Pareto efficiency is “a state of allocation of resources from which it is impossible to
reallocate so as to make any one individual better off without making another individual worse
off” (9). In other words, each individual within a Pareto-efficient system is using their time in the
most efficient manner that they can-not necessarily the most efficient for their own benefit, but
perhaps for the benefit of someone else within the system. It’s worth noting that the idea of
Pareto efficiency mentions nothing about equality, or an equal distribution: in fact, an extreme
example of a pareto-efficient system could be a medieval kingdom, where the King assigns all of
his subjects to carry out duties that make him as well off as possible in the most efficient manner
possible, without any regard for their happiness. All of the King’s subjects are miserable, but it’s
a Pareto-efficient system because any reallocation of resources would cause the King to be worse
off, however marginally. It may seem intuitively true that a more equal system where the total
level of utility or happiness is greater is superior to this system, but any such judgment occurs
outside the crude doctrine of Pareto efficiency.
That being said, one method for determining Pareto-optimizing (A) social policy is what I
refer to as the “Capitalist method”, which builds on a foundation of capitalist ideas which
together state that the free market system is the most efficient economic system. This foundation
stresses the importance of property rights, individual freedom (B), and the law of comparative
advantage (C), which explain why free trade is beneficial. Free market economists believe that a
purely free market full of rational, utility-maximizing individuals “leads, in the absence of
externalities, market power, and other distortions, to convergence on equilibrium characterized
by Pareto optimality (A) (8).” Thus, the Capitalist method to maximizing pareto efficiency is to
remove these external influences which prevent the free market from functioning in its ideal
form. The Capitalist method forms the basis of many American social policies, for example:
Mandatory, government-provided K-12 education attempts to create a country comprised of
rational thinkers. Antitrust laws, and the Federal Trade Commission's requirement that it must
sign off on company mergers, work to prevent monopolies, which have outsized market power,
and ensure Pareto efficiency. Free trade agreements such as NAFTA and the TPP (until recently)
connect markets to allow Pareto-optimizing free trade with foreign nations, in accordance with
the law of Comparative Advantage. A key facet of Capitalist method social policies is the
primacy of individual freedom, in order to facilitate the free market, which in turn will lead to
Pareto efficiency (B).
A conflicting method to determine Pareto-efficient social policy, which I’ll call the
“Chinese method” (D), is to quantify people’s actions which either help or hurt society, but they
don’t usually experience positive or negative repercussions for under capitalism. For example,
donating to Charity (5) helps society, and Jaywalking (3) arguably harms society, yet don’t make
the action taker any better or worse off. Because the Capitalist method fails to provide positive or
negative incentives for these actions, Chinese makers of the Chinese social credit system argue
that it’s insufficient. Instead, they argue, policies should be put in place which incentivize the
“good” actions and disincentivize the “bad” actions which a purely capitalist system misses.
China’s social credit system currently has several early-stage prototypes, but the final version
will be a Pareto-optimizing social policy that disincentivizes activities including the following
(1,3,5,6):
● Smoking in non-smoking areas
● Bad driving
● Playing video games all day
● Insincere apologies
● Criticizing the government
● Being friends with people with a low social credit score
It also incentivizes activities such as:
● Donating to charity
● Paying bills on time
● Looking after your family
● Being friends with people with a high social credit score
There are many different incentives for high social credit scores and disincentives for low social
credit scores, but disincentives will include restrictions from purchasing certain goods, hotels,
and train/plane tickets (5). Architects of the social credit score system argue that, although the
Chinese system interferes with individual freedom-which brings it into direct conflict with the
Capitalist method-it provides a superior method of Pareto-optimization. Chinese method
supporters would question the usefulness of individual freedom in the context of Pareto
efficiency. After all, in order to come as close as possible to Pareto efficiency, why shouldn’t
actions which could be optimized for the betterment of society-such as insincere apologies, bad
driving, or playing video games all day-be punished?
Defenders of the Capitalist method may respond by saying that any implementation of
the Chinese method will create an artificial society, where activities that were once done purely
for altruistic purposes are now done for the wrong reasons, and freedom of expression including
government dissent is severely stifled. For example, in China, one local implementation of the
social credit score system penalized citizens for petitioning Beijing to address their grievances
(7)! This will lead to people being worse off after a period of time, because of the negative
governmental and cultural shifts that will occur over time in such a stifled environment. The
replacement of the purely altruistic incentive for engaging in Pareto-optimizing actions may,
over time, lead to fewer people partaking in them. This is especially true if, for whatever reason,
China must reduce or end the incentives for the Pareto-optimizing actions. Thus, the Chinese
method is unsustainable, even if it increases Pareto efficiency in the short term. Furthermore, the
Capitalist method supporter notices, policies such as the social credit score system necessarily
create a less Pareto-efficient world in the near term as well due to the punishments they impose.
The restrictions on purchases of consumer goods, plane tickets, and train tickets which will be
present in the final implementation of the social credit system, necessarily lead to a less
Pareto-efficient world due to the deadweight loss which they create. The Capitalist method
supporter may have to agree with the Chinese method idea that the capitalist system leaves out
incentives for many activities, which currently exist at a below perfectly Pareto-efficient level
and thus should be increased. The harm caused by governmental attempts to increase the
frequency of these Pareto-optimizing actions, however, outweigh the benefits.
A. “Pareto-optimizing”, “Pareto optimal”: A Pareto-optimizing policy, event, or action is
one that brings a society closer to the Pareto efficiency curve for that society (even if it
makes some individuals worse off) by making a Pareto improvement: “A Pareto
improvement is a change to a different allocation that makes at least one individual or
preference criterion better off without making any other individual or preference criterion
worse off, given a certain initial allocation of goods among a set of individuals. An
allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto
improvements can be made, in which case we are assumed to have reached Pareto
optimality” (9).
B. Here, individual freedom is a foundation of capitalism because it allows individuals to
participate in the capitalist economic system to an optimal extent. Restrictions on the
freedom to choose which job to work at, and what items can be bought, cause capitalist
economies to move away from the Pareto efficiency curve.
C. “The law of comparative advantage states that under free trade, an agent will produce
more of and consume less of a good for which they have a comparative advantage”
(which eliminates inefficiency). “In an economic model, agents have a comparative
advantage over others in producing a particular good if they can produce that good at a
lower relative opportunity cost”. Under the law of comparative advantage, one must
compare the opportunity costs of producing goods across countries (10).
D. I refer to the Chinese approach to maximizing Pareto efficiency as the ‘Chinese method’
instead of the “Communist Method” because China’s economy closely resembles a
capitalist economy. The ‘Chinese method’ refers to the ideal theory, and the Chinese
social credit system is simply one implementation of that theory.
SOURCES
1. https://www.wired.co.uk/article/china-social-credit
2. https://www.wired.co.uk/article/ai-bias-black-box-sandra-wachter
3. https://www.businessinsider.com/china-social-credit-system-things-you-can-do-wrong-an
d-punishments-2018-4#jaywalking-2
4. http://www.ndrc.gov.cn/gzdt/201803/t20180316_879653.html
5. https://www.checkmyfile.com/articles/2938/credit-score/chinas-social-credit-scoring:-ho
w-does-it-work.htm/
6. https://www.forbes.com/sites/audreymurrell/2018/07/31/pushing-the-ethical-boundariesof-big-data-a-look-at-chinas-social-credit-scoring-system/#7f55950325e5
7. https://www.washingtonpost.com/news/theworldpost/wp/2018/11/29/social-credit/
8. https://www.npr.org/templates/story/story.php?storyId=120890870
9. https://en.wikipedia.org/wiki/Pareto_efficiency
10. https://en.wikipedia.org/wiki/Comparative_advantage#Deardorff's_general_law_of_com
parative_advantage