Allocative Efficiency for Beginners

By James Kwak

I was catching up on some old Planet Money episodes and caught Allen Sanderson of the University of Chicago talking about how to allocate scarce resources. The first day of introductory economics, he says, there are always more students than seats. Say there are forty extra people, and he can only accept ten more into the class. He asks the class: how should the ten slots be allocated? You can easily guess the typical suggestions: by seniority, because seniors won’t be able to take the class later; by merit (e.g., GPA), because better students will contribute more to the class and get more out of it; to the first ten people outside his office at 8 am the next day, since that is a proxy for desire to get in; randomly, since that’s fair; and so on. Someone also invariably suggests auctioning off the slots.

This, Sanderson says, illustrates the core tradeoff of economics: fairness and efficiency. If you auction off the slots, they will go to the people to whom they are worth the most, which is best for the economy as a whole.* If we assume that taking the class will increase your lifetime productivity and therefore your lifetime earnings by some amount, then you should be willing to pay up to the present value of that increase in order to get into the class. An auction therefore ensures that the slots will go to the people whose productivity will go up the most. But of course, this isn’t necessarily fair, especially when you consider that the people who will get the most out of a marginal chunk of education are often the people who have the most already.

Sanderson is quite reasonable on this topic. He says that the discipline of economics has focused almost entirely on efficiency rather than fairness because the former is more susceptible to analysis, but that there is still no way to decide what the right balance of efficiency and fairness is.

But I think the picture is still a bit more complicated. Even if we assume for a moment that allocative efficiency is the only thing we care about, it’s far from clear than an auction will give it to us. If people could (a) predict their increased productivity from taking the class, (b) predict their increased lifetime earnings, (c) discount those earnings to the present (which implies knowing the proper discount rate), and (d) borrow up to that amount of money at the risk-free rate, then, yes, everything would work out OK. But this is clearly not the case, since then people would be bidding thousands if not tens of thousands of dollars to get into the class.

Still, you might say that people’s willingness to pay for the class — even if it’s just that one person is willing to pay $60 and another is only willing to pay $5 — is a valid proxy for the value of the class to them. So instead of thinking in terms of lifetime productivity, we’re thinking of the class as a short-term consumption good, and it would provide $60 of utility to one person and $5 of utility to the other. (Note that we’ve given up the idea of maximizing the ultimately economic impact of the class.) But then we have to ask whether money is a valid proxy for utility, and at this point the chain of reasoning breaks down. My willingness to pay for various goods might reflect their relative utility to me, but saying that different people’s willingness to pay for the same good reflects the relative utility of that good to those people is a much greater leap. Most obviously, a rich person will be willing to pay more for some goods than a poor person, even if those goods would provide more utility to the poor person. Assume for example that the rich person has a wool overcoat, the poor person has no overcoat, and the good in question is a cashmere overcoat.

This may seem obvious, but the point is that allocative efficiency in dollar terms does not translate into allocative efficiency in utility terms. The whole justification for allocating resources in dollar terms is that it’s the best available proxy for allocating resources in utility terms. That may be true, but the two are still not identical.

By the way, in practice Sanderson just lets everyone into the class, and eventually enough people drop so that there are seats for everyone.

* What you do with the auction proceeds doesn’t matter, so you could just give them to charity. According to Ronald Coase, you should get the same allocative result if you distribute the slots randomly but then let people trade them among themselves. You will still get allocative efficiency, only now the distributional benefits are shared with the lucky recipients of the slots. In practice, however, this won’t work because of endowment bias (the tendency to overvalue things you have and undervalue things you don’t have.)

44 responses to “Allocative Efficiency for Beginners

  1. I agree with the entire argument here. Except for the part where you have this gigantic concession that it “might be true” that dollars the best available proxy for allocating resources in utility terms.

    That sir, is ridiculous.

    Consider the following hypothetical. Society has a million dollars. There are two choices that we will consider for that money. Either we bring clean drinking water to a poor rural village, saving lives. Or we use that money to buy luxury vehicles for rich people.

    Well, I can guarantee that from the perspective of utility. It makes more sense to provide the clean drinking water to the rural village. To assert that it “might be true” that ability and willingness to pay money is the best proxy for utility is a stupid concession to make.

    I think this illustrates something about economics. The more economics classes you take where economists make what are clearly unreasonable and wrong assumptions (all in the name of being supposedly “objective”) the more reasonable those unreasonable and wrong assumptions start to sound.

    There is absolutely no reason whatsoever to think that dollars allocate resources efficiently if what you are trying to do is maximize utility. Look around you. Common sense will tell you that people buy a lot of pretty useless stuff (I sometimes buy stuff I don’t even need or sometimes even use much afterwards) even while critical needs are not met (like clean drinking water in some rural villages).

    Why not say something a little stronger. Like, it is clearly not true that dollars are the best proxy for allocating resources in terms of utility? Are you really that lacking in certainty on this point?? Afraid to take a stand? Can you really say that it “might be true” that allocating everything in dollar terms is the “best proxy” for allocating resources on the basis of utility when the facts that suggest otherwise are clearly before your eyes? Can you say this even after people end up dying due to a lack of clean disease-free water or famine or lack of cheap vaccines (which they really do in some parts of the world) while others (like me) have the luxury of occasionally buying stuff we never even use afterwards and so much of our economy is devoted to buying status goods that bring only momentary pleasure, but nothing like true meaning or happiness?

    I think it is important to take a stronger stance than you are.

    What if I said it “might be true” that 1 + 1 = -57?

    Admirable sign of conciliatory reasonableness or itself an unreasonable concession I should never even consider making?

    You decide.

  2. @David Welker
    Beautifully stated! The assumptions that are used to advance an academic discipline are often at the outset known to be unreasonable or arbitrary, yet get propagated into policy discussions because they are the basis for models and textbook analysis. It takes but a moment for the users of such assumptions to forget that they are there, or that they were known nonsense to start.

    Money as proxy for all human utility is one of the most fundamental things wrong with US society. Believe it or not, it was not always so: Up until about 1980, this was a view held by a small minority, much despised. There was a broad consensus that those who held such a view should be ashamed of themselves. Times do change.

  3. Which resources are absolutely, as opposed to artificially as a matter of intentional policy, scarce? Certainly none of the necessities of life, and not productive, fulfilling employment either.

    He says that the discipline of economics has focused almost entirely on efficiency rather than fairness because the former is more susceptible to analysis, but that there is still no way to decide what the right balance of efficiency and fairness is.

    I doubt that fairness would be any harder to analyze if even a small fraction of the resources were put into it which are currently put into lying on behalf of kleptocracy. The reason economists emphasize fraudulent pseudo-efficiency rather than fairness (which is also far more truly efficient, using that term in its English language rather than its Orwellian sense) is because they’re paid to be such liars.

  4. If people could (a) predict their increased productivity from taking the class, (b) predict their increased lifetime earnings, (c) discount those earnings to the present (which implies knowing the proper discount rate), and (d) borrow up to that amount of money at the risk-free rate, then, yes, everything would work out OK. But this is clearly not the case, since then people would be bidding thousands if not tens of thousands of dollars to get into the class.

    You clearly had a much better introductory economics course than I did. I’d estimate that the contribution of my first economics class (many years ago) to my current productivity is pretty close to 0.

    More seriously, the two flawed assumptions in Sanderson’s argument are that people are rational, and that they have perfect knowledge of the contribution of his economics class to their future earnings and productivity. This seems embarassingly obvious, at least to most non-academic non-economists.

  5. And all these students have the same resources? I think not. I think there will be many students, like my friends in college, who came from middle-class families and were getting through college on student loans.

    They’d be lucky to have $500 to spend.

    I, OTOH, would simply be able cash a bond and use however much money necessary to secure a spot. Which illustrates one of capitalism greatest flaws. It is not nearly as efficient in allocating its resources as many pretend.

    Case in point, AT&T. They’re America’s largest telephone company. They got that way by acquisition of semi-monopolies because people put a lot of money into the company, not service-related merit.

    And so it goes. Time and time again large, cash-rich, yet otherwise second-rate, technology-lagging, crappy-service companies simply absorb their better, yet smaller and not as well-heeled competition.

  6. I apologize ahead of my comment as I realize this blog strives for sincere intellectual analysis.

    That said, I must admit I laughed as I read the post. Certainly NOT at Mr. Kwak, rather at what immediately came to my mind.

    First, the entire auction process sounds like our legislature, which most would agree is now “captured”. They basically “go to the highest bidder”. A “captured” prof in Econ 101.

    The bidders, if we parallel them to those who own our legislators, are not in the least interested in some nontangible, future, possible outcome. No, the bidders want immediate, tangible results, like supportive legislation- or perhaps that A in econ 101?

    Thirdly, the concepts of efficiency and fairness in such an auction system? Surely you do jest. One merely needs to look at our society to see how THOSE concepts are applied.

    Finally, as for donating the “take” to charity? Sounds like a great tax writeoff for the ol prof and possibly wielding some influence for board status at some future date? Maybe some hocus pocus tax returns?

    Mr. Kwak, thanks for a good chuckle.

  7. The Auction fails to achieve a fair or efficient outcome because of a lack of liquidity. None of the other options achieves a fair or efficient outcome. Sanderson’s solution may come close, but it wastes the time of the drop-outs. The efficient coat outcome has the poor man buying the old wool overcoat.

    It is unfortunate that we teach economics to students who usually face severe liquidity constraints which make it more difficult for them to understand theory. There should probably be more focus on the economics of imperfect market conditions. We should teach students to identify when practice is different from theory and how to design markets to achieve the least inefficient outcomes under imperfect conditions.

  8. I would assume that a side market would be allowed in which all potential attendees would be allowed to borrow or lend money in order to back up their bids. And the loans could not be reneged on. Thus losing bidders would still have to repay the debts they incurred. But could only potential attendees participate in the loan/borrowing market?

  9. @ MosesZD in on-the-mark.

    The following statements are completely absurd outside of the fictitious world of Economists:

    “If you auction off the slots, they will go to the people to whom they are worth the most, which is best for the economy as a whole.”

    (Assumptions: Everyone has the same time, money, health, schedule, distance to the course…)

    — and —

    “Still, you might say that people’s willingness to pay for the class — even if it’s just that one person is willing to pay $60 and another is only willing to pay $5 — is a valid proxy for the value of the class to them.”

    (It is hardly a valid proxy if the income and/or wealth of the parties are disparate. If I am unemployed with a net worth of $10K, and the party willing to pay $60, has an income of $70K/yr and a net worth of $1M — is it rational to use their $5 and $60 as if they are on the same scale? Hardly.)

    ——————

    There people, a chemist, an engineer, and an economist become shipwrecked on an island. The only surviving food are cases of canned beans. The start to think of how to open them. The chemist says she can create an acid from some of the plants on the island and use it to eat through the metal…but there would likely be some contamination of the beans. The engineer says they could drop the cans from a point above the coral reef…but some of the beans will likely be washed out to sea. After a few more minutes of silence, the economist pipes up and says, “Well, we could assume we have a can opener.”

    The “idiocy” of economists sitting in ivory towers is exasperating, and dangerous to the rest of us.

  10. Typo: “There people..” should read “Three people..”

  11. @Everyone who has commented so far: Thanks for such incisive responses to Mr. Kwak’s post. Since I cannot improve upon what has been said so far, let me just compliment all of you.

  12. Blunt Instrument

    @ David Welker

    The more economics classes you take where economists make what are clearly unreasonable and wrong assumptions (all in the name of being supposedly “objective”) the more reasonable those unreasonable and wrong assumptions start to sound.

    I’m not convinced. Your assumption that society only produces clean water and luxury cars sounds “clearly unreasonable and wrong” to me. Or is the problem that you’re not an economist?

  13. Blunt Instrument,

    Not an assumption, just an illustration.

    I have heard all the defenses of the false assumptions embedded in economic models before, including those made by Milton Friedman in his Methodology of Positive Economics. I am doubtful that you can make the case half as well as he did.

    The problem with economic models as excessively used (and often misused) by economists is not that they logically MUST lead us to forget the assumptions that we are making. The problem with them is that they inevitably do. Human beings are imperfect, so the question is not merely whether economic models MUST logically lead to errors in thinking, but whether it is likely that they will do so. And in fact it is very likely that they will do so. I have seen it over and over again.

    Economists would do well to embrace words more and problematic economic models less. Yes, models have their place, but they should be used with much more caution than they are. Economists often think they get a lot of insight out of their models. I think they get a lot less than they realize.

  14. I sometimes pose to my students an extension of this argument which is why shouldn’t I just auction off grades? They would go to the highest bidder and this would be an efficient way to allocate several important goods: “grades”, my time, their time. I also occasionally point out that they do not need to use a numeraire to bid for “grades” but could provide in-kind services. I am also extremely careful to add that this is a thought experiment and that no actual “grades” will be auctioned off or otherwise harmed….

  15. “The whole justification for allocating resources in dollar terms is that it’s the best available proxy for allocating resources in utility terms”

    Yes – linear utility in income must certainly be the best approximation. Diminishing marginal utility is just nonsense.

    I hope you don´t actually believe that.

  16. PS: Still – a very good post.

  17. Startlingly narcissistic and self serving.

    About the only *single* class at the graduate level with any particular long term value is one in which you are given real assistance in structuring your own research and writing project.

    ie., Shouldn’t this class have to produce something to be add value?

    All other faculty are interchangeable cogs and that includes interchanging them with printed materials that replace them entirely.

    Interesting how they suddenly contort the logic of post-industrial capitalism all over the place when it’s their useless can on the line.

  18. After reading the comments, I can help but think that the only way to insure efficeincy and fiarness is to let David Welker decide who gets to atend the classes. Since his decisions are likely to upset some people, we should also stablish a gulag in Alaska for the dissidents.

  19. Bruce E. Woych

    A great teaching model: I look forward to the advanced class and its critical perspective on this standard we call “efficiency” that has such a final verdict in our formula world. Here is an interesting splice of history on the entire question of “efficiency” (but it is certainly not the last word on precisely how many faces this “ultimate measure” can present:

    http://topdocumentaryfilms.com/light-bulb-conspiracy/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TopDocumentaryFilms+%28Top+Documentary+Films+-+Watch+Free+Documentaries+Online%29

    The Light Bulb “Conspiracy”

    Another side of the “learning” model.

  20. Stephen A. Boyko

    Mr. Kwak –

    Does “Pareto efficiency” aid your analysis? A situation is said to be Pareto efficient if there is no way to rearrange things to make at least one person better off without making anyone worse off.

    Further definiing the conflation error often provides clarity in in separating dollar terms that do not translate into allocative efficiency in utility terms.

  21. Bruce E. Woych

    “…the University of Chicago talking about how to allocate scarce resources.”

    “This, Sanderson says, illustrates the core tradeoff of economics: fairness and efficiency.”

    Not to split hairs on the issue being discussed (efficiency?) but the differential access to resources is the very definition of stratified society; not fairness and efficiency.

  22. Bruce E. Woych

    @David

    “I think this illustrates something about economics. The more economics classes you take where economists make what are clearly unreasonable and wrong assumptions (all in the name of being supposedly “objective”) the more reasonable those unreasonable and wrong assumptions start to sound.”

    I think you have a gold vein here, David, and one that is difficult to tap without crossing certain triggers. My compliments! And my compliments on your own website:
    (by David Welker: among other very well structured arguments
    SEE:

    http://www.david-welker.com/search?updated-max=2011-03-22T18%3A44%3A00-07%3A00&max-results=7

    David Welker

    I hope you are going to be a regular among us.
    Commentary on Technology, Politics, Economics, and Law.
    Tuesday, March 22, 2011
    A proposal for cooperation among bleeding-heart libertarians and liberals.

  23. Bruce E. Woych

    @ cedar

    You are right on the MONEY!

  24. Blunt Instrument

    @Vladimir
    Well said.

    @David Welker

    Not an assumption, just an illustration.

    A distinction without a difference. Your illustration necessarily assumes that there are only 2 goods.

    Economists would do well to embrace words more and problematic economic models less.

    If by “words”, you mean “public policy”, I think you have it exactly opposite. The problem is that economists (and ESPECIALLY non-economists) extrapolate incorrectly from the models. They should stick to what they suspect and can somewhat reasonably predict. Which isn’t very much.

  25. Bruce E. Woych

    http://en.wikipedia.org/wiki/Emissions_trading

    * What you do with the auction proceeds doesn’t matter, so you could just give them to charity. “According to Ronald Coase, you should get the same allocative result if you distribute the slots randomly but then let people trade them among themselves. You will still get allocative efficiency, only now the distributional benefits are shared with the lucky recipients of the slots. In practice, however, this won’t work because of endowment bias (the tendency to overvalue things you have and undervalue things you don’t have.)”

    Why does this sound so much like “Cap and Trade” ???

    http://en.wikipedia.org/wiki/Emissions_trading

  26. @David Welker
    “Economists would do well to embrace words more and problematic economic models less.”

    I disagree. Inasmuch as economics invariably has a political component, embracing words would drop economic thought into the morass of fuzzy political rhetoric, which rests more on catchphrases than on analytical thought.

  27. The notion that auctioning things ensures that they go to those to whom they are worth the most is a rather stupid fallacy. It supposes that money has a fixed value for everybody, which is nonsensical. If $10,000 is a year’s income for one person and an hour’s income for another, the fact that the latter is willing to pay that much for a good is not evidence that he values it more. In fact, if that is his highest bid and the other person is willing to pay $20–roughly four hours versus one–then one might argue that the good is valued more by the poorer bidder and should go to him.

  28. @Bruce
    And in what way has Coase said anything about it – this is simply trading with a (government created) good, not the market finding the optimal level of emissions?
    (I understand that it´s not your words)

  29. Fascinating if you do actually apply this to the problem of access to higher education and the reality that a quality college education is becoming unaffordable.

  30. @Blunt Instrument

    If you can’t see the difference as well as the distinction, that is your limitation. I will give you a hint though. A counter example is different than a model.

    Also, even if it were a model, that only proves that models are sometimes useful, not that they do not also have issues.

    @jakepgh

    You can’t escape issues of politics if you want to give policy advice. So, if economics wants to actually be a relevant field for the rest of society (that is, a field that produces policy insight) it is going to have to grapple with complexities that go beyond analytically clean models. It should be further pointed out that just because you personally enjoy analytically clean models as a consumption good (just as some others enjoy science fiction novels as a consumption good), that doesn’t mean that they are very relevant for the rest of society without also grappling with the unavoidable real world complexities that go beyond such analytically clean models.

    Or to put it another way, stay away from the complexities of the real world all you want. Just don’t expect anyone else to find your policy advice useful. Or better yet, don’t even bother giving policy advice.

  31. Bayard Waterbury

    James, really thoughtful article about an economics as philosophy issue, as many of us understand the discipline to be, in practice. After all, any political party can hire a serious (or several for that matter) Nobel Prize winning economist to validate their particular political economic agenda.

    Recently we have seen, in many ways, a special instance which may serve to demonstrate the validity of this. The owner of the LA Dodgers has filed bankruptcy and Major League Baseball has taken over the team until a new owner can be found. There is a broad assumption that they are looking for a wealthy person or group of wealthy people to buy the team. However, just how much consideration is there being given to forming a public corporation and, as with the Green Bay Packers, having Dodger fans buy and own the team through purchasing shares of stock. Will MLB’s Commissioner consider this option, or will the fans continue to pay extraordinary ticket prices and getting ripped off at the concession stands to see ball games (very few kids go now)?

    What your argument has done for me is to show how capitalism is fraught with moral peril. Clearly, in a world of shrinking resources per capita, capitalism will lead to massive amoral rationing. It is already happening in many ways, and unfettered capitalism is heading down a path toward social collapse. The allocation of resources is a perilous thing in any society, but especially now and in the future globally. In fact, if we care to dig deeply, almost every problem the world is presently experiencing is about resource allocation. Sadly, humanity seems to be losing the battle of wisdom and prudence to greed and overreach.

  32. Blunt Instrument

    @ David Welker

    and if Milton Friedman can’t explain assumptions in economic models to you, then that that must be HIS limitation. or a problem with economic models. Because it couldn’t possibly be that YOU just don’t understand it. Could it?

  33. What the heck is New Jersey supporting in New Mexico?

    Roswell crowd control or the aliens? :-)

    Cut and pasted from the lowly state college conversations, “If your state is receiving more than a $1.00 in federal funding for every dollar you spend in taxes, feel free to give it back to those of us funding your arrogance.

    New Mexico $2.03
    Mississipp¬i $2.02
    Alaska $1.84
    Louisiana $1.78
    West Virginia $1.76
    North Dakota $1.68
    Alabama $1.66
    South Dakota $1.53
    Kentucky $1.51
    Virginia $1.51
    Montana $1.47
    Hawaii $1.44
    Maine $1.41
    Arkansas $1.41
    Oklahoma $1.36
    South Carolina $1.35
    Missouri $1.32
    Maryland $1.30
    Tennessee $1.27
    Idaho $1.21
    Arizona $1.19
    Kansas $1.12
    Wyoming $1.11
    Iowa $1.10
    Nebraska $1.10
    Vermont $1.08
    North Carolina $1.08
    Pennsylvan¬ia $1.07
    Utah $1.07
    Indiana $1.05
    Ohio $1.05
    Georgia $1.01
    Rhode Island $1.00
    Florida $0.97
    Texas $0.94
    Oregon $0.93
    Michigan $0.92
    Washington $0.88
    Wisconsin $0.86
    Massachuse¬tts $0.82
    Colorado $0.81
    New York $0.79
    California $0.78
    Delaware $0.77
    Illinois $0.75
    Minnesota $0.72
    New Hampshire $0.71
    Connecticu¬t $0.69
    Nevada $0.65
    New Jersey $0.61″

  34. I wonder if rationing is really amoral. What if one limits one’s own consumption? If we learned to base consumption on actual need?

    I firmly agree that capitalism is fraught with moral hazard, and the danger is that as we have created models, like the Greeks created models of the planetary system, that we suppose are dictated by natural laws and not by personal choices. If there were never enough seats in the classroom, what foolish administrator kept scheduling the class for the same room? Or created a another section?

    Models rely on assumptions which the better part of wisdom commands we ignore.

  35. CBS from the West

    So, tomorrow night when I prepare dinner for my family, I think I will deliberately not make enough for everyone, and I will auction off the portions to the highest bidders. I guess my little girl will go hungry–her allowance is pretty paltry. Too bad, so sad.

    My point is that context is important in deciding how to allocate resources. If I needed to sell off some of my things to raise cash to pay my bills, I wouldn’t put out an RFA asking people to demonstrate how much they need or would benefit from owning them. I would sell them to the highest bidder.

    Context matters over time, as well. Only a little more than a century ago, life was nasty, brutish, and short. The very survival of our species was far from assured and we were at constant risk of starvation, pestilence, natural disasters, predation… It can be argued that applying principles of economic efficiency helped us develop the technology and infrastructure that supports modern life and eliminated most of those threats.

    Today life is long. The nastiness and brutality persist–but now we inflict them on each other, rather than being victims of nature. There are new threats to our survival–most of them arising from the solutions to our earlier problems. If we agree that maximizing economic efficiency in the sense of this post was once critical to human evolution (and I’m not sure that it might not have been accomplished in other ways, but for the sake of discussion…) we must nevertheless be prepared to acknowledge that we need new paradigms to solve new problems, and that economic efficiency no longer promotes the overall well-being of humanity.

    The continued veneration of economic efficiency as an ideal persists in part due to cultural inertia, and in (larger, I think,) part because it so well serves the interests of the predators who rule over us.

  36. “This, Sanderson says, illustrates the core tradeoff of economics: fairness and efficiency. If you auction off the slots, they will go to the people to whom they are worth the most, which is best for the economy as a whole.”

    That is simply BS. It ignores the question of money. You could just as well say that they will go to the people to whom money is worth the least. I. e., the rich. That’s wrong, too, but perhaps more obviously so. ;) What is correct is the question of affordability. Taking the class may be worth the most to me, but I may still be outbid by someone with more money. In an auction the slots would go to those who want to take the class and can afford to outbid others. I do not pretend to be able to set a precise function for that.

    The easy assumption that money does not matter can lead to the conclusion that the best thing for the economy as a whole is for the rich to get the goodies.

  37. Kudos for making this blog post. It is actually good. Getting excited about the next piece of writing.

  38. @CBS
    “…we must nevertheless be prepared to acknowledge … that economic efficiency no longer promotes the overall well-being of humanity.”

    I think one of the reasons for the ever-present cognitive dissonance in US political “discussions” is that there is one group of people to whom “the overall well-being of humanity” is paramount, and another that believes not only that selfish behavior is justifiable, but that it is (magically!) the best route to “the overall well-being of humanity”. In economic terms, the latter position depends on negative externalities (pollution, resource depletion) being nearly free. Your point, well-taken, appears to be that the negative externalities are no longer free, but increasingly costly and dangerous to humanity as a whole.

    BTW, I quoted you on another matter on our blog.

  39. Blunt Instrument

    @ jakepgh

    is that there is one group of people to whom “the overall well-being of humanity” is paramount, and another that believes not only that selfish behavior is justifiable, but that it is (magically!) the best route to “the overall well-being of humanity”

    You correctly identify that both groups of people want to maximize “the overall well-being of humanity.” You also suggest a means by where the second group seeks to achieve this “overall well-being”. However, you fail to mention how the first group seeks to maximize “well-being”.

    Either a) they have no plan; b) they believe that it is found in the application of fairy dust and unicorn tears; or c) the plan is obvious to everyone in the “one group of people” and need not be explained to the other group, as they are wholly unworthy of it’s splendor.

    Which is it?

  40. I think the problem with the world is that folks think that the allocation of scare resources is a topic to speak of instead of outer space mining. As the galaxy gave us many planets with tons of minerals and resources all for us to use. All we have to do is get there before the Communist Chinese are following exactly in the Soviets foot steps. From everything from creating a Bloc which is now called the Bric, to trying to implement a single world currency, to literally going on a resource domination campaign.

    n Nomeni Patri Et Fili Spiritus

    http://rideriantieconomicwarfaretrisii.blogspot.com/

    Rider I

  41. If China is following the Soviets footsteps then the US doesn’t have much to worry about judging from past events.

  42. Vishv jeet

    It would be interesting if we auction the class slots with the condition that student would have to pay the bid by using the money they will earn by working on campus. This will introduce some sort if fairness into auction efficiency.

  43. “But I think the picture is still a bit more complicated. Even if we assume for a moment that allocative efficiency is the only thing we care about, it’s far from clear than an auction will give it to us. If people could (a) predict their increased productivity from taking the class, (b) predict their increased lifetime earnings, (c) discount those earnings to the present (which implies knowing the proper discount rate), and (d) borrow up to that amount of money at the risk-free rate, then, yes, everything would work out OK. But this is clearly not the case, since then people would be bidding thousands if not tens of thousands of dollars to get into the class.”

    An addition to point (c). To discount it back, not only would they need to know the appropriate discount rate but also know at what point this increase in productivity comes and how long it lasts (how many years of life they have left).

  44. @ Vishv jeet

    I’m not so sure if that would work. What if some (or all) of them earn similar wages – Or all of them earn different wages? (wage rates maybe the same but total wages might be different). It would depend on factors other than just the capacity to bid. The problem with the latter in my view is that it may be obvious who wins. The criteria then will move to another factor – desire to pay perhaps?

    The only thing that’s “fair” is chance!