The Institutional Justice of the Market Process

The 20th century saw a transformation in the vision of economics from one that emphasizes disequilibrium processes to one that emphasizes the analysis of states of equilibrium. This transformation, we argue, has had a significant impact on how economists view the role that governments play in the promotion of distributive justice. Although classical political economists had made a case for the institutional justice of the market process, this argument was overshadowed in the late 19th century and the early 20th century by the early neoclassical economists, who defended the market in terms of the equilibrium pricing of factor payments. Justice, according to the early neoclassical economists, was defined in terms of market outcomes that approximate the marginal valuation of the productive contribution of each factor of production. We argue that the persistence of this equilibrium paradigm today, by eliminating the notions of uncertainty and entrepreneurship from an analysis of the market, has also excluded any analysis of the inherent tendency by which factor payments are equalized across markets by entrepreneurs taking advantage of arbitrage opportunities. The result of this has been the emergence of the notion that income equality is a substitute and not a complement to economic prosperity. Stated differently, economic analysis that ignores institutions and entrepreneurship also precludes an understanding of how the market process generates a tendency toward greater income equality and greater economic prosperity simultaneously