Academic journal article
By Klein, Philip A.
Journal of Economic Issues , Vol. 34, No. 2
One of the most frequently trumpeted virtues of conventional price theory is that the analysis is capable of quantification that leads to precise results. In testing for allocative efficiency, it is possible to calculate whether or not marginal cost equals price. In testing for welfare implications, the equality of marginal cost and revenue is perhaps a bit harder to pin down, but with enough assumptions, the diligent theorist can push his or her results all the way to Pareto optimality, which customarily is as far as it is felt one needs to go.
Institutionalists have always insisted that allocative efficiency is too narrow a standard. The broader standard is one that some years ago I called "the higher efficiency." It is a standard that, in addition to allocative efficiency, would include equity, freedom, security, and compassion or humaneness. In judging economies by all of these, I was careful to point out that every economy could be judged according to the importance of each of these criteria ranging as they could from zero (no importance at all) in a given economy to a very great deal [Klein 1984].
Of all the criteria involved in higher efficiency, compassion or humaneness is considered the most difficult to quantify. It is unassailable that modem economies' concern for those who do not have disposable income can find themselves in a society where the response to their plight ranges from ignoring them to putting their welfare at or near the top of societal responsibility. Still, one can ask, how can the degree of concern be measured?
Another problem often raised by institutionalists in connection with criteria such as humaneness is that the price system structures the ways in which participants in economic activity can respond. There are ways in which well-informed participants might wish to redeploy their income, or societal income, but the alternatives they are given by prevailing prices do not permit them to display these choices. This is particularly true of humaneness. The discussion below will attempt to illustrate these two problems.
A New Look at Social Indicators
It is possible to gain some idea about social priorities and values from national statistics, particularly those dealing with social indicators. The importance attached to national defense (security) is often expressed by the comment, "We want the very best possible national defense regardless of cost." I would assume that, in the United States, we place considerable store as well in "freedom" as a criterion. We could make the same comment about compassion, but we do not.
Comparison of actual expenditures adds to our understanding. While we compare national expenditures in various directions according to national per capita GDP, some of the most interesting comparisons are not between the poorest countries and the wealthiest, but among the wealthy countries. To the extent that per capita GDP reflects what is financially possible, the differences clearly point to different choices among these countries. Comparison of expenditures also reveals how ill-equipped the price system is to elicit and reflect all information required for individuals to make choices that would change aggregate expenditures and national priorities.
The basic framework of the discussion that follows is simple. Obviously, the significance attached to security, for example, can be discerned by the percent of GDP devoted to national defense. This comparison is the most obvious. Words do not speak as loudly as percentages; if, for example, a country asserts that it is pacifist but spends a large percentage of its GDP on military supplies, then this is presumptive evidence to the contrary. An indicator of compassion can be discerned from expenditures, such as those for health, or the results of such expenditures as are reflected in infant mortality rates.
Finally, rhetoric can be checked against reality by comparing words with percentages. …