Bryan Caplan  

Who Loses From Efficiency?

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During last night's debate, Robin repeated an argument many economists have made: In the long-run, maximizing efficiency is actually better for everyone.  If we consistently adopt any policy with benefits greater than costs, then the times that you win will outweigh those that you lose, so you'll be better off on net.  Optional escape hatch: Even if you don't happen to win on net, you can still ex ante expect to win on net; efficiency raises everyone's expected well-being.

When I give my lecture on efficiency, I always point out how crazy this claim is.  "Everyone" means everyone.  The world has over six billion people.  Some of them have really weird preferences; a subset of these people with weird preferences are already extremely satisfied.  Is it really likely - or even credible - that every single one of these people would be better off if we junked all inefficient policies? 

Take for example Kim Jong-Il, dictator of North Korea.  Right now he owns 20 million slaves.  He's the master of life and death for a nation.  How exactly would Kim be better off if, for starters, communism were abolished?  Even if you offered him billions in compensation, he's got a lifestyle that money just can't buy.

Or to take a more mundane example: How about an elderly, childless misanthrope?  It seems quite likely that he won't live long enough for Robin's "long-run" defense to kick in. 

Of course, you could always modify the efficiency standard to say, e.g., that "The welfare of 99% of people must go up."  I don't think Robin's willing to do so.  But suppose he was.  In the real world, what percentage of the population would lose if we consistently followed the efficiency maxim?

Personally, I think it's got to be at least 10%.  Human preferences are incredibly diverse - as you can see if you read nationally representative survey results instead of just talking to the people like yourself.


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COMMENTS (17 to date)
Robin Hanson writes:

An ex ante efficiency question is whether a fifteen year old Kim could have foreseen with enough confidence that no amount of compensation could make him willing to endorse a rule of always doing the efficient thing.

dWj writes:

Workers in dying industries in their early fifties might largely fit this category, though, unlike Kim, they might well be able to be bought. If they believe that their self-worth is higher, though, if they take implicit handouts rather than explicit ones, then even that could be false.

Hanson makes a good point above; if you fall back on the Rawls test, supposing your preferences will be bestowed exogenously after you decide in favor of policies, then "everybody" benefits, but this serves more to illustrate the problem with the Rawls test than to provide a good defense of utilitarianism.

Les writes:

Isn't this just old wine in new bottles? In other words, classic Jeremy Bentham utilitarianism versus Pareto-efficient Kantian deontology?

El Presidente writes:

Bryan,

EXCELLENT POINT

This is where the rubber meets the road. So, that leads me to ask what sorts of inefficiency are desirable or should not be interfered with in pursuit of greater efficiency? There are plenty of things that are healthy for us that really provide no efficiency gain, and sometimes an efficiency loss, with respect to output per capita or MPL. We sometimes call these things leisure and they are an integral part of human life. If we measure efficiency in terms of utility instead of output, we will have to clarify our measure of utility in order to calculate it and we might want to reconsider Pareto optimality. The notion that output itself has declining marginal utility, like everything subsumed by it, is one that most economists refuse to acknowledge except in passing. My guess is that nobody will pay them to dwell on it except accidentally as with tenured professors.

My professors started intermediate courses with a subtle caveat that we couldn't tell how much leisure is economically efficient and then proceeded to ignore the question while explaining how our goal should be to maximize output per capita and MPL (a normative statement if there ever was one) while minimizing involuntary unemployment. That means that resources are limited, we don't know how much of our time and effort we might reasonably set aside for things other than production, but let's go ahead and max out our resources on production and hope the other stuff all works out; and, by the way, moving money around to maximize utility is a no-no. This also ignores the important possibility that leisure enhances productivity to some extent; that a work-leisure utility curve actually has relevance for production above and beyond its typical use as a statement of exogenous individual preference. This Achilles' Heel of the Neoclassical school is unmistakable if you follow the dominant models (i.e. Solow) to their logical conclusion then compare them with observable reality. We would do better to say: _more_ is often _better_ , but _most_ is rarely _best_ , especially if we fail to measure everything together, tangible and intangible alike. This is similar to Aristotle's point in the Nicomachean Ethics when he describes a golden mean.

El Presidente writes:

Les,

Isn't this just old wine in new bottles? In other words, classic Jeremy Bentham utilitarianism versus Pareto-efficient Kantian deontology?

Only if we insist that they are incompatible and we therefore must choose one or the other, or neither. If we can combine them, then we get something different.

Tom West writes:

n the real world, what percentage of the population would lose if we consistent followed the efficiency maxim?

Couldn't this very well be 0% under certain circumstances? History is replete with cultures that have been given what would objectively seem better technology, more efficient ways of doing things, etc. and seen their life improve by objective measure. Yet by any human judgment they are massively worse off, and seem to continue so many generations later.

We think of progress as a good thing, but then it's been our civilization that's been leading the progress. I'd bet that if aliens ever gave us the benefits of efficiency that made everything we've ever done seem meaningless, we'd lose big time from increased efficiency.

David Jinkins writes:

El Presidente:

Many economic theory papers explicitly specify utility functions that are increasing in leisure. A basic theory example (which I am sure you discussed in your intermediate micro class) can be had by considering time allocation. An individual must decide between leisure and work. As you know, a raise in wage makes this person more wealthy, which increases his demand for leisure, but also makes him want to work more since the wage is higher. When models ignore leisure, it is often because adding leisure will complicate the model without adding any intuition to the results. In this case, it makes sense to leave leisure out.

El Presidente writes:

David Jenkins,

In this case, it makes sense to leave leisure out.

This is precisely why we can't bridge macro and micro and why we can't make our graphs match our intuition. If it makes sense to leave it out, then we are leaving it out because: 1. it doesn't make a difference if we add it or not; 2. we don't know how to put it in; or, 3. we aren't sufficiently interested in knowing what the results would be. Game theory undermines the first, the second might be true, but it seems that the third is the driving force. So long as we are content to keep macro and micro separate, perhaps it does make sense to leave leisure out of our macro models. If we want to have a unified discipline, we cannot afford to make that choice. We need to find a way to address it.

It's only alright to leave leisure out if we embrace the notions that diminishing marginal utility doesn't apply to growth in output, that distribution of income has no important effect on output, and that calculating a person's wellbeing based upon the average material standard of living within their society is good enough. It's only alright if our goal does not require us to be cognizant of the details and if we are content to throw our hands up in the air and shrug when people ask why business cycles happen. Solow is flawed, perhaps fatally, for this reason. It is a macro model that is intentionally dismissive of the notion that distribution is relevant, even to the goal it sets: maximizing output by directing investment more efficiently. It's a worthy goal but there is a strong underlying bias in the model. So, the model excludes distribution without having to mount a defense, and Neoclassical economics passes it on without question. It needs to be questioned because it is highly implausible, even if that makes the calculus messy.

Joshua Goetz writes:

Ammitidly, I am not a PhD and perhaps this is a elementary argument; but can't the basic premise of Coase (i.e., 100% efficiency is just too costly) be applied to this argument?

Robin Hanson writes:

A better question is what fraction could reasonably expect to lose, if the decision is made when they are say ten years old. I'd say that is less than one percent, if we compensated for a few simple and obvious factors.

Kurbla writes:

99.9%.

If someone starts selling nuclear bombs for $10 000, in every major city in the world there will be at least one man able to buy it and willing to detonate it.

ajb writes:

I think even a 1% figure underestimates the share of people in this world who would pay (or take hits to their income) to see certain other people suffer harm. This is not well dealt with in economic theory.

benjaminvw writes:

My econ prof always told us that there are always winners and losers...... even if in aggregate we are 'all' better off

Tom West writes:

Oops, of course my Couldn't this very well be 0% under certain circumstances? should have been 100%.

However, the central point remains. Are people better off if maximal efficiency gains can only be made by destroying their culture and ignoring their current skill sets?

My intuitive answer would be, yes, within one generation. However reality seems to disagree.

Hugo Pottisch writes:

Is this really a growth vs ROIC discussion.. eh.. efficiency vs inefficiency? Or shouldn't the title rather be: Who loses from applied statistics?

Vangel writes:

The debate seems ridiculous because one can't define the term efficiency when looking at the aggregate because efficiency only matters on the individual level.

Robin Hanson writes:

If all I know about a choice is that it is between helping 90% and hurting 10% on the one hand, or helping 10% and hurting 90% on the other hand, it seems pretty obvious I should help the 90%. The complication in my economist advice context is that the 10% helping option might be the status quo and you might need more than 90% agreement to make a deal go through. In which case I'd sadly set aside this great 90% helping option as not feasible here.

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