Private Property and Social Justice: Complements or Substitutes?

Among scholars working in the classical liberal tradition, the extent to which social justice has been treated as a meaningful concept has varied. F.A. Hayek famously argued that a market system based on private property, “in which each is allowed to use his knowledge for his own purposes the concept of ‘social justice’ is necessarily empty and meaningless” (1976, p. 69). Moreover, “no system of rules of just individual conduct, and therefore no free action of the individuals, could produce any principle of distributive justice” (1976, p. 69). While not denying the importance of Hayek’s claim, Israel Kirzner has argued that “it seems to be that important additional insights must be introduced in order to fully appreciate the flaws in the standard treatments of social justice under capitalism” (Kirzner 1989 [2016], p. 12). Kirzner states that “the question of social justice under capitalism is seen as the question of distributive justice” (Kirzner 1989 [2016], p. 11). Stefanie Haeffele and Virgil Storr have recently argued that social justice “is a meaningful concept. To the extent that the socioeconomic system in a country favors some and not others, either because it systematically rewards some characteristics (e.g., hard work, inventiveness, intelligence, etc.) that are not equally distributed or it privileges some groups (e.g., based on economic power, political capital, demographic characteristics, etc.), it is appropriate to question the justness of the system and its results.” Consistent with Haeffele and Storr’s broader point, I adopt the definition used by Douglas Rasmussen, who argues that social justice “can be seen as nothing other than giving a man his due” (1974, p. 307). More importantly for my argument here, “the determination of what a man has due is a function of social, moral criterion—namely the concept of rights” (Rasmussen 1974, p. 307) enforced by a political or legal order.

My purpose here is neither to refute the reality nor the gravity of any social injustice befallen on any individual, or group of individuals. Rather, my point is to suggest that if we are to identify a proper solution to any problem of social injustice, then we must first clarify what is the source of such social injustice. Moreover, to the extent that individuals associate a free market as a source of social injustice, such a conclusion is fundamentally based on a misleading premise, namely that the right to private property is synonymous with privilege. However, the case of the free market, going back to Adam Smith, has always been predicated on the notion that private property is a social liability, not a private privilege.1 Therefore, to the extent that the terrible consequences of the Financial Crisis of 2008 or the BP Oil Spill of 2010—or any other historical example cited as exemplifying a matter of social injustice—were caused by government privilege, but mistakenly associated with free markets, not only creates a dangerous conflation between private property and privilege. More importantly, it also creates further aversion in reclaiming the institutional framework necessary for securing a society of free and responsible individuals. As Lord Acton has stated this point, “a people averse to the institution of private property is without the first element of freedom” (Dalberg-Acton 1907, p. 297).

The point here is not to suggest private property guarantees a social panacea to problems of social injustice, nor that markets are the perfect solution to remedying social injustice. If injustice occurs because a particular individual or group of individuals are faced with a consequence of another’s action that was not due to them, then the concept of a “perfect market” is an oxymoron, since such a world implies no social conflict, and therefore irrelevant to problems of social justice. Therefore, the distinction between a perfect market and an imperfect market is a false dichotomy.

Instead, it is crucial to begin with questions of social justice, and their relationship to the free market, with the notion that markets are in fact imperfect, but not in the sense of being “flawed” or “sub-optimal” compared to some ideal notion of perfection. Rather, by simply reframing our notion of the word “imperfect,” what follows is a radical reframing of the narrative often told regarding the relationship between the free market and social justice. Rather than saying that the free market is flawed, suboptimal, or non-ideal, another way to interpret the meaning of “imperfect” is an act or process that is not thoroughly done, or incomplete.2 Thus, the narrative often told about free markets, whether its proponents have regarded it as an efficient system of allocating resources, or whether its opponents regard it as a dysfunctional mechanism conducive to financial chaos, environmental decay, or exploitation, paint an incomplete picture of the issue at hand, namely that any economic outcome, whether it is regarded as socially just or unjust, must be first discovered. Just as the outcome of a game cannot be known without first playing the game and understanding the rules of the game, whether an economic outcome is regarded as socially just depends upon first discovering that outcome, and understanding what individuals are incentivized to discover and learn, given the set of rules governing a particular market in question. Thus, the relevant issue is not whether market processes are socially just or unjust compared to a particular ideal standard, but whether market processes incentivize individuals to learn what is socially just.

According to F.A. Hayek, liberty “not only means that the individual has both the opportunity and burden of choice; it also means that he must bear the consequences of his actions and will receive praise or blame for them. Liberty and responsibility are inseparable” (Hayek 1960, p. 71). Such a definition not only illustrates why the right to private property is not only the cornerstone of liberty. More importantly, it also alludes to the notion that fundamental nature of private property as a social relationship is not to physically assign goods and services to individuals, but to assign the consequences of action over goods and services, both negative and positive, in relation to others. The enforcement of private property rights imply that individuals are accountable and liable for their decisions when private property rights are well-defined.

The introduction and abrupt discontinuation of the Edsel model (1958-1960) by Ford Motor Company illustrates the point of private property in terms of a set of social relations. When Henry Ford II decided to produce its Edsel model, resources first had to be purchased and workers had to be paid before it accrued any revenue from selling any Edsels. In effect, by acquiring property rights over resources required to mass produce Edsels, Henry Ford II incurred a social liability to use those resources for prospective customers in a manner that would create more value to such customers than in alternative productive activities. If successful, Ford Motor Company would have accrued profits, communicating to the company that it created value for Edsel drivers. In reality, however, the significant losses incurred as result of producing Edsels implied that Ford was using the resources they purchased in a socially irresponsible manner, meaning they failed to utilize the resources purchased on the market in a manner that was responsive to the demand of its customers, as well as the potential customers of the alternative products those resources could have been used to create. However, such social irresponsibility did not imply a lack of social liability, since Ford learned quickly to discontinue the production of Edsels, given that consumers communicated this in the form of losses.

What does this all have to do with the relationship between private property and social justice? The critical lynchpin between private property and social justice is that private property establishes the conditions for social responsibility by creating liability over the benefits as well as the costs of one’s decision in relation to others. To the extent that private property and individual responsibility are reciprocal to one another, social justice emerges as a result of individuals having to bear the consequence of their actions. Therefore, private property establishes the preconditions of social justice, namely by facilitating the creation of the context-specific knowledge necessary to learn what is due to each individual. The concept of a privilege, however, whether it is social, legal, or political in nature, implies the physical assignment of a good or service independent of bearing the full responsibility, or consequences, of one’s choices over the use of a particular good or service. Thus, to the extent that private property has been associated with social injustice, this conclusion is premised on a conflation between private property and privilege. For example, Adam Smith was an adamant critic of the social injustices associated with colonialism, imperialism, and slavery. The source he attributed to such injustice was not private property, but the creation of privilege that precluded the perpetrators of social injustice the full social liability for their unjust actions, both economically in terms of the loss of potential economic wealth as well as morally in terms of violating the natural right of individuals to flourish and actualize their personal destinies (see Easterly 2021). Proponents of the free market, going back to Adam Smith, have consistently argued that a market economy, properly understood as an institutional framework of private property and freedom of contract under the rule of law, is a means of eliminating, not establishing privilege, and therefore a means of liberating individuals from social injustice. The importance of this subtle distinction between private property and privilege applies not only to economics, but also has important legal and philosophical implications pertaining to the social justice of the free market.

Violations of the rule of law unleash what I refer to as the unholy trinity of government intervention. That is, any violation of the rule of law implies that political or legal privileges cannot be granted without (1) creating a special advantage to one group of individuals, (2) creating a special disadvantage to another group of individuals while (3) simultaneously granting discretionary power to those political actors who are in the position to grant such privileges. Such a violation in the rule of law results in a transformation of private property into privilege, and a corresponding transformation of free-market competition into crony-capitalist competition. Such a metamorphosis, in turn, degenerates the market into a competitive race for privileges that shields firms from liability over the full costs of their decision-making and subsidizes irresponsible behavior. The conflation between private property and privilege, and the corresponding conflation between free-market competition and crony-capitalist competition, has led to the false conclusion that private property is the source of social injustices, whether they be associated with financial chaos, environmental degradation, systemic discrimination, or an unfair distribution of income through exploitation. The reality is quite the opposite.

An example used to illustrate the deleterious environmental consequences of the free market was the 2010 BP Oil Spill in the Gulf of Mexico (also known as the Deepwater Horizon oil spill). Again, to the extent that such offshore drilling resulted in a social injustice associated with environmental degradation, then diagnosing the problem as one of “deregulation” is analogous to diagnosing a flu by treating the sneezes that follow from such illness. If “deregulation” was the culprit, then this was because BP operated in a legal environment where the profits of oil drilling were privatized, but the expected social liability of an oil spill was socialized. However, the privatization of profits and socialization of costs is not the definition of private property, but characteristic of a social injustice due to special privilege. Regulatory discretion by policy officials transformed a system of private property into a system of privilege through the Oil Pollution Act of 1990, which capped the liability over damage claims from third parties to $75 million, an insignificant amount compared to the billions of dollars in liable damages to third parties resulting from the BP Oil Spill. Capping liability created a situation that capped the social responsibility of oil companies, setting the expectation that they could engage in deep-water drilling without having to pay the full consequences of any subsequent environmental damages. Indeed, to the extent that the environmental degradation is regarded as a social injustice, it is because taxpayers, not oil companies, were expected to foot the bill of any subsequent liabilities. However, the source of such social irresponsibility, and the resulting social injustice of environmental degradation, can be traced to the granting of privilege, not the enforcement of private property. Had private property rights been enforced through the threat of costly lawsuits, the social expectation would have been set that BP, or any oil company, would have been liable for environmental damages. Instead, the Oil Pollution Act had the effect of eliminating a free market, specifically by removing the social liability that private property rights would have concentrated on BP, making it far less likely for this disaster to have happened. The point here is not to suggest that private property rights would have guaranteed that such an oil spill would not have happened. However, to attribute the BP Oil Spill to a free market, then such a criticism can only be made in the context in which free markets exist, specifically where private property rights are well-defined and well-enforced. The point here is not to argue that the relevance of private property is to guarantee social justice before market activity takes place. Such a comparison of markets to a context populated by perfect human beings with perfect foreknowledge misses the point that what is socially just requires context-specific knowledge that is discovered only in a context where imperfect individuals are liable for their actions. Thus, social justice is contingent on the ability of individuals to learn and correct for socially unjust behavior by being fully liable for any socially irresponsible behavior and discovering what is due to each individual.

Even if we are to concede that the right to private property establishes the institutional conditions that hold individuals accountable for their actions, one might still object that a defense of private property does not necessarily imply a justification of the distribution of income that unfolds through market transactions. Even if firms are held fully accountable to their actions under private property, their source of profits might be regarded as, at best, resulting from “unearned” speculation or, at worst, outright exploitation, either of their workers or their customers. However, the enforcement of private property implies that the only way in which firms can compete for profit is by creating social value where it had not previously existed, not exploiting existing wealth from other individuals. For example, the forerunner of what is known today as Bank of America was originally founded in San Francisco as the Bank of Italy by an Italian American named Amadeo Giannini. An alert and creative entrepreneur, Giannini used his particular knowledge of the Italian immigrant community in San Francisco to provide financial services. Though the profit motive in the financial market did not guarantee that Italian Americans would face the social injustice of ethnic discrimination, competition in the banking system created high-powered incentives for Giannini to learn from the failure of other bankers and realize the potential profits of serving Italian Americans in San Francisco foregone by his competitors. Giannini was able to realize such foregone profits by providing financial services to Italian Americans where they had been otherwise neglected. Thus, a system of private property rights set in motion a process of error-correction, discovery, and learning, from which Gianni was able to amass his wealth, but in a manner that created social justice where it had not previously existed, specifically by discovering an opportunity to serve a disadvantaged group of immigrants and giving them the dignity to which they were due.

Free markets are indeed imperfect, but the whole point for their existence is to discover how we are able to serve our fellow human beings, most of whom we do not even know, in a peaceful and productive manner, and rendering each of them what they are due, both economically and morally. Thus, the “imperfection” of the market process is to discover how social justice can become complete. Rearticulating the case for a society of free and responsible individuals requires that we first understand that its institutional cornerstone, namely private property, is not synonymous with privilege. Moreover, clarifying this conflation illustrates that the source of social injustice has been the granting of privilege, rather than the enforcement of private property, which has established the conditions for realizing social justice.

References

Dalberg-Acton, John Emerich Edward. (1907). The History of Freedom and Other Essays. London: Macmillan.
Easterly, William. (2021). “Progress by Consent: Adam Smith as Development Economist.” The Review of Austrian Economics, vol. 34, no. 2, pp. 179-201.

Haeffele, Stefanie, and Virgil Henry Storr. (2019). “Is Social Justice a Mirage?” The Independent Review: A Journal of Political Economy, vol. 24, no. 1, pp. 145-154.
Hayek, F.A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press.
Hayek, F.A. (1976). Law, Legislation and Liberty, Vol. 2: The Mirage of Social Justice. Chicago: University of Chicago Press.

Kirzner, Israel M. (1989 [2016]). The Collected Works of Israel M. Kirzner: Discovery, Capitalism and Distributive Justice (edited by Peter J. Boettke and Frédéric Sautet). Indianapolis: Liberty Fund.
Rasmussen, Douglas B. (1974). “A Critique of Rawls’ Theory of Justice.” The Personalist, vol. 55, no. 3, pp. 303-318.

Footnotes

[1] See my May 13, 2021 EconLog post, “The Right to Private Property Implies a Social Liability Not a Private Privilege,” for more on this.

[2] See my May 18, 2020 EconLog post, “Are Markets Imperfect? Of course, but that’s the point”, for more on this.