Friday, September 25, 2009

How much should one care about efficiency anyway?

-- some speculations --

Economists are so preoccupied with efficiency that they twist debates away from more important aspects. Often, big social questions do not need to be answered optimally at the margin, they need the right answer.

We economists argue based on what economics is: the subject concerned with the allocation of scarce resources - the subject that teaches efficiency.

But how much should (the rest of) society care about efficiency? How important is it compared to other goals?

ex 1: the equity debate. Economists usually retreat from any debate about unjust distributions of opportunities, wealth, factors and everything else by claiming that due to the "welfare theorems" of some mathematician from long ago by the name of Walras, they do not need to care: The cake should be as big as possible and the sharing can be done afterwards. In that sense, we claim, we do equity a favour - more is for sure better, isn't it?

We solve the social optimization problem and then say a perfect market can achieve it, given the right initial distribution of "x". But nobody says out loud that we can not impact the initial allocations practically. Lump sum transfers do not grow on trees on this planet… And, of course the initial distributions are not "right". So we do not get at the real issue - welfare loss due to wrong initial allocations. The welfare loss we can get at are efficiency losses from redistributive measures - that, we are good at. But that's often not the issue. And by the way, we have no social welfare function in first place, making the initial problem unsolvable (Arrow's impossibility theorem).

That is not to say that the entire subject of economics ignores the relationship betweeen inequities and efficiency - far from. Development economists point out causal effects running both ways. But when economists are not directly concerned with distributive effects, they rest their not so troubled minds on the pillow provided by Walras and go on arguing for efficiency as if there is no other game in town.

ex 2: the climate/technology debate. What might be efficient today is maybe not so good for future developments. If one wants to retain or increase living standards and avoid climate change, one needs new production and consumption technologies.

For sure, we economists do care about growth and have all kinds of growth models; Solow, Romer, Acemoglu, what have you. A caricature of standard models is to "throw money at the R&D sector and out will come growth". And of course there is research about climate change that accounts for technological development.

But what comes out of economics into the public are mainly static efficiency arguments - we should start cleaning up where it is cheapest. Buy into CDM projects in less developed countries. Put up a market and get the prices right and stuff.

The argument for doing the most expensive things today at home since that might mean more rapid technological advances rather than (or in addition to) installing scrubbers in some ancient coal plants in faraway does exist. So does the argument that this symbolizes political will and leadership, engages the public and other countries etc. But those are fuzzy and not as mathematically clear cut as the efficiency argument. Hence they tend to be mentioned as an aside rather than the real issue.

I'm not saying that this or that argument is right or wrong. I'm just saying the latter tends to be put aside because it isn't about what we are most preoccupied with - efficiency. And that means trouble if that's not what it's all about.

That doesn't get easier if economic results are sold as if they would contain more than just efficiency: everything. The implicit or explicit believe that all arguments can be wrapped into some fabric of supply and demand crosses leads to neglecting that there is more to a social issue that can be put into economic models. Again, economics is about allocation of scarce resources. A lot of the world can be looked at that way. But not everything.

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