If economic efficiency doesn’t increase well-being, what is it good for?

Economists, after rejecting the idea that we could compare one person’s utility with another person’s utility, set out to find a value-neutral criteria of socially optimal arrangements. The phrase, ‘value-neutral criteria’ should have been their first clue that this would be a doomed quest, but instead they settled on Pareto optimality. In brief, a situation is Pareto efficient if there is not any way in which one person can be made better off without making someone else worse off.

As economists are fond of doing, allow me to start with a rather stark example and then transition into a more realistic analysis. Suppose I am on my way to a job interview when I pass by a small pond and notice that a child is about to drown. It is in my power to save the child, but it would involve ruining my new suit and missing the interview. Clearly, I should save the child, but doing so is not Pareto efficient. I’m made worse off, and under the Pareto criteria, this not economically efficient regardless of how much better off the child is.

Economists are no doubting busy pointing out that (1) this is not an economic transaction, (2) it’s not particularly realistic, and (3) I might not be made worse off by saving the child because I would feel terrible if I didn’t and will probably feel pretty good about myself if I do. For the third point about enjoying altruistic acts I will have to refer you to a previous post, but the other two I will address here.

The example of the child is taken from a (relatively) famous essay by Peter Singer, “Famine, Affluence, and Morality” Singer, of course, is trying to make a point that he then extends to economic situations that are more realistic. Before discussing those situations, Singer puts forth a general principle that I wish to use as a comparison to Pareto optimality. Singer writes,

if it is in our power to prevent something bad from happening, without thereby sacrificing anything of comparable moral importance, we ought, morally, to do it. By “without sacrificing anything of comparable moral importance” I mean without causing anything else comparably bad to happen, or doing something that is wrong in itself, or failing to promote some moral good, comparable in significance to the bad thing that we can prevent.

If we accept Singer’s criteria, it seems clear that there are situations in which it is morally preferable to make some people slightly worse off in order to make others better off, i.e. to violate Pareto optimality. Singer is writing in the context of redistributing income to prevent famine. This redistribution is clearly economic in nature and also clearly makes some people worse off, so fails to be Pareto efficient.

Even though economists tend to agree that money is less valuable to individuals when they have more of it (i.e. $100 dollars means a lot less to you if you have $100,000 than if you have $5,000), they argue that there is no meaningful way to compare the utility of person X to person Y. This means we can never justify making one individual worse off in order to make another person better off because there is not a precise way of measuring how much worse off and how much better off they are. Hence, Pareto optimality is the best we can do. Of course, just because we can’t precisely quantify the utility difference doesn’t mean it does not exist, and so utilitarian philosophers like Singer have come up with quite a different criteria by which to judge society.

By now economists are perhaps screaming that they understand the difference between efficiency and equity. The fact that it’s not efficient does not always mean we shouldn’t do it. Sometimes considerations of equity are more important. But if this is true, we have an efficiency criteria that doesn’t measure what we want it to measure. Efficiency is concerned with finding the least expensive (in terms of effort and/or money) way to our desired result. What’s the point of showing us the most efficient way to a place we don’t want to be? At best it’s offering us a map we can ignore, and at worst the constant considerations of a particular definition of efficiency may make us more likely to head in that direction.

P.S.  You really should read Singer’s entire essay. The implications he draws from two simple assumptions (1) starvation is bad, and (2) if you can stop bad things without causing other bad things then you should are quite remarkable. Also check out his website, The Life You Can Save.

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