Download Lecture 9 - Carleton University

GEOG 3404
Economic Geography
LECTURE 9:
Efficiency, Equity and Sustainability
Dr. Zachary Klaas
Department of Geography and Environmental
Studies
Carleton University
Goals for the world economic system
Our final lecture is centred around the question of how to evaluate
the workings of the world economic system. How do we know
whether the performance of an economic system is justified?
 The criteria by which we consider an economic system justified
should be the first object of our enquiries. Is it clear that these
criteria are generally shared?
 We will consider, for the purposes of this lecture, three of the more
popular universal criteria for the justification of the economic
system: the efficiency of the system, the equity of the system, and
the sustainability of the system.
 In addition, we will address the possibility of more particular
cultural criteria for the justification of an economic system, and
whether such criteria are reasonable in light of the more
universalistic approaches to the issue.

Efficiency
An efficient economic system is one which achieves maximum
productivity within the constraints of one’s initial endowments with respect
to the factors of production.
 We attempt to measure this sort of thing via measures like:
 Gross Domestic Product or GDP [the total market value of goods
and services produced within a country during a study period, such as a
calendar year]
 Gross National Product or GNP [same as GDP, but adding income
earned by citizens of the country abroad, and subtracting income
earned by foreigners while in the country, during a study period]
 Net Domestic Product or NDP [same as GDP, but subtracting out a
figure corresponding to the depreciation of capital over the study period]
 Net National Product or NNP [same as GNP, but subtracting out a
figure corresponding to the depreciation of capital over the study period]
 The GDP is a widely used measure of a nation’s efficiency, and comparison
across nations is often done using the GDP as a common metric of
efficiency.

GDP: A reasonable measure of
efficiency?
As a direct measure of the output of goods and services, GDP is
unquestionably a good measure of productivity. Nevertheless, we
can ask some reasonable questions about how this metric
represents efficiency of production amongst a region’s population.
 First of all, we often see GDP represented as a per capita (Latin for
“by the head” – meaning “per person”) statistic. The use of GDP as
a per capita statistic carries within it the seeds of potential distortion.
After all, is it true that the responsibility for the efficiency represented
by per capita GDP is truly distributed equally across the entire
population of a region? In other words, if Canada has a per capita
GDP of around $40,000, does that really mean that every Canadian
does his or her part to create $40,000 in goods or services? More
likely, there is some variation within the regional unit that is
concealed by the statistic when used on a per capita basis. This is a
criticism of GDP from an equity point of view.

Secondly, we may ask whether GDP being maximised today is
necessarily something which leads to its maximisation tomorrow.
Practices which maximise GDP today, in the short-term, may harm it
tomorrow or in the long-term. For example, overfishing the cod in
Newfoundland’s Grand Banks maximised GDP in the short term, but
also represents a depletion of the resource which makes possible
future efficiency for the fishing industry. This is a criticism of GDP
from a sustainability point of view.
 Thirdly, we may ask whether GDP takes into account goods and
services which are provided through the informal economy (that is to
say, through non-market means). The GDP is usually represented in
terms of a standard currency (for example, dollars), and this
representation should tip us off to the fact that what is being
represented are transactions in a conventional market, where goods
and services are given monetary value and paid for in money. But in
some economies, exchange still takes place through bartering, or
other kinds of non-market direct trade of commodities. GDP misses
this, unless some effort is made to weight these transactions as if
they were made as more conventional market transactions and
valued in dollars. This criticism of GDP is essentially made from a
cultural point of view.

What is involved in the measure of
GDP?
The Gross Domestic Product is made up of four essential
components:
 consumption (that portion of the GDP which goes directly to
satisfying the economic wants and needs of individuals) –
represented as C;
 investment (that portion of the GDP which goes towards
providing for future production) – represented as I;
 government spending (that portion of the GDP which goes
towards maintaining state services, via taxation usually) –
represented as G;
 net exports (that portion of the GDP which is exported abroad,
less the value of products imported into the country) –
represented as (X-M).
 The “expenditure method” equation for GDP:
GDP = C + I + G + (X-M).

What does the “expenditure approach”
imply about efficient production?
Efficiency, the “expenditure approach” seems to imply, is “about
something”. Production may not done simply for its own sake, but in
order to promote other specified goals.
 In other words, we produce in order that we may consume what
has been produced (consumption), in order that we may invest
further in production (investment), in order that we may support
government services (government spending), or in order that we
might trade with others (net exports).
 Arguably, all of these reduce to consumption as the goal. Goals
relating to preparing oneself economically for the future (e.g.,
investment, government spending, net exports) may really be
expressions of “delayed consumption”. That is, we seek out these
goals because we are ultimately concerned with consumption as the
main goal.

The view of John Maynard Keynes
The economist John Maynard Keynes was notable for his strongly
articulated view that economies are, first and foremost, about
promoting the “consumption function”.
 Other goals are, for Keynes, at their core, ultimately about
promoting consumption. If they are to be regarded, as many do,
as “delayed consumption”, this was fine from Keynes’ point of view,
so long as the delay was not too long.
 In the 1930s, during a time of worldwide economic depression,
Keynes argued that it was vital to ensure that economic systems be
judged by how efficiently they provided for consumption.
 Keynes viewed the stimulation of economic demand (the
“consumption” side of the economy, as opposed to economic supply,
which represent the “production” side of the economy) as critical for
bringing economies out of depression. Firms need people to buy
products – when there is a lack of consumers, ultimately, production
will also fail.

In addition, although Keynes recognised that markets
have the power to correct themselves over time, he also
believed that allowing consumption to not be served over
long periods of time while a market slowly corrects itself
was barbaric. “In the long run,” Keynes famously
said, “we are all dead.” In his view, markets need to
respond to the needs of consumers in a timely fashion.
 Previously to Keynes, many economists had focused on
the importance of savings, another example of “delayed
consumption” – when you save for the future, you do so
presumably in order to use the money for consumption at
a later date. Keynes, however, believed that when an
economy is in recession or depression, having
tremendous savings only takes money out of circulation
in the economy. In other words, Keynes believed that
too much saving hurts the economy in times of
crisis, by reducing the consumption function.

The “euthanasia of the rentier”
This view that efficiency in an economy implies efficiency
specifically with respect to promoting consumption generally in the
population was one Keynes maintained as a consistent theme in his
economic work.
 Towards that end, Keynes conceived of the notion of a rentier
capitalist, or a capitalist who profits off of the mere scarcity of capital,
as the kind of capitalist whose “rent-seeking” behaviour is an
affront to the consumer, rather than involved with promoting the
consumer’s interests. For Keynes, it is the rentier, not the capitalist
generally, who needs to be eliminated from economic life, chiefly
because his or her actions do nothing to effectively provide goods or
services to people. In a somewhat jarring passage in his writings,
Keynes advocates the gradual (and hopefully metaphorical!!)
“euthanasia” of the subclass of rentier capitalists.
 We can easily compare Keynes’ view here with those of Henry
George and Karl Marx – indeed, it appears that Keynes is applying
George’s concern with profit off of scarce resources to a modern
economic world where capital, rather than land, is the chief source of
economic power.

Unlike Henry George (who promoted the single tax as the solution
to advance the cause of his views of political economy) or Karl Marx
(who promoted revolution as the solution for his view of political
economy), Keynes tended to promote the “euthanasia of the
rentier” through a number of policy initiatives, each with
varying degrees of success. In general, Keynes felt that lowering
interest rates would do the most to harm the cause of the rentier, as
profiting off of the hoarding of capital would be less lucrative if
interest rates were as low as they could be – enough to pay the
“good” capitalists for their industry, but not so high to reward the
rentiers.
 Perhaps more interestingly, though, Keynes generally put things
down to a choice – if one has a reasonably clear choice between
promoting the consumption function on the one hand or
“disappointing the rentier” on the other, one should assertively
opt to promote consumption. Granted, sometimes such choices
are not all that clear – distinguishing between what is a justified
return on an investment and what is “profiting off of scarcity” is, as
we have previously discussed, not always easy. Nevertheless, there
are occasions when the choice does seem clear.

Equity
Another possible goal which one might promote via an
economic system is the goal of equity. Equity is the
general equalisation of outcomes in an economy.
 This notion can be expressed in terms of one of various
(and potentially competing) visions:
 equality of formal rights – in this view, equality is
defined in terms of access to formal protections of
custom or law, whereby no person has any more or
any less of these formal protections
 equal shares – in this view, equality is defined in
terms of literally equal outcomes, either regardless of
contribution, or within a scheme of contribution (e.g.
“equal pay for equal work”)
 a maximin distribution – in this view, those the
least well-off in terms of outcomes should be most
benefitted by the overall distribution

Equality of formal rights
This view of equality is most often associated with political
libertarianism. The basic viewpoint is that individuals can only
meaningfully be accorded equal treatment by the law. Anything done
beyond this in order to promote social welfare empowers undue
interference in people’s lives and establishes authoritarian controls
which do not even ultimately help the disadvantaged. The key such
right most libertarians are keen to defend in the economic sphere is
the right to property.
 Karl Marx lampooned this kind of equality. “The law,” he said,
quoting Anatole France, “in its majestic equality, forbids rich and poor
alike from…sleeping under bridges…” The point here is that only the
poor would have to do this, so this “equal” law applies unequally.
Marxists have taken up this kind of opposition to what they term
“bourgeois rights”.
 Nevertheless, equality of formal rights is something that can serve
as the precondition for other rights. The role of equal democratic
rights, for example, was even acknowledged by Marx as a reason
why socialism, when it comes to places like the U.S., the U.K. or the
Netherlands, could possibly come peacefully rather than through
revolutionary violence.

Equal shares
This view of equality is most directly attributable to Marxism. In
Marx’s arguments, this view characterises the arrangement of
economic outcomes with respect to both the “socialist” stage of
development (where distribution is done according to “to each
according to his work”) and the “communist” stage of development
(where the distribution follows the rule “to each according to his
need”).
 This view promotes the idea that, barring any great distinctions in
how much labour people can do or how needy they are, their
economic outcomes should be as similar as possible. Whenever
those outcomes vary – and no matter how this affects productivity –
this constitutes the injustice of Marxian exploitation.
 It is possible, however, that some stratification in terms of the
distribution of wealth actually can lead to the total pool of wealth
getting bigger. In other words, the existence of incentives to make
more money can actually result in all of society, even the worst off in
the distribution, being better off than they might otherwise have
been.

The maximin distribution
This view of equality is largely associated with the social
liberalism of the political philosopher John Rawls. In this
view, differences in outcomes are arranged, insofar as
this is possible, so that they are the most advantageous
to those the least well-off in the distribution of outcomes.
This kind of distribution is referred to as a maximin
distribution, as it maximises the position of those
minimally well-off.
 Maximin conceptions of distributive justice tend to be
more popular than the equal shares sorts of conceptions
because they allow for greater social prosperity and
productivity. On the other hand, they can lead to
situations where those most well-off in the system can
use their riches, which may help the least well-off today,
to dominate them tomorrow. In other words, the
maximin distribution can be satisfied today and
create the conditions for its violation tomorrow.

Sustainability
Another consideration we must make about economic systems is
their ability to continue on in the future, under the same
operational logic that they currently employ. This is referred to as the
sustainability of the economic system.
 In the 1970s and 1980s, a “green” criticism of traditional views of
political economy began. The first major work to lead this wave of
criticism was Rudolf Bahro’s The Alternative in Eastern Europe. A
centrepiece of Bahro’s work was the claim that both Western
capitalism and Eastern socialism had utterly failed to prevent
development pressures from overrunning the stock of natural
resources and unduly interfering with ecological systems.
 Bahro’s work inspired a number of “political ecologists” whose basic
standpoint reflects that same premise, that both capitalism and
socialism harm the environment when they are premised on an
underlying acceptance of industrialism.

Industrialism
Essentially, “industrialism” plays a role for ecologists largely the
same as the one “capitalism” plays for socialists – it is the bogey that
those in the movement oppose. It is a catch-all term for economic
development which ignores environmental cost and the need to
sustain economies into the long-term future.
 The aim of the “green” movement is properly understood to be the
use of legal and social tools to restrain, as much as is possible,
heedless “industrialism” and promote economic development that
does not deplete essential stocks of natural resources or interfere
with important natural processes.
 The notion of “full-cost pricing” exposits this aim the best –
economic costs should be weighted, according to this view, by their
future effects on the environment. This would provide disincentives
to develop, but only where development is itself environmentally
problematic.

One final twist: different economic goals
for different cultures?
The kinds of economic goals we have thus far discussed are
general or universal in their application. But is it possible that there
are different cultural understandings of the proper goal for an
economy?
 Take, for example, the right of Canadian aboriginal populations to
use land according to the principle of usufruct. This principle
implies that the property of another may be used for certain
purposes, so long as the land still has value to its owner. In Canada,
what this amounts to is a right for aboriginal persons to hunt and fish
on land that is owned by others. This right is a “traditional” right
associated with aboriginal culture, and not available to the nonaboriginal population, which must respect the property boundaries
and not hunt and fish on the property.
 Does this make sense? Should there be a general right to use land
in a usufructary manner, or should this continue to be respected as a
specific cultural inheritance of aboriginal peoples in the economic
sphere?
