Public Virtues – Distributional Fairness

In Economic Planning, Economics, Financial Crisis, Full Employment, Political Ideology, Politics, Politics of Policy, Public Policy, Public Sector, Regulation, Social Democracy, Social Policy, Welfare State on January 25, 2010 at 7:14 pm

Introduction:

One of the great claims of anti-statist and pro-market thinkers, especially among followers of the Austrian school, is that the public sector will always be less efficient than the private sector because of the un-replicable capacity of the market to accurately signal supply and demand through prices. To this end, commodities have to be dependent on ability to pay (hence, their objection to “de-commodification”), because that’s the only way to signal people’s willingness to pay in a system with finite resources.

However, not all commodities should be distributed according to the ability to pay. And that’s where the public sector shines – because one of the virtues of the public sector is its ability to distribute commodities fairly.

Effective Demand:

Before I begin to discuss the theme of this post – distributional fairness – I want to briefly explore the idea of demand, so central to economic thought, but often not particularly explored. One of the great explorers of desire was John Meynard Keynes who gave us the very useful idea of effective demand. In Keynes’ eyes, one of the chief reasons why the real world economy he observed didn’t match the perfect equilibrium of neoclassical economic models was that demand could only be expressed if consumers had sufficient purchasing power. Thus, if effective demand was insufficient (due to a maldistribution of income, or a sudden change in “animal spirits,” or a sudden restriction in credit), you could have a sudden accumulation of unsold inventory as back orders pile up in the warehouse which prompt manufacturers to cut back on production and employment, creating a negative multiplier effect as raw materials producers and transportation firms respond to the cutbacks in manufacturing and newly unemployed workers cut back in consumer spending.

The idea of effective demand is useful because it throws into relief the reality that demand can only be expressed if someone has money to spend and there is a good to buy. This suggests two things – first, that in a market system, you are always going to have demand that will go unmet because of lack of funds, which is interesting from a philosophic level, and second, that you are also going to have demand that will go unmet because there’s no good on the market for them to buy – which is one variation of a market failure.

In the first round of Public Virtues, I mentioned the example of the TVA and rural electrification as a case of a huge wellspring of demand that wasn’t met by the market. In this case, farmers were assumed to have no demand for electricity because they had no electrical appliances and no demand for appliances because they had no electricity.  Another example from the New Deal was the case of affordable housing, where undersupply of urban housing had created an overcrowding crisis, such that a huge swell of demand could not find goods to purchase.

Thus, even in the case of a much less regulated market in pre-New Deal America, the system of supply and demand signals being sent through the price mechanism still produced large-scale market failures.

Distributional Fairness:

While it’s true that satisfying demand for consumer goods is not the public sector’s strong suit, there are categories of goods that you want distributed on non-market principles. For example, there is an important category of goods that its best if they are distributed broadly across the population without distinction as to ability to pay, yet which if distributed by the price system leads to a sub-optimal outcome.

Health care is an obvious case. For a variety of reasons, economists have pointed out that health care fundamentally doesn’t work as a market: we can’t tell in advance if and when we’re going to be sick (hence, it’s impossible for an individual to budget against health care costs), we lack the information necessary to tell whether the treatment recommended by our doctors is worth its cost (since we don’t have a medical degree ourselves), and then there’s the issues of moral hazard, adverse selection, and the like.

It’s also the case that there are many areas of health where we don’t want health care to be distributed on the basis of the ability to pay.  Public health issues such as contagious disease are perfect examples: because we need an overwhelming majority of the population to get vaccinated in order for herd immunity to kick in, and since vaccines are public goods (in that the individual is highly unlikely to voluntarily consume them, due to the low risk of their actually getting the disease and the enticement of free riding off of others), it makes sense that you don’t want to distribute vaccines through the price system. Instead, you need the public sector’s compulsory powers to ensure that everyone gets the vaccine – and one of the chief ways of achieving compliance has historically been to make vaccines free of charge. At the same time, because contagious disease spreads without distinguishing between income levels, there’s also a compelling interest in ensuring that access to preventative medicine like regular checkups and frequent testing for major diseases should also be free of charge.

And given that we should be providing vaccinations, general medicine, and treatment for contagious disease, it seems only logical to provide the full range of health care while you’re at it. Given that most individuals cannot afford to pay for their own health care, and that an individual’s consumption of health care provides benefits to others – employers offer health care to their employees in part because it increases productivity and reduces absenteeism and turnover, and a society full of healthier people benefits from increased production and thus a higher GDP and tax base – the case for health care as a right seems to function just as well as a case for health care as a public good.

Education is another case where distributing a good on the basis of price leads to underutilization and a generally sub-optimal level of productivity, and where distributing the same good on the basis of “distributional fairness” creates positive knock-on effects for the whole of society. For most individuals, the cost of education (especially higher education) can be prohibitive – and even in the case of parents footing the bills for their children, the $6,600 per year average cost of private education would be extremely hard for the median family (with a household income of $44k a year) to afford. Hence, before the advent of public education systems throughout the West – and especially before the advent of public support for school construction, teacher training, etc. – literacy rates (a good test of basic education) were quite low and educational attainment was likewise unimpressive. Even in the United States, which was a world innovator in free public education from the 18th century on, only half the population enrolled in school during the 19th century, and as late as 1940, only a minority of the population had completed the 8th grade, let alone high school. And yet the provision of education provides enormous benefits to the whole of society in terms of the speed of communication, productivity of the workforce, new technological and scientific advances, and the training of specialist professionals.  Especially given the fact that educational ability is not inherited from birth, the failure to distribute education regardless of ability to pay means that untold numbers of potential geniuses who could add to the general stock of knowledge are denied that chance.

Conclusion:

Beyond these two categories of goods, there’s plenty of others we can think of that provide great benefits to society when they are distributed fairly. And in these spaces, the public sector shines as a producer and provider. However, it’s rare for us to investigate which goods should be distributed fairly, in part because the very idea that any good should be distributed outside of the price system is constantly challenged by pro-market advocates, especially in debates over the privatization of public services.

As they seek to make the case that goods formerly distributed on the basis of fairness through the public sector (the provision of clean drinking water through a public utility, for example) should be turned into market goods, one of the chief tactics of pro-market advocates is to deny the social benefit of these goods. For example, in the debates over the privatization of higher education, pro-privatizers have invested enormous amounts of time and resources into pushing the idea that education is a private benefit to the individual, realized in higher wages through the acquisition of credentials, and that therefore the individual should pay the full freight of higher education as an investment in future higher earnings. This line of argument relies on deliberately ignoring or downplaying any advances to society at large from individual education – the existence of the public domain of intellectual property, or the benefits provided by new scientific and technological advances, the social share of increased productivity through tax revenue, and so on all have to be removed from the narrative.

This is why making the case for distributional fairness requires us to look more holistically at the economy, to see the ways in which interconnections between individuals matter.  Understanding that things that benefit other people benefit ourselves is, in the end, the best argument for collective action.

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