Monday, November 06, 2006

Pareto Fallacy

The Pareto Fallacy is probably the biggest problem in the economics profession. Economists are aware of it, but it nonetheless infects the way they think and talk about things.

Back in my grad school days Greg Mankiw gave a talk about how much better our public policy decisions would be if only everyone knew a bit more economics. The fact that he had just released an introductory economics textbook was of course pure coincidence. Certainly a better informed electorate would be better, and perhaps make it a bit less likely that people would believe in Tax Cut Ponies and other Republican nonsense, but his thinking was clearly driven by the Pareto fallacy. One example he gave was that if people knew why rent control was bad policy they'd vote against it. Tell that to the fixed income senior, or the family on food stamps. As Yglesias says, policies which increase the size of the pie also change the sizes of the slices. It is in fact a normative judgment to believe that making the pie higher is always better no matter what the distributive consequences. People still need to put food on their families.