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Is economics like car building or car repair? Are we working toward a finished product, or are we attempting to answer pertinent questions that arise and change from time to time? These questions are entertained in this chapter in order to explore the nature of the methods economists employ. The subjective nature of data and the relevance of predicting from past trendsis explored. The proof that rational choice analysis predicts better than any alternative process is seen to be less than definitive by typical standards of proof. Welfare economics comes closest to philosophy when it optimizes social welfare with a social welfare function, but the ramifications of that model are rarely explored. Finally, it is suggested that key questions change and economic thinking then adapts to deal with the new challenges. The vignette for this chapter looks at John Maynard Keynes and his rethinking of mainstream macroeconomics.

This chapter distinguishes between Pareto optimality, Pareto superiority, and Kaldor-Hicks efficiency, and provides an extended discussion of the Coase theorem. One of the central claims in this chapter is that the economic analysis of law relies largely on the Kaldor-Hicks criterion of efficiency, less on Pareto optimality, and almost not at all on Pareto superiority. This is important, especially from a normative point of view. What justifies the use of public power, that is, courts, legislatures and administrative agencies, in pursuing efficiency? In his essay Theory of Negligence, Richard Posner shows that a large number of negligence cases were decided along lines of economic efficiency.

The concept of efficiency is used in different ways in economics. First, the practical relevance of models that conclude that tax competition is either Pareto optimal or not is limited, because we do not live in the idealized circumstances of the Pareto frontier. Second, the more relevant criterion of Pareto improvement is silent on the prospect of regulating tax competition because, as previous chapters have shown, the latter has redistributive effects. Third, efficiency as an instrumental value to arbitrate trade-offs between two or more policy goals—a role it plays in optimal tax theory, for example—can in fact be used to show that regulating tax competition is a requirement of efficiency rather than an obstacle to it.

The basic general equilibrium model of resource allocation is extended to take environmental goods and externalities into account. The conditions for social welfare maximization and Pareto optimality are derived and compared with the characterization of competitive market equilibrium. The optimality conditions are then used to characterize optimal environmental taxes under the simplifying assumption that there are no other distortions in the economy. The analytical framework is generalized to take account of uncertainty and resource allocation over time, and includes discussions of attitudes to risk and time discounting.

This chapter uses multi-objective optimization theory to examine how natural selection resolves trade-offs among multiple conflicting performance objectives. Because physical constraint is universal, it is not usually possible to improve performance in one dimension without degrading performance in another. The optimizing tendency of natural selection is therefore best understood as implementing a constrained multi-objective optimization. Although we cannot, from first principles, predict exactly how natural selection is expected to weight these various performance objectives, it is usually possible to say something qualitative about how the importance of a given performance objective varies with ecology or behaviour. The most natural way to analyse the outcome of the optimization is therefore by using the concept of Pareto optimality, and the concepts of dominated and non-dominated solutions, which avoids the need to identify an explicit weighting function relating fitness to performance. This approach is illustrated by identifying the Pareto sets of soaring birds with respect to different combinations of soaring performance objectives, by mapping the morphospace describing flight morphology to a performance space describing soaring flight performance. The analysis shows that Procellariiformes in general, and albatrosses in particular, are optimized for performance objectives associated with straight-line soaring flight. In contrast, Acciptriformes in general, and vultures in particular, are optimised for performance objectives associated with circling soaring flight. This analysis solves a long-standing puzzle in animal flight research: the question of why all soaring birds are not albatross-shaped. More generally, it provides a way of understanding the astonishing variety of forms found in nature.

This chapter discusses an argument that we should nevertheless be committed to equal property rights in external resources, on account of our (broadly liberal) commitment to freedom as a fundamental value. In order to demonstrate the problem with this argument, we have to return to the original egalitarian Robinsonade that was invoked to make the case for basic income.

This chapter explores the view that, on both economic and moral grounds, unanimity is the preferable voting rule. Unanimity captures the essential Paretian and consensual features of market exchange, and is thus uniquely defensible on both market and moral grounds. Departures from unanimity are unavoidable but must be seen as necessary evils. The usual criticism of unanimity is that it unjustifiably favors the status quo. The chapter asks whether unanimity actually bears the relationship to market exchange that its proponents take to justify it uniquely.

This chapter discusses the relationship between capitalism and progress and ends with a discussion of three mechanisms for reducing some of the problems associated with markets. A familiar argument says that markets must advance progress under ideal conditions because they guarantee Pareto optimality. It is shown here that for a variety of reasons—among them the incommensurability of values, the incommensurability of persons, and the fact that history matters—Pareto optimality is neither necessary nor sufficient for progress. Capitalism—understood as the pervasive use of markets—appears, under modern conditions, to lead to greater material inequality, butwhat is problematic is (a) the absolute lack of certain basic resources and (b) the social and political inequalities associated with great differences in wealth. These last can be mitigated by the familiar state mechanisms of law regulation and tax incentives, but also by professional business norms sustained by a concern for one’s honor.

This chapter sets out the details of John Rawls’s theory of justice and explains why his view includes a concern with regulating the “top end” of any distribution. It is not simply concerned with maximizing the position of the relatively worst-off. Alternative interpretations of Rawls are discussed and the importance of the assumptions of chain-connectedness and close-knittedness is emphasized. In a just society the interests of different classes will be interconnected, which explains why a property-owning democracy is one of Rawls’s preferred social systems. The chapter discusses both why inequality is bad for its own sake and why it is instrumentally undesirable because of its bad effects. These arguments draw on the importance of positional goods. The account of inequality’s bad effects is extended to its impact on social solidarity and the fracturing of American society along class lines. The chapter concludes by considering issues of transitional justice.

This chapter lays out some of the ways in which the current capitalist market economy fails to achieve some human needs and its own full potential. It is not intended to be comprehensive. For one, it ignores the problems of inequality of income and wealth, which would require a long consideration on its own. The chapter reviews the strengths of the market system and then discusses information incompleteness and asymmetry, limitations of the price system in market clearing, and especially externalities. Climate, the financial industry, and the business cycle are mentioned as instances of problems that the market system is yet to address satisfactorily.