The Statist Policy Dilemmas of Liberals from Keynes to Piketty within the Framework of Pareto Optimum

While economic and political actors in society attempt to maximize their benefits within the framework of rationality, social benefit often fails to be maximized. The term introduced by Pareto and expressed in economic literature as Pareto efficiency, Pareto optimum, or Pareto optimality, states that it is impossible to improve the situation of one producer, consumer, or factor owner in society without worsening the situation of another.

In other words, it explains that it is impossible to increase the welfare of other individuals without reducing the welfare of at least one individual in society, and that this level is the “welfare optimum” level. However, this efficiency does not always yield the desired results from a social perspective. Although difficult to implement, the Pareto optimum should be considered in politics, political economy, and the programs of political parties and governments. Even if political parties have different priorities in economic, social, political, cultural, and other areas, “improving the quality of life of the citizen” should be the common and primary goal of every political party. In this context, a major policy dilemma of liberals from Keynes to Piketty stands out.

THE LIMIT OF FREEDOM AND PARETO OPTIMUM

When someone is asked what the limit of freedom is, the cliché answer is clear; it is defined as the level up to which one does not violate the freedom of another. A similar question: does the increase in the welfare of some individuals in a society bring about an increase in the welfare of the entire society? The answer is similar to the definition of the limits of freedom. While economic and political actors in society attempt to maximize their benefits within the framework of rationality, social benefit often fails to be maximized. The upper limit of the “selfish” understanding and behavior in society is the point where the freedoms of certain segments are restricted and sovereignty passes to a certain class.

If the phenomenon in question is approached from the perspective of economic benefit, we encounter the Pareto optimum. The term introduced by Vilfredo Pareto in 1906 and expressed in economic literature as Pareto efficiency, Pareto optimum, or Pareto optimality states that it is impossible to improve the situation of one producer, consumer, or factor owner in society without worsening the situation of another. In other words, it explains that it is impossible to increase the welfare of other individuals without reducing the welfare of at least one individual in society, and that this level is the “welfare optimum” level. Conversely, if an increase in welfare can be achieved, a “Pareto Improvement” is in question. According to Pareto, if every individual in society desires what is best for themselves and wants to make it permanent, after a certain point, increasing welfare will only be possible through a decrease in the welfare of another individual.

Pareto optimum is achieved through efficiency in both production and consumption. Can the Pareto optimum, which focuses on the efficient distribution of produced goods and services among people in society and how production factors distribute various goods and services, also take place in politics and political economy, and in the programs of political parties and governments? If it does, how should it be implemented?

PARETO OPTIMUM IN POLITICAL PARTY PROGRAMS

Political parties and governments try to include various economic, social, and cultural priorities in both their party programs and policies, and at times these goals can be mutually exclusive. What should be the ultimate goal of political parties and governments, how should they explain to the public why they want to be in power, and how should they convince the voter? Of course, every political party can include various priorities in its plans and programs that reflect its own ideology, and these priorities vary according to the country's conditions.

However, even if political parties have different priorities in economic, social, political, cultural, and other areas, “improving the quality of life of the citizen” should be the common and primary goal of every political party. So, how will it be measured whether the citizen's quality of life has improved compared to previous periods? How should quality of life, which is a relative concept that varies from country to country and even between different regions of the same country, be compared between countries and regions? The importance of the term expressed as Pareto efficiency or Pareto optimum emerges in answering these questions.

IMPROVING QUALITY OF LIFE AND SOCIAL WELFARE

The quality of life in a country consists of the sum of measurements in economic, social, political, cultural, and other areas. It should increase the welfare, benefit, and happiness of other individuals and actors in society without lowering the quality of life of any individual in society, without reducing the welfare or benefit of one, and without making anyone unhappy; in other words, it should improve the situation of other individuals and actors in society without worsening the situation of another. As long as this improvement exists, social benefit, welfare, happiness, and quality of life increase along with individual benefit, welfare, happiness, and quality of life, and the policies of political parties and governments are successful.

However, if there is no possibility to increase the benefit, welfare, happiness, and quality of life of one individual without reducing that of at least one other individual in society, then the benefit, welfare, happiness, and quality of life of that society have reached the Pareto optimum as a result of the currently implemented policies. In this case, political parties and governments need to make significant changes to their current programs and policies and implement alternative policies; otherwise, it means that political parties have failed to produce solutions to social problems and have completed their mission.

MARKET FAILURE AND THE STATIST POLICY DILEMMAS OF LIBERALS FROM KEYNES TO PIKETTY

The lack of demand that emerged during the Great Depression prevented markets from reaching equilibrium, and it was first proposed by Keynes in 1930 that equilibrium could only be achieved through state policies. In the struggle against a crisis that could affect the world and the capitalist system, John M. Keynes, with the motto “In the long run we are all dead,” proposed that even if one does not want statist practices, they must be put into effect with a short-term approach to economic problems. In this sense, Keynes wrote the prescription for overcoming the crisis by inviting “state intervention.” Thus, although Keynes was not a statist, he was able to propose statist policies when necessary.

Similarly, the French author Thomas Piketty, who is thought to have presented a critical approach to the capitalist system in his recent book “Capital in the Twenty-First Century,” actually presents the policies to be implemented as an “antidote,” even if they currently disturb the capitalist system. In his book, the author reveals that the rate of return on capital is increasing faster than the growth rate of nominal national income, and that this increasingly distorts wealth distribution in favor of the rich; after revealing that the problem in capitalism is not the falling rate of profit as Marx predicted, but rather that wealth is historically and stably concentrated in the hands of a privileged group, he assigns tasks to the state, primarily through progressive wealth taxes that should be implemented, and discusses the necessary measures.

The book has caused a great stir in the world and has even disturbed some proponents of liberal views. Whether it is the discomfort of some segments or because the subject is very important, the bombardment regarding the data in the book was started immediately. The criticisms regarding data security initiated for Piketty bring to mind the Reinhart-Rogoff debate.

The set of rules in capitalism that pushes individual benefit to the maximum is actually valid within the social-cultural relationships we live in. Pushing benefit to the highest level can sometimes disrupt the functioning system and cause damage. Even Keynes and Piketty, who are considered liberal economists, can sometimes appear “statist” in order to add insurance to the system. In fact, the measures or policies proposed are merely a repair of a flat tire, in other words, a market failure, and are a tool to keep the system running healthily. When the market cannot overcome this failure on its own, it becomes inevitable for the state to intervene in the market with various tools and regulations.

In summary, both Keynes and Piketty, who are considered liberals, proposed that because the market cannot reach equilibrium on its own due to reasons called market failure that can also occur cyclically, the state should increase the benefit, welfare, happiness, and quality of life of other actors and individuals in society without worsening the situation of others through fiscal policy tools (public expenditures and taxes) to eliminate this market failure.

PARETO OPTIMUM IN THE FIGHT AGAINST POVERTY

The Pareto optimum is also of great importance in terms of poverty. While the world is busy with the idea of going to Mars, are we aware that the existence of people “dying of poverty,” which is a shame for rich countries, could harm rich states like a “boomerang” in the future? In fact, regardless of our income status, “poverty” and its solutions are a duty for each of us and a subject that needs to be thought about. This concept concerns not only individuals but also other countries. The world seems to have made great progress in terms of hunger and poverty, but the reality is not so.

In terms of creating a world free from poverty, OECD countries have committed to providing international aid to poor countries amounting to 0.7% of their GDP within the framework of sustainable development goals. However, developed countries other than the Netherlands, Luxembourg, and Scandinavian countries have not been able to meet the set target, and when the total national income of developed countries is taken into account, they have not even reached half of the target. In fact, while stagnation, inflation, and expansionary monetary policies are being discussed today, two birds could have been killed with one stone. Since the aid to be provided by countries will immediately turn into spending, it is of a nature that can be a balm, if not a cure, for problems such as “stagnation.” At the same time, the effect of the aid to be provided will not create a monetary result. They can contribute to the reduction of a global problem by using some of the funds created as a result of the expansionary monetary policies implemented in the recent period to improve the situation of poor countries without worsening the situation in their own countries.

EVALUATION AND CONCLUSION

The subject is broad and worth talking about and discussing. Understanding the unhappy segment and making the necessary allocation by determining their needs is actually a way of building a building that is earthquake-resistant. Therefore, the concept of Pareto Optimum seems to continue to be talked about in the future. As J.M. Keynes said, "in the long run we will all be dead," and the loss of the accumulation we have acquired along with us would be a loss of efficiency.

The Pareto optimum should be considered in politics, political economy, and the programs of political parties and governments. Even if political parties have different priorities in economic, social, political, cultural, and other areas, “improving the quality of life of the citizen” and “welfare increase” should be the common and primary goal of every political party.

We hope that from now on, decision-makers will start to show more effort in producing policies that will improve the situation of other individuals and actors in society without worsening the situation of another, taking into account that the decisions they make may create unhappiness in a large part of society while making a very small part of society happy.