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Wednesday, December 01, 2010

Ireland and Pareto

Ireland and Pareto

It is a tale often told by the economist, this one of Pareto optimization. The tale goes that, in the Pareto optimal state, we reach a sort of distributional heaven, in which no person can gain any utility without that gain being made at the expense of somebody else in heaven. But the tale contains a paradox, of the kind associated with Zeno. To advance to this state, we must move through Pareto superior arrangements. These arrangements subtly reverse the terms of the optimum. A Pareto superior arrangement is one in which one party – or shall we say the owners? – may gain utility, but without any other party in our heaven losing it. This, we are assured, improves the entire set – all of heaven rejoices when one sinner is forgiven – or when one of the archangels receives a nice golden parachute and stock options amounting to 400 million dollars.

This, of course, is the neo-liberal heaven on earth, and the dispensation by which our rulers rule us. It is, however, a curious idea. For one thing, the ‘gain’ of utility seems to come ex nihilo – surely we are far removed from the labor theory of value here. Ex nihilo, in bureaucrat-speak, is exterior – it is an exogeneous gain. If it were, after all, endogenous, then we would have to ask about who created it, which would lead us to the question of whether, indeed, the other party wasn’t losing utility here. Which brings us to the other perplexing moment in this paradise. For the assumption, here, seems to be that there is no future - it is all present states. Heaven indeed! We transcend time, in Pareto superior states. For the inequality that must hold between the parties is eternally static.

But if our heaven is not in eternity, but in the sublunar flux of time – if all things in this heaven are mutable – then we see that, indeed, what looks like no skin off the nose of the drudge – what does he care if the boss makes his 400 million, as long as the drudge himself makes enough to buy the entertainment center, the car and the house on easy credit terms of 9 percent per annum (with the creditor holding the right to readjust interest at any time)? – might actually not be such a good deal. Heaven has a flaw. The devil’s disciples, from Machiavelli to Marx, have noticed it. The flaw is called power. In fact, a part of the 400 million dollars might well be used to block the poor drudge’s socially upward mobility, by making the cost of entry into a higher class too expensive – say, by making college tuition too expensive, or dentistry, etc. The boss may use part of the 400 million dollars to make tax loopholes for himself, to be paid for by either closing off social welfare programs that benefited the drudge (who will be scolded for his ‘special interests’ and his unwillingness to “share the sacrifice”). Or – and such are the wrecks of mutability – there may come a time, a horrible time, called a slump. Yes, in heaven on earth, it may be that the business cycle is not abolished, even if the economist angels have announced that God, that is, the free and competitive market, has abolished it.

We are testing the effect of creeping from one Pareto superior position to another in Ireland. Here, indeed, the gains in utility seemed to be exogenous. A low corporate tax brought in companies from outside the country. And then, look at how easy credit terms were offered through banks that were flooded with cash from foreign investors! Why, drudge and millionaire could dance to the pleasing pipes of some Celtic Tiger rock band and lay down, afterwards, in one another’s arms, like the proverbial lion and the lamb.

But it turns out that, while the lamb was asleep, he was being trussed up, and now he wakes up to discover, to his horror, the boiling pot and the butcher’s blade. For it is the drudge, the lamb, the one who was gaining utility in spirit whenever his boss’s board of directors gave the boss another raise, who is going to be sacrificed in the feast. Pareto superior states, it turns out, are heavens for the peculator, and they end in fricassee for the drudge. Who doesn’t understand, and turns to the economist who proclaimed the end of the business cycle. Only to hear that now the business cycle must end by the drudge, a., paying for all his boss’s parties, and b., lowering his wages and paying the debts (the not so easy credit term debts) that the economist, just last week, was telling him was the great reason he was the most fortunate drudge in all of Emerald heaven!

And the poor drudge turns to the right (where the words are the same) and the left (where sympathetic leaders should that the drudge has been mishandled, but (sotto voce) that really, there’s nothing one can do, and we do depend on the boss for all good things in life, don’t we?) and discovers that not only is his credit worthless, but so is his vote!

One of Pareto’s admirers wrote an article – oh, I should find the buckos name – to defend the great man from the accusation he was a fascist. The accusation comes from the fact that, at the end of his life, Pareto embraced Mussolini. The admirer wrote that Pareto was a great lover of liberty – of entrepreneurial freedom! – and thus, the fascist business was all a misunderstanding. But, he also wrote, Pareto also hated democracy.

The love of liberty, the hatred of democracy, stir a little and you get Pinochet. Or Klein’s shock doctrine. Or the current state of Ireland, as the drudges are auctioned off to the bankers.

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