Before the Market Came Equality – Well, in Theory

According to the Daily Mail, some footballers openly flout parking laws because Manchester parking fines are so low relative to premier league incomes. For example, Mario Balotelli, who joined Manchester City in August 2010, is reported to have run up £10,000 worth of parking tickets by the 26th of April 2011.

The money spent on parking fines by Balotelli alone could, for example, have provided fresh water for 1000 villages in Africa or saved the sight of over 300 people in the developing world. It seems reasonable to question whether £10,000 carelessly, thoughtlessly or deliberately spent on traffic fines has created more “good” than using the money to provide thousands with access to fresh water. This is apparently a sub-optimal (in the sense of failing to promote overall good) use of scarce resources.

Other examples of the apparently sub-optimal outcome of our economy abound. For example, the £5 thousand million per year cost of UK food waste or the 1·2 million tonnes of UK textile waste which is neither re-used nor recycled.

The mantra of the market fundamentalist when faced with such waste may well be to insist that, despite appearances, it is not in fact waste. Such allocation (or misallocation) is the result of the market, and the market is always “efficient”. If it is indeed the case that markets are always efficient, it follows efficiency requires hundreds to become blind while the resources which might have saved their sight are devoted to paying parking fines or simply tipped into landfill.

However, markets are not efficient except under certain conditions. The “proof” that markets maximise social welfare rests on Samuelson’s (1956) paper “Social Indifference Curves1. In his analysis Samuelson describes how he assumes society may be modelled on the family; prior to the commencement of market trading, there is an “optimal reallocation of income so as to keep each member’s dollar expenditure of equal ethical worth” (ibid:21). In other words we require equality of income if we wish efficiency of the market.

In the real world, few, if any, states have the social capacity to realise “optimal reallocation of income”; indeed, we observe increasing inequality. It is little surprise then we also observe persistent market failure – in the sense that goods and services do not flow to those who would most value them. What is more surprising is how little we seem to be prepared to do about it.

Until income inequality is reduced, the “invisible hand of the market” will deliver a wasteful result. Therefore, reducing inequality should be a major policy goal of market economies. In the meantime, all of us should use what resources we have more thoughtfully.

1 Samuelson, P.A. (1956) Social Indifference Curves, The Quarterly Journal of Economics, 70(1), 1-22.

Kevin Albertson

This entry was posted in Uncategorized. Bookmark the permalink.