Monday, September 22, 2008

Economics Question

Today in microeconomics, my teacher said "economics can be extraordinarily unfair, but it is remarkably efficient." She followed this by saying that many government programs "aimed at creating fairness, by necessity, create inefficiency".

So, my readers, all twelve of you - Are economic efficiency and fairness necessarily opposed? Are they opposite ends of the same spectrum?

Your thoughts in the comments section, please. I'm intrigued to get other minds looking at this.


Christine Robinson said...

This quote sounds snappy because it uses a common but tiny measure of "efficiency". That is, "efficiency = someone making the most possible money with the least possible work."

So lets say, Social security...very inefficient, if you're a business owner who wants that 7% employee tax to go to you and your expansion ideas, instead. But is it "efficient" for society as a whole to have no safety net for the elderly? That would mean all kinds of inefficiencies as families scrambled to care for elders, as emergency rooms were swamped with sick old people, as city sanitation departments had to go out each morning and pick up dead elders off the street, as the government had to run, as they used to do, homes for the elderly indigent.

Much more efficient, and humane, to enforce a single payer social services net.

Just as it would be much more efficient to have a single payer health plan, as do nations which spend far less of their gnp on better health than we Americans do.

V said...

Just about what Christine said: economists seem to measure "efficiency" in such a way as to make it easy for accountants to meter, but without regard for whether the outcome is "good", whatever that is.

So, anything that won't go into a ledger is an externalized cost, borne by someone else. Therefore, efficient tends to mean extracting the most out of the system with the least (measurable) inputs. It's that hidden stuff that ends up as global warming, toxic dumps, employee alienation and "modern" health problems.

I single out externalized costs because there seem to be so few hidden advantages to this kind of thinking. Perhaps there are "externalized profits" as well as "externalized costs", but I've never seen them discussed.

Kelsey Atherton said...

Thanks for the comments, guys!

I will have to ask here how that "snappy equation" factors in public goods. Efficient for the business that owned them would be toll roads, but efficient for everyone (all business that uses roads included) are roads created and maintained by the govt.

Christine - I like your example, because I was about to go ahead and point out that dead elderly may be inefficient, but you countered that right quick with the social costs (that can become economic costs) of dead/dying elders.

V(ance, may I assume?) - Good point about what is being measured as efficient. Certainly, when actions have costs that aren't factored in, they can't be as efficient as they look initially. Give absolute knowledge of the consequences of actions, I think many things which look efficient become less so, and I think the market at times favors hiding unprofitable inefficiencies. The default example in class for why a good would become less desirable is "it causes cancer", and I think that the inefficiency of selling non-cancer-causing goods is something that economics doesn't immediately take into account as a positive good.

John Fleck said...

I think that, properly defined, "efficiency" and "fairness" are entirely compatible, as long as your definition of efficiency incorporates externalities.

A couple of examples:

A society with great disparities of wealth can be an unpleasant place to live because of social friction. The straightforward accounting model - merely counting the dollars earned - does not take that externality into account, and so offers us a false definition of "efficient" by ignoring the negative externality.

You can also model "fairness" in allocation of a scarce resource between this generation and the next, maximizing efficiency *over* time by reinvesting capital now to make up for the lost resources later. This is "Hartwick's Rule".

I believe economics, done right, must include these externalities, and once you do, you come far closer to a system that is both "efficient" and "fair."