What (If Anything) Can Economics Say About Equity?

Does economics have anything to teach us about the meaning of fairness? The leading practitioners of law and economics disagree. Judge Richard Posner argues that economics is largely irrelevant to distributive issues. Posner maintains that the most useful economic measure of social welfare is cost-benefit analysis (which he calls wealth maximization). But, he observes, this economic measure “ratifies and perfects an essentially arbitrary distribution of wealth.” Given an ethically acceptable initial assignment of wealth, rules based on economic efficiency may have some claim to be considered fair. On the critical issue of distributional equity, however, Posner apparently believes that economics has little to say. In contrast, Professors Louis Kaplow and Steven Shavell believe that economics can teach us nearly everything about equity. In Fairness Versus Welfare, they argue that there is only one viable notion of equity: resources should be distributed so as to maximize overall social welfare. As we will see, the full import of this argument is ambiguous. On the one hand, Kaplow and Shaven expressly concede that multiple ways of calculating social welfare might exist, so Wy might have to look beyond economics to determine the right one. On the other hand, much of their argument is implicitly predicated on a specific social welfare function, and in a footnote they give the argument for adopting this function universally. If a unique social welfare function is given, economic analysis would completely resolve all equity issues under their approach. Thus, although they do not say so explicitly, the book can be read to endorse a singl� definition of equity based on economic analysis. This reading would completely eliminate any independent role for judgments about equity. At the least, however, Kaplow and Shaven believe that economics can restrict value judgments about equity to a single, sharply defined place in policy analysis: the choice of an appropriate social welfare function. Posner, in turn, sees only modest merit in the Kaplow and Shaven theory of social welfare, except to the extent that it reduces in practice to his own theory of wealth maximization.