Wednesday, 22 April 2009

Views on the scope of government

Also over at TVHE Matt Nolan gives a simple distinction between the broad brush strokes of libertarianism, the underpinning beliefs of economics, and statism as statements for the scope of government.

Libertarian:

  • Market prices are a good allocation mechanism - therefore market prices make sense.
  • Initial endowment of resources is fair - therefore no need to redistribute initial endowments.

Economist:

  • Market prices are a good allocation mechanism - therefore market prices make sense,
  • Initial endowment of resources is unfair - need a democratic state to define what is fair and redistribute endowments.

Statism:

  • Market prices are a poor allocation mechanism - therefore market prices are not necessarily any good and pragmatic government shifts to prices make sense,
  • Initial endowment of resources is unfair - need a democratic state to define what is fair and redistribute endowments.
Now I'm not 100% what either the "initial endowment of resources" is, or what "fair" means. But thinking in terms of an Edgeworth box, if you don't like some given endowment-call it the initial endowment-you can move it to an endowment you do like via lump-sum payments. Basically this is the second welfare theorem. So for economists I don't see why they would much care about the initial endowment. Such an endowment could be either fair or unfair, but changeable without incentive effects. It would be the "final endowment" rather than the initial that they would worry more about. Their main concern would be efficiency.

For libertarians, is it the case they think that any initial endowment is fair, or is it they they think a reallocation of that endowment would create more problems than it solves? Would they not see a forced reallocation as a violation of a person's rights? Which returns us to the first of the two points, that they would see a market reallocation of resources as fair.

Also why should any of the three think that an initial endowment is necessarily unfair? For example, if in the Edgeworth box, the initial endowment is the center point, would any of three call this unfair?

2 comments:

PC said...

Initial "allocations" are neither fair nor unfair. They simply are what they are. (Morality begins only what is done, not with what is.)

The interest begins with subsequent "allocations": does one get to keep what one has produced, or not?

Matt Nolan said...

"So for economists I don't see why they would much care about the initial endowment. Such an endowment could be either fair or unfair, but changeable without incentive effects. It would be the "final endowment" rather than the initial that they would worry more about. Their main concern would be efficiency."

I'm not sure I agree. We love prices as the efficient allocation mechanism - but we realise that the initial endowment can be moved to provide different levels of (not Pareto-ranked) welfare.

We actually need the transfer to occur to say it is welfare optimal - which is why the allocation of the initial endowment (which can be changed through lump sum transfers) matters.

However, I agree that in reality the idea of initial allocation is vague - and is hard to separate from the allocation mechanism of prices. But, the recognition that a requirement of a lump-sum transfer may be required to maximise welfare provides a reason why economists generally push for larger govt than libertarians.