Efficiency Versus Equity: A False Dichotomy?

Abstract

Marc Tool has made a convincing argument that, over the last sixty years, economists have been compelled to do institutional analysis. The compelling forces have been the problems and situations facing people trying to improve their material circumstances. The world-wide depression of the 1930s was the event that broke “the pervasive grip of the Marshallian/Hicksianorthodoxy on the minds and hearts of an increasing number of economists and policy makers” (Tool 1981a, p. 569). Other events such as World War II, de-colonization, and rapid advances in technology have caused the shift to institutional analysis to continue. A major point made by Tool is that these structural shifts in the economy have compelled policy makers to be concerned with normative issues as they consider questions of efficiency. If economists failed to respond to the concerns of policy makers, the discipline would be left out of the most important public debates. The orthodoxy Tool referred to posed a trade off between equity and efficiency; equity enhancements necessarily impose an opportunity cost in terms of efficiency. The shift to institutional analysis is a recognition of the fact that the relationship between equity and efficiency is much more complicated than a simple trade-off. The characteristics of that relationship will be explored in this chapter.