Kaldor-Hicks Efficiency and the Problem of Central Planning

Supporters of Kaldor-Hicks believe it useful to have a quantitative measure to assess the efficiency of different situations.  Although it may appear convenient to be able to judge policies using such an efficiency standard, I will argue that no such measures can be constructed. Contrary to Caplan who states, “Rothbard’s own theory strips him of the ability to call any act of government inefficient,” I will argue that the neoclassical standard itself cannot be used to judge different states of the world. As Gerald O’Driscoll wrote, Kaldor-Hicks advocates such as Posner are “actually grappling with the calculation problem.” This article will follow up on this point and discuss whether Kaldor-Hicks-efficient policies can be calculated. There are a number of criticisms of the wealth-maximization standard on both positive and normative rounds. The focus here will be on the positive pitfalls of Kaldor-Hicks efficiency to argue that it is an unusable standard. 

Edward Stringham
Published in: The Quarterly Journal of Austrian Economics
2001 4 Pages 41-50