Pareto Optimal and Perfectly Disgusting

By Daniel Gurevich

One of the fundamental measures of efficiency in economics is Pareto efficiency (or Pareto optimality). A society is called Pareto efficient if resources have been allocated in such a way that it is impossible to redistribute them so that at least one person is better off and nobody is worse off. In other words, Pareto efficiency implies that any “improvement” requires a value judgment. One could argue that any Pareto efficient distribution could be considered optimal by some definition.

In 1951, Nobel Prize-winning economists Kenneth Arrow and Gerard Debreu published a mathematical proof that a perfectly competitive free market results in Pareto efficiency in the long run. So there is proof that free markets really do work! But not so fast – according to 1998 Nobel Prize winner Amartya Sen, Pareto efficiency is not all it is chalked up to be. In his 1970 magnum opus, 'Collective Choice and Social Welfare', Sen writes, “An economy can be optimal in this sense even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich. . . . In short, a society or an economy can be Pareto-optimal and still be perfectly disgusting.” Sen asserts that freedom and equality are far more important than Pareto efficiency, and he is right.

Consider Qatar. With the world’s highest GDP per capita (over $100,000), an official unemployment rate of 0.1%, and no residents below the poverty line, it could pass for a Pareto efficient paradise. Pareto efficient it might be, but a paradise Qatar is not. The restrictions on freedom in Qatar, especially for non-citizens, are appalling. According to the United States Department of State’s Trafficking in Persons Report (TIP) for 2014, immigrants who come seeking unskilled work live in conditions of effective slavery:

“Approximately 1.2 million men and women . . . voluntarily migrate to Qatar to work as low- and semi-skilled workers . . . but many subsequently face forced labor . . . Instances of delayed or nonpayment of salaries are a leading driver of forced labor, including debt bondage, in Qatar. Many migrant workers also face denial of exit permits, threats of deportation, physical or financial harm, physical, mental, and sexual abuse, hazardous working conditions, and squalid living accommodations . . . 86 to 90 percent of expatriate workers’ passports are [illegally] in their employers’ possession.”

But, the report continues, “the government has yet to take increased action to investigate, prosecute, and punish trafficking offenses for forced labor and forced prostitution.” It is not especially surprising that Qatar has done next to nothing to improve the conditions of its migrant workers or reduce inequality between natives and expatriates; that would mean sacrificing its utopian economic status. Hence the exploitation of non-Qataris, who comprise 94% of the country’s labor force, continues.

Of course, unbridled capitalism rarely leads to such an economically successful but perfectly disgusting situation as in Qatar. However, we must always make sure that our focus on prosperity does not interfere with basic human rights. Economists may mostly talk about maximizing growth or keeping prices stable, but we should never forget that the most important goal of economics is to help people, not help the economy for its own sake.