A fair world doesn't have to be an inefficient one

ONE common criticism of economics is that it focuses too much on efficiency, and not enough on things such as equality, fairness and the welfare of future generations. In the extreme version of the criticism, the focus on efficiency is a deliberate plot to keep resources in the hands of the wealthy.

The economic definition of efficiency - also called Pareto efficiency, after the Italian economist Vilfredo Pareto - is easy to understand. Basically, it is just the same thing as gross domestic product (GDP). The more things we produce - including goods such as TVs and cars, but also services such as insurance and back massages - the fewer resources we are wasting. Perfect efficiency - called Pareto optimality - is a situation in which the economy is so efficient that it is impossible to give one person more without taking something away from someone else. In other words, perfect efficiency is a world where there really is no free lunch.

Economists focus on efficiency for several reasons. The first is probably historical. As historian Adam Tooze notes in his book The Deluge, government attention to economic statistics increased dramatically after World War I. The US, with its massive economic output, had tipped the scales decisively in favour of the Allies, so total output was believed to be an indication of warfighting strength. That logic seemed to repeat itself in World War II, and again in the Cold War, in which the US is widely believed to have outspent the Soviet Union. Greater economic efficiency probably means a more militarily powerful nation.