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Thursday, June 14, 2007

I just can't keep my opinion to myself (blame Mankiw)

Mankiw today says the following in response to a report regarding social welfare / utility:

"They believe:
1. Tax policy should be set to maximize a social welfare function.
2. The social welfare function has strong aversion to inequality.
3. The tax-setting social planner must take into account that taxes are distortionary, but elasticities are small enough that the distortions are not much of a problem until tax rates reach much higher levels than we have today.

Note that points 1 and 2 are about political philosophy rather than economics. Economists can have opinions about these matters, but our opinions are not much better or worse by virtue of our training than those of anyone else. One can even reject the whole idea of a social welfare function. ..."

I read that, then shook my head in shamed dissapointment at this expression of how closed-minded Econ is and has been for years. My response:

I don't buy your logic Prof. Mankiw.

First of all points 1 and 2 are not at all about a 'political philosophy' - it's about common sense (the field of psychology also has a good deal to say about this). The fact that comprisons of interpersonal utiltiy is not wholly possible in the real world doesn't mean that these differences don't exist - it just means we aren't sophisticated enough yet to measure it well.

So we fall back to what we can measure well, despite the fact that pareto efficiency has severe drawbacks (precisely because it ignores equality).

I also disagree that we as economists should continue to shrug this stuff off as 'outside our realm.' That's very closed minded thinking and it's the kind of thing we econ nerds get bashed for. Econ at its core is just the study of behavior under constraints and scarcity. It's time we start advocating a more mulidisciplinary approach to economics and stop falling back on useful yet severely limited metrics.

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