Economics Dictionary of ArgumentsHome
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| Nirvana Fallacy: The Nirvana Fallacy in economics is the error of comparing real-world situations to idealized, perfect alternatives, rather than to realistic options. It often leads to rejecting good policies or markets because they are imperfect, ignoring that proposed alternatives may be worse or unachievable. See also Methods, Methodology, Theories, Comparisons, Comparability._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Harold Demsetz on Nirvana Fallacy - Dictionary of Arguments
Henderson I 53 Nirvana fallacy/Demsetz/Henderson/Globerman: The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing "imperfect" institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements. The nirvana approach is much more susceptible than is the comparative institution approach to three logical fallacies - the grass is always greener fallacy, - the fallacy of the free lunch, and - the people could be different fallacy.(1) Henderson: In the now-famous article quoted above, Harold Demsetz, (…) presented the "nirvana approach" and contrasted it with the "comparative institution" approach. His term "the nirvana approach" has become famous and most economists Who discuss it currently refer to it as the "nirvana fallacy." The latter term has become so well known that it has earned its own entry in Wikipedia. (Wikipedia even got it right.) DemsetzVsArrow: In his 1969 article(1) laying out the problem with the nirvana approach, Demsetz criticized at length a 1962 publication by Kenneth Arrow(2), who later won the Nobel Prize in economics. Invention/Arrow: Arrow had argued that a free-enterprise economy would underinvest in invention. Arrow then stated the conclusion that he thought followed: „The previous discussion leads to the conclusion that for optimal allocation to invention it would be necessary for the government or some other agency not governed by profit-and-loss criteria to finance research and invention.“ (Demsetz, 1969)(1). DemsetzVsArrrow: After quoting that statement, Demsetz pointed out the key problem: Arrow didn't carefully examine how "the government or some other agency" would solve the problem. He just assumed that it would. Here's how Demsetz put it: „Whether the free enterprise solution can be improved upon by the substitution of the government or other nonprofit institutions in the financing of research cannot be ascertained solely by examining the free enterprise solution.“ (1969:2)(2). That is like a judge in a figure skating contest between two contestants seeing the first contestant's performance and then, on that basis alone, awarding the prize to the (unseen) second contestant. Grass is alway greener fallacy: This, Demsetz noted, is "the grass is always greener" fallacy. We can't know whether the grass on the other side ofthe fence is greener without examining it. Demsetz did acknowledge that in the last few paragraphs of his paper, Arrow "does discuss some problems in substituting the government for the market.” But, Demsetz noted, this does not lead Arrow “to reconsider his allegation of inefficiency in the market.” >Free lunch/Demsetz. Henderson I 54 Comparisons/DemsetzVsArrow: We can’t say that a situation is inefficient if the other likely alternatives to it are not more efficient and could be less efficient. It’s a matter for comparison: thus, his term for his preferred approach is “comparative institutions.” Henderson: The question Demsetz always asks is: What institutions get us closest to the desirable outcome? >Institutions, >Comparisons, >Comparability. 1. Demsetz, Harold (1969). Information and Efficiency: Another Viewpoint. Journal of Law and Economics 12, 1 (April): 1-22. 2. Arrow, Kenneth (1962). Economic Welfare and the Allocation of Resources for Innovation. In The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau Committee for Economic Research (Princeton University Press)._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconDems I Harold Demsetz Toward a theory of property rights 1967 Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
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