The ethics behind efficiency

ABSTRACT

The normative elements underlying efficiency are more complex than generally portrayed and rely upon ethical frameworks that are generally absent from classroom discussions. Most textbooks, for example, ignore the ethical differences between Pareto efficiency (based on voluntary win-win outcomes) and the modern Kaldor-Hicks efficiency used in public policy assessments (in which winners gain more than losers lose). For the latter to be ethically palatable, society must have in place basic institutions of justice, transparency, and accountability. Normative economics thus requires a pluralist approach that includes considerations of virtue and duty, closer to Adam Smith's Enlightenment conceptions. This surprising finding should embolden economics teachers to engage students with critical thinking problems that are controversial and relevant, and which better prepare students for a complex world.

KEYWORDS:

• Adam Smith
• duty
• efficiency
• Hicks
• Kaldor
• normative economics
• Pareto
• virtue

JEL codes:

• A22
• B0
• D6

Acknowledgments

The author is grateful for spirited conversations on these issues with Robert Dolan, Erik Craft, David George, George DeMartino, Rob Garnett, John Davis, Mark White, Irene van Staveren, and members of the Association for Social Economics. David Colander also provided valuable suggestions for the article.

Notes

1. This claim may be too stringent, but its virtue is that it would force policy analysts and students to consider multiple outcomes.

2. It is important to point out that only adult males were allowed to sign the agreement, and adult women and some adult servants did not participate. Would such a compact with unequal participation be considered ethically defensible today?

3. Hence, an entrepreneur “may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of” (Smith 1759/1982, 83).