The Second Best

An "individual" is composed of different subsystems trying to optimize different things, and the individual can't optimize them all.

I don't think you can deny that there is indeed a huge gap between group rationality and individual rationality. As individuals, we're trying to better approximate Bayesian rationality and expected utility maximization, whereas as groups, we're still struggling to get closer to Pareto-efficiency.

An interesting question is why this gap exists, given that an individual is also composed of different subsystems trying to optimize different things. I can see at least three reasons:

• The subsystems within an individual are stuck with each other for life. So they're playing a version of indefinitely iterated Prisoner's Dilemma with a very low probability of ending after each round. That makes cooperation easier.
• The subsystems all have access to a common pool of memory, which reduces the asymmetric information problem that plagues groups of individuals.
• Ultimately, the fates of all the subsystems are tied together. There is no reason for evolution to have designed them to be truly selfish. That they optimize different values is a heuristic which maximized overall fitness, so it stands to reason that the combined effect of the subsystems would be a fair approximation of rationality.

By way of clarification: it is easy to oppose individual Pareto-efficient distributions... it's more difficult to oppose every Pareto-efficient distribution.

E.g. if the possible distributions are (10,0), (9,9) and (9,10), it's pretty easy to oppose (10,0) even though it's Pareto-efficient. Indeed, many people would rank (9,9) above (10,0) even though (9,9) is Pareto-inefficient. But it's tougher to prefer (9,9) to (9,10).

Of course, there are probably strong egalitarians who would prefer (9,9) to (10,9). Are such people necessarily crazy?

Not true. Perfect competition => Pareto Efficiency. !Perfect Competition !=> !Pareto Efficiency.

From http://en.wikipedia.org/wiki/Pareto_efficiency:

Moreover, it has since been demonstrated mathematically that, in the absence of perfect competition or complete markets, outcomes will generically be Pareto inefficient (the Greenwald-Stiglitz Theorem).

The most charitable thing that categorical imperatives can be called is arational. The most accurate thing they can be called is unintelligible. The statement "You should do X" is meaningless without an "if you want to accomplish Y," because otherwise it can't answer the question, "Why?" More importantly, there is no way to determine which of two contradictory CIs should be followed.

No moral rule can be derived via any rational decision making process alone. Morality requires arational axioms or values. The litany of things you "should" have done if you were individually rational does not actually follow. "Rational" gets used to mean "strictly selfish utility maximizer" a bit more often than it should be, which is never. There may be people who are indeed individually arational to not do those things, but as we all have different values, that does not mean we all are.

-I'm using categorical imperative as distinct from hypothetical imperative - "Don't lie" vs. "Don't lie if you want people to trust you." There can be some confusion over what people mean by CI, from what I've seen written on this site.

I have always thought that rational thing to do would be something like doing your very best for the prosperity of the society you live in, abiding every norm and law you can etc. I

Nah, that's what they want you to think. (Which seems to be more or less literally how norms apply in reference to altruism.)

I thought I addressed this issue in the paragraph starting "But, I'm an altruist." Is there something about my argument that you find unclear or unsatisfactory?

I regarded categorical imperative as an obvious result of rational and selfish decision making.

Argue this point in more detail, it isn't obvious.

Yeah, I'm not really using the distinguishing feature of the Theory of the Second Best in this post. Eliezer had made the same point as your paragraph starting "FWIW" in a post and I pointed out the connection to the Theory of the Second Best in a comment. Now I'm just using using "second best" to refer generically to any situation where group rationality conflicts with individual rationality, and we have to settle for something less than optimal.

Your second condition is analogous to Marshall efficiency, or the closely-related (same?) Kaldor-Hicks efficiency

There is a large difference between "there are no more 'freebies' where we can make someone better off without hurting someone else" and "we will not allow a change if it hurts anyone at all".

The first is Pareto-efficient, the latter is a horrible idea.

Regarding Pareto-efficient outcomes, what do you think would happen if Omega came down and allocated all goods in a pareto-efficient way, and then left? Assume he did this simply via pareto-improving trades, not by messing with distributions or anything. Sure, maybe for a little while there would be very few economic transactions. The only trades that could happen would be ones with negative externalities because otherwise you wouldn't be able to find one that made both parties better off. However, around dinner time people's preferences would start changing such that they would prefer some food to some of their money and all of a sudden there would be a ton of pareto-improving trades available.

My point is that everyone's utlity function is a function of time. Therefore any static allocation of goods would be pareto-efficient for a very short time, and then start to become pareto-inefficient very quickly, unless there was a constant stream of transactions pushing it back out onto the efficient frontier.

I sense phantom opportunity cost argument. Pareto efficiency is to be found among the available options, not among the unattainable ones.

Aerodynamism IN SPACE? Whatever for? The cubes are almost certainly constructed in a vacuum and not designed to land, nor operate in atmo. The cube configuration allows for very efficient layout on the interior, very tidy formations in fleets, and lots of nice flat surface area to put exterior equipment.

For hard vacumn?

Perfectly elastic collisions and point masses are also impossible, but that doesn't stop physicists from using them in their models sometimes. A simplification can be theoretically useful even if it can't exist in reality, especially when you're studying something as complicated as markets.

And perfect competition does have desirable qualities, it (along with some other conditions) allows for maximum allocative efficiency, meaning that all goods and services are held by the people who value them the most.

And utility incomparability is not a big problem for Pareto efficiency, as its not that hard (at least conceptually) to work out whether someone is better or worse off. The incomparability of utility functions is a problem for Kaldor-Hicks efficiency, but that's not what we're talking about here.

A pretty key aspect of pareto-efficiency is that there are no interpersonal utility comparisons. A pareto-improvement is an improvement that makes at least one person better off (by their own standards) while making no one worse of (by their own standards). Even if a trade makes one person much, much better of and another person only a tiny bit worse off, that is not a pareto-improvement. Any situation like that can usually be made into a pareto-improvement by having the person who is made much better off give some enough money to the person who is made worse off that they are no longer made worse off.