Wednesday, May 20, 2015

What This Blog Is About

Welcome to a new blog on welfare economics. Welfare economics provides the framework economists use to solve real world problems. So it's very important to get welfare economics right. Much of this blog will be about explaining how economists have not got welfare economics right, and what might be right instead.

There are essentially three premises that underlie my view of welfare economics:

 1. Economic agents choose to acquire the most value that is feasible to acquire.

2. That which is not chosen is not feasible, not sufficiently valuable to motivate action relative to cost, or both.

3. Creating markets is costly. In other words, transaction costs exist.

In other words, people do what they want insofar as they can. When they don't do something, it's because they can't or won't. And making markets is a thing that sometimes can't happen or isn't worth doing. All these premises, which are standard accepted truths among economists, yield the following conclusions:

1. Externalities don't exist.

2. Everything is efficient.

3. The task of welfare economics, handed down from Alfred Marshall to Arthur Pigou to the rest of the profession, might literally be impossible.

The first position would strike most economists as utterly asinine. Ronald Coase won the Nobel prize in economics in large part for proving this position in 1960. The second position has a history going back to at least Frank Knight and has been argued for by names like Stigler and Alchian, and Buchanan and Demsetz to some degree. It hasn't caught on. I will spend some time talking about why and where Stigler and Demsetz in particular go wrong. The third position is more speculative. It will be interesting to see how things go.

A note on the normative: although welfare economics is critical to normative considerations, this blog has no normative concerns. Everything is efficient, meaning capitalism is efficient, Communism is efficient, and so is everything in between. Efficiency does not distinguish between states according to normative (or any) considerations, but efficiency is not a normative property. And while externalities do not exist, coordination problems do.

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