Efficient Equality

The current economic thought is dominated by the focus on “efficiency”, that buyers and sellers are both able to complete their trade at the price agreed by the two parties. The dawn of the 20th century had seen the rise to prominence of an alternative thought, socialism, where everyone gets the same payout (return or prize) regardless of their work or trade.

The two thoughts can be put in two words – efficiency (free market) and equality (socialism).

Between the two sides, which one is correct?

With the defeat of the Soviet Union in the Cold War, socialism was dealt a death blow. So with America coming out as victors, it was capitalism that won and with it, the economic thought that it was the market (efficiency) that was to be the prime focus. With that began the push to make the market the sole aim in the field of economics. So for most economists, it is the market, with some consideration being given to the issue of “consumer and producer surplus”. The argument is that taking away the surplus from either side is detrimental to market efficiency and hence each side has to remain in possession of their surplus. This is what leads most economists to argue against taxation. Not surprisingly, lowered taxation by the government on income has led to worsening inequality, firstly for wealth then for income. Previous work argued that inequality would be “done away with” as the economy matured and hence unnecessary to focus on (details in the link provided).

What led to this argument

So we have a movement to try and solve many things using a “market” approach to everything. Does it work? Hint. This movement to put everything within a market framework is forcing a large number of those who “have-not” into getting priced out of life itself. Education? No money? Sorry. Food? No money? Sorry…and the list goes on.

In short, people end up getting “priced out” of markets, their fault for having been born poor. Economic Darwinism at play.

This is in violation of the UN Human Rights Declaration, Article 25, #1. People are prevented from exercising their right to an adequate standard of living because they cannot “afford” it. The value book I derive my morality from points to this as an “economic injustice”. Is being born poor, or being made poor by unfortunate events, a crime?

So the solution is to have the same for everyone, a.k.a. socialism. Everyone gets paid a fixed amount regardless of their labour, or the quality of their labour. I know, not all labour has the same value. Think of it like this, you raise two horses, one has been fed the best grain and water and kept in care, the other was not that well cared for. Looking at the two horses, which one is going to attract more interest and the higher bids? A person’s labour is somewhat like that. If both the horses would command the same price, why would anyone put in the extra effort to raise a better horse? In the same spirit, if a normal construction worker and a doctor are going to receive the same payout, who would bother to put in the extra effort to become a doctor? This is the other “economic injustice”, not receiving a rightful return for a trade.

So both systems, capitalism and socialism, lead to one of the two forms of economic injustice. Of the two, it is the not giving of the fair return to a trade that is the more obvious event. So it has been rightfully eliminated. That still leaves the other one, which expresses itself by “economic Darwinism”. We overlook because it acts via the market, it is the market that is to blame, not people. Those involved cannot be (directly) blamed. “It’s all dependent on how the market works, not my doing.” Being poor is a crime in the market economy. This prevents people, particularly the poor and the unfortunate, from having access to a minimum standard of living. So over time, the strain of the negative effects of resorting to the market for everything will show on the social fabric. The effect is not felt by society first, it changes the people. John Steinbeck summarized it best in his book, The Grapes of Wrath,

” ….. There is a crime here that goes beyond denunciation.
There is a sorrow here that weeping cannot symbolize.
There is a failure here that topples all our success.
The fertile earth, the straight tree rows,
the sturdy trunks, and the ripe fruit.
And children dying of pellagra
must die because a profit cannot be taken from an orange.
And coroners must fill in the certificates
— died of malnutrition —
because the food must rot, must be forced to rot.”

“….. In the souls of the people
the grapes of wrath are filling
and growing heavy,
growing heavy for the vintage.”

Now if both the economic systems are keeping one of the two economic injustices as a component of the system, can there be an alternative to this situation? Short answer, there is.

A longer answer now.

All the texts I have come across till now have dealt with inequality. It’s inequality that is the prime concern of all economists. To quote my thesis supervisor in my economics master’s, “The income between a millionaire and a billionaire are very unequal.” Unequal, yes, inequitable, not at all.

Most people (read “economists”) tend to confuse “equity” and “equality” as synonyms when they are not. Equal means the same, equity is used for two things that are similar in effect but are not the same. An example – I can afford to go out and eat, once a month, for $40-$50. A poor person cannot. All that the person wants is to have some food in his/her stomach and that can be accomplished with $5, a tenth of what I eat costs. The end result is the same – both I and the poor person are fed. That is equity. $50 meal for who can afford it, $5 meal for who needs it. Both are fed.

From this example, it shows that inequality itself is not the problem, it is inequity. Put in more direct terms, it is inequality leading to inequity that is the problem and has to be tackled.

Most economists will be quick to dismiss inequity with “better rewards for all from proper functioning markets” or “equal rewards for all will take care of it”, or an argument in between. However, equity does not lie between either equality or efficiency. It is separate to either of them. In a free market economy, it goes ignored. In a socialist economy, it is hidden from perception. Both of them perpetrate one economic injustice or the other. Hence the question of equity was always a side issue.

A tangential point here: equity encompasses justice, you cannot have justice when injustice is ingrained into the system.

Is the issue of equity a topic economists need to consider?

What’s the link? It is simply that rising inequality, and the consequent inequity, is much worse for the social fabric than an economist, especially a free market cheerleader, will admit. As Steinbeck wrote, “In the souls of the people the grapes of wrath are growing heavy, growing heavy for the vintage.” Putting it differently, if you had to go hungry day after day while you see people around you filling themselves up, how long would you stay “social”?

I suspect that efficiency, equality and equity form a three-way balance to achieve overall economic justice. Ignore or disregard any one and you risk upsetting people’s sense of being fairly treated.

Note: I did consider “equal efficiency” as a title but decided against it as people cannot be equally efficient, by nature.

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