Now i wanna back up and talk about the developments in economics that also inform that same transition. And this is where we'll get into some technical things that are less complicated then they seem. And you should feel free to stop me, because the ideas themselves Are neither technical nor difficult to understand. And we're going to do this through the lens of Vilfredo Pareto, the famous marginalist economist who had probably more than any other single economist to do with the invention of modern price theory. And I should say right of the back that the neoclassical economists were not really interested in the questions we're talking about. They had a very different intellectual agenda. They were trying to understand how markets work. They were trying to understand what drives them to behave in the ways that they do. And they thought it would be a good idea to do this with as little information as possible because information about what makes people do what they do is hard to get. You can ask them maybe, but maybe they get it right. Maybe they get it wrong. Maybe Benton's right and most of the time people don't know why they're doing things and so on. So the question they were concerned with is can we understand how markets behave with as little information as possible. So for one thing they said we're not gonna make Cardinal judgements. We're not gonna operate with the sort of units of utility that we were playing around with in our little distributive diagrams with Bentham a couple of sessions ago. No, we're not gonna do that. We're just gonna talk about ordinal rankings. We just rank order things. So that we say if I prefer apples to bananas and bananas to cherries, I must also prefer apples to cherries. More generally if I prefer A to B and B to C I must also prefer A to C. But we can't say how much I prefer A to B or how much I prefer B to C. All we're going to want to know is how People order these things, how people rank them. Okay, so that's one respect in which they're gonna ask for much less information. Another, and we'll go into this in some detail, they're going to say, no interpersonal comparisons of utility. We don't have any way to make them. So look at Pareto here early on in his famous Manual of Political Economy. He says " The happiness of the Romans lay in the destruction of Carthage; the Carthaginians happiness, perhaps in the destruction of Rom, in any case in the saving of their city. How can the happiness of the Romans and that of the Carthaginians both be realized? It could be replied that total happiness would be greater if the Romans wouldn't destroy Carthage and the Carthaginians wouldn't destroy Rome, than if both cities were destroyed or even if one of the cities were destroyed. Then Pareto says, this is an idle affirmation which cannot be supported by any proof. How can one compare these agreeable, or painful, sensations, and add them? There no way to compare how much happiness the Romans would get out of destroying Carthage. what the Carthaginians' would get out of destroying Rome let alone with what would happen if their cities were not destroyed. So it's a radical assumption of no interpersonal comparisons of utility. >> It's because there's basically no way we can get that kind of information. >> Exactly. And they, as I said, Pareto wasn't really interested in Rome and Carthage. What Pareto's really interested in is explaining prices in a modern economy. We'll get to that in a minute. So he agrees with Stevenson. So here he says "Ethics and morals" this is Pareto saying- Have almost never been studied from an objective point of view, making exactly your point. The moral prototype is only a product of the sentiments of the one who constructs it, the sentiments for which, for the most part, are borrowed from the society in which he lives, and which in a very small part, are his own. Sentiments which are non logical product which reasoning changes very little. Back to yea and boo and nothing more that you can say, right? So and this quote here and this is the last quote I'll give you before we get into Pareto system is just to underscore that Pareto really wasn't interested in the questions we're talking about, but that his theory has huge implications for that, okay? So he says here, one is grossly mistaken then when he accuses a person who studies economic actions, or homo oeconomicus, of neglecting, or even scorning moral, religious etc., actions, that is the homo ethicus, the homo religious, etc., it would be the same as saying that geometry neglects and scorns the chemical properties of substances, their physical properties, etc. The same error is committed when political economy is accused of not taking morality into account. It is like accusing the theory of a game of chess of not taking culinary art into account. He's just not interested in moral questions, cuz you can't say anything about them, right? Okay, so let's talk about what was his product. I've set a lot about what wasn't his project. Let's talk about what was his project. A science of market dynamics. How do prices behave in a market economy? That was what these guys were ingested in okay and you started off with the notion of indifference curves which many of you would have confronted in econ 101. What is the notion of an indifference curve? >> With simply the choice between a and b, doesn't make a difference for the one who's choosing. >> Right, the choice between a and b doesn't make any difference. So if you look at this diagram I have up there, I have a, one person. And we're thinking about bottles of wine and loaves of bread. And there curves are shaped in the way they are to reflect the idea of diminishing marginal utility. For instance, if you look at what I'm calling indifference curve number one over there. You can see that this is the notion that the more bread you have, the less valuable new bread is to you. And the more wine you have, the less value new wine has to you. So the idea is, you're indifferent among the distributions of bread and wine, as you just said, anywhere on that curve, I won. You would be just as happy to be at any point on that curve is to be at any other point on it. What would make you happier if you were on I1? How could you improve your happiness? If we know that moving around that curve doesn't improve your happiness, it just keeps you the same happy, what would improve your happiness? >> You wanna go up. Exactly, going Northeast. Right, if you move from I1 to I2, you would have more bread and more wine, so of course you'd be happier. And then you would be in the same position over again. You would be indifferent among all of the different distributions on I2. But you would be happier if you could get onto I3 and I4 and so on. So we want to get more of the things that give us utility but any given thing gives us diminishing amounts at the margin. And hence, the notion of indifference curve. So this is the first building block of neo classical price theory. Could indifference goes cross like I've just done there. With that, does that make any sense? >> No because in that case there is contradiction. >> Right because we're now saying if we say you always indifferent on any >> Higher indifference curves, they can't cross, so you're into a situation where you're saying you both prefer something to something else, and you don't. So that's sometimes said, for those of you who like the technical jargon, That violates the principle of transitivity. So, the idea of a transitive ordering, is that if I prefer A to B, and if I prefer B to C, I must also prefer A to C. That's the notion of a transitive ordering. And economists think that's a basic property of rationality. You can't in-transitive orderings. Right. So if you prefer the New York Giants to the Seattle Seahaws and you prefer the Seattle Seahawks to the Dallas Cowboys you must also prefer the Giants to the Cowboys. This is a notion of transitive ordering, okay? In different stripes cannot cross. Okay, now this diagram might look a little bit intimidating but it's really not. So let's just back up and see what we're talking about. We now again have instead of on the previous diagram we only had one person right? Person A over there trying to go northeast Getting on a sign and difference curve now we have two people so A is utility going up and B is utility heading east okay and we imagine a status quo point X there and we also question what would make both of them better off? Okay, do you want to answer that? >> Any, at any point in the shaded region. >> Exactly, at any point in the shaded region. Okay? So this would be, for instance, let's say, B says to A, 'I'll give you a bottle of wine for a loaf of bread', and A says, 'great!' and they go to I. Okay so that would be the kind of transaction that's the realm in other words of market transactions. It's the realm of the market. Any move that's going to benefit them both by definition they're both gonna agree to make. You don't need the government. They'll just do it. >> Right? That's what we mean by a Pareto superior move. So let's suppose they went from X to Y in that way we've just described. Okay? At that point, B says okay, I'll give you another loaf of Bread for another bottle of wine and A says,"no". Then, you know, A has reached the point where a one for one swap isn't worth it. So, it says, all right, what about for two bottles, and says, "okay". Then, perhaps, they go, to point Z on that diagram. And the way you would know they were at point z would be how? >> If at no point a trade would be more beneficial for them, or if you just ran out of resources. >> Okay. So and those might be the same thing, ultimately, because what z represents is When A comes along and says, well, I'll give you three bottles of wine for two loaves of bread and A says no, I want three loaves of bread. And B says, sorry, it's not worth it to me. Then you know you've hit point z, okay. Then you know you've reached the point where as you correctly put it a minute ago, There's nothing there's no there's nothing that B will give A that's gonna be worth it to A to take and so they're on what Pareto then refered to as the possibility frontier and that very dark shaded area that I put up there to the Northeast of Z is just to indicate that it doesn't exist, right. That's fantasy world out there for both of them. So the Pareto principle says that if he start at x, people are gonna keep exchanging until they wind up on the possibility frontier and then they will stop, okay. So any Movement into the shaded area. And then, northeast of wherever you go, is gonna be better. So, in an utilitarian sense, Pareto said, we can unambiguously and scientifically say both of them are better off. Right? So, that's a sense in which The Pareto system gives you a class of possibilities that are better in a utilitarian sense. Okay, now what about the southwest quadrant that I put there rather inelegantly I'll refer to X Q 1 down there. So if you moved Anywhere into the southwest quadrant from X. What would that be? >> [INAUDIBLE] >> That would not be a good position for [INAUDIBLE]. >> Yeah, so we might think let's suppose the government taxes A and B and sends the money >> To a country they both hate. We'll give some money to a charity they both despise. They clearly both can be worse off, right? Than if the government hadn't done that, it's taking their money and supporting a cause they hate. So there's no issue that we can unambiguously and scientifically say no, that's Pareto inferior >> There's no way they will agree to it and the way you'll know they agree to it is they both resist. They both try not to pay back tax. Okay. So on the Northeast quadrant we have the realm of the market in the Southwest quadrant we have the realm of extractive taxation from everybody and we can say definitively things about both of them. What about the other two quadrants they are the most interesting from the point of view of real politics because they are the situation where the government taxes one person and gives it as a benefit to the other. So for instance, look at that point G over there on the far right. If we started out at x, that would be where the government taxes A, maybe A would be Donald Trump and gives the money in a benefit. To the poor person that we had on that slide last time. What Pareto say about that? >> That for the poor person would be the best to die because he doesn't have any- >> Poor person would want it, but Trump would resist it, right? Okay. And would we know that The poor person's gain exceeded Trump's loss? >> Not really. >> No, because no interpersonal judgements of utility. And I purposely put g far out to the right there to make the point that is often obscured in expositions of this. That these distances mean nothing. So, the fact that it looks like a long distance from X to G as far as B is concerned and only a short distance as far as A is concerned is meaningless because now we're just working with ordinal utilities, right? So the distances Don't ever let anybody bamboozle you with the distances in these diagrams, because they are completely meaningless. All that means anything is the rank orderings. Yeah? >> Is this to suggest that any interpersonal comparison of utility is >> Unuseful because it presupposes perfect information. >> So I'm very glad you asked that question because Pareto said, people are going to say that my system justifies refusing to redistribute from the rich to the poor. I'm not saying that. I, Paredo, am not saying that. All I'm saying is there's no scientific basis to decide whether or not to do it. You might wanna do it for other reasons, but don't kid yourself that there's a scientific, utilitarian theory. That justifies it. I know I'm going to be misinterpreted, people are going to say the Pareto system says never redistribute through the state. I'm jus saying science has to be agnostic on that question. There is no scientific answer to the question. So it's not that you shouldn't do it but you simply shouldn't pretend you have science on your side when you are doing it. You have to justify it in some other way.
