« Restoring the Public’s Trust in Economists | Main | 'The Great Utility of the Great Gatsby Curve' »

Tuesday, May 19, 2015

'The Most Misleading Definition in Economics'

John Quiggin:

The most misleading definition in economics (draft excerpt from Economics in Two Lessons), by  John Quiggin: After a couple of preliminary posts, here goes with my first draft excerpt from my planned book on Economics in Two Lessons. They won’t be in any particular order, just tossed up for comment when I think I have something that might interest readers here. To remind you, the core idea of the book is that of discussing all of economic policy in terms of “opportunity cost”. My first snippet is about
Pareto optimality
The situation where there is no way to make some people better off without making anyone worse off is often referred to as “Pareto optimal” after the Italian economist and political theorist Vilfredo Pareto, who developed the underlying concept. “Pareto optimal” is arguably, the most misleading term in economics (and there are plenty of contenders). ...

Describing a situation as “optimal” implies that it is the unique best outcome. As we shall see this is not the case. Pareto, and followers like Hazlitt, seek to claim unique social desirability for market outcomes by definition rather than demonstration. ...

If that were true, then only the market outcome associated with the existing distribution of property rights would be Pareto optimal. Hazlitt, like many subsequent free market advocates, implicitly assumes that this is the case. In reality, though there are infinitely many possible allocations of property rights, and infinitely many allocations of goods and services that meet the definition of “Pareto optimality”. A highly egalitarian allocation can be Pareto optimal. So can any allocation where one person has all the wealth and everyone else is reduced to a bare subsistence. ...

    Posted by on Tuesday, May 19, 2015 at 09:44 AM in Economics, Methodology | Permalink  Comments (47)


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.