I had an interesting exchange with another economist online the other day about the chimerical “equity efficiency tradeoff.” I commented it doesn’t really make sense to talk about such a tradeoff because economic efficiency is only defined, or at least only normatively significant, with respect to a particular distribution of economic power and hence pattern of supply and demand. If one is having a disagreement relating to distributional ethics, efficiency is only important once that disagreement has been resolved. He readily agreed, but it got me thinking how the ubiquity of this particular bit of nonsense is yet another example of fake distributional indifference.
What one must understand about economic efficiency is that all the normative content associated with economic efficiency in neoclassical welfare economics derives ultimately from utility. That’s why it’s important. That’s why we discuss it. It doesn’t have its own independent normative significance beyond utility. That means when we encounter an issue that cannot be addressed using utility as defined in economic theory because of the impossibility or undefined status of making interpersonal utility comparisons (depending on which version of utility one is using, perception utility or preference utility respectively), such as the distribution of economic power (or really any other ethical issue related to resolving interpersonal conflicts of wants or desires or needs on the basis of economic power in markets, a point I’ve discussed previously and will no doubt discuss again in the future) “efficiency” cannot emerge as a distinct criterion. It is not correct to say one should apply whatever external ethical principles one likes to an issue that cannot be addressed with utility as defined in economic theory, but one must then consider the tradeoff of those values with “efficiency.” If utility as defined in economic theory is irrelevant to assessing or resolving an issue, so is economic efficiency.
In the vernacular, economic efficiency, like efficiency in general, is only normatively significant if one is talking about an end one accepts or desires, for example, a distribution of economic power one feels is ethically acceptable. If one has the choice of going to hell very efficiently in a hand basket or not, and one chooses not, one doesn’t worry about the tradeoff between not going and the resulting lost “efficiency.”
In more specifically economic and theoretical terms, in neoclassical welfare economics we are, or should be, indifferent between Pareto optimal (economically efficient) outcome A and non-Pareto optimal (non-economically efficient) outcome B if we cannot get from B to A via Pareto improvements, that is, if it requires the sort of interpersonal tradeoffs we cannot address using utility because of the impossibility or undefined status of interpersonal utility comparisons. It is not theoretically correct to say something like we’re indifferent to A and B on the basis of utility, but we should prefer the Pareto optimal outcome because it is economically efficient. That’s a form or version of what I’ve been calling fake distributional indifference. A different way of saying the same thing is that economic efficiency only has normative significance with respect to a given distribution of economic power and hence pattern of demand and supply. If one gives economic efficiency independent normative weight, what one is really doing is giving the current distribution of economic power and hence pattern of demand and supply independent normative weight, thus breaking distributional indifference.
It’s funny when the purveyors of bad economics, including alas many economists, try to do science, math, and ethical philosophy at the same time and make a complete hash of it. They may like doing it for whatever reason, such as the opportunity to express their own value judgments in obscure ways they may hope will insulate them from criticism and debate, but we all end up paying the cost in terms of the resulting confusion and conflict. We should fix bad economics by taking out the normative or ethical content and putting it back with the people. Let economics become a true science. Let it be the rigorous intellectual discipline it has always aspired to be or has always pretended to aspire to be anyway.
