The Best is not Optimal

good fast cheapIt would be best if we had zero crime, or zero pollution, or zero inequality (of wealth, income, health, beauty, intelligence, lifespans), or zero transportation deaths, et cetera. That is, it would be best if we could obtain the best and not have to pay too much for it. But, alas, the real world refuses to comply with our wishes. For anything good that the real world grudgingly gives us, it exacts a cost.

To gain any benefit one has to pay a cost. The best may come at such a high price that it may not be worth it. How much of a good thing we actually end up having depends on a cost-benefit analysis. That particular amount of a desirable good for which the cost balances the benefit at the margin is the optimal amount of that good. The optimal amount is almost never at one or the other extreme of the case.

As an aside, the Buddha recognized this universal truth and advised against extremes. He preached moderation in everything, and therefore Buddhism is known as the “Middle-wayed Way.” I think that the Buddha would have made a pretty good economist. He thought at the margin.

The marginal revolution in economics was a breakthrough in our understanding of how the world of living beings works and how. Darwinian evolution implements marginal strategies because they are optimal. Nature avoids extremes. It appears to be following the Middle-wayed Way of the Buddha. Nature makes the eye just good enough to get the job done. Making the eye better would not be worth the extra cost. Nature keeps an organism around just long enough for it to reproduce — and then lets it die.

Good enough is good. Doing better than good enough is bad.

Digression: Henry Ford asked a team of his engineers to inspect the Model T cars in junk yards and figure out which parts had a lot of serviceable life left in them. He realized that those parts were over-designed for the purpose and had them redesigned so that they lasted only as long as the car. That reduced production costs and therefore benefited the customers.

Evolution is wise. Some people think at the margin. They are wise. Some of these people are economists, and these economists are wise. People (some of whom are economists) who don’t think at the margin are indistinguishable from idiots.

It’s worth remembering that it was an economist’s book that partly prompted two naturalists to independently arrive at the theory of evolution through natural selection. Both Charles Darwin (1809 – 1882) and Alfred Russel Wallace (1823 – 1913) had read the book An Essay on the Principles of Population published in 1798 by Rev. Thomas Malthus (1766 – 1834.)

A bit of a digression is warranted here. England was an agrarian economy during Malthus’s time. Given the technology and tools, productivity was very low, and the growth of productivity was also severely limited. That meant, any increase in the growth rate of the population was sure to lead to starvation that reduced the population numbers to the point that people barely survived. We now call that the “Malthusian age.”

As it happened, because of the industrial revolution, the Malthusian age came to an end nearly at the same time that Malthus died. Humans, for the first time since humans evolved as homo sapiens around 250,000 years ago, escaped from the Malthusian trap of surviving at the edge of starvation.

Marginal thinking seeks a balance between costs and benefits. It does not seek to reach perfection at some extreme. The extreme would be too costly, and hence not be optimal. The optimal amount of pollution is, for instance, not zero pollution but somewhere between zero pollution and extreme pollution.

Suppose you have a certain amount x of pollution. Suppose reducing x by a small amount dx affords a small bit of benefit db at a small cost dc, then you should reduce x only if db exceeds dc. The benefit of an action has to exceed the cost of the action. As you increase pollution mitigation efforts, the marginal benefit (the little bit of extra benefit) starts to decline, and the marginal cost (the little bit of extra cost) starts to rise. At the extreme, to reduce pollution to zero, the cost will be extremely high.

If you wish to reduce automobile accident deaths to zero, you can impose a 4 mile an hour speed limit. But you probably would not wish to pay that price. You have to trade off the practicality of the speed limit with a non-zero probability of accidental death.

If you wish to reduce crime to zero, you can preemptively lock up people who may engage in crimes. But that would not be a good society to live in. If you wish to enforce equality of wealth and income, you could impose confiscatory taxes on those who have above average wealth and incomes but you’d get a society poorer than a society that tolerates inequality of wealth and incomes.

I had begun a previous post Billionaires are Different – Part 3, with:

James Buchanan proposed a simple test to distinguish economists from non-economists. It was that economists would not agree with the old adage that “whatever is worth doing, is worth doing well.”

He meant that whatever is worth doing is worth doing only till the point that the marginal benefit equals the marginal cost. Econ 101 students learn the optimality condition for quantity produced q is MC(q)=MR(q). (MR stands for marginal revenue.)

In the next bit I will explore why in a well-functioning free-market economy taxing the super-rich to redistribute their wealth, an idea much beloved of leftists and politicians, is a super bad idea.

Author: Atanu Dey


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