“GDP is in fact the operational approximation most often used in a
Kaldor-Hicks evaluation. The problem with this use of GDP isn’t moral
but operational–GDP gets some things systematically wrong in measuring
welfare. Unlike many critics, I think the biggest problem is that it
undervalues hedonic improvements of all kinds, but that’s a different
topic.”

Indeed. Welfare measurements often move towards consumption instead as a result – and I think the “long-term” consumption view is generally a good way to start a policy debate. However, GDP or consumption will then often we taken as the end point also – something I don’t feel as comfortable about.

“Want to open up a new, more-popular restaurant? Can’t do it unless you
cut in the existing, less-popular restaurants in on your profits.
Gridlock is far too tame a metaphor for what would happen to the economy
under a true Pareto-improvement standard.”

Hehe, I like that description, very nice – I may have to steal it 🙂 . I’d probably make a distinction between the actions of government and the actions of all other agents. Government, due to its position as arbiter of the social contract, with the ability to set the rules of the game and redistribute through tax and transfers, has to take into consideration the distributional impact of policy. This involves taking things a step further when doing analysis of what should be done.

Personally, I think information requirements imply that most of the time, merely using Kaldor-Hicks to come to a conclusion can be best – but I’d be remiss if I did not say that I felt the argument needed to be made 🙂

GDP is in fact the operational approximation most often used in a Kaldor-Hicks evaluation. The problem with this use of GDP isn’t moral but operational–GDP gets some things systematically wrong in measuring welfare. Unlike many critics, I think the biggest problem is that it undervalues hedonic improvements of all kinds, but that’s a different topic.

What I meant about the “wisdom” of Kaldor-Hicks as a rough guide to policy is partly its implied morality–that material wealth is good on the margin but we don’t want to try to interpersonally compare marginal utilities. The combined moral/prudential judgment embedded in KH is that the dynamic consequences of trying to make those “potential” Pareto improvements “actual” would be dire. It would be like applying eminent-domain law to every transaction in the economy: Want to open up a new, more-popular restaurant? Can’t do it unless you cut in the existing, less-popular restaurants in on your profits. Gridlock is far too tame a metaphor for what would happen to the economy under a true Pareto-improvement standard.

This fellow:

http://www.amazon.com/Principles-Economics-N-Gregory-Mankiw/dp/0030259517/ref=sr_1_3?ie=UTF8&qid=1372271497&sr=8-3&keywords=principles+of+economics+mankiw

I’m pretty sure that was the edition we were using when I was 18.

Indeed.

However I get a bit concerned about the way potential pareto improvements are treated – often the focus is tacit, based on an underlying statement about some factor like GDP – and often the “transfer” implied will in turn be seen as an uncomfortable sidenote. When economists do that, they are making implied moral judgments … a thought that is interesting.

When economists say “efficiency,” 90% of the time they mean Kaldor-Hicks efficiency, 9% of the time they mean Pareto efficiency, and 1% of the time they have an explicit social welfare function that looks at distributional consequences. Over time I’ve come to appreciate the importance of Kaldor-Hicks efficiency improvements, because roughly speaking a society that pursues these will end up a lot richer over the long term with distributional consequences whose unpredictability looks vaguely like a veil of ignorance.

Fair call – but I would note that, by saying his assumptions so directly, he has made it very easy for people to quote them and say “this is stupid, he is stupid” … when he’s obviously not stupid. This clarity of assumptions is something all economists should do GIVEN THAT what they say is likely to be used as evidence for things!

Fair enough, Matt, but where you see clear assumptions, I see dissembling. Like Reinhart and Rogoff, he crafts an article that appears, at first reading, to support, say, the case for austerity, but embeds caveats so as be able to say, no, no, that’s not what I said.

All of which takes nothing away from the beauty of his textbooks. I’ll be with Perloff for Intermediate Microeconomics next semester, so I’ll be interested in comparing the two.

Undergrad Phil is more moral philosophy than I have 😉

“But Rawls wants the veil to hide things like what people think the good
life is, and the probabilities relevant to being born into a given
station”

That is a good point. I’d always felt that rather than being a direct thought experiment to abstract away everything, the goal from it should be to get an objective ranking of preferences that is not clouded by views and interests with regards to the current endowment of resources.

In this context, a hypothetical (although unobservable) unique original position should exist in the absense of value being “socially constructed” … which as you point out can be an issue.

I prefer using the idea of the original position to try to step back and ask “what sort of society, with given moral judgments, would have chosen the society we are in – or the society which would occur with X policy”. In this way, I use it more as an idea for moving backwards in though – rather than trying to solve for “optimal policy” which is a far harder question 😉

The one that is clear with his assumptions, and writes about issues in a way a lay audience can understand. In the article they are criticising there he is informing people that in the long term the government should look at stabilising debt-GDP – that it isn’t about “surpluses” but it is about this. Then a whole bunch of people attacked him because “we have a demand shortfall now” … which wasn’t his point.

Mankiw seems to know that we should compartmentalize issues, and that this is an economists “strength”. He knows the strength of the method is in the transparency of assumptions (which makes his arguments an easy target – same with his book). But to be honest, that is the only method of understanding and teaching economics that is worth its salt.

I struggle to understand why so many of these left-wing blogs dislike his writing so much. I guess it is because his value judgments differ – hell they are different to mine as well. But he is one of the few economic writers out there that gives an argument for lay economists rather than using appeals to authority. Some people may think his analogies are misleading – and this would be a strong criticism – but I don’t agree for the most part.