Handbook on Contemporary Austrian Economics

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58 <strong>Handbook</strong> on contemporary Austrian economics looking at net willingness to pay associated with different potential outcomes, economists have quantitative figures they can rely on to compare different policies. Bryan Caplan (1999, p. 835) writes, "this criterion of efficiency has many advantages over Rothbard's approach. In particular, it actually allows one to make efficiency judgments about the real world - to judge, for example, that Communism was inefficient, or rent control is inefficient, or piracy was inefficient." Not only is economic efficiency held up as useful for positive analysis, many economists also hold up Kaldor-Hicks efficiency as their normative ideal. Policies, legal cases, and property rights should be determined based on how well they maximize economic efficiency. Supporters say it is the best usable proxy for well-being because it not only takes into account factors like monetary income, but also factors like consumer and producer surplus. This construct has advantages over traditional social welfare functions, because it does not attempt to sum up imaginary uti Is, it attempts to sum up an objective and cardinal unit: dollars. Different states of the world can be compared by measuring all people's consumer and producer surplus for all goods and then seeing which state of the world has the highest willingness to pay associated with it. But to certain economic subjectivists, comparing net willingness to pay associated with all different states of the world is much easier said than done. To the thoroughgoing economic subjectivist, Kaldor-Hicks efficiency requires outside observers to know more about individuals' utility functions than outside observers possibly can know. It is one thing to observe a transaction and market price, but how can one observe consumer and producer surplus for all goods, and how can one compare net consumer and producer surpluses in all possible states of the world We know that at the current margin of choice, most Americans are willing to spend an additional one-fifth of one cent to consume their 80th gallon of water in a given day, and we also know that the marginal utility of the 80th gallon exceeds the marginal utility of the one-fifth of one cent forgone. But what is my consumer surplus for all 80 gallons What is your hypothetical maximum willingness to pay for your 70th gallon, your 10th gallon, or your 5th gallon If someone had four gallons and was contemplating purchasing his fifth, we might be able to observe his willingness to pay for the fifth gallon. But given that we are so far from that situation, it is difficult for most people to think about what they would do with only five gallons or how much they would be willing to pay for each of them. If calculating the consumer surplus for one person were not difficult enough, cost- benefit efficiency requires the calculation of consumer surplus of water for everyone. And once one has calculated the
Economic value and costs are subjective 59 consumer surplus for water, the economist then has to calculate the consumer surplus for all other goods. 9 Once one is done calculating total consumer and producer surplus for all goods for everyone in society one then has to compare the net surplus associated with that state of the world, with the net surplus of every other imaginable state of the world.1O To the most thoroughgoing subjectivist, not only is economic efficiency incalculable for simple positive analysis, it is especially meaningless for normative issues. To those whose normative ideal is maximizing economic efficiency, property rights and all other policies must be formulated in a way that maximizes wealth, but to the economic subjectivist there is a problem of infinite regress. When property rights are yet to be defined, willingness to pay is indeterminate, and when willingness to pay is indeterminate, there is; no unique assignment of property rights that maximizes wealth. Gerald O'Driscoll (1980, p. 357) writes, "Maximization makes sense if we know who has what rights, and what rules govern the choice process. The suggestion that the maximization principle be used to determine the rights distribution and the legal rules is almost incoherent." How can willingness to pay determine property rights when willingness to pay is determined by property rightsll Since willingness to pay is only meaningful within a system of defined property rights, we have a circularity problem of using economics to render policy. Economists would need to know who owns the property to solve these maximization problems. Unless economists assume that all people are exactly the same and would spend their money exactly the same way, then the assignment of property rights will matter for evaluating economic outcomes. This means that economists cannot say that a certain outcome is socially preferable even if the standard is willingness to pay. The problem relates to the Scitovsky Reversal Paradox, which shows the potential incommensurability of efficiency levels. This is the case when the willingness to pay attached to one outcome exceeds another under the current assignment of property rights, but once property rights are rearranged the ranking is the opposite. This problem can surface if preferences vary across individuals or if individuals' preferences vary over time. Since changes in property rights can alter the production possibilities frontier, even in a simple two-person world we can have a situation where Person I 's preferred bundle is only attainable in State of the World A and Person 2's preferred bundle is only attainable in State of the World B. Which state of the world is more socially efficient (i.e., which state of the world will have the most willingness to pay associated with it) The answer will depend on the distribution of property rights. When the first person is assigned a large portion of the property rights, the net willingness to see State of the World A will be higher than to see State of the World B, but
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Contents List of contributors Intro
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Contributors Scott A. Beaulier is t
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Contributors ix Society, the Journa
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I Only individuals choose Anthony J
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Only individuals choose 5 perhaps m
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8 Money is non-neutral J. Robert Su
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Money is non-neutral 113 I. Money a
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Money is non-neutral 115 However, s
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Money is non-neutral 117 or less th
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Money is non-neutral 119 of borrowe
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Money is non-neutral 121 the causal
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Money is non-neutral 123 Hume, Davi
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Some implications of capital hetero
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Austrian economics in the twenty-fi
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Handbook on Contemporary Austrian Economics

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