On the social construction of markets

In a recent discussion on an online board I took the position that an entry salary for a lawyer of 70k€ was unacceptable. I didn’t even specify in what sense I found this unacceptable: whether it was morally, economically (rationally) or in any other sense.

With this entry I hope to invite debate. I’d like to stress that my point of view is by no means fixed on these matters, and that this is bound to go right to the heart of what it means to live together as a community: in a state, a company or even on a planet. I do know that this is not apparent in public debate, and I will try to show that Economics as it is practiced today implies a value system – it is not neutral. I apologize for all error – and I’m a hobby philosopher.

I wrote: “What upsets me is that most people in our [western] societies by now [implicit: after years of free market liberalism pervading public discourse] believe that they actually deserve this money (in english we use different words for deserve and earn, in German I used its equivalent), in the sense that they have a right to this income because they create a corresponding (or equivalent) value”.

I further suggested that the state could introduce a rule defining the maximum allowable inequality in society – I was overly specific at the time, I proposed a 10 standard deviation maximum income difference without giving a justification. There is none, and why this is in my view not a problem will be explained below.

I did not question the freedom of the labour market today: obviously there are agents willing to pay these salaries for the service rendered. Assuming a free labour market (or more specific: a free market for legal services), this outcome (the payment of high salaries) is exactly the theoretical Pareto optimum.

“I only think that the free market is misallocating here, it is locked in an optimum that is on a societal level (i.e. adding all utilities) sub-optimal. There is no doubt that the outcome [of high salaries for legal services] is locally optimal for the lawyer and his client – the client possibly losing millions, the lawyer earning a high income – and whenever we take something away from any of them, we violate the Pareto rule.”

I brought up the example of Jugde Judy, earning more than a supreme court judge, and I mentioned that from my point of view the law firm is exploiting the lawyer, as would be the case in any capitalistic system.

There have been several criticisms to my suggestions, and I will try to answer them in turn. Some of them are serious, and should be debated and some are simple misunderstandings. I have to admit that I will disappoint anybody expecting a completely scientific argument: societal rules are not subject to natural laws, setups can be changed, and indeed do change with the ideas that prevail in a society. I argue that economic questions are quintessentially social questions, and that questions of redistribution and distribution of fortunes cannot be separated from a notion of what a ‘good life’ means. Hence the question about social rules and setups is not purely about efficiency, it is deeply connected to theorizing about justice. To understand where I intellectually come from at the moment and for deeper insights into these matters I would like to recommend “The nature of money” by G. Ingham, “Collapse” by J. Diamond, and (a bad but leading book in the field) “Small is beautiful” by E. Schumacher. Another valuable book is Dowd: “Capitalism and its economics” which unfortunately has a righteous and arrogant tone to it. I further strongly suggest to read up on literature in Econophysics, especially papers by authors such as Wright (2005) “The social architecture of capitalism” or papers by Victor Yakovenko. Michael Sandel from Harvard and John Rawls are very interesting for the debate on justice. For a libertarian view on matters, read Robert Nozick or a recent attack from Peter Sloterdijk.

Enough namedropping.

Last but not least I wish to stress that even though I frame my thoughts in notions and thought models we’re all used to, I’m trying to rethink matters from scratch. I’m not a supporter of any side in the whole capitalist vs communist debate, and not a supporter of any political party in Germany. Neither system is sustainable, neither makes us truly free. Maybe there is no such paradigm for society, maybe the goals are contradictory. I believe not, but until today I have not found a solution. But I refuse to accept the status quo as the last word on these matters.

Here we go:

1. my notion of productivity was questioned: economies today are service economies, and only because one does not ‘make screws’ it doesn’t mean someone isn’t productive
2. the high salaries become reasonable if calculated on an hourly basis
3. studying law involves high opportunity costs, rendering a high entry salary reasonable
4. lawyers deliver important contributions to society: they resolve conflict, help to increase profitability of enterprises by restructuring them and help to finance deals and investments
5. my example of 10 standard deviations does not do the trick anyway, it wouldn’t change anything in the case of the 70k€; further I had put forward no reason for this specific number. I was asked to provide a different allocation mechanism if I was really thinking the market couldn’t do the job.

On the notion of productivity and the contribution to society (1, 4)

On opportunity costs for jobs and hourly wages (2, 3)

On the failure of markets and allocation mechanisms (5)

A final remark on market mechanisms

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