Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 3 May 2014

Pareto, Inequality and Government Debt

Or is economics inherently right wing?

I noted in passing in an earlier post that Pareto efficiency was obviously not a value free criteria. So those who argue that economists should only look for Pareto improvements – changes where no one is made worse off – are making a value judgement. One, and only one, of its implicit normative assumptions is that inequality does not matter. For others see, for example, Elizabeth Anderson (pdf, HT Anon). Now you could argue that an assumption that inequality does not matter intrinsically is at least internally consistent with the conventional assumption that personal utility depends only on personal variables. However as that assumption is clearly incorrect, this is a rather weak defence.

(You could also reasonably argue that Pareto improving increases in inequality could have a negative impact on the personal variables of others that conventional economic analysis ignores. So, for example, rising incomes of the 1% - even if this initially comes from just increasing the size of the pie - allows that 1% greater political power, which they will subsequently use to redistribute income away from the 99%.)

This is hardly a new point. For just two recent examples of other posts saying the same thing: Richard Serlin here, and Ingrid Robeyns here. It only has to keep being said because too many students are taught that economists like the Pareto criteria because it is value free. One of the comments to that second post says that the task should not be to “import liberal or left-wing moral philosophy into economics. It’s to scrub right-wing, libertarian moral philosophy out of it.” Well, in my usual moderate manner, I’d say we should at least expose it.

A more sophisticated defence of Pareto optimality is the second welfare theorem, which says that we can separate issues of distribution from issues of allocative efficiency. So, if some Pareto improving measure only makes the 1% better off, we can go ahead with it and deal with any reduction in social welfare generated by additional inequality using lump sum transfers. One obvious problem with this idea is that there are no lump sum transfers. Another is that we do not as a society decide at some date every year what the optimal distribution of income to implement is. In practice the only chance of reversing any inequality created by a Pareto improving measure is to use compensation alongside that measure, but then agents will recognise this connection which in turn will influence incentives.

The only possibly original point I wanted to make here is that the absurdity of restricting policies to Pareto improvements becomes immediately apparent if we think about government debt. Measures to reduce currently high levels of debt will almost certainly make current generations worse off, because they will have to pay the taxes (or whatever) to get debt down. Yet I do not often hear people arguing that we have to let debt stay high because the government can only implement Pareto improvements. If you think about it for a second, restricting government debt policy to Pareto improvements would be a sure fire recipe for deficit bias.

While this may be obvious, textbooks still make a big deal of dynamic inefficiency. This is the idea that the amount of productive capital in society can be too high, so that too much output is going to preserving that level of capital (replacement investment to offset depreciation etc), and not enough to consumption. If that is true, then if the current generation saves less, everyone can be made better off. Government intervention to discouraging saving would be a Pareto improvement: the current generation consumes more because they save less, but future generations consume more because less output needs to go to replacement investment.

The symmetrical case is where there is too little capital, which also reduces long run consumption compared to what could be achieved. Yet the implication in many textbooks is that this case is not one we should worry about, because to change it (by raising saving) would make the current generation worse off and is therefore not a Pareto improvement. The discussion in Romer, for example, is all about whether economies are dynamically inefficient rather than sub-optimally small. We don’t think this way about government debt, so why should we when it comes to productive capital?

Why is there this emphasis on only looking at Pareto improvements? I think you would have to work quite hard to argue that it was intrinsic to economic theory - it would be, and is, quite possible to do economics without it. (Many economists use social welfare functions.) But one thing that is intrinsic to economic theory is the diminishing marginal utility of consumption. Couple that with the idea of representative agents that macro uses all the time (who share the same preferences), and you have a natural bias towards equality. Focusing just on Pareto improvements neutralises that possibility. Now I mention this not to imply that the emphasis put on Pareto improvements in textbooks and elsewhere is a right wing plot - I do not know enough to argue that. But it should make those (mainstream or heterodox) who believe that economics is inherently conservative pause for thought.    


30 comments:

  1. "Couple that (diminishing marginal utility) with the idea of representative agents that macro uses all the time (who share the same preferences), and you have a natural bias towards equality."

    I don't understand this sentence. Why is that? Thks.

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    1. So if agents are all alike in their preferences, you can increase aggregate utility by transferring consumption from those who consume a lot to those who consume much less.

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    2. How is diminishing marginal utility intrinsic to economic theory?

      The ordinal scale of utility functions imply that you can apply any positive monotonic transformation of your liking to it. Take a log-linear Cobb-Douglas with two goods and solve the bordered Hessian. You'll get the appropriate constraint on the coefficients: both must be positive.

      Now, transform it back into its multiplicative form -- it's a valid positive monotonic transformation. You can use whatever positive exponent you like and the solution MUST be the same, with second order conditions still respected. However, you need fractions as exponents to get diminishing marginal utility for each good.


      So, I reiterate: how is diminishing marginal utility part of economic theory?

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    3. You discuss only choice under certainty. Economic theory also considers choices made under risk. In particular economic agents are, in fact, risk averse. To model choice under uncertainty, economists all use the concept of expected utility (while some note that assuming agents maximize subjective expected utility is an approximation).

      If one attempts to identify utility functions using choices under uncertainty, the utility function is determined up to an affine transformation (plus a constant and times a constant). Marginal utility must be diminishing if agents are risk averse.

      The bit about the representative agent is relevant, because once one assumes that agents have the same preferences, it is natural to assume they have the same utility function. All that is needed to decide how good is redistribution from the rich to the poor is that all have the same multiplicative constant.

      There is something odd going on when economists are willing to consider models in which agents all have the same preferences as a useful approximation, but consider the assumption that agents all have the same utility function to be going too far.

      It is also very odd that economists are willing to use models ( which include simplifying assumptions which we know are false) because we hope they are useful in analyzing policy but are not willing to make any assumptions about social welfare functions because we can't know those assumptions are true. Not known to be true is usually ranked above known to be false.

      Finally, the use of models implies that we consider small enough deviations of reality from the model to be negligible (the phrase "a useful approximation" implies this). But the Pareto principle requires us to ignore magnitudes and look only at signs. A tiny harm to one in 7 billion people counts as much as a huge benefit to all the others. In fact economists analyse which outcomes are approximately Pareto efficient. "Approximately Pareto efficient" means exactly precisely nothing.

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    4. As Samuelson noted in 1937 economists did not measure utility. And we still don't. We do measure the national accounts. But those are about flows of money, not about utility. 'Revealed preference' economics has also not succeeded in estimating still utility. Marketeers skipped the idea of 'utility' decades ago - as it does not help you to sell nylons. The reason is simple: people do not have well defined, consistent, transitive preferences, let alone 'diminishing marginal utility'. The concept of utility is a figment of the 'left brain interpreter, that part of the brain whcih continously makes up stories which tell us (itself and the other parts of the brain) that we are rational - even if we aren't. The Wikipedia entry about the interpreter, on why neoclassical economics is ergodic: "The drive to seek explanations and provide interpretations is a general human trait, and the left brain interpreter can be seen as the glue that attempts to hold the story together, in order to provide a sense of coherence to the mind.[3] In reconciling the past and the present, the left brain interpreter may confer a sense of comfort to a person, by providing a feeling of consistency and continuity in the world. This may in turn produce feelings of security that the person knows how "things will turn out" in the future." http://en.wikipedia.org/wiki/Left_brain_interpreter

      Reading Gary Becker will teach you how this works: twisting reality into a pre-conceived set of coherent and overly simple explanations, stating in about every second sentence that your way is the only and the best way to do it.

      Merijn Knibbe

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    5. Anyone who's ever actually studied people's happiness, or looked at stuff like Maslow's hierarchy of needs, or frankly anyone who's ever been both poor and rich, knows that the declining marginal utility of money is an *empirical fact*.

      It's not a linear decline. Hitting particular thresholds of money increases people's utility in fairly clear and provable ways (no longer hungry, no longer homeless, no longer has to work for a living, can indulge in expensive hobbies),

      The thresholds requiring more money are *less valuable* according to almost all coherent assessments of people's happiness.

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    6. Robert,

      thanks for that very helpful comment.

      I have always wondered whether a reluctance to make inter-personal utility comparisons is to blame for all this. What I mean is, if economists were more comfortable with making the useful approximation that we all have the same utility function etc. then welfare optimisation would entail redistribution, and questions of distributing the pie would (often) matter far more than trying to grow the pie.

      this makes me thinks that critics of economics should actively encourage economists to take the above approach and stop carping on about how problematic utility functions are and how interpersonal comparisons are inherently impossible etc. That road just leads to the current state of affairs where economists say oh we can't really say anything about social welfare.

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    7. "Reading Gary Becker will teach you how this works: twisting reality into a pre-conceived set of coherent and overly simple explanations, stating in about every second sentence that your way is the only and the best way to do it."

      I know it sounds bad having just passed away, but I think Gary Becker who was lionised by a lot of the profession, rather like Lucas, Sargent and Prescott, represented some of the very worst excessive of the discipline.

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  2. Recycling my take on Pareto optimality and the interpersonal comparison of utility from 1999 that even Brad DeLong liked:

    The injunction against interpersonal comparisons of utility became SOP in the 1930s after Lionel Robbins brought Frederich Hayek to the LSE. Tibor Scitovsky's (1950?) essay on the 'old' welfare economics versus the 'new' welfare economics raises the appropriate objections about this "no interpersonal comparisons" line.

    While it may be impossible to make interpersonal comparisons, it's impossible NOT to make them (since interpersonal comparisons are embedded within every individual's utility function). So just maybe it would be better to make them modestly while acknowledging their impossibility rather than to LOUDLY PRETEND to not make them and then covertly introduce them behind one's own back.

    "Pareto optimality" is obfuscatory hogwash. The the big covert interpersonal comparison of utility of the post 1930s welfare economics was introduced by Enrico Barone in 1908 and carried forward without objection or qualification by Abram Bergson in 1938. The spell cast by the Pareto-Barone-von Mises-Hayek-Robbins-Bergson mystification is marvelously convoluted.

    What it comes down to is a pseudo-mathematical proof that to optimize social welfare a collectivist state would have to perfectly simulate the workings of the free competitive market. The covert interpersonal comparison is introduced in a false identity equating output with welfare.

    In plain words, here's the interpersonal comparison: more stuff = better living ("as if the power of compelling or inducing men to labour twice as much at the mills of Gaza for the enjoyment of the Philistines, were proof of any thing but a tyranny or an ignorance twice as powerful.") It's as simple as that. Read the Barone.

    What's doubly shameful is how "Marxism" bought into this incredible regression. Oskar Lange thought the argument was just dandy and proposed placing a marble statue of von Mises in the hall of the socialist ministry of production. I guess marble statues were in vogue in the 1930s.

    The difference between shit and shinola: if you assume that maximum output equals maximum welfare, you're making an interpersonal comparison of utility between those who have a preference for consumption goods and those who have a preference for disposable time. The "no interpersonal comparison" crowd relies on that assumption.

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    1. Let me put this Barone business in context. Barone was, among other things, "the first economist to describe the conditions under which a competitive market is Pareto efficient." (Nordhaus, 1992 "The Ecology of Markets.")

      Now imagine some guy comes along and solves the problem of monopoly and imperfect competition by assuming that the price elasticity of demand is always unitary (just for fun let's call this guy "Marty Feldstein"). Everybody thereafter cites his "results" without ever mentioning his assumptions. To paraphrase Kafka's "third version" of the Prometheus legend: in the course of thousands of journal articles, Feldstein's treachery was forgotten, the economists forgot, the assumptions are forgotten, the findings are forgotten he himself forgot...

      All that remains is the vast, impenetrable rock of methodology that mutely incorporates the long forgotten assumptions and conclusions. Barone? Never heard of him!

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  3. Diminishing marginal utility is intrinsic to economics? All this time I've been teaching my students that utility, and marginal utility, cannot be measured, or compared between people.

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    1. http://unsdsn.org/resources/publications/world-happiness-report-2013/

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    2. See above: declining marginal utility of money is an empirical fact, easily proven with pretty basic psychology.

      It doesn't decline linearly; it's a matter of crossing thresholds (no longer worrying about where the next meal is coming from, etc.) Thresholds requiring relatively little money are *very* important to people's happiness; threshholds requiring billions of dollars are not very important to people's happiness.

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    3. "Diminishing marginal utility is intrinsic to economics? All this time I've been teaching my students that utility, and marginal utility, cannot be measured, or compared between people."

      This is why we need a school of thought approach in economics like in political science. In political science realism says that relative gains matter. Liberalism/Neoliberalism says what is important is absolute gains.

      So for realists/neo-realists, for example, in international relations countries will always want to beat the rest. It is a Darwinian struggle of the fittest. For neo-liberalism what is important is more the present relative to the past.

      There is no right answer here, you accept different ways of looking at things.

      I am very disappointed about the level of analysis of Piketty by the economics profession, especially those such as Tyler Cowen, their ignorance of what is outside "mainstream" economics reveals a lot. One of the best I read was Gillian Tett's review, orignally an anthropologist. Essentially the truth is what most people believe - ie monopolies on knowledge.

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  4. I also think there is a problem with how to measure whether or not something is Pareto efficient. If there is broad prosperity, then there will be a market able to support development of innovations that have a high development cost. That leads to robots and advanced medicine and such like. If only a tiny number of people are massively well off, even those well off people won't get innovations because the development costs won't be worth funding if only a few units are sold. So the oligarchs will be able to afford the great expense of being carried around in sedan chairs and having personal physicians applying leaches but won't be flying and getting curative cancer treatments.
    I had a go posting about that http://directeconomicdemocracy.wordpress.com/2013/03/29/rich-people-could-benefit-if-everyone-else-were-also-rich/

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    1. To clarify, I was meaning that measuring Pereto efficiency in terms of monetary value doesn't give a useful measure of what simply isn't available to buy because it hasn't been invented or has been entirely eliminated.

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  5. Simon

    You may be damaging the Oxford University brand slightly with your minor grammatical errors. Using a spelling and grammar checker would have picked up the error in the first sentence. Criteria is the plural of criterion.

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  6. Thanks Simon for the link. What I'd add is this: You often hear from economists that Pareto Optimality is value free and no one can object to it because no one is hurt by the Pareto option, so no one can object.

    But here's the huge problem with that. What you're immediately doing when you say that is we will consider only two options, and rule out as unacceptable every other. We decide every other option is unacceptable except the two libertarian options, Pareto and nothing. THAT's value-free? That's positive and unideological? To rule out all of the many other options, including the utilitarian one, immediately as unacceptable, and only consider permissible for analysis, the two libertarian ones? That's positive value-free? You can't even positively state, this is what the total societal utils optimum is, so people can know and consider it, making no endorsement?

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  7. Another thing I'd add is that Pareto optimality never even exists in the real world anyway (other than doing nothing ever). No matter what a government does with policy, given how heterogeneous utiltiy functions are, many market problems, and frictions, there will always be at least one person in the entire country made at least a little worse off from any significant policy or program.

    And really Pareto optimality is a lot less harmless than it sounds. Consider the classical physician's oath, First do no harm. This sounds so great, but if it was really followed we would have basically no medical care at all, and we'd still have small pox ravaging the world, polio, and mass death from basic infections. Because the cures for every one of these things do at least some harm to at least some people. Virtually everything a doctor prescribes from aspirin to chemotherapy to antibiotics to Viagra does at least some harm to the patient. Of course, usually the good dwarfs the harm. But that's the at least largely utilitarian view, that all physicians take, not the libertarian, First do no harm. So it may sound great, but thank goodness no one does it.

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  8. A lot seems wrong to me about the way the concept of Pareto efficiency is used in economics. I think a lot of students are given the impression that the first and second welfare theorems make much stronger claims than they do because it isn't made clear what a weak claim Pareto efficiency is. Some things everyone should know about Pareto efficiency:

    1. Plenty of Pareto efficient outcomes would be reasonably judged by most people to be terrible outcomes, relative to other possible outcomes.
    2. Pareto efficiency is intended for the purpose of taking a large set of possibilities and narrow it to a smaller (but probably still quite large) set of possibilities, the latter set certain to contain the most desirable possibilities but probably undesirable ones as well. Pareto efficiency is not intended for the purpose of justifying any particular outcome in the Pareto set as being a good outcome.
    3. If outcome A is Pareto efficient and outcome B is not, that itself is no reason to believe A is better than B, unless A itself is a Pareto improvement over B.
    4. The most insidious use of arguments from Pareto efficiency come when options are discarded due to the existence of Pareto better options that aren't actually on the table. You should never throw away option A in favor of option B if option B isn't a particularly plausible option and option A is. But this is quite common in economics, because the Pareto set in the welfare theorems is drawn from the outcomes that are *theoretically* achievable, whereas no consideration is given to what is practically achievable. As a result, options that are Pareto efficient in practice are thrown out because they are not Pareto efficient in theory. This is problematic.

    To give an example of the last one, consider the minimum wage. It can be argued in theory that if we got rid of it, if we calculated how much each person benefited or lost from that change the winners would be able to compensate the losers such that everyone would be better off than they are with it. Therefore an outcome with a minimum wage is not part of the theoretical Pareto frontier. However, arguing on this basis for getting rid of the minimum wage without any sort of compensation scheme would be a non-sequiter (see point 3) as this would certainly not be a Pareto improvement. But a more sophisticated argument might be that we shouldn't consider a minimum wage because there are better ideas we could be considering instead. However the better ideas are unrealistic. No one has ever actually laid out a policy that could be enacted into law that would get rid of the minimum wage in a Pareto improving way; this is not practically possible to do (see point 4). Furthermore, due to its popularity a minimum wage is not just practically possible to write legislation to enact, it is politically possible to build the support necessary to enact it, something other alternatives may lack. For this reason keeping the minimum wage (or raising it to $10, $15, probably even $35) should be considered part of the practical Pareto frontier even if they are not part of the theoretical Pareto frontier.

    Now that doesn't mean that raising it to any of those values would be a good idea (see point 1). There may be good reasons to support lowering the minimum wage or to oppose raising it by too much, but Pareto efficiency is not one of those reasons.

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  9. "Now I mention this not to imply that the emphasis put on Pareto improvements in textbooks and elsewhere is a right wing plot - I do not know enough to argue that."

    Hugely important question, very difficult to answer. I first came across the "Pareto isn't neutral" argument in Blaug's `economic theory in retrospect' and have been wondering since what the process was for its establishment. I can imagine there's something like an evolutionary dynamic: the political sphere is the landscape on which economic ideas breed, live and die. But it would be great to track down some specific historical pivot points where it became embedded. Just reading Diane Coyle's history of GDP, she's doing a fantastic job of identifying those kind of pivot points, as well as implicitly showing that we *can* (in fact, must) make those kind of decisions about theory.

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  10. You may not believe it upon first sight but the whole idea breaks down to this: Pareto optimality = do not upset the status quo.

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    1. If you take Pareto optimality to mean that non-Pareto optimal options can be discarded from consideration (which I would argue is all it is meant to mean) then this is not the case. Pareto optimality allows us to narrow a large set of options down to a smaller set of options, but we still may reasonably consider making non-Pareto-improving changes that move us from one Pareto efficient outcome to another, as it is not the case that every Pareto efficient outcome is just as good as any other.

      However, if you take Pareto optimality to mean only consider Pareto improvements, then you are correct that it is an argument for extreme status quo bias. The concept really isn't intended to be used this way and this is certainly smuggling in some arguable values behind a seemingly value neutral concept.

      Yet much as I object to this second version of the Pareto criterion, it is fun to imagine how different economic discourse would be if those who often invoke this criterion did so in a consistent way! After all, as you note this is an argument for the status quo -- it is no good at all as an argument for making the economy more libertarian! Certainly, for example, free trade policies have been enacted that have sacrificed the wellbeing of many for the greater good. Where were the economists arguing that NAFTA should not be done because no change should ever be made unless it is a Pareto improvement? Who argues that deregulation and tax cuts should never be done unless you know there is not a single person who will be made worse off?

      To get libertarianism from the second criterion, you have to ignore the status quo and instead imagine starting over from scratch. You ignore the harms that will be inflicted on people by the changes you would like, and instead ask if you can find anyone who would be harmed in the parallel universe where we were considering moving from a libertarian economy to this one. Thus it is fine to harm many if some benefit if you are making the economy more libertarian, whereas it is not fine to support the status quo if some are any worse off than they would be if the economy were more libertarian. Needless to say this kind of thinking is not value neutral at all; it holds libertarianism up as the ultimate ideal that everything is to be compared to, and alternatives are only to be accepted if they are unarguably better in every way for everyone.

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  11. "While this may be obvious, textbooks still make a big deal of dynamic inefficiency. This is the idea that the amount of productive capital in society can be too high, so that too much output is going to preserving that level of capital (replacement investment to offset depreciation etc.), and not enough to consumption."

    Yeah, the "golden rule level of capital". It's just not really an issue. First, capital is not homogeneous. There might be some rare kind of capital, in some locality, that we have so much of that any more will cost more to maintain than its benefit. But most capital types and locations are way way below this level.

    And for the most important type of capital, knowledge and understanding, this is never an issue. It costs almost zero to maintain new knowledge and understanding about science, technology, and medicine on a server or magnetic tape.

    So this is pretty much a non-issue.

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    1. The use of "most types" is not good here (I love the commenting software that allows editing, like with Kevin Drum.) The way to put it is this, it's absolutely no problem to find trillions upon trillions upon bazillions in types and localities of capital investment that's way way below the golden rule level. Moreover, it's not even hard to find huge amounts of capital investments that meet a way higher standard, that are positive social NPV. So this is really not an issue.

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  12. As far as hypocrisy on Pareto optimality from the right. This is typical. We must be Pareto optimal (or try to get very close to it) when it means getting what we want, or denying what we don't want, but otherwise it doesn't matter and we ignore it, or go blatantly against it. Same with "states' rights" in the US. It's so important to the right if it helps to get what they want, or stop what they don't want. But if it's an obstacle to what they want, they'll go ridiculously against it.

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  13. As Samuelson noted in 1937 economists did not measure utility. And we still don't. We do measure the national accounts. But those are about flows of money, not about utility. 'Revealed preference' economics has also not succeeded in estimating still utility. Marketeers skipped the idea of 'utility' decades ago - as it does not help you to sell nylons. The reason is simple: people do not have well defined, consistent, transitive preferences, let alone 'diminishing marginal utility'. The concept of utility is a figment of the 'left brain interpreter, that part of the brain whcih continously makes up stories which tell us (itself and the other parts of the brain) that we are rational - even if we aren't. The Wikipedia entry about the interpreter, on why neoclassical economics is ergodic: "The drive to seek explanations and provide interpretations is a general human trait, and the left brain interpreter can be seen as the glue that attempts to hold the story together, in order to provide a sense of coherence to the mind.[3] In reconciling the past and the present, the left brain interpreter may confer a sense of comfort to a person, by providing a feeling of consistency and continuity in the world. This may in turn produce feelings of security that the person knows how "things will turn out" in the future." http://en.wikipedia.org/wiki/Left_brain_interpreter

    Reading Gary Becker will teach you how this works: twisting reality into a pre-conceived set of coherent and overly simple explanations, stating in about every second sentence that your way is the only and the best way to do it.

    Merijn Knibbe

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  14. «the second welfare theorem, which says that we can separate issues of distribution from issues of allocative efficiency.»

    That seems to me a crass misinterpretation of the well known and often misinterpreted theorem.

    What the theorem actually says is that it is possible to create a model in which issues of distribution and efficiency are separable only by choosing a set of very narrow and unrealistic assumptions.

    Discovering the very peculiar assumptions under which efficiency and distributions are separable was a notable display of technical virtuosity; that should not be misdescribed as implying that *in the general case* distribution and efficiency are separable.

    This is a perhaps less clever version of what "Sandwichman" above describes as:

    «Everybody thereafter cites his "results" without ever mentioning his assumptions.»

    for another crucial result.

    As to the original issue of Pareto optimality, I am surprised that nobody above mentioned the Theorem of Second Best, which essentially says that any result in neoclassical economics that deliver Pareto efficiency (or whatever else) are irrelevant for policy because any small violation of their extremely narrow assumptions results in potentially (and usually) vast changes in the outcome.

    In particular that even tiny variations from the inputs that deliver a Pareto-optimal outcome usually result in outcomes that are very far from Pareto-optimality.

    But Pareto-optimality as remarked above is essentially a defense of incumbency, because in practice initial allocations are tacitly assumed as "given".

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  15. This is a *brilliant* piece (although the commenters such as Blissex go further, which is excellent). You're on a roll this week...

    Now if only you can get comprehension of to be part of the credentialling policy for your profession. The primary problem is that econ department credentialling allows for right-wing hacks to be fully credentialled...

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  16. So, paying debt off would not be Pareto optimal?
    If you consider a closed economy, for matters of simplification, then debtors are made worse off - but creditors get better.
    Therefore, debtors are the "normal workers", and they will want to work more and harder, which is obviously good. Also, paying off debt inherently implies reducing supply of bonds, for instance, thus lowering yields. It is plausible that, seeking higher yields, empowered creditors reach for the stock market, which will create a wealth effect on the economy that eventually will lead to an outcome that is better than the initial situation.
    There will be a dominant substitution effect for the poor that will increase GDP (and they will also benefit from the surging stock market prices) and a positive income effect for the rich - in which case, them being capitalists, we can afford not to care whether they will or not work harder.
    So, poor people outcome is at best uncertain (not to say that they actually get better) and rich definitely get better. Is this not a Pareto improvement?

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