Introduction

Economists often assert that if we wish to raise the standard of social equity, we have no choice but to pay for this by compromising (or sacrificing) the country's ‘economic efficiency’. They make this assertion when they claim that there is a ‘trade-off between equity and efficiency’. Efficiency means avoiding waste, and who would like to waste; but to describe the act of taking social equity seriously as being a waste is bizarre. Indeed, it is not merely bizarre, but as we shall see in this chapter, it is also wrong as far as a rigorous grasp of economic theory is concerned.

A closely related proposition of the ‘equity and efficiency trade-off’ concept is the problematic idea that reduced levels of equity and social justice could be better redressed via money payments. Accordingly, matters such as health and safety negligence on the part of employers, or government policies that prioritise low inflation over full employment, could be equitably redressed with a grant of money. I beg to differ on this matter.

‘Efficiency’ and ‘equity’ in economic theory

So, what is it that economic theory does say about the notion of ‘efficiency’? And what is the actual origin of the odd idea that when social justice concerns are addressed by our governments, we end up compromising ‘economic efficiency’? First, let us see what economic theory does say about the notion of ‘efficiency’.

To begin with, economic theory says that we cannot possibly know the most efficient pattern with which we should use our natural, human and financial resources before having a clear idea about what it is we are trying to achieve. In other words, we must determine our intended purpose before we can know how to best allocate our economic resources among competing claims. This applies to a single person, a household, a large corporation or the nation as a whole. Indeed, common sense itself provides the same advice – know what you are aiming for, and only then you might know the most economical (that is, least wasteful) way to reach your goal. This is precisely what economics describes as the efficient way of doing something, big or small. Note, however, that once our goals change, so does the pattern that describes how our resources should be deployed in a truly efficient manner.