The Political Economy of Participatory Economics - by Michael Albert and Robin Hahnel



Saemtenevia Prospect was two miles long, and it was a solid mass of things to buy, things for sale. Coats, dresses, gowns, robes, trousers, breeches, clothes to wear while sleeping, while swimming, while playing games, while at an afternoon party, while at an evening party, while at a party in the country, while traveling, while at the theater, while riding horses, gardening, receiving guests, dining, hunting-all different, all in hundreds of different cuts, styles, colors, textures, materials. But to Shevek the strangest thing about the nightmare street was that none of the millions of things for sale were made there. They were only sold there. Where were the workmen, the miners, the weavers, the chemists, the carvers, the dyers, the designers, the machinists, where were the hands, the people who made? All the people in all the shops were either buyers or sellers. They had no relation to the things but that of possessions. How was he to know what a good's production entailed? How could they expect him to decide if he wanted something?

--Ursula LeGuin

The traditional treatment of consumption is quite simple. As long as people are free to buy what they want in competitive markets, consumption will efficiently take care of itself. In this view, the only problem is that people's ability to buy-the distribution of incomemay be inequitable. In this chapter we present the case for equity as payment according to effort, criticize the reasoning behind alternative definitions of equity, and examine whether an equitable economy lacks sufficient incentives to be a productive economy. However, while we focus on the meaning of equity and its implications, we do not think consumption takes care of itself efficiently when people simply buy what they want in markets. On the contrary, using markets to organize consumption is highly inefficient and exerts a deleterious bias on the development of people's preferences for reasons explained in chapter 1. So before tackling questions of equity, since externalities in consumption are the rule rather than the exception, and since the market's bias against goods and services with positive external effects provides socially counterproductive incentives for people to develop along trajectories that lead to ever greater losses in potential well-being, how can we organize consumption activity to minimize these failings? The answer lies in recognizing that much consumption activity, like much production activity, is social and should be organized as such.

Consumption Councils
Instead of markets, our principal means of organizing consumption activity are consumption councils. Every individual, family, or living unit would belong to its neighborhood consumption council. Each neighborhood council would belong to a federation of neighborhood councils the size of a city ward or a rural county. Each ward would belong to a city consumption council, each city and county council would belong to a state council, and each state council would belong to the national council.

Participatory economies incorporate this nesting of different consumers' councils to allow for the fact that different kinds of consumption affect different numbers of people. The color of my underwear concerns only me and my most intimate acquaintances. The shrubbery on my block concerns all who live on the block. The quality of play equipment in a park affects all in the neighborhood. The number of volumes in the library and teachers in the high school affect all in a ward. The frequency and punctuality of buses and subways affect all in a city. The disposition of waste affects all States in a major watershed. "Real" national security affects all citizens in a country, and protection of the ozone layer affects all humanity- which means that my choice of deodorant, unlike my choice of underwear, concerns more than me and my intimates!

Failure to arrange for all those affected by consumption activities to participate in choosing them not only implies an absence of self-management, but, if the preferences of some are disregarded, also a loss of efficiency. It is to accommodate the range of consumption activities from the most private to the most public that we organize different "levels" of consumption councils. Once we recognize that much consumption activity, like production activity, is social, we must insist that consumption decision making, like production decision making, be participatory and equitable. And we must again investigate whether this is compatible with efficiency.

The principle of one person one vote will apply in all consumers' councils and federations of councils, and each consumers' council and consumers' federation will participate in the planning procedure described in chapter 4. In each iteration of the planning procedure, neighborhood councils will propose individual consumption requests for members as well as neighborhood consumption requests; ward councils will ask for inputs required to carry out consumption activities affecting all in a ward; city consumption councils will ask for inputs needed for consumption activities affecting all who live in a city, and so on. Every council must eventually win approval for its proposal from other councils. This means a neighborhood consumption council must win approval from the other neighborhood councils in its ward, ward councils must win approval from the other ward councils in the city, and so on. Moreover, consumers' councils must win approval of their proposals from workers' councils and vice versa. So consumption councils must demonstrate that their requests do not entail greater social costs per member than the requests of other consumption councils. Or, if a request does have a higher social cost than average, the council will have to provide an explanation others find acceptable. How consumers calculate and compare social costs of consumption requests will be explained when we describe allocation in chapter 4.

In neighborhood councils, each living unit will propose its own consumption request and while the content of individual proposals is open to discussion, requests whose social cost is no greater than the average individual consumption request cannot, in the end, be rejected by a neighborhood council.1 In higher level consumption councils, each lower level council will "vote" its preferences either directly or by sending representatives, and lower level councils will be "charged" in the planning procedure for their proportionate share of the social cost of all public goods requested by higher level federations to which they belong, as described in chapter 4.

In light of the importance of representing consumers' interests in the economy, lower level consumption councils will have research and development task forces and higher level consumption councils will have full time R&D units. These R&D task forces and units will explore new consumption possibilities and ways to organize consumption so as to minimize wasteful duplication of goods, and will help establish priorities for R&D units attached to workers' councils and industry federations.

But "equal consumption rights" does not guarantee equal participation in consumption decision making. We doubt the problem is serious enough to require carefully calculated "consumption complexes" analogous to job complexes where consumption activity would be selfconsciously balanced for empowerment, but certainly care should be taken to ensure that the same people do not always chair discussions, serve on research and development task forces, or serve as delegates to higher level consumer federations. Otherwise, they could accumulate disproportionate influence over consumption decisions.

Admittedly, there is a fine line between doing what is necessary to ensure that all are able to participate fully and infringing on individuals' rights to decide how often they want to attend meetings, serve on committees, and the like. In the final analysis, we would not propose granting consumers' councils the power to force a member to participate beyond her or his wishes. But it is interesting to note that to the extent that a participatory economy is a "public good" rather than merely a right guaranteed to those who choose to exercise it, an economic rationale exists for institutional forms that establish at least the expectation of participation on everyone's part.


Incentive Compatibility

Efficient provision of public goods has never been considered easy. Before the literature on incentive compatible mechanisms there was a consensus among public finance theorists that while efficient allocations existed and could be identified in theory, the "free rider" problem would inevitably prevent achieving efficient allocations in practice. In Welfare Economics we have analyzed, interpreted, and evaluated the literature on incentive compatible mechanisms for providing public goods that blossomed at the end of the 1970s only to fall into oblivion in the 1980s because of their presumed impracticality. What we wish to point out here is that while our network of consumers' councils does not solve the problem perfectly (since an infinite spectrum of consumers' councils is a practical impossibility), our system for structuring consumption choices is compatible with "truthful" reporting of preferences for public goods. Moreover, our consumers' councils provide a practical setting for implementing some of the refinements brought to light by demandrevealing and pivot mechanisms.

While a full explanation must await our description of participatory allocation, there is no incentive for consumers in our economy to misrepresent their preferences regarding public goods at any level. Since each will be "charged" their proportionate share for the public goods proposed by the higher level councils to which they belong, there is no incentive to misrepresent preferences for public goods because there is no possibility of "riding free." The best way to influence the package of public goods one will consume is to vote truthfully. But while our system is incentive compatible with reasonable claims to efficiency, it "charges" people independent of their preferences. As we discussed elsewhere, the important issue raised by demand-revealing and pivot mechanisms is not efficiency, since there are simpler ways to achieve efficiency, but whether those whose preferences for public goods deviate further from average preferences should be "compensated" for their lesser benefits or be "charged" for skewing the package provided further away from the package others would have preferred.2 "Outliers" will find the package of public goods less to their liking than those with average preferences, but "outliers" also inconvenience others more than those with average preferences when each expresses their preferences for public goods.

We also explained in Welfare Economics why an endogenous view of preferences changes one's view of what is at stake in implementing a "compensating" or "penalizing" system of assessing deviant preferences for public goods. A plausible case can be made for both compensating and penalizing on equity grounds. But if deviant preferences are penalized, people will develop more conformist tastes for public goods, whereas if deviant preferences are compensated, preference variety will be encouraged. While in our view more variety is generally better, in the case of public goods the more alike people's preferences are the easier it is to give everyone what they want. So it is not obvious what kind of deviations might be warranted from proportionate charges. But while there is no clear-cut theoretical answer to what adjustments should be made, this does not mean proportionate assessment cannot be improved on in particular situations. What should be more feasible in our system of consumers' councils, where people meet and discuss options and where people's preferences for public goods are explicitly recorded, is for consumers to debate the pros and cons of differential charges and make whatever compensations they deem warranted in the particular councils and federations to which they belong. What the theoretical literature on demand-revealing and pivot mechanisms has shown is that this can be done in incentive compatible ways. While implementing these procedures is impractical in traditional economies, our consumers' councils provide a practical setting for implementing these schemes whenever they are deemed beneficial by a particular group of consumers even though no single scheme can claim superiority in all situations.



Economists are not alone in being unable to agree on what constitutes equitable rewards. In fact, it was largely because philosophers, politicians, and people from all walks of life were as likely to disagree about what was equitable as economists were, that separating equity from efficiency via the concept of Pareto optimality was considered such a great theoretical advance. Nor do we expect everyone to agree with our conclusions regarding equity. Instead, we mainly wish to clarify an array of different options and the rationales behind each.

Distributive justice is only an issue in social arrangements where the human costs and benefits of joint endeavors must be assigned. In Welfare Economics we identified four different distributive maxims and noted that each justifies the outcomes of a different kind of economy.

DISTRIBUTIVE MAXIM 1. Payment according to personal con tribution and the contribution of property owned.

DISTRIBUTIVE MAXIM 2. Payment according to personal contribution.

DISTRIBUTIVE MAXIM 3. Payment according to effort.

DISTRIBUTIVE MAXIM 4. Payment according to need.

Private enterprise, market economies distribute consumption opportunities according to Maxim 1.
Public enterprise, market economies distribute according to Maxim 2.
What we deem equitable economies distribute according to Maxim 3.
Truly humane economies distribute according to Maxim 4.

We certainly do not intend to argue against Maxim 4. In situations where trust, empathy, and mutual concern-or what we call solidarityare sufficient to permit distribution according to need, it will be pointless to do otherwise. Nor do we think such situations can only exist among family members, or small groups of intimate acquaintenances. Beyond participation and equity, an important goal for a desirable economy is to establish conditions giving rise to increasing solidarity among its participants since more fulfilling lives for all are possible when this holds. But for now we set Maxim 4 aside on grounds that it is beyond equity. It is not a conception of equity as much as a (fortunate) situation in which equity is no longer an issue.

For as long as justice or equity is an issue, what rationales support Maxims 1, 2, and 3? The rationale supporting Maxim I is that people should get out of an economy what they and their belongings contribute to it. It generally envisages "free and independent" people, each with his or her own property, who would refuse to enter a social contract on any other terms.

While it is clear that those who wander in the "state of nature" with a great deal of productive property would have reason to hold out for a social contract along the lines of Maxim 1, why those who wander in the "state of nature" with little on their backs would not hold out for a different arrangement is unclear. In other words, if the idea is that the social contract must be unanimous, it is not obvious why poorer inhabitants would agree to Maxim 1. Of course, if it is further stipulated that those with considerable wherewithal can do quite well for themselves in the "state of nature," whereas those without cannot, it is not difficult to see how requiring unanimity might drive the bargain in the direction of Maxim 1. However, for those of us who see nothing fair or equitable about a bargaining situation requiring unanimity when some are better able to tolerate failure to reach an agreement than others, the traditional version of a social contract rationale for Maxim I loses force. In any event, economists know that the marginal productivity of an input depends as much on the number of units of that input and other inputs available as on any intrinsic qualities of the input itself, which undermines the moral imperative many noneconomists assume behind Maxim 1. And Joan Robinson pointed out long ago that however "productive" a piece of land or machine may be, that hardly constitutes a reason for paying anything to its owner. As John Roemer has recently clarified, the morality of unequal income distributions due to unequal ownership of productive property therefore reduces to the morality of why the ownership is unequal in the first place. 3 It seems clear to us that unless those with more productive property acquired it through some greater sacrifice, the income they accrue from property is not justifiable, at least on equity grounds. In which case we must reject Maxim I if we find that those who own more productive property do not come by it through personal sacrifice, except in rare instances.

Inheritance of property hardly qualifies as a sacrifice by the heir. Moreover, in our view any "right to bequeath" of older generations should be subordinate to the "right of equal opportunity" of younger generations. We also believe most initial accumulations are more often the result of "robbery and plunder," unfair advantage, or simply good luck-none of which merit reward-rather than personal sacrifice. Moreover, as we will argue below, "unfair advantage" includes any accumulations due to personal attributes that were not acquired through personal sacrifice. To put it differently, in our view, whatever differences in productive property accumulate within a single generation due to uneven sacrifices are insignificant compared to the total differences in wealth that inevitably develop in private enterprise economies. In sum, we reject Maxim 1 on the grounds that "property is theft," more often than not, which means the resulting income is exploitation.

While those who support Maxim 2 find "property income" unjustifiable, they hold that all have a right to the "fruits of their labor." There is no doubt the rationale for this has a powerful appeal: If my labor contributes more to the social endeavor it is only right that I receive more. Not only am I not exploiting others, they would be exploiting me by paying me less than my contribution. 4 But, ironically, the same logic for rejecting Maxim 1 applies to Maxim 2. While we agree that greater personal sacrifice for the sake of the joint endeavor merits greater compensation, it turns out that most reasons why some contribute more than others have little to do with greater sacrifice on their part.

Besides the well-known fact that the marginal productivity of different kinds of labor depends greatly on the number of people in each category and the quantity of nonlabor inputs available to use, most differences in productivity due to "intrinsic" qualities cannot be traced to differential sacrifices. No amount of eating and weight lifting will give an average sized individual a 6 foot 7 inch frame with 300 pounds of muscle. Yet, Dave Butz received over 50 times an average U.S. income for playing defensive tackle for the Washington Redskins largely because those attributes made his marginal revenue product outrageously high in the context of U.S. sports culture. Likewise, if the movie Amadeus is true to history, no matter how hard he tried, Salieri could never have turned out the music that leaped from the pen of his rival, Mozart, which continues to yield incalculable pleasure. Clearly, the genetic lottery greatly influences how valuable one's contributions will be. Yet there is nothing more fair about the genetic lottery than the inheritance lottery.

Frequently it is argued that while talent may not deserve reward, talent requires training, and herein lies the sacrifice that merits compensation. Doctors' salaries are compensation for all those years of education. And if it was truly the case that someone's training entailed greater than average personal sacrifice, we would agree that greater compensation was justified, just as we agree that if performing a job is more dangerous, unhealthy, tiring, or boring, and a society is organized so that someone must endure this while others have better work circumstances, a compensating wage differential is in order. But longer training time does not always connote greater personal sacrifice. Training always has a social opportunity cost, but we should not confuse the social opportunity cost with the private cost to the trainee, which is frequently far less. To the extent the scarce resources and time used in training are paid at "public expense," to the extent consumption opportunities are not diminished for those in training, and to the extent time spent in developing one's most socially productive talents is no more burdensome than time others spend training and working, training merits no compensation on equity grounds.

Which leaves us with Maxim 3. Whereas differences in contribution will be due to differences in talent, training, job assignment, luck, and effort, the only factor that deserves extra compensation is extra effort. If we define effort as personal sacrifice for the sake of the social endeavor, then only effort merits compensation. Of course, effort, as we define it, can take many forms. It may be longer work hours, less pleasant work, more intense, dangerous, or unhealthy work, and so on. It may consist of undergoing training that is less gratifying than the training experiences others enjoy. Below we examine arguments to the effect that difficulties in measuring effort, and the need to promote efficiency, may provide reasons for rewarding something other than effort. But our point here is that if reward were to be guided by equity considerations alone, compensation should be based on effort.

How can we concretely understand the difference between Maxims 2 and 3? According to Amadeus, Salieri was a dedicated, hard-working, but plodding composer, while Mozart was a frivolous, irresponsible genius. Assuming both could best serve the social interest by spending their work time as composers, then according to Maxim 2 Mozart deserved to be paid a great deal more than Salieri, while according to Maxim 3 Salieri deserved to be paid more than Mozart. So here we have a "test" of one's ethical inclinations. Would you pay Mozart or Salieri more? But remember, in judging equity you have to assume your answer will have no effect on the quantity or quality of either's compositions. And paying Salieri more does not mean you cannot choose to listen to Mozart!

Finally, before proceeding to the relation between equity and efficiency, we should clarify how a participatory, equitable economy will handle "free consumption." Even in economies that emphasize pecuniary calculations, individuals consume "free of charge" in some situations. That is, even in economies where solidarity is minimized, the public sometimes allows individuals to consume at "public expense" on the basis of need. Since we believe one of the merits of an equitable economy is that it creates the necessary conditions for a humane economy, and since we incorporate features designed to build solidarity in our allocative procedure, clearly we will expect considerable participatory consumption on the basis of need. This will occur in two different ways. First, particular consumption activities will be free to all individuals. This does not mean they have no social opportunity cost, or that they should be produced beyond the point where their social costs outweigh their social benefits. It simply means individuals will not be expected to reduce requests for other consumption activities because they consume more of these free goods. Students and sick people, for example, will not be expected to eat less. What items should be on the "free list" is something that will have to be debated and decided in consumer federations. Second, consumption will be on the basis of need when requests to that end are accepted by others in the economy. Frequently, individuals, or collectives, might propose a consumption request above the social average accompanied by an explanation of what they regard a justifiable need. These requests are considered on a discretionary basis and either approved by others or rejected. But there is no reason to suppose approvals will be infrequent.

Equity, Incentives, and Efficiency

Even among those who accept Maxim 3 as the only morally and logically defendable interpretation of equity, many think there is an unfortunate tradeoff between equity and efficiency, so that a reasonable system of rewards must strike a reasonable compromise.
It is surprising that this conviction is so commonplace, since the case for rewarding only effort on efficiency grounds is more straightforward than the case for rewarding only effort on equity grounds.

Once again, differences in outcome are due to differences in talent, training, job placement, luck, and effort. Once we clarify that "effort" includes personal sacrifices incurred in training, the only factor influencing performance over which an individual has any discretion is effort. By definition, neither talent nor luck can be induced by reward. Rewarding the occupant of a job for the contribution inherent in the job itself does not enhance performance. And provided that training is undertaken at public rather than private expense, no reward is required to induce people to seek training. In sum, if we include an effort component of training in our definition of effort, the only discretionary factor influencing performance is effort, and the only factor we should reward to enhance performance is effort.

This certainly turns common wisdom on its head! Not only is rewarding effort consistent with efficiency, but rewarding the combined effects of talent, training incurred at public not private expense, job placement, luck, and effort, is not. Suppose we wanted to induce maximum effort from runners in a 10,000-meter race. Should prize money be awarded according to place of finish, or according to improvements in personal best times? Rewarding outcome provides no incentive for poor runners with no chance of finishing "in the money" and no incentive for a clearly superior runner to run faster than necessary to finish first. Paying in accord with improvements in personal best times gives everyone an incentive to maximize her or his effort-if that is the kind of reward to which people respond. (We take up the issue of what constitutes effective "rewards" below.) So why do many believe that equity conflicts with efficiency?

There are three reasons cited that merit response.

In situations where solidarity is insufficient to elicit effort without reward, and where greater consumption opportunities are the only effective rewards, it will be inefficient to award equal consumption opportunities to those exerting unequal effort. But this is not what we have proposed. Below we challenge the facile equation of effective human rewards with differential consumption opportunities. But even so, we do not rule out correlating consumption opportunities with work effort. Our vision of consumption is that all should have a right to roughly equal consumption opportunities because our vision of production was that all should exert roughly equal effort in work. To the extent that job complexes are balanced so that no one is required to make greater personal work sacrifices than others, effort is equilibrated and therefore consumption should be as well.

But this is not to say that variations cannot be tolerated. Individual allocations of effort and consumption over time are perfectly acceptable. If someone wants to put in above average work effort now to consume above the social average later, or proposes to repay above average consumption now with more work effort later, this is perfectly acceptable. It means permitting individuals to equilibrate differential work efforts or consumption levels over time, and we see no reason to prevent individuals from "lending" and "borrowing" from their work mates whenever all concerned find it convenient. We also are not opposed to someone working less and consuming less over their lifetime, or to someone working extra hard or long in order to consume more. We personally believe the latter kind of variation can become unhealthy, but while we have described institutional structures that establish expectations that discourage excesses, and support informal social pressure against excesses, we do not propose ruling out individual variations. No doubt people do have different preferences for income and leisure and there is no point legislating the same tradeoff for all. In any case, if the system we are describing has the kind of effect on people that we expect, people's attitudes toward work and what they find rewarding will evolve in ways that reduce current variations in work/leisure tradeoffs.

Thus, while we expect members of consumption councils to enjoy equal rights to consumption opportunities based on equal efforts exerted in their workers' councils, variations will exist and can be accounted for by a system of "report cards," if you will, that members receive from their workers' councils and bring to their consumption councils. The assessment could be a fully scaled effort rating-so many points above or below average. Or it could simply read "superior, average, or below average." Since circumstances and opinions will differ regarding the need and best means to calibrate effort, different workers' and consumers' councils will likely opt for different systems. But whatever differences in effort may arise, they will surely not lead to the extreme income differentials characterizing all economies today. And so the question finally arises, with no "sky to reach for," will people lift their arms?

In a society that makes every effort to depreciate the esteem that derives from anything other than conspicuous consumption, it is not surprising that great income differentials are seen as necessary to induce effort. But to assume that only conspicuous consumption can motivate people because under capitalism we have strained to make this so is unwarranted. There is plenty of evidence that people can be moved to great sacrifices for reasons other than a desire for personal wealth. Family members make sacrifices for one another without the slightest thought of material gain. Patriots die to defend their country's sovereignty. And there is good reason to believe that for nonpathological people wealth is generally coveted only as a means of attaining other ends such as economic security, comfort, social esteem, respect, status, or power.

We do not intend to debate the point at length, but if accumulating disproportionate consumption opportunities is often a means of achieving more fundamental rewards, as we believe, there is every reason to believe a powerful system of incentives need not be based on widely disparate consumption opportunities. If expertise and excellence are accorded social recognition directly, there will be no need to employ the intermediary device of conspicuous consumption. If economic security is guaranteed, as it will be in an equitable economy, there will be no need to accumulate out of fear for the future. If people participate in making decisions, as they will in a participatory economy, they will be more likely to carry out their responsibilities without recourse to external motivation. If the allocation of duties, responsibilities, sacrifices, and rewards is fair, and seen to be fair, as it will be in an equitable economy, sense of social duty will be a more powerful incentive than it is today. And if a fair share of effort and personal sacrifice are demanded by work mates who must otherwise pick up the slack, and if additional effort and sacrifice are appreciated by one's companions, recognized by society, and awarded commensurate increases in consumption opportunities, we are quite confident that incentives will be powerful indeed. The fact that there won't be motivation for excessive production to useless or egotistical ends would be a gain, not a loss.

2. If payment is equal, there is no incentive for people to train themselves in the ways they can be most socially valuable.

Since, presumably, Mozart could contribute more composing than engineering, it would have been inefficient had he studied engineering. And if Salieri would have made an even worse engineer than composer, the same follows for him. In general, it is efficient to develop the talents in which people have comparative advantages for reasons familiar to economists, which means incentives should facilitate rather than obstruct this outcome.

First, there is good reason to believe that people usually prefer to train in areas where they have more talent rather than less-unless there is a powerful incentive to do otherwise. Clearly there is no such disincentive in a participatory economic system. Those who could be composers, playwrights, musicians, and actors will not become lawyers, accountants, and insurance salespeople for "economic reasons." Nor will people in an equitable economy shun training that requires greater personal. sacrifice since this component of effort will be fully compensated. Second, our system increases direct social recognition of excellence. In a participatory economy the best way to earn social esteem is to make notable contributions to others' well-being. Since this can best be done by training in accord with one's talents, there should be powerful incentives to do so. The only thing our system prohibits is paying ransoms to superstars. Instead we prefer to employ direct social recognition.

3. Effort is difficult to measure while outcome is not, so rewarding performance is the best system in practice.

Neither half of this proposition is as compelling as usually assumed. While economic textbooks speak blithely of marginal revenue products in infinite substitution models, the real world of social endeavors does not always cooperate. There are many situations where assigning responsibility for outcome is ambiguous. As those
who have attempted to calibrate contributions to team performance can testify, there are some situations where it is easier than others. Sports teams are certainly more suited to such calibration than production teams. And it is more difficult to calibrate individual contribution in football and basketball than baseball. But even in
baseball, arguably the easiest case of all, debates over different measures of offensive contribution, and acknowledgment of the importance of "intangibles" and "team chemistry," testify to the difficulty of assigning responsibility for outcomes.

Nor is measuring effort always so difficult. Anyone who has taught and graded students knows there are two different ways to proceed. One can compare students' performances to each other, or to an estimate of how well the student could have been expected to do. Admitting the possibility of grading according to "improvement" is tantamount to recognizing that teachers can, if they choose, measure effort. Given a student's level of preparation when she or he entered the class, given a student's natural ability, is this an A, B, or C effort, are not questions teachers, in general, find impossible to answer. It is also important to note who is responsible for measuring effort. Who is in a better position to know if someone is only giving the appearance of trying than the people working with her or him in the same kind of task? While teachers don't see student preparation, workers do see workmate's work. It is not as easy to pull the wool over the eyes of one's work mates as of one's supervisors.


Endogenous Preferences

In Welfare Economics we have written much on the subject of endogenous preferences, arguing that an endogenous view of preferences changes the assessment of the deficiencies of some wellknown economic models. Here we briefly summarize the significance of endogenous preferences and what this implies for a participatory, equitable economy.

In traditional analysis, preferences are deemed exogenous. This means they do not alter due to specifically economic influences. Preferences may change due to schooling or aging but not due to our work or consumption. Most economists admit this is an abstraction. They realize that advertising has some effect and that people sometimes learn by consuming. But economists generally agree that abstracting from all this is more than justified by the resulting increase in clarity. Effects of endogenous factors are deemed minor, and if the examples most economists recognize were the only examples of endogenous preferences, we would not object too strenuously. But there is another way preferences are endogenous.

Just as people can account for the "preference fulfillment effect" of their consumption choices, they can also account for the "preference development effect," at least in some approximate way. If my future characteristics depend to some extent on what I do today, and if my preferences always depend in part on the characteristics I have, then my present consumption choices have preference development implications as well as preference fulfillment effects. Clearly, to the extent I can anticipate them, it would be irrational for me to ignore the preference development effects. In short, a strong incentive exists for people to develop preferences in accord with the anticipated terms of availability of different activities.

For example, it makes sense to develop preferences for consumption activities that are going to be easily available but not for activities that are unlikely to be available, or only available at great personal cost. For this reason, anticipated terms of availability for different consumption goods will exert an influence on people's preferences for those goods. While this complicates the logic of evaluating economic performance, it poses no welfare problems as long as there is no systematic bias in the terms of availability of different consumption activities. That is, as long as people are free to develop preferences in unbiased circumstances and as long as terms of availability are determined only by true social costs, the fact that people adjust preferences in accord with those social costs is perfectly consistent with efficiency. But, as we argued in Welfare Economics, market allocations are systematically biased against provision of public goods and goods with greater than average positive external effects, and hierarchical production relations and central planning are both systematically biased against self-managed work opportunities. Moreover, these biases are pervasive and significant rather than trivial, and individually rational adjustments to them prove socially counterproductive in the sense that when individuals adjust, the biases grow over time, thereby generating ever greater losses of potential well-being.

So, the question is whether any features of our model of a participatory, equitable economy bias the terms of availability of different kinds of human activities. We designed the system for organizing production precisely to avoid biases against participation and self-management. Likewise, the system of nested federations of consumers' councils and the method of charging people for collective goods avoids the antipublic bias inherent in market allocations. But whether there are any counterproductive biases present in the allocative procedures we propose is best discussed after describing our planning procedure and investigating its welfare properties, to which we now turn.


Notes to chapter 3

1. We assume for the remainder of this chapter that consumers exert average effort in work. Appropriate adjustments would be made in any other event.

2. See chapter 7 of Welfare Economics.

3. See John Roemer, Free to Lose (Cambridge: Harvard University Press, 1988), chapter 5.

4. Interestingly enough, Mikhail Gorbachev provides one of the most eloquent, recent versions of this argument in Perestroika: New Thinking for Our Country and the World (New York: Harper and Row, 1987).

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