Distributional Issues And The Extent Of The Market

I probably mentioned before, but I’m feeling too lazy right now to go back and check, so let me discuss again or maybe for the first time the distinction between so-called “distributional issues” in neoclassical welfare economics and the ethical issues associated with what I call the “extent of the market.” I think it’s an interesting area that probably leads to a certain amount of confusion and conflict, an element of bad economics from the inner and middle layers of the onion of bad economics according to my previous model, so maybe it’s something worth spending a few moments talking about.

So-called “distributional issues” are broken out for special treatment in neoclassical welfare economics because “utility” as defined in that theory does not provide a normative basis for resolving interpersonal conflicts of needs and desires on the basis of economic power in markets. However, the idea of “distributional issues” seems a bit under-developed. It’s not really clear whether it’s meant to address all of the ethical issues associated with resolving interpersonal conflicts of needs and desires using economic power in markets or just some of them.

Off the top of my head, I’d say there are at least two rather distinct sets of ethical issues related to using economic power to resolve interpersonal conflicts in markets we must consider. One is based on people. Does one agree everyone has the economic power he or she ought to have based on his or her characteristics and behaviors? One is based more on situation or context, the type of interpersonal conflict involved. For example, should a vaccine for a raging pandemic be allocated on the basis of economic power in markets like any other good, or should we allocate it according to medical need or some such basis?

Are both sets of issues sensibly considered “distributional issues” relating to using economic power to resolve interpersonal conflict? Or is it more sensible to consider the person based issues distributional issues and to consider the other set of issues as involving something else, such as the proper extent of the market? By extent of the market I mean the potentially controversial ethical issue of when we should use economic power and the market mechanism to resolve interpersonal conflict and when we should resolve such interpersonal conflict on some other basis. Should the vaccine be allocated to rich folk first or on the basis of medical need? That sort of thing.

Yes, we could contrive to ensure we give those with higher medical need the necessary economic power to outbid rich folk and make things turn out the way we want, so there seems some undeniable point of connection between the two, but that seems as though it might be quite cumbersome and difficult in practice, doesn’t it? We have quite a lot of very rich, that is to say economically powerful, individuals indeed. I would say the nature of the issue suggests a different sort of policy response might be advisable. Something that doesn’t involve adjusting the distribution of economic power so much as simply coming up with a different legal basis for allocating whatever it might be, let’s say a vaccine. 

Or to look at the issue a different way, I suppose one could certainly calculate a net “welfare loss” if rich people don’t get the vaccine first based on their relative ability (and willingness) to pay, but the real issue is whether we consider it normatively or ethically relevant in this situation. It’s not about the conditions of the market, per se, it’s about the issue of whether market mechanisms are even ethically appropriate in that context.

Unfortunately, as you may or may not have noticed, neoclassical welfare economics doesn’t really contain any explicit normative propositions relating to the extent of the market, about when using economic power in markets is ethically advisable, despite that issue seeming every bit as potentially controversial as the “distributional issues” it explicitly sets aside because of their ethically controversial nature (only to have that explicit exclusion happily ignored in practice by purveyors of bad economics using the rhetorical techniques associated with fake distributional indifference, which I’ve discussed many times before and no doubt will discuss many times in the future). Suggesting some interpersonal conflicts should be resolved on the basis of economic power in markets is a much weaker ethical statement than saying all such conflicts must be resolved on that basis alone. The latter statement is much more controversial than the former. Does neoclassical welfare economics contain the ethical proposition all interpersonal conflicts should be resolved on the basis of economic power in markets? Or is that issue meant to lie outside economic theory because of the ethical controversy, like distributional issues?

This is partially what I have in mind when I discuss bad economics, in this case involving problems built into neoclassical welfare economics itself as opposed to add-ons like fake distribution indifference. The value inputs used in normative neoclassical welfare economics are unclear, opaque, inconsistent. Economists make bad ethical philosophers. We should take the ethical content out of neoclassical welfare economics and put it back with democratic government and the people where it belongs.  

The Free Market As Rhetoric

I’m sure I’ve written on the pseudo-economic concept of the “free market” a couple of times now, but I find it an interesting concept. I seem to see references to it all over the place, and from people who really ought to know better. It makes me think the “free market” must be one of the great rhetorical inventions of all time. The epicenter of economic equivocation. The nexus of nonsense. The crux of confusion. You think I’m overdoing it? Well, maybe. Bad economics is a rather well developed field at this point. Anyway, let’s take another whack at it today, shall we?

The first question any reasonable person might have about this “free market” is whether it’s meant to be a theoretical construct, something like the “perfectly competitive market” discussed in the theory of neoclassical welfare economics, or it’s meant to be an actual, existing instance of a real market system. If I were to open my window some fine day might I behold the “free market?” Or is that taking things too literally? Is it more of an unreachable goal of abstracted perfection than a real thing that might exist in the world?

It matters because there are theoretical constructs from neoclassical welfare economics, like perfectly competitive market outcomes, Pareto optimums, and so on, that are typically meant to be evaluated in the rarefied atmosphere of what I call the Fairy Land of Economic Theory, in which certain ostensibly controversial ethical issues relating to markets and economic systems are set aside, including distributional issues but others as well if one is seriously interested in avoiding ethical controversy of the sort associated with distributional issues, or eliminated through use of false factual premises or incompletely defined sets of conditionals like perfect rationality or perfect information that are clearly designed to avoid ethically controversial situations. So discussing a “free market” presumed to exist in the real world is necessarily a rather different issue from discussing an artifact from the Fairy Land of Economic Theory.

If the “free market” is not meant to be just a dumbed down version of the theoretical construct of the perfectly competitive market from neoclassical economic theory, what sort of market structure or structures are we accepting into the definition? Just whatever happens happens? Unimportant? Doesn’t matter? Because it’s “free?” So, for example, monopoly is just fine in the context of the “free market?”

If the “free market” is meant to be just a dumbed down version of the theoretical construct of the perfectly competitive market, what is the “free” about, I wonder? Are we making the empirical claim that real markets will necessarily run to perfect competition once “free?” Why? Given the stringent requirements of perfect competition, one wonders if any instance of a perfectly competitive market exists anywhere in the world. Certainly seems a far cry from supposing every real market is destined to take on those characteristics as a matter of course. 

And what, I wonder, is the word “free” about anyway? Because surely we’ll need government monopoly of power, police, courts, prisons, property, contracts, and so on if we’re meant to have a market. We’re certainly not talking about anarchy. One may be free to do what likes under the legal conditions democratic government has set up to define and make possible the market, but one is certainly not free to do whatever one likes more generally. I suppose we’re just saying we won’t do anything to address market failures and distributional and other ethical issues? So the “free market” is really only “free” from improvement and correction by the same democratic government that created it in the first place and that actively maintains the conditions for it to continue to exist? Seems an interesting use of language.

Well, let’s cut to the chase, shall we? Whenever I read or hear someone talking about the “free market” rather than something sensible I recognize from real economic theory, like market structure, market failure, “utility,” distributional issues, legal property specifications, and that sort of thing, I usually assume the person is a purveyor of bad economics interested only in using sloppy, ill defined quasi-economic rhetoric in a rather transparent attempt to pull a fast one on people.

The odd thing is one can often hear trained economists waxing eloquent about the “free market,” so one must suppose quite a few economists are also purveyors of bad economics. Seems odd. Funny old field, isn’t it? Interesting pedagogy, that’s for sure. Are economists experts, fools, charlatans? Some of each? I wonder, has a less rigorous field than economics every found a home in higher education? A field less interested in correcting popular misconceptions and errors about its subject matter? Doesn’t seem likely, does it? We should fix bad economics.

Ideology and Ethics In Economics

I had a fun conversation the other day with another economist interested in addressing the normative content of neoclassical welfare economics, and we had a little disagreement relating to ideology and ethics. It occurred to me this is probably yet another source of confusion that complicates addressing bad economics, so maybe I can discuss that today.

Ideology is typically raised in the context of the philosophy of science to explain how normative values can affect positive theories evaluated on empirical, objective criteria. The basic idea is that one’s ideology can encourage one to generate new theories consistent with it and spur one to neglect theories inconsistent with it, affect one’s choice of what issues to study, recommend attractive and ostensibly promising theoretical approaches, etc. There is little question value judgments and normative or ethical propositions operating through ideology can affect the development of any sort of positive science, including positive economics. However, there is a natural limit to the role of ideology in positive science in the sense that scientific theories are meant, eventually, to be objectively evaluated by their ability to predict observable phenomena. It’s not just about what feels good or right to the scientist. If a scientist, perhaps operating with a different ideology, generates a theory that is more successful at predicting or explaining empirical phenomena, then that theory will eventually be accepted as the stronger theory. Well, that’s what one expects will happen in any healthy field of science anyway. In that sense, scientific theories are positive theories, not normative theories, despite the motivating influence of normative ideology. Scientific theories are ultimately about fact, reality, observable phenomenon. On their own, positive scientific theories can never tell anyone what he or she ought to do. One has to add normative or ethical content to do that. When it comes to intellectual artifacts like theories and propositions, the positive versus normative split is about whether the theory or proposition is question proposes to talk about what is or what ought to be, about empirical fact or about what people ought to do. It’s not really about the presence or absence of normative factors that may or may not impinge on the development or rate of acceptance of that theory or proposition.

When it comes to normative neoclassical welfare economics, a theory that purports to tell people what economic systems and arrangements and outcomes are socially optimal, which people should prefer, the role of normative value is more direct and obvious than the operation of normative values via ideology in positive economics. Normative neoclassical welfare economics is basically a form of ethical or moral philosophy. It takes normative or ethical inputs, including famously the ethical proposition we should try to maximize total social “utility” as defined in neoclassical economics, combines them with factual premises about the world (often misidentified in the context of normative neoclassical welfare economics as simplifying assumptions, which is a concept appropriate to positive economics but not normative economics), to arrive at obviously normative conclusions. Talking about the role of values and normative or ethical propositions in neoclassical welfare economics does not require the concept of ideology and, indeed, bringing up ideology tends to confuse the issue. If a philosopher presents a rights based ethical theory it seems a little nonsensical to talk about the potential role of “rights based ideology” on the person creating the theory or on the development of the theory. I mean, he or she is saying that value is involved. That’s what the theory is about. One can just discuss it directly at that point.

Confusingly discussing ideology when one has in mind the ethical or normative content of normative neoclassical welfare economics is a reflection of the confused mix of science and ethics, fact and value, positive and normative, one finds in neoclassical economics in general. It causes one to pause and ask whether one is talking about normative or positive economics. It confuses the issue, even more so when one jumps back and forth between discussing the role of ideology in positive economics and the value or normative or ethical inputs of normative economics. We should really simplify the situation. We should fix bad economics by taking out the normative content and making it a true science, with ideology the only route by which values would then affect the theory. Explicit normative or ethical judgments relating to evaluating market systems and outcomes belong with the people and should be expressed through democratic government.

What Are Economists About?

I’ve discussed a number of times in this blog the peculiar combination of activities, interests, and methods one finds among academic economists, even among the restricted cadre of economists working within the intellectual confines of neoclassical welfare economics, that is to say, conventional, traditional microeconomics. It occurs to me after talking with a wide variety of random economists online that the rather confused, non-rigorous state of economics as an academic discipline had created a situation in which different economists have entirely different conceptions of what they’re actually meant to be doing, about what the field of economics is meant to be all about. Seems to create quite a bit of confusion. Let’s take a quick look at the main contenders this week.

Some economists working with neoclassical economic models seem to believe they’re doing science, that is to say, predicting empirical phenomena. This is the group who views modeling assumptions like perfect information and perfection rationality as obviously false simplifying assumptions that are instrumental for model building and believe the resulting models can be evaluated as a unit with respect to how well they predict observable economic phenomena.

Some economists working with neoclassical economic models including the seemingly normative or evaluative models one finds specifically in neoclassical welfare economics seem to believe they’re simply doing mathematics in the form of solving random optimization problems. That is, they don’t believe it’s their role to actually evaluate any normative inputs or indeed factual premises that appear in their math problems or models. They’re working strictly with logic and mathematics and producing theories of the general form: if X, then Y. Other people can make of their theories and conclusions what they will. For these economists, assumptions like perfect rationality and perfect information have exactly the same status as inputs to their math problems as assumptions like the moon is made of green cheese and we need to get it to planet Earth. If we have X space ships traveling at speed Y, how many years will it take?

Some economists working with neoclassical welfare economics seem to believe they’re doing social ethics. They believe their role is to serve as ethical arbiters, explaining to others what economic systems and outcomes they should find optimal or preferable to others. They may be using logic and math to make their arguments, but they also pretend to understand and to have evaluated both the normative or ethical inputs and any factual premises required for their normative or ethical conclusions. They think they’re producing theories of the general form: X, therefore Y is normatively best. Other people can always disagree with them, but if they do they either don’t know how to do logic or math or their ethical beliefs are flawed in some way. They view assumptions like perfect rationality and perfect information as true factual premises that are logically required to deal with certain otherwise ethically dodgy implications of the proposition we should maximize total social utility. They’re likely to respond to doubts on the truth of those assumptions with a haughty, “Do you think people are stupid?”

Some economists working with neoclassical welfare economics seem to believe they’re engaging in the art of telling stories or making myths. They want to help other people “understand” markets and the economy by constructing psychologically appealing frameworks for thinking about such issues. They seem to care less about the empirical predictions of science and the normative or ethical inputs and conclusions of social ethics as they do about just getting other people to “think like economists,” to frame issues in a certain way, to adopt a certain perspective when thinking about economic matters. They don’t much care if assumptions like perfect rationality or perfect information are true or not. They’re all just part of the story, plot devices, like the Great Fairy Castle in the Sky the hero visits in chapter five. However, to work as intended some elements of the story must bear some relation to reality. This is the sort of thinking that leads some people to observe that economic theory only changes when the gap between theory and reality becomes too big to ignore, as a newspaper article I read recently had it.

Some economists working with neoclassical welfare economics seem to think they’re doing some combination of the preceding. A little bit of this, a little bit of that. Jack of all trades, master of none. Assumptions are sometimes interpreted one way, sometimes another. Normative inputs and conclusions are sometimes defended, sometimes not. These are the people who are fond of portraying economic theory as a magical, Mary Poppins sort of purse or toolbox such that nothing in particular is really entailed by the theory at all, it’s just a matter of whatever one feels like saying or doing from one moment to the next. This is the annoying sort of slippery, shape shifting economist who is likely to bring to mind the sarcastic rebuff, “Whatever you’re talking about, I’m talking about the other.”

It’s a comical sort of field, isn’t it? Has there ever been such a sloppy, intellectually ill-defined field of inquiry admitted into an academic environment that thinks so highly of itself and proclaims its own fake rigor with such pathetic persistence? We have to fight bad economics to be sure, but I wouldn’t really expect a lot of help from perpetually confused academic economists. Not until they decide amongst themselves what economics is all about, anyway. No, it will apparently depend upon non-economists learning the normative or ethical program of neoclassical welfare economics, interpreting it correctly, addressing bad economics, and working around the self-proclaimed experts on the subject.

The Power Of Myth In Economics

I had a sort of epiphany a while ago now related to what people might have in mind when they discuss “ideology” in the context of neoclassical welfare economics. I love it when that happens. Probably something everyone else figured out long ago. Took me a bit longer to get there, but you know my motto, or one of my many mottos anyway: better late than never. I’m never really satisfied with an idea unless and until it makes some sort of sense to me, personally. Maybe I can take a little break from more theoretical concerns and discuss ideology today?

I’m thinking now there seems an interesting gray area in discussions about what economics is all about that ostensibly involves “understanding” the economy and that seems confined neither to the purely scientific method of evaluating a positive theory by successful prediction of empirical phenomena nor to the philosophical method of evaluating a normative theory by investigating the plausibility and controversy associated with normative input and conclusions and by evaluating any factual premises and logic used to get from the inputs to the conclusions. A third way of theory evaluation, so to speak. This “understanding” may incidentally generate empirical predictions and normative or ethical propositions, but the actual evaluation of those intellectual artifacts seems curiously unimportant, irrelevant, secondary. I wonder now if this mysterious additional dimension of “understanding” may related in some way to the worlds of story telling.

To appreciate the significance for me, it may help to realize I’ve long wondered what people have in mind when then discuss “ideology” in the context of neoclassical welfare economics. For some time, I thought they must be referring to the typically opaque normative content or to a sort of internal wellspring of positive and normative theorizing. At the same time, I’ve long puzzled over this notion of “understanding” that seems to crop up along side of the perfectly sensible notion of predictive ability in the context of evaluating ostensibly scientific or positive economics in general. So it was a bit of a discovery to me to realize the concept of ideology may involve something rather more pervasive, powerful, and impenetrable than opaque ethics or a wellspring of ideas. What I have in mind is an entirely different mode of evaluating intellectual artifacts based not on the normal methods of evaluation proper to positive or normative theories but based on psychological criteria instead. An evaluative scheme in which it doesn’t necessarily matter if predictions turn out to be correct or normative arguments make any sense or are normatively plausible or acceptable or controversial because the important thing is achieving a mentally and emotionally appealing and coherent story or “understanding” of the economy. The power of myth.

Might the enduring power and influence of normative neoclassical welfare economic derive simply from the fact some or perhaps a great many people enjoy contemplating what I call the Fairy Land of Economic Theory? A beautiful realm where everything is simple, everyone is rational, everyone knows everything, there are no ethical controversies, and matters of interpersonal conflict and relative power are never an issue? Might it be that all or a good part of the problem of bad economics is simply that some people’s heads inhabit this lovely Fairy Land of the conservative imagination, but their bodies unfortunately inhabit this mundane, messy, and rather less than entirely beautiful world of interpersonal conflict, economic power, human diversity, suffering, and ethical controversy? That they much prefer to think about the one but perforce interact with the other? When it comes to bad economics are we talking about just a confused mix of science and ethics, or a confused mix of science, ethics, and myth?

Well, I suppose it’s really neither here nor there for me and my personal project anyway. My primary concern is straightening out bad economics by discussing the obscure and opaque normative content of neoclassical welfare economics in both theoretical and applied contexts. I’m concerned and indeed driven to establish the truth and to respect it. I’m not concerned at the moment if others can’t be bothered or don’t care or are not in an emotional or psychological state to contemplate the truth. I suppose I have a sort of faith that truth is important and always prevails in the long run. That truth will out. Vincit omnia veritas. But I think now I might understand and have a bit more respect for people who look at the issue from a different perspective, one focused less on what’s rational, logical, scientific, true, and more attuned to unconscious dreams, unstated desires, fundamental psychological needs. It’s all good. Seems plenty of room for different approaches when it comes to confronting the baleful influence of bad economics. 

Information And Rationality

It’s hardly the most significant issues in normative neoclassical welfare economics, but there seems to me still quite a lot of confusion floating about relating to the role of the assumptions of perfect information and perfect rationality, which I suppose is only to be expected giving the confusing and idiosyncratic mix of the positive and the normative, fact and value, science and ethics associated with that theory. Let’s discuss that this week.

The main point I wish to establish is that the significance of the assumptions of perfect information and perfect rationality is entirely different in a normative context from in a positive context. In a positive, empirical, scientific context, perfect information and perfect rationality can be seen as simplifying assumptions that needn’t be true for the theory in which they are embedded to be highly evaluated on a scientific basis by its ability to predict. The use of such assumptions is just an analytical choice that may be useful in constructing predictive, scientific models without getting bogged down in complicating details that may add little to the predictive accuracy of the results.  Certainly, those particular assumptions make possible a great deal of mathematical model building that might otherwise be infeasible, although of course the scientific, empirical evaluation of the resulting models is another matter entirely.

In contrast, in a normative context, the “assumptions” of perfection information and rationality are more properly classified as “factual premises” that must be true if the conclusions are to be relevant to reality. The method for evaluating arguments or theories proper to ethical philosophy involves logic and precision. If one is evaluating an ethical proposition about what to do about other people eating apples that may be poisoned, and one knows ninety-nine out of every one hundred people know the apples are poisoned and one doesn’t, then that’s the correct factual premise that should appear in one’s ethical theory. The correct factual premise is not the approximation “everyone knows the apples are poisoned.” That’s a false factual premise. If one bases one’s ethical conclusions on that premise, one’s normative conclusions will not be applicable to the real world. One’s theory will not be highly evaluated according to the relevant criteria. That’s the way ethical philosophy works.

Nor can I can’t fix it by saying, look, I understand the problem. I dutifully call instances where the factual premise is false in realistic situations “theory failures,” and I try to address those theory failures by telling everyone I meet the apples are poisoned. My ethical theory would still be garbage, if not as a funny parlor game at least as a serious ethical theory, because the conclusions would be still inapplicable to the real world. The theory would remain garbage until I introduced true factual premises. 

It’s also important to realize that in normative neoclassical welfare economics, the factual premises of perfect information and perfect rationality are relevant to the evaluation of the fundamental ethical or normative proposition we should maximize total social utility. It’s a theoretical mistake to suppose those factual premises are only relevant in the context of specifying the conditions of a chimerical ideal market structure everyone understands is difficult or impossible to attain in a literal sense. It’s relevant to the entire normative program. It’s not the case that our theory can establish we reach pretty good normative outcomes even if we never attain those conditions exactly and hence arrive at ethical perfection. That’s not the way ethical philosophy works. My ethical theory of what I should do about people eating poisoned apples using the false factual premise everyone knows the apples are poisoned isn’t pretty good because the premise is approximately correct.

And if we’re thinking of perfect information and perfect rationality as hypothetical conditions rather than factual premises per se, then we not only need to identify them as such to avoid confusion with factual premises, but our normative or ethical theory needs to contain propositions about what we’re meant to do when those hypotheticals are not met; otherwise, again, it’s simply an example of a bad ethical theory, in that case because of incompleteness. In the context of the ethical or normative program of neoclassical welfare economics, are we still meant to accept the goal of maximizing total social utility when people don’t have perfect information and don’t exhibit perfect rationality, or are we meant to be interested in doing something else in that case? Because based on how we’ve defined “utility,” it sounds to me like that might be a bit controversial.

When one tries to address science and ethics, facts and values, the positive and the normative at the same time, confusion and conflict is the likely if not inevitable result. We should fix bad economics by taking the normative content out and allowing economics to become a real science.

The Ethics Of Markets 2: The Return Of the Onion

I thought recently of yet another way to describe or illustrate the distinctive, layered, onion-like structure of normative neoclassical welfare economics, and hence also of the bad economics based upon it, in which unrelated and inconsistent normative or ethical propositions enter into the theory in unexpected ways and places. Maybe I can talk about that this week.

The first step in developing this new perspective is to appreciate people have preferences not only with respect to goods and services exchanged in markets but also with respect to any number of other issues, such as the subjective distributional ethics they endorse and would prefer to live under. If one is interested in talking funny, like an economist, we can say people derive “utility” not just from fulfilling their preferences about goods and services and so on, but also from fulfilling their preferences about living in what they feel is an ethical society. (If you follow my blog at all, you’ll know I question the value of using the word “utility” when talking about the normative proposition we should allow other people to follow their preferences if there are no interpersonal conflicts involved to complicate the situation, which serves as one of the fundamental value inputs to neoclassical welfare economics. Saying it in plain English eliminates all or most of the conceptual nonsense and confusion associated with equivocating on the term “utility” as it is used in economic theory and other potential definitions of “utility” one finds in ethical philosophy.)

Preferences relating to living in societies expressing different forms of distributional ethics, and the “utility” associated with those preferences, if one insists upon talking that way, are explicitly set aside in normative neoclassical welfare economics as belonging to a class of so-called distributional issues considered exogenous to that theory. Even when the philosophical crazy quilt of “social welfare functions” are admitted as a legitimate feature of neoclassical welfare economics, those distributional issues remain exogenous to the theory because the distinctive weights that feature in social welfare functions are not part of that theory and because normative results or conclusions resting upon indifference to the weights would typically also be accepted as part of that theory. 

The ostensible reason distributional issues are explicitly set aside in neoclassical welfare economics is that they involve controversial ethical preferences or judgments or beliefs about how to resolve interpersonal conflicts of needs and desires, which again may involve not only goods and services but also the sort of society one prefers to live in, that cannot be resolved on the basis of ethical propositions about how to treat individuals expressing preferences when no such conflict exists or, again, if one insists on talking funny, because of the inability to make interpersonal comparisons of “utility.”

However, some preferences (and the “utility” associated with those preferences) are not similarly set aside but are taken up in the context of normative neoclassical welfare economics. Which ones? The preferences involving demand for goods and services expressed using economic power in markets. Why the differential treatment of preferences, or “utility” if one must? Because the fundamental normative propositions involved in, and required for the conclusions of, neoclassical welfare economics don’t just involve individual preferences or “utility” as defined in economics. Other normative or ethical or value inputs are involved. And those other normative propositions pertain to some preferences but not others.

What other normative propositions? Well, as I’ve discussed in previous posts, one normative or ethical or value input required for the normative argument presented in neoclassical welfare economics about the supposed optimality of perfectly competitive, Pareto optimal, economically efficient market outcomes is the implied ethical proposition we should resolve interpersonal conflicts on the basis of economic power in markets, which in turn implies or relies upon yet another ethical proposition that says we should respect, if not necessarily support as ethically optimal, some specification or definition of economic power in the form of legal specifications of property ownership to make such market resolutions possible.

The additional ethical proposition saying we should resolve interpersonal conflicts using economic power in markets, that is, resolve interpersonal disputes using the market mechanism, cannot be derived from the unrelated normative proposition about how to treat other people expressing their preferences when there are no interpersonal conflict involved, that is, from the ethical propositions about “utility” as defined in economic theory. It’s an entirely different, independent normative proposition. 

So under what conditions does the normative or ethical or value proposition required for the conclusions of neoclassical welfare economics suggest we resolve interpersonal conflicts on the basis of economic power in markets? Always? Sometimes? Under certain factual conditions? Under every possible set of factual conditions? 

This rather undeveloped, and indeed generally left entirely implicit, normative or ethical proposition is the one that causes problems when one tries to apply the conclusions of neoclassical welfare economics in certain difficult real world contexts involving things like future generations, the environment, animals, or even seemingly less complicated issues like education and medical care. It’s also what’s behind the controversial, if not downright dubious, ethical proposition we would create a more ethical society by increasing the extent of the market wherever and whenever possible, for example, if rather than resolving interpersonal conflicts involving preferences about social ethics including distributional ethics via one person one vote democracy, we instead instituted some sort of virtual market mechanism that could resolve those interpersonal conflicts on the basis of the economic power of those holding different beliefs or preferences.

To study the normative program of neoclassical welfare economics seriously, one must understand the normative content that enters at the stage of “utility,” that is, how to treat other people expressing their preferences in a no conflict case, at the stage of specifying or defining economic power, that is, so-called “property rights,” and at the stage of deciding which interpersonal conflicts to resolve on the basis of economic power in markets, that is, issues relating to the extent of the market. That’s the structure I’ve previously called the “onion” of bad economics to indicate the different layers or levels or stages at which controversial normative or ethical content enters normative neoclassical welfare economics. And don’t forget the all important and most pungent outer layer, which involves propositions that aren’t even really properly part of neoclassical welfare economics but often added on in practice to create the illusion pure neoclassical welfare economics is more relevant in realistic contexts than it really is, including the plethora of funny rhetorical stratagems associated with fake distributional indifference.

Interestingly, the various ways I’ve discussed this issue all seem to me to be different perspectives on what is essentially the same phenomenon.  One can use the same observations to illustrate the notion of neoclassical welfare economics as an insincere form of ethical “utilitarianism.” Normative neoclassical welfare economics has a small role for what it calls “utility,” but not much really, and certainly not only that.  One can also use the same observation to illustrate the notion of neoclassical welfare economics as an ethical half theory. Some relevant ethical issues are endogenous; some exogenous. Agenda control is so important in such cases, isn’t it? One can also use the same observation to illustrate the notion of normative neoclassical welfare economics as an ethical system that properly applies only to a sort of fairy land in which certain ethical issues relevant to the real world are explicitly banished, but can only be correctly applied to real world issues if those relevant ethical issues are reintroduced and addressed.

Unfortunately, economists typically aren’t very interested in serious discussions or explications of the normative program of neoclassical welfare economics. Economists typically prefer to express their personal ethical beliefs in policy prescriptions any old way they can, without worrying about clarity, consistency, evaluation, degree of controversy, or anything else. Basically, economists are bad ethical philosophers, which is why we should take the normative or ethical content out of economics and make it a true science.

Addendum

I’ve lately changed my mind about the middle layer of my onion of bad economics. In particular, I now believe it’s more sensible to present the choice to use economic power in markets to resolve interpersonal conflicts, and even the choice to support the legal conditions required to create or sustain markets, as exogenous to neoclassical welfare economics. It’s a point of interpretation, of what one believes reasonable to suppose neoclassical welfare economics is meant to say, but recently I’ve concluded it makes more sense to say neoclassical welfare economics says a good deal less than many people seem to suppose. For example, see the post Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021.

It’s Not Them, It’s You

I go on and on every week happily doing whatever I can to unravel the rhetorical mysteries of bad economics assuming always at least a few others must be as interested in the issue as I am myself, but every now and then I suspect most people may not even really see the issue or have any real notion what I’m talking about and that, consequently, I may be making my fascination observations mostly to myself. Nothing particularly wrong with that, of course. I’ve had some rather fascinating conservation with myself over the years. To be honest, much more interesting than the lion’s share of conversations I’ve had with other people. Nonetheless, this week I thought I’d step back, take a little breather, and try to provide some basic intellectual motivation for my agenda. What perceived puzzle, exactly, have I been laboring so strenuously to straighten out for everyone? Well, in a nutshell, neoclassical welfare economics is meant to avoid ethical controversy, that’s the ostensible rationale behind the way it defines “utility” and the Pareto concepts and so on, but practical policy recommendations ostensibly based on neoclassical welfare economics are quite often highly controversial ethically speaking. Isn’t that weird? How does that happen? Well, let me explain.

A common conceit among devotees of neoclassical welfare economics is that the normative or value or ethical inputs involved in that theory are so fundamental and non-controversial we needn’t think about them too much or, indeed, at all. That is incorrect. That’s one of the ways it happens. The ethical controversy associated with normative policy recommendations in realistic contexts is actually entirely consistent with that of the normative inputs, as one would expect in a logical or mathematical system, once one identifies and evaluates the normative inputs properly.

In particular, there is more ethical or normative controversy associated with the ethical proposition we should “maximize” total social “utility” as defined in economic theory, or in plain English, with the ethical proposition we should not interfere with other people expressing their preferences if there no interpersonal conflicts involved, than economists acknowledge. In addition, there are additional controversial normative or ethical inputs involving the assignment of economic power in the form of legal specifications of property ownership (so-called “property rights”) and when to resolve interpersonal conflicts on the basis of economic power in markets, that are unrelated to the proposition about “maximizing” total social “utility.”

The evaluation of these controversial normative or ethical inputs, both the commonly acknowledged and commonly unacknowledged ones, is complicated by the ubiquitous concomitant use of false factual premises, which are, of course, perfectly acceptable as simplifying assumption in positive, predictive, scientific theories, but are entirely inappropriate in normative or ethical theories that are meant to be relevant to the real world. The presence of false factual premises in the normative theory of neoclassical welfare economics serves to hide some of the controversy associated with the normative or ethical or value inputs.

To top it all off, there are certain controversial normative or ethical propositions that are commonly albeit informally and typically surreptitiously added on to neoclassical welfare economics in practice to make the theory appear more relevant in real world contexts than it really is in its pure non-augmented form. The typical example I’ve discussed in previous posts, and will no doubt discuss in future posts, is fake distributional indifference, in which additional normative or ethical propositions are slipped in to tip the metaphorical scales to certain preferred outcomes in situations in which the pure theory actually implies indifference.

Purveyors of bad economics shouldn’t flatter themselves that those opposed to the normative policy prescriptions they present, based ostensibly purely on neoclassical welfare economics, simply can’t comprehend the simple logic and math involved. That’s not the problem. The problem isn’t other people being unable to comprehend simple math and logic, it’s purveyors of bad economics being unable to comprehend, or unwilling to acknowledge, the ethical or normative content of neoclassical welfare economics and their own creative additions, and to evaluate them properly under realistic conditions by carefully analyzing potentially problematic cases and so on. The solution to the conflict and controversy caused by bad economics is not to dismiss the concerns of others, to smirk, pose, proselytize, make ostensibly witty mathematical comments, but to go back to the fundamentals: identify, understand, explain, and evaluate the normative or ethical or value inputs in both neoclassical welfare economics proper and those added on in practical applications. Bad economics creates conflict and confusion. We need to fix bad economics.

Pareto Improvements And The Fairy Land

I probably discussed it before but I thought I’d take another shot at explaining why instances of Pareto improvements, changes that make one person better off and no one worse off, are not ethically controversial when controversial distributional issues are set aside in what I’ve been calling the Fairy Land of Economic Theory, but are ethically controversial in real life where they come packaged with controversial distributional issues. Ready to take another trip to the mysterious Fairy Land of normative neoclassical welfare economics? Fine. Get out your pointy hat, old clay pipe, and trusty staff, and let’s take a quick look at the changeable normative status of Pareto improvements this week.

The reason we talk about Pareto improvements in the context of neoclassical welfare economics is that they’re meant to be normatively or ethically uncontroversial, and the laboriously created and maintained conceit that motivates neoclassical welfare economics is that it contains only simple, widely accepted, uncontroversial value judgments or ethical propositions. Well, actually I suppose it does when properly interpreted, so perhaps conceit is not the right word in the context of the theory itself, but in my experience hardly anyone properly interprets the real theory substituting instead what I call bad economics, which contains plenty of controversial ethical content, and in that context the claim in question clearly qualifies as a conceit.

The issue I’d like to think about this week is whether Pareto improvements are uncontroversial in real life, or only in the partially unspecified Fairy Land of Economic Theory in which certain relevant ethical issues have been set aside. In the words, whether the notion that Pareto improvements are ethically uncontroversial is yet another bit of mathematical formalism never correctly evaluated in a normative sense when applied to realistic situations.

Let’s try to imagine a Pareto improvement so we have something concrete to talk about. Let’s say hard working A makes $50 K per year. Layabout B makes $5 K per year, part time, and is perfectly happy. We drop $1 billion into B’s bank account. Would A find it ethically controversial? Is the only reason he or she would object to what just happened envy at B’s good fortune?

That’s what they call a trick question. You saw what I did there, right? I switched out the “utility” on which Pareto improvements in neoclassical welfare economics are meant to be based upon for money.  However, as I established in a previous post or probably several previous posts, “utility” in neoclassical welfare economics is not money; “utility” is meant to have different characteristics than money. What I just described is not a true Pareto improvement. Person A was made worse off in terms of relative economic power, buying power, which may translate into very real results in terms of the preferences he or she is able to express in the market, let’s say his or her preferences for the mysterious one-off gem everyone is so excited about that previously he or she could lay hands upon but no longer, so that’s not a true example of a Pareto improvement.

Let’s try to do it right. Let’s say layabout B gets a boost in his or her “utility” or ability to express his or her preferences using economic power in markets by a factor of one billion, whatever that means, and his or her moving up along his ranking of preferences by that factor has no effect on hardworking A, who still fulfills his or her preferences exactly as before. Is that a real thing or are we back to talking conceptual nonsense again? What happens if A wants the one-off gem but it also figures somewhere in the string of preferences B is moving up? That would be funny if the concept doesn’t even really make sense in realistic contexts, wouldn’t it? Shortest blog post ever! But I still have a point I wanted to make so let’s just get out the old broom and sweep that one under the rug this time, shall we? Let’s say B moves up his or her preference rankings by a factor of one billion but none of it has any effect on A, who still manages to fulfill exactly the same preferences as before or, if you’re a fan of funny talk, he or she has the same “utility” as formerly. Now that’s a Pareto improvement, right?

Let’s consider the same issue. Is the change in question ethically or normatively controversial or uncontroversial? Does A have any reason beyond envy to object? If not, then I suppose our Pareto improvement would be uncontroversial because I suppose rejecting ethical propositions based solely on envy would generally be considered uncontroversial. Well, if you’re asking me, I suspect hardworking A may be a little miffed for reasons that go beyond simple envy. I know I would be in his or her place. For example, A may believe the results of our little economy no longer comport with his or her distributional ethics, which let’s say propose the ability to meet one’s preferences, or “utility” if one insists, should be related in some way to individual merit or activity or behavior. Interestingly though, it would becomes uncontroversial were we to remove consideration of distributional ethics, and oddly enough that’s one of the distinctive characteristic of the ethical half-theory of neoclassical welfare economics.

So, yes, I suspect what’s going on here is that we’re looking at another artifact from the Fairy Land of Economic Theory, which is normatively evaluated one way in its proper context, the Fairy Land, but evaluated rather differently in real life. That is to say, it seems real instances of Pareto improvements are not really all they’re cracked up to be, similar to how real instances of Pareto optimality are not all they’re cracked up to be. Both are controversial in realistic settings because of the inevitable ethical and in particular distributional aspect or component. Concepts like Pareto improvements and Pareto optimality work just fine and as intended in the Fairy Land of Economic Theory, but don’t mistake the Fairy Land for reality. When one returns to reality and begins discussing real, defined, instances of Pareto improvements or Pareto optimums, one must confront the ethical or normative issues and controversies that were banished from the Fairy Land. The noncontroversial becomes controversial. Don’t end up forever wandering dark and twisted Fangorn Forest. Step into the light, behold reality, and adjust your ethical reasoning accordingly. 

All joking aside, I think the answer must be to remove the confused, complicated, misleading normative or ethical content from neoclassical welfare economics. We should make economics a science. When purveyors of bad economics, including alas many economists, try to do ethical philosophy, the results are just not very pretty. Comes out a bit of a mess, really. Economists should leave the ethical and normative issues involved in evaluating economic systems and outcomes to the people and democratic government to resolve.

Economics As Something Other Than A Toolbox

I was having a little conservation with another economist online the other day who presented neoclassical economics as a normatively neutral collection of theoretical techniques and concepts one could use to argue for any normative or ethical position “if you’re clever enough.” You may have encountered this theory before. Economics as a toolbox or a collection of tools are common ways of expressing the idea. He seemed obviously a well meaning, socially conscious sort of fellow who had in mind using the toolbox to say something normatively or ethically sensible, so he clearly had good intentions, but we were at a bit of a loggerheads for a few moments because his train of thought seemed to run smack into my determination to establish that neoclassical welfare economics, in particular, is not neutral in a normative or ethical sense as many would like to suggest, but explicitly or implicitly contains opaque, contradictory, and indeed controversial and even implausible value propositions, dodgy factual premises, and frequently misinterpreted normative conclusions. As is usual in such cases, the problems was resolved once we realized we were equivocating on terms. Both statements are correct. He was discussing “neoclassical economics” broadly conceived. I was discussing “neoclassical welfare economics.” What a difference a word can make, right? 

In my writing in this blog, I try to remember always to spell out my primary concern is “neoclassical welfare economics” as opposed to just “economics” or even just “neoclassical economics.” That’s because what I’m mostly interested in talking about is a particular normative or ethical argument that comes complete with value inputs, factual premises, logic, and normative or ethical or value outputs or conclusions.

In this blog, I’m not talking about a neutral, content free, arbitrary collection of conceptual tools one can take up or not or revise or manipulate however one likes to say whatever one likes, which is one common formulation of what orthodox “economics” is all about. And if I do ever take that up for some reason or other, rest assured I’ll take pains to establish that’s what I’m talking about.

I’m also not talking about positive, scientific, essentially arbitrary models meant only to predict empirical phenomenon, in which the modeling assumptions can be as divorced from or as close to reality as one likes, which is a one common idea of what “neoclassical economics” is all about. Again, if I start talking about such a thing for some reason or other, I’ll be sure to let you know in no uncertain terms.

I’m also not talking about positive, arbitrary, mathematical optimization problems delivered in a neutral if-then format with the if statements accurately and completely identified and no explicit statement or implicit suggestion of endorsing the if statements, the value propositions, the normative or ethical proposition thus represented, which is another common idea of what “neoclassical economics” is all about. Yes, you got it. If I ever feel the need to start talking about that one for one reason or other, I’ll let you know.

No, what I’m talking about unless I indicate otherwise is the normative or ethical theory expressed in traditional neoclassical welfare economics involving evaluative, value laden concepts like total social utility maximization, social welfare, Pareto optimality, economic efficiency, the supposed optimality of perfectly competitive markets, etc. I’m talking about what amounts to a rather confused and disjointed ethical theory containing value inputs in the form of explicit or implicit normative or ethical propositions and factual premises and generating normative or ethical conclusions. What conclusions? The normative or ethical conclusions from the Fairy Land of Economic Theory stating we should move toward a generalized perfectly competitive, Pareto optimal, economically efficient outcome, or if already at one, stay there, and its evil twins from bad economics. Evil Twin One, that in realistic situations we should move toward any particular instance of a perfectly competitive, Pareto optimal, economically efficient outcome, or if already at one, stay there. And Evil Twin Two, that any particular instance of a perfectly competitive, Pareto optimal, economically efficient outcome is preferable to any real outcome without those characteristics.

I’m talking about economists giving practical economic policy advice, advocating for certain policies, in realistic contexts, based ostensibly on normative neoclassical welfare economics, and the normative and ethical issues, oversights, and errors generally associated with that project that lead directly to what I call bad economics.

I’ve found one of the main hurdles in addressing bad economics is that the field of economics is squishy, vague, amorphous, and difficult to pin down. No one seems ever to be talking about the same thing. The math may be rigorous, but that’s about all that is. Certainly not the normative or conceptual content. We should simplify economics. Talk about one thing at a time. Interested in the opaque, inconsistent, misleading, just plain old bad ethical philosophy expressed in normative neoclassical welfare economics and even more so by its monstrous offspring, bad economics? Great! So am I! Interested in predictive scientific modeling or econometrics? Sorry. Not really my cup of tea just now. 

Ordinal and Cardinal Utility In Neoclassical Welfare Economics

I’ve done a series of posts already on “utility” as defined in neoclassical welfare economics, including a post on social welfare functions in particular, but I’ve noticed whenever the word “utility” crops up in my various online conversations with other economists of both the professional and amateur varieties I invariably develop the uneasy feeling we’re not always on the same page as it were, not always using the word the same way. It’s comical to me because utility is probably the most fundamental concept in neoclassical welfare economics, which is ostensibly all about maximizing it. Maybe it makes sense to take yet another look at the ever so complicated albeit needlessly so heart of neoclassical welfare economics.

One element of normative neoclassical welfare economics I think creates enormous confusion and conflict is the simultaneous existence or discussion of both ordinal and cardinal conceptions of utility. They represent two very different versions or definitions of utility and the fact one is never entirely sure which version anyone else has in mind, or rather as soon as one starts talking about one whoever one happens to be talking to at that moment will invariably start talking about the other, adds a great deal of confusion to any conversation about normative economics.

Ordinal or ordinal only utility captures only the order or ranking of preferences for a given individual. It doesn’t really have any meaning beyond the preference rankings of individuals. In particular, it doesn’t refer to any underlying concept like “happiness” or “satisfaction.” One can see that easily enough when one realizes that, linguistically, one cannot discuss interpersonal comparisons of ordinal only preference rank utility because that type of utility is undefined in that context. Linguistically, grammatically, that would be nonsense, like talking about the square root of red, a fact which would be perfectly obvious were it not for the existence of other conflicting conceptions or definitions of “utility” in which that statement would not be grammatical nonsense and the ease with which one can equivocate on that term. Any concept of “happiness” or “satisfaction,” for example, that breaks no grammatical or linguistic rules, sounds sensible to the ear, when used in the phrase interpersonal comparisons of happiness or satisfaction cannot equate to ordinal only preference rank utility. Indeed, under preference rank utility it doesn’t matter if one’s preferences make one “happy” or more “satisfied” in any sense that adds content beyond the mere fact of the preference ranking itself. If one’s preference is to do something that makes one miserable that’s evidently what gives one higher utility. Under this definition of utility, the word “utility” could be removed entirely from economic theory and replaced with “preference ranking for individual X” with no loss of content. And, incidentally, that’s really what economists working with that sort of “utility” should do and would do if they were interested in intellectual clarity and honesty in the normative realm and not also in misleading rhetorical effect.

Cardinal utility, which adds the notion of an amount of “utility” so, for example, an individual can be said to get twice as much “utility” from fulfilling preference A than preference B, is an entirely different concept. In that case, one is obviously talking about something beyond merely a preference ranking. So what is the thing someone is doubling when we discuss someone getting twice the cardinal utility from A as from B? One likely suspect is we’re talking about some notion of happiness as with traditional philosophical utilitarianism. However, that doesn’t really fit with the notion of revealed preference and the idea it doesn’t really matter for utility if preferences lead to anything anyone would normally associate with happiness, per se, beyond the mere fact of the preference itself. The more relevant concept is really a sort of narrowly conceived satisfaction derived from preference fulfillment that applies even when one fulfills preferences that to an observer appear to make one miserable. 

It’s important to note we must be talking about an inaccessible internal perception of satisfaction from preference fulfillment for this type of utility to work with the logic of neoclassical welfare economics because we need to preserve the result we cannot make interpersonal utility comparisons, which is central to the normative argument in neoclassical welfare economics under both formulations of utility. We can’t be talking about observable indications of satisfaction as we could and would with respect to happiness in traditional utilitarian ethical philosophy. As we discussed a moment ago, under ordinal only preference rank utility, talking about interpersonal utility comparisons is gibberish. In contrast, under cardinal perceptions of satisfaction utility, making interpersonal utility comparisons is impossible because we cannot as a matter of fact access or measure the relevant subjective perceptions. Same theoretical significance in terms of the math. Two very different concepts in terms of the normative or ethical content.

In that sense, revealed preference is the only objective indicator of both ordinal only preference rank utility and cardinal internal perception of satisfaction from preference fulfillment utility, but it would be confusing to call both “preference utility,” wouldn’t it? Confusing? That was my little attempt at a joke. Add it to the list, right? I’m sure people do it all the time. But let’s not do it here. Let’s reserve the term “preference utility” for ordinal only preference rank utility and use “perception utility” for cardinal internal perceptions of satisfaction from preference fulfillment, just to keep track of what we’re actually talking about.

In a normative context, preference utility is obviously an entirely different beast from perception utility. One can’t just switch between them willy-nilly. Doing so amounts to the logical error philosophers call terminological equivocation. The flippant attitude of purveyors of bad economics toward the distinction seems to me an example of mathematical formalism masking conceptual confusion in the normative realm. People used to working in a positive, scientific, predictive modeling mode may suppose all they’re doing is changing the mathematical specification in a model so what’s the big deal? And they’re right, in a positive context in which a model may be unreal in its entirety and still be highly evaluated because of its predictive ability, it really doesn’t matter. Use this, use that, use whatever you like. But in a normative context, of course, it does matter. In ethical philosophy and really philosophy in general, one must use language carefully, precisely, consistently, or confusion and error will be the inevitable result.

In a normative context, it’s actually much more philosophically useful to distinguish a version or conception or definition of “utility” where it doesn’t exist per se (exemplified by ordinal only preference rank utility) and a version where it does exist in some sense, if only as an internal perception (exemplified by cardinal perceptions of satisfaction from preference fulfillment utility).

In the case of the version of utility that exists in some sense, perception utility, the ethical proposition we should maximize total social utility can be shown to be weak, normatively or ethically implausible, and certainly very controversial, if one takes the time to analyze it properly and doesn’t just wave one’s arms about hoping other people lose track of what one is talking about. I’ve done it before a couple of times, but just to give the short version imagine having a dream where one can access or measure perception utility and hence make interpersonal utility comparisons. Think about the normative ramifications of accepting as one’s goal maximizing total social utility if one person’s capacity to generate perception utility were much higher than everyone else’s. Not necessarily a pretty picture, is it? Basically just whatever that person prefers; others be damned. It’s only a dream? A thought experiment? Sure. Of course it is. But it’s a revealing dream or thought experiment that shows no one who supports maximizing total social utility defined as perception utility in the context of neoclassical welfare economics does so out of any genuine interest in maximizing that type of utility. They support it because it’s inapplicable to real world conflict situations, because we don’t actually live in the postulated dream / nightmare world where we could really access it and maximize it, and hence it makes room for other ethical values in those conflict situations. Well, that and support for the trivial normative proposition we should let other people do what they want to do when what they want to do doesn’t conflict with what anyone else wants to do.

In the case of the version of utility that doesn’t actually exist per se, preference utility, the ethical proposition we should maximize total social utility just means we should generate an outcome consistent with certain propositions about how to treat other people expressing their preferences in non-conflict situations. That’s it. Under this version of utility, ethical or normative propositions about “maximizing utility” aren’t really about increasing the amount or level of something called “utility” but about generating outcomes consistent with certain ethical propositions about how to treat other people expressing their preferences in non-conflict situations. The propositions are just expressed in a funny way in an apparent attempt to deceive or confuse the unwary. 

In previous posts, I discussed the distinctive form of neoclassical welfare economics as an ethical half theory. That applies to both preference utility and perception utility, but in the latter case only because of the unobservable or inaccessible quality of perception utility. Were it not for that problem one could, of course, base an entire ethical theory on the objective of maximizing perception utility, which would be somewhat similar to the program of traditional utilitarian ethical philosophy with respect to maximizing happiness variously defined. We already discussed it would be ethically implausible and certainly controversial to do that, but at least it obeys the laws of logic. However, if one does an end run around the inability to access or observe or measure internal perceptions of satisfaction directly by using a so-called social welfare function, where one introduces some weighting scheme to allow interpersonal comparisons of perception utility with the weights based on some criteria one finds ethically relevant, including for example criteria related to observable indicators or clues or beliefs relating to happiness or satisfaction (such as implicitly setting everyone’s capacity for utility or maximum utility to be at one level and then considering the implications of diminishing marginal utility), then one can mimic a more plausible ethical theory by expressing, using the type of utility used in economic theory, ethical concepts relevant to other definitions of utility from traditional utilitarian ethical philosophy or indeed other ethical principles entirely. It’s an awkward, unnecessarily confusing crazy quilt of an ethical theory, but it gets the job done in some respects. In contrast, trying to use social welfare functions with ordinal only preference rank utility doesn’t really make sense at all. Weighting something that doesn’t exist in the first place to facilitate interpersonal comparisons of a concept that is undefined in an interpersonal context is just gibberish. A confusing Frankenstein monster of unrelated ethical concepts and terms is one thing, but I think we really must draw the line at complete nonsense.

However, the mere availability of social welfare functions doesn’t convert neoclassical welfare economics using perception utility into a full ethical theory. The weights are not a part of the theory but exogenous to it, and are just as important or more important for the normative conclusions as the normative or ethical content and positive factual content that does appear in the theory. In addition, if one considers social welfare functions and the ethical or normative reasoning underlying the weights used in social welfare functions as applying only at the stage of deciding between perfectly competitive, Pareto Optimal, economic efficient outcomes, a great deal of the submerged normative content I’ve discussed in previous posts will remain. Honestly, it’s a bit of a philosophical mess, isn’t it? If we want people to be able to discuss these normative or ethical issues openly, honestly, transparently, then we really should remove the normative or ethical content from economics. Economists make bad ethical philosophers. They aren’t trained in it, aren’t interested in it, and produce risibly non-rigorous and amateurish normative theories when they set they hands to it. Ethical decisions relating to the evaluation of economic systems and outcomes belong with the people and should be addressed in the political arena by democratic decision making bodies, not in ivory towers by philosophically and in particular ethically clueless economists.

Property Rights Revisited

I’ve taken up the issue of the legal specifications of property ownership that define economic power, so-called “property rights,” in a previous post (Property Rights As An Element Of Bad Economics, June 24, 2020); however, given their importance for bad economics maybe it’s sensible to have another go at the issue.

A common conceit in bad economics is to try to slip in random value judgments, that is, ethical or normative propositions, in some cases possibly because one believes they are so noncontroversial they needn’t be discussed or even recognized as such. One area where this seems to happen quite frequently is with legal specifications of property ownership or as sometimes confusingly called, “property rights.” If we don’t have legal specification of property ownership to define economic power then we can’t have markets, and purveyors of bad economics in general are prone to skip the part of their normative argument that involves establishing and relying upon markets to resolve interpersonal conflicts often preferring instead to simply assume the existence of markets, and assume also that everyone agrees the application of economic power in markets is the most ethical way to resolve interpersonal conflicts of needs and wants, and moving directly on to assessing particular market structures and outcomes.  But if the argument is that certain market structures are the ethically optimal way of resolving interpersonal conflicts of needs and wants, one really needs to start at the beginning, not just jump in half way to one’s conclusions.

The controversy associated with the decision to have or not have any sort of specification of property ownership or “property rights” at all is that between utopian anarchists (the real sort, not the fake market sort) and pretty much everyone else. There is some ethical controversy there that should be acknowledged, but perhaps not a lot.

The bigger problems in terms of unstated normative or ethical premises start when one begins to overstate the conceptual or logical requirements of neoclassical welfare economics. The normative conclusions of that theory logically requires a normative proposition supporting the existence of some sort of legal specification of property ownership to support the existence of markets, but it doesn’t require one to conceive of those legal specifications in terms of the broader notion of an ethical “right.” In particular, it doesn’t involve any particular notions of whether one can change those legal specifications, why, how, when, under what conditions.

A related problem is minimizing the ethical controversy associated with particular legal specifications of property ownership based on the relatively noncontroversial notion one should support existing laws in the sense of abiding by them, assuming one endorses the system that produces those laws. One may support the enforcement of existing legal specifications of property ownership while also believing they are somewhat lacking on an ethical basis and should really be revised in some way. They’re really two different issues. Thus, the actual legal property specifications themselves may be associated with more ethical controversy than simple support for law abiding behavior at any particular moment suggests. One’s ethical assessment of legal specifications of property ownership may be complex. For example, one may think an existing pattern or mechanism of legal property specifications is generally reasonable, yet still support changing them in certain ways, such as revising inheritance laws, changing tax rates, adopting redistributional policies, etc. Similarly, one may support legal property specifications as an important determinant of the most ethical way of resolving interpersonal conflicts using economic power in markets in most situations, but not in certain ethically distinctive or unusual ones, such as let’s say health care or issues involving future generations or environmental concerns.

If one’s attempt to apply neoclassical welfare economics involves additional value premises that are not expressed in the theory itself, such as that existing legal specifications of property ownership are special, ethically correct, cannot be revised, or should be considered expressions of philosophical “rights” of one sort or another, then one needs to say so. If one endorses the normative or ethical proposition that resolving interpersonal conflicts of needs, wants, desires, on any basis other than economic power so defined on markets is always ethically unacceptable, then one needs to say so. Because those sorts of beliefs belong to the world of distributional ethics (and really even more general ethics) and thus contradict the distributional indifference in neoclassical welfare economics (in additional to the indifference on other controversial ethical issues that should be treated the same as distributional issues for consistency in neoclassical welfare economics but are often simply ignored instead). To avoid confusion and conflict, to accurately characterize the level and type of ethical controversy associated with the normative conclusions one ostensibly derives from neoclassical welfare economics, one must accurately and clearly specify all one’s value inputs.

Of course, on the other hand, if one associates no particular normative status to particular mechanisms for generating legal property specifications or to particular patterns of legal property specifications, if one is indifferent to retaining them or revising them in particular contexts or generally, if one is indifferent to resolving interpersonal conflicts on some basis other than economic power so defined in markets, if one wishes to avoid the controversy associated with distributional ethics (and with the other controversial ethical issues associated with resolving interpersonal conflicts on the basis of relative economic power in markets), then I suppose one doesn’t really have  to say that, because that’s ostensibly what neoclassical welfare economics already says. However, to avoid confusion one should probably say that as well.

Economists seem rather more interested in, and indeed one might say fascinated by, the level of ethical controversy associated with the normative propositions relating to “utility,” that is, propositions about how we should think about an individual expressing his or her preferences in the absence of interpersonal conflicts requiring ethical resolution, than with the level of ethical controversy associated with the entirely distinct and really inconsistent or incompatible value inputs or normative propositions related to legal specifications of property ownership and the proposition interpersonal conflicts of needs and desires should always be resolved on the basis of economic power in markets. Indeed, economists generally manage to mis-state and minimize even the relatively modest level of ethical controversy associated with preferences in the no conflict case, that is, “utility” as they’ve defined it, in realistic situations, by evaluating it in conjunction with false factual premises such as complete information, rationality, etc., which are typically and confusingly only explicitly introduced much later in the context of the conditions required for perfectly competitive markets in particular.

It’s rather difficult for a serious reader to suppose purveyors of bad economics including alas many economists are not trying to actively hide or misrepresent the normative or value or ethical inputs required to apply neoclassical welfare economics in realistic contexts, that is, to ignore some value inputs, ignore inconsistencies in the philosophical bases of those inputs, and hence misstate the level of ethical controversy involved with the value inputs taken as a whole and hence with the normative conclusions. But, of course, economists are famously bad ethical philosophers. They’re not trained in philosophy, and many or perhaps even most are happy to explain they’re just not very interested in such matters anyway. So the attribution of intent isn’t as clear as one might suppose, at least not now. However, one thing seems clear, we should not continue to use neoclassical welfare economics to derive bogus normative results based on bad ethical philosophy, but use it in a sensible way to identify where value inputs in the form of normative or ethical propositions are required for the evaluation of economic systems and outcomes, so they can be referred to democratic processes for temporary and continually revisited and potentially revised resolution according to the subjective ethical beliefs of those involved.

Addendum

More recently, I’ve argued the ethical issue I now call “law over anarchy” is more sensibly considered exogenous to neoclassical welfare economics, which is a step back from the argument presented here, which follows my old “onion of bad economics” model to portray neoclassical welfare economics as containing implicit normative or ethical arguments meant to establish we should use economic power in markets to resolve interpersonal conflicts of preferences, needs, and desires, and hence also implicit normative or ethical arguments addressing creating or sustaining the legal conditions for markets to exist. See the post Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021. 

Greed Is Good Three: Utility And Money

I was talking with an astute and bracingly concise fellow online the other day about whether or not modern neoclassical welfare economics involves the ethical or normative proposition greed is good, that is, the proposition people should act on the basis of narrow financial self interest, and he argued neoclassical economic theory does imply that at least for business people acting in their official capacity as business people because the normative conclusions are based on business people competing with one another on the basis of maximizing profit, that is to say, money, not expressing broader ethical principles or concerns about the welfare of their less clever or able competitors. Narrow financial self interest, greed, at least on the part of business people qua business people is the engine that is meant to drive the socially optimal results. In the context of that theory, if those particular economic actors don’t act the way they’re meant to act, then we don’t get where we’re meant to get. I say business people qua business people because I’m not talking about the behavior of business people more generally, in their private capacity so to speak, but in their official capacity, which in some sense involves simply agreeing to acknowledge the dictates of the market in the sense a business person who does not agree to maximize profit is not destined to be a business person much longer. The function of greed in that context is an interesting point because that does sound correct to me, profit maximizing behavior on the part of business people qua business people does seem generally presented as instrumental to attaining the ostensibly ethically optimal results of perfectly competitive markets in neoclassical welfare economics. I’m not sure there are any such general normative propositions relating to greed for other economic actors in their various roles. That is to say, I’m not sure neoclassical welfare economics explicitly or implicitly expresses normative propositions that labor should be concerned only about wages or capital owners only about returns on capital in order to get the ostensibly normatively optimal results with perfectly competitive markets. Actually, that’s as somewhat interesting question, but it’s not important for what I’m talking about here, so let’s just stick with the easy case which I think is definitely there, the proposition that business people acting in their official capacity should act on the basis of greed, that is, maximize profit. What makes that particular proposition interesting is that it clearly contradicts the more general normative propositions based on “utility” as defined in neoclassical welfare economics, which don’t appear to place any special emphasis on greed or narrow financial self-interest and instead involve preferences quite generally regardless of the underlying motivations involved. Somewhere along the lines, business people qua business people appear to have morphed from plain old people who maximize their “utility” like anyone else to a rarefied group of people whose behavior expresses their function in the economic machine and who may be encouraged or expected to maximize something rather more concrete, money, profit. Seems something a little funny is going on somewhere, and if you know me at all, you know I love that sort of thing, so let’s discuss it. Hint: It’s basically the same thing I always end up talking about, but in a slightly different guise. Intriguing, isn’t it?

One possibility we should probably acknowledge at the outset is that the whole issue of the existence of the normative proposition greed is good, that people or particular people anyway should be greedy, may be a simple error, and one can actually construct an argument within neoclassical welfare economics showing a perfectly competitive market maximizes “utility” that involves everyone, including business people qua business people, acting to maximize only the more general concept of “utility,” and not involving any normative propositions relating to business people qua business people acting any special way such as maximizing profit. I don’t want to dismiss that possibility out of hand. I don’t really see at the moment how that would work, but I just don’t really know for sure. Which is odd, since I’m an economist, and I’ve studied the issue, and one would think I’d know with absolute certainty something that basic, but then many things seem a bit odd to me, and more gets added to the list the older I become. Perhaps it’s theoretically perfectly fine if business people qua business people form and express preferences on other bases and maximize their “utility” along with every one else, except we’ll lose a little something when their businesses fail, as one supposes they must in a perfectly competitive market; which actually sounds pretty close to an implicit normative proposition business folk should just learn to maximize profit to begin with, although maybe it doesn’t work that way. Maybe we can’t compare the value on the basis of “utility” of whatever they chose to do as business people before their businesses failed with whatever we lost as a function of those businesses failing. Or maybe maybe what appears to be a normative proposition that business people qua business people should maximize profit is meant to be a simple factual premise, greed happens or greed must happen as opposed to greed is good, per se, and the normative conclusions of neoclassical welfare economics are meant to apply or not depending on the accuracy of that factual premise; which actually also sounds pretty close to an implicit normative proposition business folk should just maximize profit so we can all get the ostensibly desirable results. Anyway, if the normative conclusions of neoclassical welfare economics relating to the ostensible social optimality of perfectly competitive markets don’t actually depend on business folk maximizing profit, if the theory contains no explicit or implicit normative proposition they should operate on the basis of greed, narrow financial self interest, or if it’s just a factual premise predicated on how markets work that business people qua business people will, in fact, need to operate on the basis of greed, then I guess all we’d be talking about with the supposed normative proposition greed is good, the proposition people or some people anyway ought to be greedy, is just people not understanding neoclassical welfare economics, or to put it another way, a failure on the part of academic economists to accurately and effectively explain the normative component of neoclassical welfare economics so people avoid making that potentially rather significant normative error. I say potentially rather significant because certainly a world in which people believe there is some sort of general normative imperative to be greedy will end up quite different from a world in which people believe there is some general normative imperative to look after their fellows, which perhaps in certain limited and specific circumstances may or even must be set aside in favor of carefully circumscribed greed. But given all the funny business involved in how normative content actually enters neoclassical welfare economics, I think something a little more serious may be going on, so let’s move on to discuss that possibility.

To set the stage for what may be happening, let me just give a quick nod to my previous commentary about the curious conflating of “utility” as defined in economic theory with money, which appears to happen quite easily and frequently at least in the context of neoclassical welfare economics. In a previous post I mentioned an interesting pattern one commonly encounters in more casual forms of economic thinking in which “utility” as defined in economic theory morphs into various rather more concrete concepts like money, physical amounts of goods and services, or sometimes total economic output however defined. I opined previously it’s the sort of philosophical confusion or really conflation of concepts that leads so many purveyors of bad economics, including many economists, to mischaracterize the potential tradeoff between total economic output, generally discussed in terms of money, and “equity,” generally discussed in terms of “utility” as defined in neoclassical welfare economics (or more prosaically and less confusingly discussed in terms of certain ethical propositions involving how we should behave with respect to other people expressing their preferences in certain situations), as the conceptually entirely different tradeoff between “efficiency” and “equity,” both of which are generally discussed in terms of “utility,” thus magically transforming the money that should really appear on one side of the tradeoff into “utility.” I’m not going to repeat the whole argument here. You can look at my previous post on the topic if you’re interested in that. No, for now I’d just like to make one thing clear. Money is not “utility.” “Utility” cannot be expressed as money. One can compare amounts of money across people; one cannot compare amounts of “utility” across people. In modern neoclassical welfare economics, “utility” refers simply to preference rankings for a given individual. One cannot compare the preference rankings of individuals across people. One can talk about a big bucket of money one distributes to people this way or that; one cannot talk about a big buck of “utility” one distributes to people this way or that. The ostensible social objective of neoclassical welfare economics economists invoke when normatively evaluating economic systems and outcomes is maximizing total social “utility,” not maximizing the total amount of money produced or the total output of goods and services produced. The faux behavioral assumption that people maximize their “utility” is tautological in both the positive and normative contexts of modern neoclassical welfare economics because the theory places no restrictions on the ethically acceptable bases for one’s preferences. Preferences based on ethics have exactly the same significance as preferences based on any other motivation including greed and narrow financial self-interest, that is, money. That’s the whole point of the de gustibus principle. “Utility” in neoclassical economic theory may just be a funny term for “preferences,” but it is not also just a funny term for “money.”

Why am I so concerned to establish “utility” is not money here? How does that relate to our original puzzle relating to the apparent implication within neoclassical welfare economics that business people qua business people should act on the basis of narrow financial self interest by maximizing profit, in light of its theoretical companion, the tautological statement people in general maximize “utility” and the normative proposition we should all accept the objective of society maximizing total social “utility?” Well, I think to understand what may be going on in this curious nexus of the real and practical with the theoretical and insubstantial we have to go back to the funny ways some normative content is introduced into neoclassical welfare economics, the distinctive ethical half theory structure of neoclassical welfare economics, and the interesting distinction between what I think of as the ethics appropriate to the Fairy Land of Economic Theory, in which certain ethical issues relevant in the real world can be banished or indefinitely kept at bay, versus the ethics of real life, the here and now, in which those ethical issues cannot be banished or kept at bay. The clue I think is that when we’re talking about greed and business people qua business people we’re talking about behavior on the part of economic actors that is instrumental to the existence or function of markets, at least as presented in the theory of neoclassical welfare economics. This suggests the normative proposition relating to business people qua business people acting on the basis of greed, if there is such a normative proposition, is yet another one of those ethical or normative propositions related to establishing markets that enters neoclassical welfare economics through the back door so to speak, unannounced, and not necessarily entirely consistent with “utility,” which for some not very mysterious reason seems always to be given pride of place in discussions of the normative content of neoclassical welfare economics. In that sense, the normative propositions relating to supporting or accepting greed on the part of business people qua business people would be in the same category as similar normative propositions supporting legal specifications of property ownership or supporting the ethical superiority of resolving interpersonal conflicts on the basis of economic power in markets as opposed to some alternative mechanism, such as democratic government for example.

As with those other instrumental normative propositions, what one has to understand about the normative proposition relating to greed and business people qua business people is that it is only fully normatively significant in realistic situations after one has addressed the pertinent ethical issues that have gone missing from the ethical half-theory of neoclassical welfare economics, before that it is normatively significant only in the instrumental sense of setting the stage to potentially arrive at a normatively significant or acceptable result. For example, supporting a legal specification of property rights is instrumental to having a functioning market, but simply accepting that normative proposition alone doesn’t necessarily get one to an ethically optimal outcome because we have the pesky issue of the normative or ethical basis of those legal specifications of property rights and issues like whether we can change them, and if so how, why, under what conditions, and so on, which involve distributional and other ethical issues that lie outside the theory of neoclassical welfare economics. Supporting any old legal specification of property ownership may get one a market, but there will be nothing particularly normatively special about the results of that market. The results will be ethically controversial. Some people may find them perfectly ethically acceptable, others may not. For the results to have any special normative significance one must address the missing ethical issues at least in the temporary and changeable sense of reaching a social consensus about how we should address them. Simply accepting a generalized concept of a legal specification of property may be all one needs for an ethical half theory, it may suffice for ethical reasoning confined to the Fairy Land of Economic Theory, but not for ethical reasoning in the real world.

Along the same lines, the normative proposition supporting the ethical optimality of resolving interpersonal conflicts of needs, wants, and desires, on the basis of the economic power in markets seems fine, as long as it’s combined with distributional indifference and the elimination of certain other controversial ethical judgments required in real life, which in neoclassical welfare economics are eliminated or kept at bay via studious ignorance and neglect or the use of false factual premises like perfect information and rationality (which, as I’m always eager to point out, function rather differently in a normative context than in the guise of simplifying assumptions in a positive context). That’s all one needs in the Fairy Land of Economic Theory. However, back in the real world, that proposition alone doesn’t necessarily get one anywhere normatively special. Again, it gets one a market. And that market will give one a market outcome or result. But attaching normative significance to that outcome involves addressing ethical issues exogenous to neoclassical welfare economics.

So it is with the potential normative proposition greed is the proper basis on which business people qua business people should act, that is, the proposition greed is good. Business people qua business people acting on the basis of greed may be instrumental to the operation of markets at least as conceived of in neoclassical welfare economics, but there’s nothing normatively or ethically special about where those markets get one unless one combines that proposition with ethical beliefs missing from the ethical half theory of neoclassical welfare economics, beliefs relating to distributional and other controversial normative or ethical issues. Holding up greed on the part of business people qua business people as a complete, general, dispositive normative principle, ignoring its instrumental and normatively incomplete quality, is in the same general category of philosophical error as proposing there’s an “efficiency versus equity” tradeoff as opposed to a “total output versus equity” tradeoff, or granting “economic efficiency” independent normative significance from that of the underlying concept of “utility” on which it is actually based. It involves a denial or misunderstanding of the distinctive structure of neoclassical welfare economics as an ethical half theory.

One way to see this is to imagine a world in which all of one’s ethical concerns relating to markets have been met including distributional ethics and any miscellaneous ethics involving resolving interpersonal conflicts on the basis of economic power in markets, say involving future generations, the environment, particular situations like medical care, or people acting under realistic conditions of flawed information and rationality. In that situation, how would one think of business people qua business people acting solely on the basis of greed under the conditions of a perfectly competitive market? I’m thinking one would probably be perfectly fine with it because all one’s ethical issues relating to markets will have been resolved, by assumption. What’s not to like? How would one think of business people acting solely on the basis of greed in an economic system that doesn’t have those particular characteristics? Where one has unmet ethical concerns relating to markets or perhaps the market involved just isn’t quite up to the level of the ostensibly social optimal perfectly competitive market? Well, I suppose one might still accept the normative proposition business people qua business people should act solely on the basis of greed, the profit motive, as instrumental to markets in some general sense, but one would certainly have some ethical issues with the results of the particular market in question. One would want to change that system in some way so the instrument of greed on the part of business people qua business people leads to a market outcome one accepts as ethically attractive. The greed of business people qua business people wouldn’t appear as some sort of free floating, dispositive ethical principle. One wouldn’t say something like, the greed of business people qua business people is ethically acceptable behavior in the context of markets, so even though it’s leading the world to what I consider some rather unethical market results, at least they’re being properly greedy, so I’m satisfied that all is right with the world as far as ethics go. That would be ridiculous. That would be like saying we shouldn’t make changes that would lead us to one what one believes is an ethically superior market outcome because those changes might interfere with the “economic efficiency” of allocating productive inputs to generate what one believes is the current unethically or ethically inferior market outcome.

Looked at yet another way, what we have is different levels of normative propositions relating to greed on behalf of business people qua business people. We have propositions relating to greed specifically in the context of a driving force in a particular system or part of a particular system, the supply side of markets, and indeed possibly in a particular iteration or instance of that system, perfectly competitive markets, and then we have propositions relating to greed more generally, with respect to the behavior of business people in other than their official capacity as business people or the behavior of people other than business people, and with respect to more general issues such as deciding whether we should change or revise the system itself in some way, say by deciding to institute perfectly competitive markets where appropriate or altering the distribution of economic power or addressing problematic ethical situations like future generations or environmental issues using non-market decision mechanisms and so on. Greed is good as a general ethical principle is simply much too simplistic, one of the hallmarks of philosophically inept bad economics. Greed, at least on the part of business people qua business people, might be all one needs for ethical philosophy in the Fairy Land of Economic Theory, but assessing or evaluating the normative significance of greed in the real world is a rather more complicated affair. Popular confusion surrounding the normative proposition greed is good and its relationship to neoclassical welfare economics is yet another way bad economics retards and complicates the discussion of important normative or ethical issues and hence leads to social confusion and conflict. We should fix bad economics. At the very least we should accurately identify, express, and properly evaluate all the normative inputs and factual premises required to generate the normative conclusions of neoclassical welfare economics, and ideally we should take the next step and take the normative content out of economics and put it back with the people operating through democratic decision making and informed, hopefully, by serious ethical philosophers who can help people analyze these issues a bit more rigorously than most economists seem willing or able to do.