From a moral point of view, the function of compensation is straightforward. Compensation serves to right what would otherwise count as wrongful injuries to persons or their property. That is the role of ‘compensatory damages’ in the law of torts. That is the role of ‘just compensation’ paid in return for the public taking of private property, pursuant to the state's power of eminent domain. That is what the New Welfare Economists are relying upon when making the possibility of gainers compensating losers the proper measure of permissible policies.

It would, however, be wrong to presume that we as a society can do anything we like to people, just so long as we compensate them for their losses. Such a proposition would mistake part of the policy universe for the whole. The set of policies to which it points – policies that are ‘permissible, but only with compensation’ – is bounded on the one side by a set of policies that are ‘permissible, even without compensation’ and on the other side by a set of policies that are ‘impermissible, even with compensation’.

There clearly are some things that we as a society can do to people without compensating them in any way for their ensuing losses. This is familiar to American constitutional lawyers through, eg, the distinction between actions arising under the state's ‘police power’ and those arising under the state's ‘takings power’.