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 a society fails the envy test if one of its members, A, wants the money that another one, B, earns if A is not willing to do the work that B does to earn the money.
Even after taking those two steps and putting work and leisure into the bundles we are comparing, however, a society would still easily fail to meet the envy test.
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 is mot much demand for what I am most skilled at doing and there is a lot of demand for what, say, my co-teacher is skilled at doing. (It helps to have a philosopher and an economist at the front of the room for this part. Team teaching for the win.) 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 will. 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.
Bummer. But have no fear, Dworkin has a plan for dealing with this problem. And, even better, it is the last problem like this that he is going to tackle. The end is in sight.
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 not include that 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. (Hello, Professor Brown!) Those people would either have their time owned by others or they would bid on their own time. When the auction was over, one of two things will happen. Either the productive people’s time will be owned by everyone else; the productive people will be forced to work at the most productive jobs in order to maximize everyone else’s return on their investment. The other possibility is that the productive people would have bought their own time to avoid being owned by others. But the end result would be pretty much the same. They would have to work at the most productive jobs in order to pay off the bids they made 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. That means that even if Prof. Brown bought her own time in the initial auction, she may not have had enough clam shells left over for, say, a house. If so, she would have to work in order to have a place to live.
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 do we do when we cannot pass the envy test? It’s a 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 create 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 are not 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 do not worry. It is 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 cannot 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. That way, 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.
We have made two points in the past that I think are worthy. But experience has shown that we sometimes do not get to them. So I am going to put them here.
The first concerns progressive taxation to fund the hypothetical insurance plans.
Dworkin thinks he has an argument for a progressive income tax, where the tax rates go up with higher levels of income. He points 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 the premiums would go up with wealth 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 even more with a progressive schedule of income tax rates.
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.
Here are a few differences between Dworkin and Rawls.
First, Rawls gives priority to the worst off class while Dworkin does not.
Second, Dworkin’s theory is much more individualistic than Rawls’s, as Rawls is concerned with slices of the income distribution.
Finally, Dworkin addresses the problems that people with disabilities face while Rawls assumes that everyone is a fully participating member of the economy. In addition, Rawls does not consider any of the special problems that full time workers with disabilities might face.