In economics, it’s important to have a measure of “better” versus “worse” outcomes. Even someone with a very narrow definition of “better” would most likely agree that an outcome is made better if it makes some people better off and doesn’t make anyone else worse off. As such, some old Italian economist named Vilfredo Pareto defined a “Pareto improvement” to be a change where some parties are made better off and no parties are made worse off. Furthermore, an outcome is said to be “Pareto optimal” or “Pareto efficient” if there are no Pareto improvements available to be made- i.e. that it’s no longer possible to make anyone better off without making somebody else worse off.
Many changes in the world, however, are efficient in a lot of ways even if they are not technically Pareto improvements. For example, when markets are opened up to international trade, there are winners and losers- either consumers win and producers lose, or producers win and consumers lose. The efficiency of these changes comes from the fact that in each of these situations the winners win more than the losers lose, so the overall size of the economic pie gets bigger.
In other words, this:
For a long time, I didn’t know that there was a term for this, but a few years back a professor I TA’d for at the Kennedy School described such situations as “potentially Pareto improving.” The rationale is that, if one party is helped more than the other is hurt, there is some theoretical after the fact transfer that can make everyone better off. (On some level, this is the crux of the Coase Theorem.) The difficulty in these transfers, however, is that they are difficult to implement without reintroducing inefficiency into the system.
Personally, I encourage people to take a wider view and realize that sometimes they are the losers and sometimes they are the winners in the quest for efficiency, but hopefully gains and losses are distributed such that everyone ends up a winner overall.* You know, the economic equivalent of this:
I can only hope that I am the windshield more often than I am the bug.
* That said, this rather utilitarian principle does not necessarily hold when it would violate certain fundamental rights of the losers- for example, while it might be efficient for society to sacrifice me so that my organs can be used to save multiple other lives, I wouldn’t expect people to sit back and think that this proposal was entirely reasonable. And, with that lovely image, I will leave you to the rest of your Saturday afternoon.
7 responses so far ↓
1 Nathanael Snow // Jan 28, 2012 at 7:26 pm
Care to extend these thoughts with a discussion of Transitional Gains Traps? That is, when a potentially Pareto improving situation is blocked because the potential losers are fully capitalized? #Tullock
From @Jurisnaturalist
2 Steve // Jan 28, 2012 at 7:53 pm
“Potentially Pareto improving”? Don’t Kaldor/Hicks have a better term?
3 BradyDale // Jan 30, 2012 at 11:05 am
This is what makes me skeptical of the whole world of investment banking. It’s all just betting, right? It’s not like when you’re a consumer and you buy, say, a pizza, but you buy it at the airport or at a ball game so you get completely ripped off.
But, hey, you are a little better off because you got some pizza.
In investment banking, it’s all one-sided wins, right? And no one *wants* any of it. Those guys couldn’t give a rat’s ass about the assets they hold. They are just papers they’ve made bets on. If they made a $100K investing in pork bellies or Microsoft, they wouldn’t really care so long as they got the $100K.
So if all anyone cares about is how their bet turns out, then everyone is better off exactly as much as someone else is worse off, so they don’t really ADD anything to the world.
4 Rod // Jan 31, 2012 at 9:31 am
Larry Niven’s made a fair amount of money writing novels about things like, “it might be efficient for society to sacrifice me so that my organs can be used to save multiple other lives”
5 John // Feb 1, 2012 at 12:09 am
I am fascinated and thrilled that so many before me have put so much work into creating these models of difficult-to-quantify events with such partial and fractured information.
I am particularly interested in modeling with INCOMPLETE information. But, more specifically, players having different BELIEFS. Moreover, in the few models I have studied, mainly, from the book “Game Theory with Applications to Economics” by James W. Friedman (Oxford University Press 1986) which someone in graduate school gave me for a gift, and “Discrete Mathematical Models” by Fred S. Roberts when I took Prof Roberts’ course in Fall 1992 at Rutgers University, the models always simply record the info of a set of strategies for each given player. I am interested in a deeper understanding of what it means for a player to CAUSE a certain set of strategies (or, as I like to call them, “events”) to happen. Clearly, an ENORMOUS problem of justice and fairness in the world is the violent disagreement over who caused what: whether good or bad. I seek the help of linguists in parsing out meanings of words and sentences. I am trying to incorporate such statements into a notation that can build more complex statements from simpler ones, namely, if P, Q, R are players, and X, Y, Z are events, here is what I’ve come up with so far:
P->X will mean BOTH the formal logical statement that antecedent P implies statement Q, and it will ALSO mean that “P causes X”. Functionally, these will be the same thing.
Furthermore, P, Q, R can each have their own belief systems. “P believes/knows X1, X2, X3″ gets translated simply as P({X1,X2,X3}). Then we can build up compound statements, such as
X1=Q->X2
P(X1)
R(~X1), meaning R does NOT believe Q caused X2.
Ordinary noun-verb-direct-object gets translated as noun-causes-direct-object.
Anyway, the LOGICALLY CONSISTENT ATTRIBUTION of cause-and-effect is a necessary part of computing justice (i.e. what’s fair).
6 Punditus Maximus // Feb 1, 2012 at 11:17 am
“Clearly, an ENORMOUS problem of justice and fairness in the world is the violent disagreement over who caused what: whether good or bad.”
Ah, no. The problem is that the beliefs come after the events, not before. People believe what allows them to advance their interests.
7 John // Feb 11, 2012 at 4:28 am
“The problem is that the beliefs come after the events, not before.”
Ah, no. People make all kinds of predictions (mostly wrong, see exception below) all the time, especially in economics, where there is absolutely ZERO accountability of predictions about what ANY pundit with free media airtime or a professor says. Let’s see tv economists put their exact predictions in sealed envelopes, stored by an independent party, to be opened at a later date, and count how many of them were wrong and how many of them were right. Even Max Keiser, whom I admire and who is absolutely right that the entire world is a giant Ponzi scheme run by criminal fraud, has never made any testable predictions.
Predicting “the stock market will go up or down” does not cut it. Not falsifiable.
So, clearly, economists in particular, and everybody else in general, has strongly held beliefs BEFORE events occur.
By contrast, for example, the computations and math models that prove Anthropogenic Global Warming (AGW) are a modern miracle. They have made accurate predictions, and proved consistent with past data.
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