Seeking an Explanation for the Stagnation

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This is the second of two posts I am writing in reaction to Adam Martin, who wrote two responses to my essay about ways in which James Buchanan may be leading free market economists astray with his ideas. This post will focus on social welfare functions and debt.

To start, I am a perplexed that Martin claims social welfare functions are a “zombie” idea that was “buried” long ago by Kenneth Arrow and James M. Buchanan. Maybe this is true amongst libertarians, but social welfare functions are alive and well in numerous areas of modern economics, including climate change economics, optimal tax theory, and macroeconomic growth theory, just to name a few. Neither Arrow nor Buchanan buried them, and it may be a sign of an insulated culture amongst Austrian economists that Martin incorrectly thinks they did.

With regard to Arrow’s “impossibility” theorem, Martin supports the unpopular Independence of Irrelevant Alternatives (IIA) condition. IIA is indefensible for at least two reasons. The first is that it requires pairwise comparisons. That is, it requires the decision maker to choose between alternatives in pairs, rather than in groups of three, four, or some other number. There is no basis for this assumption. It certainly doesn’t conform with reality, where people routinely choose amongst many options simultaneously. For this reason alone, we can disregard Arrow’s theorem.

Even if we assume the pairwise comparison restriction is reasonable, IIA has other problems. For example, it rules out the possibility of contingencies. In a previous essay, I used the example of how if the option to go to college becomes available, this could change a preference ordering I have with respect to how I spend my evenings (studying or partying). By excluding information from this alternative as “irrelevant,” it’s as if consequences are removed from consideration.

If Martin doesn’t like my college example, a common example found in the academic literature is third party candidates running in a political race, which can result in strategic voting. Some Florida voters in 2000 preferred Nader over Gore, but in a matchup between Nader, Gore, and Bush, they voted for Gore in hopes of preventing Bush from winning the election. They did this because they care about the outcome of the election. According to IIA, Bush running against Nader and Gore shouldn’t result in strategic voting of this kind. Again, consequences seem not to matter.

Read the full article on Econlib.