The economics of equity and justice

Now the neoliberal idyll is over. The casino has shut its doors. The neoliberal moral economy is in crisis. But the crisis is not the work of greedy bankers, lax regulators or corrupt MPs alone: they are only grubby flotsam floating on much deeper currents. It will not be resolved unless and until we acknowledge that we, the “people”, are also part of the problem - that the real culprit is the hyper-individualistic, materialistic hedonism of the entire culture, popular at least as much as élite. David Marquand, The Guardian, May 26, 2009.

In a speech to this year’s Australian Council of Social Service national conference, Treasury Secretary Ken Henry posed what he called the “mildly provocative” question: “How much inequity should we allow?”

Castigating his own “brash young” self for being fixated on so-called hard issues like efficiency and productivity, Dr Henry argued that, far from being “soft” and secondary, distributional concerns have intrinsic importance: so much so that “today equity is central to Treasury’s mission and policy advice”.

However, “Leaving fairness solely to the market to determine should be unacceptable to a civilised society. Societies will choose how much inequity they allow according to the institutions, norms, laws, policies and programs they adopt.”

The two traditional frameworks for determining equity regarding the tax-transfer system are procedural and distributive fairness. The former is concerned only with whether processes are transparent and unbiased: with whether individual’s rights have been respects. The outcomes of this view of fairness can yield any sort of inequity.

Distributive fairness, on the other hand, is grounded in some conception of the social good and, in relation to tax, is inherently redistributive.

Both distributive and procedural fairness are necessary to the pursuit of equity in the tax-transfer system, Dr Henry said, but not sufficient. The greatest challenge for his current review is to deal with features of the system “which cause, contribute to, [and] fail to redress significant inequities that chronically harm people’s lifetime well-being”.

This concern with well-being, not simply income, and the focus on one’s lifetime, rather than only immediate circumstances, is inspired by the “capabilities approach” of Nobel laureate Amartya Sen, for whom “the true measure of human development is that a person has the ‘capabilities’ necessary to leading the kind of life they value and have reason to value”.

Henry’s respect for Sen is well-known. What is of broader significance is that the ethical core of the capabilities argument should sit so comfortably in the context of a discussion of tax reform - by the country’s leading econocrat.

This is not an isolated case, and precedes the financial and economic meltdown, though the latter has certainly helped concentrate the mind on matters of right and wrong. People of all ideological stripes have for some time been noting - or noticing for the first time - that economics is not only compatible with moral reasoning but, at least implicitly, grounded in it.

Articles with titles like “Dare to be moral” (by Frank Furedi) and “Doing the right thing is worth money in the bank” (by Elizabeth Farelly) are becoming increasingly common. Even the conservative American satirist P.J. O’Rourke has been telling anyone who will listen (like the ABC’s Alan Saunders) that Adam Smith was first and foremost a moral philosopher and that the Wealth of Nations can only be properly understood as a sequel to the earlier Theory of Moral Sentiments - a much more influential book in Smith’s own lifetime and one with which he assumed readers of the economic treatise would be familiar.

Rather it is an attempt to wrest ethics back from what Furedi calls the “moral entrepreneurs … in the business of peddling simplistic ideas about ‘good’ and ‘evil’” to establish “true moral judgments, based on values and convictions”.

Therein lies the rub. How exactly do we differentiate “simplistic” from “true” moral judgments - if it can be done at all? On the one hand, it is as easy to caricature serious ethics as it is to misrepresent economics: the one as camouflaged special pleading, the other as soulless quantification.

On the other, there are countless charlatans in both disciplines, with neither having a particularly firm link to empirical certainty. That said, the difficulty of reaching an objective understanding of what we might term economic morality is no reason to avoid the attempt. If anything, it makes the task more urgent.

The best approach, as usual, is to work from practical cases and Dr Henry’s question about allowable inequity is as good a starting-point as any. The commitment to maximising capabilities entails equality only in respect of those Sen identifies as absolute: proper nutrition, shelter, freedom from avoidable disease and the like. For the development of higher faculties and general social advance capabilities are relative - in terms both of community standards and individual aptitude. Not everyone can or would want to be a heart surgeon or tennis champion. But in today’s Australia any child lacking numeracy or literacy (including computer literacy) is deprived of certain basic abilities for being a full citizen. In between come the vast majority of us, our individual differences being as much a source of energy as potential division.

Naturally, there will be many disagreements at the edges about which capabilities qualify as “basic” as well as the extent of inequality that is compatible with a broader conception of equity or justice. Beyond the highest level of generalisation, and the satisfaction of truly absolute needs, there will never be full agreement. But that does not matter. The point is that we can and should have this kind of conversation - as a central element of economic debate.

That the head of Treasury is grappling with such problems is encouraging. The traditional distance between ethics and economics - or that between the community sector and business - was always artificial. We can not only learn from each other, we can speak the same language. We can even, with a bit of effort, share the same vocabulary.