I thought this week I might revisit the idea of efficiency as it relates to markets. I know I’ve done it before, many times, but I was reading a young fellow waxing eloquent on the efficiency of markets and it brought it to mind again. Sound a plan?
Efficiency must be defined relative to some goal or objective. Nothing is efficient in general, with respect to everything. Jumping off a cliff is an efficient way to get to the bottom, but not necessarily getting there alive. One must always ask, efficient with respect to what? The efficiency of markets in a welfare economics sense is typically defined with respect to individual preference rankings, there called “utility,” in the rather arcane sense no one can move up his or her preference ranking without someone else moving down his or her own. That’s called “economic efficiency” or “Pareto efficiency” after the Italian fascist who came up with it. My point here is simply it’s not necessarily efficiency with respect to what some may suppose the most normatively significant goal or objective. Let’s have an example.
To make the issues more obvious, imagine a quite unequal distribution of economic power in which most of it is in the hands of a very pampered big shot indeed, the Heiress of All. The Heiress has plenty of most things but is interested just now in very fancy jeweled eggs. A theoretical perfectly competitive market will allocate scarce resources to meet that preference set and be “economically efficient” at the same time. That’s good, right? It’s not as though there’s no sensible ethical content to “economic efficiency.” Seems a nice thing to have.
But for some, the ethical significance of the “economic efficiency” of that market may pale in comparison to, say, efficiency with respect to improving the welfare of the starving commoners. Indeed, some may suppose the Heiress’s preferences have altogether too much significance. Frankly, some may not give a damn if the Heiress of All manages another jeweled egg or not. The “economic efficiency” of that market may be a relatively insignificant consideration for them, based on their ethical views on the definition, distribution, use of economic power. Because of the existence of other people, the scarcity of resources, the ubiquity of interpersonal conflicts of preferences over resource use and other matters, we’re never truly in a situation in the real world where only individual preference ranks matter in terms of ethics.
Of course, if one agreed the ethics of the definition, distribution, use of economic power in markets to resolve interpersonal conflicts of preferences, supposed all more serious interpersonal ethical issues resolved, then “economic efficiency” would appear more significant. To reprise our discussion from last time, one may suppose considering those exogenous interpersonal issues fine for some but those operating within neoclassical welfare economics are meant to confine their ethical thinking to individual preference rankings, “utility,” economic efficiency. That’s fine, if presented as an ethical half-theory. However, if one tries to pass it off as an ethical full theory, propose others give more weight to “economic efficiency” in real contexts than seems ethically sensible or appropriate to them, then that’s not fine, not at all.
An advanced example is insisting economic efficiency is normatively paramount so interpersonal ethics cannot be addressed unless that condition is met, a form of fake indifference I usually describe as setting up of arbitrary roadblocks to expressing interpersonal ethics. I’ve discussed such roadblocks before and will do again. They include stratagems such as insisting the ethics of resolving interpersonal conflicts of preferences be addressed only via the distribution of economic power rather than by regulation or choice to use economic power. What one typically sees in anti-democracy bad economics in the conservative style is people arguing no one should interfere with or distort or fail to pursue or promote the “economic efficiency” of some real market, which is fake indifference of a rather more obvious sort.
Real neoclassical welfare economics, in contrast, recommends those using that ethical half-theory acknowledge the existence and significance of the ethical issues external to that theory in realistic contexts but express indifference to them, not oppose them. That is, purveyors of real neoclassical welfare economics understand ethical considerations exogenous to that theory relating to resolving interpersonal conflicts of preferences are a legitimate reason, even within the context of that theory, to depart from “economic efficiency.” The ethical half-theory of real neoclassical welfare economics does not support one using that theory to cast interpersonal ethics as illegitimate, something to oppose as baseless, etc. It recommends indifference, acknowledging those ethics as relevant but beyond one’s purview.
When one reads or hears anyone talking about efficiency and markets, one should put one’s critical faculties in high alert. It’s a concept often used in rhetorically underhanded ways to play funny word games, equivocate on terms, create unnecessary confusion and conflict.
