5 - On Resource Allocation, Optimality, and Equity

Summary

Marginalist revolution tended to ignore equity questions because it focused on the efficient allocation of resources and not on the fair distribution of income and wealth. The concept of Pareto Optimum was generally endorsed by classical economists. It was opposed by those with socialist views. Marginalist principles stressed that the utilities of different individuals could not be compared. Substitution effects were emphasized over income effects. This had strong implications for policies, including tax and spending policies. The view was that comparisons should be based on science and not on vague intuition. Forced distribution could have negative implications for the allocation of resources and for the performance of the economy. The concept of justice had been vague in history and remained different between socialists and classical economists. For socialists there was the Marxist and the milder Catholic branch. The Marxist branch stressed income equality while the Catholic one tolerated some inequality, as long as it was justified by different effort and ability. The Marxist version would characterize the 1917 Russian Revolution. Tax levels were still low and public debt was expensive.