Pareto efficient is such a useless concept for any economic controversy; most real world decisions about how to structure society aren't between one Pareto efficient outcome and one non-Pareto efficient outcome, but between two Pareto efficient outcomes with different stakeholders gaining and losing.

If one trillionaire has their every indulgence satisfied, while the rest of the world starves, and our one trillionaire refuses the minor inconvenience of selling off one of their dozen yachts to invest in feeding everyone else? That's a Pareto efficient outcome; you can't make everyone else happier without making the trillionaire slightly less happy. This is a made-up story, but analogous to what actually happens, where there are many, many possible Pareto efficient ways to run the world, but those which privilege the status quo wealthy are always pointed to as somehow imbued with mathematically proven optimality because they are "Pareto efficient".

You mean that right now you think the world is in a Pareto efficient state, and the only question is distribution? You have a much more optimistic view of the world than I do.

Everyone agrees that Pareto efficiency isn't everything. But even there, the Second Welfare Theorem literally tells you how to efficiently redistribute wealth away from the trillionaire, to move to a different Pareto outcome.

Real policymaking is much messier than any of this, of course.

I believe most controversies over how to structure our economy/society/etc are not between "possibility X" and "possibility Y which everyone considers as good as or better than possibility X", given that they are, well, controversies. However poorly one thinks of the masses, Pareto improvements are not the stuff that people argue over; this is a red herring to the substantive questions.

My feelings about all of this, including the Second Welfare Theorem, are roughly those outlined in this post (or rather, series of posts): https://www.interfluidity.com/v2/date/2014/06.

"Most recently, we’ve seen that the 'welfare theorems' — often cited as the deep science behind claims that markets are welfare optimizing — don’t help us out of our conundrum. The welfare theorems tell us that, under certain ideal circumstances, markets will find a Pareto optimal outcome, some circumstance under which no one can be made better off without making someone worse off. But they cannot help us with the question of WHICH Pareto optimal outcome should be found, and no plausible notions of welfare are indifferent between all Pareto optimal outcomes. The welfare theorems let us reduce the problem of choosing a desirable Pareto optimal outcome to the problem of choosing a money distribution — once we have the money distribution, markets will lead us to make optimal production and allocation decisions consistent with that distribution. But we find ourselves with no means of selecting the appropriate money distribution (and no scientific case at all that markets themselves optimize the distribution). We are back exactly where we began, wondering how to decide who gets what."

> Real policymaking is much messier than any of this, of course.

Thanks for your posts which I find interesting. Can you point me to any good sources on crafting better policies?

For context, I'm most interested in better policy choices that generally prioritize 'equal opportunity for all' as opposed to trying to engineer 'equal outcomes for all'.

I don't know a good new source, but there's an old book by Alan Blinder, "Hard Heads, Soft Hearts" that talks about how to take existing policy goals and how to redo them so that they are more economically efficient.

> Economics specifically does not make that assumption.

As everything in economics, it depends on which branch you're talking about, but this assumption is the core of the marginalist revolution which is fundamental to the whole classical branch and it's derivatives, which makes the vast majority of mainstream economics nowadays, because the neoclassical synthesis made the biggest part of the Keynesian school move toward this assumption (say hello to micro-founded macro).

Anecdotally, claims that [insert a foundational hypothesis of classical economics] isn't really that important in the whole model has been the favorite defense of neoclassical economics against criticism since at least Friedman in 53 ( it might have existed before, but none of them had the popularity of his Essays in positive economics)

Classical economics is something different -- think Smith and Ricardo. Marginalism is sometimes called neoclassical, but is distinct from classical economics. The neoclassical synthesis was macroeconomics from the 1940s until the stagflation era. Micro-founded macro was later. I don't think neoclassical has a very clear meaning -- I would call any kind of Keynesianism non-neoclassical, personally.

Anecdotally, it's because so many people are bullshitting when they claim that something is a foundational hypothesis of the mainstream. People prefer to argue against a caricature rather than the real thing.

I don't see how micro-founded macro models equate utility with willingness to pay? Work-horse New Keynesian models begin with a representative agent so willingness to pay of different consumers doesn't even make sense in this context. Moreover, these models are (to my knowledge) seldom used for welfare analysis but rather to examine things like the effects of montetary policy on employment and growth. Models with heterogeneous agents certainly don't assume willingness to pay is the same as utility. I'm an econometrician not a macroeconomist though so perhaps I'm missing something.

They don't equate the two in macro.

> As everything in economics, it depends on which branch you're talking about, but this assumption is the core of the marginalist revolution which is fundamental to the whole classical branch and it's derivatives

Marginalism is saying something much more precise than that. It is saying that (in the given example) the two people value their marginal dollars differently than they value one marginal unit of coffee. A statement which is certainly objectively true, but doesn't capture the apparent contradiction present in the original example.

You seem to talk about Menger's view of marginalism, but Menger isn't really part of the classical branch I am talking about: he founded the Autrian School and was pretty skeptical about the neoclassic school at its time.

I suppose you could be right. My understanding is that literally that is what marginalism is. Where are you getting the idea that there are multiple branches of it?

> Where are you getting the idea that there are multiple branches of it?

That's common economics history: Marginalism was “invented” by Jevons and Menger pretty much at the same time (and Walras came a bit later with no prior knowledge of the two others' work at time of writing).

Jevons' work lead to the birth of the neoclassical school, while Menger's founded the Austrian school, and those two where pretty antagonistic for a while (One of Keynes' biggest achievement is probably the reconciliation these two branches in order to fight against his legacy ;).

This isn't accurate. Whatever Jevons and Menger thought of each other, the Austrians and the British were not completely distinct schools. People would call both groups "neoclassical".

The Austrian school in the modern sense only broke with the mainstream with Keynes. They had their own alternate explanation of the Great Depression that never caught on. I think the leaders of the school just moved to the US and became increasingly dogmatic, so modern Austrianism is a small niche.

There was a more recent form of macro that is anti-Keynesian that can be called "neoclassical", which would be the real business cycle theory, but it doesn't owe much to the modern Austrians. If you want to identify it with a specific marginalist, it's closest to Walras.

> Austrians and the British were not completely distinct schools. People would call both groups "neoclassical".

Nope.

Pareto efficiency might be more useless than "calculate the physics problem assuming air resistance is negligible"

It is exactly as useful. Macroeconomics was completely tangled up until people understood that in a perfectly function economy there was be no business cycle, that even a serious shock would only temporarily slow down the economy. So the focus turned to understanding the market imperfections that make temporary dislocations have such long-term effects.

Physics in idealized situations is incredibly useful, and more importantly, absolutely necessary for understanding non-idealized real situations, so I'm not sure what you're getting at here.

Arrow-Debreu isn't all it's cracked up to be: http://frankackerman.com/publications/economictheory/Interpr...

Can one prove that an idealized perfectly competitive market is Pareto efficient or is this taken as a definition?

There's a proof...

...but then again (1) nobody has ever seen an idealized perfectly competitive market; (2) it's by no means clear that an idealized perfectly competitive market even serves as a useful approximation to the ones we have; (3) efficiency (in the narrow sense defined by efficient markets) is not the goal we want to be pursuing anyway.

There's a proof. The theorem is called the "First Welfare Theorem". There's also a "Second Welfare Theorem" that says that you can achieve any Pareto efficient outcome through a perfectly competitive market and lump-sum taxes.

IIRC Kenneth Arrow proved something around it yes.