Is maximum economic efficiency always desirable?

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One of the main arguments leveled against socialism is that it is less efficient than capitalism. However, this confuses the goal of socialism- it is not necessarily to maximize production, it is to ensure equality in distribution of what is produced. For someone who values egalitarianism over total production, socialism might seem to make more sense.

Take two hypothetical scenarios:

(For simplicity, I will imagine societies of 10 people. You can take these to be deciles if you wish, ie top 10%, next 10%, and so on)

Case 1: Take these as annual incomes, and say the poverty line is somewhere around $30,000
Person 1 has $700,000
Person 2 has $100,000
Person 3 has $50,000
Person 4 has $25,000
Person 5 has $25,000
Persons 6-10 have $20,000 each.

In total, these ten people have $1,000,000, making per capita income $100,000.

Case 2: As above, but
Persons 1-10 all have $65,000.

In total, these ten people have $650,000, and per capita income is only $65,000, significantly less than under Case 1. However, because of the different distribution patterns of wealth, there are only 2 people in Case 1 better off than they would be under Case 2, with everyone else benefiting from the latter scenario. Case 1 gives a median income of $25,000, and Case 2 a median income of $65,000. Now, utilitarianism dictates the greatest good for the greatest number (not necessarily the greatest total good) and economics implicitly embraces utilitarian ideals. By marginal utility theory, we can expect that persons 4-10 are happier about being lifted out of poverty than persons 1 and 2 would be about the added incomes they get under Case 1, which far exceed what they need or even have much use for. Because of diminishing marginal utility, we can actually expect that person 1 in Case 1 is not likely to be significantly happier than any of the people in Case 2.

Basically, I'm wondering if the egalitarian nature of socialism can justify the lower overall economic efficiency that would be expected.

Thoughts?

Orwell, the big problem then becomes entrepeneurship and job creation. If you really crush it down dead equal; no one is in their right mind technically to invest all kinds of money to start something that could have them and their children in debt for the rest of their lives if it fails. If that last point is covered and there's no penalty for failing - exactly what we just went through with our mortgage bubble and Fannie Mae/Freddie Mac who had the wonderful providence of being both government back and listed on the stock-exchange in a very for-profit kind of way.

Corporatism can shave the curves a little bit but to flatten it like a pancake - socialism would be a necessity in that case as you'd legally and ethically have a hard time figuring out how to deal with the individuals brave enough or crazy enough to set it on the table and start a business if that business model went sour. I haven't seen statistics but I'd imagine, intuitively speaking, that this would be on something of a j curve where the negative effects of government interceding over business exponentiate as you hit certain percentages - starting at very little effect and then becoming increasingly louder.

edit: Another concern to think of as well - it needs a much more stable world, both in terms of geopolitics or resource management, than we're likely to have for thousands of years. If socialism does happen and the government runs everything, you can possibly square away with it if the people of a particular country find that sacrifice acceptable, however its something that makes a country very vulnerable geopolitically. Instead of having thousands and thousands of microeconomies as shock absorbers if a supply comes up short, if another country imposes a trade embargo, or if your even attacked by another country; changes and fixes to problems like these become very sluggish rather than if the private sector still had the economy.

Last edited by techstepgenr8tion on 19 May 2009, 10:02 pm, edited 1 time in total.

Right, well, these are oversimplified hypothetical situations, it wouldn't necessarily be dead equal under socialism. Socialist systems also do try to provide some incentives, just of a different fashion than those found in a capitalist system. In terms of motivating individuals to work harder, one option would be to try to replicate the Stakhanovite movement of 1930s-era USSR.

As far as enterprise and job creation, socialism by definition is the centralization of industry in the hands of the state, so those things would be the government's responsibility.

The other issue is that it's an abberation of human behavior - as in trade and barter will happen, black markets will occur, and because its fighting an almost immutable force I can see why many of the socialist countries of the early 20th century became dictatorships or totalitarian; they may not have even wanted to to begin with but as people wanted to take it as tongue and cheek and do what they really wanted to they found out that it would take secret police to shut down all of the blackmarket traffic that was occuring.

I think the sad part is that everyone likes what it stands for, just that the battle seems to be the translation between theory and practice.

This isn't really what I wanted to debate. Personally, I'm still inclined to believe that socialism would just collapse eventually, but I'm interested in seeing some different views on this. If socialism could maintain a level of production that, compared to capitalism, was fairly stagnant, but was able to distribute the results of that production in an equitable manner, would people then regard socialism as a good idea? I'm not wondering whether socialism would succeed or fail. The two cases in the OP assume that socialism is stable but produces less than capitalism would. Those are the assumptions I'd like to argue off of. Assume the two hypothetical scenarios hold, and the only differences in the two societies is that Case 2 has a more equitable distribution of a smaller amount of wealth.

well, the thing about Socialism is that equality is enforced. People would get angry in the old Soviet Union if anyone did the slightest bit better than their neighbors. This results in a downward societal pressure that limits initiative and advancement.

Marxist-Leninist theory says that a thesis (capitalism) generates an antithesis (socialism - and don't start, this is taking the dialectic into new territory), which would create a synthesis (Chinese-style socialism? Jury's still out...

I tend to think is what we should have is 'from each according to their imagination, to each according to their potential'....but that's me...

Where did you get this idea? People in the USSR were not all equal, and there was actually quite a bit of societal pressure to do well, most notably in the Stakhanovite movement.

But anyways, as I said... disregarding issues of whether socialism has an easy practical implementation... if we could have lower overall wealth, but have that wealth distributed more equally, in such a manner as to eliminate extreme poverty, would that be desirable?

There is a book titled "Communitas" by Percival and Paul Goodman which is basically about architecture and how it should reflect different types of societies. It discusses a couple of different tpes of societies and has interesting things to say.

You know what would be good for job creation? elimination of the role of machines, use of assembly lines, and tax benefits for companies that have greater numbers of employees and getting rid of the type distinction that benefits only minorities and people who have been mistreated in the past or in regions other than ones own state.

Socialism has a good sound to it, but the people in the government controlling the redistribution control their own benefits and thereby become the Patricians of the land, no matter what. and even with a nice income of $65,000 a year, there are going to be mafias desiring ever more.

Socialism penalizes the outliers, especially on the high end. An egalitarian society makes a false assumption. People are not equal. They differ physically, they differ in intelligence, they differ in ambition. By penalizing brightness, the gifts of brightness will soon be not forthcoming. Why should our best and brightest bust their humps when they will get the same reward as the dull and mediocre?

Discouraging excellence is the greatest flaw of socialism. Socialism is great for producing a society of mediocre performance as we have seen it to be historically. To have the benefits of winning, one must let the Winners Win.

ruveyn

That is just it the current 'capitalism' isn't efficient anyway. Corporations, exist only because of corporate protectionism, they are very inefficient otherwise due to diseconomies of scale and lack of innovation of their own making.

People will try to exploit all the advantages given to them, and try to get round all the disadvantages imposed. This is what happened with this banking crisis. There was light touch regulation, and where there was regulation they blame each other for not enforcing it.

Capitalism is total idealism (no differ than communism in that respect), it is efficient in theory only.

Once we get passed these silly labels, it really isn't a question of having regulation, it is how an where the regulation is applied.

It is funny how those who are capitalist fan boys (and not that does not imply I’m the complete opposite), are just as idealist as the next person.

It is sort of like the fallacy of the ‘balance of nature’, the balance of capitalism is just as fairy tale. You can’t exclude chaos from anything.

That is a good point. Corporations are granted the privilege of limited liability but what is even worse is that they the the recipients of subsidies (both tangible and intangible) whose expense is borne by the tax-paying public.

The regulations I wish to see imposed on businesses are laws that punish fraud and activities which physically damage others, such as air and water pollution. That means businesses should be pretty free to succeed and also free to fail. It should not be the business of government to prop up failing firms, especially those which fail because of gross managerial incompetence.

For example we should let the major automobile companies go down the tubes. In the process some of their assets will end up in the hands of those who know how to make a better automobile or truck. No firm shoule be "too big to fail".

What we currently have is a kind of corporate socialism and a pretty obnoxious form at that. Profits are privatized and losses are socialized.

ruveyn

Last edited by ruveyn on 20 May 2009, 12:34 pm, edited 1 time in total.

First, Efficiency does not exist as a dimensionless entity - it is entirely relative to a perspective. Some economists believe that maximizing GDP is equal to maximal fulfillment of human needs, but that is clearly not the case, as the income scenarios above demonstrate.

American agriculture is both the most efficient and least efficient in the world, depending on how you want to measure efficiency ... high yield per acre, but very low return on energy inputs, worse than most other countries.

It is far more economically efficient for the producers to have fashions that change frequently, as they sell more when there is planned obsolescence, and they charge more for 'fashionable' labels or styles. On the other hand, the individual might be better off buying clothes that cost less to start with and which can be worn for several or many years.

Henry Ford saw the problem with massively uneven distribution of wealth when he started building cars - if the average worker couldn't afford to buy a car, he couldn't sell nearly as many. So he started with his own workers, and paid them respectable salaries. If we consider things other than autos (education, lower infant mortality, low crime rates, etc), then unbridled capitalism is a very inefficient system - some sort of hybrid is almost always better.

Well, for one, the question is difficult because you only want to look at inequality of life as a value, while ignoring other benefits and issues.

So, to take the question at face value: yes, inequality is a bad, and lower net income would be better to some extent.

However, there are some additional questions that make this entire thing just really more complicated:
1) Is income inequality itself a negative externality? If so, then your question becomes somewhat superfluous.
2) Is it realistic to look at a one-time glimpse at all?

Techstepgenr8tion looked at 2. I will point to 1.

Then after that question, the next one that emerges is what trade-off should be taken, once we have decided that inequality is a bad.

Orwell, I think you make a good point regarding marginal utility and rich people having more money than they have anything to do with. But I think this illustrates that capitalism can be economically inefficient just as socialism can. Just as it’s going to be difficult to motivate people to acquire professional skills if they’re going to be paid no more than unskilled workers, it’s also going to be difficult to squeeze much more productivity out of a multi-millionaire by dangling a few extra hundred-thousand in his face.

From what I’ve read, the Japanese have a system that does not really qualify as capitalism or socialism, and it’s a system that seems to be to be superior to both of them. It’s a system that focuses on incentives other than financial ones, a system that focuses on long-term stability rather than short term profit, and a system where the government does not own the means of production but controls the allocation of capital.

It’s really a system that goes hand in hand with nationalism. I imagine some on this forum might find that all a bit scary.

Here’s a fairly long article I already posted once a while ago, in case anyone’s interested. http://www.paecon.net/PAEReview/issue23/Locke23.htm

The economist Eamonn Fingleton has been writing for years about how superior the Japanese system is to US-style neoliberalism.

Orwell, I guess I didn't mean to pick it apart too much but - its always important to point out that the price tag is much higher than what it looks like just on the face of it. That and the $65,000 might be a bit high.