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Klein on the invisible hand

This week’s EconTalk is Dan Klein talking about the use of allegory in economics and in particular, his own way of looking at the invisible hand more deeply and how that provides a way to assess public policy. It’s all interesting but I found his discussion of evaluating public policy particularly interesting. Dan argues that we should evaluate public policy the way we evaluate art or movies. Hang on, I know this sounds ridiculous, but what he means is that we don’t use a formula or equation to evaluate art or to assess the best movie to watch tonight or our favorite novel. We don’t pretend that those kinds of aesthetic evaluations are remotely scientific or amenable to an equation or statistical estimation. So why should we evaluate the minimum wage or trade policy that way?Instead of trying to put a dollar value on the gains and losses and adding them up for some net measure of efficiency, it’s more honest to say here are the winners, here are the losers, here is what happens to them and here are the larger effects on liberty or security or innovation or other things we might also value. Whether the overall economic pie gets larger or smaller isn’t irrelevant. But why would you pretend you can measure that precisely and that that effect is the only relevant one?At least that’s how I take Dan’s point–I’ll let you know if he agrees.

When I was younger, I taught my students about efficiency and dead-weight loss. That approach is too utilitarian for me. I stopped teaching dead-weight loss a few years back. It’s great for exam questions. Not sure it’s good for thinking about public policy other than as one factor that is interesting but never decisive. I think Dan’s approach is a better way to teach and maybe a better way to think about it.