The Equity-Efficiency Tradeoff under Capitalism and Market Socialism

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Abstract
This chapter presents a theoretical formulation and quantitative assessment of a third efficiency argument for pragmatic market socialism: the argument that the equity-efficiency tradeoff would be significantly more favorable under pragmatic market socialism than it is currently under capitalism. It also presents a simple general equilibrium model of the economy designed to allow convenient numerical determination of the equity-efficiency tradeoff, as well as the socially optimal level of taxation/redistribution. The chapter focuses on the differing equity-efficiency tradeoffs implied by the model as between capitalism and market socialism. It also presents numerical estimates of the equity-efficiency tradeoff for the capitalist economy and the pragmatic market socialist economy. Traditional socialists to a large extent base their critiques of capitalism on various alleged "breakdowns" of the Walrasian conditions in the real world. A favorable effect of pragmatic market socialism on ordinary labor may or may not be offset by unfavorable effects on saving and/or capital management effort.

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