A while ago, in a comment thread on Stumbling and Mumbling, whilst arguing against someone who was using it as a point in favour of free markets, I asked what the value of economic efficiency was. Generally, efficiency, of itself, has no value, because it is purely instrumental, merely picking out the rate at which resources are converted into achievement of some end, meaning that the moral weight gets shifted mostly on to the end itself. Of course, because there are a plurality of morally important ends and a shortage of resources to achieve them with, it is important to be efficient, because we want to achieve as many of the morally important ends as much as possible given the resources available. That, however, is to do with the achievement of the ends themselves, not efficiency in and of itself, so efficiency per se does not have any intrinsic moral value.
There is however a sense in which efficiency is used by economists, if I remember first-year undergraduate economics with any accuracy, which does seem to have some independent moral weight to it. Economists call a distribution allocatively efficient when cost of the last unit sold is the same to the consumer and to the producer, when the marginal revenue of possessing whatever it is that was sold is equal to the marginal cost of producing it. Assuming - which I'll let slide for the time being - that marginal returns are diminishing and marginal costs increasing, at this point, neither party would benefit from any further trades, because neither would be prepared to meet the conditions necessary to make the trade beneficial to the other side. This is because for the producer, the price has to go up in order to meet costs, whereas for the consumer, the price has to go down in order to compensate for the loss of marginal revenue. For any additional trade to occur would be to make one party better off at the expense of the other, and that seems to have moral weight.
If I take some of your possessions, the mere fact that it makes me in some sense better off does not seem to mitigate or justify it. Granted, most people think that stealing in order to survive, at least at little cost and from those who are under no similar threat, is usually acceptable, but this is not that case. If redistributions were justified on the simple grounds that they made some people in some sense better off, then anyone stealing from anyone would presumably be acceptable, as long as the thief was in some sense better off afterwards, and usually, until they get caught, thieves are better off, or else they wouldn't steal. So, allocative efficiency looks like it points to a situation which redistributions from would be generally morally bad, because they would make one party better off at the expense of the other, and that's generally morally bad.
Allocative efficiency is a property, it is argued, of perfect markets. This, libertarians believe, stands as a moral argument in favour of laissez-faire economics. There are at least two problems here, the first being that there are no perfect markets, which constitute a kind of constraint-less fantasy world in which everyone has identically perfect information, there are no transaction costs, and all goods are undifferentiated. That's not totally decisive though, because some other markets might approximate pretty well to perfect markets, and be, in this respect, morally superior to anything else on offer. What is really decisive is to realise that the costs and benefits in question are dependent on the initial bundles that actors have, and what can be and is done with those bundles. Allocative efficiency can be achieved in a situation where one party has all the resources and the other starves to death, as long as the worse-off party has nothing the better-off party is prepared to exchange any of their resources for. The fact that under such a distribution it is never to both's advantage to make some kind of exchange does not obviously tell us anything about the moral properties of that distribution.
Granted, it's unlikely that there are many situations in which there are no mutually advantageous trades to be made, but many situations in which there are quite clearly lack moral respectability. It is presumably possible to rationally prefer slavery to starvation, so it is presumably possible to achieve allocative efficiency by enslaving the starving, as long as the party doing the enslaving prefers to have slaves over any other outcome. Initial bundles thus matter. Ronald Dworkin has reasonably convincingly argued that at least most, if not all, of the moral force of the idea of allocative efficiency comes from the thought that the costs to the two parties genuinely are equal, that is, represent equal commitments from each, which they could only do under, in a gross simplification, conditions of initial equality. This is because, proverbially, the worth of the ten pounds that keeps the starving man alive for another couple of days and the worth of the ten pounds which pays for my evening in the pub are not the same: the cost of the starving man losing the ten pounds is much greater than the cost to me of losing my ten pounds, because what they get converted into is of hugely different value.
Dworkin not only notes that costs, as comprehended by the market, are relative to initial bundles but to what can be and is done with resources. This is true not only in the simple sense that restricting the use of a particular resource means that is has less value to those who would have used it in that way, a loss which cannot be reflected in the costs to others, but also in the sense that the use of resources by others can increase or decrease the value to me of my resources. Planning regulations are one obvious example: building a skyscraper in the middle of a low-rise residential block imposes a number of costs on those living around it, and if we're interested in making sure that no costs are imposed without compensatory benefits, then that has to be taken into consideration, just as the costs to those who want to build skyscrapers should be. Because of collective action problems, it is often difficult to ensure that these costs are not ignored through the market: where costs are spread across a large group of people, they may find it difficult to coordinate action so as to recover their costs, the obvious solution to which, for Dworkin, is to buy insurance against such costs in the form of regulation.
So, the moral force of the idea of allocative efficiency depends on resources representing equal commitments from both parties to the bargain, and on all the costs, in the full moral sense, of uses on property being included in the assessment of the bargain. It is, politely, far from clear, given that a decent argument for the closed shop can be mounted from this position, that allocative efficiency then actually does tell in favour of laissez-faire economics.
Links added and slight editing, 22/11/055
Subscribe to:
Post Comments (Atom)
11 comments:
I apologise for attending to your train of thought rather late, but isn't as rather strong moral argument against closed shops the fact that they are typically - or perhaps almost always -imposed by violence or coercion?
Either the last sentence about closed shops doesn't read properly, or I can't read it properly (which is a possibility at 9am)
I don't recall much economics, but if I remember rightly there's productive efficiency - being on your production possibility frontier - and allocative, which is some ideal point on that frontier, I think - basically building in normative ideals like equality.
E.g. If you can produce 100 guns OR 100 butter OR 50 of each (a constant 1:1 trade off), any production totalling 100 would be productively efficient; and perhaps 90 butter and 10 guns would be allocatively so. Though the latter bit's controversial, and I'm not so sure I remember the bit about marginal costs.
Dearieme,
the link I've just added should be to an earlier post trying to show that all social arrangements are coercive, meaning its coerciveness can hardly be an argument against one particular social arrangement.
Ben,
as I remember, and this is nearly five years ago now, the Dworkinian idea of true opportunity costs is more or less identical to allocative efficiency under initial equality. There's also, I think, technical efficiency, which is producing at the lowest point of the average cost curve. Allocative efficiency is efficient because it exhausts mutually advantageous trades: it's almost a Pareto condition.
I don't know if I remember first year economics with any accuracy either but aren't you mixing up a couple of different concepts here? Is it really the case that economists attach a moral value to efficiency per se? Isn't it rather the case that, to use the dread economist's phrase, all other things being equal more effeciency is better than less simply because it involves a reduction of waste?
This is not quite the same as the situation you refer to where an 'economically effecient' distribution has one man with everything and another starving to death, which is a 'Pareto optimal' distribution. I don't recall any economist arguing that carried a moral weight of its own. It is nevertheless a useful concept that can inform moral decisions. For instance, using this concept we can understand that it can never be the case that all inequality involves the 'rich getting richer and the poor getting poorer' unless you can say with confidence that perfect equality in the allocation of resources is a Pareto optimal outcome.
Similarly are you not conflating the concept of effeciency with the notion of 'externalities' - markets producing 'bads' that harm others, the environment or whatever, simply because they are not a cost to the economic actors involved? I think the difference can be illustrated using these examples. Let's say a company pollutes a river for the reason above. This isn't good but nevertheless can it not be said that, for example, a company that pollutes the river and wastes electricity because of it's inefficient production techniques is less good than the company that pollutes the river yet saves electricity? I would however completely agree that effeciency isn't some absolute good and that it follows from this that less effeciency might be necessary in order to gain some other benefit, such as environmental protection, if that's what you're saying.
I'm not convinced that this is a very useful line of attack against the free-market. Apart from anything else, you seem to have taken on board the ahistorical assumption that markets are always and everywhere are more efficient in every area when it is fairly easy to demonstrate from economic history that this is unequivocally not the case.
Robert "all social arrangements are coercive" - really, and to the same extent? Is "join us or you are going to suffer a very nasty industrial accident" really as coercive as "contribute to this charity or the neighbours will think you are a stingy bugger"?
We've heard that 'all social arrangements are coercive' line quite a bit here. I might agree all limit liberty, or prevent us being totally free to do what we want regardless of others, or some such - but not sure I'd go so far as to say coercive, at least not in the fully pejorative sense we usually associate with the term.
Even if it were to be accepted that all social arrangements are coercive, surely it still remains the case that coercion can form the basis of 'an argument against one particular social arrangement' if, for example, it is on the basis that the degree of coercion is unecessary, unjust, and more excessive than in an alternative set of social arrangements that are humanly achievable?
But it goes deeper than that. You say "Libertarians don't think so though. Both are inclined to ignore the way in which freedom is lost, or rather, never gained, by the simple fact of living in society" but shouldn't you consider the idea that freedom, as it is conventionally understood is only possible because one lives in a society ordered by enforcable norms? In this sense, one could judge a particular set of social arrangement, not by the mere existence of coercion, I'd agree, but what it is supposed to achieve.
I don't mean this in any Rousseau type 'forced to be free' way, only that the paradox that freedom if it is to be enjoyed has to be limited. In that sense I don't think it's valid to claim that all libertarians are really authoritarians simply because they advocate the idea that the state should ensure that the space in which people can make their own choices is as wide as possible. This would be to render the term 'authoritarian' meaningless to anyone except anarchists.
To take the example of closed shops: while I'd agree that a cogent argument can be made for them, the idea that they aren't any more or less coercive than any alternative social arrangement isn't one of them. Regardless of the union situation in a workplace, the individual who sells their labour is as an individual compelled by definition to take the going rate. The individual working in a closed shop is less free than the one who is not. He may well be financially better off but to say that represents a lack of freedom is to conflate liberty with welfare.
He may well be financially better off but to say that represents a lack of freedom is to conflate liberty with welfare.
Sorry, meant to say that arguing that being financially better off represents freedom is to conflate liberty with welfare.
Shuggy,
I can see that this might not be very clear, but my target isn't economists per se, but those, some of whom may well be economists, who believe that distributions arrived at through a free market all have some serious independent moral weight. Allocative efficiency looks like it might do that work, because of the features I point out. I then go onto argue that much of the moral weight that allocative efficiency has ought to be restricted to, as it were, a special class of distributions which are allocatively efficient, most of which are very unlikely to be achieved through a free market, even if such a thing existed. I suppose one of looking at it is to say that if efficiency is about reducing waste, it requires an account of waste, and the account of waste on which simple allocative efficiency is based looks, although initially attractive, deficient.
On the externalities point, I suspect that economists would argue that externalities of the sort you mention are inefficient, because they involve the failure on the part of the market - in the absence of compensation or regulation - to incorporate obvious costs. This would make them inefficient because the marginal cost which the market represented - i.e., the cost minus the cost of the pollution - would not be the actual marginal cost. This further illustrates, though, I think, and I may be getting into a whole world of pain here, that efficiency is relative to whatever rights over bundles are held in the first place, since in the absence of rights against pollution, there aren't any mutually advantageous trades to be made - it's unlikely to be to the advantage of the polluter to pay up for the pollution. Economists operate with a particular set of property rights in mind.
On the 'forced to be free' thing - which I personally don't have any problem with, and might as well be traced to Hobbes as Rousseau - I am partly equivocating across two concepts of freedom. You don't have control over your life when you don't have control over the costs and benefits of your actions, and that's a form of unfreedom. Equally though, the implication of total control over the costs and benefits of your actions is the inability to act, since anything you can act on restricts you in certain ways, which is surely also a form of unfreedom. I don't think this compels me to retreat from the 'all social arrangements are coercive' claim, because that claim is not 'all social arrangements are equally coercive'. To put it another way, the first kind of unfreedom - the lack of control over the costs and benefits of actions - can admit of degrees, in the sense that I can have more and less control over the costs and benefits of actions, and the lack of control can be more and less morally troubling. I think that that idea should deal with the claim that someone in a closed shop - by which I meant the legal requirement to either join a particular union, or to abstain from joining other unions, not the threat of violence towards those who refuse to join from colleagues - is less free: a union gives more control over the terms and conditions on which you work, and that control is a form of freedom.
Ben,
in line, I hope, with what I said above, I'm not ruling out the possibility that the coercion associated with social arrangements qua social arrangments is compensated for by their removal of coercion elsewhere, as it were. Think of a ban on murder. This is undoubtedly coercively enforced: there are sanctions associated with it. Still, the coercion of the ban removes coercion elsewhere - that would result from living in a society which regarded violent death with equanimity. To put it another way again, this isn't a claim which implies an all-things-considered judgement, because coercion has effects, which will have bearings on the status of all-things-considered judgements.
On the externalities point, I suspect that economists would argue that externalities of the sort you mention are inefficient, because they involve the failure on the part of the market - in the absence of compensation or regulation - to incorporate obvious costs. This would make them inefficient because the marginal cost which the market represented - i.e., the cost minus the cost of the pollution - would not be the actual marginal cost.
No, I don't think they do. The problem of externalities come under the sub-section of the discipline known as 'welfare economics' where issues like this and the one of 'public goods' etc. are dealt with. But it has nothing whatsoever to do with efficiency and marginal cost. Indeed the whole point about externalities is that they don't even register as a cost, marginal or otherwise, to the actors in the market because they are not a cost to them.
a union gives more control over the terms and conditions on which you work, and that control is a form of freedom.
No, it gives you better terms and conditions for the most part and this is good. But you cannot be said to control this by membership of a union in any meaningful sense and certainly not if the membership is compulsory.
What you are talking about is not a 'form of freedom' but welfare. I'm not saying freedom shouldn't ever be limited in order to secure other benefits, such as security, welfare etc. - only that the concepts should be kept distinct. To say that freedom cannot be enjoyed without a certain level of welfare may well be true but it does not follow that they are the same thing.
Shuggy,
on the closed shop thing, this is an empirical question to which I am not sure of the answer. I suspect that in addition to better terms and conditions, a closed shop will tend to grant workers a greater ability to say which of a set of terms and conditions they prefer. That may not be the case, but it seems likely to me. Also, I think most of the conceptual confusion going on is around the term 'welfare' - think about whether being more free, all other things being equal, makes you better off - but that's another issue.
On the externalities thing, it strikes me that externalities are relative to a set of property rights. Pollution is not an externality if compensation is required. Allocative efficiency, however, if it is to have any moral weight, shouldn't be relative to a set of property rights, because, if the idea that we shouldn't impose costs on other people has any moral weight, it must take account of all costs. Just because the prevailing set of property rights does not require polluters to compensate those whom the pollution effects, that does not remove the fact that it does effect them.
Post a Comment