The mentioning of ‘chance’ in the lemma and theorems induces a short discussion on randomness.
Let Queen Q fall in love with Prince Random PR. Q especially adores PR when he goes about the court with an attractive air of responsibility. To this end she gives him the job of Treasurer. However, PR does not know much about taxes, and true to his name he chooses tax exemption at random. Hence, any regime is ‘subject to approval by official royal authority’, and in this sense there is a SWF and maximisation. And only economists think that the economy or economic theory are relevant. On the other hand, this is an incomplete sense of optimality. If PR happened to choose regime 0, then teaching PR about taxes would have Pareto Optimizing effects. In this sense, only one case is really optimal. This example shows that we can discuss cases with random elements, and that we can maintain our classification of cases. In fact, Y(1) - Y(0) would be the ex post implicit price paid, in regime 0, by the Queen for decentralizing decisions to a nitwit. If PR has ex ante probability p of choosing regime 0, the ex ante expected loss is (1 - p).(Y(1) - Y(1)) + p.(Y(1) - Y(0)). It is not very useful, however, to indulge in the notion of randomness, when considering the theorem. The stylized fact is that it is the (deliberate) lack of knowledge that is crucial here.
Book X
Conclusions
Some of the conclusions can be best understood in relation to the work of others. There are two sets of authors: those who take a general position and those who concentrate on the poverty issue.
41. Relating to Mankiw’s “Principles”
Mankiw (1998)’s “Principles” textbook is becoming a corner stone in the education of economics - and very understandably so. As a teacher I would likely prefer this book myself too. It will be clear, however, that Mankiw’s book does not mention many of the fundamental points made here. This makes that one would wish, and in a sense should predict, that Mankiw adapts his text to them. My own suggestion however is that we allow students the advantage to better appreciate the gap between economic thinking ‘before’ and ‘after’ the current new analysis. Such appreciation will be an asset to their historical perception and understanding of the role of economics in society. So, buy both Mankiw’s book, as it is now, and this book, as a package deal.
Discussing income redistribution, Mankiw states: “(…) here we digress from economic science to consider a bit of political philosophy.” (p431) Tinbergen, Keynes, Marshall, Mill and Smith turned in their graves. Income redistribution and the underlying philosophies are a topic of Political Economy - and thus they still are economics !
Mankiw himself states: “When the government enacts policies to make the distribution of income more equitable, it distorts incentives, alters behavior, and makes the allocation of resources less efficient.” (p421) and “The more equally the pie is divided, the smaller the pie becomes. This is the one lesson concerning the distribution of income about which almost every one agrees.” (p441).
I find these statements problematic. The matter is put in a binary ‘pro-con’ manner. The same approach happens in the back of the book, when the student is confronted with ‘pro-con’ questions. Such an approach in itself stimulates debate, but decisions in reality are subtler. A ‘pro’ view can change into a ‘con’ view if a tax rate proposal differs by only a percentage point.