Saturday, September 03, 2011

An efficent economy

It's a matter of controversy not only how to measure macroeconomic efficiency, but also if the notion of macroeconomic efficiency is even meaningful.

Consider the game of chess as an extended metaphor. From any individual player's perspective (i.e. the "micro" perspective), efficiency seems rather obvious*: efficiency is the number of games won divided by the total number of games. There might be some subtleties, but basically each player wants to win as many games as she can. But what happens when we take an aggregate ("macro") perspective and look at all the players in all the games? No matter what happens to any individual player or sub-group of players, our "aggregate efficiency" is always exactly 50%. For every winner, there's a loser. Considering efficiency as the proportion of games won to games played, there's nothing at all we can do at all to change the aggregate efficiency of chess.

You should, of course, treat my use of "obvious" as a red flag. When I say "obvious", I'm begging you, gentle reader, to carefully examine my assumptions.

Not only does this measure of individual efficiency fail to be interesting at the aggregate level, there is no interesting or meaningful aggregate measure of chess efficiency at all. The smallest aggregate we can look at is both players of a single game. For an individual, there are more or less efficient moves—an efficient move is one that makes winning more probable. But the aggregate efficiency of each move, considered from the perspective of both players simultaneously, is exactly 50%. The purpose of a game of chess is to determine which player is, at least at the moment, the better chess player. The best way to determine the better chess player is to let each player make whatever legal move she decides to make. Any interference, prohibition or compulsion beyond the legal moves actually detracts from the purpose of the game. An "efficient" chess game is one with no outside interference.

Alternatively, consider the art world as another metaphor*. To preserve the analogy with macroeconomics, assume we cannot change the total amount of resources devoted to art. (In macroeconomics, we cannot add any outside resources to the whole economy.) Given a fixed amount of resources, how can we produce art "efficiently"? If we differentiate it from superficially popular entertainment, art is just "for itself"; a work of art serves no purpose other than to just exist. Again, any external interference by definition takes away from the "itselfness"; there can be no useful measure of efficiency.

*I'm not committed here to any particular philosophical theory of philosophy; I'm just trying to use a particular theory of art as a metaphor.

My point here is not to argue that economics really is a zero-sum game like chess, or that it's "for itself" like art. I want instead to understand as charitably as possible how modern economists and modern realist political scientists see the world. With this understanding, I think it's easier to explain the fundamental differences between on the one hand laissez faire economics/political realism and on the other hand communism as an economic and political theory.

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