Matt Nolan

The equity-efficiency trade-off, what’s the point?

/9 Comments/in , /by

Sorry about the constant methodology talk lately, rauparaha and me have just have methodology on the mind 😉

I wish to focus on a subject that is a little different than the rationality definition that my esteemed colleague has been looking at. I plan to look at the equity-efficiency trade-off.

The trade-off between equity and efficiency is one of the primary lessons of first-year public economics. It takes two concepts and illustrates how they behave in the framework of scarcity – which is where the trade-off comes from. As long as we have scarce resources there will be an efficiency-equity trade-off.

However, digging a little further, we might ask why does equity matter? A potential answer is that people value equity, and thereby it is something that needs to be taken into account (something that was described here). But if we care about equity because individuals value it, then why can’t we just introduce equity into the individuals utility function – then the optimal choice will automatically take into account the trade-off between our original idea of efficiency and equity and the new solution will simply be – ‘efficient’.

Is there a reason why we are so keen to divide efficiency and equity – and what does this tell us about economics?

Read more

jamesz

The great un-revolution

/9 Comments/in , , /by

As much as I hate link farmers, I can’t help reposting this great paragraph from the Positive Economist. It just ties in so well to the recent discussion on this blog about rationality and behavioural economics!

Behavioral economics is possibly the least revolutionary revolution ever to hit an academic discipline, because, as Scheiber is alluding to, the behavioral school is absolutely not changing or abandoning the methodology of economics. As I’ve noted before, the “perfectly rational” economic man can happily do whatever the behavioralists want him to do to be more “realistic”; it’s therefore not necessary to come up with a whole new way of modeling people.

Instead the behavioral school is writing down models of “perfectly rational, utterly self interested maximizers” who act in accordance with the behavioral evidence. That is, writing rationalization of the “irrationality” we observe. Contrast this with the traditional criticism of economic man, which is to throw up ones hands and loudly reject the whole idea of trying to predict what people will do. I prefer the behavioral way.

Yeah, what he said 🙂

jamesz

Wherefore art thou, rationality?

/4 Comments/in , /by

I’ve been bombarded recently with people telling me about economists’ perception of rationality and the wonders of behavioural economics. The term homo economicus gets thrown around with gay abandon as a generic criticism of economics. Oliver Woods claimed that rationality means having perfect information and being entirely self-interested. At the other end of the scale, Will Wilkinson extends rationality to include anything that’s “…the best we can do given our numerous limitations.” Tim Harford goes as far, in his book ‘The Logic of Life’, as suggesting that someone can be termed rational if they respond to incentives. So, if even economists don’t agree on what rationality is, how can we complain that economists are silly to speak of humans as rational? Read more

jamesz

Taking a look in the mirror

/18 Comments/in , /by

Over at NZQuest, Oliver Woods claims that economics

…works around perfect conditions and universal application of models and theories developed many years ago to any economic problem, believing history, society and all sorts of other factors undermine the ‘homo economicus’, or the supposedly rational profit-driven man who thinks entirely in his own self-interest and only helps others when they can help him.

As Matt has previously addressed there is a huge difference between positive statements and normative judgments. Woods is confusing the judgments he attributes to economists with positive statements of economics. Read more

Matt Nolan

The economist’s economic growth bias

/23 Comments/in , , , , /by

Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither rauparaha or myself defined what ‘growth’ we were talking about. Like all economists, we took ‘Growth’ to be synonymous with growth in gross domestic product.

Could this possibly imply that economists such as rauparaha and myself have an inherent bias when discussing normative statements about welfare that points us towards pro economic growth policies – even when there is a hefty trade off in other social values. Do economists focus too strongly on technical and allocative efficiency without taking social efficiency and equity into account?
Read more

jamesz

Chicken and egg economics

/4 Comments/in /by

After my recent post, which dealt with issues of equity, I have been invited to consider how appropriate it is to bring normative issues in to a discussion of economics. I was referred to a paper which discusses the distinction between economics as a science and political economy:

For Robbins, the science of economics and the entire field of economics were quite different… He saw [the] pure science of economics as only a small sub branch of economics — a branch, which in his view, had nothing to do with policy. He saw another branch of what economists do — political economy, as the branch primarily concerned with applied policy, not with science. Here, he wanted value judgments to have free reign, and to be allowed into the analysis.

I like the distinction, but I feel that the normative judgments should inform our science, not just the other way around. Read more