Brad De Long wrote:
>
> >"I do a little number in my Micro classes called "Pareto Optimality at
> >Auschwitz" ... "
> >
> >Way back, I changed degrees half a semester into an education/economics
> >degree. Those who purported to teach how to teach couldn't teach, and
> >those who purported to explain human behaviour weren't talking about
> >anybody I knew - well, not then, anyway.
> >
> >Maybe I wasn't as lucky with my teachers as your students so obviously are.
> >
> >Maybe too many of us weren't.
> >
> >All the best,
> >Rob.
> COMMENT: (This is material from Rob not Brad of course)
Insofar as the Auschwitz examples represent CBA (Cost-Benefit Analysis),
surely only Potential Pareto Improvements are involved not Pareto Optimality---
the Kaldor-Hicks' principle, as it is sometimes called. This requires that a
policy should produce a net benefit so that if losers were compensated some would
be left better off and no one worse off. Pareto Optimality would occur only if
the losers were compensated for their losses. This is not required in applying
CBA.
The Auschwitz examples show how ludicrous this principle is. There is no way that
you can be compensated for being incinerated.
This is quite a different situation than people voluntarily trading to an
equilibrium in a market. No libertarian would approve of Auschwitz. It is a clear
violation of rights. Jews didn't voluntarily work in the labor camps or go to the
gashouses as a result of some trade. Auschwitz examples are a perfect reductio of
CBA, a cardinal principle of contemporary applied welfare economics..
> I think famines work better--they make the point that if your labor-time
> endowment has no value, then your utility has no weight in the social
> welfare function that the market maximizes, and so you starve to death: the
> market's equilibrium weighs each person's preferences roughly by the market
> value of his/her endowment.
>
> I think famines work better because starvation is not a willed and desired
> objective of anyone in the market--while mass death certainly was a willed
> and desired objective of those who ran the show during the "final
> solution." "Final solution" examples leave people thinking, "yes, this
> market-as-a-social-allocation-mechanism does indeed efficiently produce the
> goals that society has chosen." Famine examples--I think, at least--probe a
> little bit deeper because the market also plays a powerful role in
> "choosing" "society's" "goals."
>
> Brad DeLong
COMMENT: Certainly it is crucial to make the point that markets only respond to
effective demand, demand backed by money, and so famines can exist when markets
are operating freely etc., as you point out.
I don't see how the final solution examples tell you anything about markets per
se, as noted above. They tell you that welfare economics in the form of CBA can
have totally heinous consequences when applied.
I do think that the market as allocative device efficiently allocates
resources according to the desires of the ruling classes in society. As you note,
the market weighs preferences roughly according to the market value of each
person's endowment. Consumption then will be a function of wealth and/or the
market value of marketable skills that can produce surplus value. Surely this is
a most efficient way of rationing scarce resources on the basis of money. The
rich get most, the poorest depend upon voluntary charity and will have no power
in the market. Makes for cheap labor too. You don't have to rob people or have
tons of overseers as with slave labor. You can give them all the freedoms of
liberal democracy as long as they don't elect Marxists, and so on. Its much
cheaper for the ruling class to dominate through markets. They can also claim
everyone is free, has freedom of choice. etc. Surely that IS more efficient than
other ways of trying to achieve domination by the well-off. When they don't need
workers anymore they don't have to get the gendarmes to come and throw them into
the street. The global market and global competition requires downsizing they can
say. That talk costs almost nothing. If the workers don't accept this argument
just close down the plant. The market is free, move your capital to the
Maquiladora regions. There are no restrictions in the market on the movement of
capital or shouldn't be the story goes.
Cheers, Ken Hanly
