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