I thought this week I might say a few words about a term I occasionally invoke when discussing neoclassical welfare economics: the Fairyland, as the Fairyland of Economic Theory. Why do I say that? Everyone knows economic theory is false but simple, right? Let’s discuss.
To understand the point of calling out the Fairyland as such, one must appreciate the issue of normative versus positive economics: ethical / moral arguments about what one ought to do, what policies are best, what is optimal, versus positive economic prediction. In the world of positive economics, economic prediction, it would be facetious to refer to a simple but false engineering model meant for prediction as involving a Fairyland because there is no presumption it conform to reality; it’s just a model. However, in the world of normative economics, where ethical or moral arguments are being made about what one ought to do, what is preferable or optimal, the issue of whether any relevant factual premises are true or not is relevant and concern about a Fairyland apt. (The same may be said of ostensibly positive engineering models that propose to serve an objective predictive function and be evaluated on that basis but actually serve a normative, storytelling function and are evaluated on that basis.)
To understand the role of factual premises in normative or ethical arguments, an example I used before and rather like and will thus repeat here is to imagine an ethical theory about murder set in a fictional world in which, by assumption, no one ever wants to kill anyone else. It might be a fun and interesting thought experiment. One might analyze arguments, develop and debate ethical propositions, fret about logical consistency, all manner of things. However, if one were tempted to apply any findings to the real world, one would of course have to make some adjustments. When thinking about ethical philosophy, propositions, theories, it’s not just the normative propositions that matter; it’s also the positive issues in the ostensible factual premises that provide the context under which those propositions are to be analyzed and evaluated.
The theoretical context of normative neoclassical welfare economics famously includes several false factual premises, as perfect information and rationality, but I think maybe the most interesting example comes from the methodological critique relating to the range of subjects’ preferences. While neoclassical welfare economics famously takes up consumer preferences as they relate to goods and services, and in that context can entertain any motivation for buying goods and services including interpersonal ethical values, it ignores other preferences of a more systemic sort. Most notably, it ignores the issue of whether the subjects, let’s call them ciphers as we’re in the Fairyland and don’t want to confuse them with people in reality, have preferences relating to the normative propositions, findings, recommendations of economists, economic theory, good or bad. One suppose that bit necessary for logical consistency because an important principle in neoclassical welfare economics is the exogenous quality of consumer preferences as expressed in the famous de gustibus non est disputandum principle.
In reality, full ethical theories are relevant, not ethical half-theories. Real subjects, real people, have normative preferences / beliefs, values, concerns relating to equity issues, interpersonal ethics, the allocation of scarce resources, economic systems, markets, democracy, all sorts. The confusion introduced by that particular difference between the Fairyland and reality, between an ethical half-theory and an ethical full theory, between the role bad economists would like to play and the one their theory actually supports, can sometimes manifest in rather funny ways. I’m thinking in particular of the version of bad economics in the conservative style that presents trying to make reality more like the Fairyland a part of the normative argument, thus not only telling people they should be more informed, rational, but also devoid of equity concerns. The confusion is often manifested in a context I call actors and roles. Who does neoclassical welfare economics propose is meant to not have or express opinions on interpersonal ethics / equity issues? Economists dealing with that theory, only? Their audience? The subjects themselves?
Another example along similar lines is the determination by some bad economists that because neoclassical welfare economics deals only with markets, it must include an implicit ethical proposition everything is best handled via markets, the extent of the market should be complete. It doesn’t. Talk about your ethically controversial stances, am I right? But to understand the controversy, one must must understand the rhetoric. A great many taken in by bad economics in the conservative style cannot perceive the normative controversy in even their most outrageous policy recommendations.
When thinking about real neoclassical welfare economics or the misinterpretation I call bad economics in the conservative style, consider always if one is talking about reality or the Fairyland, about real people or theoretical ciphers. Don’t equivocate on context as well as terms. Normative neoclassical welfare economics is not logically wrong. That’s not its problem. It’s simply bad, confusing ethical philosophy written by people who are not trained in philosophy and thus unused to rigorous thinking about normative issues, which can then be used to deceive and manipulate.
