All Commentary
Tuesday, December 1, 1992

Economics and Ethics in the Public Policy of the Free Society

Efficiency and ethics need not be traded off against each other in the making of public policy.

Alexei Marcoux is a native Californian and graduate student in philosophy at Tulane University, New Orleans, Louisiana.

My economist friend stood aghast upon learning of my support for Proposition 13, the California property tax initiative recently upheld by the U.S. Supreme Court. He argued that taxation, being virtually indistinguishable from theft, is morally wrong and therefore any measure circumscribing the taxing power of government—even if only over a select group of citizens (in this case, property owners)—is just. “But,” my friend intoned with a note of paternal solicitude, “it’s inefficient.”

How could I, possessed of an undergraduate degree in economics, embrace a public policy initiative guilty of that unpardonable sin? I reasoned that, in a free society, the state exists for the purpose of protecting persons and property from invasion by others. Consistent with that role, the free state favors markets as the highly efficient—and ethical—means by which individuals arrange their property holdings so as to maximize their well-being. Where improvements in market efficiency demand property rights violations, however, it is market efficiency, not property rights, that must yield. My friend apparently saw it the other way.

In retrospect, it occurred to me that our brief exchange was a microcosm of the current state of public policy discourse. The economist and the ethicist speak mostly past each other. Where they deign to acknowledge one another, each insists, at best, that the other’s criterion is subordinate to his own; at worst, that the other’s criterion has no place in public policy. This divergence is apparent among advocates of free markets, as well. Free market economists (e.g., Milton Friedman) stress the market’s efficiency while taking a seemingly agnostic position in matters of ethics. Free market philosophers (e.g., the early Robert Nozick) stress the ethical soundness inherent in the voluntary nature of market processes while minimizing the importance of efficiency.

One should not, of course, favor inefficient government policies—our deficits (federal, state, and local) are large enough already. Neither, however, should one favor unethical policies on the grounds of their supposed efficiency. What, then, is the correct course when considering issues of public policy?


Efficiency and Ethics

Efficiency and ethics each have a meaningful role in the making of public policy. Moreover, a proper understanding of the nature of efficiency and ethics as evaluational criteria reveals them to be complementary. Consider:

Efficiency is a wholly comparative criterion. That is, a policy or practice is never efficient in and of itself, but only more or less efficient than the alternatives to it. An “efficient” policy becomes inefficient upon the discovery of a more efficient alternative. Thus, efficiency is a criterion by which alternatives are ranked.

Compare ethics. A policy or practice is ethical (or not) entirely by reference to its content; it either violates an ethical norm or it does not, and this is true irrespective of the alternatives to it. Ethics does not comprise a comparative criterion. It is nonsensical to say that two policies are ethical, but one is more ethical than the other. Rather, ethics provide a benchmark by which to categorize alternatives in a binary fashion, i.e., as “ethical” or “unethical.”

Understood in this way, efficiency and ethics need not be traded off against each other in the making of public policy. Sound public policy is formed in accordance with a simple rule: Choose the most efficient among the ethical alternatives.

Whether ethical or efficiency determinations are made first is immaterial. One can rank all possible alternatives in terms of efficiency and then, beginning with the most efficient, eliminate alternatives until one conforming to ethical norms is found. Conversely, one can categorize all possible alternatives as ethical or unethical and then, after ranking the ethical alternatives in terms of efficiency, choose the most efficient. Either method will yield the same result.

That economics is, as Ludwig von Mises taught, wertfrei (value free) does not imply that the making of public policy (even in the economic realm) is value free. That public policy is laden with ethical considerations does not imply that economics is impotent in its formulation. Market ethics and market efficiency jointly bolster the case for a free society. Each can and should be manifest in a free society’s public policy.

This raises an interesting question: When my friend called Proposition 13 “inefficient,” did he mean that it does not promote efficient markets or that there exist more efficient policies that achieve the same ethical objectives? I must ask him.