• inequalities are an artefact: there are no real differences between the health of social classes; any apparent difference is due to statistical errors such as missing data;
• health status affects social status: people with poorer health have low paid jobs or are unemployed and as a result are in lower social classes;
• behavioural differences between social classes lead to health differences: people in lower social classes take more risks with their health such as smoking, a poor diet and drug abuse;
• material inequalities lead to health inequalities: people in lower socioeconomic groups are exposed to health risks such as poor housing, dangerous jobs and worse environmental pollution.
The last two are probably the most convincing explanations. The health produc- tion model, introduced in Chapter 7, also explained health inequality through material inequality and behavioural differences. The behavioural differences were expressed in terms of preferences and education levels.
Many health systems are concerned not only with the maximization of welfare (efficiency) but also with the fair distribution of welfare (equity) – recall the study on cigarette taxation in Chapter 6. But what exactly is a ‘fair distribution’? What makes a health system fair? Is there any single definition of justice that should be applied to health systems? Furthermore, does this objective conflict with the need to make health systems efficient? The following extract by Michael Parkin and colleagues (2003) considers the different philosophical approaches to equity that have been proposed.
Activity 12.1
When you have finished, answer the following questions as they apply to health and health care:
1 What different equity objectives are identified?
2 Why might there be conflict between different equity definitions?
3 Why is there a trade-off between efficiency and equity?
4 In your culture, which is considered more important, end-state equity or process equity?
Is the competitive market fair?
To think about fairness, think of economic life as a game – a serious game. All ideas about fairness can be divided into two broad groups. They are:
It’s not fair if the result isn’t fair.
It’s not fair if the rules aren’t fair.
It’s not fair if the result isn’t fair
The earliest efforts to establish a principle of fairness were based on the view that the result is what matters. And the general idea was that it is unfair if people’s incomes are too unequal. It is unfair that bank directors earn millions of pounds a year, while bank tellers
earn only thousands of pounds a year. It is unfair that a shop owner enjoys a larger profit and her customers pay higher prices in the aftermath of a winter storm.
There was a lot of excitement during the nineteenth century when economists thought they had made the incredible discovery that efficiency requires equality of incomes. To make the economic pie as large as possible, it must be cut into equal pieces, one for each person. This idea turns out to be wrong, but there is a lesson in the reason that it is wrong.
So this nineteenth century idea is worth a closer look.
The nineteenth century idea that only equality brings efficiency is called utilitarianism.
Utilitarianism is a principle that states that we should strive to achieve ‘the greatest happiness for the greatest number’. The people who developed this idea were known as utilitarians. They included the most eminent minds such as David Hume, Adam Smith, Jeremy Bentham and John Stuart Mill.
Utilitarianism
Utilitarianism argues that to achieve ‘the greatest happiness for the greatest number’, income must be transferred from the rich to the poor up to the point of complete equality – to the point that there are no rich and no poor.
They reasoned in the following way: first, everyone has the same basic wants and are similar in their capacity to enjoy life. Second, the greater a person’s income, the smaller is the marginal benefit of a pound. The millionth pound spent by a rich person brings a smaller marginal benefit to that person than the marginal benefit of the thousandth pound spent by a poorer person. So by transferring a pound from the millionaire to the poorer person, more is gained than is lost and the two people added together are better off.
The big trade-off
One big problem with the utilitarian ideal of complete equality is that it ignores the costs of making income transfers. The economist, Arthur Okun, in his book Equality and Efficiency:
The Big Trade-off, described the process of redistributing income as like trying to transfer water from one barrel to another with a leaky bucket. The more we try to increase equity by redistributing income, the more we reduce efficiency. Recognizing the cost of making income transfers leads to what is called ‘the big trade-off’ – a trade-off between efficiency and fairness.
The big trade-off is based on the following facts. Income can be transferred from people with high incomes to people with low incomes only by taxing incomes. Taxing people’s income from employment makes them work less. It results in the quantity of labour being less than the efficient quantity. Taxing people’s income from capital makes them save less. It results in the quantity of capital being less than the efficient quantity. With smaller quan- tities of both labour and capital the quantity of goods and services produced is less than the efficient quantity. The economic cake shrinks.
The trade-off is between the size of the economic cake and the degree of equality with which it is shared. The greater the amount of income redistribution through income taxes, the greater is the inefficiency – the smaller is the economic cake.
There is a second source of inefficiency. A pound taken from a rich person does not end up as a pound in the hands of a poorer person. Some of it is spent on administration of the tax and transfer system. The cost of tax-collecting agencies, such as the European Community, and welfare-administering agencies, such as the British Child Benefit Agency, as well as regional government welfare departments, must be paid with some of the taxes collected.
Also, taxpayers hire accountants, tax specialists and legal experts to help them ensure that they pay the correct amount of tax. These activities use skilled labour and capital resources that could otherwise be used to produce goods and services that people value.
You can see that when all these costs are taken into account, transferring a pound from a rich person does not give a pound to a poor person. It is even possible that with high taxes, those with low incomes end up being worse off. Suppose, for example, that highly taxed entrepreneurs decide to work less hard and shut down some of their businesses.
Low-income workers get fired and must seek other, perhaps even lower-paid work.
Because of the big trade-off, those who say that fairness is equality propose a modified version of utilitarianism.
Rawlsianism
A Harvard philosopher, John Rawls, proposed a modified version of utilitarianism in a classic book entitled A Theory of Justice, published in 1971. Rawls says that, taking all the costs of income transfers into account, the fair distribution of the economic pie is the one that makes the poorest person as well off as possible. The incomes of rich people should be taxed and, after paying the costs of administering the tax and transfer system, what is left should be transferred to the poor. But the taxes must not be so high that they make the economic pie shrink to the point that the poorest person ends up with a smaller piece. A bigger share of a smaller cake can be a smaller piece than a smaller share of a bigger cake.
The goal is to make the piece enjoyed by the poorest person as big as possible. Most likely this piece will not be an equal share.
The ‘fair results’ ideas require a change in the results after the game is over. Some econo- mists say these changes are themselves unfair and propose a different way of thinking about fairness.
It’s not fair if the rules aren’t fair
The idea that it’s not fair if the rules aren’t fair is based on a fundamental principle that seems to be hard wired into the human brain. It is the symmetry principle. The symmetry principle is the requirement that people in similar situations be treated similarly. It is the moral principle that lies at the centre of all the big religions. It says, in some form or other, ‘behave towards other people in the way you expect them to behave towards you’.
In economic life, this principle translates into equality of opportunity. But equality of opportunity to do what? This question is answered by another philosopher, Robert Nozick, in a book Anarchy, State, and Utopia, published in 1974. Nozick argues that the idea of fairness as an outcome or result cannot work and that fairness must be based on the fairness of the rules. He suggests that fairness obeys two rules. They are:
The state must enforce laws that establish and protect private property.
Private property may be transferred from one person to another only by voluntary exchange.
The first rule says that everything that is valuable must be owned by individuals and that the state must ensure that theft is prevented. The second rule says that the only legitimate way a person can acquire property is to buy it in exchange for something else that the person owns. If these rules, which are the only fair rules, are followed the result is fair. It doesn’t matter how unequally the economic pie is shared provided it is baked by people
each one of whom voluntarily provides services in exchange for the share of the pie offered in compensation.
These rules satisfy the symmetry principle. And if these rules are not followed, the sym- metry principle is broken. You can see these facts by imagining a world in which the laws are not followed.
First, suppose that some resources or goods are not owned. They are common property.
Then everyone is free to participate in a grab to use these resources or goods. The strongest will prevail. But when the strongest prevails, the strongest effectively owns the resources or goods in question and prevents others from enjoying them.
Second, suppose that we do not insist on voluntary exchange for transferring ownership of resources from one person to another. The alternative is involuntary transfer. In simple language, the alternative is theft.
Both of these situations violate the symmetry principle. Only the strong get to acquire what they want. The weak end up with only the resources and goods that the strong don’t want.
In contrast, if the two rules of fairness are followed, everyone, strong and weak, is treated in a similar way. Everyone is free to use their resources and human skills to create things that are valued by themselves and others and to exchange the fruits of their efforts with each other. This is the only set of arrangements that obeys the symmetry principle.
Feedback
1 Parkin and colleagues identified two objectives of equity:
a) The distribution of outcome or end-state (health) is fair.
b) People have the same opportunities even if the outcomes are unequal. This allows differences in tastes, differences in skills, and differences in diligence to influence outcomes.
2 The latter view implies that it is fair for someone to smoke and to be less healthy than someone who does not because their behaviour suggests that the smoker places less value on good health. It also holds that it is fair that someone on a higher income is healthier. Their extra income is seen as a reward for their skill and effort and having extra health is considered part of the reward. These definitions of fairness are clearly in conflict with an egalitarian view, which holds that people’s health should be equal regardless of their preferences, behaviour or genes.
3 Okun’s ‘big trade-off’ exists because removing money or wealth from people cre- ates disincentives and administrative costs. If income is taxed then people will have a smaller incentive to work long hours; therefore production will be smaller than with- out taxation and consequently there is a smaller ‘pie’ to redistribute from. Similarly, taxing interest or profits means that people have a smaller incentive to invest in business. If the tax is levied on sales of a good then the producers will have a smaller incentive to produce and sell that good. The implication is that by imposing tax we reduce the benefits of engaging in productive activities and therefore fewer of these activities are carried out. The extent of this inefficiency is debated though. For one thing, consumer theory shows that a fall in income could make some people work more, not less.
4 In the USA there appears to be a strong association with equality of opportunity (process equity). After all, it has been long billed as the ‘land of opportunity’ and government intervention has always been looked on with scepticism. End-stage equity was an explicit policy goal in socialist countries, many of which experienced dramatic changes in their social policies in the 1980s and 1990s. In the few surviving socialist countries, such as Cuba, and in the social democratic countries of Europe, there is far more emphasis on end-state equality. Equality is often an explicit policy objective and these countries often have a long history of welfarism.
Would you say that your country has ideological leanings towards the USA, towards the European system or something else?