http://www.financialcarrier.com Wed, 07 Dec 2011 13:51:51 +0000 en hourly 1 http://wordpress.org/?v=3.0.4 http://www.financialcarrier.com/separating-economics-and-ethics/ http://www.financialcarrier.com/separating-economics-and-ethics/#comments Sun, 12 Jul 2009 11:42:46 +0000 admin http://www.financialcarrier.com/?p=26 The clearest explanation of the role of economic efficiency that I know of comes from an anecdote about a press conference held by Robert Fogel right after his 1993 Nobel Prize was announced. During the press conference, a reporter expressed outrage. One of Fogel’s controversial hypotheses was that slaveholders had limited their abuses of slaves, because slaves were valuable economic resources. Fogel asked the reporter whether a relative of the reporter had passed away. The reporter answered that his grandmother, indeed, recently had. Fogel then asked the reporter why he had spent thousands of dollars on funeral expenses, when economic efficiency would have suggested selling the corpse as dog food. Of course, Fogel’s goal was not to suggest more efficient methods for corpse disposal, but to point out that, just because an action is economically efficient and just because someone explains that an action aids economic efficiency does not mean that the action should be adopted. Economic efficiency is only one side of the coin. Never forget this! In these two cases—slavery and corpse disposal—efficiency seems like an entirely unimportant point. Incidentally, Fogel’s hypothesis is also just that—a hypothesis, not a fact. Given ample evidence of severe abuses, it may be difficult to believe either that slaveholders limited abuse, or, even less credibly, that slavery was an efficient means of production.
A good economist’s argument that counters many “ethical appropriateness” considerations is that it is better to first achieve the economically most efficient solution, and then use the money thereby saved/earned later for “better purposes.” In the reporter’s case, it might mean a cheaper funeral and donation of the saved money toward causes that grandma would have liked.
The same suggestion of “efficiency first, charity separate and later” appears in many economists’ A living wage?
arguments. For example, in Scenario 24 on Page 182, we consider the living wage, which is the salary necessary to maintain an average family. Assume that paying above minimum wage gains you no extra economic benefit, and assume that there are more than enough applicants to allow you to pay minimum wage. Should you pay a living wage to your employees? If you do, your firm’s profits will be lower. Your products may become more expensive. Your firm may lose market share, or even go out of business. So, most economists would suggest that you should pay market wages (minimum wage), and then spend the earned profits in a lump sum transfer payment to the most deserving causes (e.g., the poorest people and/or most deserving workers).
But unfortunately, our economists’ solutions are not as idyllic as we like to suggest. First, virtually every transfer creates allocation distortions and distorted future incentives. If paid once, why would it not be paid again? In the real world, there are no non-distortionary lump sum transfers. Second, who are the most deserving recipients? Your poor workers? Poorer non-workers? Even poorer people in the third world? There is good evidence that too many choices lead to “no-choice.” Indeed, in the real world, the economists’ voluntary lump sum transfers usually just do not occur.

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