Why economists undervalue social justice

Michael Sandel’s recent book “What Money Can’t Buy” has been selling well. He has put his finger on something that many people feel very uncomfortable about, the increasing number of activities that are subject to market-like forces. Examples including people paying other people to queue for them in a wait for free tickets to see Shakespeare plays outdoors in New York City. Or Steve Jobs apparently jumping the queue for a liver transplant. Or any person selling an organ to pay for food.

The standard economic argument in this case would go like this. Scarce commodities (meaning goods or services) can be rationed either by price or by some sort of quota, such as queuing. While queuing might seem fair, it is inefficient. A person who really wants to go and see the Shakespeare play and is willing to pay for it, should be allowed to pay to jump the queue by paying somebody else to queue for them. This is a mutually beneficial exchange: the person waiting in line is willingly selling their time to another person who really values the Shakespeare.

A person who freely chooses to sell a kidney to raise money for their family is also taking one side of a mutually beneficial exchange, in this same view of the world. If somebody rich and ill can afford to pay for the kidney, why should the government regulate or block this trade?

The obvious objection to this is that not everyone has the same amount of money. Economists’ analogies between political democracy and the economic “democracy” of the market are flawed because in a true democracy everyone has a single vote. In the market, you have as many votes as you can afford. Rich people have very many more votes than poor people and can therefore buy scarce commodities, including those that many citizens feel should be allocated on a genuinely democratic basis.

Now economists may be many things but they are not stupid. They see this flaw in the analogy, so why do they keep arguing as if markets can be described as economic democracy? The reason lies in the way that they learn economics. There is a branch of economics which deals with normative decisions, that is, deals with questions involving a “should”. It’s called, with no trace of irony, welfare economics. It is distinct from, but grounded in the same way of analysing things as, positive economics, which is the economic theory of trying to predict and explain things, rather than evaluating whether the outcomes are good or bad.

Welfare economics tells us that, if we believe people are the best judge of what’s good for them, then their choices, as revealed by their market behaviour, are a good basis for evaluating outcomes and making policy choices. A situation that makes at least one person better off and nobody else worse off, using the criterion that “better off” is whatever a person chooses to do by spending their money (or time) is the touchstone of economic efficiency. It’s called Pareto efficiency in recognition of its originator, Vilfredo Pareto.

If the person selling a kidney is made better off and the person buying it is also better off, then this is a welfare improving outcome, as far as orthodox economics is concerned. But economists have noticed that this criterion wouldn’t count for much if there were a few very rich people and lots of poor people.

But this is not a problem because there is something called the Fundamental Theorem of Welfare Economics, though it perhaps doesn’t live up to this grand title. The theorem says that a government could, in principle, achieve any income distribution without economic distortion, by making lump sum transfers between people. This is the government as omniscient central planner, able to engineer whatever world it thinks is right. The attraction of “lump sum” transfers is that they don’t distort marginal decisions.  For example, my choice of how many hours to work is a choice to give up leisure (time not working) in exchange for an hourly rate of pay. If there is a tax on income it distorts my decision because some of the hourly pay I get is taken by the government: I will therefore probably choose a different work/leisure split and the tax pushes me away from the efficient choice that I would make in the perfect world without income tax. So distortionary taxes lower economic welfare.

A lump sum tax would take money off me (or give it to me) in a way that did not distort that choice. If somehow the government could tax me independently of any economic choice, just add to or subtract from my income, then it would be able to effect any chosen income distribution without distortion.

Having proven this theorem, the welfare economist can completely separate matters of income justice from matters of policy choice.  Efficiency (what leads to the best allocation of resources, given people’s rational preferences) is separable from matters of justice and income distribution. Any trade in which two people become mutually better off or at least one of them better off and the other no worse off, is now a good one. The objection that some people have vastly more power and choice because of their greater income is no longer relevant, because the government could use those lump sum taxes to change the income distribution, if it were thought necessary.

Except that lump sum taxes are a theoretical fiction: they don’t exist. The nearest there is to a lump sum tax is the poll tax that was levied in fourteenth century England and led to the Peasants’ Revolt in 1381. The tax was levied on each individual, regardless of income or capacity. Seen as unfair (particularly when some people seemed to be able to avoid it), the poll tax led to a widespread uprising that involved far more than just peasants. The great insurrection, as it was also called, led to the storming of the Tower of London and the murder of several senior government figures. King Richard II conceded the peasants’ demands then, after they dispersed, killed their leader and broke his promise. But the revolt marked the beginning of the end of feudalism in England and is celebrated as one of the defining moments of English history. (The next time there was an English revolution, in the seventeenth century, the rebels took no chances and chopped the King’s head off).

The only other person to try to impose a poll tax was Prime Minister Margaret Thatcher, in 1989. Her “community charge” led to riots, though not quite as violent as those of the fourteenth century, and to the end of Thatcher’s political career. The tax was abolished two years later.

So lump sum taxes are, for the most part, impossible. And any situation in which “free” market transactions take place in a situation of grossly unequal income distribution is likely to trigger concerns over injustice. Democratic governments usually do intervene to some extent to reduce the inequality of income. But many people would consider that a society in which people are forced to “choose” to sell body parts is one that has not done enough to deal with income inequality.  More generally, the greater use of market forces in the last few decades has gone hand in hand with an increasingly unequal society, in the US and the UK. This is something that Michael Sandel and his many readers understand and many economists do not.

2 Responses

  1. Samir Prakash

    Hi Simon – thanks for sharing this very clearly-written piece. I can’t imagine a shorter explanation of why the welfare economist is able to, as you say, completely separate the issue of income justice from that of rational/efficient policy choice. My concern is that this still does not fully answer the question you pose at the start: Why do economists undervalue social justice? Because this separation – of the concern over income injustice from a desire to achieve market efficiency – only holds IF we believe that lump sum tax is a tool available to government to address the former. Given that it’s now understood to be politically unacceptable/unavailable, the assumption does not hold. Therefore, what is left unanswered is why many economists, as you suggest, not recognise/accept this? With greater inequality, many choices exercised are not free choices – as you’ve hinted yourself by placing “choose” in quotes. Why has this concern played second fiddle, if even that, for so long to the logic of relying on markets alone to address all types of scarcity?

    • Simon Taylor

      I think it’s mainly an acquired habit of thought. I don’t want to suggest that all or most economists don’t care about income disribution. On the contrary, there is a raging debate in the blogosphere about the rising income inequality in the US and UK and how the Republicans’ tax plans would make it even worse. But the training that economists get through learning welfare economics does tend to skew them to consider the efficiency arguments without enough consideration of the equity ones. Cost benefit analysis and other applied welfare tools can be very effective but they are, in my view, a bit biased to taking the income distribution as given and implicitly OK.

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