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”.