Last time, we went through the first step that, according to Dworkin, a society must take in order to satisfy the envy test: An initial distribution of resources in an auction.
We did not cover the second step: hypothetical insurance policies that cover shortfalls due to brute bad luck, such as having been born with a handicap.
For today’s class, we will start with the insurance policies for handicaps and then we will turn to insurance policies for underemployment.
The big picture here is that Dworkin is trying to describe the welfare state as a kind of social insurance scheme.
When 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 do not 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.
Yes, we have failed the envy test once again. At this point you might be feeling despair. Why do we have the envy test if society can never meet it? More importantly, will this ever end? Do not fret. This is the last turn through the envy test. So hang on. We can do this.
Deep breath. Ready? Good.
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. This is going to happen pretty quickly once life gets going on the island: some people are just going to be more fortunate than others.
For example, suppose that there isn’t much demand for what I am most skilled at doing and there is a lot of demand for what you are skilled at doing. (It helps to have a philosopher and an economist at the front of the room for this part. Team teaching wins again.) I am going to wind up wishing we could trade places. Or suppose there is a major recession and there just is not much demand for labor. Some people will have jobs and others will not even though they are equally willing to work. The unemployed will have less stuff than the employed and we will not 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 is about how Dworkin deals with this problem.
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 he thinks it would make people slaves to their talents.
Suppose each person’s time were part of the auction. Then we would all bid for 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 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 had to make in order to prevent others from owning their time. Those bids will 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.
Here’s an illustration. What if someone who could work as a highly productive computer programmer would rather be a philosopher? That person would be out of luck. She would have to work as a programmer either because everyone else bought her time and they want to get the best return on their investment. Or she will have to work as a programmer because she bought her own time but the price was very high, given how much demand there was from other people, so she has to make it back by working at her most productive occupation.
What do we do when we cannot pass the envy test? Nine letter word that begins with “I”. Say it with me: insurance! And we face the same problem we talked about when discussing handicaps: 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 insurance policies. No one is going to offer me insurance at a price I would pay against the possibility that I won’t make as much as an economist does because we can see that, given my training and skills, I am definitely going to collect. It would be like trying to buy health insurance after you get diagnosed with a disease. 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 or economists 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? Of course not. But don’t worry. It’s only two more paragraphs.
We have to deal with the problem of moral hazard. 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 under compensated 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.
And with that, we rest.