A Stanford GSB economist argues that well-designed markets can address inequality while remaining competitive
If traditional economics can be boiled down to one idea, it’s this: Competitive markets, by maximizing supplier and consumer surplus, are the most efficient way to distribute goods.
“But then, all of a sudden, economists make this jump from the idea that markets maximize surplus to the idea that they maximize total welfare,” says Mohammad Akbarpour, an associate professor of economics at Stanford Graduate School of Business. He has doubts about that equivalence, as it’s built on the assumption that money has the same value to everyone: effectively, that $100 means the same thing to Bill Gates as it does to a family on the brink of eviction.
“What if we drop that assumption?” Akbarpour asks.
He does just this in a new theoretical paper coauthored with Piotr Dworczakopen in new window, a former PhD student at Stanford GSB, now at Northwestern University, and Scott Duke Kominersopen in new window of Harvard University. They find that, contrary to what classical economic theory holds, when there is inequality, a carefully regulated market not only produces fairer outcomes than a free, competitive market, but it does so more efficiently. On a practical level, this suggests that properly designed redistributive regulations like subsidized housing or minimum wages, which are often accused of being inefficient, can, in fact, outperform a competitive market while also generating fairer results.
That finding might surprise both fans and skeptics of market-based solutions. And Akbarpour realizes it requires a different way of thinking about the intersection of economic theory and policy. “When we started this project, almost everyone I talked to was against this idea, in part because of the philosophical case that you don’t know what’s happening in the brain of Bill Gates,” he says. “But if I were a policymaker thinking about the optimal way to run or regulate a particular economy, I’d feel pretty comfortable assuming that one dollar has less value for Gates than most other people.”
This piece originally appeared in Stanford Business Insights from Stanford Graduate School of Business. To receive business ideas and insights from Stanford GSB click here: (To sign up: https://www.gsb.stanford.edu/insights/about/emails)