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?