Efficiency Disclaimers

Though I generally avoid disclaimers, since Bryan Caplan calls my latest claim that econ efficiency is a good tool for finding win-win deals “complete nonsense,” let me try to clarify:

  • We have many purposes when we talk about “what to do”, and making deals is only one of our purposes.
  • Getting what we want is only one of many reasons we try to achieve deals; we also want to signal our features, for example.
  • Analysis aids are only one of many sorts of aids that can help us to make deals; aids can also to organize negotiations, enforce deals, etc.
  • Most useful deal aids are relatively specific to a particular context, such as real estate sales, or marriages; when available, more specific tools tend to be more useful.
  • Deal aids can specialize in what groups that they best assist.  A particular aid might be best suited for couples, club, firms, or nations.  Wider aids specialize in assisting larger groups.

Economic efficiency is our best wide general analysis tool for finding win-win deals that get people what they want.  That isn’t everything, but it is a lot.  I’m glad I mastered this tool and am eager to apply it.  Efficiency can:

  • Suggest Deals – Efficiency analysis suggests policies to make “the biggest pie.” A deal also needs folks to agree on a way to divide the pie, such as via cash transfers between the parties.  Even so, knowing better ways to make bigger pies should make parties more eager to agree to deals to lock in such gains.
  • Be Part Of A Deal -  Groups can make explicit deals to adopt the results of efficiency analysis.  For example, legal systems can adopt a general accident rule that puts responsibility on the least cost accident avoider, and government agencies can be instructed to make policy decisions on a cost-benefit basis.  Most can reasonably expect to gain from such policies, even if they do not expect to gain from each particular application.

Admittedly:

  • Efficiency analysis is a rough guide, and does not determine exact implications with certainty for each possible situation.
  • The policies efficiency recommends depend on particular modeling assumptions and parameter estimates, for example, and those depend on particular analysts and sources used.
  • Even when negotiators have access to solid analyses, deals can fail for many other reasons; good analysis doesn’t ensure good deals.
  • Most deals are not between all possible parties, and each deal may well disadvantage those not included in the deal.
  • People may expect to gain from a deal, but end up not actually benefiting.
  • As a wide general tool, efficiency is less useful for small deals or for contexts where specialized tools are available.
  • Efficient deals may well be immoral, or unattractive for other purposes of deal-making, or of “what to do” talking.

Few deals can guarantee to get everyone more of what they want, but by encouraging and enabling more better wider deals, the use of efficiency analysis sure seems to me to tend to get most everyone more of what they want.  Isn’t that good enough?

OK, now that I’ve tried this exercise of explicitly listing many possible disclaimers, when is this sort of exercise actually worth the effort?

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  • Bryan Caplan

    It would have been sufficient if you said: “When I said ‘everyone,’ I meant ‘most everyone.’” I’m not jumping on you for lack of disclaimers, but for stubborn overstatement.

  • rapscallion

    i) Continuing my criticisms of efficiency analysis from the prior thread, “Efficiency isn’t Moral,” the problem with cost-benefit analysis is that its accuracy can never be tested. You can only test the accuracy of a cost-benefit analysis by doing another cost-benefit analysis, but all cost-benefit analyses are based on the assumption that prices reflect efficient tradeoffs, which means ipso facto that the previous decisions must have been right.

    ii) Given the deep methodological problems with efficiency, what’s wrong with just using intuitive moral concepts, ones for which we’re wired, to help us make deals: fairness, reciprocity, honor, etc.

    • nazgulnarsil

      the whole point of a money economy is that accounting in money is trivial. accounting in social capital is impossible, and with a lack of transparency comes corruption, as we see in economies that run on such systems.

  • http://www.permut.wordpress.com Michael Bishop

    Might not be the sexiest post but I think its great.

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