| "Who gets to decide what the right outcomes are and whether they are efficient?" Whether or not an outcome is "right" is subjective, and is more in the field of law and philosophy than economics. Whether or not an outcome is efficient for society does not need to be determined as it can be measured. An outcome is efficient for society if it makes at least one individual better off without leaving any other individuals worse off. (This is Pareto efficiency). Of course in the real world, there will almost always be winners and losers with any policy change. The solution is thus to make sure that the total net benefits of any policy change is positive. The net benefits are the benefits (both implied and explicit) of a policy minus both the costs of doing the policy and the costs of potential gains that could have been had by pursuing alternative policies. Both the costs and the benefits should be aggregates that include the costs and the benefits to all parties affected by a policy. One thing that I think is worth thinking about when you look at recent developments in the markets is this. From the time period of roughly the 1950s to roughly the 1980s this form of detailed cost-benefit analysis was popularly employed by both governments and private companies. (I am not actually this old, but I have heard this story multiple times from economists considerably more seasoned than me). Unfortunately, starting in the 1980s, a more expedient form of cost-benefit analysis that focuses mostly on the immediate costs and benefits to the organization conducting the analysis began to dominate. This type of analysis was championed by the finance and accounting oriented economists that began to spring up at around this time. (Disagreement over this and other issues led to university economics departments around the nation dividing from business departments and finding a new home - and less funding - with the liberal arts and social sciences.) It is expensive and time-consuming to conduct a thorough impact analysis, so I can understand why the more academic approach would fade away in favor of something more expedient. However, I think that a lot of the recent problems we see in governance can be traced to this fast-food economic analysis: * Lack of investment in infrastructure? - Well, this report on my desk says that it will be expensive to fix those roads and the ones we have now seem to be holding up just fine * Internet providers want to throttle bandwidth based on its source? - Makes sense, according to this report on my desk providing bandwidth obviously costs money - why not charge for it? * A tax on transactions? - Well, this report on my desk says that would make it more expensive to trade stocks - there's no way this could be beneficial. While the right answers to many of these questions can be found either in economic journals or by speaking with an independent consultant, policymakers rarely have the enthusiasm for a topic to dive so deeply. I hope that soul-searching due to the financial meltdown brings the old approach back in favor. It is sorely missed. |