TRUTH OR ECONOMICS

Vol. 18 No. 8 (August, 2008) pp.748-750

TRUTH OR ECONOMICS: ON THE DEFINITION, PREDICTION, AND RELEVANCE OF ECONOMIC EFFICIENCY, by Richard S. Markovits. New Haven: Yale University Press, 2008. 520pp. Cloth $65.00. ISBN: 9780300114591.

Reviewed by Scott A. Beaulier, Stetson School of Business and Economics, Mercer University. E-mail: beaulier_sa [at] mercer.edu.

TRUTH OR ECONOMICS is a frustrating and incomprehensible book written by Richard S. Markovits, Professor of Law at the University of Texas Law School. The author’s primary aim is to both critique and “offer an appropriate response” to many of the flawed efficiency claims made by economists, legal scholars, and policymakers. While Markovits’ project might sound like an ambitious and intriguing one to readers initially, I doubt his book will succeed in persuading economists to rethink their arguments for economic efficiency.

The main reason why TRUTH OR ECONOMICS will fail in its attempt to persuade is because the book is poorly organized, poorly written – in some places it is redundant, and, in many places completely incoherent. The book is heavy on unnecessary and clumsy jargon, such as “monetized definition” (p.19), exaggerated claims and over the top assertions. On page 3, for example, Markovits claims that he will explain why a number of different definitions of economic efficiency – Pareto-superior, Kaldor-Hicks, Scitovsky tests – “are wrong.” He makes a similar assertion about the Coase Theorem on page 68.

While the book is chocked full of suboptimal presentation, it is too thin on applications and real world illustrations. Markovits’ main gripe is with the way economists use economic efficiency, arguing that,

if money has diminishing marginal value, any analysis of a private choice’s or a public policy’s economic efficiency that incorporates the compensating-variation definitions of its winners’ equivalent-dollar gains and losers’ equivalent-dollar losses will tend on that account to underestimate those gains and overestimate those losses . . . the diminishing marginal value of money will render any operationalization of economic efficiency that incorporates compensating-variation definitions of the dollar gains of a policy’s winners and the dollar losses of a policy’s losers not only inaccurate but also biased against economic efficiency. (p.24)

In other words, since the law of diminishing marginal utility appears to take on a hedonic shape, most efficiency benchmarks overstate the gains to “winners” and understate the losses to “losers.” Based on this simple proposition, Markovits’ analysis then turns to a sweeping critique of traditional efficiency arguments (e.g., Kaldor-Hicks, Pareto, Scitovsky, and so on), which he concludes by stating that “[economists’ definitions of efficiency] are inconsistent with both popular understanding and professional usage, and they create concepts that are not useful. [*749]

In the second part of his book, Markovits discusses the theory of second best, arguing that “The General Theory of Second Best demonstrates that, unless one can generate an appropriate, mixed theoretical/empirical argument to the contrary, one cannot assume that policies of any of the above sorts that reduce the Pareto-imperfectness of the economy will tend on that account to increase economic efficiency” (p.77). Markovits first discusses the theory of second best and then, in Chapter 4, criticizes economists for ignoring this theory. The final sections of the book (Chapters 5-6) continue to attack economists for flawed applications of efficiency arguments to moral theory.

As someone with a deep interest in the Austrian school of economics and their alternative notions of the economy (i.e., catallaxy) and efficiency (i.e., plan coordination), I approached Markovits’ with deep sympathies and tried to give him a charitable reading. However, to a mainstream economist, let alone an Austrian economist, the arguments Markovits makes against economic efficiency appear unsatisfactory and simplistic. I suspect that scholars outside of economics, such as legal scholars and political scientists, will also be disappointed with many of Markovits’ arguments.

Take, for example, Markovits’ discussion about marginal utility theory. Without ever mentioning that the diminishing marginal utility of income hypothesis is an empirical claim, Markovits proceeds to deconstruct most arguments for economic efficiency on this questionable initial hypothesis. Many subjectivist economists (see e.g., Rothbard 2004) and philosophers have pointed out the robustness problem that arises if even a few individuals have utility functions that are not “well-behaved.” In other words, what do we do with efficiency analysis if there are even a few misers in our population? Markovits gives us no guidance and swallows the diminishing marginal utility of income hypothesis hook, line, and sinker.

At other times Markovits is quick to attack economists, rather than look deeply for good reasons why efficiency analysis has evolved in the direction that it has. Wealth maximization as our efficiency standard is just one example. Economists rely on wealth maximization, not because it is perfect, but, rather, because it is a fairly objective yardstick that gets us around thorny philosophical issues that Markovits could care less about. The subjectivity of utility, coupled with the fact that interpersonal utility comparisons need to be avoided, are issues economists take seriously. Since we cannot know how much one gains or loses from an exchange (as measured by “utils”), we must rely on some kind of alternative measure of well-being, such as cash.

Nowhere in TRUTH OR ECONOMICS does the reader find a careful explanation for why welfare economics has developed in the way that it has. In fact, Markovits tends to avoid any deep engagements with any of the major contributors to welfare economics. By failing to provide any kind of context to the field, Markovits leaves the reader thinking that economists are a bunch of fools who are deeply mistaken about efficiency and public policy. While this might be a widespread belief outside of [*750] nomics profession, Markovits’ argumentative style is not going to persuade many within the discipline. Economists have encountered these kinds of criticisms and attacks in many different areas of economics (e.g., “Economists care only about efficiency;” “Homo economicus cares only about himself.”), and our standard reply to transcendent attacks of this sort is to dismiss them with a retort that the critic just does not understand what we are saying. I am afraid that is, in all likelihood, the response that TRUTH OR ECONOMICS is also going to receive. This is unfortunate because this book could have been an extremely important and damning critique of efficiency analysis had greater care been taken to provide context to the current state of welfare economics, followed by an immanent criticism of the field.

When reading back over my margin notes in preparation for this review and thinking more about Markovits’s manuscript as a whole, I could not help but recall Frank Knight’s reaction to John Maynard Keynes’ GENERAL THEORY when he said, “What’s new isn’t true and what’s true isn’t new.” Despite the book’s grand promises and quick dismissals of economists’ standard tools of efficiency, the same can be said for Markovits’ book. Our traditional standards of efficiency, while deeply flawed, have withstood the test of time. For better or worse, they have survived criticisms far more sophisticated than those found in TRUTH OR ECONOMICS.

REFERENCES:

Keynes, John Maynard. 1936/2007. THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY. London: Macmillan

Rothbard, Murray N. 2004. MAN, ECONOMY, AND STATE WITH POWER AND MARKET. Auburn, AL: Ludwig von Mises Institute.

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