Overview

Last time, we went through the first two steps that, according to Dworkin, a society must take in order to satisfy the envy test.

1. An initial distribution of resources in an auction.
2. Hypothetical insurance policies that cover shortfalls due to brute bad luck, such as having been born with a handicap.

Then Dworkin turns to labor markets. He argues that the bundles of resources that we are comparing in the envy test should include work and leisure as well as things, such as money, wine (claret), and eggs. The idea is that we don’t want to say that the envy test is not met if A wants the money that B earns without being willing to do the work that B does to earn it.

Even after taking those two steps and putting work and leisure into the bundles we are comparing, however, a society could still fail to meet the envy test. Aargh! When will this ever end? Soon, my friend, soon; this is our last spin through the envy test. So let’s do this.

We will fail to meet the envy test if one person would prefer someone else’s bundle consisting of her job, leisure, earnings, and other resources over his own similar bundle. Say, for instance, that, for whatever reason, I couldn’t get Ryan Gosling’s role in La La Land.¹ I was willing to dance with Emma Stone, play piano, and do the morose jazz guy thing! But he got it rather than me and now I’m willing to trade my bundle of philosophy job and philosophy pay for his acting job and actor pay. That means we fail the envy test.²

Here is a more important example that makes the same point. Suppose that there is a major recession and there just is not much demand for labor. Some people will have jobs and others won’t even though they are equally willing to work. The unemployed will have less stuff than the employed and we won’t be able to say that the envy test has been met because they chose leisure over work. On the contrary, the involuntarily unemployed will want to trade their bundles of work, leisure, and money with those held by people with jobs.

Today’s class was about how Dworkin deals with this problem.

Auctioning Talents

One way of dealing with the problem would be to put people’s time into the auction. After all, the auction is supposed to cover all the resources on the island, whether they are going to be used to produce things or consumed. One of the chief productive resources is human labor. Just ask John Locke! So why shouldn’t that be included in the auction?

Dworkin rejects this approach because it would make people slaves to their talents.

Suppose people’s time were part of the auction. Then people would bid on the time of the people who are capable of doing the most productive jobs. Those people would either have their time owned by others or, as Kamyab noted, they would bid on their own time. When the auction was over, either they would be owned by other people who would make them work at the most productive jobs to maximize their investments. Or they would have to work at the most productive jobs in order to pay off the bids they made on their own time. Remember, those bids have to reflect the opportunity cost to others of not owning the productive people’s time. So they will be expensive.

In a nutshell, the talented will not have any choice about what jobs to take. But that makes their share of resources insensitive to their tastes and ambitions. What if someone who could work as a highly productive computer programmer would rather be a philosopher? (This is not me, incidentally; I’m pretty much at my peak contribution to society, sad to say.)

Anikka came up with a different reason why auctioning talents would fail. People would have a strong incentive to either hide their talents or, if that wouldn’t work, they could threaten to do a bad job if they were forced to work for someone else. Either way, they would lower their value to their fellow auctioneers. But then, as Prof. Brown noted, the auction wouldn’t correct the brute luck of having talents that are in demand (or talents that are not in demand). If the argument about being enslaved by one’s talents shows that it would be undesirable to put labor into the auction, Anikka’s argument shows it would be ineffective to do so. (By the way, Anikka’s point is totally new to me after over a decade of teaching this. Kudos!)

Ineffective + bad = not a good idea.

Insurance

What do we do when we can’t pass the envy test? Peter T. knows. Insurance! But we face the same problem Peter N. noted last time: the thing we want to insure against, not being able to find work you want, has often happened before people have a chance to buy their policies. So we get another hypothetical insurance market.

Insurance is provided against failing to have an opportunity to earn whatever level of income, within the projected structure, the policy holder names, in which case the insurance company will pay the policy holder the difference between that coverage level and the income he does in fact have an opportunity to earn. (Dworkin 1981, 317)

Dworkin argues that no one would buy insurance against failing to have the very highest paying jobs. Instead, they would seek to insure against failing to have a modestly paying job. If they genuinely cannot find adequate work, they receive a payout from the insurance plan to pick up the difference between what they can earn and what they wanted to earn. And if they can do better, they pay their premiums to the state as taxes.

What you get is a social safety net. You have an ersatz insurance policy that guarantees you what we deem to be a minimum standard of living, no matter how successful you are in the labor market. But we aren’t committed to saying that everyone has to have the standard of living that movie stars do. A society passes the envy test if none of its members would trade their bundle of things, work, and risks taken in the hypothetical insurance market for someone else’s.

So are we done? Almost, but not quite.

Anikka’s problem comes back to bite us. If you have an insurance policy that guarantees you an income and you could basically earn that income by working, you have an obvious incentive to say you can’t find work and collect on the insurance policy instead. That’s both unfair to others and bad for the productive capacity of the society.

Dworkin tries to draw the line between people who are genuinely undercompensated and those who are trying to game the system in the way that all insurance plans do: with deductibles and co-pays (Dworkin 1981, 325–26). The trick is to set the insurance payout low enough so that no one will be tempted to avoid work just in order to collect insurance. The idea is that almost everyone who does collect would be genuinely needy. This will be difficult to do in practice, but it is the sort of thing that insurance companies do all the time. So it is not an insuperable problem, Dworkin maintains.

Professor Brown thought Dworkin was mistaken in thinking he had given an argument for a progressive income tax, where the tax rates go up with higher levels of income. Dworkin pointed out that people would choose to pay a higher premium if they were wealthier due to the declining marginal utility of money (Dworkin 1981, 323–25). But that would be so even if tax rates were a flat percentage that applied to all income levels or even if tax rates declined for wealthier people. In either case, the wealthy would (or could) still pay more in total dollars. Of course, they would pay more with a progressive schedule of income tax rates too. The point is just that the argument only supports the conclusion that the wealthy would pay higher premiums than others do. It does not single out a progressive income tax scheme over a flat or even a mildly regressive one.

And with that, we rest.