voxette-vk replied to your post
Surely the generalization to other markets is “being good at satisfying demand”?
Ohhh, duh. I am dumb :P (Thanks to @mbwheats for also pointing this out)
I have to be somewhere soon so I shouldn’t write too much, but yes – this is a real and important tradeoff. @furioustimemachinebarbarian said something good about this in this reblog, in that they framed it explicitly as a tradeoff
If you want the capitalist mode of production to work, people need to be able to reap returns from their activities that they can reinvest in capital. But capital investment is just another element of the bundle of goods someone buys, so my argument as stated ought to apply to it as much as to anything else. So my argument, as stated, was too broad.
I hope it was clear that my argument, as stated, was trying to establish the existence of a particular mechanism rather than provide a proposal. I don’t actually want everyone’s wealth to be literally the same at all times (trying to cause this would break all sorts of other things too, I’d expect). Rather, the point was that when the “initial endowments” are closer to equal, supply and demand (which I called “markets,” and which are a distinct desideratum from “capitalism”) work better.
Distinguishing capitalism from supply and demand is important. I should have done it more clearly in the OP, but I am also not sure @neoliberalism-nightly was doing it sufficiently in their ask – as far as I can tell prediction markets are supposed to work because of supply and demand, even without capitalism (which is not yet having a non-negligible internal effect in them).
I’m no longer in a hurry, so let me expand on this a bit.
To be completely precise, the target of my post was the tradition in economics of distinguishing “efficiency” from “distribution.” This distinction encourages economists to treat distribution (i.e. wealth [in]equality) as an outside concern that can be ignored when considering the market mechanism as a system.
The attitude is that the market “works” (in some “efficiency” sense) no matter what is going on with distribution, and insofar as we care about distribution, this is a separate value which we will in general have to trade off against “efficiency” / “the market working.” (Although it may be possible in principle to alter distribution without introducing market distortions, it is not generally possible in near-term political practice.)
This story is internally consistent if you define “efficiency” in the usual way, which is Pareto optimality. We know thanks to Arrow and Debreu (et. al.) that under some idealized assumptions, supply and demand will get us to a Pareto optimal outcome (First Theorem of Welfare Economics), and this is frequently viewed (see e.g. Stiglitz here) as a successful formalization of the views popularly associated with Adam Smith. Even work that is critical of the invisible hand, such as Stiglitz’s, has tended to concede Pareto optimality as the correct formal desideratum, arguing only that markets do not achieve it in practice as much as the First Theorem would lead one to think.
By contrast, my position is that Pareto optimality does not capture the good things we wanted out of the invisible hand in the first place. I first started thinking about this stuff after reading Brad deLong’s very entertaining post “A Non-Socratic Dialogue on Social Welfare Functions,” which I recommend reading. (I am largely just repeating deLong here, and less stylishly at that.)
As in the OP, I think what we want out of the invisible hand is (at least) a market that “gives the people what they want” in some intuitively recognizable sense.
A Pareto optimal outcome is defined to be an outcome in which no one can be made better off without making anyone else worse off. The phrase “can be made” should be interpreted as “by physically achievable means,” like transferring goods from one person to another. That sounds obvious, but has significant implications.
The richer you are, the less marginal utility you will get (on average) from goods you acquire. This is implicit in standard economic assumptions, to the extent that you cannot deny it without being very heterodox at best, and talking nonsense at worst. (You can get it from the usual assumption of convex preferences, plus the idea that individuals have utility functions, since convex preferences correspond to [quasi-]concave utility functions. Or, if you like, you can get concave utility functions from the assumption of loss aversion, without which finance makes no sense whatsoever.)
In practice, if people do deny it, they tend to do it by rejecting the utility concept as a whole (as the Austrians do). But without some way to do interpersonal utility comparisons, I’m not sure how you can even state the invisible hand idea. (How can individual self-interest serve the common good if there is no valid concept of “the common good”?)
OK, enough sidenotes. As I said, the richer you are, the less marginal utility you will get (on average) from goods you acquire. Thus, when there are large wealth inequalities, Pareto optimality is compatible with large sub-optimalities in sum-aggregated utility, in that it allows transfers (from rich to poor) which would increase summed utility a lot. The bigger and more widespread the inequalities, the more sub-optimality we can have (in this sense) even if everything is still Pareto optimal.
There are much more rhetorically forceful ways to put this. deLong puts it this way: if we say that the market’s desirable property is its tendency to produce Pareto optima, we are saying it optimizes a certain social welfare function, and if this function is a weighted sum of individual utilities, then it gives rich people bigger weights than poor people. (He derives this formally here.)
In other words, by saying “we will consider efficiency first and worry about distribution later,” and defining efficiency as Pareto optimality, we are implicitly saying that what we really ask the market to do is “give the people what they want, weighted by wealth.” This is pretty clearly not what we originally wanted out of the invisible hand, and not something that one would ever come up with as a natural desideratum. If the First Theorem vindicates the invisible hand, it is only by moving the goalposts.
Another way of putting it is that, by over-valuing the utility of the wealthy, the Pareto optimality desideratum treats the wealthy as utility monsters.
That last line.
