Pareto efficiency is one of the main arguments economists use for not recommending policies that improves income equality. Something is Pareto efficient if you can't make somebody better off without making someone else worse off. So a Pareto improvement is one where you can make some or all people better off, without making anyone worse off. And it's one of the criteria economists like to apply to policies.
But it's dumb. It gives credibility to the idea that it's wrong to take a dollar from a rich man and give it to a poor man. It even suggests that if taking $1 from a rich man let you give $5 to a poor man, it might be a bad thing. It supports the status quo and implies that if someone already has something they have a right to keep it. It assumes that harm can be measured with money. It's possible that taking $10,000 from a wealthy person harms them approximately not at all. Of course, economists will say that sometimes it's OK to do something even if it makes some people worse off, but in practice policies are criticised if the wealthy are "harmed" no matter what the benefits.
I think it's a bogus criteria. You can never know exactly who is going to be harmed and helped by a policy. Most people have accepted that you often have to harm someone in order to help someone else. But economists don't in general. If working out these trade-offs all seems too hard then give up and call your compromise science. They present it as an economic concept but it is just an ideology. I suppose a lot of economics is much like that. But giving it a name like "Pareto efficiency" sneaks an ideological preference into the realm of empirics.
If you don't think the benefits of a policy to one group are worth harming another group, then you should say that. Hiding behind words like "efficiency" just clouds the issue.
Nice observations – which, by the way made me smarter without making you dumber…
But are all economists as committed to Pareto efficiency in every area? Aren’t large swathes of trade economics and industrial relations predicated around the doling out of pain and loss to some (through adjustment, flexibility etc.) in order for there to be (supposedly?) greater gains in overall efficiency and wealth (that might just, possibly maybe be used to compensate the losers – but probably won’t be in the real world)?
ben / 8:56pm / 13 March 2007
You’re right. Economic efficiency will often trump Pareto efficiency. Pareto efficiency is only a meaningful concept if there is no compensation. If you can efficiently transfer money between winners and losers then anything that improves economic efficiency can also be Pareto improving. I suppose that’s why it comes up when you’re talking about wealth transfers rather than wealth increases.
The compensation example is actually a good one. Increasing wealth and compensating the losers sounds good until you actually get to the point of implementing the policy. It turns out that compensation is never Pareto improving and the taxes required “damage work incentives”. So, they decide, perhaps it’s better if we just let the losers fend for themselves and hope the invisible hand will sort things out.
In the case of trade I also suspect economists don’t treat the groups who lose out as groups deserving of moral consideration. “The poor” will benefit overall they say, because prices will drop faster than wages. They usually talk about the unfair privileges that some “interest groups” get from trade restrictions. Money made by the wealthy apparently isn’t due to unfair privileges, so that status quo is worth defending.
There was an article in The Economist a few weeks ago about how the winners so far from globalization have been the wealthy. They often talk about how increasing inequality doesn’t matter because it’s economic mobility that really counts. That’s usually followed up with a grudging admission that mobility isn’t improving either, but the main point is always that income equality isn’t important.
Ryan / 9:24pm / 13 March 2007
Ah, it all becomes clear. Your observations about the ‘undesirability’ or compensation and moral indifference to losers in trade (and to the winnings of the winners too!) are very helpful. We need much more nuanced views here, recognising that, for example, poor producers and poor consumers aren’t the same as each other, and aren’t the same as middle-class producers or consumers. Power and social location do matter in assessing these questions.
I had a conversation with a staffer to a senior Government minister that finished with him saying, “And anyway, I’m one of those liberals who isn’t too bothered about inequality. As the long as the whole pie is getting bigger…”
Three things went through my head:
1) rude words
2) a quote from JK Galbraith comparing trickle-down economics to the idea that you can feed the sparrows on the road by what passes through after you’ve given more grain to the horse
3) the thought of how nice, how unutterably comfortable it is that one of the best paid people in the employ of one of Australia’s most senior government members, living one of the safest cities in the world isn’t too bothered about inequality.
But the conversation was over. I only mumbled the rude words later.
ben / 9:50pm / 13 March 2007