Sunday, February 20, 2011

Angus Is Right, As Usual!

Holy cow, why so much hatin' on Angus?

Look, the welfare economics case for free trade could be built on (a) the Pareto criterion, or (b) the Kaldor-Hicks Compensation Principle.

As Angus notes, no way you can say moving from protection to free trade is a Pareto improvement. There are winners and losers.

And no Libertarian can invoke the KHCP, because it's collectivist and utilitarian. 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. Angus is obviously right about that.

Two points: First, less of a problem if compensation is actually made, as I suggested last summer at the Takeaway.

Second, I have a paper coming out in an edited volume that points out the equivalence of KHCP and Coase, in terms of costs (in both cases, you are adding up costs and benefits). Differences are (a) KHCP doesn't require consent or compensation, while Coase requires both, and (b) KHCP faces the Hayek problem, because there are no prices to measure welfare costs. Coase forces bargaining and honest preference revelation, EXCEPT when transactions costs of collective action and preference revelation are too high.

7 comments:

Bill said...

You may have already seen this, but, if not, here's an interesting presentation by Demsetz on Coase.

http://percolatorblog.org/2011/02/16/demsetz-lecture-on-coase-on-externalities/

Anonymous said...

I'm not an economist but:

1) Pareto improvement seems like a pretty high bar to clear to me. Moreover its a bar based on policies that are most unambiguously good, instead of most good overall.

2) If you can show that Free Trade allows for a Pareto improvement then I think it dominates no free trade even if we prefer no compensation which isn't a Pareto Improvement. Even if we don't know how to compensate (which I think shows why compensation isnt a good idea) its pretty reasonable for an economist to argue that we should go to a set of policies that would dominate our current one if we redistributed.

3) Mankiw was fusing economic analysis with a pretty common moral intuition that the US should pursue policy that makes it wealthier as a whole. It really wasn't that unreasonable.

Anonymous said...

Anon:
Pareto Improvement is indeed a high bar - too high for almost all policies changes that most economists would agree upon. Another related standard is that a policy change should be adopted if a hypothetical side payment system could be conceived that would make the policy change Pareto improving. This is the standard most economists implicitly ascribe to. It is likely too low of a standard because it is all to easy to claim such side payments could be made if one need not actually make them.

Angus said...

Bill, not only have Mike and I seen Demsetz on Coase in videos, we had a class from Harold where he frequently would Coase it up. At one point in Demsetz's career he was simultaneously employed by Washington University AND UCLA!

increasingmu said...

In making this argument, you're just subverting all modern utilitarian standards. This has nothing to do with free trade per se, but non-natural rights economics.

I don't disagree with the limits of Kaldor-Hicks, but making such an eccentric methodological criticism in the scope of an innocuous statement by Mankiw is nothing short of bizarre.

Mungowitz said...

Increasingmu:

Bull! It's completely unfair of you to single out this one post and call it bizarre.

ALL of my posts are bizarre.

eightnine2718281828mu5 said...

---
so it is inherently coercive.
---

If I don't like the deal my employer gives me, the libertarian response is: tough nuts, find a different employer.

Goose, gander, etc...

If you don't like the deal your country gives you, find another country.

Any country that allows you to emigrate isn't coercive.