An efficient economy

The financial crisis that began in 2008 has revealed that there is something not quite right about the way that we run our economy: reckless bank loans; debt being sold as a commodity; governments supporting the banks and reducing public expenditure; an increasing proportion of the proceeds of production going to capital, and a decreasing proportion to labour, reducing demand and increasing personal debt. As Galbraith puts the solution: ‘Sufficient equality in the distribution of income, within a country, is a proper goal of efficient economic policy, and is part of a strategy for shared prosperity and full employment; it is both effect and cause.’

Trades unions used to extract from the proceeds of production a sufficient return to labour to enable households to consume the products of capitalism and thus maintain it in existence. This process is now in a state of collapse, so we need to find a new way of redistributing income that ensures that we can increase rather than decrease economic efficiency. Economic theory recognises that an original distribution of incomes is not necessarily the distribution required to achieve the most efficient allocation of resources. We shall need taxation that does not interfere with the preferences of those being taxed, so we shall need a tax that cannot be affected by the payee's behaviour. This is called a ‘lump sum’ tax. A Citizen's Basic Income would be a negative lump sum tax, and so might be more efficient than benefits that can be affected by our behaviour.

But how large should a Citizen's Basic Income be in order to maximise efficiency? Presumably quantity of supply needs to match quantity demanded. This condition will be met if the level of the Citizen's Basic Income is equal to a subsistence income. However, the revenue required to pay such a Citizen's Basic Income needs to be collected in such a way as not to compromise economic efficiency, and it is difficult to see how lump sum taxes could achieve that. We shall therefore need to balance the efficiency offered by a Citizen's Basic Income with the inefficiency created by income tax and other taxation.