Bryan Caplan  

The Evasion of Equity

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A Supererogatory Provision... A Charitable Parable...
Economics textbooks often speak of the "efficiency-equity trade-off."  The definition of efficiency is fairly clear.  But what exactly is "equity"? 

When cornered, most economists say that equity is a synonym for "fairness" or "distributive justice."  In practice, however, most economists use the word interchangeably with "equality."  Why then don't textbooks simply speak of the efficiency-equality trade-off, and leave justice to the philosophers?

The ugly truth, in my view, is that economic educators are being deliberately evasive.  They're trying to...

1. Do ethical and political philosophy by stealth.  When economists talk about "equity," they sound normative.  If anyone actually asks for moral arguments, however, economists can backpedal and claim that they're making purely descriptive claims about the trade-off between efficiency and equality.

2. Embrace conventional left-wing moral values by stealth.  When economists equivocate between "equity" and equality, they create the impression that equality is the Only Moral Value.  If anyone objects, however, economists can backpedal and claim that they're merely saying that there's a trade-off between efficiency and Any Moral Value.

So what should economic educators do instead?

1. Replace the vaguely normative concept of "equity" with unequivocally normative concepts such as "justice," "distributive justice," or simply "morality."

2. Acknowledge that there is a lively debate in philosophy about the nature of justice, distributive justice, morality, etc.

3. Identify common moral views, and discuss how each of these views implies a trade-off between efficiency and morality.  Egalitarians favor more equality than efficiency recommends.  Libertarians favor more liberty than efficiency recommends.  Meritocrats favor more rewards and punishments than efficiency recommends.  Civil libertarians favor freer speech than efficiency recommends.  And so on.

4. If you have worthwhile moral arguments, state them openly and clearly.  Otherwise admit the limits of your expertise.


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COMMENTS (25 to date)
F. Lynx Pardinus writes:

"The definition of efficiency is fairly clear."
vs.
"Economists occasionally do use 'efficiency' in the dictionary sense - ratio of the value of output to input or something similar. But normally they use it in quite different ways, and unfortunately often equivocate between the various usages."

Handle writes:

Why stop there? Why don't they also say, "There is a trade off between economic efficiency and: "

being "humane",
politics,
religion,
law,

or, really, any theory of social organization and relations that is thought preferable to the theoretical assumptions.

Which is not really that interesting. There are always trade-offs everywhere.

What is interesting, however, is the degree to which there is a trade off. The size of the distortions, the magnitude of the deadweight losses, etc.

What is informative is the comparative analysis of the trade-offs. Contrast the trade-offs between, say, Libertarianism, Meritocracy, Socialism, and Communism.

What is even more informative is that, I'm absolutely sure, individual Prominent Economists would disagree to an enormous degree as to their estimates of these trade-offs. Perhaps favoring a model or a story that, conveniently, puts their preferred social arrangement at the optimum.

And students, seeing these wildly different estimates and models, seeing that the issue is never 'settled' - that there seems to be no real "scientific progress" (converging towards an agreed view of reality through accumulation of persuasive logic and evidence) - would learn the most important meta-lesson of all.

ajb writes:

Caplan misses a different point. Leftist liberals have succeeded by deliberately obscuring the meanings of things. Recall that both Samuelson and Tobin were pleased that social security was a pay as you go system that was routinely misinterpreted by the common man to be a standard pension fund because that ensured its political success. Ditto for affirmative action -- wherein early proponents spoke out loudly that it could NEVER lead to quotas. Or those who favor middle class welfare because it justifies redistribution in general. Or those who thought that even non-Keynesian fiscal policy mistakes were good because it promoted big government in a crisis. Stealth works.

OBB writes:

It seems to me, that you, Bryan, consider efficiency to be "objective" settled. But, in my opinion, efficiency is relative concept. Efficiency is always efficiency toward something - toward the goal, end.

I don't think that economists have agreed what the end should be, or what does it look like.
Is it general equilibrium, demonstrated preferences, social welfare?

My point is that maybe we would disagree also on what is efficient and what is not, not just what is equitable.

john personna writes:

I had little exposure to "efficiency versus equity" before your piece, but by the end I think I do like the word. I think the fuzziness of "equity" is useful. Efficiency might be, in certain situations, at odds with some moral argument ... but it is not just one moral argument. It's a can of worms. And you can't really reduce (or hide) a can of worms as one word or concept.

"here be dragons?"

F. Lynx Pardinus writes:

ajb: "Leftist liberals have succeeded by deliberately obscuring the meanings of things."

Isn't one of the points of "The Myth of the Rational Voter: Why Democracies Choose Bad Policies" that some on the left have succeeded by openly and explicitly catering to the public's misconceptions on economics, not the other way around?

Morgan Warstler writes:

Equality should be measured in time scale by economists.

HOW FAST do the inventions enjoyed by the rich become accessible by the poor?

If it takes 20 years for the avg poor person to get a smart phone, those poor people are less equal than a system where poor people get a smart phone in 7 years.

Wealth has nothing to do with equality in economic terms. No one wants to live in a land 500 years ago, where there were no smart phones.

As the curve of history compresses HOW SOON are smart phones invented? The equality of technology access shrinks as well.

In a world where the Internet is commonplace by 1845, it takes only three years for the avg poor person to have a smart phone.

Efficiency is ALAYS the more fair and the most just, bc it shortens time scale to new goods for everyone.

Mordatar writes:

I do not think that economists embrace conventional left-wing moral values by stealth when they talk about the promotion of equality. But I agree that maybe they talk about it in the wrong way.
Equality is a public good. It is non-rival and non-excludable and there is considerable amount of evidence that people think it is valuable.
Where I think this discussion misses the point, however is that, as we debae this, there is no trade-off between effiency and equality. Bryan is one of the best people to point this out: open borders (the best example I know) would dramatically increase effiency and equality. But there are other examples of policies which undermine effiency and increase inequality: credentialism, intellectual property...
So instead of debating these age-old questions, I would propose we forward the "no-brainer" solutions. (by no-brainer I do not mean it is obvious, but that, whatever reasonable moral theory you have, you would prefer that solution).

Nick writes:

If philosophers don't teach economics in their class, why should economists teach moral philosophy!?

In my intro economics class whenever the topic comes up I present it by saying something like the following, and the way I present it is the way it was presented to me:

"So on the one hand we could implement policy X, which would be an efficient policy. But, on the other hand, some people might argue that this is unfair inequitable because the wealthy get so much more than the poor. It's not entirely clear to me what that means but of course you will encounter many arguments like this in your college career."

Then they might get an exam question: "Is the proposed policy efficient? Do you think the proposed policy is equitable and why?" and there's never a 'right' answer as long as they say something about how efficiency might not be the only standard by which to judge things.

I truly fail to understand how I'm advancing 'left wing' moral values by 'stealth' or trying to sneak in some moral philosophy. I acknowledge that 'efficiency' is just one way of evaluating policies that is particularly nice and that there are others that people might care about.

RPLong writes:

My problem is not the use of the term "equity" but rather the fact that the word is introduced and never mentioned again throughout economics courses.

For example, a lecturer could probably spend a week discussing the issues surrounding equity, comparative advantage, and the production possibilities frontier. Only in such a context does any reference to an "efficiency/equity trade-off" make sense. Only in such a context will students come away with an understanding of what is meant by efficiency so that they can compare it to whatever vague definition they prefer for equity.

I suspect the real reason this doesn't happen in most economics courses is because it is a difficult subject that has challenged human beings for eons. But I sure would have liked even one good discussion on the topic in my four years of economics training.

Hazel Meade writes:

I agree. The slippery meaning of "equity" allows one to equate "fairness" or "justice" to "equal distribution", when it's clear that there are many ways to be "fair" that do not necessarily involve equal distribution.

Indeed, if you believe that free market outcomes are just because they are the outcomes of a series of fair voluntary transactions, then unequal distribution is equitable. It's just that the "equity" comes in the form of "equal justice under law" - as long as the rules are the same for everyone then the outcomes of the system are fair.

Hence, in a free market system there is no conflict or trade off between efficiency and equity. Inequity would be introduced if the government attempted to intervene to force a more "efficient" outcome, therby introducing unequal rules or rule enforcement.

Becky Hargrove writes:

Equity just needs to be relevant and useful. The problem only comes in when one's contribution is not enough to actually participate in an economy. Something positive happens when the goal becomes finding relevance, rather than getting stuck on the idea of injustice.

R Richard Schweitzer writes:

Equity:

In our Western Experience Equity has been derived from the necessity to supplement or offset the rigidities and limitations of Common-Law.


We have departed from the original principles of "conscience directed conduct" and its enforcement through ecclesiastical power, transferred to the secular organizations in Western societies. We have retained certain of the mechanisms of supplementation and offset to other established rules for human interactions.

There are, therefore, continuous attempts to "adjust" the mechanisms established for determining the results of human conduct, under the claim of the processes of "Equity." Few of those claims are related to "conscience directed conduct."

Michael writes:

There is really no need for economists to discuss the morality of inequality. The economic arguments are strong enough to stand on their own.

We all know the wealthy invest most of their income while the middle class spends most of theirs. When there is too much inequality, middle class demand suffers while there is a glut of investment capital (like right now).

When there is too little inequality, consumer demand is strong, but there is a shortage of investment capital - like the late 70's and early 80's.

Andre Mouton writes:

"Efficieny" is the more dangerous term. When talking about equality, it is generally understood to be a vague concept: equality of wealth vs equal protection under the law; equal lot in life vs. equal opportunity.

On the other hand, the question is rarely asked "efficiency towards what?" Maximizing the good? Growing prosperity? What does this have to do with markets, in which competing ideas of efficiency result in the destruction of valuable resources? Efficiency is only meaningful with respect to the future; equality with respect to the Good. If we know neither, then what business does a field of science have in pretending to know both?

In nature, neither efficiency nor equality are much in evidence. The advantage of a diverse and heterogenous ecosystem isn't that it's equal, or efficient, but that it provides the best foundation for an uncertain future. If we were really discussing economics, and not competing visions of a utopian future, we would be eschewing both of these terms.

Nick - perhaps if economists had a better understanding of moral philosophy, they wouldn't confuse it for economics.

RPLong writes:

Andre,

Efficient is generally understood to mean Pareto efficient.

F. Lynx Pardinus writes:

RPLong: "Efficient is generally understood to mean Pareto efficient."

From the linked notes: "In practice, then, economists almost always switch [from Pareto efficiency] to Kaldor-Hicks efficiency, aka 'cost-benefit efficiency.'"

Zachary writes:

RPLong, Efficiency is generally understood to mean Kaldor-Hicks Efficiency. C'mon dude. I've never - ever - seen or heard of a real life Pareto improvement.

Austin Middleton writes:

"Distributive Justice" isn't even an agreed upon term.

In the Aristotelian tradition it means the proper distribution of the public revenue to individuals.

In the Platonic tradition it means the becoming and voluntary use of one's own goods in the advancement of others.

So even here the water is muddied between Aristotelain coercion and Platonic liberty.

Michael Strong writes:

Morgan is on the right track, but most economics educators and most economic textbooks do not provide a clear-cut analysis showing how free markets lead, over time, to higher quality, lower cost, and more finely tuned alignment with customer preferences. While one can argue that "efficiency" provides such an outcome, most critics of economics who lobby for equity do so because of a concern that "efficiency" criteria do not adequately address issues of "equity."

But over time, properly structured markets (e.g. property rights, rule of law, freedom of contract, externalities internalized, etc.) demonstrably result in improvements in the lives of the poor (or the "worst off") that are orders of magnitude better than what can be attained through redistribution.

I see the Austrian line of thinking as articulated by Hayek in "Creative Powers of a Free Civilization" and to some extent by Kirzner and more recent writers on entrepreneurship as providing more insight into this process than is available in neo-classical economics. To some extent, the entire "efficiency" vs. "equity" debate is an artifact caused by the invisibility of long-term entrepreneurial dynamism and the benefits that it brings to all.

F. Lynx Pardinus writes:

Michael Strong:
"demonstrably result in improvements in the lives of the poor (or the 'worst off') that are orders of magnitude better than what can be attained through redistribution."
vs.
"the invisibility of long-term entrepreneurial dynamism and the benefits that it brings to all"

RPLong writes:

Zachary - Okay, Kaldor-Hicks if you prefer. The difference with respect to Caplan's point is minor.

Floccina writes:

ajb makes a good point.

What bugs me about SS is that it makes me feel that the designers of and supporters of SS talk as if they think they are fooling me.

For example by making it look like the employer pays for half of it. That though they speak of it as existing to save the elderly from abject poverty it pays out more to the rich than to the poor.

They like it that the people think of it as an annuity rather than as welfare though it is clearly the latter.

That they call FICA a tax when they talk about taxes on the poor and call FICA a contribution when they side with the elderly people's demands to to not reduce the payout to the rich.

They treat me like I am ignorant of their vote buying schemes. It is an insult to our intelligence.

Michael Strong writes:

F. Lynx,

The long-term results of entrepreneurial dynamism are visible in the real world via phenomena such as the prosperity of all nations that have had a high degree of economic freedom over time as well as the phenomenal improvements in the quality, price, and diversity of goods and services that have been produced in free markets (e.g. steam engines, railways, steel, automobiles, chemicals, photography, washing machines, televisions, computers, telephones, etc.)

That said, entrepreneurship (along with the entrepreneurial dynamism that results) is almost entirely invisible in neo-classical economic theory. See Humberto Barreto's authoritative "The Entrepreneur in Microeconomic Theory: Disappearance and Explanation," which documents the phenomenon clearly:

"Since the 1930s . . . orthodox microeconomic theory has removed entrepreneurial considerations from its explanatory structure; the entrepreneur 'virtually disappeared from the theoretical literature.' The word 'entrepreneur' may still occasionally be used, but it has lost any real meaning. Entrepreneurship, in any of its various facets, does not play a vital role in modern micro theory."

Steve Roth writes:

@Bryan:

Totally agree on sloppy and deceptive usage.

Also: I wish textbooks would also point out that insufficient equality can result in a smaller pie just as much as excessive equality can. Kind of a Laffer Curve kind of thing, and we have to evaluate policies that deliver difficult-to-value goods relative to that curve.

IOW, it's not always a tradeoff. There are plenty of instances where more equality delivers a bigger pie for all.

@Handle: "What is informative is the comparative analysis of the trade-offs."

Right. As Steve Randy Waldman has pointed out nicely, there is a difference between accounting profits and economic profits.

http://www.interfluidity.com/v2/4043.html

"Accounting profit is what a firm, under generally accepted accounting principles, can claim to be the earnings that accrue to shareholders. Economic profit is revenue that exceeds the true cost, defined as the value of the next-best opportunity, of all inputs. According to theory, in a competitive market, economic profits should be relentlessly pushed toward zero while accounting profits should stay positive but very near the broad market return on capital placed at comparable risk."

But in reality, of course, there are economic profits lying around on the sidewalk like $5 bills, because of coordination failures.

Just one example I poked at recently:

http://www.asymptosis.com/?p=7060

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