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Economics and Justice

By John F. O'Connell, Professor of Economics

John F. O'ConnellOn entering Holy Cross in the fall of 1960, I took the required courses in philosophy, theology, Latin and Greek. By the beginning of my third year it was clear I would have to find a job after graduation so I enrolled in Principles of Economics taught by Jim Gross. Many of my classmates and some of my teachers were convinced that I had thrown in the intellectual towel. Economics did not have the status of many, if not most, other majors. But it was only one course, I protested, and I might get hold of myself and become a dentist. 

I felt inferior to my friend Jack Kavanaugh who was in pre-med; or Tom Wall who was going on in philosophy; or George Hill, who, like most, asked whether he had a vocation, but, like so few, answered affirmatively; or Charlie Amelin who was so much better in mathematics; or Charlie Abdella whose oratorical skills foretold judicial success, while I still waited for my voice to change. But like each of them, I, too, cared about people and enjoyed pondering basic moral, ethical questions about the role of the individual in society. Much to my surprise I found economics utilized my talents and interests, that it was and continues to be intellectually challenging and rewarding, and, though we may be hesitant to admit it, that economics plays a major role in all of our lives.

While historians will debate the Clinton legacy, it was during his term that the welfare system was dramatically and irrevocably transformed. Summarized in the cliché  "from welfare to workfare," the change represents a case study of the many parts of the science of economics. Let me summarize some of the economic research that has driven the debate about welfare reform. Begin with the premise that we want the highest level of well-being possible for the members of our society. Early economists argued that this involved maximizing the total happiness (utility) of the citizenry. But does that mean that each member should be equally happy? If so, how do you measure happiness between optimists and pessimists? Alternatively, should we provide everyone with equal resources and leave their use up to the recipient? But isn't it better to give more to those likely to produce more? Or given different innate abilities, might some need more than others to achieve the same level of happiness? What is a feasibly "just" economic society? There is little consensus among economists about economic justice. Some conclude that because there is not a clearly defined goal, an objective function, then government policy cannot be effective and certainly cannot be evaluated. Maybe policymakers know that.

But let's assume that we are able to settle on an objective (economists are great at assuming they know the answer). How then do we make choices regarding alternative ways of reaching that goal? In a democracy that might appear obvious: we vote for political candidates who support what we think is best. But can we be certain that individual preferences will in some way be collected and translated through the voting system into a consistent social or collective ordering? Will special interest groups be able to manipulate the voting system to serve their own purpose? All the recent talk about political fund raising would lead one to believe that politics is much more than a mechanism for collecting preferences.

The difficulty of arriving at an objective and making policy choices to reach that goal is clearly illustrated by the social welfare system in the United States. By the early 1980s, the costs of the myriad income support programs had grown exponentially. Even the staunchest supporters of the "Great Society" and "New Deal" wondered why there seemed to be so little bang for the buck. Despite large injections of money, the problems of poverty and unemployment remained and in some cases, for certain groups, became more severe.

Where had the policymakers gone wrong? They undervalued the supremacy of the individual and the effect of incentives on individual behavior. Each of my classmates freely chose a career path that would yield a happy and rewarding life. In each case what was good for the individual was also good for society. Rational people know what's in their best interest and they behave in a way that is best for them. If the government pays me more in a training program than I would make in the actual job, there is little incentive to take the job and leave the program. When welfare benefits are cut pari passu with increases in employment, the incentive to work is lessened. On the other hand, an incentive structure that encourages and rewards productive activity benefits both the recipient and others as well. It is not a question of caring or not caring for the less well off, but of how best to help those in need.

Economists believe that markets can be used to answer this question, at least in part. But is it  "just"? Potentially it is, because market efficiency means we have the greatest amount of goods and services to satisfy consumer needs.  There are two theorems in welfare economics. The first says that a competitive market system will exhaust all those trades that are mutually beneficial to buyers and sellers (the direct theorem). The second says that an efficient economy can be reached using market prices (the converse theorem). Government policies, no matter how well intended, that alter market prices lead to inefficiencies; the pie gets smaller even if the piece going to certain groups gets bigger. Prices convey information and if you tamper with the informational content of the price you distort efficiency.

But what about the option for the poor? What about those people who in a market economy will be locked into low wage, high turnover jobs with little upward mobility, or will be unemployable? Surely the government can and should help these people. Economists who believe that the government has such a responsibility suggest the following: (1) policies should allow for individual choices rather than be imposed; (2) policies should encourage individual initiative and reward productive behavior; and (3) policies should use the market system rather than obstruct the workings of the market.

For the market to work, the good or service traded must have clearly defined property rights. Policies that give people ownership rights empower in ways other aid programs do not.   Let me be more specific. Public housing in the United States never lived up to the expectations of those that thought it would improve welfare. But tenants in public housing have no incentive to maintain the units or report acts of crime or vandalism. If the rent took the form of a mortgage, an ownership right, it would be in the owner's best interest to maintain the property. They would have an equity stake in the unit that they could use at some later time. The Earned Income Tax Credit is another example of a policy that receives widespread support. Low-income families earn tax credits (pay less taxes) because they work. The disincentive effects of the tax system are replaced with a positive incentive to be employed.

Economics is not about making legal decisions, like Charlie (the judge), or moral decisions, like George (the priest) and Tom (the philosopher), or decisions about one's health, like Kav (the doctor). Its argumentation is certainly not as analytical or scientific as that of Charlie (the mathematician). But economics affects all of them in subtle, one might even say insidious, ways.


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