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Thursday, October 02, 2008

Economic Fairness

A statement of belief, that is not entirely without foundation in my personal study and observation: Any economic system must balance fairness with the transactional cost of ensuring fairness.

COMPENSATION

In the military, there is no pay for merit or for hours worked. The military functions solely because of the authoritarian structure present there. If not for the threat of force behind the orders of superiors, the military would be very inefficient. The military system completely lacks fairness.

In union shops you can run into a similar problem. Unions are good for jobs where there is little difference from one worker to another, but less good for jobs where there is a large range of expertise.

In high paying jobs, some randomness in compensation is acceptable so long as working hard and working well is compensated.

Now, this is only about one aspect of the economy--compensation. What about pricing? I think the same rule applies. It is wrong that a woman is likely to pay more for a car than a man, simply because of her gender. If car dealership posted two prices for cars, one for men and one for women, the transactional cost of curing the injustice would be small--we could just have the Corporation Commissions fine business who carried out the practice, or eventually take away their license. However, the current problem has to do with subtle biases, perhaps even unintentional behavior. This means the transactional cost could be very high to ensure fair treatment.

Nonetheless, I believe fairness is a crucial component in evaluating an economic system.

NOTE: Fairness is not sameness. Paying better workers more is fair. Charging a higher finance rate for those with poor credit is fair.

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