The fundamental originating principle of law and economics (L&E) is that legal decisions should be (and are) based on maximizing efficiency.
increasing it is all we can hope for. The Law says, in a civil suit, if the parties can come to an agreement- let them do so by all means. Litigation should be the last resort. Allocative efficiency improves where I exchange something I have little use for and the other party to the transaction gains more than they have to give up.
But L&E proponents do not define “efficiency” in the way agreed to by most economists, as Pareto Efficiency.
Ronald Coase explained that opportunity cost is a global concept. It is intensional. We don't know the true 'extension' of 'opportunity cost of doing x'. We only know what appears to us now to be the next best alternative. Later we may find out it is something else entirely. This means that there is scope for a 'masked man' or 'intensional' fallacy whereby we pretend that the term 'opportunity cost', and thus the 'preference' which minimizes it, has a well defined extension and thus obeys Leibniz's law of identity.
Incidentally, 'transitivity' is only desirable if opportunity costs are known irrefragably in advance. There can be no growth of the knowledge base with respect to it. Thus, where there is Knightian Uncertainty or else there are information asymmetries or gaps in knowledge, transitivity is wholly undesirable. We need to be exploring the fitness landscape or otherwise expanding our knowledge base. That is the 'regret minimizing' solution
A Pareto optimal condition is obtained when no one can be made better off without making someone worse off.
Sadly, nobody can know whether any situation is Pareto optimal. This is because of Knightian Uncertainty. We don't know all possible states of Society. Even when it is obvious that everybody will be better off if a particular change is made, there can still be 'hold out' or 'free rider' or other such problems.
Pareto Improvements are win-win changes where no losers exist.
In practice, they are merely voluntary, uncoerced, not repugnant or unconscionable, transactions such as would happen anyway and which it would be costly to prevent happening. I live on the ground floor. My upstairs neighbor breaks her leg. We exchange flats. What's wrong with that? The answer is that if men- many of whom have penises- can transact freely with women- who seldom have penises- it is inevitable that Patriarchy will cause Neoliberalism to RAPE the Environment. Stop it now!
In the judicial system, however, there are always winners and losers, because under Article III § 2 of the Constitution a legal case does not exist unless there is a justiciable “case or controversy” in need of resolution.
No. A legal case can result in both sides winning or both sides losing and some other party gaining. Suppose, I want to do a deal with a Trust I established. The Trustees may need a Court judgment to show there was no 'self dealing' or unconscionable aspect to the contract. In India, there is the further absurdity of two Government Departments putting the onus on the Bench to decide the basis on which they can complete a transactions. The Civil Servants want to cover their own asses or just enjoy delaying everything for a few years.
Unable to use Pareto Efficiency, L&E scholars have been forced to adopt alternative definitions of efficiency.
In any given context, Pareto just means 'let peeps transact unless the thing is repugnant, unconscionable, or involves some tort arising from externalities, information asymmetry etc, etc. ' But the Law already says this. Things only become justiciable if some party directly affected petitions the Court.
What about Competition policy?- more particularly the notion that an increase in market power is always bad? Should we mindlessly apply a rule which prevents a 'natural monopoly' exploiting economies of scope and scale which yields lower costs to industry and hence a lower cost of living for citizens? No. If we fuck up our big businesses, our industrial base will shrink. We will become dependent on China or some other jurisdiction.
The problem with markets- indeed the problem with people- is that they can suddenly become very pessimistic about the direction in which a Society is going. Sometimes, dictatorial method, backed by what appear to be draconian laws, are needed to create 'positive vibes'. But that comes under 'doctrine of political question' in Law and 'Muth Rationality' as involving a Brand of Political Economy which has a good theory of 'exigent circumstances' or Schmittian 'state of exception'. But this isn't hard to supply.
Most L&E scholars claim to define “efficiency” based on the work of Kaldor and Hicks,
i.e. go ahead if the winners gain more in total than the losers. But this is actually a Public Finance doctrine. Approve the thing if tax revenue rises. Don't if it falls. At the margin, this is self-reinforcing. The Law can kick against the pricks but what you end up with is a smaller and smaller realm where Hicks-Kaldor improvements are not allowed while servicing the Fiscal deficit quietly increases transfers to the Rich.
but (perhaps unwittingly) instead use a definition of “efficiency” derived from the 19th century idea of consumer surplus, which encompasses L&E notions such as “wealth maximization,” and “consumer welfare” in antitrust.
What's wrong with us having lower prices? Should we really break up Google so as to enable the local organic goat farming collective to give us access to their search engine for only 50,000 dollars a week? Yes. I happen to know that the goat who does the searching is Lesbian and has massive Student Debt and, between you and me, has been showing a worrying tendency to wander down to the doner kebab place and make sheep's eyes at the hirsute grill-cooks there.
Neither of these alternative definitions is viable, however. Outside of L&E, the Kaldor-Hicks approach has long been recognized to be riddled with logical inconsistencies and ethical failures, and the surplus approach is even more deficient.
Academic Economists have low IQ and tend to have a paranoid view of the world. But L&E aint about Economists. Its about how we run the country. Do we mindlessly fuck up our big Corporations by refusing to let them tap economies of scope and scale or do we want to remain competitive with respect to China?
The answer, of course, is that we must fuck up all our wealthy and talented people. Let them sod off to China or wherever. We need to get young people in our country to stop working for the Rich or, worse yet, themselves becoming rich. Everybody should become an organic goat farmer. Nobody should have any money to pay taxes. Then the Government will stop being the tool of the rich. Also, that nice Chairman Xi will be running our country. I'm sure he will give us lots of Panda bears to hug. Sadly, he may want to re-educate Muslims in concentration camps.
Critically, all definitions of efficiency improvements in economics are biased in favor of wealthy individuals or firms, either because they are dependent on the status quo ante distribution of assets, or because they bestow large advantages on parties with political influence or who can afford to bring lawsuits quickly.
Yup. Justice is a Service industry- that's true enough. If it serves the Rich, the country will have an increasingly affluent appearance. If it serves the poor organic goat farmer, it will look like a goat shat on it.
Many L&E practitioners treat efficiency improvements instead as being objectively good,
which is what they are. If everybody involved agrees a particular transaction benefitted everybody or, at least, harmed nobody- then, objectively, the thing is a fact.
Subjectively on may say that an objective fact does not have the same 'intension' as its extension. For example, everybody may agree that a guy who is teen feet tall is 'tall'. Indeed, he fits the extension of 'the tallest man in the world'. But, subjectively, his wife may say, if she finds him porking her sister, 'You aren't a big man at all. You are a very small man. Indeed, morally speaking, you are a fucking dwarf!'
an error revealing that L&E is primarily motivated by its neoliberal policy agenda.
These guys are 'motivated' by something sure enough. Perhaps they are interested in the goat previously mentioned
Our authors say they will be
showing that there cannot be interpersonal comparisons of utility.
This is foolish. We do such comparisons all the time. They are the basis of Tardean mimetics. 'I'll have what she's having' we say when we hear a fellow diner, in the restaurant, experiencing orgasmic pleasure. More generally, for any useful activity with a large enough, open enough, market, there will be a number of public signals which encode 'interpersonal comparisons'. Thus, I can easily find what is the right diet for me given my age, religion, racial origin etc. The advise I'm given is based on observations of a large set of individuals. The right foods for me are the ones I can turn into the right outcomes for me. Since many other people are like me in some respects, interpersonal comparison is the basis of informed decision making.
In econ theory, when we speak of preferences or utility curves etc. we are speaking of 'intensional' objects as they would exist after all 'knowledge gaps' are closed. We don't know the real extension of any of them. We don't know how to 'constructively' go from our 'guesstimate' extension to what it should be once all sorts of interpersonal comparisons have been made and everything is common knowledge.
But this means that the 'methodenstreit' re. Cardinal and Ordinal was just 'masked man fallacy' bullshit. The Szpilrajn extension theorem means that just having a partial order is the same thing as having a full-blown Bergsonian Social Welfare Function. As Arrow put it if you can rank some pairs, and the pairs you do rank do not have any intransitivity, then you can generate a complete rankings of all pairs which respects the original incomplete ordering. Since individuals have transitive preferences, Pareto ranks are transitive, and hence we know there exist social welfare functions which “extend” Pareto.'
A lot of our language and behavior and social interaction and politics and diplomacy is about comparing ourselves to others. Are they getting more out of what they consume? This goes for political regimes as well. We may feel we want to be more like Biden's America and less like Putin's Russia even if both countries have the same material standard of living. The fact is Putin starts unjust wars. Biden doesn't.
Economic Efficiency is Pareto Efficiency Vilfredo Pareto, in his Manual of Political Economy first published in 1906, was one of the first economists to reject cardinal utility and the interpersonal comparability of utility. His replacement for “the sum of utilities” as the basis of economic policy today bears his name: “Pareto Improvements” are defined as changes in which at least one agent is benefitted while none are harmed.
Pareto used the term 'ophelimity'. Why not just say 'money'? I suppose that would have been considered vulgar. Still, the fact remains, money is what fiscal authorities introduce so as to increase Pareto efficiency and to gain more tax revenue in return for which they provide public and club goods and collective security of a basic kind.
(The amount of benefit, which would be cardinal, is irrelevant: only direction matters.)
Should the law permit any Pareto improvement whatsoever? No. Some transactions are unconscionable or otherwise repugnant. Moreover, some agent not currently present may be very badly affected.
The bigger problem with Pareto is that though we can be sure people value what they pay for if the price is high enough, we can't be sure they aren't lying when the claim to place great value on something they own for a strategic reason. Thus, if you say-' listen, you haven't used your exercise bike since the lockdown, mind if I take it?' I may pretend I care greatly about it in the hope that you'll offer me a good price for it. There can be a 'hold out' problem. In more significant contexts- e.g. land acquisition for a vital job-creation project- Courts can help everybody by cutting through the 'Preference Revelation' problem. This is where mechanism design comes in.
Pareto defined, for the first time, the word “efficiency” in the context of economic policy: he defined a situation to be “efficient” if no Pareto Improvements from it are possible— i.e., there is no possible change that would benefit one agent without making another worse off. Then, Pareto asserted that the purpose of economic policy should be to eliminate any situation that is not Pareto Optimal.
But this would happen through 'interpersonal comparison' and 'transferable utility' (i.e. money changing hands) in any case. Pareto, obviously, wanted Italy to get rid of various 'paternalistic/ corporatist, Listian and other barriers to trade. It must be said, the Italians were vastly better read in Latin and Greek than most Anglos. They knew the Epicurean Greek economists. There's a dude mentioned in Cicero whom, in England, was only known as a poet. Thus, we didn't get what Cicero was really saying in the in Pisonem. Things may have been different in Civil Law jurisdictions. The truth is, neither the Law nor current Econ theory matters very much if the people of a country are determined to rise up. Institutions don't matter. People do. This is why we must fuck up the Economy so as to give goats an equal chance.
This “Pareto Principle” uses only ordinal utility and no interpersonal utility comparisons.
but my preferences are either 'revealed'- i.e. empirical', or, if they are 'intensional'- then the extension is 'the ordering I would have if everything was common knowledge'- including interpersonal comparisons without any preference revelation problems. This means all mutually beneficial transactions can immediately and costlessly occur without any 'hold out' or 'free riding' or other strategic behavior.
Essentially, things like Language, Economics, Politics, the Law, Science, Art etc. are decomposable as either coordination or discoordination games. It doesn't matter if a 'Muth rational' focal solution is not computable or 'canonical'- so long as, for a particular game, its direction is salient it still serves its purposes. That's as much as we can say. Reality is ideographic not nomothetic. Economia not 'akrieibia' is required. Law & Econ got salience because the 'akreibia' of rules based Competition Policy would have denied consumers significant benefits while giving International Competitors a huge advantage. There were other changes- e.g. the Federal Government letting inventors exploit patents acquired during tax-funded research and making it easier to turn software into intellectual property- all of which were 'Coasian'- i.e. they accepted that property rights didn't matter per se. What mattered was the nature of the incomplete contract. This led to a sort of Hohfeldian analysis of Control rights but, clearly, the thing is far more opaque, perhaps dysfunctional, than was envisaged twenty years ago.
Consider the following-
“Now it would seem that to obtain an efficient outcome, the total surplus – the sum of consumer and producer surplus – must be maximised.
Unless Knightian Uncertainty obtains- which it always does. Otherwise, Regret Minimization is the way to go. Hedge your bets. Don't get cocky. Tell Economists to go fuck themselves but don't let them bill you for it even if they make you watch.
'Otherwise, both the producer and the consumer could be made better off by redistributing resources
The moment 'redistribution' starts those with resources take them and run away while those with nothing show up with their hand out
to increase the total surplus, and then dividing the larger surplus among them so that each obtains strictly more surplus than before. But we must take care….” (emphases added). 20 while simultaneously using no more of any input”
Sadly, the guys doing 'redistribution' use up resources. If Governments do stupid shit then they have to skimp on doing smart things- like defending the borders.
Speaking of stupid shit, a central claim of the authors is
Pareto Efficiency Depends on Distribution: The Separation Hypothesis, Pie Analogies, and the “Efficient Allocation of Property Rights”
L&E’s free market ideology counsels that judges should ignore distributive justice
but, if judges didn't ignore 'distributive justice' nobody would go to court. Why? Only poor people would sue rich people. I demand large civil damages from Beyonce for sexual abuse. Judge has to award me a lot of money because 'distributionally' that is a better outcome even though nobody thinks a beautiful woman would touch me with a bargepole.
The Soviet Union did order judges to look at the class origin of defendants. A prole who raped a Nun should be compensated. The Nun is rich coz the Church has lots of money- right? She should be sentenced to a Gulag. Honest labor will help reform her character
and instead use efficiency as their sole criterion for adjudication.
Nope. Courts should not break up natural monopolies so consumers can enjoy low low prices and the Chinese don't eat our lunch.
This requires belief that efficiency improvements can be identified independent of distribution.
No it doesn't. Courts are welcome to look at issues of unjust enrichment. Suppose two firms start level in a market with non-convexities. By some justiciable maneuver, one firm starts growing much faster than the other. Maybe there is a tort, maybe not. Why not settle the matter with a share swap? The same point can be made w.r.t 'wasteful competition'. Legislation is one route. But Judges can encourage the same outcome. Coase said his intention was to promote a type of thinking whereby people settle rather than litigate. Internalize the Externality already! You know you want to. Doing it doesn't necessarily mean you are gay. Anyway, what happens in Coase's Theorem stays in Coase's Theorem.
We call this idea that efficiency improvements and distribution are completely separate from each other “the Separation Hypothesis.”
Coz giving a name to your Strawman shows you really care about it. Indeed, if you start beating the shit out of it, it's coz it's been very naughty. You are just trying to make it lead its best life.
A Pareto improvement forbids any agent receiving less than before. However, if someone gains more than before, 'distribution' has been affected. But, 'dynamic efficiency' can improve greatly when a guy gets more than he did before without anyone else losing anything. This is because a positive sum game has been found. Tardean mimetics- i.e. other peeps imitating this innovative guy- generates 'endogenous growth'.
We worry about 'distribution' in zero-sum games. One reason is because it can have disincentive effects. Basically the guys getting screwed may fuck off. But if 'distribution' worsens coz some peeps are making amazing new stuff everybody wants and needs then that's a good thing because of the dynamic benefits.
L&E often explains the Separation Hypothesis by using the analogy of a pie: increasing the size of the pie corresponds to efficiency improvements, while the way the pie is sliced and handed out corresponds to distribution.
This also how relationships of all types work. First we see that there is a positive sum game. Then we try to decide 'Shapley Value' based sharing so the thing is incentive compatible going forward. But, under an incomplete contract, sometimes we go to arbitration or even litigate so as keep the thing going.
To show that this analogy is not apt and that the Separation Hypothesis is false, consider an Edgeworth Box.
Don't. Pies have to be baked. You can't model this in an exchange economy. The solution concept here has to be found in the theory of repeated games.
If the “pie” analogy were correct, then in such an Edgeworth Box of a pure exchange economy, wherein the size of the box (i.e., the amount of each commodity) is fixed, efficiency (the size of the pie) would be fixed and unchangeable. Moves within the Box would only reflect changes in distribution not efficiency.
Suppose two people are needed to make pie. Pie is also the only consumption and capital good. There could be a 'contract curve' involving hours worked by each. But, with the best will in the world, if one is lazy or sick or greedy, less pie will be produced. But this also means efficiency can fall while distribution also worsens. This is because of the backward bending Labor supply curve where the Income effect swamps the Substitution effect.
Clearly this is not the case: changes in distribution like that from F to G, or even from F to a point halfway between F and G, generate efficiency improvements. It is as if changes in the way a pie is sliced affects the size of the pie.
D'uh! If it is a case of 'to each according to his needs' everybody slacks off. There is a general dearth.
Since actual pies do not behave in this way, the pie analogy in economics is misleading and should be dropped.
It's a fact that if people pay for pies, there's lots of pie. What is foolish is discussing how to carve up the pie such that pie-makers get none before any pie is baked.
The Separation Hypothesis says that efficiency improvements can be identified separately from distribution,
This is obvious. If all of us on this street could put our money together we could do stuff such that our property values rise significantly. We could all be better off. Why don't we actually make this Pareto improvement? Well, we doubt that poorer people will actually have the cash and then there are holdout or free-rider problems and so forth. The 'co-operative' solution is Pareto Efficient but we stick with the Nash Equilibrium because, truth be told, we are shitty people living on a shitty street. A smart developer may be able to do what we can't but the distributional consequence will be horrendous. Essentially, the smart peeps will sell up and fuck off. The Developer will bring in tramps and thieves who drive the rest of us out at rock bottom prices. Then that fucker pays bribes and gets planning permission for luxury condos or whatever.
but this example shows that distribution determines what points are and are not Pareto improvements.
No. Distribution can affect incentives which can make some Pareto improvements infeasible for implementation in a repeated game. But this has nothing to do with the Pareto frontier.
If we define the new term “efficiency improvements” to be a synonym for “Pareto improvements,” then we can say that distribution determines efficiency improvements.
No we can't. Finding the Pareto frontier is a matter for engineers. Suppose, like the Ukrainians we face 'total war'. Then the Government can get us all to go to a point on the frontier which involves many of us losing our lives and our property and so forth. Still, we'd rather be one of those who die rather than live as slaves. When I say we, I don't mean me. I'm not a Ukrainian hero. I'm a very cowardly old man.
This is a case where an endogenous event changes preferences. But a people may decide to stop being poor and work very very hard for two or three decades till, like the South Koreans, they have risen into affluence.
(Note that distribution does not determine the set of efficient points, which is the entire contract curve and is independent of distribution: thus, distribution determines efficiency improvements, not efficiency.)
No. Incentive compatibility permits these improvements though there will still be problems because of information asymmetry, agent-principal hazard and so on.
In an economy with prices there is yet another way to see that distribution affects efficiency. Suppose a society is composed of two factions, one that is quite fond of banana cream pies and the other that despises banana cream pies. In such a society, the value/“size” of a banana cream pie will be much higher if the first faction of people is rich and the second faction is poor than if the reverse holds.
Not necessarily. An economy with prices may be one which also has laws banning any particular type of commodity which the majority despise.
To extend this argument to an economy with production, suppose the only input to production is human-capital-adjusted labor. Suppose it is the only commodity in anyone's endowment. There are two types of people, Type A and Type B. Type A people like apples but do not like bananas. Type B people like bananas but do not like apples. Further, suppose that Type A has a large amount of human-capital-adjusted labor and Type B has very little. Under such conditions, the "optimal" allocation of labor is to put labor into the production of apples; producing bananas is not “productive.” But if Type A has very little human-capital-adjusted labor and Type B has a great deal, then the “optimal” allocation of labor is to put labor into the production of bananas and producing apples is not “productive.” So “100 apples and 0 bananas” is “a big pie” in one situation and “no pie at all” in the other situation. Distribution of endowments determines pie size, thus disproving the Separation Hypothesis.
This would not be an economy. There is too much preference diversity. The relevant result is from Chichilnisky & Heal. Essentially we have a discoordination game. The two types of people should separate. Type B's need to go somewhere where everybody likes bananas and not all of them are utterly shit at producing stuff.
This also means, in turn, that if one measures “output” using market prices, as for example is done in calculating GNP, then one’s measure of “output” depends on the distribution of wealth.
Which according to these two assholes, depends on glaring disparity in preferences and productivity between dusky folk who eat bananas and decent white folk who eat apples. Why not just say 'surely it would be kinder to repatriate colored peeps to some nice cannibal-free part of Africa or India or whatever?' Oh. That wouldn't be 'politically correct'. Let us instead suggest that we must break up all our big Corporations and drive our living standards down because dusky folk are only happy if they have a banana once in a while. They don't need nice houses or cars or smartphones. Bananas are what they are into. Also watermelon.
The concept of economic “output” is distribution dependent.
There won't be any fucking output if you keep talking about distribution and pointing at dusky folk and whispering 'Bananas. That's what they really want.'
The goal of proponents of the Separation Hypothesis was to separate economic policy questions into two aspects, “efficiency improvements,” which economists and judges could “objectively” identify, and
rent allocation. Clearly where there is a natural monopoly, there will be economic rent. That is the pie for which, since Regulatory Agencies get captured, White Shoe lawyers sharpen their knives. These two nutters are hoping to promote 'Law & Political Economy' as an alternative to 'Law & Econ'. Sadly, the thing is stupid shit.
“distribution improvements,” which they could not. However, the set of points which are Pareto Improvements completely depends on what the original distribution was,
Any point closer to the frontier is a Pareto improvement. The original distribution does not matter. Borrowing or stealing or cheating can cause a Pareto improvement.
and distribution affects prices, which in turn affect the valuation of any commodity bundle.
not if all are price takers on open markets- which is what was increasingly the case till quite recently.
Therefore, the notion that efficiency improvements can be determined independently of distribution is false.
No. Efficiency improvement are easily identified. The distributional consequences are zero or incalculable.
(d) The Coase Theorem Does Not Support the Separation Hypothesis. The “Separation Hypothesis” entered economics in the first part of the twentieth century via Kaldor and Pigou (supra note 63), but it entered the L&E tradition in 1960 via the famous Coase Theorem, which states that one may obtain “the” efficient outcome regardless of how property rights are distributed. This conclusion flatly contradicts the argument against the Separation Hypothesis we just made in Section III.G.1(c), so it is impossible for the Coase Theorem and our earlier argument to both be true under an identical set of assumptions.
But the guys who developed the Coase theorem were smart. These two jokers are as stupid as shit. Essentially, the 'intension' baked into the 'Separation Hypothesis' has to do with a non computable object-viz the Pareto frontier- which, however, purely technical, engineering type considerations, can enable us to estimate. What the Hypothesis depends on is there being some feasible 'backward induction' based non-coercive path to that point on the Frontier. This may involve a bargaining game. It may involve cheating or delusive propaganda. But, it a coercive authority can do it, there is also a non-coercive way to get the same outcome. However, the folk theorem of repeated games, which says the same thing, may only hold if we introduce some bizarre mechanisms. Still, the fact is, polities often show people sacrificing their own self-interest for a patriotic purpose. Our soldiers fought as valiantly as Stalin's soldiers though they were at risk of being shot by Political Commissars.
Recall, we make all the Arrow-Debreu assumptions of market perfection, and therefore our task in this subsection is to show that under those Arrow-Debreu assumptions, the Coase Theorem is false. Note that the Arrow-Debreu assumptions rule out strategic behavior and transactions costs. Therefore, our discussion will be quite different from the discussion of many other Coase Theorem critics, who show that the Coase Theorem fails upon the introduction of strategic Coasian Bargaining considerations or who show that it fails upon the introduction of transactions costs. In contrast, we demonstrate that it fails even in the absence of strategic behavior and even in the absence of transactions costs
But you guys are as stupid shit. Arrow Debreu assumptions mean that there is a General Equilibrium. Fuck is the point of doing comparative statics if that obtains? All you can say is that if there are Income and Hedging effects, then the outcome is 'anything goes'. But that doesn't alter the thrust of either Coase's theorem or the folk theorem of repeated games. Who owns what doesn't matter. There not being a Planning authority doesn't matter. If people can do deals, the outcome can be just as good.
On the other hand, improving access to information and lowering transaction costs will always, ceteris paribus, lead to Pareto improvements.
The Equity-Efficiency Tradeoff Fallacy
the more evenly one cuts pieces of the pie, the smaller the pie becomes.
If you look at a Company which employs 100,000 people would you expect to see everybody earning the same wage? How about a couple of guys running a hotdog stand? Would you expect to see a big difference in their remuneration?
In other words, it holds that policies promoting equity damage efficiency. In this subsection we prove this position similarly fallacious. In an Edgeworth Box of a pure exchange economy,
there are no work disincentive effects
it is easy to disprove the contention that increasing equity impairs efficiency.
You can't prove anything about efficiency in an exchange economy even if markets don't clear.
as a theoretical microeconomics proposition, there is no necessary tradeoff between equity and efficiency,
No. Equity and Efficiency are 'policy targets'. There is a tradeoff between them. A small change in equity has zero impact on efficiency, bigger changes may have proportionally bigger effects. If you take one dollar from everyone earning more that 100,000 and divide it up among those earning less that 30,000, there is no effect. But as the percentage of income deducted increases you will have efficiency effect. The young and smart go elsewhere.
and the “Equity-Efficiency Tradeoff” is a fallacy.
No. There is always a trade off, ceteris paribus. This is like Kuhn's no Neutrality theorem or Tinbergen's Rule that policy instruments must be equal to policy objectives.
True, Karl Marx had some Hegelian theory about how, after scarcity ends, everybody would make stuff just for the pleasure of it which they'd give away to anybody.
The Second Fundamental Theorem of Welfare Economics extends this argument. It says that “we can achieve any desired Pareto Optimal allocation as a market-based equilibrium using an appropriate lump-sum wealth distribution scheme.”
This was the justification for the 'salt-tax' in India, or the 'hut-tax' in European colonies in Africa. Since the natives could feed themselves it was difficult to get them to work on plantations growing cash crops. Do we need to introduce slavery? No. A lump sum tax is good enough. We still whip the darkies but not because they are slaves. They are tax defaulters.
What would happen if we said to wealthy tax-payers- 'pay us this lumpsum tax based on what we expect your income to be'.? The answer is that they would work harder and earn way more money. Because their marginal rate of tax went to zero, they had a stronger work incentive. Their average rate of tax went down. The rich just got richer- again!
Lump sum taxes are a theoretical way to get rid of 'excess burden'. But Economic rent disappears in the long run because all factors are elastic. Ultimately, taxes are 'the price of civilization', This means a mix of public goods and services which appeals to the tax payer. Going forward, I expect to see more subsidiarity and 'Tiebout sorting'- i.e. local authorities offering different fiscal mixes to attract different types of tax payers.
However, if there is once again a threat of total war, subsidiarity will be off the menu
These two cretins quote Dasgupta & Heal who were too stupid to understand shit which happens to the environment or exhaustible resources can completely change what we think of as Pareto efficient. Remember the criterion is that no one be harmed, whether they know this is happening or not. Like opportunity cost, efficiency is a global concept.
'The fact that a vector of acts is Pareto efficient does not offer sufficient ground for it to be regarded as optimal—or even desirable.'
Dasgupta, being as stupid as Sen, didn't get that if an angel said this allocation is Pareto efficient then we'd be getting a lot of extra information. Our entire thinking & way of life would change. A Pareto efficient point is one that is kosher from the Green point of view. We'd love to know at least one configuration of our economy which is 'safe' from the point of view of our future generations.
'Typically, one would be concerned with the distribution of utilities, and it is possible that a vector of acts sustains an equilibrium [and is efficient]…and at the same time yields a distribution of utilities that one may deplore.'
Dasgupta is supposed to care about the Environment. That's his stick. As human beings we need to put virtue signaling aside and do what is good for future generations.
The Second Fundamental Theorem of Welfare Economics can help in understanding how social well-being could be enhanced by abandoning a Pareto Optimal point.
Fuck off! If we knew a point is Pareto Optimal- e.g. if an alien from a distant galaxy arrives to tell us this- we should think very very carefully before moving away from it. We might have to change the fiscal mix to remain in the 'safe' configuration.
If one started with an endowment point like S or E but then confiscated enough apples and bananas from Jones and gave them to Smith so that the endowment point was changed to F, then under the Arrow-Debreu assumptions, competitive trading from F will achieve an efficient point somewhere on the contract curve between I and H.
No it wouldn't. Confiscation is itself an economic activity. It uses up scarce resources. Jones and Smith may ally to kill Mr. Confiscator. They may also sodomize him and make trinkets out of his testicles. This may greatly enhance their felicity.
In other words, if society has a sufficiently great aversion to inequality, a one-time wholesale, even revolutionary, reassignment of property rights would—so long as afterwards property rights are respected and voluntary trades are allowed—enhance social well-being by moving society’s fate away from Pareto Optimal points S or E to I or G or H.
That is the theory. Sadly, Revolution is a sow which devours its own farrow. Look what happened to Condorcet. Incidentally, Malthus put forward his theory to show why Condorcet was fucked in the head. Even if you get demographic transition, sooner or later the locals will object to unrestricted immigration. Land is scarce. That's why wars happen.
In such societies, Pareto Optimality is clearly not sufficient for social optimality.
It is a necessary condition for it.
In an Arrow-Debreu world, most observers would agree that Pareto Optimality is a necessary condition for social optimality (in other words, no point which is not Pareto Optimal can be socially optimal). Given the monotonicity assumption of Section III.G.2(a), it cannot be socially optimal to refrain from engaging in a Pareto Improving move. However, in a nonArrow-Debreu world, suppose in Figure 1 that for some reason the points in the lens-shaped area generated by F—in other words, the points that belong to neither the “Smith Veto” region nor the “Jones Veto” region—are not feasible. A reasonable person might then prefer a nonPareto-Optimal point like F to a Pareto Optimal point like E, meaning that Pareto Optimality would not be a necessary condition for social optimality.
This is nonsense. It is never socially optimal to have a hold-out or free-rider or other such problem. That's where the law comes in. It adopts a 'reasonable man' test. Jones may have perverse or antagonomic or nosy preferences of an unreasonable kind. The court can decide his 'veto' can't be enforced but there's a slippery slope here.
The great strength of the Pareto Efficiency approach is that it keeps very far away from any attempt to measure utility change in a cardinal way.
Yet, you can't verify the thing without some such cardinal interpersonal comparisons. It's not as though we have angels on tap to say 'this configuration is at the Pareto front'. It is not enough to say everybody agrees they haven't been harmed and at least one dude is better off. You have to check that people are right in this matter.
utility changes simply are not cardinal.
if there is a partial ordering they must be cardinal. Anyway, what matters is money. It is 'transferable utility'. Courts can put money values on stuff where markets are ambiguous or missing.
We understand the motivation to wish that utility changes were cardinal.
They are. Go pick a fight with Szpilrajn's Extension theorem.
It would be wonderful if economists were able to say that “John Doe values one apple at two bananas”
This is true if we can see him repeatedly trading at this ratio.
or “John Doe values one apple at $1.23.” But economists cannot say such things.
Yes we can. But, as economists, we add a qualifying 'ceteris paribus'.
One of the most fundamental questions in all of economics is “what is the value of a commodity?”
Fuck off! The only fundamental question in econ is 'will I get paid for this?' followed by 'will I get paid more if I pretend to be the Mother Theresa of this worthless shite?'
In the same way there is no single number that is the right measure of human blood pressure—there are two numbers (the systolic and diastolic pressures), equally valid and important though different—there is also no single number that is the right measure of the economic value of a commodity to a person—there are two numbers, equally valid and important though different.
But value is not like blood pressure at all. Why mention it? Is it coz u r stooooopid? The value of a commodity is its price. That is because a commodity is defined as something which can be acquired or disposed off at a price.
One is the value a person puts on a commodity he or she has been given (for free);
Like when the cat gives Mummy a sparrow it killed. Mummy may pretend to be delighted but Mummy isn't really. Also, you remember how she said that picture you drew was wonderful and that she'd put it up on the fridge? She was lying. What she wanted to say was 'get a fucking job you lazy sod!'
the other is the value a person puts on that same commodity if he or she will not be given it.
What I do, when told I won't get a slice of cake because I'm a lazy sod and should have got a job twenty years ago, is say 'Mummy crapped out that cake. Seriously, it is shit. You are eating shit! I'm not jealous of you at all!'
These numbers are different because in the first situation the person is richer than he or she is in the second situation, and a person generally behaves differently when he or she is richer than poorer. One way economists approach understanding economic value is by imagining a consumer, say Ms. Smith, who possesses no apples and five bananas, and asking how many bananas Ms. Smith would be willing and able to pay (“WATP,” traditionally shortened to “willing to pay,” “WTP”) for an apple. A second approach is to determine how many bananas Ms. Smith would be willing to accept (“WTA”) as compensation for not receiving that apple. We will see that in general, WATP, which is measured assuming Ms. Smith has become better off by receiving the apple, is not equal to WTA, which is measured assuming Ms. Smith will never receive the apple.
This is stupid shit. The idea here is to get an estimate of consumer and producer 'surplus'. But that depends on substitutability and complementarity. It isn't intrinsic 'value' of any type. Since the Government is itself the provider of substitutes and complements, it must look at the Fiscal consequence of the change. That yields a univocal result. Obviously, the 'political cost' for the existing administration may diverge from this. But that is a corrupt consideration- i.e. one which could be trumped by an even more corrupt counter proposal. Thus, there is a 'Muth rational' and univocal solution based on the uncorrelated asymmetry constituted by the interest of the deciding body. Even if the judiciary is independent, it should uphold what is eusoical. But that is the 'bourgeois strategy' of the Government. It is a separate matter that the bunch of crooks and cretins currently in power don't give a shit about the public interest. Nevertheless, all branches of Government must aim at what is good for Government.
To be frank, there is nothing wrong- in principle- with having mechanisms for Social Choice which involve voting with dollar bills. Still, the way 'transferable utility' is doled out so as to get agreements does militate for an intellectual industry of purely nuisance value. That's where 'Law & Political Economy' comes in. The idea is to create a nuisance which may attract a subsidy. It's like 'Creation Science' getting some money so Evangelicals have a stick to beat the Left with.
America has lots of billionaires for whom it is advantageous to give money to Foundations which fund this type of stupidity. But it is a nuisance and sooner or later, it must be curbed. That's Pareto optimality right there.
On the other hand, we may well ask, why should there not be a market for 'comparative evaluations of different distributions of income'?
There are markets for the comparative evaluation of all sorts of goods and services. Why not one for 'different distributions of income?'I suppose the authors mean 'univocal evaluations of different distributions of income'. However, since Income is defined, in Econ, as what you can spend without reducing your Wealth and thus your future income stream from that Wealth, and since the future fitness landscape is characterised by Knightian Uncertainty, it follows that there is a coordination problem here which can yield a Muth Rational result. In other words, mathematically, there is a canonical determination which, though not computable in itself, nevertheless fulfils an asymptotically Pareto efficient coordinating function. Indeed, if people have Rational Expectations, then reduced uncertainty means a Pareto improvement occurs.
Thus nothing can rule out 'comparative evaluation' re. income distribution- least of all considerations of efficiency.
No comments:
Post a Comment