What’s Wrong with Rawls’ Defence of Capitalism?

I’ve always found it a bit strange that Rawls considered the question of whether free markets, or socialism, could better fulfill the principles of justice. It appears plain to me that “free markets” are anything but, and modern capitalism is a political system where power is concentrated in the hands of economic actors, primarily high finance. To understand Rawls’ defence of capitalism’s moral possibility, it’s necessary to make a distinction between markets in ideology and markets in reality. Rawls’ idea of capitalism is:

… [a] system of markets [that] decentralizes the exercise of economic power. Whatever the internal nature of firms, whether they are privately or state owned, or whether they are run by entrepreneurs or managers elected by workers, they take the prices of outputs and inputs as given and draw up their plans accordingly. When markets are truly competitive, firms do not engage in price wars or other contests for market power. In conformity with political decisions reached democratically, the government regulates the economic climate by adjusting certain elements under its control, such as the overall amount of investment, the rate of interest, the quality of money and so on. There is no necessity for a comprehensive direct planning. Individual households and firms are free to make their decisions independently, subject to the general conditions of the economy. (241)

In effect, Capitalism has various ways of concentrating that “decentralized” economic power – the most obvious being the business run media, and the lobbies which influence “democratic” governments. But the most obscene way the power is centralized is in high finance. The economic renumeration succesfully demanded by the top US hedge fund managers is simply obscene:

Appaloosa Management chief David Tepper, who bet on the recovery of banks and the debt of bailed-out US insurer AIG, earned the biggest payouts with $US4 billion ($4.36 billion) in 2009, a record for the sector.

US financier George Soros, the head of Soros Fund Management, took the second spot with $US3.3 billion ($3.6 billion), followed by James Simmons of Renaissance Technologies with $US2.5 billion ($2.73 billion).

In other words, the amount of money earned by three people in one year is the same as the cost of the electrification of all Canadian mainline railroads. The amount of power such cash brings means that economic power is being held in private hands, and sometimes that power challenges states. In July 1993, for instance, currency speculators forced European governments to loosen the ERB (European Exchange Rate Mechanism). In result,

George Soros alone made nearly $1 billion in two weeks, betting against the ability of Britain to keep the pound within ERM limits

This money is not created by the financiers – finance experts only create wealth if their investments produce more growth than a cruder system of investment. In other words, they are nothing more than efficiency experts, optimizers. When currency speculators extract billions the money simply comes out of someone else’s pocket and into theirs, and they can then use that money to further increase their economic and political clout.

To understand why this kind of political power is not protected by the lexical priority of the principle of liberty over the difference principle, one actually must read what Rawls says about the two principles of justice, and the rules which explain the priority of one of the other:

FIRST PRINCIPLE

(1) Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all.

SECOND PRINCIPLE

(2) Social and economic inequalities are to be arranged so that they are both:

(a) to the greatest benefit of the least advantaged, consistent with the just savings principle, and

(b) attached to offices and positions open to all under conditions of fair equality of opportunity.

FIRST PRIORITY RULE (THE PRIORITY OF LIBERTY)

The principles of justice are to be ranked in lexical order and therefore the basic liberties can be restricted only for the sake of liberty. There are two cases:

(a) a less extensive liberty must strengthen the total system of liberties shared by all;
(b) a less than equal liberty must be acceptable to those with the lesser liberty

SECOND PRIORITY RULE (THE PRIORITY OF JUSTICE OVER EFFICIENCY AND WELFARE)

The second principle of justice is lexically prior to the principle of efficiency and that of the maximizing the sum of advantages; and fair opportunity is prior to the difference principle. There are two cases:

(a)an inequality of opportunity must enhance the opportunities of those with the lesser opportunity;

(b) an excessive rate of savings must on balance mitigate the burden of those bearing this hardship

(A Theory of Justice – Revised Edition. Rawls 1971, p.266)

Now, from this it should be clear that what is meant by “liberty” in the liberty principle, i.e. “an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all”, can not mean liberty to gain from social inequality. If liberty included liberty to not have one’s position in inequality challenged, then there would not simply be lexical priority of the liberty principle over the difference principle; there would be no difference principle at all. Liberty should be understood in the sense of classical liberalism – liberty of speech, assembly, religion, thought, etc… If Rawls thought liberty included the right to free markets, then he would not have said that the question as to whether socialism or free markets best actualizes the principles of basic liberty must be left open (p 228).

Now, the standard manner of criticizing Rawls’ defence of capitalism would be to employ the difference principle – markets do not care whether an inequality benefits the least well off, or increases their equality of opportunity. Worse, the principle of inheritance flies in the face of any notion of equal opportunity – or at least creates a moral need for a strong welfare state where the right to inheritance can only be justified in terms of increased overall tax base to fund a welfare system which can better support those without the benefit of an inheritance.

However, this criticism is tired, and is subject to anyone who cares to thoughtlessly assert that the principle of liberty is “lexically prior” to the difference principle. And, they are right to claim this – however, they are wrong to assume that capitalism any more than socialism satisfies the principle of liberty. Free markets satisfy the principle of liberty only insofar as they do not permit the concentration of economic power in the hands of macro economic actors, or the public relations industry. In fact, capitalism allows for the easy co-option of power by corporations, and by public relations geniuses. Socialism is also subject to corruption and the concentration of power in the hands of the few who might not use it in accordance with the Second Priority Rule. However, the fact that the USSR failed to actualize the principles of justice is no defence for capitalism’s failure to do so in the current world order.