Let’s have another run at “efficiency” as used variously in plain English, neoclassical welfare economics, and anti-democracy bad economics in the conservative style, shall we? Always good for a laugh or two.
In plain English, efficiency must be defined with respect to some objective or goal. As I’ve suggested before, nothing is ever efficient with respect to any and every goal one likes, so how efficient anything is depends always on what one is trying to accomplish. Moving up a level (and you know I love a good level issue), there is a context in which one may set aside evaluation of the goal or objective, leave that to someone else, and talk about efficiency with respect to whatever that goal or objective may be. At that level, efficiency is preferable to inefficiency because at least one isn’t unnecessarily wasting resources. This is the sense in which people extol the supposed efficiency of the old Nazis based on their murder camps being efficient killing machines. If one doesn’t care to evaluate the goal or objective, then the efficiency appears good: no resources were wasted during the killing process. However, if one objects to the goal, one may be at least indifferent to efficiency in that context or indeed one might suppose inefficiency superior.
Now in the context of neoclassical welfare economics, issues relating to interpersonal ethics are exogenous as the idiosyncratic form of “utility” (as individual preference ranks) cannot support interpersonal comparisons. So-called “economic” or “Pareto” efficiency is about doing the best one can with respect to individual preference ranks without considering interpersonal ethics. However, what one see as the proper goal or objective of an economic system involves interpersonal ethics: who should get what and why.
An “economic” or “Pareto” efficient outcome will not necessarily be an efficient way to maximize the welfare of the people along any observable interpersonally valid dimension, or justice, or fairness, or equity. So is that sort of “efficiency” even good, desirable? It’s desirable in the sense the efficiency of murder camps is desirable. Certainly, if one agrees the interpersonal ethics that inform the market outcome in question, if one sees no equity, fairness, justice, welfare, real utilitarian issues, then the efficiency of that outcome is also good. If one disagrees the interpersonal ethics that inform the market outcome in question, the fact that it’s “economic” or “Pareto” efficient may be entirely irrelevant. It surely won’t be dispositive. It may still be good in some minor, abstract sense, as arriving at an outcome one finds morally reprehensible without even doing the best one can along individual preference ranks seems inferior to at least performing well on that last dimension, but there are surely more significant issues. This, of course, is just my usual point about neoclassical welfare economics being, at most, an ethical half-theory that cannot, on its own, tell people what economic policies they should pursue, re-packaged in the rhetoric of efficiency.
An economist will say, “As an economist, I cannot take up interpersonal ethics and talk about efficiency with respect to reaching any objective identified by any full ethical theory, I can only speak of 'Pareto' or 'economic' efficiency.” And that’s fine, as long as he or she explains the limited normative relevance of that sort of efficiency. However, a bad economist will then continue on to suggest it dispositive and argue one must not interfere with or distort any system or outcome that is 'economic' or ‘Pareto' efficient. A bad economist will bang on about the efficiency of markets hoping no one follows the word games involving different senses of efficiency defined with respect to different goals, hoping people will just simplistically say something like, “Well, efficiency beats inefficiency, so...”
One shouldn’t walk around talking about the efficiency of markets if one doesn’t understand the argument. Decide ethically desirable economic outcomes, then think of efficient ways to get there. Don’t simply pursue efficiency on minor issues losing sight of the larger issues.
