Co-state variables...

Mark Jones Jones_M at netcomuk.co.uk
Wed May 13 12:07:06 PDT 1998


Brad, before you go any further I should tell you that my doctorate was at the LSE with an eminent prof that you at least respect. Don't start me off on Kenneth Arrow or Lagrange, unless you are seriously contemplating a different future from the one portrayed in your quite incredibly self-satisfied web pages. There is no way in the world that you will leave a debate with me, feeling the way you do now. You have obviously never met anyone like me, which is a comment on the tragedy of US postgrad programmes. But I am your nemesis.

Mark You all squared off, now? Or about ready to unsub?


> Would you be happier if I said that market prices in a competitive economy
> (that is, "exchange value") are the values of the co-state variables that
> appear in the Lagrangian for the economic problem of arranging production
> and distribution so as to maximize the chosen welfare function?*
>
> *Where the welfare function is "chosen" by the society's
> distribution of income and wealth: the greater your income
> and wealth, the greater weight your preferences have in
> determining the shape of the welfare function that the
> competitive market economy tries to maximize. For this
> reason most--liberal--economists think that if you take
> care of the distribution of income and wealth (and
> externalities, and monopoly) that most other economic
> good things will take care of themselves.)
>
> Market prices in a competitive economy ("exchange values") *are* indicators
> of scarcity: they carry information about the money-metric utility of that
> particular commodity or resource in its most favorable alternative use.
> This is one of the two key reasons that markets appear to be very flexible
> and "efficient" mechanisms for allocating production and distribution (but
> if the distribution of wealth is wrong, or if externalities or monopoly are
> rife, then they will flexibly and efficiently carry you to the wrong
> destination).
>
> The second key reason is that the possibility of bankruptcy appears better
> than alternatives in enforcing "sunset" on inefficient and unproductive
> organizations. Certainly neither bureaucracy nor politics are very good at
> closing down organizations that have outlived their usefullness. As former
> Undersecretary of Commerce Ev Ehrlich once said, "It is a good thing we
> didn't have the Federal Government around 3,000 years ago. We would still
> have 4,000 people down on the Mall working in the Department of Hunting and
> Gathering."
>
> But I digress...
>
> Brad DeLong



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