Thursday, January 27, 2011

The fundamental leap of welfare economics

I like this. This is honest. It's stupid, but it's honest. And clear: "Improved welfare" means nothing more than "new, previously not available choice option was picked". That's all. All of standard welfare economics presupposes that the best (only?) way to identify the welfare-maximizing choice available to an individual is to see what he chooses when left alone.

Maybe someone who didn't believe me will believe it when it comes from a Harvard economist praised by both Akerlof and Gary Becker... Here's Ed Glaeser

Teachers of first-year graduate courses in economic theory, like me, often begin by discussing the assumption that individuals can rank their preferred outcomes. We then propose a measure — a ranking mechanism called a utility function — that follows people’s preferences.

If there were 1,000 outcomes, an equivalent utility function could be defined by giving the most favored outcome a value of 1,000, the second best outcome a value of 999 and so forth. This “utility function” has nothing to do with happiness or self-satisfaction; it’s just a mathematical convenience for ranking people’s choices.

But then we turn to welfare, and that’s where we make our great leap.

Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices.

When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice.


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