Lars P. Syll — David Andolfatto and the Chicago dismissal of ‘involuntary unemployment’

Roger Farmer schools David Andolfatto on some history of economics. 

The dismissal of ‘involuntary unemployment’ from the lexicon of the modern economist was introduced as part of a deliberate attack on Keynesian economics. It is time to roll back that attack. As I have shown here, ‘involuntary’ unemployment is a useful way of distinguishing unemployment that is part of a social optimum, from unemployment that is not.

Ten dogs, nine bones.

It doesn't matter how much job seekers are willing to reduce their offers if there are too few bids for workers. Some workers will be unemployed "involuntarily," the veil of Pareto optimality notwithstanding. And Keynes explained why there are too few jobs for those willing and able to work regardless of wage flexibility.

Lars P. Syll’s Blog
David Andolfatto and the Chicago dismissal of ‘involuntary unemployment’
Lars P. Syll | Professor, Malmo University

Branko Milanovic — What remains of Pareto?

My class on personal income distribution theories (within-nations) begins with Pareto. Pareto will indeed be for ever part of such classes because he was the first economist to have been seriously interested in empirical analysis of inter-personal inequality. Before him, economics was about functional income distribution which, of course, makes sense if you assume that all workers are at subsistence, all capitalists rich, and all landlords even richer. Then, you do not need to bother with inter-personal inequality. It is just a transformation of factoral income distribution. (This is, I think, most obvious in Ricardo who cannot even conceive of a possibility of wages ever going above subsistence—except temporarily to precipitate the Malthusian movement. The advantage for modeling—since Ricardo’s “Principles” are in reality an exercise in verbal modelling—is that you have one fixed quantity and you can then let others vary).

It is just a minor simplification to say that Pareto thought that there was an iron law of income distribution, namely that inequality did not change whatever social system was in power. It gave consistency to his theory of the circulation of the elites, because whatever elite be in power (land-owning, capitalist or bureaucratic), income distribution would be the same although the people who would be rich or poor would be different. It was a serious critique of the idea that Marxist socialism would reduce income inequalities. 

What remains of Pareto’s claim? Several things are clear now--more than a century after Pareto defined his power low and showed that the number of recipients of a given income decreases in proportion as that income threshold is raised. Pareto law does not apply to any entire distribution.

Global Inequality
What remains of Pareto?
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Matt Bruenig — Pareto Fail

Occasionally, I happen upon people who claim that they base their economic justice views on the idea of Pareto Improvements. On this view, economic justice requires that all moves to make individuals better off must not make other individuals worse off. Those who promote this view often seem to have roughly laissez-faire capitalist preferences. In this post, I outline just a few of the problems with this view, especially as applied to reach laissez-faire capitalist conclusions.…

This Pareto Improvement rationale for laissez-faire capitalism is a joke, and the above is only a short sample of why.

Right. Under Pareto optimality, we would still have slavery in the US since freeing the slaves would make the slave owners worse off and the nation, too, by destroying capital. This was a central issue in the period from the drafting of the US Constitution to emancipation.

Another sounds good principle based on false logic.

Matt Bruenig
Pareto Fail

Thomas Palley — Looking for flimflam: some hints on where to find it

Palley repeats the usual criticism of New Keynesianism, which New Keynesians brush off.

Then he attacks assumption of Pareto optimality. According to Wikipedia,

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society.

If it were known at the time, Pareto optimality would have used to defend the ownership of human capital in the debate that culminated in the US Civil War and Emancipation Proclamation. This has been estimated to be the largest destruction of capital that occurred simultaneously until that time.  The agricultural economy of the South was devastated and along with the culture,  making some much worse off by making others better off. Economically it was a disaster; ethically, socially and politically, it was the right thing to do. While contemporary inequality does not rise to that level of inequity and iniquity, it is a similarly significant, indeed  serious, issue ethically, socially and politically, and, it can be argued, also economically.

Now to the big enchilada which I did not mention in my post because it would have confused an already difficult subject matter. Absent imperfect competition, price and nominal wage rigidity, and other market failures, the so-called new Keynesian model delivers Pareto optimal outcomes. In my view, the notion of making Pareto optimality the benchmark for describing and discussing capitalist economies is silly. Yet from the moment one enters an economics classroom that is the frame through which theoretical thinking is forced. The economist who tries to offer another theoretical frame and stands in the way of that juggernaut will be excommunicated by the mainstream.

 Touché.

Looking for flimflam: some hints on where to find it
Thomas Palley

Josh Hendrickson — What is Fair?

Josh Hendrickson weighs in on Piketty.

Notice how his argument assumes methodological individualism based on ontological individualism that ignores that human being are situated in society, culture, and institutions, so that individual action is entirely free of social influence. Which is absurd from the point of view of the life sciences, social sciences, history, and psychology.

I am not picking on Professor Hendrickson here, since he does not put this forward as his own view personally. Rather, he presents it as how economists think about these things.

These economists whom he mentions appear to be without a clue about how life actually works in the real world outside their heads. I remember the day when this was said about philosophers, but now economists have taken it over.


The Everyday Economist
What is Fair?

Josh Hendrickson | Assistant Professor of Economics, University of Mississippi

P.A.P.-Blog — Human Rights, Pareto Improvements, and a Difference Principle

Human rights activism is rarely zero-sum, in the sense that we can only improve the rights protection of some through the imposition of an equal loss on others.

P.A.P.-Blog // Human Rights Etc

Human Rights, Pareto Improvements, and a Difference Principle

Chris Dillow — Jungles, Matches & Optimality

What I'm edging towards here is a point made (pdf) - in a different context - by Amartya Sen, that Pareto optimality isn't as great an ideal as economists think.If you can't abolish slavery without making slave-owners worse off, then slavery is Pareto optimal.

Stumbling and Mumbling
Jungles, Matches & Optimality
Chris Dillow | Investors Chronicle (UK)