Wednesday, July 26, 2006

 

A question

Can the government create wealth?

I want all exceptions, examples, and arguments.

It is important to discuss the concept of wealth. Here's Bastiat, this fellow and another. You can also check out these definitions. There are many differing opinions and many examples, but is there any consistent definition throughout?

What do the past and modern economists have to say about this?

Comments:
Well, Posner defined an action to be wealth-maximizing if there were net gains to the "winners" of an action after accounting for the losses suffered by the "losers" of an action.

So, removing a tariff on steel will maximize wealth (overall well-being) because the gains to consumers of steel are so great they exceed the losses of steel producers. This is essentially the Kaldor-Hicks approach to efficiency.

Using Posner's definition, it is certainly possible for the government to "create" or maximize wealth.

Take air pollution for example. Even if we did assign property rights to the air, the transaction costs are too high to expect a Coasian solution. So a tax designed to mirror a Coasian outcome would be wealth maximizing. The gains to utility of the winners exceeding the higher costs and lost profits of the losers.

For more on Kaldor-Hicks Efficency:
http://en.wikipedia.org/wiki/Kaldor-Hicks_efficient

And here's a list of Greg Mankiw's Pigou Club.
http://gregmankiw.blogspot.com/2006/06/pigou-club.html

Featuring such liberals as:
Greg Mankiw
Gary Becker
Martin Feldstein
Johnathan Rauch
John Tierney
 
"So a tax designed to mirror a Coasian outcome would be wealth maximizing."

How do you know what to mirror? And who do you tax?
 
Travis,

Well, in the case of negative externalities, you would want to tax the individual whose actions impose costs on others (in this case motorists are probably the main culprits, but that's an empirical question). A properly designed tax would force these individuals to fully bear the costs of their actions.

How do we decide what that tax should be? Some pretty serious use of cost-benefit analysis.

How much should we trut cost-benefit analysis results? I don't know. In our example of air pollution, how do you really measure and sum the benefits of clean air? What about problems with inter-personal utility comparisons?

But these are all practical questions that are not releated to Chris' original question: Can government "create wealth"?

I think using Posner's definition, it most certainly can (theoretically).
 
I agree that goverment may create wealth using Posner's definition, but I don't want to use Posner's definition.

Are we limiting ourselves strictly to the sum of monetary income? Or are we looking at the imporatant thing, which is an individual's utility?

How can anyone know if the sum of the gain of an intervention is greater than the sum of the loss if it is across individuals?

I'd rather stick with Pareto on this. Unless winners actually compensate losers so that no one is worse off, it's impossible to say whether new utility was created.
 
I am not a fan of Posner's definition either. It seems that in any possible "wealth-maximizing" court case, the government is in fact creating wealth?

I have problems with that one.
 
Chris,

I wouldn't go that far. It would all depend on the circumstances. But it's really just a variant of utilitarianism.

Travis,

Well, in practice we can't sum up the gains to make sure there is a net gain. But, theoretically, we can say that under certain conditions it will be the case. That's basically what we do back in school. If you got a tariff on a competitive market with a downward sloping demand curve and an upward sloping supply curve, figuring out what will happen is just a matter of measuring the welfare triangles.

CRAP!!! 3:18 gotta run.
 
I have to admit that lowering tariffs cannot be proven to be Pareto optimal unless everyone agrees with it. In that case, steel producers would have to be compensated somehow by steel consumers. Just dropping tariffs without the compensation might satisfy Kaldor-Hicks efficiency, but not Pareto efficiency.
 
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