We are seeing the specter ofinstability with the growing protests of income inequality, theeconomic and political power of the very wealthy, and the economicdistress of the middle class. There is Occupy Wall Street in theU.S., and similar protests ranging across the globe. In parts ofEurope we are seeing rioting in the streets, in parts of Chinaprotests have turned deadly.

A microcosm for theseprotests can be seen in Israel, which is among the first countries tostage such protests. In a recent post I recount my experience inIsrael in the early 1980s, and contrast that with the Israel oftoday, with its version of the Occupy Wall Street movement. In Israelthe focus is more than the banks: a small set of families basicallyhave controlling interest in the economy proper, and the country hasa concentration of wealth at the top that makes the U.S. look like acommune. The transformation of Israeli society and the recentprotests tell us something about the roots of social unrest that havespread recently from Occupy Wall Street to other countries.

The egalitarian Israeli society that Isaw three decades ago was one that had remained true to the foundingspirit of the country, and I believe it managed to do so because ofthe unrelenting specter of war. During times of crisis, of war ornatural disaster where there is a randomness to existence thatextends beyond wealth to issues of life and death, people choose tobe more egalitarian. In the face of the uncertainty they know theymight end up with the short end of the stick with the next roll ofthe dice, and that whatever they acquire will likely be transitory.So they first and foremost focus on keeping a social system and itssupport structure in place.

Unerring stability leads to theopposite course. For example, in the medieval societies whereposition remained unchanged for decades, even centuries, where land,the key source of wealth, passed inexorably from one generation tothe next, where class distinctions dictated the path of your life andthat of your children, an egalitarian notion was not even in therealm of consideration. There were the rich and there were the poor.It was as simple as that.

Absent a policy of incomeredistribution, capitalism plus stability leads to incomedisparities. Take stability out of the equation, and thedistribution will narrow. Israel is more stable thanks to the effortsof the broad base of society, most notably through their militarycommitment And so Israeli society as a whole maintains theenvironment that allows the remarkable income disparity to occur. Because of this, Israeli society as a whole questions the socialstructure that gives rise to this disparity. They have a hand increating that stable society, and could theoretically choose insteadto move more toward one of instability. In the extreme case, doing somight be their best course.

In The Theory of Justice,Rawls performs the thought experiment of developing a politicalsystem where those determining this system are operating under whathe calls the veil of ignorance. The veil of ignorance prevents thecontractors – those who are going to enter into the politicalcontract that they have a hand in developing – from knowing theirplace in the resulting society. They do not know their assets, theirendowments of intelligence and strength, even many of theirpreferences and values. They do not know their place in society, theydo not even know the civilization and culture that has been achieved.

The veil of ignorance is an importantvehicle for the development of his political theory. The exercise istrivial without it. If one's endowment is known at the time politicalsystem is being crafted, then obviously the endowed will push towarda winner-takes-all system while those on the other extreme will pushfor an aggressive redistribution of wealth.

The epistemological constraint imposedby the veil of ignorance creates the circumstances for thecontractors to act in accordance with Rawls' fair principles, whichinclude: The contractors cannot choose to advantage just themselves(since they do not know where they will fall in society); they cannotchoose to risk massively disadvantaging others (because these otherswill defect); and they cannot risk massively disadvantagingthemselves (because they must consider their descendants and theirown capacity to stay true to the principles they choose). Thus, evenif the contractors do not affirmatively seek fairness, theircircumstances lead what they choose to end up being fair.

From their perch in the originalposition behind the veil of ignorance, Rawl's contractors seek totemper the worst possible outcomes. We might think of this as thecontractors choosing a basic structure for society in which thereposition will be randomly assigned, or even where there is a chancethat their enemy will assign them their place. Rawls offers severalreasons why this is the natural result. First, the parties cannotrationally take risks because the veil of ignorance makesprobabilistic calculations impossible. Second, the contractors arechoosing the political system not only for themselves, but for theirprogeny, and with such high stakes, they will want to guard againstthrowing their progeny into a purgatory. And third, although thecontractors do not know their preferences or what they will considergood and desirable, they do know that there will be some notion ofthe “good and desirable” that will motivate them, so they seek tosecure circumstances that will allow them to pursue this.

We can take Rawls' construction toexplore the implications of instability in a capitalist society.Suppose that the contractors are told that whatever system they putforward will be beset by occasional exogenous shocks that destroywealth. The social and political system may continue through theseshocks, but there is nothing they can do to affect the occurrence ofthe shocks or their result.

Take the two extremes of possibleshocks: complete stability versus unrelenting instability. In thefirst case one's position and wealth are secure. Once you have it,you can't lose it. And if you don't have it, you can't get it. In theother extreme, society is essentially beset with economic revolution,and fortunes are made and lost.

Now back up and suppose that thecontractors placed in the Rawlsian veil of ignorance know a littlebit more than he allows, in particular, that they know what theirinitial state will be in terms of position and wealth when thepolitical system is first set, and they also know the degree ofinstability that will surround that system. What happens when we addthis additional knowledge to Rawls original position?

The greater the instability, the lessvalue there will be in their knowledge of their initial state. In thelimit, the additional information of one's initial state meansnothing, because everything will become randomized in short order. So we are pretty much back to Rawls' assumption of a veil ofignorance in terms of each person's initial state. Things do notexactly reduce to Rawls' argument, however, because we have anadditional piece of information, namely that no matter what system weput in place, it cannot prevent the frequent and arbitrary change ineach person's conditions. In this situation, there will be a movetoward an egalitarian solution; those who know they will be at thetop when the game begins will join those on the bottom rung to votefor an egalitarian system.

Indeed, on an inter-temporal basis anegalitarian system is inevitable in the roll-of-the-dice extreme, inthe sense that over the many rolls of the dice sometimes one personwill be on the top, sometimes another, and everyone will face thesame distribution of wealth. If people are not myopic, that is, ifthey look at the results of this extreme as it plays out over a longperiod of time, they will find that the greater the instability –the more frequently the dice are tossed – the lower the dispersionof wealth will be. Indeed, for all practical purposes there will beno private property, because period by period the property will besold off based on the reshuffling of fortunes. It is “here today,gone tomorrow”.

On the other hand, if there is noinstability, and people know their initial states, if everything isset in stone and one's initial state will persist forever, thenobviously the rich will vote for a system where the winners keepeverything they get, while the losers in the lottery will vote, asthey will always, for sharing the wealth.

(Note: We don't need a literal lottery;we can have hard work and talent take a part in getting people wherethey are, and that each time the world essentially starts over hardwork and talent play a part in how wealth gets redistributed. But weneed to recognize that luck also plays a role, and so we can stillinvoke the image of a lottery or a roll of the dice. And, as Rawlsasserts, inborn talent comes from the luck of the draw. The joke thatsomeone's best career move was in choosing their parents applies tomore than inherited wealth).

This might help provide a context forsome of the current debate on wealth, income distribution, and taxes,and the related protests arising throughout the world. Instabilityhelps overcome one of Rawls concerns, and a concern, not always wellarticulated, that must be in the minds of the protesters and othersamong the “99 percent”: That the political system, though just,can gradually move toward a result that, ex post, is at variance withthe principles that society initially agreed upon.

Rawls concedes that even if everyoneacquires their property justly in accordance with the politicalsystem and all distributions are done freely in accordance with theagreed concept of justice, it is still possible that over timedisparities in wealth may occur that undermine the values fromoverarching first principle. He states:

Even though theinitial state may have been just, and subsequent social conditionsmay also have been just for some time, the accumulated results ofmany separate and seemingly fair agreements entered into byindividuals and associations are likely over an extended period toundermine the background conditions required for free and fairagreements. Very considerable wealth and property may accumulate in afew hands, and these concentrations are likely to undermine fairequality of opportunity, the fair value of political liberties, andso on.

This gives rise to a possible socialcontract. Faced with a knowledge of their current state, the peoplecan design a political system that is unstable, thus giving them atshot at the lottery in the future. Or they can move toward one thatmaintains stability, and in doing so establish the rich moresecurely. For the people to choose the latter route and participatein a government that entrenches the rich, they will demand anegalitarian structure similar to what they would under the Rawlsianveil of ignorance.

We cannot separate theissues of income distribution from the social system. As a startingpoint, a wide income distribution requires a developed society. Thisis somewhat of a tautology, because a distribution suggests apopulation to distribute, but income distribution is not verymeaningful in a family clan. It is hard to be very rich when you areall tilling the land and are all facing risk of starvation. Nut even more than that, a wide income distribution requires a stable society,which means laws to maintain property rights, a government that isnot confiscatory in taxation, and a military that protects thesociety from attack. It is impossible to discuss the economicswithout considering the social contract. That is why it is calledpolitical economy.

This discussion was not one ofcapitalism versus socialism. We can take unfettered,eat-what-you-kill capitalism as a starting point. The knob that isbeing turned is the level of social stability. Even from their perchin my version of the veil of ignorance those who are wealthy in theinitial state will choose to keep the knob turned back toward the “donot disturb” setting, even when the tradeoff for doing so is toconstruct a society that induces less inequality.