Rules of the Game

by Paul Hond
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Six weeks before the 2010 World Cup in South Africa, Sunil Gulati ’86GSAS, a dashing, silver-haired blade of a man in a dark blue suit and tie, stood before his class and talked about Pareto efficiency.

“The allocation or distribution of goods or resources is considered Pareto efficient if what’s true?” he said, and answered: “That it’s impossible to make anyone in the room better-off without harming at least one other person.” Thus, taking a dollar from Bill Gates and giving it to a poor person would not be a Pareto improvement, since Gates would be out a buck. (“We’re not talking about fairness and justice yet,” Gulati advised.) But if Donald Trump is in the desert and pays someone $1000 for a bottle of water, the Pareto standard is met, since both parties benefit. “Mutual gains from trade: This is an example of a Pareto improvement,” Gulati said. “It’s the invisible-hand story: We don’t seek to make other people better-off, but it ends up happening if markets work well. Strange thing to say in a week when Goldman Sachs is testifying before Congress.” Gulati concluded by observing that, despite the grilling on Capitol Hill, “the facts show that there’s generally something good about competitive markets.” He repeated this for emphasis.

Then he shifted gears. “Put away your notebooks,” he said. “What we’re about to discuss won’t appear on the exam.”

There was a loud rustle as the more than 200 students who packed the lecture hall in Schermerhorn each Tuesday and Thursday morning for Principles of Economics shut their laptops and shifted in their crampedseats. On this, the last day of regular classes, after a rigorous semester of supply and demand, of inflation and stagflation, of slopes and curves and production-possibility frontiers, of Glass-Steagall and collateralized debt obligations, Gulati’s order brought palpable release.

As the shuffling died down, Gulati raised his voice. “The United States has an enormous budget deficit and an enormous trade deficit,” he said. “My question is this: ‘Is the United States a generous donor in terms of international aid?’”

Hands levitated. Gulati pointed to a woman in a middle row. “Yup?”

“In relation to —”

“You’re whispering.”

“In relation to GDP —”

“You’re still whispering.”

The student piped up. “In relation to GDP, the United States is at the lower end.”

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