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One branch of economics introduces social welfare functions which assign welfare to individuals based on their income. There is no real science to estimating social welfare functions, but if one makes one up that seems reasonable, then the total social welfare of the two schemes can be computed and compared. If we assume that another dollar is worth less to a wealthy landowner than to a poor farm worker, we might well find that the inefficient government park-building scheme is much better than the efficient pure-market scheme, because it produces more total social welfare.
It must be admitted that we little scientific knowledge of how welfare relates to income. But we do know that it is completely plausible in a real case like the above example of low wages, that the inefficient non-market solution could win out if God told us the true social welfare function and we applied it. Since the non-market scheme really could be better, and there is no evidence to the contrary, what excuse to economists have for always siding with the "efficient" market solution. There is no good excuse for taking a hard line, but there are two excuses for generally siding with the market.
True but usually dumb excuse: It would be possible in theory to use a pure market, and then take some money from the rich and give it to the poor and make some better off and no one worse off than in any particular non-market scheme.
Reasonable excuse: In many cases, the difference between the market and non-market proposals do not have much impact on over-all income distribution, so the efficiency gain of the market (not wasting any of the pie) will outweigh any benefits of income distribution by the non-market approach.
The first excuse, when applied to the wage example, says that land-owners could be taxed and the tax distributed to all workers, with the result that everyone is better off than in the government-parks alternative. If the government program would build too many parks from a societal point of view, this excuse is technically correct. But the fact that such a possibility is a technical possibility is irrelevant when it is politically impossible as is usually the case. This excuse points out that an irrelevant third choice is better than choice B. This in no way argues that if one must choose A or B, one should choose B.
The second excuse is often valid. For example, subsidizing electricity price with an income tax will help some poor people who pay no income tax, and this may be desirable. But this will also result in everyone else over-using electricity, and will probably result in decreasing the efficiency of investment in generators. It is much better to allow a market-determined electricity price and give a few poor people subsidized rates. This in not a pure market solution, but it is much closer to the market solution than a general subsidization of electricity prices.
The bottom line is this: Economics does not generally tell us a market solution is better than a particular non-market solution if the non-market solution redistributes income from rich to poor. Economics is agnostic on this. It is necessary to compare the benefits of efficiency with the benefits of redistribution. This is difficult.
Bottom line #2: When comparing these benefits, the left almost always undervalues efficiency and the right almost always undervalues helping the poor. Each side must learn to listen carefully to the good points the other side makes.
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http://zfacts.com/p/384.html | 01/18/12 07:22 GMT
Modified: Sun, 28 Jan 2007 04:33:03 GMT
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