Dialogue: Equality and fairness two different stories

CATHY BUCHANAN and PETER HARTLEY* argue that seeking to achieve equality of material wealth or income does more harm than good in practice.

What is fair? This question has bedevilled us since childhood. When another child got a bigger ice cream, a place on the sports team or a part in the school play, we wondered whether it was fair.

At first it seemed that what was equal was fair. As toddlers we wanted to be equal with other children. We wanted an equal number of stories at bedtime, an equal number of pushes on the swing and an equal number of peas on our plates.

Later, we realised that what is fair is not always what is equal. Everyone can't be captain of the sports team or the star of the school play. People have different abilities, and they should specialise in what they do best. A new definition of fairness emerged: what is fair is for people to have the opportunity to capitalise on their abilities. Rewards should be determined by merit.

As we grew older, we noticed that rewards aren't always given to those who deserve them. Some are rewarded by accident, while others who should be rewarded are overlooked. Life is full of mishaps and deciding when someone deserves something is difficult.

By the time we reached adulthood, we realised that fairness is a complex notion incorporating both what we ought to do and what we can do.

Each person has trouble deciding how to act fairly. If it is difficult for an individual to be fair, how much harder is it for a society to be fair? At the level of social or governmental action, the fallibility of human nature is magnified.

If we were philosophers we might abandon the attempt to understand fairness or equity because the term can never be precisely defined. When we doff the beret and don the hard hat, however, we realise our need for institutions that do a good, if not perfect, job of ensuring that people are treated fairly. In short, equity is a problem that can't be ignored.

The toddler's idea that equity involves being equal with other children is an example of what economists call horizontal equity, the notion that equally situated people should be treated equally. Equality before the law is an important example of horizontal equity. Our belief in horizontal equity leads us to oppose racial and other forms of discrimination.

While free markets and competition allow anyone to supply goods or services, special licences, subsidies, and other Government support programmes do not treat people in the same situation equally. When we grant equally situated people privileges, we violate the principle of horizontal equity.

Many people think horizontal equity is inadequate and want to implement programmes to reduce inequality. There are, however, two different motives for wanting greater equality. The first is a compassionate concern for the needy. The second is envy of those who are well off.

A rational but risk-averse person may decide that lower average living standards are acceptable in exchange for a life that is free of poverty. But a concern for limiting poverty is not the same as opposing opportunities for some to become very well off. Risk-aversion does not justify eliminating all chances of getting ahead.

Even if complete equality were desirable, it would be unattainable, since there is no objective way of measuring how well off people are. Annual money income is a poor measure of wellbeing. University students, for example, have a low money income but many are destined to become well off after they graduate.

Temporary bad luck may also give people a low measured income, although they are not truly poor. Urban workers with high housing costs might be worse off than their rural counterparts, even if the former have a higher income. In many instances, redistributing from higher income to lower-income people would exacerbate inequalities in living standards. It is easier, however, to determine when a person is facing hardship.

Trying to achieve equality through taxation and income transfers makes some people better off but most people worse off. Taxes and transfers are costly to administer and distort incentives. The benefit of much government spending is far below the costs imposed by the taxes needed to finance it. A sacrifice in living standards is a particularly poor bargain when people receiving Government handouts could look after themselves.

Attempting to equalise money incomes may even make the poorest citizens worse off. Suppose a valuable new firm were established. The founders of the firm might become millionaires overnight. Hundreds of jobs would be created and wealth would spread throughout the economy. Although income inequality would increase, many would benefit and few, if any, would be made worse off. Should we block such a development in the interests of greater equality? Envy is the only plausible reason to favour equalising money incomes. Everyone feels envious sometimes. We should put aside our feelings of envy, however, because indulging them is harmful and delivers little in return.

Should equity be a social goal? If equity is defined as equal treatment of equals, equality before the law, or a compassionate concern for the genuinely needy, it deserves a place among our moral beliefs and public policies.

If equity is defined as equality of material wealth or equality of money income, it should be rejected both because it lacks an ethical foundation and because seeking to achieve it in practice does more harm than good.

* Dr Cathy Buchanan and Professor Peter Hartley teach at Rice University, Houston. They are the authors of Equity as a Social Goal, published by the Business Roundtable.