Thursday, May 28, 2020

We Can Have a Fairer, More Prosperous World: The Deep Emptiness of Efficiency as a Concept Is Even Deeper Than It Seems

by Neil H. Buchanan

Pretty much everyone who has studied even a tiny bit of economics is likely to have come across the familiar "efficiency-equity trade off," which posits not only that there are two distinct concepts called efficiency and equity but that they are in conflict.  If we want more efficiency, the logic goes, we must accept less equitable outcomes.  If we want more equity, we must give up some efficiency.  Sound familiar?

This is, in fact, not only wrong as a matter of logic but tragically so in its consequences.  Even though it is wrong, however, the liberal/conservative divide in the U.S. (and probably in many other countries as well, although what counts as left-ish in this country is clearly to the right of center in any other country to which we might compare ourselves) is in some ways built around this false choice.  Liberals have accommodated themselves to the idea that they are trading away some amount of efficiency when they promote things like minimum wages and income supports, and conservatives delight in saying that liberals want to kill the proverbial golden goose.  We thus see right-wing think tanks pumping out op-eds with headlines like this recent New York Times guest piece: "The American Dream Is Alive and Well: We have bigger issues than inequality."

To be sure, left-leaning economists and other policy analysts can do a lot of interesting work within the narrow strictures of that debate, sometimes pointing out when efficiency (as typically conceived) can be enhanced by pursuing more equitable policies.  The most obvious examples are in medical care and health insurance, where it is particularly easy to describe how the usual conservative economic assumptions are violated in ways that cause "free market" choices to be wasteful, hugely unfair, and self-defeating,

But this framing of a trade-off between equity and efficiency is, as I noted above, deeply wrong.  As Professor Dorf announced in his column here two days ago: "A New Buchanan/Dorf Paper Explains Why We Don't See More Conflict Between Law & Economics and Originalism/Textualism."  Our article draws from the authors' respective areas of specialization (I write mostly about economics and policy, Professor Dorf focuses on constitutional law and legal interpretation, among other things) to note an unexpected similarity between how conservatives in my field and conservatives in Professor Dorf's field rig their respective games: both groups claim to be using neutral, objective, and even scientific methods of analysis, yet somehow those analyses can be manipulated to produce conservative results every time.

There is much more to the article, of course, and interested readers should take a look at Professor Dorf's column.  People who have run out of Netflix content might even find a pleasurable diversion in the paper itself: "A Tale of Two Formalisms: How Law and Economics Mirrors Originalism and Textualism."  Here, I want to move the analysis from the broader economic critique that forms the basis of half of the article to a particularly alluring misuse of the efficiency concept in legal and policy analysis.

So as not to be coy or evasive, I will state my bottom line as clearly as I can here: Not only is efficiency an empty concept, but it is deeply empty in the sense that it is wrong even to fall back on a narrower claim, which generally goes like this: "Well, it's true that efficiency is manipulable, but there are some situations where it so obvious that something is inefficient that it is still meaningful to use the concept, albeit modestly."  No, even that minimalist defense cannot be sustained.

Although I did not realize that I was doing it at the time, I previewed the core arguments in what later became the economics sections of the latest Buchanan-Dorf paper in a series of columns on Dorf on Law last summer ((here, here, here, here, and here).  In the final entry in that series, I described the project as
"... criticizing the concept of economic 'efficiency' from various angles. The scare quotes are necessary to emphasize that this supposedly neutral concept is ultimately a shell game that allows any minimally clever economist to claim that what he (yes, economics is still one of the most gender-unbalanced academic fields) likes is efficient and what he dislikes is inefficient."
The simplest way to describe our critique of economic efficiency is to ask how we know when something is inefficient, which is particularly easy to see when we note that economists regularly use the term "distortion" to describe an inefficient policy or market outcome.  Distorted?  What does something that is not distorted look like?  To know that, one must first know what the baseline is against which all other possibilities are compared.

The baseline that necessarily underlies any efficiency analysis is composed of the preferences, technology, and legal rights that exist in an economy.  If I have a right to hold the copyright on a book for five years, that is a different baseline than a 25-year copyright period or none at all.  Whether tort claims must be pursued under strict liability doctrines, and whether they can be brought as class actions, will determine how people and firms make decisions and pay the consequences of those decisions (or not).  Whether a jurisdiction adopts contract formalism or realism profoundly changes outcomes.

Because of this lack of a neutral baseline, any set of economic outcomes can be called efficient if one merely takes the time to specify a baseline that supports those outcomes.  That is why Professor Dorf and I call efficiency "incoherent," that is, that it means nothing to claim that one set of outcomes is efficient or inefficient.  As I put it in the block quote above, "any minimally clever economist [can] claim that what he ... likes is efficient and what he dislikes is inefficient."

Many readers might feel some nagging discomfort with so broad and surprising a claim, but in fact there is no "other side" to this debate.  There is no way to defend a claim that some set of legal rules is objectively the correct and neutral baseline and that all deviations from the economic outcomes that flow from that baseline are axiomatically inefficient and distorting.  As Professor Dorf and I argue, that does not stop conservatives from claiming -- usually implicitly -- that theirs is a neutral baseline, but such a claim is unsupportable.

What is the fallback position, for those who (reluctantly or not) concede that they in fact have no greater claim to being able to rely on their baseline than anyone else does to rely on other baselines?  As I noted above, a standard response is to say that some core concept of inefficiency nonetheless remains.  Somewhat like Justice Stewart's oft-quoted claim about pornography -- "I know it when I see it" -- the idea is that although there might be a lot of gray, there is still some black and white when it comes to efficiency and inefficiency.

When Professor Dorf and I presented our paper to my colleagues at the University of Florida Law School's workshop series, one colleague formulated this idea (very much in good faith) in what I now think of as "the Room 204 example."  UF Law's building is a bit of a maze, and we were meeting in a room on the third floor.  Room 204 is down a set of stairs and (if I recall correctly, although I have not been there physically for months) in a different wing of the building.  The questioner asked if it is not obvious that -- no matter how right Buchanan and Dorf are about the incoherence of efficiency -- it would be inefficient to place the seminar's beverages and snacks in Room 204 rather than within every participant's easy reach at the back of the room in which we were meeting.

And to be clear, that is an appealing thought.  "Come on, Buchanan and Dorf, can't you at least admit that some things are inefficient?"  No.  No we cannot.  The only reason that the Room 204 example seems so obviously inefficient is because the questioner has not thought of any countervailing reasons that would lead to a different conclusion.  If the university wanted to be able to offer refreshments but not spend much money to do so, the provost might indeed ask us to make it inconvenient for people to consume them.  Or if there were a campus-wide push to get everyone to be less sedentary, there could be a very good reason to set out the food a long way away.

Indeed, why did we hold the event at the law school rather than at my home?  I have not checked, but I suspect that my house is closer to more of my colleagues' homes than the seminar room is.  And although Professor Dorf presciently changed his plans for our March 7 presentation by appearing via Zoom (only days before UF and most other universities shut down live meetings), why did we not originally plan to meet at Gainesville's tiny regional airport, at Jacksonville's larger airport 90 minutes away, or at a hub airport between Professor Dorf's home in Ithaca and mine in Gainesville?  Charlotte Douglas International is lovely in early March.

These alternatives are in no way silly, and each of them could be justified by some set of objectives that can be easily defended.  Or, to put it in the terms of baselines above, a decision to hold the seminar in an alternative setting would lead to different outcomes -- some people not choosing to attend, others opting in -- and each outcome would be an "efficient equilibrium" given the baseline that was created by the organizers of the seminar series.

In the fifth of my five-part series of columns last year, I described the version of the Room 204 example that is most familiar to tax scholars: administrability.  This is the idea that beyond equity and efficiency lies a third concern that is entirely non-theoretical and non-normative, which is that we should not set things up in an obviously silly and wasteful way.  As I put it there, however,
"administrability ... is merely a subspecies of efficiency.  Both standard efficiency analysis and administrability concerns are, after all, directed at the idea that we are using resources in a way that 'makes no sense,' that is, that we are imposing costs on ourselves that we could avoid but have chosen to take on in an expensive effort to defeat the dictates of the Invisible Hand (which efficiently mediates costs and benefits)."
I concluded: "I am not saying that one cannot spin a perfectly good story" in which something like the Room 204 example seems obviously wasteful, but "one can just as easily spin a no-less-defensible story" that would justify it on falsely objective grounds.  "Our willingness to buy one argument over the other ultimately depends on our hidden values."

In the end, then, there is nothing wrong with saying that it is silly to make refreshments available in an inconvenient place.  But calling that wasteful, or distortionary, or inefficient is just as wrong as any other attempt to justify calling something inefficient based an unacknowledged choices in setting a baseline.

The title of this column begins: "We Can Have a Fairer, More Prosperous World."  That claim is actually less grand than it sounds, however, because "prosperous" is simply a stand-in for efficiency.  What we call prosperity differs wildly under different circumstances and based on our ethical commitments.

When anyone makes an efficiency argument, then, we should always bear in mind that the argument is in reality an argument about what matters and what does not matter.  We can and should have robust debates about what matters, and those debates will be much clearer if everyone concedes up front that we are arguing about our normative commitments and not about scientifically objective truth.