Efficiency, Equity, Sustainability
What do we want from our economy? What most folks want boils down to three economic goals: efficiency, equity, and sustainability.
by Fred E. Foldvary, Senior Editor
Efficiency is the ratio of output to input, and an efficient economy gets the greatest possible production from its input resources. How can we maximize productivity and economic growth? By letting the free market work without interference. There is no way to improve the productivity of an unhampered market. Any restriction on honest and peaceful human action reduces productivity and efficiency.
Therefore an efficient economy is one with free trade, both with within the country and with foreign economies. Maximal efficiency requires the abolition not only of tariffs on imports but also the internal tariffs, taxes on productive activity. Civic revenues can be obtained without hampering the market with user fees, pollution and congestion charges, and by tapping the value or rental of land. Land-based public finance does not hamper efficiency because the land is fixed in supply, with no cost of production, and because civic services pump up site values, and the tapping of this value returns it to the provider of the public works.
One of the biggest misconceptions found in almost every economics textbook is that there is a necessary trade-off between equity and efficiency. They say that to get more equality, we must tax the rich, and that leaves a smaller economic pie. But in fact true equity is complementary to efficiency. Relative to today’s mixed-up economies, we can have more equity and more efficiency by scrapping taxes on labor and capital, and instead letting nature pay the public finances by grounding public revenue on land.
Landowners today get welfare subsidies as their rental income gets pumped up by civic works paid for by taxing workers and consumers. This contributes hugely to income inequality, while the reduction of productivity and the taking of bread from the worker’s table makes for poverty. Tapping the site values for public revenue eliminates the inequality of wealth and income from the land factor.
There is also a deeper reason why the pure free market is equitable. A pure free market consists of voluntary human action, and the meaning of voluntary implies a universal ethic that gives the market its meaning. The universal ethic also has to be the ethic that prescribes proper policy. Therefore, the pure free market cannot be other than ethical and therefore maximally equitable.
The third economic goal is sustainability. Equity and efficiency have to be applied to the future and not just today’s economy. A discount on the future may only apply to one’s own life and not to new lives that are born and hatched and sprouted in the future.
Sustainability has several elements. For fixed resources such as oil, there is no way to use them other than to use them up. Any interference with the usage by a pure free market would be arbitrary, as there is no way to know how future persons would value such resources. But sustainability requires that today’s consumers pay the full social costs of using up fixed resources. For example, there needs to be pollution charges for the use of oil and gasoline. With proper pricing, as a resources becomes used up, its price rises, and less is used, so the market can automatically allocate use so that some is always left, at some price, for the future.
For renewable resources such as water and wildlife, sustainability requires that we conserve the capital and only use the interest. Fish beget new fish, and we may harvest the increase so long as the breeding stock is maintained. Likewise, trees may be harvested so long as we heed the credo of John Locke to leave enough of the same quality for others. Sustainability is compatible with the free market as polluters compensate the victims for trespass and damages.
“Efficiency, Equity, Sustainability” makes for a good bumper sticker, poster slogan, and pin. Economics should keep it real by presenting these three goals and recognizing that they are compatible, complementary, and feasible only with a pure free market economy.
-- Fred Foldvary
Copyright 2006 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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