Desert, Entrepreneurship, and Crony Capitalism.

Author:Shapiro, Daniel
  1. Introduction

    I provide three main arguments in this paper. First, in a free-market system, profits gained and losses suffered by entrepreneurs are, in general, deserved. However, second, the degree of profits gained and losses suffered is not in proportion to the degree to which entrepreneurs deserve them. This discrepancy appears to create a problem with arguing that entrepreneurial profits and losses are deserved in a free market. Third, a free-market economy is nevertheless superior to one of its main relevant alternatives: crony capitalism.

    Crony capitalism is a system wherein many entrepreneurs make profits to the extent that they receive protection and privilege from a system that favors politically well-connected firms and makes it difficult for outsiders to become entrepreneurs and compete with insiders. Free markets exist to the extent that these privileges are generally absent and to the extent that entrepreneurs generally compete with one another to satisfy consumer needs and wants. It is this satisfaction, I argue, that is the basis for deserved profits. The superiority of free markets to crony capitalism resides in the connection between desert and profits, which is closer in free markets than in crony capitalism, and in how free markets make it easier for outsiders to become entrepreneurs and thus become deserving of profits. My arguments build upon N. Scott Arnold's important article, "Why Profits Are Deserved" (1987).

  2. Arnold's Argument

    Arnold's paper is about the moral status of entrepreneurial profits and losses, so I begin by explaining what these are, by way of contrast with the income of capitalists. Entrepreneurship essentially involves organizing production: "deciding what to produce, when to produce it, and how much to produce at what price" (Arnold 1987, p. 388). Entrepreneurial profit occurs by discovering ways to rearrange the structure of production so that it more successfully meets consumers' previously unrecognized wants and needs; it is most visible in great innovators who envision new products and services and bring together the needed factors of production. (1) A capitalist's income, on the other hand, is a return on investment in capital goods. While entrepreneurs are often capitalists, they need not be. Their functional roles are different. Even if a market system could exist without a capitalist class, (2) entrepreneurs would still exist since markets change continuously, creating an ongoing need to uncover opportunities for reorganizing production in more profitable ways.

    Entrepreneurship is central to markets, but why are entrepreneurial profits and losses deserved in a free market? The place of desert in a theory of justice is controversial, but it is plausible that if I deserve something, there is a morally significant reason why I should get it. (3) It's a prima facie reason, because there are other elements of justice than desert that could override desert considerations. Desert is typically analyzed as a three-part predicate: A deserves X in virtue of Y. Y is the desert base, or the "basal reason" for desert. (4) X is the object of desert, or what is deserved. Typical basal reasons for desert are conscientious effort, admirable character traits, and achievements. (5)

    Desert concerns what is fitting, what is appropriate, what should occur. Desert claims are not claims about rights or entitlements. One reason for this is that entitlement need not be a normative notion, if, for example, the issue is purely a matter of a legal or conventional right. The more important reason is that one can have a right to something one doesn't deserve, and one can deserve something to which one has no right. The fastest runner in a footrace deserves to win, but if she unluckily trips and comes in second, she isn't entitled to win, and an official who rules otherwise is robbing a slower runner who crossed the finish line first of a victory to which the slower runner was entitled. The slower runner didn't deserve to win; he just got lucky. However, though desert and entitlement are different moral notions, I will note shortly that considerations of desert may be used to criticize entitlement rules.

    Arnold offers an institutional theory of desert: the basal reasons that ground desert claims are determined by the goal or point of an institution. (By contrast, in a noninstitutional or preinstitutional account of desert, the basal reasons that warrant desert claims stand outside of the institution and can be used to criticize it. (6)) For example, in the World Series, the basal reason--being the best team--warrants a desert claim because the essential goal of the World Series is to discover and recognize the best team in baseball. The institution's goals also determine what is deserved. In a contest, one of the things deserved is victory. Some of the entitlement rules--Arnold calls them achievement rules--specify what is needed to claim victory relative to the institution's essential goal. As already noted, entitlement rules can't guarantee that the entitled person deserves the achievement, given the role of luck. However, the rules are designed to bring desert and entitlement together. (7) If the point of a contest is to determine who has the greatest skill, the achievement rules are designed to reveal that. More importantly, the entitlement rules can be criticized as defective (and can be changed) if the rules do not have a significant relationship with desert.

    The same kind of criticism can be made with other things deserved, such as entitlement rules setting out rewards and punishments. If part of the goal of an institution is to positively or negatively recognize certain characteristics, the reward rules are defective and should be changed if they conflict with that goal.

    Rewards or punishments can be out of sync with desert if they fail what Arnold calls "the proportionality principle," that there should be a fit between the basal reasons and the things deserved. Consider grading, whose purpose is to reflect students' mastery of knowledge and skills. If a student who demonstrates excellent mastery of the subject gets a C and a student who has mediocre mastery gets an A, then the proportionality principle is violated and these students are not getting what they deserve.

    Now we can explain Arnold's argument that entrepreneurial profits are deserved. The market's essential goal is to meet and anticipate consumer needs and...

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