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Welfare Propositions of Economics and Interpersonal Comparisons of Utility by Nicholas Kaldor

Welfare Propositions of Economics and Interpersonal Comparisons of Utility by Nicholas Kaldor. Ryan Murphy. Mike Munger : What is the Utilitarian Case for Free Trade?.

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Welfare Propositions of Economics and Interpersonal Comparisons of Utility by Nicholas Kaldor

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  1. Welfare Propositions of Economics and Interpersonal Comparisons of Utility by Nicholas Kaldor Ryan Murphy

  2. Mike Munger: What is the Utilitarian Case for Free Trade? “Look, the welfare economics case for free trade could be built on (a) the Pareto criterion, or (b) the Kaldor-Hicks Compensation Principle.[There is] no way you can say moving from protection to free trade is a Pareto improvement. There are winners and losers. […] KHCP does not require compensation be made, and doesn't even require individual consent, and so it is inherently coercive. A majority decides on a policy, and the minority is harmed without its consent. Yes, perhaps the harm was caused by eliminating a policy (protection) that was itself coercive (consumers were harmed without THEIR consent), but you can't get to free trade unless you go the collective-coercion route.” (Munger 2011).

  3. What allows us to compare utilities? • Utility is ordinal. • Utility is subjective. • Utility is non-measurable.

  4. How subjective is utility? (Stringham 2010) • What makes goods valuable? • Are costs subjective? • Can we survey subjective preferences? • Can we measure utility? • Can we compare utility between individuals? • Can we aggregate utility? • Does national income proxy national utility? • Do migration patterns proxy national utility? • Does CBA proxy national utility? • Can demonstrated preferences in a market setting proxy social utility?

  5. Kaldor: Use CBA • Robbins, Harrod: economics provides no policy prescriptions • Kaldor: maximize wealth • Economics provides no answer for whether we should compensate (per Piguo)

  6. “There is no need for the economist to prove – as indeed he never could prove – that as a result of the adoption of a certain measure nobody in the community is going to suffer. In order to establish his case, it is quite sufficient for him to show that ever if all those who suffer as a result are fully compensated for their loss, the rest of the community will still be better off than before. Whether the landlords, in the free-trade case, should in face be given compensation or not, is a political question on which the economist, qua economist, could hardly pronounce an opinion.”

  7. Problems with Compensation • How do we observe if we’ve compensated enough? Measuring compensation properly reduces to the Socialist Calculation Problem (Stringham 2001). • Endogeneity of “Willingness to Pay” • Endowments • Property Rights (Stringham 2001) • “Stalin’s Statue” (Stringham 2010) • May be unable to observe relevant portions of the demand curve (Stringham 2010)

  8. Solutions • Economic Education • Allow Kaldor-Hicks to be final arbiter in “extreme” situations. • Mises’ “commonweal” rather than “social welfare.” • Use neuroeconomics to develop “utilometers.” (McKenzie 2010: 194; Park and Zak 2007; Knutson et al. 2007; Gimcher et al. 2005; Knutson and Peterson 2005; and Nelson et al. 2004)

  9. Works Cited • Glimcher, P.W., M.C. Dorris, and H.M. Bayr. 2005. “Physiological Utility Theory and the Neuroeconomics of Choice.” • Kaldor, Nicholas. 1939. “Welfare Propositions of Economics and Interpersonal Comparisons of Utility.” The Economics Journal 49:549-552. • Knutson, B. and R. Peterson. 2005. “Neurally Reconstructing Expected Utility.” Games and Economic Behavior 52: 305-315. • Knutson, B. S. Rick, G.E. Wimmer, D. Prelec, G. Loewenstein. 2007. “Neural Predictors of Purchases.” Neuron53: 147-157. • McKenzie, Richard B. 2010. Predictably Rational? In Search of Defenses for Rational Behavior in Economics. New York: Springer. • Munger, Mike. 2011. “Angus, is Right, as Usual!” Kids Prefer Cheese. http://mungowitzend.blogspot.com/2011/02/holy-cow-why-so-much-hatin-on-angus.html. Accessed 27 Feb 2011. • Nelson, A.J, D.J. Heeger, K. McCabem D. Houser, P.J. Zak, and P.W. Glimcher. 2004. “Expected Utility Provides a Model for Choice Behavior and Brain Activation in Humans.” Society for Neuroscience, Program No. 20: 12. • Park, J.W. and P.J. Zak. 2007. “Neuroeconomic studies.” Analyse & Kritik 29 (1): 47-59. • Stringham, Edward. 2001. “Kaldor-Hicks Efficiency and the Problem of Central Planning.” The Quarterly Journal of Austrian Economics4 (2): 41-50. • Stringham, Edward. 2010. “Economic Value and Costs are Subjective.” In Handbook on Contemporary Austrian Economics. Boettke, P., ed. Northampton, MA: Edward Elgar Publishing.

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