4. Morality and efficiency

The consideration that efficiency and justice are two different dimensions that may be combined in varying proportions is one of the very negative consequences that arise naturally from the neoclassical paradigm which has dominated economic science to date: if one believes that it is possible to decide on the basis of a cost-benefit analysis because it is assumed that the required information is given in a static context, not only it is unnecessary for individual actors to follow any prior scheme of guided moral behaviour to direct them in their actions (other than merely “maximizing its utility ad hoc”), but it is also very easy to reach the conclusion (included, for example, in the “second fundamental theorem of welfare economics”) that any scheme of equity imposed by force is compatible with the static criteria of Paretian efficiency.

However, the consideration of the social process as a dynamic reality constituted by the interaction of thousands of human beings, each of which is endowed with an innate and constant creative capacity, makes it impossible to know the costs and benefits that will arise from any given action in detail, meaning that the human being has to use a series of guides, or moral principles of action, as an automatic pilot. These moral principles tend, furthermore, to make coordinated interaction between different human beings possible and, therefore, generate a coordination process that, in a certain sense, could be described as “dynamically efficient”.

Seen from the conception of the market as a dynamic process, efficiency, understood as coordination, arises from the behavior of human beings when they act following specific moral guidelines and, vice versa, human action performed in accordance with these ethical principles gives rise to dynamic efficiency understood as the coordinating trend in processes of social interaction. Therefore, we may conclude that, from a dynamic point of view, efficiency is not compatible with different schemes of equity or justice, but rather arises solely and exclusively from a single scheme.

Therefore, it is not acceptable to affirm that criteria of efficiency and those of equity are opposed to each other. The oppositon between these two dimensions is false and erroneous. What is just cannot be inefficient, nor can what is efficient be unjust. The fact is that, under the perspective of dynamic analysis, equity or justice and efficiency are simply two sides of the same coin which, moreover, confirm the integrated and consistent order that exists in the social universe. The supposed opposition between these two dimensions originates from the erroneous conception of static efficiency developed by the neoclassical paradigm of “welfare economics”, together with the erroneous idea of “social justice”, according to which the results of the social process can be judged regardless of the individual behavior of those who participate in it. The theoretical developments of welfare economics based on static criteria of Paretian efficiency arose with the vain hope of avoiding the need to explicitly enter the ethics field and have made it impossible to appreciate the serious problems of dynamic inefficiency that emerge when the entrepreneurial process is institutionally coerced to a greater or lesser extent. The consideration of the market as a process, not only allows efficiency to be appropriately redefined in dynamic terms, but also throws a great deal of light on the criterion of justice which should prevail in social relations. This criterion is based on the traditional principles of morality which allow individual behavior to be judged as just or unjust in accordance with general and abstract moral and juridical rules regulating, basically, the property rights that make it possible for human beings to appropriate everything that results from their own innate entrepreneurial creativity. Furthermore, this point of view also shows how the alternative criteria of justice are essentially immoral. Among them, and particularly open to criticism, is the concept of “social justice” that aims to judge as just or unjust the specific results of the social process at determined historical moments regardless of whether or not the behavior of its artifices has been in line with general juridical and moral rules. “Social justice” only makes sense in a phantasmagoric static world where the goods and services are given and the only problem that can arise is their distribution. However, in the real world, where the production and distribution processes take place simultaneously as a consequence of entrepreneurial impetus, there is no analytical sense to the concept of “social justice”, which may be considered essentially immoral in three different dimensions:
a) from the evolutionary point of view, to the extent that the implications derived from the idea of “social justice” violate the traditional principles of property rights which have been formed by common law and have made modern civilization possible;
b) from the theoretical point of view, since it is impossible to organize society on the basis of “social justice”, as the systematic coercion required in order to impose the “ideal goal” of the redistribution of income prevents the free practice of entrepreneurship and, therefore, the creativity and coordination that make the development of civilization possible;
c) from the ethical point of view, to the extent that the moral principle that all human beings have a natural right to the results of their own entrepreneurial creativity is violated. It is foreseeable that, as the citizens realize the serious errors and essential immorality derived from this spurious concept of “social justice”, the institutional coercion on the party of the State which this is considered to justify will gradually disappear .(7)

Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain


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(7).See F.A. Hayek 1976.