Economic Efficiency and the Quest for a More Just World

This paper revisits the debates about the meaning of economic efficiency, and the moral dilemmas associated with using Kaldor-Hicks efficiency or Pareto efficiency for policy analysis. I lay out the best case for efficiency as meta-value, and highlight that it still does not allow us to evade the need to account for conflict and violence. Contrary to many accounts, I argue that Pareto efficiency is a poor normative criterion, while, nonetheless, offering a valuable tool for positive institutional analysis. Pareto efficiency is important not because it tells us what we should do, but because it tells us why injustice persists and reform is often difficult. Kaldor-Hicks efficiency provides a better normative guideline, despite its known problems in terms of inter-personal utility comparisons. Using it as a guide, we can see why (a) we should protect federalism and further build a polycentric order of overlapping governments in which the movement of capital and people is easier; (b) why full-blown anarchy is probably not the ideal; and (c) why we should use auctions more (in particular quadratic voting) and electoral democracy less.