What is the Meaning of Justice in Pancasila Economics

Pancasila, Indonesia's guiding ideology, prominently features the concept of justice. Principle Two emphasizes the establishment of a "just and civilized" society, while Principle Five advocates for the attainment of "social justice." However, the terms "justice" and particularly "social justice" are frequently used yet often lack a clear definition.

The study of economics traditionally does not explicitly incorporate justice concepts into its core curriculum. Economics primarily functions as a positive social science, focusing on the efficient allocation of scarce resources. Conversely, the study of justice aligns more closely with the realm of normative humanities, concerned with the fair distribution of outputs generated from these scarce resources.

Despite this distinction, justice concepts are not entirely absent from economic theory. Eventually, economics originated as a branch of moral philosophy. However, integrating economic perspectives on solving societal scarcity problems with considerations of justice remains a relatively under-explored area.

Within economic theory, justice often equates to efficiency. Pareto efficiency and Kaldor-Hicks efficiency exemplify this approach. Pareto efficiency posits that any transaction where no economic actor experiences a decline in well-being is considered efficient, and therefore just. Kaldor-Hicks efficiency builds upon this concept, stating that a transaction can still be deemed efficient, and therefore just, even if one party experiences a gain while another suffers a loss, as long as the gainer could theoretically compensate the loser.

However, both Pareto and Kaldor-Hicks efficiency have limitations. They analyze dynamic transactions in isolation from the initial or final distribution of income and economic opportunities. In societies characterized by significant inequality, numerous Pareto and Kaldor-Hicks efficient transactions could occur, potentially exacerbating existing inequality.

John Rawls, a prominent philosopher, proposed a theory of justice that incorporates both transactional considerations and concerns about inequality. He introduces the concept of an "original position," where individuals operate under a veil of ignorance regarding their future socioeconomic standing. In this scenario, it becomes plausible for everyone to find a social contract appealing. This contract would guarantee access to redistribution mechanisms for all members of society, ultimately aiming to maximize the income of the least advantaged individuals (the maximin principle). However, this redistributive approach is constrained by the potential for excessive taxation to discourage economic activity among the wealthy. Such a decline in economic activity could ultimately harm all members of society, including the least disadvantaged.

Amartya Sen’s concept of justice shows many parallels to Rawls’ maximin position. Sen, however, not only focuses on justice, but just development. Just development for Sen requires a social contract that assures all citizens access to the development of capabilities such as health, education and credit so that the citizens can realize their desired “functionings” in society. The maximization of the well-being of the least well-off in society is therefore not only about taxation and redistribution, but taxation and public investments in access to the development of individual capabilities.It is about equal opportunity in access to market access capabilities.

Additional justice concepts refer to efficiency and redistributive justice. Redistributive justice, in turn, can be categorized into equal opportunity based and equal income redistributive justice. Efficiency justice states that the more efficient or harder working individual is also entitled to a greater slice of what is being produced than the less efficient or less hard working one. Equal opportunity based redistributive justice implies that as long as equal opportunities prevail, income inequality may still result, but only because of different individual life choices, and therefore they do not constitute any injustice. Equal consumption justice, on the other hand, calls for the pie to be shared equally among all citizens as the only form of redistributive justice.

Obviously, for all major economic systems - laissez-faire, socialism, and the social market economy - equal opportunity justice is a basic human right. Market economists advocate for equal opportunity to compete in the competitive market place, socialists for equal opportunity to compete for available positions within the central plan. Laissez-faire and social market economists also consider efficiency justice a natural right, something which socialists reject. For market economists, the presence of equal opportunity in combination with efficiency justice leads to redistributive justice, even if income inequalities persist. In order to prevent any income inequality, socialists advocate for equal opportunity for central plan positions and do not tolerate unequal incomes as equal consumption justice as the ultimate goal of socialism is incompatible with efficiency justice.

The demarcation lines between market and central planner economists can therefore be drawn along normative assumptions of what constitute basic rights. But what about the difference between laissez-faire and social market economists? To answer this question, one needs to leave the realm of normative assumptions regarding what constitutes basic rights and turn to normative assumptions regarding what are natural states of the market.

Both social market economists and socialists do not believe that equal opportunity is a natural state of a minimally regulated market, whereas laissez-faire apostles do. To illustrate this, consider the following scenario. Assume two small girls with identical talents, but one girl being raised in affluency, and the other in poverty. Let a beautiful voice be that talent. For laissez-faire economists, both girls have then the same opportunities to realize their life dreams of becoming, for example, an opera singer. The parents of the girl raised in affluency can already send their daughter to musical schools from an early age on. But what about the poor girl? For believers in laissez-faire, the market will provide opportunities for the girl. For example, one day the girl will walk down a street singing and her beautiful voice will be recognized by a benefactor, who will sponsor the girl's musical training towards becoming an opera singer, at which point the little girl will become so successful that she can easily repay the loan to the benefactor. Markets then create equal opportunity. Social market economists, just as socialists, would disagree that markets can ever work that efficiently. Market failure is a real problem.

Yet to be fair, advocates of laissez faire do also acknowledge that markets might fail, but they doubt, as opposed to social market economists, that government regulation to correct market failure does work. For example, a tax to finance improvements of the quality of public schools or health care in poor areas may cause those to be taxed to relocate their capital with unforeseen consequences, such as an overall shrinking of economic activity. Thus, laissez-faire economists like to ague that while markets might fail, or are missing, government regulation to correct market failures might equally fail. In short, social market economists differ from laissez-faire economists in terms of beliefs what government can do, and what not, with respect to the correction of market failures. The social market economy likes to perceive itself not as a mix of socialist and capitalist elements, but a third way. With the help of the normative assumptions of what is just and the ability of the market to provide certain forms of justice, the demarcation lines of this third way can be clearly drawn, and they are summarized in the below table.

From Indonesia's constitution it is clear that it seeks a proactive role of the government in providing social justice. In line with the normative views held by social market economists, investing in equal opportunity justice seems therefore to be a good compass in guiding economic policy.