post by Paul Kelleher
The short version: Greg Mankiw believes people should get what they deserve, and that what people deserve is based on the economic value of what they contribute to social production. Mankiw attributes this view to libertarian philosopher Robert Nozick. But Nozick explicitly rejects the view, noting a problem with it that Mankiw never addresses.
Students of economics learn that, under a certain set of assumptions, a competitive market economy leads to an efficient allocation of resources. However, since economic efficiency may not the only thing we care about, many economists are careful to note that there may be equity-based reasons to condemn otherwise efficient arrangements. Harvard economist Greg Mankiw thinks this is a mistake. In "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber", Mankiw argues that when competitive markets promote efficiency, they do so by rewarding factors of production (including labor) in proportion to their productive contribution. Mankiw thus extols "the inherent equity of the competitive market": the market ensures that factors of production are paid what they deserve.
Mankiw claims that this "Just Deserts Theory" can be found in the work of the libertarian philosopher Robert Nozick (among others). But in fact, Nozick believed the area of economics that Mankiw draws on--Marginal Productivity Theory (MPT)--cannot reliably be used to assess individuals' productive contributions. Nozick did think that MPT could explain why individuals get what they get in market distribution, but this was not because Nozick thought the market does or should reward people in accordance with their contribution. Rather, Nozick's view is that people are entitled only to what others are willing to give them (either as gifts or in economic exchange). MPT helps us understand who will be willing to give what to whom, but that is it. So Nozick would say Mankiw is wrong on two counts: (1) people are not in fact entitled to their "Just Deserts"; (2) even if people were entitled to their just deserts, MPT cannot be used to identify what it is people deserve in Mankiw's sense.
Let me explain Nozick's argument for this second point. Nozick agrees with Mankiw that (at least under a set of "idealized circumstances") MPT can be used to predict the wage that rational firms will be willing to pay to a worker for performing a specific job. To illustrate, consider the following graphic*:
For economic reasons that Mankiw and Nozick agree upon, a rational firm will pay all laborers a wage equal to the value of the output generated by adding the last laborer, depicted here as laborer #10. To use some economic jargon, firms will pay a wage equal to the marginal value product of labor. Where Nozick and Mankiw disagree is on how this economic jargon should be interpreted. According to Mankiw, when wages are set in this way, it ensures that "each person's income reflects the value of what he contributed to society's production of goods and services...[E]ach person receives his just deserts" (emphasis added). Nozick claims that this is not an accurate characterization. Here is why: all we know from the graphic is that after adding the 10th laborer, the total product went up by 6 bushels of corn; but we don't know exactly how that outcome arose. For example, it might have been achieved by the 10th laborer simply producing 6 extra bushels all by himself. Or, those 6 extra bushels might have resulted from the 10th laborer producing 16 bushels while some other laborers simultaneously reduced their collective output by 10 (perhaps because they reduced their effort when the 10th man was added). In this case, the marginal value product of labor will still be defined by MTP as 6 bushels, and all the workers will still be paid a wage equal to the value of 6 bushels. But it will nonetheless be false to say (as Mankiw does) that "each person's income reflects the value of what he contributed." While it is true that adding the 10th laborer resulted in a net increase of 6 bushels, we cannot deduce any worker's actual contribution from this fact.
Nozick summarizes this point in a footnote to p. 187 of Anarchy, State, and Utopia:
Thus marginal productivity theory is not best thought of as a theory of actual produced product...but rather as a theory of the difference (subjunctively defined) made by the presence of a factor.
Paul Samuelson makes the same point here:
In our example, output increases from ten bushels to eighteen bushels when one adds the second man not because the second man only adds eight, but rather because his presence on the field makes the situation such that the total output of both men is eighteen...[W]hat we wish to note is that by adding the second man, output was increased by eight. Thus, the marginal product of the second man is eight. But his actual contribution may be very different than this.
If Mankiw is right that each person's income should reflect the value of what s/he contributed, it does not seem that marginal productivity theory can tells us what we need to know. Importantly, this worry arises even if we grant the many unrealistic assumptions MPT seems to require for its validity. Of course there may be even more problems with using MPT as part of a theory of just income distribution. Amartya Sen discusses several of these in a very nice 1985 paper called "The Moral Standing of the Market" (which Mankiw doesn't cite).
*This figure comes from p. 28 of David Schweickart's After Capitalism.