Fairness as a concern of economics

by Linda Beale

There is an interesting book that I am just beginning, by George A. Akerlof & Robert J. Shiller. It’s called “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”. The jacket says that the authors “challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.” It is clearly a Keynesian approach–the jacket, again, says they make the case for “a more robust, behaviorally informed Kenyesianism”.

Sounds like a tall order, and I have not yet read or thought about enough of the book to know whether it is satisfied or not. But I do find the emphasis on fairness of considerable interest.

Fairness has long been a keystone of tax policy, and yet there are a number of tax scholars who consider efficiency the quintessential policy consideration and sometimes appear to relegate fairness to the corner for hobgoblins of small minds. So I wonder if this book, and its recognition of the overriding importance of fairness to economic analysis, is indicative of a fundamental change in the academic approach to economics and related fields that have tended to push fairness aside.

Here’s a quote from Albert Rees (Chicago PhD in labor economics) that starts off the second chapter on fairness.

The neoclassical theory of wage determination, which I taught for 30 years and have tried to explain in my textbook…has nothing to say about fairness. … Beginning in the mid-1970s, I began to find myself in a series of roles in which I have participated in setting or controlling wages or salaries. … In none of htese roles did I find the theory that I taught so long to be the slightest help. The factors involved in setting wages and salaries in the real world seemed to be very different from those specified in the neoclassical theory. The one factor that seemed to be of overwhelming importance in all these situations was fairness. (Akerlof & Shiller at 20, quoting Rees, The Economics of Trade Unions, Univ. of Chicago Press, 1973).

The authors go on to admit that Rees exaggerates, but then they provide a critical insight.

However many articles there have been on fairness, and however important economists may consider fairness, it has been continually pushed into a back channel in economic thinking. … But fairness may be just as important as the economic motivations that are given prime time. (Akerlof & Shiller at 20.)

So what economic theories of fairness do the authors suggest merit consideration? They highlight socilogy’s equity theory of exchanges, which consider far more than the monetary value of the counterparties’ positions, adding subjective evaluations about status, gratitude and similar factors. Another if the theory of social norms, that suggests that people are happiest when they live up to what they think they should be doing, including conducting themselves fairly with others (and being treated fairly by others).

And how should fairness be taken into account? Essentially, Alerkoff and Shiller argue that the old way of treating “real” economics as fundamental and fairness as an afterthought has to go. In stead, if fairness motivations are discounted, justification must be provided for doing so.

This approach, they say, explains much better than traditional economics the reality of unemployment and the fact that most firms pay their workers more than the market would require. It has to do with one’s sense of fairness–if workers sense they are being treated more than fairly (and their wage is the ulimate symbol of this treatment), they will fully buy into the goals of their employers.” If they are treated unfairly, they will tend to shirk. Id. at 105.

The difficulty of course, is in settling upon a definitive theory of fairness. In tax, we often talk about “ability to pay”, in a relative sense, as the critical definition, which is in turn the justification for a progressive rate schedule that taxes wealthy people at a rate considerably (or, after 40 years of rate lowering, somewhat) higher than it taxes middle income people. Libertarians, among others, have pushed back against the ability to pay concept of fairness, arguing for one version or another of a flat tax. It is one of the critical struggles, from my perspective, in the current class warfare whereby some groups are pushing for zero taxation on capital income (through a national sales tax or consumption-base rather than an income-based tax system). In other words, though there is a long-held consensus position about fairness in tax, there is currently considerable foment around the very concept of fairness. I’m glad to see fairness appropriately emphasized, but that is just the first step to developing a fairer tax system or a more complete economic theory.

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