Shalizi delivers a slow, drawn-out illustration of the point that economic efficiency is all about who’s got the $, which isn’t always related to what we would usually call “efficiency” in other settings. (His point is related to my argument that the phrase “willingness to pay” should generally be replaced by “ability to pay.”)
The basic story is simple: Good guy needs a turkey, bad guy wants a turkey. Bad guy is willing and able to pay more for the turkey than good guy can afford, hence good guy starves to death.
The counterargument is that a market in turkeys will motivate producers to breed more turkeys, ultimately saturating the bad guys’ desires and leaving surplus turkeys for the good guys at a reasonable price.
I’m sure there’s a counter-counterargument too, but I don’t want to go there.
But what really amused me about Cosma’s essay was how he scrambled the usual cultural/political associations. (I assume he did this on purpose.) In the standard version of the story, the bad guy is a rich businessman, which fits just fine: liberals (in the U.S. sense of the word) want to give the turkey to the hungry person, whereas conservatives will let the free market decide. But in Cosma’s version, the bad guy is a rich conceptual artist, presumably the kid of guy who conservatives hate, existing economically only on the basis of handouts from guilty rich trust-fund liberals of the sort that Michael Barone likes to write about. So now the temptation is for the liberal to support the right of the conceptual artist to do something antisocial, whereas he’s egging on the conservative to side with the starving regular guy (perhaps a socially conservative businessman who’s fallen on hard times due to Obama’s crushing taxes and regulations?). I’m reminded of this example of a conservative who favored anti-market regulation . . . when the target was Muslims. (Not that all conservatives are anti-Muslim, or that all liberals are suckers for conceptual art, it’s just that by changing the labels on the economic players, you change the feel of the story.)
P.S. I once got into an argument with someone about whether it was immoral for the K Foundation to burn that million quid rather than, say, give it to the poor.
This point comes up early in introductory micro classes (or at least it did 30 years ago when I taught micro.) The income distribution is taken as given for these Pareto calculations. In introductiory micro we assume the existence of lump sum taxations to get the income distribution the way you want it. You then go on to discuss what to do where lump-sum non-distorting taxation is infeasible, and in a more advanced setting you worry about the dynamic implications of Nozick’s Wilt Chamberlain example for the stability of income distribution under voluntary exchange.
But yes… Willingness to pay is always conditioned on income. I would note that there are several things one could do to broaden the consept. For example, Lazarus could offer a bond to Alice valued at more than $5000 which he could pay off with income he earns through his continued existence. (As long as we’re making things up, I get to try as well.)
But if Alice doesn’t care about Lazarus, and Dives doesn’t care about Lazarus, what are we to make of the fact that the only guy who seems to care about Lazarus is Lazarus? In a world in which “what can you do for me” is the only relevant fact, it’s clear that Lazarus can’t do much for anybody, so he doesn’t count for much. Now any rich understanding of economics in the real world accepts the fact that “what can you do for me” isn’t the only basis for society, and admits of various exceptions, like charity, that are studied by lots of economists.
Sorry, one more thing (besides apologies for the typos). As a guy who doesn’t believe in utility theory, I thought you’d like this example, Andrew. The point is that we can’t compare the utilities of Lazarus, Dives and Alice… we have no way to do so. All we can do is look at what each person is willing to give up to get what he or she wants. That’s what we mean when we say that economics bars interpersonal comparison of utilities (or, as I’ve said to you before, that utility foundations don’t really matter as much in economics as you seem to think.
Andrew, did you think the K foundations burning the million quid was moral or immoral?
Mat:
I took the “It’s their money, they can do with it what they want” position; my friend argued that the million quid could’ve been used to feed a lot of poor people.
Are liberals actually suckers for conceptual art? I think conservatives devote more energy to being anti than liberals do to being pro.
If you want to believe that informally, that’s fine, but to make that latter statement rigorous you’d have to do a lot more work (i.e., primarily, what is the set of issues under consideration; how do you define this set; is this set consistent — for any set you come up with, are you sure this set is complete and that I won’t be able to come up with any other issue that fits your definition of ‘relevant?’, …).
At the credit card company I used to work for, the acronym was WAS — Willingness-to-repay Ability-to-repay and Stability. It was useful to treat W and A as two separate qualities.
The K-foundation burning a million quid did not destroy a million quids worth of wealth, unlike in Cosma’s example, where actual value is destroyed.
Burning a million quid in paper money is essentially burning a million quid IOU from the government. Or more precisely, like paying an extra million quid in tax, which the govt can then spend on the poor (well, it could, if it wanted).
You know, this blog has to get better at basic economics!
Sean, is England still on the gold standard? The U.S. isn’t. A dollar hasn’t been “an IOU from the government” in a long time. If you think it is, ask yourself this: if you take a million dollars to “the government” and demand to complete the implied exchange, what do they have to give you in return?
Destroying a million pound notes, or a million pounds in notes, does not enrich the government. What it does is make everybody’s pounds worth just a teensy bit more each, because fewer pounds are now available to buy the same goods and services. The increase of the value of a pound helps a person with a lot of pounds a lot more than it helps a poor person, so it doesn’t enrich the poor (or the government), it increases the rich.
You know, this blog’s commenters have to get better at basic economics!
And I have to get better at grammar! “Increases the rich,” forsooth.
Burning a million pound notes (as opposed to using or holding them in some more typical way) DOES enrich the UK government, because the limitation on the UK government printing more pound notes is its desire to avoid the consequent inflation. If you burn a million pounds, the Bank of England will print a million more (assuming a million is big enough to show up over the noise in whatever measurements they’re using to decide how much money to create). So rich people holding cash aren’t going to benefit.
If you’re wondering about the technicalities, which don’t involve much actual printing, the Bank of England would buy a million pounds in UK government bonds, paying for them with money created out of nothing. This is the main mechanism by which central banks create money. It’s not expected that the bond will ever be repaid (it will just be rolled over with a new purchase from the central bank when it comes due), since actually repaying such bonds would cause deflation.
Sorta sounds right “by which central banks create money.”
It’s been a while since I studied this (high school for my history essay on how the Canadian banks financed a very large part of the British government’s first world war expenditures. But also that was before the central bank of Canada. Actually remember it was very fascinating how so much was (safely) pulled out of almost nothing…
At least from the Canadian perspective – Britain did have to pay a lot of interest on the loans!
One of the differences between turkeys and money, is that you can starve while they raise more turkeys for you to eat. Timing should not be ignored.