In 1909, the Italian sociologist Vilfredo Pareto published his ‘Manuel D’Economie Politique’. It was an attempt to separate equity from efficiency in an economy. Economics is the branch of social sciences that tries to answer the questions of what, how, and for whom to produce in a society. This task, however, begs for allocation of often scarce resources; the role of the state, therefore, is purely to allocate resources efficiently and not to squander it. Pareto argued that allocation of resources will only be efficient for a given set of consumer tastes, resources, and technology if it is impossible to move to another allocation which would make some people better off and nobody worse off. Making some people well off and nobody worse off demands a strategy; in most part, the government of the day can only make a balancing act based on value judgment.
Welfare economics is part of economics that deals with normative issues. Its purpose, unlike macroeconomics or microeconomics, is not to explain how an economy works, but to assess how well it works. Welfare economists use Pareto-efficiency as a tool for resource allocation. The Industrial Revolution gave rise to capitalism where wages were paid for the first time. At the same time, humankind also graduated from feudalism into a democracy, and the issue of equity then came to the fore. Juggling between equity and efficiency in resource allocation then became an art by politicians. Economists use two concepts of equity or fairness – vertical and horizontal. In vertical equity, identical treatment is given to identical people. Horizontal equity (the Robin Hood principle of take from the rich people to give to the poor) gives different treatment to different people in order to reduce the consequences of these innate differences.
To determine which equity concept is desirable is a pure value judgment. We have attempted a few of value judgments lately even outside of direct economics. For instance, the calls to give amnesty to the terrorist group Boko Haram just as was given to the Niger Delta militants. Another is the presidential pardon to some people the larger society considered as antisocial. Unfortunately, these two groups have had and are still having impacts on the Nigerian economy. The kith and kin of the victims of terrorism will find amnesty for Boko Haram offensive. However, other people argue that the country could gamble on amnesty for Boko Haram to give peace a chance and preserve more lives. But what is good for the society? It depends in part on the value judgment adopted by the assessor.
Let us go back to the economy. The number one story today is the economy, and it is quite troubling at various spots around the world. The quest for dominance to control allocation of resources is not new; it has always been from the beginning of human history. It is a delusion to pretend that all could be well in a community with a skewed resource allocation and manifest ridiculous level of social inequality. Contrary to widespread belief, individualism as against solidarity (religious, regional or section) is what matters because at the end of the day the decision to join
nsurgency or sympathise with a cause, become radicalised, or be law-abiding is the individual’s. Self-preservation is humankind’s innate characteristic. God, in His wisdom, made all of us a creature of self-interest, but this same human being cannot exist outside of the community. Our willingness to balance the interest of self and that of the community drives our value judgment.
In The Wealth of Nations, published in 1776, Adam Smith (the father of modern economics) argued that individuals pursuing their self-interest would be led “as by an Invisible Hand” to do things that are in the interest of society as a whole. Smith’s argument was shaped during the Industrial Revolution, where he watched spellbound the effects of capitalism on people’s behaviour – whilst some cheated, others did not. In Smith’s argument, the pursuit of self-interest, without any central decision, could produce a coherent society making sensible decisions of resource allocation. This led to the adoption of the effects of the market as a device for effective allocation of resources. Unfortunately, the experience in the last 30 years has proven that markets should not be the only mechanism by which society can resolve the questions of what, how, and for whom to produce. Distortions in the markets have led to market failure, which in turn has heightened both social and financial insecurity.
If every market in the economy is a perfectly competitive free market (free of the influence of politics, power and who knows who), the resulting equilibrium throughout the economy will be Pareto-efficient. This would have formalised Adam Smith’s remarkable insight of the Invisible Hand. In any case, there are only two possible questions: Are our resources efficiently allocated or are they being squandered? A large number of Nigerians, for instance, believe corruption fuels the squandering of our resources. Corruption is cheating, and even though undesirable, it is a function of self-interest. According to Smith, the Invisible Hand ought to have led even the corrupt to do things in the interest of the society as a whole. That this has not happened in Nigeria shows there may be something else missing. It is indisputable that only a small number of Nigerians are well off whilst millions are worse off – that in itself is Pareto-inefficient.
The balancing between efficiency and equity is solely that of government. For equity, the government may have to tax the income of the rich in order to subsidise the livelihood of the poor. There are, however, sound arguments that raising taxes introduces a distortion in a free market. So what should the government do? The answer depends a good deal on the value judgment of the government in power. A government sensitive to the plight of the poor may judge that the inefficiency costs of ‘distortionary’ taxes are a price worth paying in order to secure a more equitable income and utility that had been created by the free market mechanism. Progressive taxation in which the rich pay their fair share has an excellent societal benefit to the rich also. It allows the well-offs in the society to sleep with their two eyes closed, not necessarily in burglar-proofed houses with high fences or street gates to ward off the desperate worse-offs in the community.
These arguments and many more may shape the behaviour of Nigerian electorates in the near future as the country moves towards a predominantly two-party political system where choices will become clearer. The political parties may have no choice but to adapt their manifestoes. Equity and efficiency were the leading topics in the last US election, but against all odds, equity won the day. President Jonathan insists the current price of petrol is an inefficient allocation of resources. He is dead right, but petrol in Nigeria of today is a key commodity to the welfare of the vulnerable people in Nigeria. They ride on petrol-driven ‘okada’ and petrol-driven ‘danfo’; their goods are moved on petrol-driven truck; they generate most of their power from petrol-driven generators, and they cannot afford anything else. Any adjustment will make millions worse off, and aside from compassion for the poor, that would be grossly Pareto-inefficient.
In other capitalist economies where the price of petrol is commercialised, the vulnerable are shielded away from the use of petrol; at the same time, the well-offs also have a choice – they could ride on mass transit if they so wish. Diesel engines are 40 percent more efficient than petrol engines. Mass transit of people and goods is on diesel-driven buses or trains, and electric trains; their goods are moved by diesel-driven trucks or train; they do not produce their electricity as they are all connected to public utility electricity, which is good economics of scale for everybody. Where are our economists in all of these? The last serious debate we had on Nigeria’s welfare economics was in 1986, grandfathered by Ibrahim Babangida. The country is in dire need of one. Our misplaced value judgment begs for an urgent welfare debate – the alternative is inconceivably dangerous.
SAMUEL AKINYELE CAULCRICK
Caulcrick writes from Lagos.
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