Good a time as any to jump back into the efficiency and allocation issues. First, when I was referring to efficiency earlier, I meant productive efficiency
WP. In this case, social preferences or regulation can, but do not have to, situate the economy at point A, and result inefficient (see graph). As for allocative efficiency
WP, I find the concept useful and the models as well, but only in the classroom, as market-based allocation is a good proxy. I find the notion of market failure
WP to be purely classroom, and to take it as a real target would be a case of model-gazing; i.e., an attempt to force a theoretical optimum on a human-based system. (As for Pareto, the initial comment remains: mainly a tool to argue for status quo in practice.)
Now, what about market-based allocation. My position is that on the right, we have the confused notion that all preferences are expressed and encapsulated by buy and sell decisions, hardly the case. I may, as a good Samaritan, prefer solutions that do not optimize personal gain, or as a die-hard Randite, detest all notion of charity and/or the duty to maintain the broader system that produced my personal success.
These individual preferences about social and broader environmental issues play out as public policy. Neoliberals and libertarians will call the effects "market distortion," but this owes exclusively to the model-gazing and lack of recognition of the fact that the model relies on serious
ceteris paribus simplifications of human behavior. Those in favor of highly redistributive and levelling policies, on the other hand, may find the net effect of many individual market choices inefficient and objectionable, but this makes the same sort of error in ignoring the impact of fixed optimal solutions based on a given social theory on the real freedoms and choice restraints of individuals.
No surprise: I argue that a policy-shaped field of play, shifting with democratic preference within a minimal yet adamant protection of basic rights (majorities may never choose oppression or violence, not matter how appealing), is the best solution. Objectivists, in their fixation on models, would simply state that any and all majority decisions that affect the actions of economic actors are illegitimate, once again mainly based on their rejection of the very real social capital required to undertake their activities.
And because we often haven't reached this point in various threads, this defense of capitalism and democracy does not mean there is no recognition of the speed with which power will seek to game both. Today, neither system is healthy or functioning as I would like to see them. Too, the knowledge and systems components to which I have referred in past threads did come up in part here, which is a relief, as the picture I wish to paint is more complete.
In fact, had I my druthers and some youth left to me, I'd be working on a theory of knowledge maximization as being the real engine of economic well-being, and as having the greatest long-term beneficial effect, from the production and allocation of goods, to how we treat each other.