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On a fallacy in the Kaldor–Hicks efficiency–equity analysis

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Abstract

This paper shows that implicit assumptions about the numeraire good in the Kaldor–Hicks efficiency–equity analysis involve a “same-yardstick” fallacy (a fallacy pointed out by Paul Samuelson in another context). These results have negative implications for cost-benefit analysis, the wealth-maximization approach to law and economics, and other parts of applied welfare economics—as well as for the whole vision of economics based on the “production and distribution of social wealth”.

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Notes

  1. The change in state could include many projects in one time period or an extended program over many time periods. Also the state changes could be stated in probabilistic terms so that the expected changes in social wealth of the winners would outweigh the expected decreases in social wealth of the losers in the “multi-change hypothetical criterion” (Polinsky 1972, p. 420). But that KH hypothetical criterion suffers from the same methodological fallacy in the hypothetical compensation criterion.

  2. Or keep the compensation payments in money but evaluate all the changes using a non-involved good such as apples. Then the compensation payments like the other changes will change the size of the apple pie (“social wealth” measured in apples). See Ellerman (2009) for the algebraic proof.

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  1. University of California at Riverside, Riverside, CA, USA

    David Ellerman

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  1. David Ellerman
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Correspondence to David Ellerman.

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Ellerman, D. On a fallacy in the Kaldor–Hicks efficiency–equity analysis. Const Polit Econ 25, 125–136 (2014). https://doi.org/10.1007/s10602-014-9159-x

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