An Exchange Theory of Social Justice: A Gains from Trade under Uncertainty" Perspective.

• Author: Gill, Anthony
• Position: Viewpoint essay

On the Island of Despair, Robinson Crusoe has little practical concern for social justice until Friday comes along. Once Friday arrives, both he and Crusoe face two important decisions. First and foremost, should they interact with one another? (1) Second, if they agree to interact, how will the benefits (and costs) of those interactions be distributed between them? The second question depends on the first: if either party freely chooses not to interact, no exchange occurs, and there are no gains from trade to be divided. If the first question is answered in the affirmative, then the second question comes into play, and issues of social justice arise. What is the most socially just distribution of the surplus that accrues from trade? Should the gains from trade be distributed equally between the two, or shall one party receive more of the net benefits than the other? If one party does receive more of the benefits, will this unequal condition persist over time, or might the gains eventually equalize? And if die net benefits from interaction do equalize, how is this accomplished--via voluntary action or coercion? Although the Crusoe-Friday scenario is hypothetically simple, answers to these questions have implications for larger societies and shape the way we coordinate anonymous (and quasi-anonymous) trade, raising the question what the most socially just means of coordination is.

This essay addresses these questions and argues that social justice should not be conceived in terms of distributional outcomes due to the uncertain and changing nature of individual preferences. Such uncertainty clouds the process of negotiating gains from trade between individuals, both in the short term and the long term. Concepts of social justice that rely on precise distributional outcomes of resources, in particular material wealth, increase the likelihood of potentially unjust misallocations because of the innate difficulty in gauging the diverse and changing preferences of individuals. Radier, I argue that social justice within a world of ambiguity and change should rest upon providing the greatest number of opportunities for individuals to exchange (or refuse to exchange). This conceptualization of social justice, although rooted in distributional concerns, rests upon a procedural definition of interaction as opposed to an outcome-based notion. Although not a comprehensive vision of what social justice entails, this perspective represents an important part of the discussion. Due to space limitations, this essay does not examine directly broader conceptualizations of social justice that encompass obligations and duties, (2) though the framework presented does suggest possible avenues for future exploration in those areas.

A Restrictive Notion of Social Justice

Defining social justice comprehensively is no easy task. Numerous definitions exist, ranging from those emphasizing equality of opportunity to others favoring equality of outcome. The point of this essay is to demonstrate that a distributive concept of social justice resting upon equality of outcome (or "fairness") is difficult, if not impossible, under situations of diverse preferences and uncertainty. Although equity is a noble goal, efforts by a third-party government to reduce inequity in distribution may lead to inefficient and less-equitable outcomes than those that emerge from voluntary trade over time. I argue that social justice instead rests upon the ability to search and discover fair outcomes in a world characterized by uncertainty and constant change (with respect to both preferences and prices). Although an optimal degree of distributional fairness might not obtain under this process-driven definition of social justice, opportunities to search and discover the terms of trade are better able to adjust to changing preferences and prices and will tend to converge toward distributional justice even if never reaching it.

To make this argument, I begin by conceding that the notion of social justice has a distributional component that relies on two criteria. First, social justice requires a Pareto efficient set of interactions such that no person is made worse off in a bilateral interaction. Admittedly, this restrictive assumption sets aside issues of negative externalities imposed on third parties. It also ignores matters of public goods and public choice (i.e., voting). If a theory of social justice cannot apply in situations of bilateral exchange, it will have difficulty with multilateral (cooperative) exchange. The goal of distributional justice in a large society of diverse preferences is quixotic in that any type of public choice (including those designed to provide pure public goods) will result in some individuals being made worse off. The second criterion is that distributional justice increases as the gains from trade within a bilateral interaction tend toward equitable distribution. The distribution need not be perfectiy equal, but our chosen institutional structure--be it market or government--should push the distribution in that direction. This criterion sits with the commonsense notion of "share and share alike" taught to children and emphasized in distributive versions of social justice (e.g., Rawls 1971). Granted, the "share and share alike" principle is not a market mechanism but is taught to children in a top-down hierarchical structure known as the family (or school system). However, individuals do take this inculcated norm into the marketplace at some point and to some extent.

This restricted definition subsumes the notion that individuals have equal rights in terms of free choice and property, a criterion that is impossible to satisfy in reality given differences in individuals' capabilities and existing sociopolitical institutional structures. It is an ideal, but one that serves to advance the discussion. The latter realization leads to a pessimistic conclusion that pure and lasting social justice can never be reached, but our quixotic search for social justice can at least be tempered by the goal of continually searching for better solutions among potential horrible ones.

Justice with Known Reserve Prices

Let me begin my examination of social justice from an exchange perspective by returning to Crusoe and Friday, remembering that they have two sequential choices to make: (1) whether to engage in exchange of goods, services, or time; (3) and (2) upon agreeing to exchange, how to share the costs and benefits of their transactions. Examining the gains from trade provides us leverage on how these choices are made and to what extent they are just. Gains from trade (i.e., consumer and producer surplus) can accrue if two parties have overlapping reserve prices for buying and selling. A reserve buy price is the highest price someone will pay to receive some good or service. Alternatively, a reserve sell price is the lowest price an individual will accept to part ways with his produce. Reserve prices reflect an individual's willingness to transact with another person and help answer the first choice facing Crusoe and Friday. Reserve sell prices set higher than a buyer's reserve buy price implies the two individuals will choose not to interact. If I refuse to pay more than $500,000 for a house, I will not enlist an agent selling million-dollar mansions. Forthwith, a person with an infinitely high reserve price is destined to become a hermit, a Crusoe who turns his...