Tuesday, July 5, 2016

Skepticism About Economic Efficiency Isn't Stupid

On Sunday the New York Times ran this think piece about how maybe "economic efficiency" isn't all its cracked up to be, or at least isn't the only thing in life.

The main point of the piece is that overall economic growth isn't the only thing people care about. People also care about things like equality, the distribution of wealth, the texture of their lives and their social world. Because of this, people may reasonably endorse policies -- like limits on trade or rent control -- that economists -- and other people -- think of as "idiocy."

A few thoughts:

1. Isn't it obvious that overall economic growth isn't the only thing that matters? When I first read this, I had that weird feeling you get when something is in the news and you're like "wait, this is something people are thinking of as a new idea?"

With any policy there are winners and losers. You'd never endorse a policy because it resulted in one person gaining more than the entire current global wealth while everyone else starved to death. It wouldn't matter if it made for more "overall growth" because that one guy was so rich. It would be stupid. And in general, if all the growth goes to some people, the other people -- the losers -- would rationally oppose the policy. It's strange to me that skepticism about economic efficiency is so often just treated as stupidity.

2. Use of the term "efficiency" in these discussions is a bit confusing. As a technical term in economics, it refers to optimization. It can mean a kind of maximizing -- say, of overall economic prosperity -- or it can refer to something like "Pareto efficiency" -- which just means that no one can be made better off without someone being made worse off.

Again, a state of affairs can be "Pareto efficient" and also be utterly intolerable. If one person has everything and everyone else is starving, and if the only way for the starving people to get what they need would involve make the rich person slightly worse off, then that state of affairs in which that one person has everything is "Pareto efficient." But it is also ridiculous.

As we've discussed before, though, in ordinary language, the word "efficiency" carries with it other connotations. It means things like "not being wasteful." But this isn't the same thing as technical optimization. If the one rich person is a bit less well off and everyone else can have a meal, this isn't "wasteful," even if somehow that resulted in there being less wealth overall. And analogously, if trade regulations ensure worker protections or lessen inequality or whatever, they're not "wasteful," even if there's not as much overall wealth.

The Times piece alludes to the idea that opposing efficiency seems absurd, asking rhetorically, "What kind of monster doesn't want to optimize possibilities, minimize waste and make the most of finite resources?" But putting it this way is misleading: optimizing wealth and minimizing "waste" are two very different things.

3. From a philosophical point of view, the problems with using optimality as a goal have been well-known for a long time. Ethical consequentialism says that you should do the action that brings about the best overall consequences (measured not in money but in something else like well-being or happiness). But this is incompatible with taking other values, like liberty, fairness, and equality, to be fundamental.

I think that valuing "efficiency" as the only goal means rejecting all these other important values for no good reason and is therefore a huge mistake. If you want a lengthy explanation of why I think that, you can read my recent book, Moral Reasoning in a Pluralistic World.

4. The typical response to skepticism about efficiency is to say that as long as there is more money in existence, the money can be moved around to compensate the less well-off -- but the problem is that in practice, this is never how it works.

The idea is that, theoretically, if you pursue the policy that makes for the most overall prosperity, then it doesn't matter that some people are winners and some are losers, because you can just move the money around. There is more money, so you can compensate the losers and voilà! Win-win.

But not only does this not seem to happen in real life, I'd say the trend is away from it. Increasingly, people who get what they get from whatever policy exists tend to just think that is "theirs" -- so that when you move the money around you're "taking it away" from them. It doesn't matter if this is false if everyone believes it.

5.The Times piece discusses some interesting empirical research showing that many people do value equality as well as efficiency but that economic winners may not. In this research, they ran a game where they gave people tokens, with real cash value, and people had to decide whether to keep them all or share them. If you shared them, the total number of tokens would go down. The idea is that more equality meant less overall prosperity.

Among Americans, about half shared anyway. They valued equality as well as efficiency. But when they ran the study at Yale Law School, 80 percent of people did not share. They valued efficiency over equality. The lead author of the study speculates that people at Yale Law School are disproportionately among society's winners and future-winners, and they don't need to worry about how the distribution pans out. Because they'll be OK no matter what happens.

6. To me, one frustrating aspect of these discussions is the way projected and losses gains are treated as obvious and inevitable -- as if predicting the economic impact of decision-making was simple and straightforward. I'll try to put this nicely: prediction-wise, economics is a work in progress.

In conclusion: All this means that when someone is skeptical about overall efficiency, and questions a policy like the TPP or eliminating rent control or whatever, there can be lots of good reasons. It may be because the policy is sure to have some winners and losers. It may be that the winners are going to people who already have a ton, while the losers are the worst off people. It may be because the predictions of overall gains are uncertain or based on questionable assumptions.

The Times piece concludes by saying that modern politics is teaching us that "dynamism and efficiency sound a lot better to people who are confident they’ll always end up being winners." I think that is correct.

So if someone questions a policy, and the people doing the questioning are poor or disenfranchised -- we would do well to listen to them attentively, and refrain from assuming they're stupid or ill-informed.

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