Economic growth and distributive justice

I have often worried about whether promoting ‘efficiency” – in the economic sense – ensures maximum well being where it makes some people better off but others worse off – even if the Kaldor-Hicks criterion is fully met e.g. by ensuring those who gain from the policy could potentially bribe those who lose from it.

I discussed at length the issues involved in “The Distribution Effects of Labour Deregulation” (see article in AGENDA, Volume 14, No 2, 2007). I reached an inconclusive answer: it depends on what mix of social values appeals most (distributive justice and equality of opportunity versus choice and self-reliance).

Now Uwe Reinhardt and Steven Landsburg debate this issue in a piece highlighted in Greg Mankiw’s blog, August 27, 2010. It is most interesting discussion which I strongly recommend.

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Kien
Kien
11 years ago

Professors Reinhardt and Landburg seem to be in broad agreement. If there is any disagreement between them, I am not sure what they are. They both seem to agree that “economic efficiency” is often a useful criterion for assessing policy; however, it is rarely a sufficient criterion. Perhaps Professor Reindhardt might contend that economic efficiency is not even a necessary criterion, but merely a (very) useful criterion.

Amartya Sen’s distinction between “culmination outcomes” and “comprehensive outcomes” seems helpful in this regard. Economists pay close attention to culmination outcomes; what is the ultimate effect of policy on welfare? Close consideration of comprehensive outcomes would also take look at the process taken to arrive at the culmination outcomes; e.g., has the policy been developed and implemented in a fair manner?

A person’s well-being can be affected by considerations of justice and fairness. There seems plenty of behavioural work demonstrating that people care about these matters.

A student of economics can generally expect to master a broad set of tools for evaluating culmination outcomes. However, a standard economics program seem to have little to say about justice and fairness. There is no reason why the study of economics should exclude these considerations, particularly if economics is properly a discipline concerned with comprehensive considerations of well-being.

Adam Smith had a lot to say about justice and fairness. His Theory of Moral Sentiments could serve as a useful base for the discipline of economics to extend in this direction.

Corin
Corin
11 years ago

Hi Fred

I wrote this last year: http://www.theaustralian.com.au/news/opinion/on-the-wrong-track-when-politics-drives-wages-policy/story-e6frg6zo-1225769982854

I think I would describe myself as a combination of Option 3 and 4 in your paper. No one seriously believes in no regulation at all. Well I guess some do, but they just weird people with weird odd political axes ….

I think it is a question of whether tax/welfare policies are better or more efficient in generating equity than labour regulation and I would say they are.

I think for example the awards could whither and we could be left with the 10 national standards and minimum wages without a great social cost and we could gain a lot more flexibility that way (and you wouldn’t need to diluite unions overly or bring back AWAs). I’d say labour market policy has bee poorly served since Keating left office. Hawke’s Accord was a good model that reform can be bought through the social wage.

Both Howard and then Rudd/Gillard have had no tool for advancing reform of the labour market that produced greater equity and efficiency together.

I tend to find your arguments drift a little bit toward the interventionist for my taste but so long as they aren’t industry specific or corporate welfare in another form I can perhaps go there …

The links were good. This debate is not that dissimilar from Nick post on the failure of Labor to have a vision beyond next week!

Cheers
Corin

Fred Argy
Fred Argy
11 years ago

Thank you for your comments, Corin. And I read your article.

I think a few of the WorkChoice measures (such as on unfair dismissals) could not be addressed by tax/welfare proposals. And the many welfare/tax proposals that could be usefully adopted now may no longer work – because of the debt-obsession stance that the public (and financial markets) have embraced. Now, we need to worry about deficits and surpluses or else all hell will break loose.

This the sad truth,but thanks for your contribution.

Corin
Corin
11 years ago

Hi Fred, I mainly agree, but then Work Choices was more ideological than policy pure. I would say that the optimal policy might be:

1. UD exemption up to say 10 may be 20 employees;
2. Let awards whither over a period but put in place tax credits or similar; and
3. Having kept FPC and its minimum wages setting (probably even penalties and over time etc which could whither over a longer term time frame).

Ben
Ben
11 years ago

Hi Fred,

Just returned to study this year after many years absence. Studying Political Science and Economics. I have just discovered your work and was hoping for some advice on study paths. As I seem to be getting straight neo-liberal economics at University (‘government intervention is inherently bad’) I was thinking perhaps of doing an exchange in Scandanavia or Germany.

If you could offer some advice that would be greatly appreciated. Perhaps I can continue your efforts in future years!

Ben