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In a series of articles in the mid-1980s, John Roemer attacked resource egalitarianism on the basis that it mimicked utilitarianism, which is ostensibly an inegalitarian doctrine.499 This line of argument was then repeated by Marc Fleurbaey.500 The examples given are those of Andrea and Bob, who in different examples, have different talents, disabilities, enzymes to convert food, endorphins, and hidden resources. Andrea and Bob do not know which of them is disadvantaged, but they have to make an insurance decision. The disadvantage not only makes them worse-off than the other, but also renders them less capable of converting resources into utility. The argument is that since equality of resources proposes hypothetical insurance to

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I will discuss the considerations of hypothetical insurers, such as incentive effects, in section 5.8.

499 _{Most explicitly, and in mathematic terms, in John E. Roemer, 'Equality of Resources Implies}

Equality of Welfare', The Quarterly Journal of Economics, 101/4 (1986), 751-84. He also makes the point in John E. Roemer, 'Equality of Talent', Economics and Philosophy, 1 (1985), 151-87, John E. Roemer, 'The Mismarriage of Bargaining Theory and Distributive Justice', Ethics, 97/1 (1986), 88-110 at 103-09, John E. Roemer, 'Egalitarianism, Responsibility, and Information', Economics and

Philosophy, 3 (1987), 215-44 at 221-43, all of which were reprinted in John E. Roemer, Egalitarian Perspectives : Essays in Philosophical Economics (Cambridge: Cambridge University Press, 1994). Roemer has continued the line of argument into his more recent work; John E. Roemer, Theories of Distributive Justice (Cambridge, Mass.: Harvard University Press, 1996) at 252-6, John E. Roemer, 'Egalitarianism against the Veil of Ignorance', The Journal of Philosophy, 99/4 (2002), 167-84 at 178- 81.

500

184 compensate people for their personal resource deficiencies, and people make insurance decisions in order to maximise their expected utility, hypothetical insurance would lead people to choose coverage that would mimic the utility-maximising outcome. Just as utilitarianism would redistribute resources from those with lower to higher marginal utility, so would equality of resources.

Roemer reaches this conclusion in the case of disability, where people would choose to insure to maximise the resources available to the non-disabled as they would be better able to convert the resources into utility. Similarly, those with superior enzymes should receive all the food, those who are better at producing endorphins should receive more resources in order to increase expected utility—by increasing total utility. Roemer argues that since all differences in ability to achieve utility will boil down to personal resources of one sort or another, we can extend the analysis to include hidden resources, which effectively sets up an entirely utilitarian programme, albeit for resource egalitarian reasons. The concern here is that if these conclusions were true, then resource egalitarianism would result in many of the extreme forms of inequality that plague utilitarianism, which would appear to contradict the egalitarian motivation behind the proposal. This would be because hypothetical insurance would not respect the distinction between persons that afflicts utilitarianism.501

These conclusions follow on the assumption that the prudent insurance deal is the one that maximises expected utility, or welfare, under conditions of uncertainty. This is the common interpretation of insurance decisions, and Dworkin certainly—and perhaps unfortunately—referred to welfare considerations when he first described the hypothetical insurance approach.502 Roemer admits that there are other theories about decision making in conditions of uncertainty,503 such as prospect theory504 and regret

501 _{Ibid. at 92. See also footnotes 12, 97 and 180.} 502 _{Dworkin, Sovereign Virtue at 96.}

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185 theory,505 but argues that it is appropriate to take the dominant expected utility

maximising approach.

Given that Roemer assumes that insurance is purchased for the purpose of utility maximisation, and builds this into his mathematical assumptions, it is unsurprising that the outcome of his axioms mimics utilitarianism. However, there are obvious flaws in his approach. Scanlon provides several criticisms. His first is that Roemer’s models include welfarist assumptions that are alien to resource-based accounts, as they based on welfarist foundations; such as the axiom of pareto efficiency.506 This challenges the claim that resource egalitarianism really can be reduced to utilitarianism. However, it is noteworthy that economic theory has shifted focus over time from its utilitarian roots in welfare outcomes to a definition of utility which is inclusive of preferences.507 When including personal preferences regarding risk, an egalitarian utility-based approach will indeed produce the same outcome as the ex ante approach. In this case the two approaches have the same outcome.

A second criticism from Scanlon is that Roemer takes all resources as resources for the generation of utility, which need not be case. Not everyone decides on their values and preferences based upon the effect these will have on his utility. Scanlon points out that if someone has a guilt-inducing religion which results in lower levels of utility, Roemer’s

504

Daniel Kahneman and Amos Tversky, 'Prospect Theory: An Analysis of Decision under Risk',

Econometrica, 47/2 (1979), 263-91, which was developed into a second cumulative approach in Amos Tversky and Daniel Kahneman, 'Advances in Prospect Theory: Cumulative Representation of Uncertainty', Journal of Risk and Uncertainty, 5/4 (1992), 297-323. A third generational approach to prospect theory is presented by Ulrich Schmidt, Chris Starmer, and Robert Sugden, 'Third-

Generation Prospect Theory', Journal of Risk and Uncertainty, 36/3 (2008), 203-23.

505

Graham Loomes and Robert Sugden, 'Regret Theory: An Alternative Theory of Rational Choice under Uncertainty', The Economic Journal, 92/368 (1982), 805-24.

506 _{T. M. Scanlon, 'Equality of Resources and Equality of Welfare: A Forced Marriage?', Ethics, 87/1}

(1986), 111-18 at 112-3.

507

My understanding is that economists from the marginalist revolution—perhaps from Jevons to Edgeworth—would have considered themselves as traditionally utilitarian. The shift to the explicit focus on personal attitudes began with—or around the time of—Alfred Marshall, and was completed by economists such as Pareto, Samuelson, von Neumann and Morgenstern. See Blaug,

Economic Theory in Retrospect at particularly 337-8. I also believe that contemporary financial economics includes attitudes to risk, following K. Borch, The Mathematical Theory of Insurance

186 approach would label this as a resource deficiency.508 This, however, is an inappropriate way to describe a person’s deeply held belief. Roemer’s approach implicitly treats every aspect of a person’s life as a means to utility. Accounting for people’s preferences in terms of their effect on utility is exactly the sort of controversial view of what counts as a good life that equality of resources is designed to avoid. It does so—partly, and relevantly for this challenge—in order to avoid perfectionism, which cannot treat people with equal concern.

Fleurbaey challenges equality of resources utilising Roemer’s assumptions about hypothetical insurance. He argues that it will be unacceptable for the same reasons that utilitarianism is unacceptable; namely that it would have anti-egalitarian features. This would occur since it would be a utility-maximising insurance choice to transfer resources from the badly-off to already well-off “utility monsters” who will get more utility from the resources.509 Dworkin responds to this argument by pointing out that people do not currently purchase insurance in this way—people insure to avoid bad outcomes despite the overall utility loss.510 Furthermore, Dworkin points out that it does not matter whether equality of resources is extensionally equivalent to any other theory of justice, as it stands and falls on its own merits and not those of another theory with the same outcome.511

508 _{Scanlon, 'Equality of Resources and Equality of Welfare: A Forced Marriage?', at 115-7.} 509

Marc Fleurbaey, 'Equality of Resources Revisited', Ibid.113 (2002), 82-105 at 96.

510

Ronald Dworkin, 'Sovereign Virtue Revisited', Ibid., 106-43 at 135.

511 _{Ibid. at 130-1. Dworkin also points out that equality of resources might be extensionally}

equivalent to utilitarianism only if everyone making hypothetical insurance decisions would do so on the basis of the same interpretation of utility,Dworkin, 'Sovereign Virtue Revisited', at 133. This degree of unanimity would be extremely unlikely given that there are many different interpretations of ‘welfare’ or ‘utility,’ as Dworkin showed in his writing on equality of welfare; Dworkin, Sovereign Virtue at 16-21. Furthermore, the utility-based insurance decision is based upon the values that the individual has, which are not themselves likely to be based on their utilitarian properties. People would seek to maximise their expected utility given the values that they have. It is a step further to assume that people would all therefore base their values on utility maximisation. This explains why hypothetical insurance would not be likely to collapse equality of resources into utilitarian proposals. Dworkin also discusses utilitarianism and hypothetical insurance briefly in Dworkin, Sovereign Virtue at 349-50.

187 Fortunately, there is no need to worry about the possibility of transfers to utility monsters anyway. Hypothetical insurance is a means to calculate transfers from the envied to the enviers where they had no opportunity to choose insurance coverage from an equal position.512 It is therefore only available only to those who envy the position of another. In the problematically inegalitarian examples, the transfer would take place from the envier to envied, which would not be a valid hypothetical insurance option. So if equality of resources does mimic utilitarianism in some sense, the troubling outcomes that plague utilitarianism would not apply anyway.

4.10

Conclusion

I have explained the ex ante hypothetical insurance based response to bad market luck. The compensation is based upon the insurance decisions that people can be assumed to have made when making binding insurance decisions from a hypothetical position of equality. This approach allows a form of compensation that is compatible with the anti- perfectionist form of equal concern described in the first chapter. I have shown that,

contra Otsuka, this approach is appropriately egalitarian, though not in the same way that he and others perhaps take that to mean. I explained that there is no place for potentially controversial distributive values in the determination of equal concern, and that it is consistent with the values of equality of resources to apply a statistical average policy. Finally, I then showed that hypothetical insurance would not mimic a problematically utilitarian approach. I have therefore countered the most notable criticisms and misunderstandings of this view, and have hopefully clarified the advantages of the ex ante egalitarian approach to tax policy. In the remaining chapters I will apply this approach to determine an egalitarian tax system.

512 _{Dworkin highlights that hypothetical insurance gives ‘considerable priority to the position of}

those who would be at the bottom of the economic distribution,’ Dworkin, 'Sovereign Virtue Revisited', at 133.

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Chapter 5

The holistic interpretation of hypothetical insurance

Having presented hypothetical insurance as integral to distributive justice, I now turn to the more positive task of determining the tax system that hypothetical insurers would choose. In this chapter I present a holistic interpretation of hypothetical insurance that differs from Dworkin’s in several areas. I will explain constraints and considerations that hypothetical insurers will apply in such a situation. I will conclude that hypothetical insurers would choose an on-going513 tax and benefit system that will cover certain baseline costs and also transfer resources from the more economically fortunate to the less fortunate while taking account of the economic effects of the policies. In the following two chapters I will apply the findings of this chapter to the benefit system for the unfortunate (chapter six), and to a tax system that will tax the fortunate in order to provide the necessary revenue (chapter seven).

I will begin—in section 5.1—by presenting my proposed hypothetical insurance approach to taxation, explaining where I agree with Dworkin. While I agree with Dworkin on the broad approach, I criticise two unwarranted assumptions that he appears to make. The first—in section 5.2—is that he wrongly assumes that insurance decisions imply hypothecated taxation. The second (5.3) is that Dworkin’s focus on hypothecated insurance decisions creates an unnecessary and unhelpful distance between the theory and the policies that are available. I propose instead that insurers should directly consider the policies available to resolve all forms of bad luck, which is a better fit with Dworkin’s ideal of including practical considerations in the construction of justice. My proposal is therefore to apply hypothetical insurance in a holistic and policy-focused fashion.

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189 The nature of this approach will become clearer through my responses to various possible challenges, mostly regarding differences between Dworkin’s interpretation and mine. Firstly, the insurance choice between different types of policy is different from the initial presentation of hypothetical insurance which focused instead on

premiums; I emphasise that qualitative issues are very important as well as quantitative ones. This raises a concern regarding the idea of determining the “average” policy, given that averaging will need to take place across types of policy as well as levels of premium and coverage. After explaining in section 5.4 that it is possible to overcome this problem, I will move on to a second—related—concern (5.5). This is that there are too many moving parts for people to make hypothetical insurance decisions. Insurers would have to take account of the effects of many policies simultaneously, simultaneously determining the level of coverage for multiple insurance policies. I will argue that it is possible to undertake such a dynamic process by bracketing some policies and tax expenditures and taking some issues as given while focusing on others.

The final challenge to my hypothetical insurance approach is that it is unclear where the envy occurs in the process of determining egalitarian policies. I will clarify this point against two alternative interpretations in section 5.6.

After answering the various possible criticisms of the approach just sketched, I will explain how to apply the approach. In order to do this, I take the position of the hypothetical insurers and explain the considerations that would guide them in their deliberations. This will involve more detailed discussion of the incidence of taxation (5.7) and the considerations that would guide hypothetical insurers (5.8). Finally, in section 5.9 I explain some of the ways of classifying people that will be useful when considering policy options. Once it is clear what hypothetical insurers would be deciding, and how they would deliberate, it will be possible to apply the approach.

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5.1Hypothetical insurance and taxation

I will begin by setting out my interpretation of the hypothetical insurance approach to taxation. There are several aspects to this approach, and some will be developed in more detail in later sections. After sketching out the approach I will discuss the areas in which the approach corresponds to Dworkin’s.

The first aspect of the approach is that insurers will be choosing an on-going tax and benefit system. Insurers will be interested in the whole system and its effects, and I therefore refer to this interpretation as holistic. As they consider the whole system, insurers have to consider many issues as part of a dynamic process.514 This approach therefore differs from Dworkin’s hypothecated approach, as I will discuss in section 5.2. Furthermore, it makes the hypothetical insurance procedure more complicated, though not problematically so—a defence I will make in section 5.5. The second aspect is that insurers should focus on the policies available to them and choose the best mix of policies to meet their insurance requirements. This differs from Dworkin’s insurance- focused approach, whereby the hypothecated insurance decisions are primary and the policies have to mimic the insurance outcomes.

A third aspect of the approach is that the revenue raised will need to be sufficient to meet certain baseline costs to government, as well as enabling a transfer of resources

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One point to make is that the approach is always forward-looking. Some may feel that justice should be backward-looking given the injustices of the past. However, we might worry that it will be impossible to fully achieve justice as if equality of resources were applied at some point in the past. Many of the beneficiaries of injustice will have died or spent their resources already and be unable to provide compensation. In cases in which there has been a clear injustice, such as state-based discrimination, it should be possible to provide compensation, something which can proceed independently of the forward-looking approach to distributive justice.

I do not find the forward-looking aspect too troubling, given the effects of the rather radical tax proposals that come out of the procedure—over several generations historical social inequalities would be largely removed. After all, good and bad economic fortune will follow from injustice as well as other forms of luck. In addition, I would suggest that any costs incurred in shifting to a just regime should fall primarily on those who have benefitted from a less just regime in the past, see footnote 739.

191 from the more economically fortunate to the less fortunate.515 Raising revenues is limited by the fourth aspect; insurers will have to take account of the economic effects

of the policies. The negative economic consequences of a policy can make it less attractive than alternatives that appear to improve the position of the less fortunate more directly.

I will now describe Dworkin’s conclusions regarding taxation and redistribution, in order to highlight where I agree and disagree with his conclusions.516 Dworkin linked his hypothetical insurance approach to taxation from its first presentation, indicating that his hypothetical islanders would choose a ‘recognizable pattern of tax. They might establish a graduated income tax financing transfer payments in the amount of the difference between the average coverage level less the co-insurance factor and what an applicant can plausibly argue is the highest income he can in fact command.’517 As I have discussed,518 Dworkin suggests that an income-based tax would be linked to actual earnings rather than ability to earn, to avoid enslaving the talented, along with reasons of administrative cost and privacy.

Dworkin discussed hypothetical insurance in more detail in a chapter written for Sovereign Virtue.519 He suggested that people would not take a “maximin” approach to hypothetical insurance, because of the costs of doing so to the economically lucky.520 These are the administrative costs of the scheme, but Dworkin also highlights that moral hazard issues—worries that insurance opens up opportunities for people the

515

These baseline costs are mostly those relating to the requirements of operating a democratic