... are the first fundamental theorem in welfare economics, and methodological individualism. There's an interesting debate at the moment concerning both, and it'll be no surprise where I stand.
Firstly, Dani Rodrik argued that there's two kinds of economists: those that think "The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best", and those who think that "The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions." My response was
Two types of economist, those who see the first fundamental as the best way to classify economists, and those that don't.
Rodrik's post received a lot of attention, and Alex Tabarrok responded
The First Theorem gives sufficient conditions for a market to be efficient it does not give necessary conditions.
Thus, as a matter of logic, the fact that the theorem's conditions are not satisfied does not prove that market outcomes can be improved, even by "well-designed" interventions.
Lawrence White also articulates it beautifully:
The First Fundamental Theorem of Welfare Economics ... merely provides a set of sufficient conditions for reaching an optimum. It is mostly used by critics of the market, who fallaciously argue that the failure of one of the sufficient conditions to hold is proof that the unfettered market is not best (as though we were talking about a necessary condition). The reasons for believing (not “proof,” because it’s not a mathematical proposition) that unfettered markets work best are not in Arrow-Debreu but in Mises, Hayek, and Kirzner.
Secondly, Chris Dillow supported the view that "there's no such thing as society", by providing the important qualification that ""Government" and "society" are merely shorthand for "groups of individuals"". If you tell me that "Romania decided to adopt a flat tax", I'll ask "what did Romania have for breakfast?" Neither makes any sense. Yet Norman Geras objected, by mistaking methodological individualism for atomistic individualism. And so did Daniel Finkelstein. Nikolai Foss and Peter Klein are also excellent on MI, and allow me to repeat the words of a poster child methodological individualist:
”Mind is as much the product of the social environment in which it has grown up and which it has not made as something that has in turn acted upon and altered these institutions”
Hayek 1973:17
The striking thing about both of these debates, is that neither Rodrik nor Geras/Finkelstein have honestly attempted to understand the other side of the argument. Notice which part of my comment Rodrik responded to (and which he ignored). They are attacking ghosts, and just sidestepping the argument.
Recent Comments