Must-Read: John Quiggin: The Most Misleading Definition in Economics (Draft Excerpt from Economics in Two Lessons)

Must-Read: John Quiggin: The Most Misleading Definition in Economics (Draft Excerpt from Economics in Two Lessons): “‘Pareto optimal’ is arguably, the most misleading term in economics…

…Pareto sought to undermine the utilitarian version of liberalism that dominated 19th century economics, according to which the optimal (most desirable) economic outcome was the one that contributed most to human happiness, often summed up as ‘the greatest good of the greatest number’…. The egalitarian implications of utilitarianism reflect the fact that the needs of poor people are more urgent than those of the better off. So, aggregate utility all be increased by policies that benefit the poorest members of the community, even if these benefits come at the expense of those who are better off. It follows that a substantial degree of income redistribution will be socially desirable…. Pareto’s big achievement, further developed by a large number 20th century economists, was to show that much of economic analysis could be undertaken without reliance on the concept of utility. Hence, interpersonal comparisons of utility, which invariably lead to the conclusion that redistributing wealth more equally is beneficial, could be dismissed as ‘unscientific’.

Pareto didn’t stop with an attack on the economic implications of utilitarianism. Utilitarians such as John Stuart Mill saw that their philosophical framework implied support for political democracy, including the enfranchisement of women…. Pareto reversed this reasoning, arguing that a highly unequal distribution of income was both inevitable and desirable… any attempt at redistribution must be essentially futile…. Pareto… bec[a]me one of the first advocates of a political position combining an extreme free-market position on economic issues with hostility to political liberalism and democracy….

Describing a situation as ‘optimal’ implies that it is the unique best outcome…. This is not the case…. A highly egalitarian allocation can be Pareto optimal. So can any allocation where one person has all the wealth and everyone else is reduced to a bare subsistence. Recognising the inappropriateness of describing radically unfair allocations as ‘optimal’, some economists have used the description ‘Pareto efficient’ instead, but this is not much better. It corresponds neither to the ordinary meaning of ‘efficient’ nor to the meaning with which the term is commonly used in economics…. Opportunity cost gives us a better way to think about the possibility of making some people better off while no one is worse off. If such possibilities exist, then there are potential benefits that have no opportunity costs…. A ‘Pareto optimal’ situation may be described, more simply as one where all opportunity costs are positive.