Friday, December 30, 2016

Market exchange and welfare

I just read an intelligent economist (not an oxymoron, I swear!) claiming that market exchange "guarantees" that in an unfettered free market, goods go to the people with the highest valued use for them.

Sigh. What about the ability to pay?

Let's say we establish a market in human organs, as many libertarians advocate. And further imagine this market is unregulated, something of which they would no doubt approve.

In such a market, there will be many poor people who need kidneys. But imagine that George Soros likes to have a dozen grilled human kidneys for breakfast every day. Poor people in need of a transplant might very well value those kidneys much more highly than Soros (i.e., if we gave them each a billion dollars, they would easily outbid him for them on a free market) -- but they simply lack the funds to compete with his voracious kidney appetite.

It is reasonable to contend that the price we pay for the benefits of free markets is that sometimes rich people get things that poor people need more: perhaps the benefits of a free market outweigh that downside. (By the way, I think that in general, they do, although perhaps not in every case.)

But it is just nonsense, and economic nonsense, at that, to claim that this problem doesn't exist!


  1. This post sounds a good deal like John D. Mueller's critique of the neoclassical rejection of final distribution: "It came as a jolt, therefore, when neoclassical economists were forced to recognize that the combination of utility, production, and equilibrium is not a logically complete description of any economic activity. The result is not a single, optimum distribution of economic resources, as economists since Adam Smith had assumed. Instead, there is at least one competitive market equilibrium for every possible distribution of income or wealth. That is, even if we knew the total value of goods that can be produced, and everyone’s preferences for those goods, the description would not be complete—the state of equilibrium would not be unique—until we knew which persons would be able finally to consume the goods. Only that would reveal exactly which combination of goods to produce, and at what prices. But the neoclassical economists still had no descriptive theory of final distribution. This hole in modern economic theory is responsible for most of the embarrassments suffered by modern economics. The problem is pervasive at all levels—personal, domestic, and political" (Redeeming Economics: Rediscovering the Missing Element [ISI Books, 2010], p. 86).

  2. This statement also makes an invalid interpersonal utility comparison, in assuming that a dollar is worth the same to everyone. Even if everyone had a billion dollars, the fact that one person is willing to pay more dollars for an item compared to someone else doesn't mean that he values the item more. He could value the item less but also value dollars less than the other person.

    What is true is that if everyone had a billion dollars, then the person who values the item for the most dollars can compensate someone who valued it for a smaller amount of dollars so that both people win. But when there's differences in ability to pay then even that is not true.


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