Are undercover economists undercover Communists? by mattsteinglass
November 18, 2009, 2:34 am
Filed under: Economics

I’ve been reading Tim Harford’s book “The Undercover Economist” from a few years back, which is interesting in part because it preserves, as in amber, the sensibility of an untroubled and confident neoclassical economist from the moment before macroeconomics melted down in 2008. Anyway, one of the kinds of slips you might be slightly less likely to come across these days is this one, on P. 67, from a section where Harford is describing the virtues of a hypothetical “perfectly efficient” market economy. One of those virtues is that in a perfectly efficient market economy, “Things Are Going to the ‘Right’ People”:

The only people who buy products are people who are willing to pay the appropriate price. Let’s say I confiscate a cappucino from Axel and give it to Bob. In the world of truth, this is wasteful. Axel was willing to pay for coffee, and Bob was not, which means Axel values coffee more than Bob, and my confiscation is inefficient.

This is obviously not true. The fact that Axel was willing to pay for coffee and Bob was not means that Axel valued coffee more than he valued two dollars, while Bob valued two dollars more than he valued coffee. One very likely explanation is that Axel is rich, and Bob is poor. This tells us nothing whatsoever about who values coffee more.

Of course, in the special case where everyone in the world has exactly the same amount of money, the fact that Axel bought coffee while Bob did not would tell us that Axel values coffee more. But I think it unlikely that Harford advocates a world like that. A bit later in the book, Harford does acknowledge that economic efficiency can be at odds with fairness. But he then goes on immediately to focus on the deadweight loss of imposing taxes for redistributive purposes. I get the sense that these days, Harford might be more alert to the distorting impact on one’s moral equilibrium of assuming that everyone has the same propensity to spend a dollar. On the other hand, on his Financial Times blogs, he still seems to spend most of his time furiously justifying income inequality.

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