GEOG 3404 Economic Geography

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GEOG 3404Economic Geography
LECTURE 9 Efficiency, Equity and Sustainability

• Dr. Zachary Klaas
• Department of Geography and Environmental Studies
• Carleton University

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Goals for the world economic system

• Our final lecture is centred around the question
  of how to evaluate the workings of the world
  economic system. How do we know whether the
  performance of an economic system is justified?
• The criteria by which we consider an economic
  system justified should be the first object of
  our enquiries. Is it clear that these criteria
  are generally shared?
• We will consider, for the purposes of this
  lecture, three of the more popular universal
  criteria for the justification of the economic
  system the efficiency of the system, the equity
  of the system, and the sustainability of the
  system.
• In addition, we will address the possibility of
  more particular cultural criteria for the
  justification of an economic system, and whether
  such criteria are reasonable in light of the more
  universalistic approaches to the issue.

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Efficiency

• An efficient economic system is one which
  achieves maximum productivity within the
  constraints of ones initial endowments with
  respect to the factors of production.
• We attempt to measure this sort of thing via
  measures like
• Gross Domestic Product or GDP the total market
  value of goods and services produced within a
  country during a study period, such as a calendar
  year
• Gross National Product or GNP same as GDP, but
  adding income earned by citizens of the country
  abroad, and subtracting income earned by
  foreigners while in the country, during a study
  period
• Net Domestic Product or NDP same as GDP, but
  subtracting out a figure corresponding to the
  depreciation of capital over the study period
• Net National Product or NNP same as GNP, but
  subtracting out a figure corresponding to the
  depreciation of capital over the study period
• The GDP is a widely used measure of a nations
  efficiency, and comparison across nations is
  often done using the GDP as a common metric of
  efficiency.

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GDP A reasonable measure of efficiency?

• As a direct measure of the output of goods and
  services, GDP is unquestionably a good measure of
  productivity. Nevertheless, we can ask some
  reasonable questions about how this metric
  represents efficiency of production amongst a
  regions population.
• First of all, we often see GDP represented as a
  per capita (Latin for by the head meaning
  per person) statistic. The use of GDP as a per
  capita statistic carries within it the seeds of
  potential distortion. After all, is it true that
  the responsibility for the efficiency represented
  by per capita GDP is truly distributed equally
  across the entire population of a region? In
  other words, if Canada has a per capita GDP of
  around 40,000, does that really mean that every
  Canadian does his or her part to create 40,000
  in goods or services? More likely, there is some
  variation within the regional unit that is
  concealed by the statistic when used on a per
  capita basis. This is a criticism of GDP from an
  equity point of view.

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• Secondly, we may ask whether GDP being maximised
  today is necessarily something which leads to its
  maximisation tomorrow. Practices which maximise
  GDP today, in the short-term, may harm it
  tomorrow or in the long-term. For example,
  overfishing the cod in Newfoundlands Grand Banks
  maximised GDP in the short term, but also
  represents a depletion of the resource which
  makes possible future efficiency for the fishing
  industry. This is a criticism of GDP from a
  sustainability point of view.
• Thirdly, we may ask whether GDP takes into
  account goods and services which are provided
  through the informal economy (that is to say,
  through non-market means). The GDP is usually
  represented in terms of a standard currency (for
  example, dollars), and this representation should
  tip us off to the fact that what is being
  represented are transactions in a conventional
  market, where goods and services are given
  monetary value and paid for in money. But in
  some economies, exchange still takes place
  through bartering, or other kinds of non-market
  direct trade of commodities. GDP misses this,
  unless some effort is made to weight these
  transactions as if they were made as more
  conventional market transactions and valued in
  dollars. This criticism of GDP is essentially
  made from a cultural point of view.

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What is involved in the measure of GDP?

• The Gross Domestic Product is made up of four
  essential components
• consumption (that portion of the GDP which goes
  directly to satisfying the economic wants and
  needs of individuals) represented as C
• investment (that portion of the GDP which goes
  towards providing for future production)
  represented as I
• government spending (that portion of the GDP
  which goes towards maintaining state services,
  via taxation usually) represented as G
• net exports (that portion of the GDP which is
  exported abroad, less the value of products
  imported into the country) represented as
  (X-M).
• The expenditure method equation for
  GDP GDP C I G (X-M).

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What does the expenditure approach imply about
efficient production?

• Efficiency, the expenditure approach seems to
  imply, is about something. Production may not
  done simply for its own sake, but in order to
  promote other specified goals.
• In other words, we produce in order that we may
  consume what has been produced (consumption), in
  order that we may invest further in production
  (investment), in order that we may support
  government services (government spending), or in
  order that we might trade with others (net
  exports).
• Arguably, all of these reduce to consumption as
  the goal. Goals relating to preparing oneself
  economically for the future (e.g., investment,
  government spending, net exports) may really be
  expressions of delayed consumption. That is,
  we seek out these goals because we are ultimately
  concerned with consumption as the main goal.

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The view of John Maynard Keynes

• The economist John Maynard Keynes was notable
  for his strongly articulated view that economies
  are, first and foremost, about promoting the
  consumption function.
• Other goals are, for Keynes, at their core,
  ultimately about promoting consumption. If they
  are to be regarded, as many do, as delayed
  consumption, this was fine from Keynes point of
  view, so long as the delay was not too long.
• In the 1930s, during a time of worldwide
  economic depression, Keynes argued that it was
  vital to ensure that economic systems be judged
  by how efficiently they provided for consumption.
• Keynes viewed the stimulation of economic demand
  (the consumption side of the economy, as
  opposed to economic supply, which represent the
  production side of the economy) as critical for
  bringing economies out of depression. Firms need
  people to buy products when there is a lack of
  consumers, ultimately, production will also fail.

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• In addition, although Keynes recognised that
  markets have the power to correct themselves over
  time, he also believed that allowing consumption
  to not be served over long periods of time while
  a market slowly corrects itself was barbaric.
  In the long run, Keynes famously said, we are
  all dead. In his view, markets need to respond
  to the needs of consumers in a timely fashion.
• Previously to Keynes, many economists had
  focused on the importance of savings, another
  example of delayed consumption when you save
  for the future, you do so presumably in order to
  use the money for consumption at a later date.
  Keynes, however, believed that when an economy is
  in recession or depression, having tremendous
  savings only takes money out of circulation in
  the economy. In other words, Keynes believed
  that too much saving hurts the economy in times
  of crisis, by reducing the consumption function.

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The euthanasia of the rentier

• This view that efficiency in an economy implies
  efficiency specifically with respect to promoting
  consumption generally in the population was one
  Keynes maintained as a consistent theme in his
  economic work.
• Towards that end, Keynes conceived of the notion
  of a rentier capitalist, or a capitalist who
  profits off of the mere scarcity of capital, as
  the kind of capitalist whose rent-seeking
  behaviour is an affront to the consumer, rather
  than involved with promoting the consumers
  interests. For Keynes, it is the rentier, not
  the capitalist generally, who needs to be
  eliminated from economic life, chiefly because
  his or her actions do nothing to effectively
  provide goods or services to people. In a
  somewhat jarring passage in his writings, Keynes
  advocates the gradual (and hopefully
  metaphorical!!) euthanasia of the subclass of
  rentier capitalists.
• We can easily compare Keynes view here with
  those of Henry George and Karl Marx indeed, it
  appears that Keynes is applying Georges concern
  with profit off of scarce resources to a modern
  economic world where capital, rather than land,
  is the chief source of economic power.

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• Unlike Henry George (who promoted the single tax
  as the solution to advance the cause of his views
  of political economy) or Karl Marx (who promoted
  revolution as the solution for his view of
  political economy), Keynes tended to promote the
  euthanasia of the rentier through a number of
  policy initiatives, each with varying degrees of
  success. In general, Keynes felt that lowering
  interest rates would do the most to harm the
  cause of the rentier, as profiting off of the
  hoarding of capital would be less lucrative if
  interest rates were as low as they could be
  enough to pay the good capitalists for their
  industry, but not so high to reward the rentiers.
• Perhaps more interestingly, though, Keynes
  generally put things down to a choice if one
  has a reasonably clear choice between promoting
  the consumption function on the one hand or
  disappointing the rentier on the other, one
  should assertively opt to promote consumption.
  Granted, sometimes such choices are not all that
  clear distinguishing between what is a
  justified return on an investment and what is
  profiting off of scarcity is, as we have
  previously discussed, not always easy.
  Nevertheless, there are occasions when the choice
  does seem clear.

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Equity

• Another possible goal which one might promote
  via an economic system is the goal of equity.
  Equity is the general equalisation of outcomes in
  an economy.
• This notion can be expressed in terms of one of
  various (and potentially competing) visions
• equality of formal rights in this view,
  equality is defined in terms of access to formal
  protections of custom or law, whereby no person
  has any more or any less of these formal
  protections
• equal shares in this view, equality is defined
  in terms of literally equal outcomes, either
  regardless of contribution, or within a scheme of
  contribution (e.g. equal pay for equal work)
• a maximin distribution in this view, those the
  least well-off in terms of outcomes should be
  most benefitted by the overall distribution

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Equality of formal rights

• This view of equality is most often associated
  with political libertarianism. The basic
  viewpoint is that individuals can only
  meaningfully be accorded equal treatment by the
  law. Anything done beyond this in order to
  promote social welfare empowers undue
  interference in peoples lives and establishes
  authoritarian controls which do not even
  ultimately help the disadvantaged. The key such
  right most libertarians are keen to defend in the
  economic sphere is the right to property.
• Karl Marx lampooned this kind of equality. The
  law, he said, quoting Anatole France, in its
  majestic equality, forbids rich and poor alike
  fromsleeping under bridges The point here is
  that only the poor would have to do this, so this
  equal law applies unequally. Marxists have
  taken up this kind of opposition to what they
  term bourgeois rights.
• Nevertheless, equality of formal rights is
  something that can serve as the precondition for
  other rights. The role of equal democratic
  rights, for example, was even acknowledged by
  Marx as a reason why socialism, when it comes to
  places like the U.S., the U.K. or the
  Netherlands, could possibly come peacefully
  rather than through revolutionary violence.

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Equal shares

• This view of equality is most directly
  attributable to Marxism. In Marxs arguments,
  this view characterises the arrangement of
  economic outcomes with respect to both the
  socialist stage of development (where
  distribution is done according to to each
  according to his work) and the communist stage
  of development (where the distribution follows
  the rule to each according to his need).
• This view promotes the idea that, barring any
  great distinctions in how much labour people can
  do or how needy they are, their economic outcomes
  should be as similar as possible. Whenever those
  outcomes vary and no matter how this affects
  productivity this constitutes the injustice of
  Marxian exploitation.
• It is possible, however, that some
  stratification in terms of the distribution of
  wealth actually can lead to the total pool of
  wealth getting bigger. In other words, the
  existence of incentives to make more money can
  actually result in all of society, even the worst
  off in the distribution, being better off than
  they might otherwise have been.

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The maximin distribution

• This view of equality is largely associated with
  the social liberalism of the political
  philosopher John Rawls. In this view,
  differences in outcomes are arranged, insofar as
  this is possible, so that they are the most
  advantageous to those the least well-off in the
  distribution of outcomes. This kind of
  distribution is referred to as a maximin
  distribution, as it maximises the position of
  those minimally well-off.
• Maximin conceptions of distributive justice tend
  to be more popular than the equal shares sorts of
  conceptions because they allow for greater social
  prosperity and productivity. On the other hand,
  they can lead to situations where those most
  well-off in the system can use their riches,
  which may help the least well-off today, to
  dominate them tomorrow. In other words, the
  maximin distribution can be satisfied today and
  create the conditions for its violation tomorrow.

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Sustainability

• Another consideration we must make about
  economic systems is their ability to continue on
  in the future, under the same operational logic
  that they currently employ. This is referred to
  as the sustainability of the economic system.
• In the 1970s and 1980s, a green criticism of
  traditional views of political economy began.
  The first major work to lead this wave of
  criticism was Rudolf Bahros The Alternative in
  Eastern Europe. A centrepiece of Bahros work
  was the claim that both Western capitalism and
  Eastern socialism had utterly failed to prevent
  development pressures from overrunning the stock
  of natural resources and unduly interfering with
  ecological systems.
• Bahros work inspired a number of political
  ecologists whose basic standpoint reflects that
  same premise, that both capitalism and socialism
  harm the environment when they are premised on an
  underlying acceptance of industrialism.

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Industrialism

• Essentially, industrialism plays a role for
  ecologists largely the same as the one
  capitalism plays for socialists it is the
  bogey that those in the movement oppose. It is a
  catch-all term for economic development which
  ignores environmental cost and the need to
  sustain economies into the long-term future.
• The aim of the green movement is properly
  understood to be the use of legal and social
  tools to restrain, as much as is possible,
  heedless industrialism and promote economic
  development that does not deplete essential
  stocks of natural resources or interfere with
  important natural processes.
• The notion of full-cost pricing exposits this
  aim the best economic costs should be weighted,
  according to this view, by their future effects
  on the environment. This would provide
  disincentives to develop, but only where
  development is itself environmentally
  problematic.

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One final twist different economic goals for
different cultures?

• The kinds of economic goals we have thus far
  discussed are general or universal in their
  application. But is it possible that there are
  different cultural understandings of the proper
  goal for an economy?
• Take, for example, the right of Canadian
  aboriginal populations to use land according to
  the principle of usufruct. This principle
  implies that the property of another may be used
  for certain purposes, so long as the land still
  has value to its owner. In Canada, what this
  amounts to is a right for aboriginal persons to
  hunt and fish on land that is owned by others.
  This right is a traditional right associated
  with aboriginal culture, and not available to the
  non-aboriginal population, which must respect the
  property boundaries and not hunt and fish on the
  property.
• Does this make sense? Should there be a general
  right to use land in a usufructary manner, or
  should this continue to be respected as a
  specific cultural inheritance of aboriginal
  peoples in the economic sphere?