10th January 2010
The social minimum – a running analysis
This is a place for me to 'park' some of my thoughts on the social minimum. This material will ultimately be incorporated into DOF or otherwise refined/published; or deleted.
Journal of Political Economy, Feb 2010. How Well Does the US Social Insurance System Provide Social Insurance? Working paper:
“From the point of view of insurance, there seem to me to be two compelling theoretical
arguments for having the State rather than the market provide a wide range of insurance, for
old-age pensions, disability and sickness, unemployment and low income: the first is that the
market handles adverse selection badly. The second is that, even if adverse selection were
not important, people should take out insurance at an age when they are incapable of doing
so rationally, namely zero.” – Mirrlees (1995, p. 384) – cited above
Plus: "labor income is not easily insured because it is partly under an individual’s control by the choice of unobserved effort or unobserved labor hours and because a component of labor income risk is realized at a young age" ("One standard rationale is the provision of insurance for risks that are not easily insured in private markets."). Note that in my view this is not quite right (see my dissertation). Even after social insurance there remain a NUMBER OF RISKS that are not insurable in the marketplace. Hence people have children.
I have not simply quoted Hayek. I talk of the ENTIRE classical liberal tradition. There is not one thinker in the classical liberal tradition who could be demonstrated to be an opponent of the social minimum. Note classical means the ORIGINAL thinkers on liberty. These include Locke, etc. whom I've cited extensively in DOF.
Your interpretation of Hayek is also partly correct. He talk about 'a certain level of wealth' as a precondition of the social minimum. In "Law Legislation and Liberty" he makes the following points: (I'm typing these since the book is not available online)
– "The problem here is chiefly the fate of those who for various reasons cannot make their living in the market, such as the sick, the old, the physically or mentally defective, the widows and orphans – that is all people suffering from adverse conditions which may affect anyone and against which most individuals cannot alone make adequate provision bu in which a society that has reached a certain level of wealth can afford to provide for all." p.54-55, vol.3
But he also writes: ‘developed capitalist market systems have no need for government maintenance of a social minimum’.
 DiQuattro, paraphrasing Hayek, Arthur DiQuattro, ‘Rawls versus Hayek’, in Political Theory, Vol. 14, No. 2, (May, 1986), p. 309, referring to Friedrich August Hayek’s 1978 New Studies in Philosophy, Politics, Economics and the History of Ideas.
Thus contradicting himself (if only a rich society can have a social minimum but the rich society should not have a social minimum!).
Note that he is not 'rigid' about such a level. Indeed, that can't be upto him but to each society to decide. I am personally comfortable that India has that "certain level of wealth" to ensure a social minimum. Further:
– "It has been this market mechanism which has created the increase of aggregate income, which has also made it possible to provide outside the market for the support of those unable to earn enough" (p.139, vol2)
Hayek, at minute 4.38 onwards of the above tape, elaborating on the social minimum.
‘There can be no doubt that some minimum of food, shelter and clothing, sufficient to preserve health and capacity for work, can be assured to everybody’ (in The Road to Serfdom).
in his 1973 Wincott Memorial Lecture he wrote: ‘We can of course in a free society provide a floor below which nobody need fall, by providing outside the market for all some insurance against misfortune.
 (1973) entitled, "Economic Freedom and Representative Government" published by IEA, p. 17.
– "It is certainly possible to take entirely out of the market process those who cannot adequately maintain themselves on the market and support them by means set aside for the purpose. For a person at the beginning of an uncertain career, and for his children, it might even be perfectly rational to agree that all should insure for a minimum of sustenance in such an eventuality." (He does note that this is going to be hard to implement) p.142 vol 2.
– [Among general obligations and rules in a society] "There can be a general obligation to render assistance in case of need towards a circumscribed group of fellow-men" (p.146 vol.2)
– "Combined with the provision of cushioning the risk by providing outside the market a uniform minimum income for all those who for some reason are unable to earn at least that much in the market." p.142 vol. 3
"Once you have accepted this and this part is incorporated as the foundation of our social minimum policy, I am fine"
No. I do not accept it; I merely said that Hayek's 'principle' (which is not a 'principle' but an ad hoc assessment with no foundation in the theory of the social contract) does not deny the possibilty of social minimum in India.
Note two things, though:
a) that I do not advocate the NIT scheme in isolation of the facts. I believe a social insurance scheme will actually possibly be cheaper than what India squanders today in the name of the poor. This is a pratical matter not linked to the theory: just an assessment.
b) I include the social minimum as a SECOND ORDER function, to be undertaken after the first order functions are performed well. In other words, it is linked to the social contract in the sense that the contract agrees to implement it ONLY AFTER the first order functions have been fully and well implemented.
This may well sound similar to what Hayek is saying but it is different because I claim that a sustainable FREE SOCIETY social contract (which Hayek doesn't talk about since he comes to his theory of liberty from a slightly – not very – different angle to mine) must include provision for a social minimum, irrespective of its 'level of wealth'. It should be stated as a function of its having performed its core functions properly first. It is, in other words, a contingent agreement; not contingent on its level of wealth but on its having provided defence and justice first.
I'd like to briefly trace the evolution of the social minimum:
In a hunting-gathering society everyone is automatically insured (e.g. see a wonderful study by an anthropologist who lived with hunter gatherers for two weeks in Africa – the study was published in last month's National Geographic). As Pugh notes (cited in Hayek for a different purpose): "within primitive human society 'sharing' is a way of life … The sharing is not limited to food, but extends to all kinds of resources." (p.161 vol.3). Such practices continue in all tribal societies that are semi-agricultural (e.g.jhum cultivators). There is therefore implicit and automatic social insurance. Indeed there is pretty much equality.
When the society became agricultural and develops the rudiments of freedom, with property rights, tribal customs mostly continue, but in a different form and shape. Because the village is a small unit, close personal monitoring of the others' efforts allows those unlucky to become poor (but who put inthe right level of effort) to broadly rely on direct charity from the better off farmers within the community to prevent distress. In India the jajmani system followed in many villages is an excellent example. That system largely prevents starvation even though extreme poverty continues to occur.
However, as these societies dissolve (and such dissolution is known as modern civilisation) leading to enormous social mobility, these charitable links become extremely weak and do not retain an value (e.g. in small towns/big cities).However, the modern free society also becomes many times wealthier virtually instantly compared to what it was in the past, because of its use of markets.
Thus, even with its terrible policies for most of the last century my very rough calculations show that every person in India today is about 5 times wealthier, on average, than an Indian in 1900. This could easily have been 15 times had the policies adopted since 1991 been adopted in 1900, or even 1950. (Note that an average person living in the West increases his personal wealth about 7 times in every 100 years).
I believe that the moment a society becomes a free society (and I'm not talking of socialist contracts such as India's), it can literally in a few years of its commencement start providing insurance for those who can't cope with the market. That increases social mobility without increasing social distress. The market is extremely powerful and creates wealth virtually overnight. Let us not forget that my theory is applicable to FREE INDIA, not to socialist India.
Friedman allows for policies similar to those that I said this line of thought might lead to. But he does this on grounds other than the one I was considering. He suggests that public funding of education can be justified on the ground that education is a public good with “neighborhood effects,” and says that that if we are distressed by having very poor people around then alleviating poverty is also a public good. (Capitalism and Freedom, pp. 89, 191.) He also advocates a scheme of funding for vocational and professional training in order to rectify the underinvestment in human capital. (p. 105–107) These arguments, which do not appeal to the value, for individuals, of having a greater range of choices, are in contrast to the position of James Buchanan, whom I should have mentioned in this regard. He holds that just institutions would include public funding for education, and a tax on transfers of wealth between generations, because these are required to ensure that those born into poor families are not excluded from a “fair chance to play.” (Liberty, Market, and the State, pp. 133–136) Buchanan’s line of thinking is much closer to one I had in mind. But it is not, I take it, standard among libertarians. [Source]