In 2017, the top 10% of Americans (families with incomes above $130,000) received 50.5% of national income; an all-time high, up from 32.1% in 1954 and 49% in 1929. The fact that the United States has surpassed Gilded Age levels of income inequality has many people asking; how can we restore our traditional ideals like equality of opportunity or the American Dream? Behind that question is a more fundamental one: what does it mean to have a fair or optimal distribution of resources?
One way economics tries to answer this question is by defining something called the “Pareto Efficiency”. Under this condition, or distribution, it is impossible to make a change that will make someone better off without making someone else worse off. Of course, being “better off” and “worse off” are subjective and difficult, if not impossible, to measure. Basic economics uses the voluntary exchange of goods between people as a proxy for moving closer to the Pareto Efficiency; if two people are freely exchanging goods and services, then they must both be better off for it, right?
The truth is that no one has ever “freely” exchanged goods or services; every individual is subject both societal influences and power differentials between them and others that shape their choices, or even the choices that are available to them. For example, the college student who waitresses over the summer does so, not necessarily because that is her desired field or life’s ambition (though it might be), but because she needs the money to survive and pay tuition. Our choices, and by extension the market, are also influenced and shaped by formal institutions like governments or laws.
One more thing about the Pareto Efficiency – while it is possible for economic exchanges to leave both parties better off, it is also possible for those exchanges leave one party much better off. The black market for Independence Passes at Bryn Mawr College is a great example; one student will buy the Pass for full price ($13) and re-sell it, after using it, for a lower price. Technically, there is nothing stopping the first student from selling the Pass for $12; both students are better off, though one person has only paid $1 for her use of the pass, while the other has paid $12. Even though this is Pareto Efficient, it is not fair, something recognized by all black-market sellers of independence passes; the real price is around $6.50 on average.
The black-market for independence passes makes an important point; what is fair is not necessarily determined by market forces. Instead, Bryn Mawr College makes community-based decisions about its ideals (like fairness) that are enforced by a complex web of social relations. Likewise, the United States makes decisions about its ideals through the democratic process and enforces those through laws. A fair distribution of resources, then, is one that allows the government to meet its obligations to its people, fulfilling the ideals and values elevated by the democratic polity.
The role of economics, then, especially in an era where it is often presented as the ultimate “rationality”, is not to determine “efficient” decisions, but to support the achievement of society-wide goals such as the American Dream. This is not “positive” nor is it “scientific”; it requires taking a stand. But our society is at a breaking point; we cannot afford to live in perpetual objectivity.
1 Piketty, Thomas, and Emmanuel Saez. “INCOME INEQUALITY IN THE UNITED STATES, 1913-2002,” n.d., 92. (Data updated 2017)