Home > Politics > The Myth of Mutual Benefit

The Myth of Mutual Benefit

One of the most fundamental tenets of capitalism, and the various ideologies that build on it, is that transactions between two parties are both voluntary and produce mutual benefit. I see two fundamental problems with this premise. The first is that the implicit assumption that the benefits received by both parties are comparable. The second is the de facto view that such transactions occur in isolation and in no way affect the overall equation.

The consensus view is that if I offer to pay you a certain amount to do something for me (or to sell something to me) and you agree to receive this amount, then the deal is fair. I benefit from receiving your goods or services and you benefit by the payment that I give you. You may have searched for offers that might pay you more but, on failing to find one, you accepted mine. The “value” of the deal is denoted in the monetary amounts that are exchanged and, because money is more or less universally exchangeable, the assumption is that we can make meaningful comparisons between benefits by referring to such monetary amounts.

The use of monetary comparisons permeates political discussion. As our initial scenario illustrates, it is the default measure of benefit.  But it also regularly appears, for example, in discussions about whether particular tax rates for particular levels of income are fair – whether it is reasonable for a person with a higher income to pay a larger proportion of that income in taxation. So we also infer a comparison of “burden” from the observation of the monetary amount. But is money a realistic or meaningful measure of benefits and burdens?

A common historic argument in defence of institutions like progressive taxation and redistribution is that money is worth more to someone with less of it than to someone with more – that a person with little money can derive more value from $100 than someone who is a millionaire. In this view the value of money is somewhat relative to circumstances. The contrary defence of monetary comparison stems from a view that interpersonal comparisons of utility are impossible, and that money, being universally equal in value, is the only possible basis of such comparisons.  That argument, as it goes, is that we cannot know what an amount of money is worth to each person, only what it is worth in the “objective” marketplace. Some, like Friedrich von Hayek, have attempted to derive an absurdity from the notion that the poor can derive more value from money than the rich. He argues (perhaps not too seriously) that if this is the case then the wealthy should be taxed at a lower rate because they clearly have more difficulty in deriving value from money and should be compensated (1). But the flaw in his reasoning is easy to spot. The error is simply that the rich have, in all likelihood, already found satisfaction in the kinds of things that the poor are still trying to fulfil, and have moved on to additional and higher order ambitions. That interpersonal comparisons are difficult is not in question. But it does not follow that nothing can be said about them. This particular neoliberal argument demonstrates little against progressive taxation and redistribution.

In the remainder of this essay I will attempt to construct a different framework within which we can discuss interpersonal comparisons. I will do this by looking at an aspect of the benefits and burdens that people bear – the effect that these burdens and benefits have on future burdens and benefits.

When people enter into a market transaction they do so from a particular position of bargaining strength. The strength of that position will influence the resulting deal – the “price”, in market terminology (although as we shall shortly see, the price is not necessarily simply monetary). It will also have some impact on the “voluntariness” of the transaction. The outcome of the transaction may affect the subsequent bargaining position of the transactors in ways that influence subsequent transactions. In many, if not most, cases bargaining positions will be asymmetrical.

The analysis I propose is to examine how a received (or parted) benefit affects a person’s bargaining position. I suggest that the receipt of weak benefits brings about subsequent weak bargaining positions, while strong benefits tend to generate strong future bargaining positions. To understand this I will use the terms “transient benefits” and “durable benefits”. Transient benefits are those that quickly diminish. A typical example is money spent on food or rent. Such expenses are one-off costs that leave no residuals beyond basic continuity. Benefits of this kind do not strengthen bargaining positions. A durable benefit, by contrast, is one that has an enduring effect and forms the basis for strengthening a bargaining position. This could take the form of the purchase of investments that generate an income. It could also be the investment in education or, as importantly, funds to cover the time for self-improvement, all of which can lead to higher asking prices. Durable benefits are themselves capable of generating benefits. Durable benefits compound with increasing lasting effects while transient ones evaporate, leaving nothing.

In many transactions you can see a durable benefit on one side and a transient benefit on the other. A person renting a home, for example, derives a transient benefit while the landlord typically derives a durable benefit. A shareholder in a company quite often receives a durable benefit (in the form of dividends and possible capital gains) from the labours of people who often receive mostly transient benefits. One might object that a grocer selling food is exchanging transient for transient. But in all probability, there are at least two transactions here: the transient/transient transaction between the purchaser and the seller, and the transient/durable transaction between the seller and her employer or store-owner (be it an individual or a stock owner). The ownership of business is, perhaps, the ultimate durable benefit – the owner, in effect, buys the time of other people to create benefits for him.

The problem with such unbalanced transactions is that one party improves his bargaining position while the other does not. This inequity is carried forward into future transactions. In effect, the stronger party has an increasing position of dominance. What appears, from the monetary analysis, as mutual benefit, is in reality a very-one sided benefit where the counterpart is maintained at a level of effective servitude.

Let’s look at the general case. A person earning an income will dispense of it by first meeting the transient expenses. If there is anything left, he might then – and only then – look at realising durable benefits. Note that the Conservative pet-dog theory of personal responsibility cannot enter the discussion before this point. They might up-skill, or seek to transform transient expenses into durable benefits – they might buy a home and remove the transient obligation of rental payments, but they are likely to pass through a long period of debt repayment in which the interest is payment for a transient benefit and the durability can only be found a long time in the future.

Conceptually, we can imagine a threshold for income, below which a person fails to meet even their transient expenses. Above this level a person might realise durable gains and improve their position. I call this the “viability threshold”. This will be, necessarily, relative to a society. In an industrial society, a car might be a non-negotiable expense and the running costs will raise this threshold (fuel poverty is not just a buzzword). The costs of maintaining a home – heating, electricity and so forth – will also contribute to evaporating an income. Similarly, healthcare and children’s education expenses will feature (especially if the income is to support a family rather than an individual). We might also include less tangible costs that affect our ability to adhere to social norms – what John Rawls calls “the social bases of self-respect”.

We shouldn’t, however, think of benefits only in terms of income. An income of £300 per week in a job that is secure is a very different benefit to a job that pays the same amount but might be terminated with little or no notice. Likewise, a job paying that amount and situated near the worker is a very different prospect to a like-paying job with a long commute. The same logic applies to jobs with significant levels of hazard and so forth. A core characteristic of the neoliberal age is that legislated worker protection has been greatly reduced in order to increase profitability. The conditions of work have, for many, become part of the bargain that they enter into, and is subject to their weak bargaining position (and to the benefit of the owners who have strong bargaining positions). This is euphemistically known as “worker flexibility” (very different from owner flexibility which carries remarkably few obligations).

Of course, all of this is simplified. I haven’t mentioned luck – although I would propose that the recipient of durable benefits will weather the storm far more easily than someone who is barely meeting transient obligations. Nor I have mentioned that neoliberal buzzword “choice”. Choice, like responsibility, only applies once transient obligations are met, and the range of available choices grows exponentially with durable benefits – indeed, choice is one of the core realisations of durability. People in precarious situations typically have a much worse choice-set open to them than those in strong circumstances – this is yet another manifestation of a person’s bargaining position. Finally, a durable benefit might diminish in its ability to generate further abilities – a skill might become defunct, or an investment might turn out to have been unwise. None of this disqualifies the argument.

We should address a possible objection to this conceptualisation. An objector might reject our argument by claiming that there is no fundamental difference between a subsistence-wage earner receiving £5.80 an hour (approximate minimum wage in the UK) to a billionaire receiving £5.80 an hour. Why should the market take into consideration the circumstances of the individual and pay more to the subsistence-wage earner? The beauty of the market, they might claim, is that it is “blind” to the individual and insisting that it become “aware” of the circumstances of the individuals involved would destroy this blindness and, with it, market “objectivity”. This is actually a common argument in neoliberal thought. The argument is straightforward to defuse.  The market is far from blind to the circumstances of the individual. In fact, one of the key components of labour pricing is the bargaining position of the labourer, and hence his external circumstances. Supply and demand, applied to labour, is largely about the labourer’s capacity to refuse an offer. That capacity will depend largely on the outcomes of previous bargains (not to mention the situation of parents etc). A labourer with a precarious bargaining position may accept a poor offer simply because he cannot refuse it – hardly an advertisement for voluntary transactions. The billionaire, of course, would be most unlikely to accept such an offer in the first place.

I’ll conclude by saying something about the practical implications of this characterisation. A person receiving purely transient benefits faces an intense gravitational force that ensures that they continue to receive only transient benefits. Conversely, durable benefits compound and grow, often dramatically, and the more one has the easier it is to obtain more. These two tendencies provide a strong argument for a progressive taxation scheme. The objective is two-part: to prevent excessively strong bargaining positions and to bolster the bargaining positions of the weaker members of society. The most plausible defence of egalitarianism is simply that one group does not dominate another, and an equality of bargaining power goes a long way to achieving that. The act of taxation serves the first objective. The second objective can be fulfilled through the use of that taxation. It can be used to remove certain transient costs – through the provision of universal healthcare, or education, and housing to the needy. Taxation can also be used to fund a “universal basic income”, championed by the Belgian political philosopher Philippe van Parijs, which provides for a subsistence income to all citizens. This, if implemented adequately, removes transience from the equation altogether and provides a firm foundation on which equitable mutual benefit can be proceed.

———

1. Hayek, The Constitution of Liberty, Routledge Classics 2006, pp.268-9

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Categories: Politics
  1. Doug
    August 21, 2011 at 9:03 pm

    Lurking in the background is the dubious neo-liberal notion that a market, or any transaction within a marekt, can really ever be “free.” There are many structures in society today that essentially restrict market freedom that are by and large “invisible” to all of us because we’ve come to accept both their equitableness as well as their their utility, but which in an earlier epoch would have been seen as burdensome or even morally wrong. One that comes to mind is child labor laws. In the early 20th Century a federal law was passed in the US that required laborers to be at least 9 years old, and that they couldn’t be made to work more than 12 hours per day. Employers railed against the new law on the grounds that if a child wanted to work, and an employer was willing to hire them, then the state shouldn’t interfere in a transaction “freely” arrived at. Today, that law, which was quite progressive for its time, seems a bit barbaric; we’ve even come so far as to raise the employment age for non-farm work to 16, and children must attend school (or be home-schooled) until that age. It’s a “restriction” on freedom that we’ve all come to accept, not only because of the ethical considerations, but the practical ones, too.

  2. August 22, 2011 at 5:50 pm

    I’m going to try to not to too many detailed responses here as I’d prefer to respond in further blogs to make clear where my thoughts are at. But your comment deserves a few words…

    Freedom is a very messy topic. What I’ve tried to do in this post is to sketch a very basic model for describing advantage/disadvantage and to give a workable starting definition of exploitation. Your comments on child labour are relevant to that. Freedom, ultimately, has to be balanced against many other important values and those values may determine that some behaviour should be restricted in favour of other things. So the parents’ freedom might be restricted in their ability to send their children out to work in the interests of the children themselves, and against the view that children going to school will probably have a much better set of choices later in life than if they start working at age 6 or 9. More generally, in a complex society acts done in freedom clash and have to be weighed. My free acts may interfere in your ability to live freely and so on. My freedom to make profit may interfere with your ability to earn an income (btw – I heard today that the super-rich are still managing to make a profit in the current downtuen – that’s some good news, at least!). Good legislation should ideally aim to replace large intrusions on freedom with more acceptable ones – find compromises etc. I know that last statement is woefully inadequate, but we’ll save the details for another day.

    Another related problem that I will talk much more about in later blogs is the issue of “choice”. This post started to look at the relationship between choice and context. The mantra of choice is at the heart of the neoliberal ideology and it is conflated with freedom (it is no accident that Friedman called his book “Free to Choose”). But we immediately run into problems. If I point a gun at you and say “your money or your life” I undoubtedly offer you a choice. But there is no way that this is a “free choice”. You certainly wouldn’t see it that way. One of the biggest problems with the libertarian conception of freedom is that it is habitually removed from context (you’ll be gathering by now that I really have an issue with removing things from their context!). Nozick, at one point, suggests that if a person chooses to be a slave then they have made a choice consistent with freedom. This seems pretty unlikely to me. If the most appealing (or least appalling) option you have at hand is to accept the loss of your freedom and become a slave then I would argue that you were not free when you made that “choice”. Your context forced the decision and it was not in any respect an act of freedom. You had lost your freedom before opting for slavery.

    Then there is the problem of overbearing choice. Many commentators have noted that if we have to decide every little detail all of the time we would soon have no time or energy to make the more important choices in life. We would be enslaved by the process of choice and would not be truly free.

    Another issue is what John Rawls calls “the worth of freedom” – the background conditions that make freedom more available or more usable. Distributive factors certainly weigh in on this. Given that some choices are more important than other, there is room to look at limiting some freedoms if they greatly enhance others. An interesting political/economic theory is the “Capability Approach” (by Amartya Sen & Martha Nussbaum). Well worth reading up on. It describes important “capabilities” (such as education or community cohesion) that are known for opening up opportunities and freedoms. The idea is a loose cousin of my idea of “durability” in many ways.

    I’ve written rather more than I intended, so I’ll sign off now 🙂

  3. Jacob Richter
    October 2, 2011 at 8:32 am

    Universal basic income fails to address:

    1) Structural and cyclical unemployment
    2) Desire to work and avoid the stigma of not doing something
    3) Inevitable downward pressure on wages as a result of implementation
    4) Privatization of the social wage (welfare being substituted)
    5) Class origins of political advocacy and beneficiaries (working-class vs. lumpen)

    • October 2, 2011 at 11:51 am

      Hi Jacob, and welcome.
      Out of curiosity, might I ask how you stumbled across my l’il blog? It’s always useful to know how/if you are connecting with people.

      On to your comments… I intend to write a lot more about the UBI. These blogs posts are not intended to follow any structure – just whatever happens to be in my head at any given point in time (a luxury I cannot take when writing the book that these blogs are supporting).

      On your first 3 points:

      (1) I assume by structural unemployment you mean basically that percentage of people whose services are simply not required. I can only see that problem getting bigger – at some point we as societies need to address the paradoxes of consumption-driven growth. We cannot both keep getting more efficient and at the same time preserve rates of employment. At least not without exponentially increasing consumption which is neither possible nor desirable.

      Cyclical unemployment (as I understand your meaning) is just a facet of cyclical economics. That’s a big topic that I wont go into, except to say that the last 30 years have been dominated by economic policies that enhance the cycles rather than the counter-cyclical policies that typified the post-war decades. The exact type of policies from the Keynsian era may no longer be appropriate but the spirit is – and those policies will need to encompass employment as much as anything else.

      The UBI is not intended to address either of these directly – they migh be seen as “background conditions” or “facts on the ground”. The UBI aims to change the character of the relationships within that – to address the balance of burdens and benefits.

      (2) So a large part of the point of the UBI is to change the relationships of labour – as Parijs puts it “to eliminate forced labour” by giving everyone a genuine option. This option might result in people not working as much – I don’t see this as a necessarily bad thing as the consumption / growth paradox can only be addressed by changing the nature of work. Jobs are presently, and more likely to become, scarce commodities and subject to distributive considerations like any other social good. The UBI scheme creates a base of security which would hopefully discourage people from “hoarding” jobs so that the social workload is distributed better across society – at present people cling to jobs and work appalling hours because they fear the destitution that would result if they didn’t. So a UBI forms an important backround condition for “job sharing”, which is the recognition that everyone should be allowed to work. More importantly it would reduce the element of labour pricing that is based on the conditions of the workers (their bargaining position) rather than their contribution – that’s what supply and demand means in a labour market. Some things would be more expensive to purchase – all those awful jobs that are currently paid very badly. People would have to pay an “honest” price for demeaning or dangerous work to be done. Workers can also use their veto to demand better / safer conditions for such jobs. This is all critically important I think – much of the disincentive to work for people is that the jobs themselves are both awful and pay awfully, and the UBI addresses this directly. Most people desire work I think – it is a social as well as an economic function. What people don’t want is demeaning work in authoritarian structures. People can also use the UBI to “up-skill” – at present poorly paid workers are often trapped because of their low incomes.
      All of this opens up the door for work that is undervalued by the market – like raising children, what is currently charity work, and the writing of blogs on political philosophy (I’m not there yet) 🙂

      Another important role played by the UBI is the influence on the demand side of the equation – a guaranteed income also ensures that everyone can, at least to some degree, influence the use of productive resources towards their needs by allowing them some amount of representation in the demand side of the market. The degree to which this is true depend on the size of the UBI. This is part of a huge topic for another day.

      Last but not least, the UBI is universal. Discretionary social benefits are deeply divisive, whereas universal benefits can promote social cohesion. Parijs has written a lot about the economics of it so I’ll leave you to check that out, but one consideration is that means-tested benefits are much more expensive institutions to administrate (and also give the State a lever of coercion).

      (3) See my point above about how wages would change prices by greatly reducing the “coercive” element of labour markets, inclining the market to reward social value more than social position. (This in itself, I think, would contribute positively to the satisfaction from working).

      I’m not clear on your points (4) and (5) – maybe you can elaborate a bit on what you mean?

      On the topic of class distinctions, although I use the language of class myself I’m not certain that the usual Marxian divisions are all that useful these days. I view these things more as relations between people based on their bargaining position than as groupings – such relations in market societies are dominated by wealth, but in other societies they may incorporate other things. Such relationships operate in a scalar way. But is it meaningful to talk of the “working class” any more? Most of us “work” in some fashion. How is the working class distinguished from the middle, or bourgois, class? Is it manufacturing vs service industries? In the UK about 70% of people work in service industries, and many are paid worse than in what little is left of manufacturing. Is the divide to be found in home ownership? What does that even mean in a time of negative equity? What about the relationship between working classes internationally? What does it mean when the developed world’s first class consumes relatively luxurious goods produced by sweatshops in less developed countries? And what of the new class that lies beneath the working class – those people who may never work, or whose work will be largely insecure and temporary – what Guy Standing has called the “Precariat”? Possibly the clearest class distinction today is that between people who receive income for what they do rather than for what they (legally) own (e.g. through dividends, capital gains, or usury). This is a particularly important distinction at the top levels of wealth. But even here there is a blurring when we consider, for example, the nature of pension schemes. For me, these distinctions are all better summed up by focusing on relative bargaining positions.

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