29 July 2008

Efficiency Rules, mostly

I've been posting quite a bit on economics lately, and was engaged in yet another heated economics debates on Ed Brayton's blog. I left my email address on one comment there, inviting people to contact me that way if they had more questions. Two did, and one of them asked where I stood on various regulations to keep corporations from abusing people. That's a good question, although I don't love the way it's phrased, because that's still a question I struggle with.

Economics is primarily about efficiency, and efficiency is a damn good thing because it allows us to maximize the ratio of benefits to costs, thus maximizing wealth. And wealth, particularly having a wealthy society, is a great thing. We in the western world are wealthier than people in the developing countries, so we can afford clean safe water, good food, medical care, better housing, books, travel, and all the other things that make our lives good.

But efficiency is just one value, and contra Plato, not all values are commensurate. It's not just that efficiency doesn't necessarily distribute wealth evenly (as long as we all continue to become wealthier, it's little harm to me that others are wealthier yet--absolute, rather than comparative, well-being, is the proper standard), it's that efficiency may at times place much too little value on individual humans.

So given that all regulations are market-distorting, yet markets may not respect humans as much as I like, when is regulation ok? It's not always easy to answer.

For example, if there is an oversupply of labor, workers become dispensable, and subject to very abusive treatment. This is the real story behind Sinclair's The Jungle, not that he realized it. Massive levels of immigration resulted in a tremendous oversupply of unskilled labor looking for factory jobs, with the consequence that none of them had much market value. Although it's guaranteed that the government regulation will be inefficient, I don't mind regulations about workplace safety and treatment of employees in such a case.

And as much as I am skeptical of nationalized health care, it does seem to me that government can be an effective insurer of last resort in cases of traumatic health care problems. Should the fact that no one's devised an economically efficient way of providing health insurance for someone who's never going to work again but will have have mounting medical bills throughout their life mean they should be left to die?

Although I'm a staunch free marketer, I do recognize that efficiency is not the only meaningful value we should try to achieve in our society. So I do support some regulation not justified by efficiency, particularly to support those who really do have no hope of supporting themselves anymore. But I also think that efficiency as a value is under-rated by too many people--after all, it's what provides the wealth that allows us to set efficiency aside and "waste" it on people who need it but can't earn it.


James K said...

This is one of the issues that gets discussed in policy economics courses. Efficiency matters a lot, but distributional concerns and human rights matter too.

I think where I personally part with most people on these kinds of regulations is trying to get at the root cause of the problem. The other part is to understand that governments are bad a complexity, far worse than markets. So many people get that backwards.

In the case of labour conditions there are two scenarios: Bad conditions, with high pay to make up for them and general crappy pay and conditions (a sweatshop scenario). The first could be handled by regulation, but the second would only cause greater poverty and suffering in the people you are trying to help. After all the employer would respond by cutting pay or firing the person.

The best way out of this is for the government to use tax revenues to create a minimum standard of living (using a negative income tax system would be best) so that people would have an alternative to those sweatshop conditions.

I guess my point is that while economics cannot prioritise different values (that is properly a role for the electorate) it can change your approach to upholding them quite a lot.

James Hanley said...

I felt the need to write the post, because every time I call myself a libertarian, I know it sends a message of "one for one, and none for all," which isn't really my view at all.

Perhaps the most accurate concise description of my beliefs is "voluntary communitarianism."

James K said...

Libertarianism is a very fuzzy ideology, it has a broad range of ideas in it.

I tend to call myself a quasi-libertarian simply to give myself some wiggle room when people start in with the Ayn Rand caricatures.

Both Milton Friedman and Friedrich Hayek believed that welfare was a good idea, which goes to show you that the definition of libertarian is more flexible than it might first appear.