Efficiency, welfare, and inequality

Posted: 28 August 2010 in Uncategorized
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In neoclassical economics, efficiency is often taken to mean welfare. And neither efficiency nor welfare is affected by the equality or inequality of outcomes.

In the continuation of his illuminating discussion of welfare economics, Uwe Reinhardt is right to point out that neoclassical economists pretend not to be making or invoking value judgments when they analyze economic outcomes.

A researcher’s political ideology or vested interest in a particular theory can still enter even ostensibly descriptive analysis by the data set chosen for the research; the mathematical transformations of raw data and the exclusion of so-called outlier data; the specific form of the mathematical equations posited for estimation; the estimation method used; the number of retrials in estimation to get what strikes the researcher as “plausible” results, and the manner in which final research findings are presented. . .

The problem with welfare analysis is not so much that ethical dimensions typically enter into it, but that economists pretend that is not so. They do so by justifying their normative dicta with appeal to the seemly scientific but actually value-laden concept of efficiency.

Absolutely. But Reinhardt does make one key mistake: he presumes that there’s an unambiguous improvement in social welfare when “changes in public policies (reallocations of economic welfare). . .make some people feel better off and none feel worse off.”

Consider the case of changes in CEO pay and average wages in recent years. Since both wages and CEO pay rose, Reinhardt and neoclassical economists generally would see this as an “unambiguous improvement in social welfare.” The problem is, the increase in the ratio of average CEO pay to average wages is the result of an increase in the rate of exploitation, which represents a deterioration in social welfare in a capitalist society.

When neoclassical economists advocate policies that lead to an increase in the rate of exploitation, even when real wages are increasing, they are adopting an ethical stance—under the guise of “economic science”—according to which capitalist appropriation of the surplus enhances social welfare.

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