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October 18, 2004

The Economics of an Altruistic Utopia

Imagine the following utopian economic system. Everyone is instructed to provide goods and services for other people if so doing is efficient-- that is, if the cost to themselves is less than the value to the other person. Let us assume that everyone does his sincere best to comply. Thus, instead of paying for groceries, the grocer will provide the groceries he thinks efficient for free, but the customer will not take any groceries unless he thinks the value to himself is greater than the cost of production. ...

... Such a system would run into immediate trouble because of information problems. How is the grocer to know what goods the customers want, so he can stock up? He can observe which goods disappear from his shelves, but that only shows which goods the customers *think* cost less than the benefit to themselves. How are the customers to know which goods have a benefit to themselves greater than the cost to the grocer? Without prices, they have little idea of the cost-- of whether salmon is cheaper to produce than steak, for example.

Thus, such a system would need prices anyway, just for information. Could it operate with prices, but without actually charging people? That would be an improvement over the no-price system. We could, for example, auction off a rare painting, awarding it to the highest bidder, but not make the highest bidder actually pay. Under our assumption that everyone is honest, the auction would reveal willingness to pay accurately.

In the grocery store, we would have the grocer acting as if he was profit-maximizing, even though he was altruistic. He would, for example, raise the price when demand increased for a good, so as to make sure that everyone would know to take it only if it were particularly valuable to them.

For goods and services, would altruism help efficiency to any considerable extent? It is hard to see how it would hurt, because an altruistic society could just imitate a selfish one, but it sounds like that might be what would happen. Otherwise, altruism simply requires too much information.

Posted by erasmuse at October 18, 2004 11:10 AM

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