A theory of Justice: Revised Edition

Quarterly Journal of Economics,
vol. 81 (1967).
237
42. Economic Systems

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everyone than some other course of action, even though, taking the
conduct of the others as given, each person’s decision is perfectly ra-
tional. This is simply the general case of the prisoner’s dilemma of which
Hobbes’s state of nature is the classical example.
8
The isolation problem
is to identify these situations and to ascertain the binding collective un-
dertaking that would be best from the standpoint of all. The assurance
problem is different. Here the aim is to assure the cooperating parties that
the common agreement is being carried out. Each person’s willingness to
contribute is contingent upon the contribution of the others. Therefore to
maintain public confidence in the scheme that is superior from everyone’s
point of view, or better anyway than the situation that would obtain in its
absence, some device for administering fines and penalties must be estab-
lished. It is here that the mere existence of an effective sovereign, or even
the general belief in his efficacy, has a crucial role.
A final point about public goods. Since the proportion of social re-
sources devoted to their production is distinct from the question of public
ownership of the means of production, there is no necessary connection
8. The prisoner’s dilemma (attributed to A. W. Tucker) is an illustration of a two-person noncoop-
erative, nonzero-sum game; noncooperative because agreements are not binding (or enforceable), and
nonzero-sum because it is not the case that what one person gains the other loses. Thus imagine two
prisoners who are brought before the attorney general and interrogated separately. They both know
that if neither confesses, they will receive a short sentence for a lesser offense and spend a year in
prison; but that if one confesses and turns state’s evidence, he will be released, the other receiving a
particularly heavy term of ten years; if both confess each gets five years. In this situation, assuming
mutually disinterested motivation, the most reasonable course of action for them—that neither should
confess—is unstable. This can be seen from the following gain-and-loss table (with entries repre-
senting years in prison):
Second Prisoner
First Prisoner
not confess
confess
not confess
1, 1
10, 0
confess
0, 10
5, 5
To protect himself, if not to try to further his own interests, each has a sufficient motive to confess,
whatever the other does. Rational decisions from the point of view of each lead to a situation where
both prisoners are worse off.
The problem clearly is to find some means of stabilizing the best plan. We may note that if it were
shared knowledge between the prisoners that they were either utilitarians, or affirmed the principles
of justice (with restricted applications to prisoners), their problem would be solved. Both views in
this case support the most sensible arrangement. For a discussion of these matters in connection with
the theory of the state, see W. J. Baumol as cited in note 6 above. For an account of the prisoner’s
dilemma game, see R. D. Luce and Howard Raiffa, 
Games and Decisions
(New York, John Wiley and
Sons, 1957), ch. V, esp. pp. 94–102. D. P. Gauthier, “Morality and Advantage,” 
Philosophical Review,
vol. 76 (1967), treats the problem from the standpoint of moral philosophy.
238
Distributive Shares

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between the two. A private-property economy may allocate a large frac-
tion of national income to these purposes, a socialist society a small one,
and vice versa. There are public goods of many kinds, ranging from
military equipment to health services. Having agreed politically to allo-
cate and to finance these items, the government may purchase them from
the private sector or from publicly owned firms. The particular list of
public goods produced and the procedures taken to limit public harms
depend upon the society in question. It is a question not of institutional
logic but of political sociology, including under this heading the way in
which institutions affect the balance of political advantages.
Having considered briefly two aspects of the public sector, I should
like to conclude with a few comments about the extent to which eco-
nomic arrangements may rely upon a system of markets in which prices
are freely determined by supply and demand. Several cases need to be
distinguished. All regimes will normally use the market to ration out the
consumption goods actually produced. Any other procedure is adminis-
tratively cumbersome, and rationing and other devices will be resorted to
only in special cases. But in a free market system the output of commodi-
ties is also guided as to kind and quantity by the preferences of house-
holds as shown by their purchases on the market. Goods fetching a
greater than normal profit will be produced in larger amounts until the
excess is reduced. In a socialist regime planners’ preferences or collective
decisions often have a larger part in determining the direction of produc-
tion. Both private-property and socialist systems normally allow for the
free choice of occupation and of one’s place of work. It is only under
command systems of either kind that this freedom is overtly interfered
with.
Finally, a basic feature is the extent to which the market is used to
decide the rate of saving and the direction of investment, as well as the
fraction of national wealth devoted to conservation and to the elimination
of irremediable injuries to the welfare of future generations. Here there
are a number of possibilities. A collective decision may determine the
rate of saving while the direction of investment is left largely to individ-
ual firms competing for funds. In both a private-property as well as in a
socialist society great concern may be expressed for preventing irre-
versible damages and for husbanding natural resources and preserving the
environment. But again either one may do rather badly.
It is evident, then, that there is no essential tie between the use of free
markets and private ownership of the instruments of production. The idea
239
42. Economic Systems

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that competitive prices under normal conditions are just or fair goes back
at least to medieval times.
9
While the notion that a market economy is in
some sense the best scheme has been most carefully investigated by
so-called bourgeois economists, this connection is a historical contin-
gency in that, theoretically at least, a socialist regime can avail itself of
the advantages of this system.
10
One of these advantages is efficiency.
Under certain conditions competitive prices select the goods to be pro-
duced and allocate resources to their production in such a manner that
there is no way to improve upon either the choice of productive methods
by firms, or the distribution of goods that arises from the purchases of
households. There exists no rearrangement of the resulting economic
configuration that makes one household better off (in view of its prefer-
ences) without making another worse off. No further mutually advanta-
geous trades are possible; nor are there any feasible productive processes
that will yield more of some desired commodity without requiring a
cutback in another. For if this were not so, the situation of some individu-
als could be made more advantageous without a loss for anyone else. The
theory of general equilibrium explains how, given the appropriate condi-
tions, the information supplied by prices leads economic agents to act in
ways that sum up to achieve this outcome. Perfect competition is a per-
fect procedure with respect to efficiency.
11
Of course, the requisite condi-
tions are highly special ones and they are seldom if ever fully satisfied in
the real world. Moreover, market failures and imperfections are often
serious, and compensating adjustments must be made by the allocation
branch (see §43). Monopolistic restrictions, lack of information, external
economies and diseconomies, and the like must be recognized and cor-
rected. And the market fails altogether in the case of public goods. But
these matters need not concern us here. These idealized arrangements are
mentioned in order to clarify the related notion of pure procedural justice.
The ideal conception may then be used to appraise existing arrangements
and as a framework for identifying the changes that should be undertaken.
A further and more significant advantage of a market system is that,
given the requisite background institutions, it is consistent with equal
9. See Mark Blaug,