Distributive Justice and Incentives: A Global Perspective

Gareth MorganPolitics


  • 16% of the world's population controls 80% of global wealth
  • If all the world's citizens consumed the amount of resources the average American does we'd need the resources of 7 globes
  • Over the 1990s, management of US firms have increased their remuneration proportionally more than the increase of the shareholder wealth they've created
  • The disaffection of those living in the illiberal regimes of the Middle East and West Asia with the actions of the US and its allies reaches far beyond the handful involved in the terrorist attacks of recent years

As the US flattens those responsible for recent terrorism and many other people besides, it is pertinent to look at the some of the drivers of the mass discontent that enables extremism to flourish around the world. Economics research of recent years that has focused on issues of meritocracy and economic inequality is pertinent to the real life issues of distribution cited above and the humane-egalitarian issues they raise.

Equality of opportunity has been the focal point of the work from Nobel Prize-winning Indian economist Amartya Sen, his basic finding being that unless people are equipped with the ability to participate in education they are, in effect, being discriminated against. In this context family, social and cultural background all can conspire to advantage or disadvantage any individual. The role then of public policy, is to ensure there is a commitment to ensure equality of opportunity, "before" the competition of commercial life starts. A Sen contention is that unless a society has an identifiable definition of distributive justice (an omission that often capitalist societies are charged with), then any cost in achieving the humane egalitarian objective of equal opportunity, in terms of lost economic efficiency cannot be valued.

Sen's research dovetails quite nicely with that done on the economic benefit of education. The latter has come a long way to prove that procuring an education does materially benefit individuals insofar as the lifetime income they procure. Additionally, an important finding is that an investment dollar spent on early education has a larger payback than one spent on later education, insofar as national net economic benefit is concerned. The law of diminishing returns not only applies to the payback an individual reaps per additional dollar spent on their own education, but it also is pertinent to the trade-off society faces between getting some members more highly educated versus getting more any significant education at all.

Further, it is not at all clear that the benefit from additional education manifest in the higher income it leads to, is due to additional skills that education bestows. Rather the role of additional education years in further harmonising the attitudes of people to work and productive efficiency, have been identified as at least as significant as any specific knowledge acquired. Education strengthens the ability to respond to performance incentives common in the workplace. It is not uncommon in New Zealand to hear employers bemoaning the supply of workers with the 'right attitude' as opposed to not having specific skills.

Charles Murray's most pessimistic finding, that has had an enormous amount of air-play is the conclusion that if the humane-egalitarian ideal of equal opportunity was achieved and all privilege of family and cultural background removed, then there would be a greater not lesser concentration of income and status in society. This is because the only determinant of success left would be inherited-IQ and it is natural for higher IQ people to mate with each other and pass on their IQ genes – generating a class stratification of genes for talent. For Murray the heterogeneity of cultural, social and family status is the very source of what egalitarian distribution of success within and between societies already exists.

There are a number of questionable components to the Murray finding, not the least of which is that globally with 16% of the population controlling 80% of the wealth we are so far from the scenario that holds talent genes as the predominant determinant of wealth distribution, as to make his concern irrelevant. Secondly it rests on an assumption that talented people have an ever-increasing desire for material rewards. Arguably it is rational for such people to become satiated in this regard. How else does one explain the propensity of talented New Zealanders to remain in this country on a fraction of the income they could command abroad? Thirdly, Murray's statistical method in reaching the estimates of a strong genetic determination of IQ led to major bias.

Even though one might be able to defend the efficacy of a humane-egalitarian ideal of equal opportunity as a legitimate policy objective against the ravages of a Charles Murray, one is still left with the issue of what merit really is or what meritocracy should be targeting as the behaviour it rewards. Should it reward talent or skills acquired, outcomes or effort? These issues lie at the heart of the pricing of capital in modern human capital-intensive capitalist societies that dominate the Western world at least.

The pricing of stock options issued to staff as performance bonuses and the particular "merit" that triggers their awarding, has increasingly come under scrutiny as the underlying performance of firms has fallen away over the last couple of years. In particular rewarding (or penalising) executives for events that were well beyond their influence can not be a sustainable development in designing remuneration packages. Rather, that is typical of a bull market only. Recent economic shocks should precipitate dramatic re-pricing of these packages. That Warren Buffet has described executive stock options as "blah" might now, in the more sober light following the vast destruction of stockholder wealth, be acknowledged.

The gap that has opened up over the 1990's in the US between growth in earnings of executives and growth in wealth of shareholders and other employees is to a large extent because of the unsustainable definition of merit that corporates chose to reward executive behaviour on. Bizarre manipulation of pro forma earnings reports and high risk investment strategies were a common behavioural result.

As the US and allies contemplate the underlying causes of the increasing terrorism of the last 20 years, they might consider whether pulverising those in the vicinity of the latest perpetrator provides a lasting solution. That power vacuums arise in these theatres that despots quickly fill (albeit temporarily) is of increasing discomfort to those who live and work within the comfortable confines of Western capitalist democracies. No longer is there a separation that cannot be breached by acts of international terrorism or information technology sabotage. And terrorists often locate themselves within the target economy. Certainly the WTO protestors don't come from the hills of Afghanistan.

The West doesn't have a model of global distributive justice. To now it has been satisfied to let the relativity gap widen, though providing aid and relief in some extreme cases, and strategic support for a very few (and all undemocratic) regimes. As acts and ongoing threats of sabotage continue, that global strategy will be exposed further as too detached from the requirements of global distributive justice. It will have to be superseded by one of effective incentives for affected nations to respond to in order to get up on to a path of economic development and not sink into tyrannies enforcing medieval servitude on millions of victims.

Importantly though major change is required from the West. The fear Western citizens now have and a new timidity we will see from investors may just facilitate that change.


Distributive Justice and Incentives: A Global Perspective was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.