Exploring Reservations about Efficiency

6. The concept of economic efficiency only makes sense if we think that we should take people's wants seriously. In other words, we should trust people to know what is best for themselves and to act in a way that will let them accomplish their goals. If we do not believe that, economic efficiency loses a lot of its appeal. (However, trying to find something else to replace it and that is not subject to even more serious problems is pretty much impossible.) Let us consider some possible objections to the notion that people know what is best for themselves.

a) Steve is overweight and in his rational moments would like to reduce his intake of calories. However, he has little self-control. When he sees junk food, he has an irresistible urge to eat until he is gorged, and then he feels very bad about his actions. When we value food for him, should we assign it the values that his rational self would assign it (low), or the value that his impulsive self would assign it (high)?

b) Some people have argued that people are easily manipulated by advertising and that hence all wants are artificial. This argument has been met with a variety of counter-arguments that need not concern us here. However, even if advertising is not as potent as some believe, the underlying assumption of most of it is that the route to happiness is to have things. If you believe that happiness is not found in the pursuit of things, and that most people believe that it is because they have been formed by a commercial culture, how seriously should you take economic efficiency as a goal for society?1

c) The concept of the endowment effect (or status-quo) bias says that the value that people place on an object depends on whether they own it or not. Asking people what it is worth to get an item will yield different answers from asking them what it is worth to give it up. How can this pose a problem for the concept of economic efficiency? (Suppose we want to know what safety is worth. We can ask people how much they would pay to have their job made 1% safer, or we could ask how much we would have to pay them to make their jobs 1% less safe. We would get radically different answers. Which should we trust?)

7. Should the government protect people from themselves? The AP reported that a "man arrested at a friend's house when police broke up a New Year's Eve party has filed a lawsuit arguing that he had a constitutional right to get drunk on private property as long as he didn't cause a public disturbance." The police were following a state law that allowed them to lock up drunken people against their will for their own protection. The article noted that in the past the police had "been sued for failing to take people into protective custody who later died of alcohol poisoning." How does this tie into the question of whether people are rational or not? Does it raise any issues about economic efficiency? (Source: Chicago Tribune, July 10, 2005, Section 1, page 8.)

1John Kenneth Galbraith was the most prominent of those who argued that the ideal of economic efficiency was meaningless because consumer wants are arbitrary. He stressed advertizing as the shaper of wants and asserted that businesses created the wants that they satisfied. Dan Ariely presents an improved version of this argument in chapter 2 of his Predictably Irrational (HarperCollins, 2008). Ariely argues, with some evidence, that people cannot value things without seeing them in some context. He maintains that we are similar to goslings that imprint on and follow the first moving thing they see after hatching. A person who decides that a good is very valuable when it is introduced in one context might have decided that the same good was not valuable if that good had been introduced in a different context. Hence, because values seem to be arbitrary, the goal of economic efficiency becomes meaningless.
One of the main arguments for the desirability of markets is markets they do a great job of satisfying consumer wants. (See the discussion of dollar voting.) Obviously the Galbraith-Ariely position undermines this argument. Less often noticed, the Galbraith-Ariely position also undermines one of the main arguments for democracy.

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