Saturday, 30 May 2015

Welfare Economics is the gift of the Grinch.

Welfare Economics is about pretending to know what is good for Society. It is taught at University to people too stupid to become Physicists or Doctors and too egotistical or greedy to be content with mindless clerical employment.

It has 2 fundamental theorems which, taken together, state that if a guy has perfect information, zero transaction costs and the power to take anything from any other guy and give it to whoever he pleases, then he can ensure that any physically feasible state of the economy can come to pass.

If  he so wishes, these states can be Pareto efficient- i.e. no one could be made better off by doing a trade with someone else.
Suppose he is so mean as not to wish that this should be the case. In other words, suppose this guy is a real Grinch and enjoys taking away your copy of Roberto Unger's latest monograph and replacing it with my copy of Mega-melons monthly. Then, supposing both you and me have perfect information and zero transaction costs and markets for everything exist, then there is some sequence of trades we can both do such that the Economy still reaches a Pareto efficient outcome.

Thus, the 2 fundamental theorems of Welfare Econ, taken together, state that if and only if
1) there is a God like omniscient guy who can just give or take anything from anyone
2) he's a Grinch who enjoys fucking with us
Markets can be a good thing provided everybody else has an equal God like omniscience and there are no transaction costs and markets for everything exist.

An Economist reading this might say 'Quite false! Perfect information only means knowledge of the price vector nothing more.'
The problem here is that there are markets for everything so everything is easily knowable.

The second fundamental theorem assumes the ability to levy non-distortionary lump-sum taxes. This can only be done if some agent has perfect knowledge of everybody's preferences & endowments. But this knowledge suffices to make the market redundant unless the agent possessing it is also a horrible meanie.

Thus Welfare Economics owes its existence to the Grinch.

However, even if all agents have equal God like omniscience to the Grinch, the Market would still fail to yield Pareto optimality unless all agents were also equally horrible meanies who didn't care that they might be entering 'repugnancy markets' simply to satisfy their own selfish desires.
(This follows iff it is morally repugnant to efface all traces of a spiteful injury such that no Consequentialist burden of guilt or Virtue Ethic marker of shame or Deontological evidence of infraction remains visible)
In other words, it is not enough that the Grinch create Welfare Econ, it is also necessary for that Subject's continued existence that all agents engage in a devout imitatio of the Grinch so as to secure the imprimatur of Pareto optimality for any Market activity which the mean-spiritedness of the Grinch has left scope for.

Welfare Econ could get rid of the Grinch by embracing imperfect information, missing markets and so on but- and this is the beauty of Greenwald-Stiglitz- by showing that, if such conditions obtain, the Govt. can always improve everyone's welfare with some mix of taxes and subsidies, what actually happens is that the Grinch is resurrected as that very Government!
Suppose a Stationary Bandit- i.e. a Govt.- isn't a Grinch at all. Suppose it devotes itself to improving everybody's welfare by plugging missing markets, reducing information asymmetry, promoting Golden path focal points etc. Muth Rational agents would recognize this to be the case and join the Govt. thus gaining a higher return on their productive power. Non Muth Rational agents would find themselves confined, this is the evolutionary stable strategy, to a turbulent margin of the economy- a series of repugnancy markets damming up 'capacitance diversity'. But this would mean Welfare Econ would itself be a repugnant market for ideas. To rescue itself from this fate, it has to take the Grinch like nature of the Govt. as its fundamental axiom. After all, it is only because the Govt. is such a Grinch that it isn't already doing whatever Stiglitz decides to tell it to do.

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