David R. Henderson  

Smuggling in Values

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Co-blogger Bryan Caplan made a good point yesterday about the alleged efficiency/equity tradeoff. He's right to emphasize it. Many economists smuggle in their "equality" value by equivocating between equity as equality and equity as some other value. I pointed this out in the Wall Street Journal in 1996 when Stanford University health economist Victor Fuchs did it in an op/ed. The irony was--well, you'll see the irony.

Fuchs' op/ed on January 26, 1996, was titled "The Tofu Triangle." Here is my letter in response. The Journal published it on February 22, 1996, titling it "Equal Justice:"

In his otherwise excellent editorial-page article ("The Tofu Triangle," Jan. 26) stating that economists should make their values explicit and not mix them with their analysis, my fellow health economist Victor Fuchs smuggles in his own value. In so doing, he does the very thing that he castigates other economists for.

Specifically, in discussing the Republicans' plans to reform Medicare, Mr. Fuchs posits a tradeoff between efficiency and justice. His bottom line is that the Republicans' plan is efficient but unjust. Why? He never says. But he seems to equate justice and equality of wealth. His is the same kind of value judgment that says it's unfair that Bill Gates has umpteen billion dollars, not a dime of which he stole. Had Mr. Fuchs followed the advice he gives other economists, he would have written that the tradeoff on health policy is between efficiency and equality, and then have said that he thinks inequality is unjust. But had he done so, his slam on the Republican plan would have lost much of its impact.

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COMMENTS (12 to date)
Bedarz Iliaci writes:

Surely 'efficiency' itself is value-laden.

Parato efficiency is defined in terms of making individuals better and worse. Now, you could only define 'better' or 'worse' if you define 'goodness'. And 'goodness' is clearly value-laden.
It may be good for a Bedouin to father ten children and have the full complement of four wives but a secular Westerner may find it height of badness.

A honor society will surely define goodness different from a commercial society. It would seem that the efficiency defined by the economists takes the norm of goodness defined in a Western commercial society.

Andy Wood writes:

@Bedarz Iliaci:

Parato efficiency is defined in terms of making individuals better and worse. Now, you could only define 'better' or 'worse' if you define 'goodness'.

I'm not sure that's right.

Pareto efficiency is defined in terms of moving the individuals' consumption bundles to higher or lowering ranking indifference curves. The ranking of indifference curves is normally inferred by revealed preference, by observing the choices individuals make. There's no need to introduce the concept of goodness at all.

F. Lynx Pardinus writes:

@Bedarz Iliaci & Andy Wood
In the linked Caplan article, I believe he is referring to Kaldor-Hicks efficiency, aka "cost-benefit efficiency, not Pareto efficiency.

Bill Woolsey writes:


Pareto efficiency is defined in terms of people getting whatever they want.


That people should get what they want is a moral judgement.

Compare a market order to one where a ruling council of priests and nutritionists make sure that reading material is full of wholesome moral lessons and restaurants serve healthy fare. While a market order is perfectly able to provide wholesome reading material and healthy food, it will actually produce what people want to buy, which might include unwholesome reading materials and tasty but unhealthy food. Which is better? A moral judgement.

I strongly support a market order.

Tom West writes:

Mr. Fuch's article is a clear example of the fact that our base moral precepts are so built-in to us that trying to think about them externally is like thinking about breathing: You can do so for a short time, but as soon as you're not concentrating exclusively on that, one's assumptions about how the universe should be judged snap back into place as the *natural* way the universe works.

I'm certain that while writing the article, it hadn't occurred to Mr. Fuch's that there could be a different definition of justice.

One of the valuable aspects of this site is that there are a number of people here for whom freedom is as naturally important as equality is for me. Helps widen my reflexive perspective as to what constitutes justice.

Andy Wood writes:

@Bill Woolsey:

That people should get what they want is a moral judgement.

Indeed it is, but that's a separate issue from the technical definition of efficiency. If you're not a utilitarian, you can view an outcome as efficient, but immoral.

@F. Lynx Pardinus:

Maybe so, but I think the argument generalises.

Many words seem to carry empirical as well as emotive content, facts as well as judgments. Although I am getting better at recognizing this, still I often fall into judgmental mode when it may be better to stay factual.

Philosophers are better trained in this than economists. Last summer I was helped by reading John Hospers' An Introduction to Philosophical Analysis, a book which is all about the meanings of words.

Another example can be found in the recent book by Acemoglu and Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty. They characterize institutions as either "inclusive" or "extractive", both words which carry normative implications. Their usage of these words seems to parallel "good" and "bad", respectively, as much as the positive meaning I might attribute to "inclusive" or "extractive".

Thucydides writes:

British philosopher of history Robin Collingwood (d. 1943) thought that every culture had its "absolute presuppositions;" certain ideas that were so taken for granted that they not only escaped analysis, but even notice, yet deeply influenced attitudes and thought. Perhaps equality as a moral ideal is one of these for us.

Andre Mouton writes:

Andy - it's a parochial definition of efficiency. One could just as easily define it as "getting people what they need". In both cases, you're inferring truth from a tiny set of circumstancial evidence. A policymaker who, having read my grocery bill, thinks he knows "what I want", is almost certainly going to make me worse off; the same as one who, after reading a biology text book, decides he knows what I need.

Equity and efficiency are both value judgments couched in empirical language... appeals to the unimportance of things we can't see or can't measure.

Jake writes:

Efficiency is achieved when a person's ratio of value received (benefit) to value forgone (cost) is maximized.

Equality may be intangible but it is also something that many people value, just like healthcare or bananas. In fact, intangibles are no different than "real" goods and services in their ability to give us utility.

Since equality is a value, there can't be a trade-off between equality and efficiency, because equality is part of the efficiency calculation. If I voluntarily decide to give away part of my wealth to people who are less affluent, I am expressing a preference for equality over any other use I could've had for the money. The action is efficient for me, else I wouldn't have done it.

Tom West writes:

> Thucydides

Bingo. That was what I was trying to say, except far clearer.

My only quibble is that cultures no doubt have it, but so do individuals, and the default setting, if one isn't careful, between two individuals with different "absolute presuppositions" is usually rancor and suspicion of bad motives.

Michael writes:

Efficiency and equality are related. No one would claim that perfect income equality (everyone gets paid the same) is efficient. Nor would anyone argue that perfect inequality (one guy makes 100% of the income) is efficient.

Somewhere in between there's a range of inequality where the economy functions well. There should be enough inequality to ensure adequate investment capital and to incentivize people to work hard and sacrifice. But not too much inequality, otherwise the middle class struggles and demand suffers.

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