With sobs and tears he sorted out, those of the largest size“
– Walrus and the Carpenter, Lewis Carroll
In an earlier post I discussed the behavioral nature of economics and the necessity for agents to be able to rank alternatives in order to make informed choices. Let us set aside the question of how these choices are made and concentrate on understanding who these economic agents are.
There are three kinds of agents or if you like, decision making entities in a modern economic system.
1. Individuals like you and me
2. Firms or businesses
3. The government or State
The interaction between these three types of agents is determined by the nature of the socio-political system in which they are reside. In the most common characterization of what is termed a market economy, individuals make buying decisions as consumers, and these in aggregate reveal their preferences to producers or firm who are then able to determine what to produce. Of course in a command or planned economy all production decisions are determined by the state, and then transmitted to production units who then carry out production. In both these cases the firm is a passive recipient of information, acting on orders as it were from consumers or the governement. There is a however a third scenario where one firm or a group of firms act collusively to in order to determine what is to be produced and in what quantity.
Most economic systems are some combination of these three systems. Certain production decisions continue to be taken by the state in most economies. These concern the production of what are known as public goods. These are such goods that are unlikely to be produced by private firms but that are essential to the functioning of an economy such as infrastructure, defence, and expenditure on conservation of natural and cultural heritage. There has in recent times been some blurring of lines, and some debate over whether it is necessary to differentiate between private and public goods, but most economists will admit that private firms would undersupply certain goods in the absence of government intervention.
Similarly it is difficult to imagine even the most totalitarian regime continuing to produce goods that were consistently rejected by consumers.
Possibly the most contentious trend is the emergence of corporations as active determinants of the economic process. The mechanisms by which this is achieved could be direct or indirect. The direct method is through the excercise of market power, in the case of a monopoly or oligopoly. The indirect mechanism influences consumer preferences through marketing and advertising campaigns.
While economics does not usually discuss politics, it is relevant to look at how political mechanisms influence economic decisions and realities. In a democracy, political power is derived from individual votes, and thereby in theory individuals determine political decisions atleast indirectly. However large firms play an important role in the political process as well. In fact it is debatable how much influence the voting public has vis a vis large corporations in some countries.
Now it becomes necessary to try and understand how these three kinds of agents make decisions, and economics tells us that each will try and maximise some particular quantity given certain constraints. In the case of the individual, she will buy that basket of goods which maximises her utility, or in other words she will consume that combination of goods which gives her the greatest amount of satisfaction given her income. In the case of firms, there is a profit function. Now theoretically the govt should be attempting to maximise the social utility function, which is the sum total of the utility functions of all the individuals residing within a country. However there are certain analytical problems in defining this function, and it is debatable whether any govt actually attempts to maximise the welfare of all of the country’s citizens.
Now let us assume that we could determine three different outcomes by allowing each of these types of agents to maximise their own functions. How would we rank the desirabilty of each of these outcomes? One way could of course be to compare the value of the total number of goods and services produced in each case. But this quantitative measure does not take into account what individuals prefer, perhaps in one case the country produced more nuclear missiles than schools or designer handbags, how does one campare that to a scenario where the economy produces more pornographic films but less lawn mowers?
Perhaps the closest we have got to a principle which should guide us is Jeremy Bentham’s Utilitarian principle, which advocates ‘The greatest good for the greatest number of people’. However if you consider the implications of this, majority rights would always outweigh minority rights. This is a question which economics raises, but has not satisfactorily managed to answer.
First point, private Public Partnerships have worked particularly well for certain public goods – e.g., healthcare, clean water provision, and even education. The model between Naandi Foundation and the government of Andhra Pradesh is one such success story.
Second point, I think it's a leap to conclude that utilitarian theory corresponds each time to majority rights. It depends on the how great the utility is for each person of the majority versus each person of the minority. Suppose 51% of people derive 3 utils from a given policy, 49% of people derive 6 utils from the same policy. Utilitarian theory wouldn't necessarily agree with the majority's vote. That particular conclusion I think only comes about when you're running utilitarian theory in a democratic government system.
I will agree that there are models where public private partnerships have produced good results. Naandi is actually an interesting case because being a foundation, it does not operate in order to make profits. The objective is actually meeting certain targets related to the actual provision of public goods. This means the incentive structure is completely different from a case where a private firm provides public goods expecting a return from the market. The reason why public goods may not be undersupplied if left to private firms has a lot ot do with the way these goods are defined. They are non-rival, which means that two or more people can enjoy the good simultaneously, private goods are rival because for instance no two people can derive the entire satisfaction from a single piece of pie. Secondly they are non-excludable which means that it is impossible to prevent someone from deriving utility. A good example of this is a street light, or say border security, which benefits everyone in the community regardless of whether they are willing to pay tax or fees. Knowledge is a very good example of a public good.
The problem with utils is that they don't exist and cannot be measured. They have ordinal but no cardinal value. You can't really measure the satisfaction a blind man dertives from regaining his sight and compare it to the satisfaction a millionare derives from buyng a limited edition Ferrari 599 GTO, the fastest road car ever built. Not that one is necessarily more or less than the other, it is just that we have no way of knowing.
Agreed with first point.
Utils was simply my way of providing an example with concrete quantification for when the minority's overall satisfaction is higher than the majority's. The point is perhaps lost in the semantics. The argument I was trying to convey is simply that utilitarianism isn't necessarily optimized by majority opinion. Change utils for dollars from a tax break and you would get the same conclusion.
The issue is not tha unit. The problem is that we have no reall way of measuring satisfaction. While we could measure dollars from tax breaks, when there is a question of majority versus minority it is very often about non-measurable benefits, or the choice lies between two options that are difficult to compare. It is actually impossible to measure the utility derived from a particular good, take ice cream, person A may derive twice as much pleasure from consuming a unit of ice cream than person B. And then to try and measure utility across goods is even more problematic.
For instance imagine trying to decide between investing in cancer research and primary education. There are many different ways you could try and measure the benefit to society, and you might find the latter more productive, but this is not based on measuring the actual total satisfaction. Take another example, slightly absurd but suppose the population split in a certain country was 60% men and 40% women, and the country could only obtain the technology to build either mens public conveniences or womens but not both. More interestingly if we go back to the primary education investment question, what if you had to choose between investing in primary versus college education.
Where's the Microfinance Coercion? Here's the Proof! A Client Perspective by MFI Consultant Ramesh Arunachalam
Read more: http://devconsultgroup.blogspot.com/2010/11/wheres-coercion-heres-proof.htm