January 30, 2014

Price and distribution

Comment on 'Pareto-efficiency, Hayek’s marvel, and the invisible executor'


To Fiona
You are of course right to point out that people can save. All we have to do in our example is to lift the condition of budget balancing. I have done this at length elsewhere (see link below). To restrict the analysis to market-clearing and budget-balancing focuses the argument but does not make the special case under consideration absurd.

Market clearing means that the quantity produced is equal to the quantity sold, hence there is no need to deal with inventory changes on this occasion. Markets never clear in the period under consideration but this, too, is an issue for another occasion.

To ishi
You are right to point out that I have not dealt with the question of how the distribution of nominal incomes comes about in the first place, but have taken the example from Cassidy.

My argument is that the price system translates any distribution of nominal incomes anonymously into real shares of output and that this function matters more than the information function. What is ultimately of importance for everybody’s living standard is the real share which is jointly determined by nominal incomes and the price structure of the final output.

To Bob Hall
Sorry for my misplaced irony. What I wanted to express is that there is some kind of double standard with regard to redistribution. Analytically, redistribution via the tax system or the price system is on equal footing with regard to the ultimate result in real terms for the economy as a whole. For an objective observer, there is no point in condemning the first alternative or praising the second as Pareto-efficient. Clearly, for the individual agent, it makes a huge psychological difference but this myopic view is not relevant for the assessment of the final result.

Egmont Kakarot-Handtke