Reflections from Europe | SEPTEMBER 6, 2004
The Doctrine of "Unequal Exchange": The Last Refuge of Modern Socialism?
While the old stuffing of Marxist economics has been knocked out of socialism, two major attempts have been made to replace it with some alternative intellectual content. One was to upgrade the vague and emotional notion of "social justice", and underpin it with the idea that since "veils" of ignorance or uncertainty hide the future, the rational individual must opt for an egalitarian social order for his own safety ("society as mutual insurance").
It was then the obvious move to infiltrate the redistributive demands of "social justice" into the capitalist system which may in other respects remain intact. Germs of this attempt can be traced back to mid-19th century English thought. It came to full flowering after World War II in the American brand of liberalism and in European social democracy. However, as a positive theory it is feeble. It needs bolstering by normative judgments condemning inequalities except if morally justified. But if we accept these judgments anyway, then we can safely throw away the theory. It is redundant and cannot salvage socialism's intellectual respectability.
At first sight more promisingly, the other major salvage attempt starts off as a non-normative economic theory, (though it does not end like one). The starting point is that though total income is equal to total product, we cannot say that individual income is equal to the individual's contribution to the product. Each contribution is rendered possible, or is "owed" to, countless past and present contributions by others. Society owes its product to itself. Given that it owns it, it may distribute it among its individual members in any way it chooses by switching on some recognized collective choice mechanism, such as democracy. It can bring about the chosen distribution either by taking the means of production and exchange into "social" ownership or, the more modern way, by using the tax code. The latter proceeding is supposed to preserve the principle of voluntary exchange and the essentials of the capitalist system. Paradoxically, this is a socialist theory of income distribution that states, in effect, that there is no theory of income distribution; it is always what society chooses it to be.
The idea that "every contribution depends on, and is owed to, every other" is a trivial truth. It is tantamount to saying that since you could not work and earn an income if you did not eat, you owe your income to the farmers, processors and retailers of food. You also owe it to all who helped make you what you are and who in various ways help to keep you going.
You may object mildly (you might indeed object indignantly) that you have squared all these debts when you paid for the food and all the other commercially provided goods and services you used, and when you paid the taxes to finance the goods and services the state provided for you. The distribution of incomes was what it was because the prices of these goods and services, and the taxes, were what they were. Ultimately, all these things (except the taxes—but believers in the social contract would not allow even that exception) were matters of voluntary exchange. Voluntary exchange is a positive-sum game in which there are no losers, no debt is left unsettled and which leaves no room for any other distribution that would make everybody better off. Is there anything left for socialism to complain about?
Here, the retreating defender of socialism is driven to the last resort. Exchange may well be voluntary, free of duress in any strict sense, and both parties may well be gainers. Admittedly, the positive theory stops short at this point. Nevertheless, all is not well and for the socialist, it seems imperative to inject a normative judgment into the argument. For even if both parties to a voluntary exchange gain, are their gains equal? Surely, under capitalism there is no mechanism, but under socialism there should and would be one, to restrain the freedom of contract and "correct" exchanges that are "unequal".
Careful thought is needed to make sense of this claim. In talking of the gains from exchange, are we talking of "utilities" or sums of money? If the former (as economists, at great cost to their discipline, often do), asking whether A's gain is greater than B's is as meaningful as to ask which is greater, birdsong or the colour yellow. Since the two utilities are quantitatively no more comparable than a tune and a colour, any comparison must be made in terms of the values someone entitled to judge such matters would attribute to the two gains. "Society" may or may not be entitled to make such judgments. Under socialism it would, under capitalism it would not be entitled to make them.
The matter is less straightforward if we try to look at gains in terms of money or goods. Suppose that in an economy using two factors of production, labour and capital, the distribution of income is the result of exchanges of one against the other, so that capital is able to use labour, or labour is able to use capital. "Equal" exchange does not mean that the share of wages in national income works out at 50 per cent and that of interest and profit also at 50 per cent. The reality is more like 80-20, and few socialists complain that the share of wages is unfairly high.
The socialist claim, instead, is that in most voluntary exchanges the poorer party concedes a greater part of the gain to the richer party than he would do if their "bargaining powers" were equal.
It is far from sure that one can define bargaining power, or compare the bargaining power of two parties independently of the bargains they in effect reach. Such comparisons are vacuous unless they can be related to some independent benchmark. For instance, if the going rate for a certain type of job in a certain region is $11 an hour and illegal immigrants are only paid $7 for the same job, it is not nonsense to ascribe the shortfall to their weaker bargaining power compared to that of their employers. The converse could be said of wage bargains at, say, $15 an hour, that may occur in the face of excess demand and labour shortage. In both cases, we are supposing the benchmark rate of $11 to represent "equal" exchange and equal bargaining powers—a supposition that is grounded in nothing except perhaps some idea of normalcy under competitive conditions.
There is, however, a set of "abnormal" conditions where the commonsense view would not hesitate to hold that the "bargaining power" of workers is uniformly and permanently weaker than that of the employers. This condition is that of the chronically high unemployment that has prevailed in "core" Europe, notably in Germany and France, with only brief interruptions for three decades. For while under full employment the worst that can happen to a worker if he holds out for better conditions or refuses to accept worse ones is that he has to look for another job, under chronic unemployment the worst that happens to him if he loses his job is arguably very bad indeed.
The irony of it all is that chronically high unemployment is the unmistakable product of the very policies, pursued ever more intensively over the last thirty years, that socialist governments of all hues have put in place to make income distribution more equal, protect the workers, achieve "social justice" and banish "unequal exchange". It is thanks to these policies that "globalisation", the export of jobs and the flight of enterprise, has come to present a genuine menace to the ordinary worker. Not for the first time, his avowed advocates are proving to be his worst enemies.