Economic efficiency and social justice

by Tim Harding

At first sight, the concepts of economic efficiency and social justice might seem unrelated or even counterposed.  Some people intuitively feel that in the economic sense, efficiency works against fairness and therefore equality. Economic inequality just seems unfair and wrong.

In this essay, I propose to argue that the concept of economic efficiency can be used as part of a case that social justice does not require economic equality.  My case is primarily based on the works of Frankfurt; but Rawls’ Difference Principle is also of assistance.  I also intend to consider some objections to this case, and to either provide counter-arguments against them, or to suggest that the objections are not sufficiently important to outweigh the case I am putting forward.

Economic efficiency is typically defined as a Pareto optimum – a state of affairs in which it is impossible to make anybody better-off without making somebody worse-off.  Economists often describe a Pareto improvement as a change that makes some people better off without making anyone worse off (Hausman and McPherson 2006, 65).

An example of such Pareto optimality is where a farmer produces a crop that he does not consume himself, and either sells all of the produce or gives it away.  There is no wastage of the produce: somebody is better off as a result of the transaction and nobody is worse off.  Transactions of this nature are called ‘positive sum’ and the outcome is classified as economically efficient.  In contrast, an example of economic inefficiency would be where instead of selling the produce or giving it away, the farmer disposes of some or all of the produce as waste.  Depending on the amount of produce involved, the farmer may incur some costs in disposing of the waste, at least in terms of his time if not monetary costs.  So under this scenario, the farmer would be worse off and nobody would be better off.

The following diagram illustrates illustrates that Pareto efficiency can be at any point on the curve (e.g. B, D or C). Points not on this curve, such as A and X, are Pareto inefficient.

Thus there are multiple states of affairs that can be Pareto optimal or economically efficient.  So on its own, Pareto optimality will not necessarily guarantee a moral outcome; and thus economic efficiency cannot serve alone as a conception of social justice – it must be supplemented in some way (Rawls 1971, 71).  For example, if there are millions of people starving, Pareto optimality will not allow one affluent person to be worse-off (through say, increased taxation) to make others better-off (Hausman and McPherson 2006, 65).

What is needed are complementary theories that build on the concept of economic efficiency to provide a better moral basis for economic inequality.  In my view, these other theories are provided by the works of Rawls and Frankfurt.

As part of his Theory of Justice, John Rawls has proposed what he calls the Difference Principle.  This principle ‘removes the indeterminateness of the principle of efficiency by singling out a particular position from which the social and economic inequalities of the basic structure are to be judged’ (Rawls 1971, 75).[1]  The Difference Principle is that social and economic inequalities can be justified if they work as part of a scheme which benefits the worst-off members of society (Rawls 1971, 75).[2]  In this way, Rawls establishes a connection between the seemingly unrelated concepts of economic efficiency and social justice.  But more importantly, he also uncouples social justice from economic equality.  Economic inequality can be justified if it meets certain criteria and conditions related to economic efficiency.

A very simple example, illustrating the Difference Principle.
Screencast by Dr. Toby Handfield

Frankfurt takes this idea further and argues against the notion that economic equality is of significant importance.  He proposes his ‘doctrine of sufficiency’ as an alternative to the doctrine of economic egalitarianism (Frankfurt uses the terms equality and egalitarianism interchangeably):

Economic equality is not, as such, of particular moral importance. With respect to the distribution of economic assets, what is important from the point of view of morality is not that everyone should have the same but that each should have enough. If everyone had enough, it would be of no moral consequence whether some had more than others.  I shall refer to this alternative to egalitarianism – namely, that what is morally important with respect to money is for everyone to have enough – as the ‘doctrine of sufficiency (Frankfurt 1987, 21).

Frankfurt defines ‘enough’ or sufficient in terms of meeting a subjective personal standard rather than reaching an objective limit.  This standard is when a person is content with what he has: ‘A contented person regards having more money as inessential to his being satisfied with his life.’ This is not to say that the person would not prefer more money – it means that he lacks an active interest in seeking it by, for example, changing careers (Frankfurt 1987, 37-40).

Frankfurt argues that economic equality can be actually harmful on several grounds. One of these grounds is that measuring their financial circumstances against others distracts people from focusing on their own real needs in terms of how much is ‘enough’ for them (Frankfurt 1987, 22).  Another ground is that economic equality tends to divert attention from considerations of greater moral importance (Frankfurt 1987, 23). In this way the doctrine of equality contributes to the moral disorientation and shallowness of our time.

Frankfurt provides an example to show that under conditions of scarcity, an egalitarian distribution may be morally unacceptable.  Suppose there is only enough of a vital resource such as food or medicine to enable some but not all members of a population to survive.  An equal distribution would result in all members of the population dying, but an unequal distribution would enable some of the population to live.  In this way, an egalitarian distribution would produce a net loss of aggregate utility (Frankfurt 1987, 30).

Frankfurt thus argues that ‘it is a mistake to maintain that where some people have less than enough, no one should have more than anyone else’ (Frankfurt 1987, 31).  He argues that this conclusion leads to a logical separation between egalitarianism and sufficiency (Frankfurt 1987, 33).

In a more recent work, Frankfurt identifies some objections to his doctrine of sufficiency.  Firstly, the excessively affluent could be guilty of a kind of economic gluttony, resembling gobbling down more food than they need (Frankfurt 2015, 4).  My view is that this objection is based at least partly on aesthetics – conspicuous over-consumption may appear to be distasteful or unpleasant to observe.  This objection can be dismissed on the ground that aesthetics are matters of subjective personal taste rather than objective standards of social importance.  However, if this gluttony is perceived as wanton waste, it could also constitute an instance of the zero-sum fallacy; that is, the mistaken view that people can only become richer by making others poorer, or vice versa.  Viewed through the prism of this fallacy, waste by the rich can be perceived as throwing money away, resulting in less money being available for the poor.  Common textbook economic theory tells us situations like these are not necessarily zero-sum, because economic value can be created, destroyed, or altered in a number of ways, thus creating a net gain or loss of value to various stakeholders.

Secondly, highly conspicuous disparities wealth in close spatial proximity could cause a lack of social cohesion, which may be associated with frustration, envy and resentment experienced by those lower down the scale, which can damage overall social welfare in a variety of ways (Parkinson et al 2006, 109).  In extreme cases, economic inequality where people do not have ‘enough’ has led to riots or even revolutions in the past.

french-revolution-6

Paris women marching on Versailles, 1789

It is sometimes argued that cooperative relationships among members of society are beneficial and that economic inequality is not conducive to such relationships (Frankfurt 2015, 16).  My own view is that adverse consequences of such lack of social cohesion can be managed at least to some extent by government intervention (for example by the establishment of social safety nets) and that the disadvantage of economic inequality where people have more than ‘enough’ does not outweigh the advantages of Frankfurt’s approach.

Thirdly, wealthy people have may have a competitive advantage or economic power that gives them an unequal opportunity to accumulate more wealth and to exert more political influence than those starting with less wealth (Frankfurt 2015, 5-6).  My view is that this problem can be mitigated at least to some extent by the regulation of excessive political influence, for example via limits on political donations.  Again, this disadvantage does not outweigh the advantages of Frankfurt’s approach and to the extent it cannot be mitigated it is probably something we may just have to live with.

Finally, I would like to consider Elizabeth Anderson’s theory of ‘democratic equality’ based on equal respect of law-abiding citizens (Anderson 1999, 287-337) as a principled objection to the case I have outlined.  Anderson does not directly respond to the arguments of Rawls and Frankfurt that I have summarised in this essay.  Instead, she approaches the debate from a different direction and initially argues against the notion that the motive behind egalitarian policies is mere envy (Anderson 1999, 287-288).  She also argues against the idea of social justice as equality of fortune or ‘luck egalitarianism’ – compensating individuals for undeserved misfortunes in their lives such as being born poor (Anderson 1999, 289-309).  One of her main arguments is that equality of fortune interferes with citizens’ privacy and liberty (Anderson 1999, 310).  She thinks that such an approach gives individuals an incentive to deny personal responsibility for their problems.  ‘It is easier to construct a sob story recounting one’s undeserved misfortunes that it is to engage in productive work that is valued by others’ she argues (Anderson 1999, 311).

From these criticisms of the equality of fortune, Anderson moves towards a positive principle of the equal moral worth of persons, or ‘universal moral equality’ (Anderson 1999, 313).  She believes that ‘the basis for people’s claims to distributed goods is that they are equals, not inferiors, to others’ (Anderson 1999, 314); and that ‘citizenship involves functioning not only as a political agent…but participating as an equal in civil society (Anderson 1999, 317).  In other words, Anderson extends the concept of the political equality of citizens to their economic equality – she thinks that you can’t have one without the other.

In contrast, Frankfurt categorically rejects ‘the presumption that egalitarianism, of whatever variety, is an ideal of any intrinsic moral importance’ (Frankfurt 2015, 65).  He argues that ‘whenever it is morally important to strive for equality, it is always because doing so will promote some other value rather than because equality itself is morally desirable’ (Frankfurt 2015, 68).  Frankfurt believes that the widespread tendency to exaggerate the moral importance of egalitarianism is due, at least in part, to a mistaken conflation of the ideas of treating people with respect and treating them equally (Frankfurt 2015, 77).

Building on the theories of Rawls and Frankfurt that economic inequality is not necessarily unjust, I think that a case can be made that there can be even some advantages in having an inequality of wealth.  An example I would like to propose lies in the social benefits of philanthropy, where almost by definition generous donations are made to worthy causes in the arts and sciences that governments do not see sufficient short-term political advantage in funding.  These donations are often highly beneficial to medical science and treatment, especially in underdeveloped countries.  For instance, it is on the public record that the multi-billionaire Bill Gates has made a major financial contribution towards eradicating the dreadful disease of poliomyelitis from the world.

polio-bill-gates-400px-81

In conclusion, I have shown that social justice, as defined in terms of either Rawls’ Difference Principle or Frankfurt’s doctrine of sufficiency, does not entail economic equality; and that the undesirable consequences of economic inequality can to some extent be managed by government intervention.  Where such consequences are unavoidable, their disadvantages do not outweigh the advantages of Frankfurt’s approach, and in the case of philanthropy an inequality of wealth can even be socially beneficial.

Endnotes

[1] Rawls’ basic structure is a foundational component of his larger Theory of Justice that need not be discussed here.

[2] The application of this principle is subject to other principles of justice that take priority under specified circumstances that also need not be discussed here.

References

Anderson, Elizabeth S. 1999. ‘What is the Point of Equality?’ Ethics 109: 287-337.

Hausman, Daniel M. and Michael S. McPherson 2006 Economic Analysis, Moral Philosophy and Public Policy Cambridge: Cambridge University Press.

Frankfurt, Harry G. 1987 ‘Equality as a Moral Ideal’ Ethics 98: 21-43.

Frankfurt, Harry G. 2015. On Inequality. Princeton: Princeton University Press.

Parkinson, Michael et al. 2006 State of the English Cities Volume 1. London: Office of the Deputy Prime Minister.

Rawls, John. 1971. A Theory of Justice. Cambridge: Harvard University Press.

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