Chapter VI: Justice and the Political Economy

The notion that justice should be a part of the science of economics is one that many economists resist. They find it problematic to include a purely moral consideration in a “scientific” discussion such as economics. They are certainly right that economics is a science, an organized body of true knowledge; they are wrong to exclude justice as part of that science, for reasons already covered in Chapter III. Further, in introducing the question of justice we are not innovating. Justice was part and parcel of economic science from Aristotle through Aquinas in the middle ages and into the Scholastic “School of Salamanca” in the 17th century. Indeed, economics was no more than a colony of ethics, and hardly any philosopher or theologian worth his stipend was without at least some commentary on economics. However, in the 16th century, as new forms of ownership and production began to take hold, a more individualistic approach to economics gradually developed. The ethical framework of medieval economics came under attack, but there was little to replace it. Or rather, what sought to replace it was a new concept which preached quite openly that “greed is good.” This idea was most famously expressed in Bernard de Mandeville’s The Fable of the Bees: or Private Vices, Publick Benefits (1724) “in which he put forth the seemingly strange paradox that the vices most despised in the older moral code…would result in the greatest public good.”1 Since Mandeville’s day, the entire economic question has centered on the miraculous transformation of “the water of ‘self-interest’ into a wine of public interest.”2

However, this miracle really isn't possible; vice—even profitable vice—cannot be made virtuous and hence cannot be the foundation of either public order or sound economics. Indeed, even the most “positivist” economists still retain a residual notion of justice. To be more precise, they marginalize justice and take one kind of justice (justice in exchange) to stand for—and displace—the other kind of justice, distributive justice. In other words, they use just half of justice and so come up with half a theory. But if political economy is to be a science, it must root itself in the whole of justice. And if we are to have a scientific economics, we must start with an understanding of the fullness of justice.

Aristotle's Justice

The reflection on the relationship of justice to economics begins with Aristotle. For Aristotle, justice is not just a part of virtue, but “virtue entire, nor is the contrary injustice a part of vice, but vice entire.”3 Justice underlies all the virtues and governs all social relations:

And therefore justice is often thought to be the greatest of virtues, and “neither evening nor morning star” is so wonderful; and proverbially “in justice is every virtue comprehended.” And it is complete virtue in its fullest sense, because it is the actual exercise of complete virtue. It is complete because he who possesses it can exercise his virtue not only in himself, but towards his neighbor also.4

In is within this relationship of man to man, that is, within justice, that Aristotle locates economics. He presents a sophisticated analysis that includes a demand function, a distinction between use and exchange values, the function of money as the medium between value and demand (or “need”) and usury, among other things. Aristotle begins his reflection with the family, for “[t]he family is the association established by nature for the supply of men’s everyday wants.”5 It is the family, and not the individual, that is the starting point (contrary to modern economics) because only the family is self-sufficient; an individual in isolation can neither reproduce nor provide for himself.6 Man, for Aristotle, is a social being always using language and reason and always embedded in a cultural milieu, and that milieu is governed by justice, understood in two senses: distributive and corrective justice.

Distributive justice deals with how society distributes its “common goods.” Aristotle defines this as “things that fall to be divided among those who have a share in the constitution.”7 This refers to the common goods of a state, a partnership, or some cooperative enterprise. For Aristotle, these things should be divided by “merit” based on contributions, but what constitutes this merit will be a matter that is determined culturally, “for democrats identify it with the status of freeman, supporters of oligarchy with wealth (or with noble birth), and supporters of aristocracy with excellence.”8 This is to say that different societies value individual contributions differently. Some reward power more than ability, and some the reverse. Every society places different values on different kinds of abilities. This means that there is no “value” apart from culture; the measure of individual contributions to the creation of wealth will never be a mathematical formula, but a cultural judgment.

Corrective justice,9 on the other hand, deals with “justice in exchange”; that is with transactions between individual men. In this case, justice consists in exchanging equal values, in “having an equal amount before and after the transaction.”10 The problem is how to determine what values are equal when dealing with dissimilar products, which is nearly always the case. To use Aristotle’s example, how many pairs of shoes are equal to one house? The only way to know this is by “need,” which many economists understand as the demand function mediated by money. Thus the demand for houses and shoes can be compared by looking at their prices and the two can be equated in terms of money. Money, however, is a social convention: “this is why it has the name money (nomisma)—because it exists not by nature but by law (nomos).”11 Thus the requirement for equality in exchange comes from the natural law, but the method of implementing it is legal or conventional.

Distributive justice, then, is a distribution of the products of a group distributed to the members of the group, while corrective justice deals with exchanges between individuals. Distributive justice will be proportional to one’s contribution to the group, and hence there can be unequal distributions based on unequal contributions. Corrective justice, on the other hand, will always involve equal amounts, like for like. We can note here that the two species of justice will lend themselves to different types of calculations. Corrective justice deals with the equality of thing and thing, mediated by a third thing (money). Thus, it forms a kind of three-body problem and will be subject, at least in principle, to the kinds of complex calculations used in multi-body problems. Distributive justice, on the other hand, involves a judgment of relative merit. This judgment cannot be reduced to a calculation.

Note here that distributive justice refers mainly to the production process, while corrective justice refers mainly to exchanges between individuals or firms. Thus a complete view of justice involves both distributive and corrective aspects, just as a complete view of any economy involves both the production of goods and their exchange. In Aristotle's view of economic systems, the cobbler or the carpenter each gets a proportionate share of the shoes or furniture that his firm produces, a share based on the contribution that he makes. But since no one needs just shoes or furniture, the cobbler and the carpenter exchange these things with each other to correct the imbalance. Of course, cobblers and carpenters, and most other workers, are paid in money rather than goods, but this does not change the underlying theory.

This difference in the types of judgments used in calculating distributive and corrective justice goes a long way towards explaining why neoclassical economics has avoided the subject of distributive justice. The mathematical bias of neoclassicism makes distributive justice problematic and forces unwanted social and cultural elements into the “calculations,” elements that cannot, in fact, be mathematically calculated. But since distributive justice deals with production, how can neoclassical economics eliminate distributive justice without also depriving itself of a theory of production? The neoclassical economists get around this by modeling the production process as a series of exchanges, originating in some exchange with nature on the farm, the fishing fleet, or in the mines, and culminating in the exchange with the final consumer of the product. Along the way, labor and capital are exchanged as the product is improved and refined. The problem with this is that mere exchange does not improve any product. To understand this objection, we will have to take a closer look at the processes of exchange and production.

The Exchange Process

Aristotle asserts that corrective justice consists in an arithmetic equality, that is, in “having an equal amount before and after the transaction.” This is no more than the common-sense notion of getting a dollar's worth for every dollar spent, of getting your money's worth. But this immediately confronts us with a problem. For if only equal values are exchanged (barring fraud), what is the point or profit in exchange? The short answer is that there is none; exchange merely corrects imbalances in what we own, exchanging what we don't need for what we do. The long answer is that exchange always involves a difference in two values that each commodity has: its use-value and its exchange-value. The exchange-value is simply the price we have to pay for something; the use-value is our perception of the item's value to us. Normally, we only trade when we perceive that the use-value of an item is higher than its exchange-value for the things we buy, and when the use-value is lower than the exchange-value for the things we sell.

As an example, suppose I am a farmer with $100,000 worth of wheat in my barn, and you are a baker with $100,000 in cash but no wheat. If you had the wheat, you could bake it into bread worth $125,000 plus all your other costs. Hence, the use-value of the wheat is $125,000 to you. To me, however, the use-value of the wheat is nil; I can't eat that much wheat and it costs me to keep it in storage. Therefore, my use-value is lower than the exchange-value, and I am more than willing to sell it. For your part, the use-value is higher than the exchange-value, and you are more than willing to buy it. Hence the trade takes place. Note I can only charge the exchange-value, not the use-value. If, knowing the use-value to the baker, I try to charge you the use-value, you will not buy it, because there is no excess use-value, and you will give me precise instructions on what I can do with my wheat. Even if I happen to have a monopoly on all the wheat in this area (perhaps because a friendly congressman has arranged for me to have an exclusive license) I still would not be able to charge you the full use-value. I may be able to claim a larger share of the use-value, charging you, perhaps, $110,000 or $115,000. But I will still have to leave some gap in order to induce you to make the trade.

The gap between the use-value and the exchange-value of an item is the precise measure of the wealth created by that item. For example, the computer creates such tremendous wealth because its costs are so low relative to its uses. Even a modestly-priced computer can give tremendous use-values in terms of business, convenience, and entertainment. Let's take the case of an entrepreneur who is able to combine a modestly priced computer (say, $1,000) and his own labor to run a business that brings in $50,000 plus all other expenses. In this case, the gap is $49,000, which is a large return on a small investment. But suppose the computer cost not $1,000, but $10,000. In this case, the return would only be $40,000, still a good return, but fewer people would be able to use the computer to create new wealth. As the exchange price rises, the exchange/use-value gap is narrowed, less wealth is created, and fewer people are able to take advantage of what use-values remain.

The Production Process

Note that the exchange does not create this wealth; that happens in the production process. The exchange process merely gives us a measure of the wealth created. Wealth is only created when we change the form or the location of some item. We change a tree into a chair, or relocate carrots from the farm to the grocery store. Each of these increases the use-value of the tree or the carrot, because it is easier to sit in chairs than in trees (even if they can be got to grow in our living room) and easier to get the carrot when it is in the store than when it is on the farm. In both cases, it is the application of human labor (whether physical or mental) that creates the new value. And this is always the case. Values are created only from human labor applied to the gifts of nature. There is nothing else.

Now, the entrepreneur is raising his hand at this point to point to two other factors: capital and land. But capital also regresses to labor and nature. The only difference between an item of “capital” and a “consumer” product is that the latter is consumed immediately while the former is consumed in the production of new goods. But the process that forms them both is the same. Land is a somewhat different case. It is also made productive only by human labor, and hence resembles capital in this aspect. However land, unlike labor and capital, is not consumed in the process of production, nor can it be “manufactured.” If I build a factory on a plot of land, it might have a thirty- or forty-year useful life. At the end of that time, the factory is torn down, but the land remains, as good as new and ready for the next use. The labor and the capital that made the factory are gone, but the land remains. This has some implications for political economy which will be addressed in later chapters. For now, the point is that the production process reduces to nature and labor. Further, it cannot be modeled as a series of exchanges, since exchange adds nothing to a item, but merely measures what has been added. Therefore, an economics which attempts to model production as exchange will lack a real production function. Economists may claim to have one, which they do, and they will display complex mathematical formulations, but insofar as these formulations describe an exchange process, they cannot describe the production process.

Justice and Economic Efficiency

If wealth is the gap between use-values and exchange-values, then it follows that more wealth is created when exchange-values are kept as low as possible. The lowest possible value for any commodity, over any appreciable length of time, is its cost of production. The cost of production reduces to labor costs, including the cost of the “stored-up” labor known as capital. Therefore, economic efficiency consists in driving price to production costs. Further, we must note here that “costs” include not just the private costs that a firm incurs, but also the externalized costs, such as the pollution that a particular production process causes.

This definition of economic efficiency immediately presents us with a question: If efficiency consists in driving prices to costs, and if all costs are ultimately labor costs, does it not follow that economic efficiency consists in driving labor costs to their lowest possible level, that is, subsistence? Or to take a practical case, when we outsource the production of shirts or shoes from a high-cost location, such as North Carolina, to a low-cost location, such as Bangladesh, are we not adding to the efficiency of the economy? The answer is that this is the wrong question. The right question is not about “high-cost” or “low-cost,” but about “right-cost,” by which we mean the cost that is in accord with distributive justice. That is, in order for the economy to achieve equilibrium, both forms of labor, capital and actual labor, must get their proportionate share of the product. If we consider both wages and profit as the just rewards of different kinds of labor, then the labor bill will always be the same, no matter what. But without distributive justice, one form of labor (usually capital) will be over-compensated and the other (actual labor) will be under-compensated. This creates an instant imbalance in the economy leading to an over-supply of capital and a shortage of aggregate demand. In such cases, the economy cannot achieve economic equilibrium and must resort to the non-economic means mentioned in Chapter V. Unless wages and profits are normalized to each other, the economy cannot be balanced and the government must step in to prevent collapse. There is no point in complaining about “government interference” in the economy, without addressing the root cause of that interference, which is the failure of the economy to balance itself by economic means alone.

We normally depend on the competitive market to ensure that the maximum amount of goods is provided at the lowest economic price. And when we are speaking of pure commodities, this generally works pretty well, under certain circumstances. These circumstances include a perfectly free market in which production is divided among a large number of small firms. It is somewhat surprising to find how infrequently these conditions are actually met. Most production is controlled by large corporate collectives, each of which has both enormous pricing power and enormous political power. In fact, corporate capitalism may have collectivized production more effectively than any Stalinist bureaucrat could have dreamed of. Further, we have already noted the problem of the externalities, which, by definition, cannot be handled within any market-price system. Finally, we note that the reduction of the production process to an exchange process means that everything used in production must be modeled as a commodity whose price and supply is regulated by the laws of supply and demand. However, there are factors of production which are not commodities, which are not produced for the market, and whose quantity and price are not regulated by the laws of supply and demand. These are the so-called “fictitious commodities”12 of land, labor, and money. They escape the logic of exchange, even though no exchange can take place without them. This is of sufficient importance that it will be the subject of the next chapter.

1 E.K. Hunt, History of Economic Thought: A Critical Perspective (Armonk, New York and London, England: M. E. Sharpe, 2002), 33⁠.

2 R.W. Faulhaber, “The Rise and Fall of "Self-Interest",” Review of Social Economy LXIII, no. 3 (September 2005): 418⁠.

3 Aristotle, Nicomachean Ethics (New York: Modern Library, 1947), 1139a 10⁠.

4 Ibid., 1129b, 25⁠.

5 Ibid., 1252b, 11⁠.

6 Ibid., 1253a, 26⁠.

7 Ibid., 1130b, 31-33⁠.

8 Ibid., 1131a, 25-29⁠.

9 Corrective justice is also known as commutative justice, due to a mistranslation in the Middle Ages. “Commutative” has become the more common term, but we will use “corrective” as closer to Aristotle's original intention.

10 Ibid., 1132b, 19-21⁠.

11 Ibid., 1131a, 25-31⁠.

12K. Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, 1944), page needed⁠.


William Peaden Wednesday, July 2, 2008 at 6:44:00 AM CDT  

This is a brilliant chapter. It actually presented me with quite a shock; that of undermining the basis of neo-classical economics by showing why land, labour and capital are not 'commodities'. Unfortunately, I cannot enter into the discussion, as my knowledge of this is not very great.

The interesting thing is that one 'feels' that land, labour and capital (stored up labour) are not merely 'money exchanges', yet this is the basis of so much evil.

A question: does over-selling against the exchange value, filling in the gap between the use-value constitute 'economic rent', or usury? Is the failure to acknowledge distributive justice, say on capital constitute the same?

John Médaille Wednesday, July 2, 2008 at 8:29:00 AM CDT  

William, I hope that after reading this book, a lot of people will be able to enter the discussion in a way that confounds the Austrians, neoclassicals, Keynesians and Marxist socialists.

You are absolutely correct about the gap between use and exchange values. A price that exceeds the cost of production (which includes fair compensation to entrepreneurs and investors) is exactly what economic rent is, and is the exact measure of economic inefficiency. This is actually well-known in neoclassical economics; they just usually ignore it in practice.

Economic rent does have a short-term utility. When any particular commodity starts to collect a rent, then capital is attracted to that market, supply is increased, prices go down, and the rent disappears. Hence the rent is a signal that a particular market is underserved. But if rent persists, then either we are dealing with a fictitious commodity, or the market is dominated by power relationships rather than economic relationships.

Donald Goodman Wednesday, July 2, 2008 at 8:56:00 AM CDT  


I agree that this is a unique and compelling argument that labor is not a commodity. In previous arguments I've always held to that in the papal encyclicals, that wages are what support a man and his family and thus labor can't be treated like apples or Big Macs. I'm pleased to have another arrow in my quiver on that point.

Tom Laney Sunday, July 6, 2008 at 8:49:00 AM CDT  

Yet more brilliance! This chapter belongs on every factory floor in America!

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