Why the economic whole is more than the sum of its parts
Contemporary Western societies are often criticized for being excessively individualistic. One interpretation of this claim is that their citizens mainly care about their own well-being and not so much about that of others or about communal bonds. Another, complementary interpretation that I develop here argues that our ideas in economics and about justice overestimate the contributions individuals make to economic production. Recognising the extent to which our productivity and thus our standard of living depends on the cooperation of others has a humbling effect on what income we can legitimately think we are entitled to.
Consider someone like Steve Jobs, the founder of Apple, or Warren Buffett, who runs a large investment firm. Here is the conventional wisdom on why the income of these individuals and others like them has so many zeros at the end: Without the genius of Jobs or Buffett, their companies would be significantly less successful. The defenders of the one percent, such as Gregory Mankiw, argue that the income of the Jobses and Buffetts of the world – of anyone, really – reflects their economic contribution.
Here is an alternative analysis of the situation: Granting that Jobs and Buffett make unique contributions, they could not make this contribution without the cooperation of others. I do not merely have in mind their co-workers at Apple and at Berkshire Hathaway, but all the other members of society who bake bread, construct houses, build roads, repair bicycles, work in hospitals, educate and train people, and so on. If Jobs or Buffett, or any of us for that matter, had to do all those tasks themselves, things such as the i-phone would be distant dreams. We would all be foragers at the brink of starvation.
The phenomenon at work here, which underpins the productivity and standard of living of modern societies, is that of increasing returns from specialisation (IRfS).It is because we can specialise – for instance on developing a computer in a Californian garage as legend has it – that our productivity soars. Of course, this is not a new idea. It lies at the heart of the work of Adam Smith, for instance, and his demonstration of how the division of labour underpins the wealth of nations. In a nutshell, IRfS explains why the economic whole is more than the sum of its parts. IRfS generate a cooperative surplus.
So how come the concept of IRfS seems to receive little air time today in both economic theories that explain the income distribution and in theories or justice that submit this distribution to critical scrutiny?
In economics, the shift from classical economics represented by authors such as Smith to the assumptions of neoclassical economics had the effect of sidelining IRfS. Neoclassical economics holds that individuals are remunerated in line with their marginal productivity – the value of what their contribution adds to the productive process. This analysis is at odds with IRfS and, while marginal productivity theory has been widely criticised, is still influential. Other economic concepts, such as total factor productivity – in short, the idea that labour and capital are not the only factors of production – are compatible with IRfS, but their implications for the political economy of income distribution are rarely theorised.
Some contemporary theories of justice recognise the importance of IRfS. Feminist theories, for instance, emphasize that any paid work relies on the invisible and unpaid care and reproductive work done by women. John Rawls’ metaphor of the orchestra illustrates how the collaboration within a social group produces a result that exceeds the mere sum of the individuals’ efforts. However, note two things. First, these reflections tend to neglect the role of capital in the social division of labour. To justify the income of someone like Buffett, our theory needs to include capital. Second, even theories such as Rawls’s that acknowledge the existence of a cooperative surplus arguably do not explicitly address the question of who is entitled to this surplus. Rawls’ difference principle does of course impact the distribution of the surplus, but the dynamics of how the surplus comes about play no role in its justification.
I argue that the income distribution should reflect the interdependence between individuals highlighted by IRfS. The radical version of this argument calls for an equal distribution of the cooperative surplus which, while difficult to measure, is plausibly enormous. A more moderate version requires that the cooperative surplus should at least be distributed in a less unequal manner compared to the status quo. For both, the next challenge consists in developing ways to implement the normative ideal.
Either variant of the argument suggests that the idea that Jobs’ or Buffett’s income reflects their economic contribution is simply absurd. Such a thought can only take hold in a social environment marked by an attribution fallacy, namely that of overestimating the contribution of individuals as opposed to the benefits provided by the way in which these individuals cooperate and complement one another.
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This piece is informed by a recently published article. For more details, see Peter Dietsch, “Just returns from capitalist production”, Ethical Theory and Moral Practice online first https://doi.org/10.1007/s10677-023-10407-y.
