Thursday, July 06, 2006

I really like this

Greg Mankiw has a reformulated take on the ages-old efficiency vs. equity problem:
The study of economics leaves a person with two strong impulses.

The Libertarian Impulse: Mutually advantageous acts between consenting adults should, absent externalities, be permitted. The ability to engage in such trades is how people in free-market economies achieve prosperity. When the government impedes voluntary exchange, it prevents the invisible hand of the market from working its magic.

The Egalitarian Impulse: The market economy rewards people according to supply and demand, not inherent worth. Markets often fail to provide people the ability to adequately insure themselves against the vicissitudes of life and accidents of birth. We should, therefore, look for ways to help those who end up at the bottom of the economic ladder.

Most economists feel both of these impulses to some degree. The difference between right-leaning and left-leaning economists is how strongly they feel each of them. Right-leaning economists have a stronger libertarian impulse, whereas left-leaning economists have a stronger egalitarian impulse.


Here is a conjecture: Whenever a policy appeals to both the libertarian impulse and the egalitarian impulse, economists will offer a relatively united view, as they do on the topic of immigration.

I personally have a strong libertarian impulse, but am also very much persuaded by egalitarian arguments regarding accidents of birth and alleviating market-based risk. Most things that happen are random, or at least unpredictable. In that way, the market is a lot like nature. When natural disasters happen, we don't blame the people hurt by them for their losses. In the same way, if free trade displaces textile workers, it is not really accurate to blame the textile workers for not having foreknowledge of what industries would be profitable in the future. It's random.

At the same time, of course, we do blame people for taking on too much risk. Like those who keep rebuilding Floridian beach houses. And there are clear problems of moral hazard with insuring unemployment. There's a very fine line that must be walked...


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