Department of “Duh”

27 August 2010 at 9:50 am 4 comments

| Peter Klein |

It must be acknowledged, however, that a researcher’s political ideology or vested interest in a particular theory can still enter even ostensibly descriptive analysis by the data set chosen for the research; the mathematical transformations of raw data and the exclusion of so-called outlier data; the specific form of the mathematical equations posited for estimation; the estimation method used; the number of retrials in estimation to get what strikes the researcher as “plausible” results, and the manner in which final research findings are presented.

That’s Uwe Reinhardt, writing a NY Times op-ed that could have been titled “A Mainstream Economist Tries to Come to Grips with Kaldor-Hicks Efficiency.” It’s actually a pretty thoughtful and informative discussion that exposes some of the fatal — to my mind, anyway — flaws of the Kaldor-Hicks concept. But Reinhardt implies, unfortunately, that virtually every economist accepts the Kaldor-Hicks principle as a normative standard. There is actually a fair amount of dissent, not only from Austrians but also from people like Jon Elster and John Roemer. As Gary Lawson notes in an excellent survey of welfare economics concepts, the Kaldor-Hicks criterion, in practice, is

as useless as Pareto superiority. Kaldor-Hicks efficiency purchases its coherence by requiring that compensation be hypothetically possible in such a way as to guarantee that each person, by her own standards, does not come away a loser, just as strict Paretianism requires that each person judge herself to be as well off or better off than before. All it takes to make the universe of Kaldor-Hicks-efficient transactions an empty set is one person who sincerely cannot be bought-that is, a person who values autonomy, either his own or that of others, so highly that no amount of after-the-fact compensation could possibly leave him as well off as he would have been had the loss never been inflicted. (without consent) in the first place. In a large population, no legal rule [or other reallocation of resources] will ever satisfy the Kaldor-Hicks efficiency criterion.

Entry filed under: - Klein -, Austrian Economics, Law and Economics, Methods/Methodology/Theory of Science, Myths and Realities, Public Policy / Political Economy.

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4 Comments Add your own

  • 1. Michael Webster  |  27 August 2010 at 3:26 pm

    Reinhart’s observation was that economist’s making normative claims or acting as advocates for a policy use the term “social welfare” or “welfare maximizing” when they know or the public ought to know that they are referring to Kaldor-Hicks efficiency.

    It is a fraud to pretend to gloss over this important detail.

  • 2. srp  |  27 August 2010 at 9:29 pm

    Be careful what you wish for. Wiping out K-H is more likely to lead to massive redistribution and egalitarian policy than respect for individual freedom or just deserts. The libertarian “autonomy monster” Lawson invokes (I”m using parallel terminology to the utilitarian bugbear of the “happiness monster”) is not why Reinhardt and company like to attack K-H.

    K-H is a fairly objective standard that blocks wholesale envy implementation when adhered to, a critical bulwark. And I’d bet that in the long run, a polity following K-H will end up with more freedom and more wealth than one letting outcomes hinge on collective distributional value judgments. (Of course, if you use MY distributional value judgments utopia will eventually ensue.)

  • 3. srp  |  27 August 2010 at 9:30 pm

    Just deserts should be just desserts, of course. I just love a good dessert.

  • 4. Andy  |  28 August 2010 at 8:48 pm

    I agree with srp, few people would argue that K-H is perfect, but it can often lead to good policies — take the standard economic case for free trade, for example

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