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“If free market prices don't give people what they morally deserve, should we try to regulate factor prices so that they do track producers' moral deserts? Hayek offered two compelling arguments against this proposal. First, if you fix prices on a backward-looking standard, they will no longer be able to perform their informational function. Producers will produce for what was demanded last quarter, even if it isn't demanded today. This creates enormous waste and generates huge opportunity costs. We'd be much poorer in an economy that worked like this. […] Hayek was right. It might sound like a compelling idea, to make sure that people receive the income they morally deserve. But orienting the economy around this goal, assuming it is achievable at all (and there are principled doubts about that), would doom us to poverty and serfdom. It would abolish capitalism, along with its chief virtues. It isn't worth the draconian costs.”

Elizabeth S. Anderson

How Not to Complain About Taxes (III): "I deserve my pretax income" http://left2right.typepad.com/main/2005/01/how_not_to_comp_1.html (January 26, 2005)

“Several implications follow from Hayek's insights into the nature of capitalism.(a) The claim "I deserve my pretax income" is not generally true. Nor should the basic organization of property rules be based on considerations of moral desert. Hence, claims about desert have no standing in deciding whether taxation for the purpose of funding social insurance is just.
(b) The claim that people rocked by the viccisitudes of the market, or poor people generally, are getting what they deserve is also not generally true. To moralize people's misfortunes in this way is both ignorant and mean. Capitalism continuously and randomly pulls the rug out from under even the most prudent and diligent people. It is in principle impossible for even the most prudent to forsee all the market turns that could undo them. (If it were possible, then efficient socialist planning would be possible, too. But it isn't.)
(c) Capitalist markets are highly dynamic and volatile. This means that at any one time, lots of people are going under. Often, the consequences of this would be catastrophic, absent concerted intervention to avert the outcomes generated by markets. For example, the economist Amartya Sen has documented that sudden shifts in people's incomes (which are often due to market volatility), and not absolute food shortages, are a principal cause of famine.
(d) The volatility of capitalist markets creates a profound and urgent need for insurance, over and above the insurance needs people would have under more stable (but stagnant) economic systems. This need is increased also by the fact that capitalism inspires a love of personal independence, and hence brings about the smaller ("nuclear") family forms that alone are compatible with it. We no longer belong to vast tribes and clans. This sharply reduces the ability of individuals under capitalism to pool risks within families, and limits the claims they can effectively make on nonhousehold (extended) family members for assistance. To avoid or at least ameliorate disaster and disruption, people need to pool the risks of capitalism.”

Elizabeth S. Anderson

How Not to Complain About Taxes (III): "I deserve my pretax income" http://left2right.typepad.com/main/2005/01/how_not_to_comp_1.html (January 26, 2005)

“Let's consider first Hayek's claim that prices in free market capitalism do not give people what they morally deserve. Hayek's deepest economic insight was that the basic function of free market prices is informational. Free market prices send signals to producers as to where their products are most in demand (and to consumers as to the opportunity costs of their options). They reflect the sum total of the inherently dispersed information about the supply and demand of millions of distinct individuals for each product. Free market prices give us our only access to this information, and then only in aggregate form. This is why centralized economic planning is doomed to failure: there is no way to collect individualized supply and demand information in a single mind or planning agency, to use as a basis for setting prices. Free markets alone can effectively respond to this information.
It's a short step from this core insight about prices to their failure to track any coherent notion of moral desert. Claims of desert are essentially backward-looking. They aim to reward people for virtuous conduct that they undertook in the past. Free market prices are essentially forward-looking. Current prices send signals to producers as to where the demand is now, not where the demand was when individual producers decided on their production plans. Capitalism is an inherently dynamic economic system. It responds rapidly to changes in tastes, to new sources of supply, to new substitutes for old products. This is one of capitalism's great virtues. But this responsiveness leads to volatile prices. Consequently, capitalism is constantly pulling the rug out from underneath even the most thoughtful, foresightful, and prudent production plans of individual agents. However virtuous they were, by whatever standard of virtue one can name, individuals cannot count on their virtue being rewarded in the free market. For the function of the market isn't to reward people for past good behavior. It's to direct them toward producing for current demand, regardless of what they did in the past.
This isn't to say that virtue makes no difference to what returns one may expect for one's productive contributions. The exercise of prudence and foresight in laying out one's production and investment plans, and diligence in carrying them out, generally improves one's odds. But sheer dumb luck is also, ineradicably, a prominent factor determining free market returns. And nobody deserves what comes to them by sheer luck.”

Elizabeth S. Anderson

How Not to Complain About Taxes (III): "I deserve my pretax income" http://left2right.typepad.com/main/2005/01/how_not_to_comp_1.html (January 26, 2005)

“The claim "I deserve my income," as applied to an individual's pretax income in free market economies, has considerable intuitive force. If true, it suggests a powerful moral claim against taxation for redistributive purposes, on the intuitively plausible supposition that a just economic order ought to ensure that people get what they morally deserve.
But, however intuitive these claims may be, they are unjustified. In two of his important works of political economy, The Constitution of Liberty (see esp. ch. 6), and Law, Legislation, and Liberty (vol. 2), Hayek explained why free market prices cannot, and should not, track claims of individual moral desert.”

Elizabeth S. Anderson

How Not to Complain About Taxes (III): "I deserve my pretax income" http://left2right.typepad.com/main/2005/01/how_not_to_comp_1.html (January 26, 2005)