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Economics specifically does not make that assumption. You will see it in cost-benefit analysis, but it is not anything like a fundamental assumption in economi

Economics specifically does not make that assumption. You will see it in cost-benefit analysis, but it is not anything like a fundamental assumption in economics. I don't know where you got the idea that it was -- if you learned it from your econ 101 class you should demand your money back. The fundamental idea in economics is "Pareto efficiency". Something is Pareto efficient if there is a no way to make someone better off without making anyone worse off. An idealized perfectly competitive market would be Pareto efficient, but the bulk of microeconomics these days studies market imperfections. A level of production is "optimal" if it's Pareto efficient. Again firms in idealized perfectly competitive markets will produce a Pareto efficient output, but real markets can fall short of the ideal. For example, a polluting industry will overproduce, unless pollution is taxed. IIRC, there are conditions where your alternative criterion matches Pareto efficiency, but they are somewhat special.

oarabbus_ 7y ago
Pareto efficiency might be more useless than "calculate the physics problem assuming air resistance is negligible"
- QuesnayJr 7y ago
  It is exactly as useful. Macroeconomics was completely tangled up until people understood that in a perfectly function economy there was be no business cycle, that even a serious shock would only temporarily slow down the economy. So the focus turned to understanding the market imperfections that make temporary dislocations have such long-term effects.
- solveit 7y ago
  Physics in idealized situations is incredibly useful, and more importantly, absolutely necessary for understanding non-idealized real situations, so I'm not sure what you're getting at here.
tossaway17 7y ago
Can one prove that an idealized perfectly competitive market is Pareto efficient or is this taken as a definition?
- sideshowb 7y ago
  There's a proof... ...but then again (1) nobody has ever seen an idealized perfectly competitive market; (2) it's by no means clear that an idealized perfectly competitive market even serves as a useful approximation to the ones we have; (3) efficiency (in the narrow sense defined by efficient markets) is not the goal we want to be pursuing anyway.
- QuesnayJr 7y ago
  There's a proof. The theorem is called the "First Welfare Theorem". There's also a "Second Welfare Theorem" that says that you can achieve any Pareto efficient outcome through a perfectly competitive market and lump-sum taxes.
- littlestymaar 7y ago
  IIRC Kenneth Arrow proved something around it yes.
Chinjut 7y ago
Pareto efficient is such a useless concept for any economic controversy; most real world decisions about how to structure society aren't between one Pareto efficient outcome and one non-Pareto efficient outcome, but between two Pareto efficient outcomes with different stakeholders gaining and losing. If one trillionaire has their every indulgence satisfied, while the rest of the world starves, and our one trillionaire refuses the minor inconvenience of selling off one of their dozen yachts to invest in feeding everyone else? That's a Pareto efficient outcome; you can't make everyone else happier without making the trillionaire slightly less happy. This is a made-up story, but analogous to what actually happens, where there are many, many possible Pareto efficient ways to run the world, but those which privilege the status quo wealthy are always pointed to as somehow imbued with mathematically proven optimality because they are "Pareto efficient".
- QuesnayJr 7y ago
  You mean that right now you think the world is in a Pareto efficient state, and the only question is distribution? You have a much more optimistic view of the world than I do. Everyone agrees that Pareto efficiency isn't everything. But even there, the Second Welfare Theorem literally tells you how to efficiently redistribute wealth away from the trillionaire, to move to a different Pareto outcome. Real policymaking is much messier than any of this, of course.
  - mrandish 7y ago
    > Real policymaking is much messier than any of this, of course. Thanks for your posts which I find interesting. Can you point me to any good sources on crafting better policies? For context, I'm most interested in better policy choices that generally prioritize 'equal opportunity for all' as opposed to trying to engineer 'equal outcomes for all'.
    - QuesnayJr 7y ago
      I don't know a good new source, but there's an old book by Alan Blinder, "Hard Heads, Soft Hearts" that talks about how to take existing policy goals and how to redo them so that they are more economically efficient.
littlestymaar 7y ago
> Economics specifically does not make that assumption. As everything in economics, it depends on which branch you're talking about, but this assumption is the core of the marginalist revolution which is fundamental to the whole classical branch and it's derivatives, which makes the vast majority of mainstream economics nowadays, because the neoclassical synthesis made the biggest part of the Keynesian school move toward this assumption (say hello to micro-founded macro). Anecdotally, claims that [insert a foundational hypothesis of classical economics] isn't really that important in the whole model has been the favorite defense of neoclassical economics against criticism since at least Friedman in 53 ( it might have existed before, but none of them had the popularity of his Essays in positive economics)
- QuesnayJr 7y ago
  Classical economics is something different -- think Smith and Ricardo. Marginalism is sometimes called neoclassical, but is distinct from classical economics. The neoclassical synthesis was macroeconomics from the 1940s until the stagflation era. Micro-founded macro was later. I don't think neoclassical has a very clear meaning -- I would call any kind of Keynesianism non-neoclassical, personally. Anecdotally, it's because so many people are bullshitting when they claim that something is a foundational hypothesis of the mainstream. People prefer to argue against a caricature rather than the real thing.
- darawk 7y ago
  > As everything in economics, it depends on which branch you're talking about, but this assumption is the core of the marginalist revolution which is fundamental to the whole classical branch and it's derivatives Marginalism is saying something much more precise than that. It is saying that (in the given example) the two people value their marginal dollars differently than they value one marginal unit of coffee. A statement which is certainly objectively true, but doesn't capture the apparent contradiction present in the original example.
  - littlestymaar 7y ago
    You seem to talk about Menger's view of marginalism, but Menger isn't really part of the classical branch I am talking about: he founded the Autrian School and was pretty skeptical about the neoclassic school at its time.
jfarmer 7y ago
Arrow-Debreu isn't all it's cracked up to be: http://frankackerman.com/publications/economictheory/Interpreting_Failure_Equilibrium_Theory.pdf http://frankackerman.com/publications/economictheory/Interpr...

oarabbus_ 7y ago

Pareto efficiency might be more useless than "calculate the physics problem assuming air resistance is negligible"

QuesnayJr 7y ago
It is exactly as useful. Macroeconomics was completely tangled up until people understood that in a perfectly function economy there was be no business cycle, that even a serious shock would only temporarily slow down the economy. So the focus turned to understanding the market imperfections that make temporary dislocations have such long-term effects.
solveit 7y ago
Physics in idealized situations is incredibly useful, and more importantly, absolutely necessary for understanding non-idealized real situations, so I'm not sure what you're getting at here.

tossaway17 7y ago

Can one prove that an idealized perfectly competitive market is Pareto efficient or is this taken as a definition?

sideshowb 7y ago
There's a proof... ...but then again (1) nobody has ever seen an idealized perfectly competitive market; (2) it's by no means clear that an idealized perfectly competitive market even serves as a useful approximation to the ones we have; (3) efficiency (in the narrow sense defined by efficient markets) is not the goal we want to be pursuing anyway.
QuesnayJr 7y ago
There's a proof. The theorem is called the "First Welfare Theorem". There's also a "Second Welfare Theorem" that says that you can achieve any Pareto efficient outcome through a perfectly competitive market and lump-sum taxes.
littlestymaar 7y ago
IIRC Kenneth Arrow proved something around it yes.

Chinjut 7y ago

Pareto efficient is such a useless concept for any economic controversy; most real world decisions about how to structure society aren't between one Pareto efficient outcome and one non-Pareto efficient outcome, but between two Pareto efficient outcomes with different stakeholders gaining and losing. If one trillionaire has their every indulgence satisfied, while the rest of the world starves, and our one trillionaire refuses the minor inconvenience of selling off one of their dozen yachts to invest in feeding everyone else? That's a Pareto efficient outcome; you can't make everyone else happier without making the trillionaire slightly less happy. This is a made-up story, but analogous to what actually happens, where there are many, many possible Pareto efficient ways to run the world, but those which privilege the status quo wealthy are always pointed to as somehow imbued with mathematically proven optimality because they are "Pareto efficient".

QuesnayJr 7y ago
You mean that right now you think the world is in a Pareto efficient state, and the only question is distribution? You have a much more optimistic view of the world than I do. Everyone agrees that Pareto efficiency isn't everything. But even there, the Second Welfare Theorem literally tells you how to efficiently redistribute wealth away from the trillionaire, to move to a different Pareto outcome. Real policymaking is much messier than any of this, of course.
- mrandish 7y ago
  > Real policymaking is much messier than any of this, of course. Thanks for your posts which I find interesting. Can you point me to any good sources on crafting better policies? For context, I'm most interested in better policy choices that generally prioritize 'equal opportunity for all' as opposed to trying to engineer 'equal outcomes for all'.
  - QuesnayJr 7y ago
    I don't know a good new source, but there's an old book by Alan Blinder, "Hard Heads, Soft Hearts" that talks about how to take existing policy goals and how to redo them so that they are more economically efficient.

littlestymaar 7y ago

> Economics specifically does not make that assumption. As everything in economics, it depends on which branch you're talking about, but this assumption is the core of the marginalist revolution which is fundamental to the whole classical branch and it's derivatives, which makes the vast majority of mainstream economics nowadays, because the neoclassical synthesis made the biggest part of the Keynesian school move toward this assumption (say hello to micro-founded macro). Anecdotally, claims that [insert a foundational hypothesis of classical economics] isn't really that important in the whole model has been the favorite defense of neoclassical economics against criticism since at least Friedman in 53 ( it might have existed before, but none of them had the popularity of his Essays in positive economics)

QuesnayJr 7y ago
Classical economics is something different -- think Smith and Ricardo. Marginalism is sometimes called neoclassical, but is distinct from classical economics. The neoclassical synthesis was macroeconomics from the 1940s until the stagflation era. Micro-founded macro was later. I don't think neoclassical has a very clear meaning -- I would call any kind of Keynesianism non-neoclassical, personally. Anecdotally, it's because so many people are bullshitting when they claim that something is a foundational hypothesis of the mainstream. People prefer to argue against a caricature rather than the real thing.
darawk 7y ago
> As everything in economics, it depends on which branch you're talking about, but this assumption is the core of the marginalist revolution which is fundamental to the whole classical branch and it's derivatives Marginalism is saying something much more precise than that. It is saying that (in the given example) the two people value their marginal dollars differently than they value one marginal unit of coffee. A statement which is certainly objectively true, but doesn't capture the apparent contradiction present in the original example.
- littlestymaar 7y ago
  You seem to talk about Menger's view of marginalism, but Menger isn't really part of the classical branch I am talking about: he founded the Autrian School and was pretty skeptical about the neoclassic school at its time.

jfarmer 7y ago

Arrow-Debreu isn't all it's cracked up to be: http://frankackerman.com/publications/economictheory/Interpreting_Failure_Equilibrium_Theory.pdf http://frankackerman.com/publications/economictheory/Interpr...