Psychological Stability

Chapter 8 asks what properties a market economy must have if it is to be psychologically stable—that is, if it is to reproduce a general belief that its governing principles are fair. I argue that, because of the division of knowledge and because the opportunities open to each person depend on how other people choose to use their opportunities, full equality of opportunity is not compatible with a market economy. Psychological stability has to rest on continuing expectations of mutual benefit, defined relative to a baseline that evolves over time and that cannot be justified in terms of abstract principles of fairness. However, if the market is to be recommended to each individual separately, each individual must be able to expect to share in the benefits that markets create. Maintaining such expectations typically requires redistributive mechanisms.