This week’s EconTalk podcast has Robert Frank of Cornell University discussing income inequality with host Russ Roberts of George Mason University.
This seems to be a fundamental basis of Frank’s mental model (about 4:40 in):
So the best situation from an economist’s perspective is the one that leads to the largest surplus. For the non-economists in the audience, surplus is just the cumulative sum over all people of the difference between the benefits they get and the costs they bear, evaluated in their own terms. So, if we can make the economic pie bigger, the attraction of doing that, is that it’s always going to be possible for everybody to have a bigger slice than before. I don’t think that requires any difficult value judgment at all.
I added the emphasis.
I agree that surplus is the difference between benefits and costs, evaluated on our own terms. That’s the root of why our standard of living is much better than our ancestors. We trade our surpluses in mutually beneficial manners with each other to make our lives even better.
But, I disagree with Frank’s last sentence.
As individuals, making value judgments on our own terms isn’t difficult. We make them naturally every day. I often to choose to pay $2 for a cup of coffee even when I can get it free elsewhere. That might sound absurd. But, I finish the $2 coffee because it tastes good, while I throw out a half cup of the free coffee because it doesn’t.
What bothers me about Frank’s last sentence is that I don’t believe he’s talking about individuals making their own value judgments any longer. I believe he’s talking about economists and politicians making value judgments for individuals based on their assessment of what creates the greater good or the largest pie. Unlike Frank, who seems to think this is easy, I don’t think it is possible for a third party to appropriately assess how others judge value. That’s an awful lot like the thinking that leads to destructive central planning.
I would like to ask Frank if he was given the power to enact his policies to maximize economic surplus, how would he know if he happened to be wrong? If he were wrong, how would that be corrected?