Thursday, April 16, 2009

Efficiency? Is it meaningful?

Robin Hanson, arguing for efficiency versus liberty in economic policy: "Each person's dollar value of a deal is (minus) the compensation he or she would need to become indifferent to (i.e, not care to choose) this deal plus compensation package, relative to the status quo. This says how much he wants the outcomes produced by this deal (and may or may not agree with what he says he wants). The sum of such dollar values says how efficient, or good, is the deal; if it is positive, the deal is good; else it is bad. "

Does this not make a key implicit assumption, that is most likely not true?

That is, doesn't this simply assumes that each person will have valuations that are comparible - such as ones that are close together? If 10000 people have a dollar value pro, and one person $9999 anti this summation would say do this. But a buck is almost nothing, money is not a linear scalable - for example, a penny is nothing, most people do not even bother to pick them up, but $100 is something. A buck versus $9999 valuation is a huge difference, one that is lost in this summation process. One can say, yeah but we can set things up so that there is a cash transfer so the guy valuing at $9999 will get paid. Then one asks in retort: how about hold outs? Those who are indifferent can simple misvalue, also - as it is difficult to place value - a "multidimensional measure" - on a single index (money), so isn't the whole process somewhat ineffective for complex issues (where one would want to use this)? And how about close to unbound valuations (i.e. very personally felt issues)? Especially when they are opposite?

Valuations will be highly personal and difficult to accuratly price and extreamly nonlinear - so comparisions will only be meaningful if values are close together, were we can assume (more correctly) that, say your $80 valuation and my $95 valuation can be contrasted. A linear summing process on one metric seems a downright silly thing to do on something that is highly nonlinear, multifaceted, and different for each participant (and potential participant) involved.

The basic liberty vs. efficiency argument comes down to this: distributed free choice, or aggragated bound choice. Not having aggragated bound choice may limit what is possible - but given that some minority will most likely always be bound by an "efficient" outcome (otherwise what are we arguing? If not bound, then this is simply a way to pick among different "liberty" choices, and Hanson is simply saying - "here is one metric to help us compare": who doesn't agree with this? After all, we can ignore the metric, or take it into account - if cheap to do, why not? Information is good.) that they don't like picking the efficiency approach is picking to hurt a few for the many.

I look forward to more postings (and possible release of the taped version) regarding the debate: the questions of choice & exchange & interactions is what makes me interested in economics. Without further information I can't say too much on this, but as it sits I can't tell how serious Robin Hanson takes efficiency.

To me the question is a deep & difficult one - how do we make aggragate decisions? A simple linear summing of a single index seems useless for any important issue. Efficiency arguments are useful at the margin, for selecting choices that are similiar and where participants have similar tastes - here they can be effective in finding better solutions, added up this can offer a lot of wealth and value. Beyond that, i.e. for anything we actually care deeply about in life, they are not so useful.

Liberty as a policy is also limited, but in trying to pick "just one" it would be the more valuable as a starting point. If Hanson disagrees with this, would he not think that debate and discussion - which assumes honest actors whos choice and understanding can be influenced- is not as meaningful as simply polling people? After all, debate and discussion is based on, for me at least, a liberty perspective - we are looking for understanding and treat our "opponents" as intelligent free agents who can change our minds (or the audiences). We do not force the issue by taking a poll and saying "yes, efficient outcome says that 52% agree that liberty is the winner so that is... wait a minute, what does this mean?!!".

By entering the debate format, didn't Robin automatically lose? Didn't his action suggest he actually does believe in liberty? ...of course this assumes that debate is related to liberty, which perhaps Robin does not agree with?


  1. I think the thrust of Robin's argument is that when people are in conflict, they can often reach a mutually beneficial deal, and economists can help them find out what they deal is by using efficiency analysis. Robin does not 'hate liberty' or think that the value of liberty should be ignored. The debate was mostly about the idea of consistently applying efficiency analysis vis a vis overriding your efficiency analysis when you find it limits liberty.

    Check out the audio here:

  2. I didn't mean to suggest Robin is against liberty.

    "Didn't his action suggest he actually does believe in liberty?"

    I meant to attach "over efficiency" in that statement; I have read the overcomingbias articles of Robin's (including his defense of the "liberty heuristic") & the posts on econlog - thanks for the audio link, I'll be giving this a listen later. It will give much more insight.

    If the deal is mutually beneficial, this, by definition, is the liberty position. Once you break this and override in favor of efficiency it is "against liberty" - and here it becomes a problem, one is taking a simplistic tool, too simplistic for the task I argue.

  3. I don't have a problem with Robin consistently applying an argument from efficiency as opposed to an argument from liberty. That is, I agree that efficiency arguments are typically more convincing than moral arguments, especially when you have special training in performing efficiency analysis (like economists do).

    I do find it puzzling that he suggests that when liberty and efficiency are in conflict, you should argue for the limitation of liberty in the name of efficiency. I am willing to say we should do what is efficient over what is not efficient ceteris paribus. But I am not willing to say we should do what is efficient in spite of any other consideration: to me that idea is crazy. I do not believe Robin really thinks this either; I think he is stubbornly supporting a position of consistency to make the point that consistency is important.

  4. "agree that efficiency arguments are typically more convincing than moral arguments, especially when you have special training in performing efficiency analysis"

    I still have to listen to the audio - will do soon! - but are *you* convinced from efficiency arguments alone? On anything that really matters to you are you willing to be truly convinced and bound by efficiency selected outcomes? Does anyone?

    I think that there are two classes of problems - (1) ones where we have a bundle of options we are all basically on board with, which we want to pick the best from, and (2) problems which we feel deeply about and there are wide variation in preferences and beliefs and valuations.

    I do not think anyone would really get on board with efficiency vis a vis their "important" issues. I can't see convincing an anti-abortion person into accepting an "efficient outcome", a nazi, a commie, a libertarian, a vegetarian, someone who loves raw butter, or any other issue that beliefs that are highly divergent and felt exist.

    Even if running the efficiency analysis supported your view on key issue X, would you think that that is the *most important* reason to support the idea? If some sort of efficiency analysis said liberty is not the policy to select would you be convinced?

    I'll stop arguing from a vacuum - I'll listen to the debate first - but based on all my discussions with people, reading, and self reflection I do not see efficiency as convincing...

  5. No, I am not totally convinced by efficiency arguments alone. I consider the efficiency outcome to be an important consideration in decision making.

    Consider the case of protectionism. People are not typically protectionist because they have performed the efficiency analysis on free trade and determined comparative advantage to be bunk. They are also not protectionist because they think free trade per se violates their moral sensibilities. It is because they believe that if other people (foreigners) are winning, they must be losing.

    The beauty of efficiency is that an efficiency analysis can show people that under different rules, many times everyone can get more of what they want.