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The Billion Dollar Squirrel

January 6, 2016

In response to my article yesterday, Eli Dourado responded:
“Suppose a billionaire decides he wants to get you a Christmas gift. He hires 10,000 skilled laborers to craft something. They spend hours and hours of their labor getting it just right. They use lots of fuel and other resources. Turns out the gift is a(n exquisitely crafted) version of this:
To be honest, you don’t really like it, and it doesn’t have much resale value. You thank the billionaire; take it home. Society had to forgo lots of other products to get you that gift. But you don’t value it. Isn’t that obviously DWL?”

Dourado defines deadweight loss (DWL) as: “DWL is about whether the dollar-value of social resources is maximized.”

I replied: Adding “as a Christmas present” to “billionaire does stupid thing” doesn’t change anything.” Which Dourado agreed with.

So, it’s not obviously deadweight loss to me. It’s obviously stupid and wasteful, but by whose standards? You can go full Veblen and say most of human spending is wasteful and therefore creates deadweight loss. Anything spend on luxuries is not strictly necessary and thus creates deadweight loss. The squirrel statues are frivolous, whether you spend $35 on them or a billion.

But then Dourado says “Whatever system maximizes the dollar value of social resources has 0 DWL. Everything compared to that base.”

Maximizes to whom? Value is inherently subjective and personal. Everyone disagrees with everyone else’s preferences. Should we have a vote, and anything that doesn’t get 50% approval gets labeled deadweight loss? Should there be a cutoff, like you can spend $1000 a year on stupid junk, but anything above that is deadweight loss? As human beings, we instinctually judge others and try to promote decisions that are good for the group. Extravagantly wealthy people really throw a wrench in our intuitions because once you have that much money, everything selfish they spend money on seems wasteful to the non-rich.

Kaldor-Hicks Efficiency was mentioned in an article Eli Dourado linked to.
“A re-allocation is a Kaldor–Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to a Pareto-improving outcome.”
Preventing the squirrel present would not be Kaldor-Hicks efficient, since there would be no way to compensate the billionaire enough to convince him not to give me the squirrel. The billionaire would only give the present if he valued producing such a thing at least as much as it cost to produce. Preventing the squirrel present would not be Pareto optimal either, since the give recipient would be worse off, the billionaire would be worse off, and all the workers producing the squirrel would be worse off.

People want to have a way to disagree with other people’s choices. Economists have historically been very hesitant to say that certain people’s preferences are wrong and need to change in order to be efficient. Preference agnosticism has the advantage of being universal and viewpoint independent. I think at the end of the day, if you disagree with someone’s preferences, you just have to say so in plain language rather than trying to label it inefficient. It’s not an economist’s job to second guess the choices people make. It’s their job to explain them.

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