Utility, welfare, and efficiency
July 7, 2014 3:33 PM   Subscribe

The Utility Monster got nerfed in 4e. It was an outrage.
posted by Sebmojo at 3:59 PM on July 7, 2014 [5 favorites]

This is good. When I was taught Pareto efficiency it almost seemed like the be-all and end-all of decision making: A decision that didn't end up on the Pareto frontier represented a failure because something was being left on the table*. This shows a lot more subtlety. Look at Figure 1 in Part 4, moving from C to A will be bad for Hicks, but it is Pareto efficient. Yes there are potential outcomes that are better off for both parties but if they are not being offered then Hicks should fight for the status quo.

* This was not in economics but rather in classes on decision making and negotiation so the lack of subtlety may have been intentional. Also, I may not have been the most attentive student.
posted by any portmanteau in a storm at 4:23 PM on July 7, 2014

I think this would be interesting to me, but it really needs a [more inside] with some background.

Would anyone be willing to do a quick get-up-to-speed explanation, or drop a link that's a bit more accessible than Wikipedia's articles on economic theory?
posted by Harvey Kilobit at 5:07 PM on July 7, 2014

Interfluidity is always great, glad to see this show up here.

One thing I was reminded of is the usual discussion of "price gouging" after a hurricane, which is mostly just the practice of selling stuff at a price approaching what the market would naturally settle on when supplies become scarce. The arguments in favour of it being an efficient way to allocate goods work well if everyone's equally wealthy; it becomes manifestly unfair only when you imagine it meaning that rich people get to buy up all the bottled water and use it carelessly, leaving none for anyone else.

The hard part is trying to imagine a world where politicians contest, revise, and consider the ramifications of mathematically reified social welfare functions.
posted by sfenders at 6:09 PM on July 7, 2014 [1 favorite]

Uff, kliuless, I've been following these straight from Steve's rss feed and I think these are meaty, thinky reads. I don't envy you the task but, definitely needs context and an introduction.

Harvey Kilobit, I can try.

Economics as a discipline preoccupies itself with maximizing certain outcomes. Given a model x of the economy y, how do we make z work more efficiently?

But on what basis do we decide that a given outcome is preferable to another? Over the years, and borrowing from other philosophies, we've settled on terms like "welfare" and "utility". Utility is what individual rational agents seek to maximize, and welfare is what society enjoys.

As a formal construct, economists settled on a principle called Pareto optimality for evaluating different claims of welfare - i.e. something is welfare enhancing when it improves someone's utility without decreasing anyone else's. It seems to be equitable, and has been treated in the discipline as axiomatic or basically value neutral.

However, as Steve Randy Waldman will show, judgements about different outcomes - as determined by Pareto efficiency - are normative claims that (my words) encode certain ethical and distributional preferences . This is to say, you can't evaluate a claim - you can't judge what people as a whole would prefer - without taking into account the existing distribution of capital.

Certain outcomes that are Pareto optimal in a given distribution of wealth are not Pareto optimal in economies with different distributions; as a result, you can't pretend that the existing distribution of wealth is inconsequential for deciding what is or is not an equitable investment of resources.

He goes on to talk about a few other things, but I haven't read part 5 yet and the remaining parts are all jumbled in my head. It's a bit of a long and wonkish read but not inaccessible if you work through the graphs. Someone correct me if I got any of the above wrong.
posted by pmv at 8:48 PM on July 7, 2014 [5 favorites]

I read this over a couple of beers last night, and while I basically followed the thread, I found myself unable to summarize it afterward. (The beer didn't help.)

The fifth part was pretty concrete to me, though: You can't start from elemental first principles and solve the equations for a perfect society; it turns out economics has very little to say about welfare, largely because the outcome is path-dependent. What you can do, though, is decide upon some arbitrary welfare metric and ask economics how to get there.

Or more in my own words, economic theories cannot tell you what's inherently good. Put that way, it makes it seem absurd that so many people tried for so long to do just that, especially given the lack of corroborating evidence or intuition.
posted by WCWedin at 3:50 PM on July 8, 2014 [1 favorite]

Executive summary here.
posted by flabdablet at 12:55 AM on July 9, 2014

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