WorldSys: Austrian Home Study Course, Week 14

1 What is the problem with all government efforts to improve on the market?

The only thing which permits a rational analysis of the costs and benefits of a given program or piece of legislation is a market price. Any public institution which wants to intervene in the market must necessarily use made-up numbers in their diagnostics. The longer the government intervenes the less accurate its numbers will become, and the more distorted that segment of the economy will be.

2 How does a mainstream economist use “efficiency” as a  criterion for settling disputes?

In short: if we think of dollars as votes then we declare an ‘efficient’ solution to have been reached when the people who are willing to pay more for one outcome than another actually achieve that outcome.

If I’m willing to pay $100 to set your house on fire and you are only willing to pay $80 to stop me, then the efficient solution is to put your home to the torch.

3 What is the efficiency objection to the free market?

That under a variety of circumstances the market doesn’t lead to efficient outcomes and the state is required to step in with interventions that provide corrections.

4 Why are secure property rights important to society?

For myriad reasons, but within the context of mainstream efficiency analysis we must note that there is a penalty for not vigorously defending property rights. If I know that the only thing stopping my neighbors from burning down my house is my having more funds immediately available than they do, all sorts of otherwise inefficient behaviors become sensible.

I might horde huge amounts of cash instead of keeping it in a savings account (where it can accrue interest) or investing it in a business (where it can move the economy forward), for example. Or I might react to a neighbor’s house party with consternation — is he plotting to have all of his guests donate money to the cause of burning down my house? The more popular he is and the more friends he has over, the more likely it is that he’ll finally have enough to outbid me!

5 What is the relevance of [Gene] Callahan’s example of swimmers reaching the Olympics?

That it is easy to say something has a lot of value to us, but we won’t know until we have to actually pay for it. A lot of children may claim to want to make it to the Olympics, but no one, including them, can know if they’re serious until they consistently make the sacrifices required.

This is yet another problem with ‘efficiency analysis’, because people can claim that something is worth an arbitrarily large amount of money to them, but this doesn’t mean much until they have the option to buy it at that price on the open market and then do.

6 What is a problem with the Pareto criterion?

The Pareto criterion is that a policy should be adopted if it makes at least one person better off while making no one worse off. There are several problems with this. First: in actual society it is virtually never the case that no one is made worse off by a policy. Second, it still isn’t possible to determine how much something is worth to a person unless they have to pay for it. We can’t determine the Pareto-optimum policy simply by asking people what they’d like, because people may not understand how costly a policy will be until they feel it’s effects. But it is precisely this process of paying for what you want at a fair price that is distorted by the government’s interventions into the market.

7 If there were at least one person in society who despised all government interventions, could the State ever effect a Pareto improvement?

Not if the person were serious enough to pay some amount to stop the interventions from being enacted.

8 If at least one person will always object to any change from the status quo, is society always or never at a Pareto optimum?

You could never achieve a Pareto optimum because any move away would make this one person worse off.

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