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Vichy comments on The Second Best - Less Wrong
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Comments (53)
'Perfect competition' is utter nonsense. Not only is it impossible, there is also nothing intrinsically desireable about it.
And Pareto-Superior conditions are also nonsense. There is no non-arbitrary way to compare utilities of separate actors. What makes someone 'better' or 'worse' off is entirely subjective, and not at all subject to arithmetic comparison or external validation/invalidation.
Perfectly elastic collisions and point masses are also impossible, but that doesn't stop physicists from using them in their models sometimes. A simplification can be theoretically useful even if it can't exist in reality, especially when you're studying something as complicated as markets.
And perfect competition does have desirable qualities, it (along with some other conditions) allows for maximum allocative efficiency, meaning that all goods and services are held by the people who value them the most.
And utility incomparability is not a big problem for Pareto efficiency, as its not that hard (at least conceptually) to work out whether someone is better or worse off. The incomparability of utility functions is a problem for <a href="http://en.wikipedia.org/wiki/Kaldor-Hicks">Kaldor-Hicks</a> efficiency, but that's not what we're talking about here.
I reject the coherence of neoclassical modeling. I am a definite Misesian in this vein. Predictability and meaningless non-economic situations have nothing to do with the real economy, and have no impact on helping us to understand the real economy (except as counter-factuals, to isolate certain elements, but then they are counter-factuals and ONLY counter-factuals).
A pretty key aspect of pareto-efficiency is that there are no interpersonal utility comparisons. A pareto-improvement is an improvement that makes at least one person better off (by their own standards) while making no one worse of (by their own standards). Even if a trade makes one person much, much better of and another person only a tiny bit worse off, that is not a pareto-improvement. Any situation like that can usually be made into a pareto-improvement by having the person who is made much better off give some enough money to the person who is made worse off that they are no longer made worse off.
Whether something is a 'cost' or a 'benefit' is itself entirely subjective.