A business that makes a habit of paying employees more than the employees contribute to the business’s total revenue will almost certainly go out of business. The total product of the enterprise, technically speaking, will likely be exhausted sooner or later, to the detriment of employer, employees, and customers alike. It simply can’t always be the case that it is morally incumbent on business owners to pay their workers more than their workers contribute if we agree that such a practice will generally not, to invoke a popular term, be “sustainable.”
Moving beyond arithmetic, it is important in discussions of just compensation to disambiguate between two operative notions of justice: commutative and distributive. Commutative justice, going back to Aristotle, was first conceived as a matter of equality in exchange. A commutatively just exchange is an exchange in which equal value—understood as the contribution of a thing to the meeting of human needs—is given and received. By this logic, a good should be priced to reflect most accurately its value to both buyer and seller. The Aristotelian vision of commutative justice was (contrary to popular impressions) taken up by the medieval scholastics in defense of the proposition that the prices of goods that obtain in the market, which they took to be a function of the community’s common estimation of the goods’ value, are presumptively just.
In the early modern period, the notion of commutative justice was transformed. The notion of equal value in exchange arguably remained; but it faded somewhat to the background. Into the foreground moved concerns with voluntarism within the rules of property and contract. An exchange is commutatively just so long as it is freely assented to by both parties and so long as the rules of ownership are respected. One might argue that those conditions will promote something like equality in exchange, in the classical sense, in that no two parties will agree to an exchange unless they understand the price to be reasonable based on their understanding of the specific personal human needs that the transaction will satisfy.
Compensation agreements, so long as they are voluntary, and so long as the specific terms of compensation are clearly articulated and well-understood, are clearly just in the modern sense of commutative justice, which again consists in respect for the person, property, and promises due to others. Voluntary compensation arrangements are arguably just in the older sense of commutative justice, too, in that the wages paid in a competitive environment will tend to correspond to the value provided by the employee. One might even argue that to oblige an employer to pay his worker more than his worker’s marginal contribution is commutatively unjust in the classical sense. The employer in such a case will give to the worker more than his worker gives to him, which violates the notion of equality in exchange.
What about distributive justice? For Aristotle, distributive justice is a matter of the sovereign or magistrate or governing class making a distribution from a common stock of goods to individuals based on their merit, which may not neatly correspond to their productivity. Thomas Aquinas arguably articulated a similar conception of distributive justice, although this is debated by some scholars. In any event, on this understanding of distributive justice, it will not be incumbent on an employer to pay his worker more than his worker produces, although it may be incumbent on a sovereign to make a distribution of goods to particularly virtuous workers.
A later sense of distributive justice that finds clear expression in Adam Smith holds distributive justice to be coextensive with beneficence or charity. Each person has a moral obligation to make a becoming, charitable, or distributively just use of his or her resources. Might we say then that employers in some cases owe their workers more than their marginal revenue product from considerations of distributive justice? Might it not be the most becoming use of an employer’s resources to use some of his own income to increase the real income of his employees?
Maybe in some cases, but my answer is still presumptively no. If an employer gives to a worker more than the value of what she produces, the difference must come from somewhere. Suppose that the difference is made up by reducing the employer’s income. One must consider what that additional income would have been used for, had it not been given to boost employee compensation. The employer would surely have used the income to patronize other businesses, indirectly supporting the livelihood of other workers. Some of the goods and services produced would surely have been used by the employer to support his family and friends—those to whom we are most immediately obligated by virtue of their familiarity and proximity. It is even possible that the employer would have used the income to give charitably to community organizations. Why should his employee have a presumptive claim, on grounds of distributive justice, to the income that he himself earned in production, that he might use in any number of ways to the benefit of those around him?
As a final consideration, note that this whole discussion has ceded some very important ground. We have given in to the presumption that employees or workers are somehow naturally more deserving or in greater need than those who employ them. Lurking in the background of discussions of just compensation lies an unspoken assumption that employers—by virtue of being employers—are privileged and deep-pocketed, while employees are less privileged, in need of support, and therefore deserve greater weight in our moral calculus. This assumption is deeply ingrained in the way many people think. But it is not obviously true. Many businesses are not large operations with ample cash reserves from which they can draw at will to pay employees. Most businesses have very thin profit margins.
But even when this is not the case, i.e., when a successful business enjoys above-average profits, why exactly should it be the case that current and potential employees are entitled to a proportion of income that exceeds their contribution? In a free society, it might be argued that successful employers and business owners should enjoy an equally strong presumption of moral desert as their workers.
After all, it takes quite a lot of resilience and creativity—which are virtues—to succeed on the market. Profitability in a market corresponds to the provision of goods and services that members of the community deem valuable. There is a real sense in which profitability itself signifies that an entrepreneur is making a becoming use of his or her resources. Profitability itself in a free society may often be an indication, in other words, of distributive justice.
Erik Matson is a Senior Research Fellow at the Mercatus Center and Deputy Director of the Adam Smith Program at George Mason University. He additionally serves as a lecturer in political economy in the Busch School of Business at The Catholic University of America.