Wednesday, December 24, 2014

Welfare Theorem vs Progress Theorem

My post over at Bad Economics subreddit... Welfare Theorem vs Progress Theorem


I'm a little confused...this link that I recently submitted was only upvoted by 13% of you.  Does this mean that 87% of you believe that my blog entry was an example of good economics?  Based on the few comments that were made, I'm guessing it doesn't...but then it means that most of you downvote good examples of bad economics.

It's entirely possible that my economics are truly super bad, but simply downvoting my submission doesn't show me where the badness is.   Neither does simply saying that it's bad economics.

When I was in school, the math teachers were always admonishing us to show our work.  That was a long time ago though.  I'm guessing that they don't do that anymore?  That's really too bad.  Being able to show how you reached a conclusion helps people understand whether you truly grasp the relevant concepts.  In other words, showing your work facilitates learning.

In the comments of my previous entry, abetadist was the only person who attempted to show their work.  This redditor brought up the Welfare Theorem so I thought I'd submit my reply as a new text post in order to show more of my own work and give everybody another opportunity to show their work.  If the bad economics are on my side, then I'd really like to fix the problem.  And if they are on your side, then I'd really like to help you fix the problem.

The Second Welfare Theorem (SWT) basically shows that redistributing wealth from the rich to the poor can improve total welfare.  The general logic is pretty straightforward... a poor person derives far more utility from one additional dollar than a rich person does.

My Progress Theorem (PT), on the other hand, shows that progress depends on difference.  From my perspective, this is also pretty straightforward...we can't make any progress by doing the same exact things with society's limited resources.  Therefore, the greater the variety of activity the more progress we'll make.

Both theorems want to eliminate poverty...but for different reasons.  The SWT wants to eliminate poverty because this would maximize total utility/welfare.  PT wants to eliminate poverty because this would increase the rate of progress.

By way of analogy, let's imagine a vegetable garden.  Right now a few of the veggies are really thriving, happy and productive because they are getting a lot of water while many of the other veggies are struggling, sad and unproductive because they aren't getting enough water.  In economic terms, the allocation of water is inefficient.

The logic of SWT is that redistributing water would increase the total happiness of the plants (Pareto optimal).  The logic of PT is that redistributing water would result in a much more bountiful and diverse harvest (more progress).

It might seem like PT only takes the SWT's logic one step further...

more happiness -> more difference (progress)

This in itself is pretty valuable.  A selfish person isn't going to care about the happiness of poor people.  Instead, he's going to care about his own happiness.  PT endeavors to show that we all benefit when difference is cultivated and developed.  Everybody stands to gain when we all have the opportunity to realize our full potential and share our unique contributions with society.

But the really important difference between PT and SWT is how they approach the elimination of poverty.

If we want to make real progress when it comes to the elimination of poverty...then, according to PT, we need difference in order to do so.  Trying the same approach over and over but expecting a different outcome is Einstein's definition of insanity.  It's also SWT's approach to the elimination of poverty.

If eliminating poverty was as easy as redistributing water in a vegetable garden...then poverty would have been eliminated long ago.  Clearly there's room for improvement and finding it requires facilitating different approaches.  This doesn't necessarily mean kicking welfare over to the private could also mean introducing a bottom up approach to public welfare.  Personally, I think this can be effectively accomplished by allowing taxpayers to choose where their taxes go.  People would still have to pay taxes but their direct allocations would reflect their very different perspectives.  As a result, there would be a diversity of public approaches to the elimination of poverty...which would increase the chances of room for improvement being found and progress being made.  

PT taps into Linus's Law which means that bugs (and solutions) will be spotted sooner rather than later.  Somebody with an especially keen eye might say, "The problem isn't a lack of water, it's these pesky little aphids.  All we have to do is introduce some ladybugs."

Put somewhat differently, PT makes the case for tolerance.  I'm arguing that tolerance and progress are positively correlated.  Tolerating difference, not just of opinion but of action, allows new paths to be taken and increases the chances of new discoveries being made.

So have you spotted any bugs with PT?  If so, then please show your work.

And if there's not enough economic "science" here for some of you, perhaps it might help if you realized that our current system of government is based on an economic model that assumes that congresspeople are omniscient.  You can't get any further from science than that.

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