NOTES LOW INCOMES, INEFFICIENCY, AND FAIRNESS

This brief note has been prompted by the recent C.A.E.S. Workshop on farm and non-farm incomes. T h e points to be made are obvious. Making them is justified only because, in my (pos- sibly mistaken) opinion, the Workshop failed to spell them out in sufficient detail.

INCOMES AND EFFICIENCY To what extent do low incomes in agriculture indicate ineffi-

ciency? A substantial amount of discussion centred around this question. Clear thinking on the matter would seem to depend upon our making a sharp distinction between two different aspects, or types, of inefficiency.

There is, first of all, inefficiency in the operation of the in- dividual farm unit. This may be a matter of poor management, i.e. not making the most economical use of the available productive factors. Or it may be a matter of the insufficiency of one of the fac- tors of production, e.g. land, so that it is impossible to use to best advantage some other productive factor, e.g. labour or capital equip- ment. In this latter case, certain economies may be denied the individual farmer because his operations are conducted on too small a scale.

Inefficiency may still exist, however, even if each producing unit is operating with its available resources at optimum efficiency and with an adequate supply of all the productive factors. T h e total volume of production may be such that, in relation to de- mand, prices are not remunerative even for efficient producers. Although we are no longer entitled to describe the individual unit as inefficient, it is still necessary that we refer to this type of situ- ation as indicating inefficiency. In this case there is an inefficient allocation of resources, with too many resources in the one industry.

It is important to distinguish between these types of ineffici- ency because they call for different remedies. The low incomes resulting from the inefficiency of individual farm operators call for better farm management or for the consolidation of small units. The low incomes resulting from inefficiency in the overall alloca- tion of resources may be overcome by (a) a lowering of the money costs of inputs, (b) an increase in demand and hence in price re- ceived, or (c) a withdrawal of resources from the industry where they are surplus.

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In practice, most low incomes will reflect a combination of these two types of inefficiency. Conceptually, however, they should be distinguished. When income differentials persist (this is apart from temporary low incomes resulting from climatic and other uncontrollable factors) we would expect to find one, or both, of these types of inefficiency associated with the low income recipients.

EFFICIENCY AND FAIRNESS It seems to me to be altogether too easy to take a strictly econo-

mic argument and transform it into an ethical proposition. Such appears to be the case insofar as the relationship between efficiency and income is concerned. It is perfectly legitimate to argue that not only do higher incomes reflect greater efficiency but, as well, in order to encourage greater efficiency the incentive of higher in- comes must be offered. It is not, however, legitimate to proceed from this economic point of view to the ethical proposition that higher efficiency should be rewarded by higher incomes.

Attempts to provide an ethical justification for the argument that efficiency deserves a reward would probably rest on the fol- lowing assumption: The more efficient producer has made a larger contribution to the total product and hence is entitled to a larger share of the product than somebody who has made a smaller con- tribution. This might be called a “quid pro quo” ethics.

Economists would generally agree that in an economy that contains monopolistic elements and hence monopolistic sources of income the market determination of incomes has no ethical basis. This is correct but it does not carry the argument far enough. Even in an economy that satisfied all the rigorous requirements of the competitive model, market determined incomes have no necessary ethical sanction. There is nothing inherently “right” about such incomes. They are simply the incomes the market has established in accordance with the distribution of the various capacities re- quired to produce the goods and services in demand. In support of this point of view I quote from Frank Knight’s “The Ethics of Competition”. “It is hard to see that . . . . possession of the capacity to furnish services which are in demand, rather than other capaci- ties, constitutes an ethical claim to a superior share of the social dividend, except to the extent that the capacity is itself the product of conscientious effort.” And earlier, after noting the shaky ethical foundations of income derived from property, he asks if income from labour is fundamentally different. “The capacity to labour productively derives from the same three sources as property owner-

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ship, namely, inheritance, luck, and effort of acquisition.” Can either inheritance or luck be considered an ethical basis for a larger share of the social product? And, to take one further argument from Knight, capacities which are scarce relative to demand tend to be higher priced than those which are abundant relative to de- mand. “It is hard to see how it is more meritorious” to possess a scarce, rather than an abundant, productive capacity. These argu- ments are valid regardless of the perfection or imperfection of the market. It follows that efficiency has no superior claim to the available product than inefficiency, from an ethical point of view.

SUMMARY It is important to distinguish, for both theoretical and practi-

cal policy reasons, the two types of inefficiency which may be the explanation of low incomes. There are certainly very good econo. mic reasons for rewarding the more efficient producers with larger incomes than the less efficient. Efficient performance, however, does not, in itself, constitute an ethical justification for a high income.

Ontario Agricultural College J. P. Cairns