Saturday, November 26, 2011

Economic Efficiency

From Cosma Shalizi's fable on Pareto optimality and economic efficiency:

And so, in yet another triumph, the market mechanism has allocated a scarce resource, viz., the turkey, to its most efficient use, viz., being turned into artificial shit. What makes this the most efficient use of the scarce resource? Why, simply that it goes to the user who will pay the highest price for it. This is all that economic efficiency amounts to. It is not about meeting demand, but meeting effective demand, demand backed by purchasing power.


  1. Ankur Kulkarni said...

    Good article. Efficiency is not a bad or flawed idea, it is just not universal. The fact is that efficiency has its quirks and one needs to be careful about them. The same can be said of capitalism too - it is the blind faith in its universality that is at the root of all our current economic problems.

    Historically, it is partly the Chicago school's adamance on using "efficiency" as a target for an economy that has propelled it. Even Adam Smith wasn't as much a champion of it, as say Milton Friedman. There is also a certain mathematical elegance to it which makes it a seductive concept; so seductive that many are lead to believing that "it must be true" and should be used universally.

  2. MP said...

    If the artist is paying 11 cents and the tramp 10, most restaurant owners will give the turkey to the tramp. Who knows, even the artist might give the turkey to him. Or the tramp may mug the artist, or the restaurant owner is an evangelist. Maybe the artist will be run over by a car, or arrested by homeland security. His maid could throw the installation out the window because he was sleeping with someone else. There are no perfectly rational agents in this world, and no perfectly separate-able situations.

    The Chicago School is one reason why I don't have much respect for that university. It seems to specialize in Tom Green type academics, who think being preposterous is the same as being original.