Knowledge And Decisions

The issue of “merit” and reward is part of a more general set of issues revolving around so-called “income distribution.” The familiar metaphor of “income distribution” conceals the crucial fact that most income is not distributed, either in capitalist, socialist, feudal, or most other economic systems. People are paid for services rendered, either by themselves or by their property. Some varying amount of income is also distributed from some central governmental funds, usually without regard to services rendered. It is confusing at best and disingenuous at worst to talk as if we simply have distribution A now, and it is merely a question of having distribution B instead. We currently do not distribute most income in any kind of modern economy — and the case for a particular distribution is a case not only for a changed result but for a revolutionary change in institutional processes from what now exist either in socialist economies or capitalist economies.

The moral question of how does one “justify” the existing “distribution” also misstates the issue. What is called the existing distribution of income is simply a set of retrospective data at a given point in time. These data are generated by an ongoing process in which buyers choose among alternative products available at varying prices, and the sum total of those prices paid during some time span become various people’s incomes. The question is not what to decide, as to whether specific retrospective data are justified, but rather who shall decide which prospective transactions are justified on what terms in an on-going process. More to the point, shall observers who experience neither the benefits nor the cost use force (the government) to supersede the judgments of those who do? The issue is not between one particular set of statistical results and another. The issue is between one kind of social process and another, and between one set of decision-makers and another.

When large incomes growing out of residual claims are involved, no one has decided that the total was either justified or unjustified, nor is it clear who would possess the knowledge to do so. What each buyer has decided, however, is whether what he himself received was worth it to him — a subject on which he is much better informed. To call for a justification of the overall totals is to call in fact for a re-justification by nontransacting observers to supersede the individual decisions of the transactors. Sometimes the moral issue is posed in more apparently neutral terms as claiming that optimality is meaningful only if one “accepts” the initial distribution of income. Pareto optimality is meaningful only if one accepts the criterion of individual satisfaction by varying individual preference standards. Once such a conception of optimality is used, it is difficult to see how another unitary set of preference standards can supersede this in the interest of “correcting” the “income distribution.”

The timeless nature of “income distribution” data misstates issues in another way. Individuals typically have varying incomes over a lifetime — usually smaller incomes at the beginning and larger incomes after more experience, skill, etc., have been accumulated. Any set of data as of any given point in time freezes millions of people at many different phases of their respective life cycle. Those in the lowest fourth at any given time include many young people who will be in the top fourth at some later point in time. It is misleading to say that an intern is “poor” while a doctor is rich, when in fact intern is simply a stage on the way to becoming a doctor. By “rich” and “poor” we think of people who are, in some long-run sense, in high or low income brackets. But an instantaneous statistical picture counts the genuinely poor and those with transiently low income the same. Concern for genuine poverty is a reasonable concern, but it is something else to be exercised over the fact that young adults do not yet earn as much as their parents or grandparents. The average income of families headed by someone in the forty-five to fifty-four year old bracket is nearly double the average income of families headed by someone twenty-four years old or younger.¹⁰ This is greater than the ratio of white income to black income. Of the top wealth-holders in the country (with assets of $60,000 in 1974), almost twice as many were over fifty as under fifty.¹¹ These age phenomena permeate income statistics which are commonly interpreted as if they were social class phenomena.

SUMMARY AND IMPLICATIONS