| > Externalities don't invalidate the entire theory The model is a simple deductive truth only when its premises -- which include actors that behave strictly according to the rational choice model (including perfect information) and the absence of externalities. Neither of these is generally true in the real world. > I think you read my sentence as "(following the principal of maximizing profits is what is most socially beneficial) in the absence of externalities" where what I meant was "following the principal of (maximizing profits (in the absence of externalities)) is what is most socially beneficial". Both have the failing when being applied to the real world that they silently assume the assumptions of the rational actor model, including perfect information, and either way they present problems when used as a statement about a real-world decision in which externalities are present (though the exact nature of the problem differs between the two.) > Classical economics with optimal "Pigovian" taxes can be thought of as a first order approximation to reality. Not justifiably. I'd agree that approximating optimal Pigovian taxes is a worthy goal for government policy, but I don't think that there's any justification for assuming that actual government policies do that. (In fact, given the distribution of power over government policy that would have to occur for that to be true, there's a pretty good reason to assume that its not even approximately true.) Further, the behavioral model underlying classical economics are a tolerable first order approximation of reality in select markets, and useful baseline from which, via different circumstances in other markets which explain variation, to explain the behavior that occurs in other markets were they aren't good as such an approximation, which (aside from the prominence of ideologies which are justified by giving that model too much weight) is why its still taught. > Also, you can produce any Pareto efficient outcome from free markets + redistribution. Making many of the same assumptions with limited and occasional connections to real behavior that underlie your previous statements, starting with the rational choice model (including perfect information), this is true. Not sure what your point is with it, or how it is supposed to be germane to the discussion. |