A Dark Age of Welfare Economics
Paul Krugman, Nov. 22, 2011:
In the first part of the paper, [Diamond and Saez] analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners — full stop. Why? Because if you’re trying to maximize any sort of aggregate welfare measure, it’s clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with the difference it makes to the welfare of the poor and middle class.
John Hicks, Value and Capital, 1939 (thanks to J. Catalan):
Now of course this does not mean that if any one has any other ground for supposing that there exists some suitable quantitative measure of utility, or satisfaction, or desiredness, there is anything in the above argument to set against it. If one is a utilitarian in philosophy, one has a perfect right to be a utilitarian in one’s economics. But if one is not (and few people are utilitarian nowadays), one also has the right to an economics free of utilitarian assumptions.
From this point of view, Pareto’s discovery only opens a door, which we can enter or not as we feel inclined. But from the technical economic point of view there are strong reasons for supposing that we ought to enter it. The quantitatative concept of utility is not necessary in order to explain market phenomena. Therefore, on the principle of Occam’s razor, it is better to do without it. For it is not, in practice, a matter of indifference if a theory contains unnecessary entitities. Such entities are irrelevant to the problem in hand, and their presence is likely to obscure the vision.
Economic theory shed itself of the dubious use of interpersonal utility comparisons back in the 1930s. If Krugman had read his Hicks, he would know better than to talk about a dollar meaning more to a poor man than a rich man in terms of economic welfare.
Why oh why can’t we have better economics bloggers?
When one lacks economics knowledge, there is a strong tendency to go back to the same prejudicial fallacies over, and over, and over, and over again.
And thus the major’s posts are finally explained!
C’mon, Bob!
It’s just the way it is.
Don’t worry, I will give Krugman a link to my blog
Oh yeah, not sure if you read Wenzel’s post on this, but it’s another Kontradiction!
http://www.economicpolicyjournal.com/2011/11/krugman-endorses-insanity.html
Gene, you are an idiot who goes to blogs to pick up fights!
Ivan,
I thought almost exactly the same thing for a while. Essentially, I thought that he was an arrogant prick that talked down to people. After getting a better feel for his personality I realized that I was wrong, he’s not a prick at all. 😉
Seriously, though. I think a lot of his more frictional comments have a humorous intent behind them, but often are read as more aggressive than they actually are. Many times, when he makes a comment like the one above I imagine him following up with a hard elbow nudge.
While I disagree with him often I do not think that he is an idiot. Recently he has been discussing praxeological concerns that have really given me quite a challenge and have shown me that maybe I don’t know as much as I thought that I did. There aren’t many idiots out there that can have me thinking through the implications of something long into the night and digging through my library during the day.
Confirmed!
Are you saying that you agree with me, or something else? Sorry, confirmed can mean a lot of things. Haha.
Oh, I thought it simply was used like “verifying something”. So yes I agree. Thanks for telling me!
No, no. That’s what I was hoping that it meant. Sorry, but it is very rare that someone actually agrees with me. I was actually a little taken aback by it. I asked myself, “is he agreeing with me or is he being facetious?”
A lot of Austrians have a cold place in their heart for Gene. I did at for a time, but I got past it.
Ah, ok..
I think discussing in the comments distorts the perception of how many people actually agree with you. Most answers are from people who disagree with you. And there is always someone disagreeing. All the people who agree mostly don’t answer, except they think it is a very important point that was made.
Actually this is good. Imagine all the thousands of people who agree with you would always answer to all of your posts with: “Yes, agreed”, “+1″,”Verified”, “Like”etc..
😉
Ivan, I come here to read Bob’s posts. And I never picked a fight with MF. But after having him tell me how stupid I am a number of times, I sure do enjoy getting him wound up!
Interesting man!
Does anyone really believe that interpersonal utility comparisons are impossible? Some people claim to believe this, but their actions suggest otherwise.
I believe that. How can you compare something that is not measurable in any realistic sense?
What “actions suggest otherwise”?
Can’t you compare Phantom Menace with Return of the Jedi?
Yes, I can. But that would be comparing preferences, not utility.
Can you measure them?
Further, that has nothing to do with comparing interpersonal utility.
In your own value scales, yes. I can say I prefer Phantom Menace over Return of the Jedi (I like the fighting scenes, don’t hate) but I can’t prove I like the Phantom Menace more than you like the Return of the Jedi because there’s no way for us to compare our different value scales.
Indeed!
Even further, you cannot express or measure how much you like A more than B in any sort of objective terms. Sure, you could make subjective comparisons or you could even use the ‘ol 1-to-10 scale, but neither is any more effective at measuring utility than that of the prices seen in the market and/or what person X or Y feels compelled to forego in exchange for another preference in moment n?
If we cannot measure utility in autistic exchange, how could we then suppose that we could do so in interpersonal exchange?
Sorry, “objective” should be “cardinal, standard, measure, etc”…. terms.
I can say I prefer Phantom Menace over Return of the Jedi (I like the fighting scenes, don’t hate) but I can’t prove I like the Phantom Menace more than you like the Return of the Jedi because there’s no way for us to compare our different value scales.
Suppose you’ve seen Phantom Menace 85 times, stood in line for a week to get tickets, own five different copies, quote the movie constantly, and have gotten involved in several multi-hour arguments in which you defend Jar-Jar from all criticism.
I’ve seen Return of the Jedi once. If asked, I’ll say “eh, it was alright,” but if it comes on TV I always change the channel.
Is a third party observer really supposed to say to himself “gosh, there’s no way to tell whether Bharat likes Phantom Menace more than Blackadder likes Return of the Jedi”?
What happens if your just not an emotional person?
Good question. Or, what about Mr. Burns from the Simpsons, versus Ned Flanders? I think Burns really likes money more than Flanders. I bet if you took a dollar from Flanders and gave it to Burns, using Blackadder’s emotional inference techniques Blackadder would conclude that we just increased social utility. But nobody in his right mind would suggest that we therefore tax Flanders to send checks to Burns.
So, our intuition about charity isn’t driven by crude Benthamite utilitarianism.
What happens if your just not an emotional person?
Since I only need a single counter-example to prove my point, we should assume that I am a very emotional person ordinarily. When it comes to Jedi, however, my reaction is meh.
Do you still want to say there’s no way to tell whether you like Phantom Menace more than I like Jedi?
Also, Bob, the question of whether you can make interpersonal welfare comparisons is independent of the question of whether one should take from some to give to others in order to improve overall welfare. If I were to convince you that interpersonal comparisons were possible, you would still object to taxing Bill Gates to feed starving orphans because taxation is theft &etc.
Blackadder wrote:
Also, Bob, the question of whether you can make interpersonal welfare comparisons is independent of the question of whether one should take from some to give to others…
Right, but Krugman (and Diamond & co-author) were using IUCs to neatly justify progressive income taxes on welfare grounds.
Right, but Krugman (and Diamond & co-author) were using IUCs to neatly justify progressive income taxes on welfare grounds.
Yes, and your response was to say that you can’t make interpersonal welfare comparisons. That’s the claim I’m criticizing, but that doesn’t mean Krugman et al’s argument isn’t flawed for other reasons.
Whenever someone makes a choice between giving money to X over Y because “X needs it more”, or “X would be happier than if I or Y had money”, they aren’t making an interpersonal utility comparison. They are making a choice based on who they would rather see with the good, i.e, which donation benefits ME the most. Its a nature of human action that the bottom line is always to benefit oneself.
And I say that hobo Bob needs my cash more than me, not really because hobo Bob earns more “utils” or benefits “more” than me, but that my ethical system instills me with the belief or value that giving to poor people is good because someone needing food is better than me buying a T.V. But my ethical system could instill me with the idea that my T.V is more important then eliminating a hobo’s hunger. There is no way to argue in a “positive” economic sense who benefits more from my money. The idea is nonsense.
I say that hobo Bob needs my cash more than me, not really because hobo Bob earns more “utils” or benefits “more” than me, but that my ethical system instills me with the belief or value that giving to poor people is good because someone needing food is better than me buying a T.V
Which ethical system is that, exactly?
The one we learn in kindergarten.
Unless you went to a really strange kindergarten, you didn’t learn that the reason we should help other people is because it makes us feel good. Certainly that’s not what *I* was taught in kindergarten.
The idea that people give money to the poor not because they believe it will benefit them doesn’t describe how people actually think (as a brief conversation with your typical person would make clear) and if it were true it would be passing strange.
Imagine a guy who thought the moral thing to do with your money was to use it to make mud pies. If you ask him what good this is supposed to accomplish, he says that he doesn’t know, but that his ethical values tell him that making mud pies is just the right thing to do.
Such a person would not be acting rationally. Yet on your account, everyone who does something for someone else is in the same position.
“Since I only need a single counter-example to prove my point, we should assume that I am a very emotional person ordinarily. When it comes to Jedi, however, my reaction is meh.
Do you still want to say there’s no way to tell whether you like Phantom Menace more than I like Jedi?”
There really isn’t. Now you require some measuring rod for comparing different states of emotions between people. The happy go lucky cheerleader would always appear to “earn more utils” than the monotone computer geek. And what on earth would we do with actors?
All of this misses the point, because the bottom line is you can’t even demonstrate cardinal utility in action. Watching a movie happy go lucky and watching a movie with a “meh” attitude are two different goods. There isn’t some ambiguous good called “watching movie” that has different ranges of emotions attached with varying amounts of utils.
“Further, actual choice obviously cannot demonstrate any form of measurable utility; it can only demonstrate one alternative being preferred to another.” (Rothbard Towards a Reconstruction..)
“Unless you went to a really strange kindergarten, you didn’t learn that the reason we should help other people is because it makes us feel good. Certainly that’s not what *I* was taught in kindergarten.
The idea that people give money to the poor not because they believe it will benefit them doesn’t describe how people actually think (as a brief conversation with your typical person would make clear) and if it were true it would be passing strange.”
We give money to the poor because we want to see them be better off. It BENEFITS us to a poor man eat bread. This is how we all implicitly think, whether or not we want to admit it. If you question a charitable person enough, they will come to this conclusion. If it didn’t benefit them more, than they wouldn’t give it to the poor person.
e.g.
“Why did you give the money to that foundation instead of spending it on a T.V?”
“Well, I would rather see the money go to helping poor people in need”
= “Well, I rank higher on my value scale helping poor people out in need than a new T.V”
=”Well, it benefits (ranks higher) me more to give money to helping poor people than a new T.V”
The type of ethical system (not like we learn ethics in kindergarten) is “Be nice to everyone” “Give people a helping hand,” etc etc. The stuff that kids learn in Sunday school, I guess. The ethical system tells us how to act in charitable circumstances. I could have been instilled with the belief that giving money to rich people is better because they deserve it since they “worked hard and clearly earned it.” There is NO way for economics to actually prove which person “needs” it more.
“Imagine a guy who thought the moral thing to do with your money was to use it to make mud pies. If you ask him what good this is supposed to accomplish, he says that he doesn’t know, but that his ethical values tell him that making mud pies is just the right thing to do.
Such a person would not be acting rationally. Yet on your account, everyone who does something for someone else is in the same position.”
What is your definition of “rational”? Its clearly rational in his mind, given his mud pie ethics. The charitable person can argue with him all day long on ethics, but the economist cannot say a word about his decision and whether its “rational” or not.
Patch, you are making the assumption that we can only make judgments about the things we can measure. I don’t believe that.
How can you make a judgement on something that requires measurement when we can’t measure it? Thats my main problem with the whole utility thing.
Joseph Fetz,
I don’t know whether you have ever given money to charity, but I’m guessing Bob has. I’m also guessing that none of his charitable giving has gone to Bill Gates. Instead, he focuses his charitable giving on those who have less.
Why do you suppose that is?
Warren Buffett has given billions to Bill Gates. He must read Rothbard.
Bob,
No, he gave the money to the gates foundation, a charitable organization that works on things like preventing malaria in Africa.
Suppose, though, that the Gates Foundation were dedicated to building swimingpools for the second homes of millionaires. Do you think Buffett would still have given them the money? If not, why not?
Blackadder, obviously I was kidding about Gates and Buffett. (I just happen to be working on something else involving that grant.) Of course I would give charity to a poor person instead of a rich person. I don’t even mind saying the poor person needs it more or deserves it more. (At least a certain type of poor person.) But I wouldn’t say it’s because the money gives more utility to the poor person than to the rich person, especially if I’m using an economic model.
Bob,
Perhaps you could elaborate on the distinction here between “x needs the money more” and “the money gives x more utility.”
BA,
I’m sick ofI don’t have the stamina anymore for this argument. Of course I know what you mean if you say “a dollar means more to a poor guy than a rich guy.” And I’m saying, I don’t think it’s useful to link that up with the concept of “utility” from economics, and in particular to try to use the law of diminishing marginal utility, or welfare economics, to draw implications for tax policy connected to this commonsense intuition.Look, does getting a root canal give me “utility”? Commonsense says heck no, but economics say yes, if I choose to do it. So we’re mixing the terms up.
I get more utility from watching Jedi than Phantom. What does that mean? It means if faced with a choice, I pick Jedi.
What does it mean to say I get more utility from Jedi than you get from Jedi? It doesn’t mean anything at all, if we’re using “utility” in the same way I used it in the last sentence.
Krugman, Diamond and the other guy are economists and use utility to explain market prices etc. Then they want to use the same concept to talk about social welfare, and how to allocate the social burden of taxation. They are mixing metaphors. It would be like a physicist using “work” in the precise sense in some areas, then switching and saying a guy holding a barbell stationary is doing “work” (when he’s not according to physics). Then the physicist says, “Of course he’s doing work! You telling me you guys don’t know that he’s doing work? Sure you do.”
Bob,
I’m sorry if you find this conversation exasperating. But if it were really just a matter of economists using a special definition for utility, then it needn’t be a long conversation. You could just say something like “we economists use the word ‘utility’ in a special sense, which is somewhat different from common sense usage,” and that would be that.
Instead, when people try to defend the illegitimacy of interpersonal utility comparisons, they do it by making appeals to common sense intuition. E.G.
“I can say I prefer Phantom Menace over Return of the Jedi (I like the fighting scenes, don’t hate) but I can’t prove I like the Phantom Menace more than you like the Return of the Jedi.”