Abstract
Let us take any historical or contemporary economic society. Would economic efficiency become better if such society erects and enforces institutions that prohibit its members from the exploitation of excludable groups that can be defined by race, ethnicity, etc.? This question actually makes no sense. One must first identity the boundary of society, i.e., who make up the objective function. Irrespective of how one defines efficiency, one cannot assess the efficiency of institutions without determining who is covered and who is excluded. Efficiency judgments can make sense only when one defines the social boundary.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
An additional possible target of Ogilvie’s critique is Fogel and Engerman’s (1974) thesis that the institution of slavery in the American South was efficient.
Given the exploitative nature of the monopoly restrictions, exploited segments can try to escape the exploitation by engaging in informal economies. Such shadow economies are usually illegal. This imposes high transaction costs on their participants— such as the jailing of people of color for drug “crimes” in the USA—and hence forms the basis for another round of exploitative practices against the weaker segments of society.
Both true externalities and pecuniary externalities can be positive or negative. So, this is not the issue. Following Ogilvie, we restrict the usage of the term to denote only “negative externality.”
To recall, an event invokes a pecuniary externality when, under complete markets, the consequent loss fully offsets the consequent gain. The consequences of the event worked its way, unhindered, through the market via the price system and, hence, the outcome is Pareto efficient as expressed in the First Theorem of Welfare Economics (Mas-Colell et al. 1995, ch. 16). In contrast, an event involves a real externality (i.e., negative real externality) when the price system fails to capture the full cost of production. Part of the cost is born by neighbors or people downstream who are not fully compensated and, hence, the outcome is Pareto inefficient.
Ng (2007) faults Coase Theorem for being either/or. Ng convincingly argues that pollution, or in our example, the height of the wall, can be of different degrees. As such there is an asymmetry of harm: an incremental increase of the harmful activity is very costly to the injured but an incremental decrease of the activity would be of little cost to the violator. So, Ng, argues it pays to apply Pigouvian taxes, adjusted to the extent of the pollution, rather than a lump-sum penalty as implied by Coase Theorem. There are many other issues, such as transaction costs, which need not concern us here.
Given Ogilvie’s rendition, it would be impossible for a side-payment to eliminate exploitation. In order to fully compensate the exploiter while raising the wellbeing of the exploitee to the same level as the insiders’ wellbeing, the exploitee would have to side-pay the exploiter the full amount that the exploitee would gain from the elimination of exploitation. That is, there is no raison d’être to expand the boundary and eliminate exploitation; the elimination would be zero-sum.
References
Arrow KJ. Social Choice and Individual Values. New York: Wiley; 1951.
Arrow KJ. Social Choice and Individual Values. 2nd ed. New Haven: Yale University Press; 1963.
Becker GS. A theory of competition among pressure groups for political influence. Q J Econ. 1983;98:371–400.
Bergson A. A reformulation of certain aspects of welfare economics. Q J Econ. 1938;52:310–34.
Bergson A. On the concept of social welfare. Q J Econ. 1954;68:232–52.
Blackorby C, Donaldson D. A review article: The case against the use of the sum of compensating variations in cost-benefit analysis. Can J Econ. 1990;23:471–94.
Coase R. The problem of social cost. J Law Econ. 1960;3:1–44.
Demsetz H. The problem of social cost: What problem? A critique of the reasoning of A.C. Pigou and R.H. Coase. Rev Law Econ. 2011;7(1):1–13.
Fogel RW, Engerman SL. Time on the Cross, vol. 2. Boston: Little, Brown; 1974.
Greenwald B, Stiglitz J. Externalities in economies with imperfect information and incomplete markets. Q J Econ. 1986;101:229–64.
Harsanyi JC. Utilities, preferences, and substantive goods. Soc Choice Welf. 1997;14:129–45.
Hicks J. The Foundations of Welfare Economics. Econ J. 1939;49:696–712. https://doi.org/10.2307/2225023.
Kaldor N. Welfare Propositions in Economics and Interpersonal Comparisons of Utility. Econ J. 1939;49:549–52. https://doi.org/10.2307/2224835.
Kemp MC, Ng Y-K. On the existence of social welfare functions: Social orderings and social decision functions. Economica. 1976;43:59–66.
Kemp MC, Ng Y-K. Individualistic social welfare functions under ordinalism: A reply to Mayston. Math Soc Sci. 1983;4:305–7.
Khalil EL. Rationality and social labor in Marx. Crit Rev. 1990;4:239–65.
Khalil EL. The implication for socialism of Marx's theory of the tendency of the rate of profit to fall. J Hist Econ Thought. 1994;16:292–309.
Khalil EL. What Determines the Boundary of Civil Society? Hume, Smith and the Justification of European Exploitation of non-Europeans. Theoria. 2013;59:26–49.
Khalil EL. Distinguishing Injustice, Exploitation and Harm: The Impossibility Result. Theoria. 2017;64:24–52.
Krueger A. The political economy of the rent-seeking society. Am Econ Rev. 1974;64:291–303.
Marx K. Capital, vol. 1, intro. by Ernest Mandel. Harmondsworth: Penguin; London: New Left Books; 1976.
Mas-Colell A, Whinston M, Green JR. Microeconomic Theory. Oxford: Oxford University Press; 1995.
Mitchell W. Doing well while intending good: Cases in political exploitation. J Theor Politics. 1993;5:317–48.
Ng Y-K. Towards welfare biology: Evolutionary economics of animal consciousness and suffering. Biol Philos. 1995;10:255–85.
Ng Y-K. Utility, informed preference, or happiness: Following Harsanyi’s argument to its logical conclusion. Soc Choice Welf. 1999;16:197–216.
Ng Y-K. Eternal Coase and external costs: A case for bilateral taxation and amenity rights. Eur J Polit Econ. 2007;23:641–59.
North D, Thomas R. The Rise of the Western World. Cambridge: Cambridge University Press; 1973.
North D, Wallis J, Weingast B. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press; 2009.
Nussbaum MC. Frontiers of Justice: Disability, Nationality, Species Membership. Cambridge: Harvard University Press; 2006.
Ogilvie S. ‘Whatever is, is right?’ Economic institutions in pre-industrial Europe. Econ Hist Rev. 2007;60:649–84.
Ogilvie S. Institutions and European Trade. Merchant Guilds, 1000–1800. Cambridge: Cambridge University Press; 2011.
Posner RA. Utilitarianism, economics, and legal theory. J Leg Stud. 1979;8:103–40.
Posner RA. Economic Analysis of Law. 7th ed. Austin: Kluwer; 2007.
Rawls J. A Theory of Justice. Cambridge: Harvard University Press; 1971.
Rawls J. The Law of Peoples: with “The Idea of Public Reason Revisited”. Cambridge: Harvard University Press; 2001.
Samuelson PA. Foundations of Economic Analysis. Cambridge: Harvard University Press; 1947.
Samuelson PA. Reaffirming the existence of ‘reasonable’ Bergson-Samuelson social welfare functions. Economica. New Ser. 1977;44:81–8.
Sen AK. Social choice theory: A re-examination. Econometrica. 1977;45:53–89.
Sen AK. Development as Freedom. 2nd ed. Oxford: Oxford University Press; 2001.
Sen AK. The Idea of Justice. London: Allen Lane; 2009.
Singer P. Animal Liberation. New York: Ecco; 2002.
Tullock G. The welfare costs of tariffs, monopolies, and theft. Western Econ J. 1967;5:224–32.
Acknowledgments
Earlier versions benefited from comments of participants at the Korea Institution and Economics Association meeting, Alan Wertheimer, Nichloas Feltovich, Alain Marciano, Yew-Kwang Ng, Michael Niekamp, John Thrasher, Deirdre McCloskey, Bart Nooteboom, Harold Jones, Ian McDonald, Gary Magee, and anonymous referees. The usual caveat applies.
Author information
Authors and Affiliations
Corresponding author
About this article
Cite this article
Khalil, E.L. Exploitation and Efficiency. Rev Black Polit Econ 44, 363–377 (2017). https://doi.org/10.1007/s12114-017-9263-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12114-017-9263-z
Keywords
- Hicks-Kaldor Welfare Criterion
- Injustice
- Collective Welfare Function
- Altruism
- Radical Social Theory
- Inter-society Utility Comparison
- Externality vs. Pecuniary Externality