Wednesday, January 20, 2016

Not pretty

Electioneering seems to bring out the worst in the candidates -- and the voters. You often heard candidates promise to "fight for you."  That's ominous in so many ways.   Democracy has always had its detractors but just look at it when the size and scope of our government are bigger than ever.

The textbooks evoke the idea of "equity vs. efficiency" trade-offs. Google Scholar beings up 2,680 citations for the exact phrase ("equity-efficiency trade-off"). There may be other ways to say it and not all of the citations use the textbook definition, but a quick check suggests that most do.  Never mind that "equity" can mean many things.

But how plausible is the trade-off idea in a world of crony capitalism. Farm subsidies, for example, enrich rich farmers at the expense of taxpayers and misallocate resources at the same time. Less "equity" as well as less economic efficiency. This Mercatus report makes essentially the same point. Is there any reason to doubt that most of the laws and policies on the books do not give us less of "equity" as well as less economic efficiency?

As is often the case, the textbooks cannot let go of a seemingly simple idea -- no matter how implausible it is.  There are of course many other examples: "perfect competition" and "perfect knowledge", ubiquitous "market failure" and "monopoly power", high and dry "equilibrium" etc., etc., etc.

Here is a slightly dated reference to research by William Baumol that finds 80% of the benefits of innovation go to the public at-large while 20% go to the investors. Is this "fair" is it "equitable"?  I would say "yes" and many others (especially in an election year stump speech) would say "no."

Innovation? No thanks! Not exactly revealed preference but not pretty either.