Abstract

The question of justice has long haunted the heart of economics, yet neoclassical theory—enshrined as the global lingua franca of economic education and policy—systematically excludes it from view. While a vast critical literature has exposed neoclassical economics for its unrealistic assumptions, narrow fixation on efficiency, and persistent neglect of inequality and welfare, even its sharpest critics—Sen, Nussbaum, Stiglitz, Chang, Piketty, Polanyi, Fraser, Heilbroner, Mirowski—have, for the most part, left its disciplinary core untouched. Interventions often seek a better, more humane economics: fixing the model, incorporating plural values, or calling for external policy correctives. What remains unexamined, however, is the deeper ideological function of the discipline itself: its transformation of historical, political, and ethical choices into self-justifying technical necessity.

This chapter breaks decisively from such incremental or comparative critique. It offers potentially a global first systematic analysis of the ethical and political foundations of neoclassical economic theory, exposing its internal tautologies, the ideological sleight of “objectivity,” and the ways in which it legitimates systemic inequality. The core thesis is uncompromising: Neoclassical economics cannot, and does not, offer a meaningful theory of distributive justice. Its entire logic of marginal productivity, price formation, and equilibrium functions to convert mere description into normative justification, naturalizing historically contingent and power-laden distributions as if they were neutral, inevitable, or meritocratic. By refusing to interrogate these foundations, neoclassical theory depoliticizes the origins of wealth and power, systematically fencing off questions of legitimacy and justice as “externalities” or “distortions.”

The result is a discipline whose vaunted neutrality is itself a mask for political work—a self-sealing apparatus that rationalizes and perpetuates the status quo while rendering questions of justice illegitimate or invisible. The conclusion is inescapable: until economics confronts its own complicity in naturalizing injustice, its claims to scientific or moral authority are both unfounded and dangerous. The urgent task, then, is to reconstruct economics on foundations that recognize—and contest—the political and ethical stakes at the core of economic life.

Markets don't distribute—they adjudicate. This essay asks whether markets are just, by faithfully reconstructing how neoclassical economics answers questions of distributive justice—investigating the sophisticated mathematics that quietly adjudicate our collective assumptions about "what is deserved."

Rather than treating justice as abstract philosophical territory, neoclassical theory operationalizes it through four deceptively simple questions: What determines the "just" wage for workers or capitalists? How should total value be split between labour and capital? Who rightfully claims supernormal or abnormal profits? And what constitutes the just price for goods and services, which ultimately governs both wages and returns?

By systematically unpacking how standard economic theory resolves these questions—centering on marginal productivity, equilibrium, and voluntary exchange—we rehearse both the analytical elegance and the curious selectivity of neoclassical orthodoxy. This archaeological work proves essential: before judging outcomes or proposing reforms, we must first excavate the normative architecture that shapes what economists and policymakers mean when they invoke "justice."

The orthodox foundation for any discussion of distributive justice in economics is the canonical claim of neoclassical microeconomics: that a well-functioning, competitive market allocates rewards in strict proportion to each participant's marginal contribution. Markets are imagined as "natural justice machines" (Hayek, Friedman), where equilibrium outcomes are taken as both efficient and fair: each factor of production—labour or capital—receives exactly the value it adds at the margin, no more and no less.

This elegant account rests on a constellation of idealized "invisible hand" conditions: perfect competition, no externalities, universal price-taking, full information, and frictionless transmission of productivity gains. Under these curiously demanding assumptions, the answers to core questions of justice appear both mathematically inevitable and morally satisfying. The "just" wage becomes the wage that matches one's marginal revenue product—the extra value a worker brings to the firm. If, for instance, my unique effort enables the production of one additional car per day, and the net value of that car after costs is $5,000, my marginal product—and thus my "just" wage—should be precisely $5,000. By the same inexorable logic, returns to capital reflect its own marginal productivity. In this wonderfully frictionless world, profits dissolve entirely. In equilibrium, marginal prices match marginal costs: what looks like "profit" in messy accounting terms is simply capital's "normal" reward for its marginal contribution.

The upshot is a unique, "Pareto-optimal" allocation in which no one can be made better off without making someone else worse off. Justice, in this vision, ceases to be a separate ethical standard—it becomes the emergent property of efficient, competitive exchange.

To analyze questions of economic distribution, neoclassical microeconomics begins by formalizing the fundamental relationships between output, input, price, and reward. The core framework rests on several interlocking concepts that transform messy economic relationships into elegant mathematical certainties:

1. Production and Output

The production function (typically Cobb-Douglas) models the relationship between inputs—labour (L) and capital (K)—and total output (Y): Y = F(L,K) = A · L^α · K^(1–α) where A represents total factor productivity, and α and 1–α indicate the relative contribution of labour and capital.

2. Factor Demand and Marginal Productivity

Firms, aiming to maximize profit, hire labour and capital up to the point where each input’s marginal contribution (marginal product) equals its cost.

3. Market Supply and Demand

Labour and capital markets are assumed to be perfectly competitive:

The equilibrium condition is defined as the set of prices and allocations where: Total Demand​=Total Supply for any good k​

No further mutually beneficial trades are possible: The allocation is Pareto efficient:

Competitive forces ensure that any deviations from equilibrium prove temporary:

4. Price and Revenue

5. Distribution of Income

6. Economic Profit

Illustrative Example:

Suppose output is 100 units (Y = 100), price is 1 (P = 1), labour’s share is 70% (α = 0.7):

Through this machinery of supply, demand, and marginal product, the neoclassical model claims to provide an objective, technical account of how wages, returns to capital, and prices are set. Each factor of production is “rewarded” precisely according to its marginal contribution in equilibrium, with markets ensuring that resources flow to their most valued use.

The neoclassical model, outlined in the previous section, claims to offer a complete technical solution to the core distributive questions facing any economy. By formalizing the mechanics of equilibrium—marginal productivity, factor shares, and profit zeroing—the theory presents market allocation as a uniquely objective and just system: prices and rewards simply follow impersonal laws of supply, demand, and technological structure.

However, when these equations are translated from blackboard to real-world justice, serious cracks emerge. The very mechanisms that are supposed to guarantee fairness—competition, marginal contribution, market-clearing prices—turn out to rest on a host of unexamined normative assumptions and practical ambiguities. This section interrogates the distributive logic at three decisive junctures:

(1) Individual desert and merit (how are “just” wages determined?),

(2) Labour–capital split (what justifies the division of output?),

(3) Profits and rents (on what grounds are “abnormal” returns allocated?).

(4) Prices and wages (how does price link to value, and “just wage” to “just price”)

 In each domain, the neat formulas of microeconomics fail to deliver a defensible theory of justice—revealing instead a set of justificatory fictions that obscure power, luck, and collective contribution.

Neoclassical marginal productivity theory asserts that each person "deserves" the value their individual contribution adds to production—so the "just wage" equals marginal product, with markets positioned as neutral arbiters that efficiently and fairly allocate compensation through impersonal forces of supply and demand. On this account, justice emerges when everyone receives rewards precisely proportional to their productive input: economic value and moral desert achieve perfect alignment, market prices register collective preferences and scarcities, and competition eliminates rents and privilege.

Yet even in theory, this model offers no genuine account of justice; it merely assumes that efficiency and voluntariness suffice as procedural legitimacy, while bracketing fundamental questions about how endowments originate, how power distributes itself, or how societies construct property rights. Pareto optimality provides only a minimal efficiency criterion, not a standard of justice, equality, or welfare. It reveals nothing about who gets what or whether distribution proves fair—only that, from any current allocation, no one can improve their position without making another worse off. Consider: if one person owns everything and another owns nothing, this "dictatorship" remains Pareto optimal—any move to assist the propertyless "peasant" necessarily makes the dictator worse off.

Some further challenges are:

In sum: Marginal productivity theory offers a superficially persuasive vision of proportional reward, but cannot ground a defensible account of distributive justice. Its logic is fraught with moral arbitrariness and hidden normative assumptions: it disregards the origins of endowments, bargaining power, the construction of property rights, and the broader social consequences of distribution. But what counts as “contribution” is itself determined by legal and institutional frameworks—distributive justice cannot rest simply on productivity without interrogating those structures. By simplistically turning “what is” into “what ought,” it conflates description with justification, treating existing wage structures as morally sufficient without any meta-ethical foundation. Moreover, any meaningful concept of desert presupposes a normative standard for comparing contributions across persons—absent this, the theory collapses into circularity: wage is taken as proof of desert, and desert is defined by existing outcomes. Distribution is used to justify value, and value to justify distribution, making the claim tautological. High compensation is presumed proof of high value creation, by definition.

In neoclassical theory, the division of economic output between labour and capital is determined by each factor’s marginal product, as defined by the production function—typically represented by the Cobb-Douglas model, where output is a function of labour and capital inputs, each weighted by its respective elasticity (e.g., α for labour, 1–α for capital). In a perfectly competitive market with constant returns to scale and no externalities, all income is distributed to these factors: labour receives total wages equal to its collective marginal product, capital earns returns commensurate with its marginal productivity, and—after these payments—no residual profit remains in equilibrium.

The shares allocated to labour and capital are presented not as matters of morality or politics, but as “natural” outcomes of technology, relative scarcity, and production structure.

There is no universally “correct” allocation—like 50/50 or 70/30—that fits all sectors or economies. For example, if α = 0.7, labour receives 70% of output and capital 30%. Market prices, driven by supply and demand, clear the markets and fully allocate the product. In essence, the theory treats these outcomes as both efficient and fair—justice is presumed to flow automatically from the invisible hand of market equilibrium; there is no explicit claim for redistribution to the wider community as part of the model itself.

In mathematical terms:

If output Y = F(L,K) = A · L^α · K^(1–α) = 100, P = 1, and α = 0.7, then labour gets 70%, capital 30%—in equilibrium

Even within the neoclassical framework, several deep challenges undermine any claim that factor-based distribution is inherently just:

While the neoclassical account models the distribution of output distribution as a function of impersonal forces acting on technology and scarcity, it does so by masking profound power asymmetries, historical contingencies, and normative gaps. Rather than providing a genuine theory of just distribution, it offers a superficially objective, but ethically and politically thin, framework whose apparent objectivity forcefully obscures the contested social realities underpinning economic outcomes.

The neoclassical model treats profits as mere “temporary price signals”—transient rewards for innovation, luck, or scarcity that should be quickly eroded by competition. This theoretical posture is a critical weakness: by ignoring the real-world persistence and institutional reinforcement of rents, and by treating profit allocation as a technical outcome rather than a normative issue, neoclassical theory forecloses any inquiry into the legitimacy, justice or social impact of profit distribution. This is not mere oversight—it reflects a broader ideological commitment to procedural legitimacy (voluntary contract, competitive process) at the expense of substantive distributive justice.

Yet, despite the neoclassical ideal, persistent “supernormal” profits—or rents—are structural features of capitalism, not fleeting anomalies. They are systematically produced and sustained by institutional arrangements, legal frameworks, property rights, and managerial strategies. The pursuit and maximisation of profit lies at the very heart of modern management “science,” leveraging barriers to entry, market power, intellectual property, branding, network effects, regulatory capture, and control of strategic resources.

As a result, a significant share of economic value is appropriated through power, advantage and exclusion rather than economic necessity or technological determinants. Any serious theory of distributive justice must confront the allocation of these persistent, not dismiss them as textbook deviations. Neoclassical orthodoxy simply allocates all non-wage surplus to capital via “residual claimancy”: after wages, interest, and taxes, the surplus accrues to shareholders, who legally possess all net cash flows and supposedly bear residual risk. In rare cases, specialized labour captures rents through rare skill or innovation, but overall, the structure systematically privileges capital.

Familiar justifications—risk-bearing, incentives, historical legacy—are often cited, but all face serious critique:

Furthermore, shareholder primacy is heavily contested across moral philosophy, political economy, and legal theory:

In sum, allocating profits exclusively to capital fails both procedural justice (fair process, participation) and substantive justice (fair outcomes, basic needs). Persistent rents demand a deeper theory of distribution that interrogates mechanisms, legitimacy, and empirical effects, rather than deferring simplistically to market convention.

The relationship between moral and economic value is both pivotal and contentious. While this analysis centers on distributive justice—how wages, wage shares, and profit allocations are determined after market equilibrium prices are set—it is crucial to recognize that any claim to the justice of market wages rests ultimately on the legitimacy of price formation.

This section shows that such legitimacy fails at every turn. First, the idea that prices efficiently allocate resources collapses under both empirical evidence and theoretical critique. Second, market prices do not reliably correspond to any objective or intrinsic worth, but merely express contingent exchange value. Third, even as reflections of subjective value, prices are fundamentally limited by the unmeasurability and incommensurability of individual utility. Finally, because wages are mathematically tied to these flawed prices in neoclassical theory, any claim that market outcomes are just is ultimately indefensible.

1. Are Prices Efficient?

Economic theory posits that prices emerge at the intersection of supply and demand, under idealized conditions of perfect competition, complete information, no transaction costs, and frictionless adjustment. The equilibrium price (P*) is where consumers’ willingness to pay for the marginal unit equals the producers’ marginal cost. Across the market, prices signal the substitution rate at which consumers trade off goods, so that prices function as an effective signal to guide resource allocation via decentralized decision-making.

Yet this elegant abstraction conceals fundamental limitations:

Thus, while neoclassical theory treats prices as pure signals of efficient resource allocation, empirical and theoretical evidence consistently shows that they are institutionally embedded, shaped by power, and far from frictionless or universal. Studies of market power regularly reveal how firms maintain price rigidity or skimming strategies insulated from competitive pressures, challenging the notion price reflects marginal cost and utility. Behavioural economics further demonstrates systematic departures from rational utility-maximizing behaviour, such as bounded rationality, loss aversion, and social preferences, further distorting the price as a pure informational signal.

2. Do Prices Express Objective Value?

“When you understand that under capitalism a forest has no value until it's cut down, you begin to understand the root of our ecological crises.” (Adam Idek Hastie)

Despite these limitations, economic theory routinely treats market prices as proxies for value. This raises a critical question: what legitimacy does “economic value” possess when compared to any philosophical or moral conception of “objective” value?

Traditionally, economic theory distinguishes between use value and exchange value:

The classic “water-diamond” paradox illustrates this tension: water, essential and possessing immense total use value, is abundant, and thus has low marginal utility and a low market price. Diamonds, less essential but scarce, have high marginal utility and command a high market price, despite far lower total use value

By focusing narrowly on marginal utility, economic reasoning legitimates the gap between exchange value and use value. This can result in socially suboptimal outcomes, such as the neglect of basic needs that are “non-scarce” in market terms. Moreover, a preoccupation with exchange value can deflect from exploitative social relations of production, which further complicates the question of distributive justice. At the macro level, aggregating prices in measures like GDP obscures critical dimensions of social value creation: unpaid labour, environmental externalities, and public goods are all excluded from price signals, further muddying the market’s ability to represent genuine distributive fairness or true social contribution. This distortion becomes even more pronounced if we view money as a public good, and its allocation reflecting the collective claim of citizens on the surplus generated by economic activity. From this perspective, the indiscriminate reliance of policymakers on aggregate GDP not only conceals the unjust distribution of the “share of money” but also serves to legitimate outcomes that may be both profoundly inefficient as well as unjust.

Philosophically, value has long been grounded in frameworks far richer than market price. For Aristotle, value inheres in the capacity of goods and institutions to support human flourishing (eudaimonia). For Kant, dignity and autonomy are ends in themselves, never reducible to price. Modern approaches—such as the capabilities framework (Sen, Nussbaum), care ethics (Gilligan), Rawlsian “primary goods,” and ecological or social justice perspectives—anchor value in the fulfillment of needs, rights, and substantive human capabilities. All of these traditions point to criteria of value that are objective, plural, and irreducible to the logic of exchange or marginal utility.

As Polanyi warned, when markets commodify labour (human effort, creativity, health, and life), land (nature, ecosystems, the environment), or money (means of exchange and store of value), they threaten the very fabric of society and nature. These, for Polanyi, are “fictitious commodities”—foundational to social life but never produced for sale, and thus incapable of being justly valued by market price.

As Hayek noted, market outcomes can be “just” only in procedural terms, not in terms of substantive results—but procedural legitimacy does not guarantee distributive justice or moral worth. These questions fundamentally challenge whether markets can ever be just—a topic to which we will return.

3. Do Prices Express Subjective Value?

Even if market prices fail to represent objective or use value, it remains essential to interrogate the normative adequacy of marginal utility—the cornerstone of neoclassical accounts of subjective value in price formation.

In neoclassical economics, marginal utility serves as the foundational lens for understanding individual welfare, price formation, and, by extension, distributive outcomes in market economies. The theory posits that the value of goods and services, and the allocation of resources, are determined by the incremental change in total utility (satisfaction, well-being, or subjective value) that an agent derives from consuming one additional unit of a good or service, holding all else constant. Mathematically, if U(x₁, x₂, ..., xₙ) denotes a utility function over an n-dimensional commodity space, then the marginal utility of good xᵢ is given by the partial derivative ∂U/∂xᵢ.

This marginal valuation underpins the demand side of markets and, in conjunction with marginal cost on the supply side, determines the equilibrium price and allocation of goods. Market prices, in this view, allocate goods and resources to those who value them most highly at the margin, as revealed by their willingness to pay. Distributive outcomes are thereby justified on the grounds of procedural justice: resources flow to their “highest valued use,” and those with the greatest marginal utility are presumed to “deserve” access, as signalled by their purchasing power.

Philosophically, marginal utility marks the subjectivist turn in value theory, treating value not as an intrinsic property of objects, but as a function of individual preferences, psychological states, and contexts. The law of diminishing marginal utility—a central axiom—states that as consumption of a good increases (with other goods held constant), the additional utility gained from each successive unit decreases.

However, substantial measurement and conceptual challenges undermine this framework:

Thus, the reliance on subjective, individual utility in neoclassical theory fails to engage meaningfully with issues of need, equity, individual responsibility, or moral desert. Utility-based welfare theory cannot justify redistributive interventions to support the worst-off or to balance gains and losses between individuals—a central concern of justice theories such as Prioritarianism and Luck Egalitarianism. At best, it provides a thin justification for existing distributions; at worst, it becomes an ideological rationalization for inequality rooted in purchasing power rather than ethical merit.

While pure marginal utility theory is rarely invoked explicitly in contemporary policy, it has profoundly shaped economic thinking about what counts as “rational” or “efficient.” The idea that market prices and wages “reveal” true value is routinely used to oppose redistributive policies, minimum wages, rent controls, or price regulations. Arguments about “distorting the price signal” or generating “deadweight loss” directly echo marginal utility logic. Moreover, firms routinely justify practices such as price discriminate by marginal utility theory, even when they produce regressive distributive outcomes.

Note: While contemporary social choice theory (Arrow, Sen) and welfare economics have explored cardinal utility and distributional weights to address interpersonal comparisons, these approaches remain limited for the present analysis.

4. So How Is the Justice of Wages Impacted by the Justice of Price?

Wage justice in neoclassical theory is mathematically and conceptually linked to price justice through the canonical relation: “Just wage” =MPL × P* —where P* is presumed “just” as the equilibrium price.

While this linkage appears rigorous, the preceding analysis shows that it collapses under deeper scrutiny:

Therefore, although the linkage between market prices and marginal product wages is foundational in economic theory, it proves normatively empty when examined through the lens of distributive justice. It cannot provide an ethical foundation for either absolute or relative wage levels, nor can it legitimate existing patterns of wage distribution. This highlights the urgent need to rethink wage-setting institutions and to reimagine distributive justice beyond the narrow confines of market valuation.

The last sections have exposed the hollow core at the heart of the neoclassical model’s claim to distributive justice. For all its mathematical elegance and technical seduction, neoclassical economics advances a fundamentally proceduralist conception of justice: legitimacy is presumed to arise automatically from voluntary exchange (and presumed mutual benefit), allocation according to marginal productivity, and the achievement of equilibrium prices.

Here, an essential normative tension emerges. Neo-classical economics reduces justice to a procedural legitimacy, thus divorcing process from any commitment to substantive justice or essential relational obligation. The result is a formal proceduralism—outcomes validated simply because they conform to “efficient” market process, regardless of any foundation in equality, reciprocity, or systemic justice. As we will see in the next part, this is in striking contract to the procedural tradition: Rawls’s constructivist liberalism, for example, insists that just procedures are inseparable from substantive justice: the ‘original position’ is constructed to generate just outcomes, not merely fair processes. For Rawls, procedural legitimacy is anchored in values like equality, reciprocity and fairness, built into the procedure itself. Habermas, similarly, grounds legitimacy in communicative rationality and inclusive deliberation—procedures that operationalise fairness and honesty rather than evacuate them.

Yet even on its own analytical terms, the framework unravels wherever marginal productivity becomes manipulated or indeterminate—a point not merely technical but foundational.

And of course, the model’s logic falters in actual markets, which are marked not by the purity of perfect competition but by persistent asymmetries of information, pervasive frictions, market concentration, and entrenched power structures. On that basis, neoclassical economics has given rise to extensive theoretical foundations for market intervention: externality theory justifies environmental regulation, asymmetric information theory supports consumer protection, natural monopoly theory legitimizes public utilities, and welfare economics demonstrates when redistribution can improve social outcomes. However, it is one thing to claim the market needs to be corrected, because it isn't efficient, another matter entirely to acknowledge that efficiency isn't a legitimate justice claim.

The issue, then, is not that real markets “fail” to measure up to idealised models, but rather that the ideological naivety of neoclassical model-builders fails to register both the normative challenges of empty proceduralism and the essential dynamics of real markets. Actual outcomes are not determined by abstract mechanisms or an “invisible hand,” but by the cumulative effects of often unjust institutional design, inherited privilege, historical contingency, and sheer accident. Power, far from being an anomaly to be corrected, is constitutive of market outcomes.

This should not surprise us. The architects of neoclassical economics—Jevons, Walras, Marshall, Pareto, Edgeworth, and their peers—were not simply scholars; they were men of privilege, shaped by elite universities and the upper echelons of society, their worldviews forged in the context of European empire and the Belle Époque, the rise of finance, and the turbulence of social change. Secular or post-Christian, steeped in Enlightenment rationalism and the confidence of scientific certainty, they aspired to replicate the clarity of Newtonian physics. The “mess” of classical political economy—history, morality, class conflict—was, for them, a source of embarrassment and anxiety. Many feared mass politics, harbouring deep suspicions about democracy, socialism, and the “irrational” demands of the poor and working classes. In their new gospel of mathematical economics, science was to become the new priesthood, supplanting the confusions of politics, philosophy, and religion. Where classical economists like Smith and Marx, and later welfare theorists such as Pigou and Samuelson, foregrounded explicit ethical concerns, these model-builders presented the erasure of “subjective” morality as a mark of moral progress. Their equations were a claim to new authority: if society could be captured by mathematics, then the economist—not the philosopher or priest—would become society’s final arbiter of justice, insulated from both the mob and the monarch.

In the light of the preceding analysis, it should be evident that justice cannot be reduced to the outputs of mathematical models constructed by men convinced of their own objectivity but blind to their own privilege. Genuine justice demands independent and morally substantive criteria—a standard that contemporary economics, for the most part, has surrendered.