Image credit. Following up from Efficiency and Freedom (1/3) - Liberty's Ethical Multiplier.
Freedom - An Environment of Efficiency
Society cannot be free when its members are not allowed to exercise their faculty of rational thinking - and act on it, of course, with respect only to the large area of innocuous and offenseless applications.
Striving for efficiency is a natural concomitant of making rational choices.
However, in oppressive societies large numbers of people are highly restricted in making rational choices, being instead subjected to the commands and prohibitions of a dominant ruling elite.
In other words, to invite freedom is to invite efficiency.
In so far as I take a very-long-run view of liberty, I consider her the result of a peculiar anthropological constant characteristic of human beings: we strive to become ever more completely "the ultimate resource" (Julian Simon):
The history of man is a journey towards our becoming the ultimate resource (Julian Simon) for ourselves. That is to say, ever more comprehensively and effectively, we become the creator of the resources that we need for our survival and well-being.
Rational comportment, efficiency and their best environment - freedom - play a crucial role in the overriding trend in human progress.
But what is efficiency, how does it work, how does it advance us, where are its limits?
Different views of the same: efficiency.
Homo economicus will consume up to the point where marginal benefits equal marginal costs. This is one definition of efficiency. [...] To choose any other way would be to choose a lower- over a higher-ranked preference, and that, of course, is the essence of irrationality. In this sense, then, efficiency is simply rationality.
There is, then, a close relation between efficiency and rational choice: to be rational is just to choose in a way that best satisfies one's preferences-and that means that the marginal gains are at least as great as the marginal costs.
(Gaus, G. (2008), On Philosophy, Politics, and Economics, Thomson Wadsworth, pp. 74-75)
The production function is an expression of technological knowledge that maps quantities of inputs into quantities of outputs. The inputs are measured as physical flows of resources. These are transformed through existing technical knowledge into flows of goods and services. [...] the state of knowledge tells us how inputs that are committed to specified tasks map into outputs. [And thus allow us to discern the most efficient input-output relation, G.T.]
(Demsetz, H. (1989), Efficiency, Competition, and Policy, Blackwell, p. 41)
However, Demsetz hastens to add:
No reference is made to the social system in which the production process is embedded [...] The social requirements of a particular social system generally affect production possibilities in much the same way as knowledge or managerial technique. They change the rates at which inputs can be converted into outputs and the rates at which trade-offs can be made between goods.
(Demsetz, H. (1989), Efficiency, Competition, and Policy, Blackwell, p. 42)
As I wrote in Efficiency and Freedom (1/3) - Liberty's Ethical Multiplier:
[A]society favouring income equality more than wealth and growth may have its set of efficient outcomes, just as a society with a preference of wealth and growth over income equality may attain efficient outcomes relative to its political boundary conditions.
In the face of a spectrum of efficiency, whose ultimate manifestations are driven by ethical determinations, managing political scarcity becomes of the utmost importance, which is to say that judicious political management is called for, to avoid unnecessary conflict, protect robust conditions of freedom, while promoting healthy competition as well as a sense of trust in a pluralistic community.
Turning to allocative efficiency we shall also discover a central place for society's political culture in dealing with indeterminate states that require political negotiation and compromise.
An understanding of economic efficiency begins with Pareto optimality. A Pareto optimal allocation iis one in which we cannot reallocate resources to improve one person's welfare without impairing at least one other person's welfare. Pareto improvements are those where a change in resource allocation is preferred by one or more members of society and opposed by no one.
(Rhoads, S. (1985), The Economist's View of the World. Government, Markets & Public Policy, Cambridge University Press, p. 63)
Here is the good news:
Economically efficient allocations are always Pareto optimal allocations ... [In] most situations free markets come closer to achieving economically efficient outcomes than do alternative institutional arrangements.
(Ibid. p. 63-64)
And here is the challenge:
[Pareto improvements] are very hard to find. If a single person objects to changing the status quo, then the Pareto improvement criterion gives no unambiguous public-policy guidance. The existing situation may be Pareto optimal. But there are a nearly infinite number of other non-comparable Pareto optimums, and the concept is of little policy use.
(Ibid. p. 63)
As we have noted elsewhere, liberty produces her own ethical multiplier, that is, she encourages and supports people's propensity to develop and promote different ethical standards.
It is the difficult job of politically responsible citizens and their representatives to operationalise the spirit of the Pareto-criterion, that is: to find win-win-solutions, promote positive sum games in our interaction and, what will be the most preponderant class of beneficial strategies, signal a serious effort to approximate Pareto-optimality.
One such effort at approximation comes in the form of a revised Pareto-criterion, the Kaldor-Hicks-criterion:
Economic efficiency [according to the Kaldor-Hicks-criterion, G.T.] requires only that recommended changes use resources in such a way that it would be theoretically possible - assuming costless transfers of income among gainers and losers - to make some better off and no one worse off. Suppose that most people would gain from some change, but some would lose. If the gainers gain enough so that they could fully compensate the losers with money or goods and still have an improved situation themselves, the change meets with what some economists call the "potential Pareto" criterion (i.e. the Kaldor-Hicks.criterion, G.T.] and would improve economic efficiency.
Politicians understand that changes never benefit everyone. Some of them may find it helpful to know when the gainers from a change gain enough that they could fully compensate losers and still be better off.
If politicians can find a way to make the potential compensation actual, they can create a better situation from the point of view of all parties concerned.
(Ibid., pp. 63-64)
This is part of what I like to call freedom as method, which is the search for such approximations.