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

surplusesThis 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 (e.g., “Chicago”) 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.” The discovery of this fallacy thus

  1. removes a major plank in the vision of economics based on some given notion of “social welfare” (usually vulgarized as “social wealth”);
  2. supports the exchange-oriented or catallactics vision of economics in Austrian economics and in the Lausanne School of Walras and Pareto which does not countenance any overarching notion of social welfare; and
  3. which is consistent with a rights-based treatment of normative economics which treats individuals as ends-in-themselves (e.g., the labor theory of property and inalienable rights theory).

In particular, the fallacy supports the views of James M. Buchanan on constitutional political economy which lends its name to this journal. Click here to download the paper in the journal Constitutional Political Economy.