Inequality And Well-Being: A Fable About The History Of "Efficiency"

From Mother Jones

Once upon a time there were some philosophers who came up with the radical idea that what mattered in life was bringing about the most happiness and pleasure possible, and the least pain and suffering. "Everyone counts for the same amount!" they said. "The greatest good for the greatest number!" You add it up. It was a moral requirement: always act so as to bring about the most pleasure for the least pain. They called this "utilitarianism."

Whatever your reservations about this view (and I have a few), you have to admit that it is a pretty radical idea.

Since a dollar given to a poor person will bring about a far greater increase in well-being than a dollar taken from a rich one will cause pain, there are immediate and deep egalitarian implications. Since animals feel pain and pleasure, they are immediately included in the moral calculus; since their factory farm life and death is worse for them than your hamburger pleasure is good for you, veganism for everybody. Since you have to take each person into consideration equally, you must foster the pleasures and ease the pains of strangers on the other side of the world equally to the pains and pleasures of your friends, your family, yourself. Since people can be mistaken about what is good for them, it's true well-being we must maximize, not just the satisfactions of, say, consumer items.

Status quo: demolished.

Back in the day, economists had the sensible idea that utilitarian concept of maximizing would be a good concept for evaluating policies, schemes, and social frameworks. One thing they noticed early on, though, was that measuring pleasure and happiness in an objective way is difficult. For this and other reasons, they shifted from measuring pleasure and happiness directly to measuring the satisfaction of personal preferences. Of course, preferences in the mind are also hard to measure. To address this, they started using the idea of "revealed preferences" -- which are preferences you reveal through your actions. When you buy some cargo pants, you are revealing a preference for cargo pants over the money and over other things you could have spent that money on.

I'm not sure exactly when the term "efficiency" came into use, but the idea was to maximize the satisfaction of revealed preferences at the least cost of frustrating them. As is often pointed out, there are immediate peculiar implications of a strategy of maximizing revealed preferences. In our ordinary lives we do not treat all preferences the same, as things to be fulfilled. A preference for cruelty, harm, or racial discrimination isn't the same as a preference for risotto. A problem gambler who loses his home "reveals a preference" whose satisfaction hardly seems to be maximizing his well-being.

And on top of all that: where do preferences come from? Efficiency as preference satisfaction doesn't concern itself with this question, but it's no secret that our preferences are deeply influenced by our cultural surroundings, our family and friends, and advertising. In a capitalist society like ours, there are armies of people working 'round the clock to instill in us preferences for cargo pants, Ford Probes, and giant television sets.

While there are still egalitarian implications -- the preference a dialysis patient has for a cure is stronger than anyone's preference for a new yacht -- maximizing revealed preference now says that for anyone who wants to buy cargo pants, Ford Probes, and giant television sets, maximizing well-being means delivering those things.

Status quo: altered.

Often these days, though, "efficiency" is measured not in terms of preference satisfaction, but in terms of maximizing goods and resources. A policy or social framework is efficient if it produces those things.

Bam! This immediately undercuts the egalitarian implications of efficiency. If we're counting dollars, the benefit to a poor person of getting or keeping a dollar is now equal to the cost to a rich person of losing, or losing out on one.

Indeed -- political rhetoric these days often invokes an idea opposite to that of moral utilitarianism, claiming that since a rich person might be a "job creator," efficiency requires preferring them as recipients of goods and resources (why increased assets, rather than increased demand, is thought to be the key issue, I've never understood). There are people who believe this benefits the poor indirectly, but the point here is that conceptually, it needn't whatsoever. Efficiency as maximizing goods and resources just counts the total. It doesn't track who is getting what. Increased efficiency is 100% compatible with poor people getting poorer.

You might think it couldn't get any worse, but in fact "efficiency" in economic and policy talk often refers to "Pareto efficiency," which means that no one can be made better off without making someone worse off. This just assumes some starting point and looks for improvements that come at no cost. As Wikipedia says, "Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society."

Status quo: reified. Rich get richer; poor people can suck it.

I'm not claiming to have given a full history of this important concept, just to have connected the dots in what I think is an illuminating way. There's more in the economist Joan Robinson's brilliant 1962 book Economic Philosophy.

I'm always astonished to see things in the news where people are like "OMG inequality is rising, what could explain it??" as if equality were somehow a natural state of things and we'd need a special explanation for a rise inequality. This makes no sense to me. In a world with unequal starting points and reasoning processes that don't incorporate fairness or justice, never mind equality itself, how would it be any other way?