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The Optimum Allocation of the Resources


What is the criterion for reforming social systems? Which one should we adopt, where we have different suggestions of improvement? Let’s examine utilitarian, Pareto and Kaldor improvements.

Image by MoteOo from Pixabay

1. Utilitarian improvement

According to utilitarianism, we must act so as to maximize the social sum of pleasure minus pain. The ideal of utilitarianism is the greatest happiness of the greatest number.

A common criticism of utilitarianism is this. Suppose A has trouble with his heart, B with his liver, C with his kidney and D is a healthy person. The former three cannot survive, unless they kill D and transplant his heart to A, his liver to B and his kidney to C. The transplant takes D’s life but saves two lives in total. So, utilitarianism would approve it.

If D is to be faithful to democracy, he must accept the majority decision. Can the utilitarian calculation justify murdering D?

2. Pareto improvement

In order to protect himself against the violence of the majority, D might refer to the Pareto optimum as an antithesis of the greatest happiness of the greatest number. The Pareto optimum is a state of allocating the resources where it is no longer possible to make anyone better off without making someone worse off. If advance in genetic technology can save the lives of the three by making spare organs artificially, it will be a Pareto-improving allocation of resources. But you cannot make the three better off by making D worse off.

Image of a Pareto Efficient Frontier
A production-possibility frontier is an example of a Pareto Efficient Frontier. The connected line of red points represents Pareto optimal choices of production. You can move K to D or E, but cannot move N to D nor E. Source: “A Pareto Optimal Front, illustrated using a production-possibility frontier" by Njr00. Licensed under CC-BY-SA.

Ideal as the Pareto principle may seem, the problem is that the strict application of it makes almost all improvement impossible. If you try to change anything, some will always oppose it so as to protect their vested interests. For example, although it is globally desirable for the Japanese Government to liberalize her rice market, accepting the suggestion of the GATT Uruguay Round was not a Pareto improvement, because the rice producing farmers in Japan were strongly opposed to it.

3. Kaldor improvement

In this case, beneficiaries can virtually make the Pareto improvement by compensating victims for a loss. This is the Kaldor improvement. It was an example of the Kaldor improvement that the Japanese Government levied a tax on the rice exporting countries and Japanese consumers as beneficiaries and compensated farmers.

Does the Kaldor improvement really optimize the allocation of the resources? The Japanese Government spent about 60 billion dollars to protect the domestic fading agriculture from the Uruguay Round, only to produce many useless and silly facilities. The Kaldor improvement rather reduces the resources to allocate by spoiling the declining industries.

Some economists use the Kaldor’s criterion just as a criterion to decide whether to change allocation or not and consider the actual compensation unnecessary. This interpretation makes the Kaldor improvement identical with the utilitarian improvement.

4. Merit improvement

What the utilitarian, Pareto or Kaldor improvement fails to see is that the allocation of resources must be based on justice and meritocracy. Even if a certain improvement makes some worse off, the disadvantage creates positive value, so long as it is valid as penalty. On the other hand, it is unreasonable exploitation for A, B and C to kill D and transplant his organs selfishly, so long as he is innocent.

The utilitarians and the marginal utility school identify value with subjective pleasure but the pleasure is sentiment toward value and not value itself. So, you cannot decide how to improve social systems by calculating the social sum of pleasure minus pain. Observing the rule of justice and free competition by itself has as low entropy as the economic resources.