regmonkey pretending to understand econ, beginner distributed energy enthusiast
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ALT They were trying to make comparisons that would go beyond the so-called the Pareto principle—which acknowledges an improvement only when some people gain and nobody loses. Plausible enough (it seemed), but with relatively rare applicability. The compensation test was meant to take us well beyond this simple case. What did it say? To summarize rapidly, consider a change from which some people gain and others lose. If the gainers have gained so much that they can compensate the losers and still retain some gain, then it’s an improvement according to the compensation test. So you ask the question, Do they actually compensate the losers? No, they don’t have to do it—the losers stay losers (all we are checking is whether they could have been compensated). I mean, what kind of an improvement is that? The losers can rightly think this to be a con job. Can the compensation test be made more persuasive by insisting that the compensation that is possible be actually paid?
ALT The others—the “compensators” involved— have also gained. Can’t we acknowledge this to be an unequivocal improvement, and isn’t this a “hooray” for the compensation test? Yes indeed, but what kind of a victory is this for the compen- sation test? After compensation, there are people who are better off and no one is worse off, but that surely is just a Pareto improvement, which is already accepted in welfare economics. Why do we need the compensation test at all then, which appears to be either completely unconvincing, or totally redundant? More particularly, there is no progress here, especially in dealing with inequality or poverty, and we are stuck with just the distribution-indifferent Pareto principle.
ALT Angus Deaton: Before you go on from there—we’re laughing about these compensation tests and how stupid they were, but they’ve totally infected American jurisprudence today. Amartya Sen: And within economics, international trade theory, too. Angus Deaton: Yes, and the Supreme Court is applying compensation tests like that on a day-to- day basis. Amartya Sen: I know. It is saddening. Angus Deaton: Violating contracts is fine if the surplus is large enough. So this monster is still out there. Amartya Sen: I know. But never underestimate the power of a bad idea. Angus Deaton: Especially if you can express it in three seconds.
