Monday, August 20, 2012

One last time with Ryan...

btw - I respond here and not on his blog both out of vanity and because his blog has been eating my comments for weeks now.

He writes: "That isn’t what I was getting at. Kuehn is importing in several background assumptions which explains his objection, but not why Boudreax or I am wrong. “Efficiency” can mean more than one thing. The two weaker assumptions  are Pareto or Kaldor-Hicks efficiency. Price theory will tell us people will bargain to those standards of efficiency unless weird things are going on. Most economists in the room will use those (especially the latter) as a standard of efficiency, with distributional effects purely secondary. If you don’t use those criteria as a standard of efficiency and want to use a social welfare function, that is fine, but you need to say upfront which one you are using because no one has any idea what you’re talking about. If Boudreaux wants to say that this is optimal because it is wealth maximizing, that’s a perfectly defensible statement. It is a statement that would be made by many mainstream economists. If this issue is all about distributional effects, what was the point of the entire original post? The fact that Boudreaux doesn’t use the same social welfare function as Kuehn somehow means he doesn’t understand the concept of an externality?"

Somehow I am not being clear.

First, there are two posts - a post where I criticized a statement by Don and a post where I criticized the concept of optimality that economists have. It's the second one that really made Ryan howl, because apparently criticizing the concept of optimality is hard to distinguish from nationalizing stuff willy nilly.

In the second post I was quite clear: the concepts of efficiency that economists use are nice in their own way, but we should all be very wary of attributing any more general sense of optimality to them. So when Ryan says "you need to say upfront which one you are using because no one has any idea what you’re talking about", what I'm talking about quite clearly is that there are problems with interpreting something like Pareto or Kaldor-Hicks efficiency as "optimal". I don't know how I could be clearer Ryan. The whole post was a variation on the theme of "When Daniel Kuehn stops to think about it he really questions how optimal these efficiency criteria are". How much more upfront do you want me to be?

Now I wasn't acusing Boudreaux of being problematic because he didn't agree with me on that. I wasn't even critiquing the concept of optimality in the first post, after all!! Don's argument was that if government didn't do it, the private sector would. My response is just that that's a bad argument against public roads and Don was mistakenly acting like it was a good argument against public roads.


He asks: "But if this is THE externality argument you wanted to make, why did you wait until now to make it?". I've been talking about externalities since the first post. Network externalities are the externality you usually think of when it comes to infrastructure, right? I didn't think you needed clarification.


He also writes, after I spell it out for him: "Okay. So this isn’t about weird Austrian-Public Choice-libertarian people off in their own little world. This is a rejection of mainstream economics." Right. This is not a conspiracy. I am not out to get Austrians/libertarians. And since I never mentioned Austrians/libertarians in the post in question you probably shouldn't assume they have anything to do with it, particularly when I'm talking about pretty mainstream stuff like "willingness and ability to pay" and "optimality".

Don made a bad argument, but that's not on the rest of the Austrians/libertarians.


He concludes: " Please either specify the social welfare function you would like to use or the precise alternative methodology and standard of optimality that wouldn’t run into such problems."

When I have the answer I'll post it.

My ignorance of this point is what I was trying to get at when I wrote "I don't think there is an easy answer here." After all my musings. The CBA approach gives the false impression of clarity. Things are a lot more contested than that.


  1. Beyond the whole nationalizing thing (which to be honest, I agreed with Ryan about for a good couple of hours before realizing where I was going wrong) I'd really love to hear your thoughts on ability to pay. It's not something I ever encountered in any of my micro classes. I only recall sometime in an early micro course, some hand-wavy stuff about the demand curve representing willingness and ability to pay. And then later, it's nothing by the endowment in GE models. I must confess I actually find it hard to think about.

    1. Sure - and I know you said this last time too. I'm not sure what to say about it because honestly it's not like I've had the opportunity to think much about it in detail either. But it's one of those nagging things that always comes to mind when I think about CBA.

      So is there something specific you were thinking about?

      So if you think about a typical consumer choice model or a GE set up with a time endowment, the real key is labor income, right? What it boils down to is that a person's welfare in life - their enjoyment, their utility, etc. - is contingent on their productivity (or the productivity of capital they own, etc.). Why should that be?

      The only answer to "why should that be?" is "because otherwise the labor market wouldn't work". As a practical matter you can't really push it much further except some mild redistribution perhaps. But as an ethical matter that seems deeply unsatisfying, particularly insofar as differences in productivity of people isn't a choice.


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