Democracy and Economic Theory

It occurred to me the other day one reason for the longevity of neoclassical welfare economics and even more troublingly common misinterpretations of that theory, which I’ve been calling bad economics, is that those who see problems with the ethical propositions expressed or ostensibly expressed in that theory don’t really present a united front.  (It’s neither here nor there right now, but to avoid sounding excessively cryptic please recall I’ve argued before a great deal of the perceived controversy about neoclassical welfare economics actually involves common misinterpretations of that theory, perpetuated or allowed by academic economists, in which it appears to say a lot more about distributional issues than it really does, although the actual theory also has some philosophically interesting bits as well.)

A common and perhaps even dominant view among critics appears to be the best way to address this problems is to help economists do better ethical philosophy by, for example, re-instituting classes in the nearly extinct intellectual and academic field of the history of economic thought so they can understand something about the origins of modern welfare economics in the Deist moral philosophy of the eighteenth century, the developments involving ostensibly ethically optimal wages and Social Darwinism of the nineteenth century, and the significance of the subsequent major developments involving distributional indifference during the mid-twentieth century Cold War period, as well as teaching them some real ethical philosophy so they aren’t quite so clueless when it comes to evaluating ethical propositions and perceiving and appreciating the real ethical issues involved in evaluating economic systems and policies.  

You may have noticed I’ve argued for a rather different approach, which is to take the ethical content out of academic economics entirely and make it a true science evaluated solely on the basis of its ability to predict and explain observable phenomena, rather than as a normative guide expressing ethical propositions and value judgments relating to what we would like the economy to do and evaluated at least in part according to how well it comports to people’s own ethical views, for one reason or another, or by how well it insulates people’s economic power from criticism and potential diminution.  (It occurred to me recently another component of economic theory, distinct from the science, involves mathematical and logical optimization problems based on agreed upon objectives, which I suppose could remain part of academic economics but probably really belong in engineering or business school.)

From my perspective, the moral sensibilities and ethical beliefs relating to economic issues of academic economists and their supporters are rather less interesting and significant than the moral sensibilities and ethical beliefs relating to economic issues of those subjected to our economic system.  I think what we really need is to get the general voting public talking about and debating the relevant ethical issues among themselves and then deciding appropriate courses of action using the apparatus of democratic government, informed hopefully by the thoughtful commentary of serious ethical philosophers or other sources and references such as religious texts and leaders, depending on the moral sentiments of those involved, and of course economists as to the factual content of how real markets may behave in an empirical, observable sense.

Although it seems rather obvious why many academic economists and their supporters would like to make their own moral sentiments and value judgments the deciding factor and lecture everyone else on what economic objectives are ethically correct and socially optimal and so on from their high horse, it’s not clear to me why the rest of us should go along with it.  What’s so special about the ethical stylings of economists anyway?  Why would anyone suppose they have any special insight into ethical philosophy or really philosophy of any sort including epistemology or the philosophy of science?  What is so noteworthy about the moral sentiments of economists and their supporters compared to those of anyone else?  Indeed, if one truly wanted to abdicate one’s social responsibilities as a citizen of a democratic nation and allow someone else to make the thorny and controversial ethical judgments relating to evaluating economic objectives, why on earth would one choose an economist, who likely spends a great deal of his or her time constructing fanciful models, working on math problems, drawing graphs, and so on, rather than some rather more serious philosopher who worked on ethical issues full time?  No, I think the notion economists should do ethical philosophy for the rest of us and all we need do is work to improve their ability to do ethical philosophy is not the best course for dealing with the pervasive confusion and social conflict generated by purposefully opaque neoclassical welfare economics and the misinterpretations it naturally generates.  The best course is to help economics finally become the real science many economists always professed it should be and to put resolving ethical issues affecting the whole of society back where it belongs, with the people.

Not Just Distributional Issues Part Two: People And Situations

I know I said before I don’t like to double up on my posts but seems I’m at it again.  Maybe I should just stop saying that?  Apparently my mind really does work as glacially as some people have long suggested.  Hard to change course once it’s on its way.  Anyway, you may recall my last post dealt with some ethical issues I argued were obscured by using distributional issues as a shorthand way to refer to all the myriad ethical issues associated with resolving interpersonal conflicts of needs and desires generated by our inability to make interpersonal utility comparisons using the definition of utility we use in economic theory.  I mentioned thinking of those ethical issues only in terms of distributional issues glosses over the practical difficulties associated with the artful manipulation of the distribution of economic power required to make things turn our right on the market according to any given system of ethics particularly given the continuous distributional mechanisms of the labor and capital markets.  In case I’m coming off a bit too much like the old Cheshire Cat, let me just explain that was my rather arch way of suggesting economic theory is often misinterpreted or badly taught in such a way that it turns out to seem not quite as indifferent to distributional issues as it really is but instead is perceived to lean rather heavily toward distributional ethics consistent with the distributional mechanisms of labor and capital markets.  I also argued treating the ethical issues as distributional in nature also ignores ethical issues involving entities that cannot currently effectively wield economic power on their own behalf, such as future generations and non-human animals and so on.  In that sense, the ostensibly ethically simple and non controversial case of one person acting in isolation to fulfill his or her own preferences isn’t quite as simple as badly interpreted or taught economic theory might lead one to suppose.  

However, it now occurs to me there is another more conceptual component to the ethical issues relating to resolving interpersonal conflicts involving people fully capable of wielding economic power on their own behalf, which is that the distributional mechanisms we usually have in mind tend to be based on the characteristics and behaviors of the individuals involved that go beyond their role in whatever conflict or transaction we may be considering in the moment, while certain ethical beliefs relating to resolving interpersonal conflicts may be more situational in nature and may be difficult to relate to more general personal characteristics and behaviors of the people involved.  For example, if one thinks of an interpersonal conflict between two people, A and B, and let’s say something someone might find of ethical significance is going on, for example, let’s say the exercise of A’s economic power causes B to drop dead on the pavement, the ethical issue at hand doesn’t necessarily involve the characteristics and behaviors of the individuals involved that go beyond their behavior in that particular moment but something a little more general.  That is to say, we could exchange A for B and end up with essentially the same problem.  This sort of issue would seem to be impossible to address using the artful manipulation of the distribution of economic power but rather more straightforward to address by simply taking that particular interpersonal conflict out of the realm of interpersonal conflicts appropriate to being resolved via the market mechanism and putting it instead in the realm of interpersonal conflicts one feels are more appropriately resolved using some non-market mechanism.  

This is yet another reason why economists should acknowledge the full extent of the implications of the impossibility of making interpersonal utility comparisons using utility as it is defined in economic theory and in particular should acknowledge it implies indifference to even using market mechanisms and non-market mechanisms to address interpersonal conflicts in the first place.  It’s intellectually dishonest to pretend they have it all covered by simply assuming the ethical superiority of the market mechanisms, suggesting all potentially controversial ethical issues are distributional in nature, then promptly making those issues disappear by sprinkling them over with the fairy dust of hypothetical transfers that would be difficult or impossible to implement or even imagine.  

Had quite enough of this issue for now?  Fine.  I’ll think of something else to talk about next week.  It’s not as if I’m likely to run out of funny bits to discuss when it comes to the bad ethics implied by neoclassical welfare economics, is it?

Addendum

This is an issue I will later come to call the “extent of the market,” the ethical decision of when to use economic power in markets to resolve certain interpersonal conflicts of preferences or desires or needs, which I will later describe as another sort of “distributional issue,” albeit one involving the distribution of a particular good or service possibly in some particular situation rather than the distribution of economic power by people that can then be used to resolve interpersonal conflicts relating to goods and services on the market. For example, see my post on Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021.

Not Just Distributional Issues

I was thinking the other day about how the focus on relative economic power in the marketplace as a means of resolving interpersonal conflicts of wants and needs and desires, an issue we would otherwise be unable to address in the context of the (partial) ethical theory expressed in welfare economic theory due to the impossibility of making interpersonal utility comparisons, tends often to make economists, such as myself for example, think of the ethical issues associated with resolving all interpersonal conflicts mostly in terms of the distribution or allocation of economic power.  However, it occurs to me now it’s probably much more common for non-economists to think of those issues in terms of the appropriateness or advisability of using market mechanisms in the first place.  In some ways that’s a rather more sensible and realistic perspective because of course it can quite difficult or perhaps even impossible to work out any real, practical, on-going scheme for distributing economic power that would make all interpersonal conflicts work out in an ethical way based on one’s ethics, an issue economists conveniently sweep under the rug along with basically all other issues relating to the distribution of economic power through the use of their magical be-all and do-all notion of a transfer, a concept lifted from the stylized and unreal world of economic modeling.  

It also occurs to me some ethical issues cannot be addressed even theoretically through artful manipulation of the distribution of economic power particularly when those ethical issues involve people or entities unable to exercise economic power or participate properly in market transactions.  For example, let’s say one has some ethical beliefs relating to unborn humans (i.e., future generations), or children, or animals, or the environment, or even some regular plain old people who may just not have the wherewithal to understand and effectively participate in market transactions.  Really by even accepting the ethical proposition the correct way of resolving all interpersonal conflicts of needs, wants, and desires is through market mechanisms and relative economic power, one is already pronouncing on a great number and variety of ethical issues that often seem to go unrecognized by economists in their zeal to suppose they’ve got it all covered and are dealing with only the most general and non-controversial of value judgments.  

In my books, I raised this issue only in the context of the ethical proposition implied by economic theory that one should prefer any formulation of property rights over complete anarchy because of the ability of any system of property rights to sustain markets.  I characterized that proposition as fairly innocuous although presumably opposed by a few people, such as anarchists for example (of the real sort, not the fake sort who arrive by the way of misinterpretations economic theory, who are generally just trying to rhetorically isolate and protect certain rules and power relationships).  However, I think now I was probably being overly charitable to economic theory in that particular respect.  The actual ethical propositions required to conclude it’s better to have a functioning market rather than (real) anarchy take on a rather more serious and potentially controversial flavor if one adds the ethical proposition economic power operating through the market is indeed the only acceptable basis on which to resolve not only the issues associated with interpersonal conflicts of desires but the even more general issues involving one’s relationship to people and entities incapable or currently incapable anyway of effectively wielding economic power on their own behalf.  The issue goes well beyond the already very serious practical difficulties associated with addressing ethical issues involving interpersonal conflicts through artful manipulation of the distribution of economic power.  

Economists make a big to do about their ostensible indifference to the distribution of economic power based on their inability to make interpersonal utility comparisons; however, to be similarly non-controversial about the various ways that same issue and other even more general but also potentially controversial ethical issues can be expressed, they should really be similarly indifferent to ethical arguments relating to the use of market mechanisms to address particular interpersonal conflicts and even broader ethical issues in the first place.  If one has ethical objections to resolving interpersonal conflicts or broader ethical issues using market mechanisms, economists should accept their theory has nothing to offer in such cases and should really be indifferent to the use of market mechanisms.  Or I guess they could also finally give up their famous indifference to distributional issues, which addresses the same basic phenomenon in a different way, as just a bit of rhetorical nonsense meant to disguise the underlying ethical issues.  So tricky when one tries to do ethics, science, and math at the same time, isn’t it?  So easy to neglect or forget to mention important ethical considerations and issues.  I guess doing ethical philosophy properly isn’t really so easy after all.  Who knew?

Addendum

I’ve gone back and forth on the best way to portray this issue, but my more recent take does not involve attributing additional normative propositions to neoclassical welfare economics but instead holds the line at “utility,” and uses that as the dividing line between the normative issues that are endogenous and those that are exogenous. For example, see my post on Law Over Anarchy In Neoclassical Welfare Economics, from June 2, 2021, in which I argue not only are ethical decisions about when to use markets (decisions relating to what I call the “extent of the market”) exogenous to neoclassical welfare economics, but so is support for a system of law as opposed to anarchy. It’s a way of looking at the issue that suggests one can’t get very far at all on the basis of neoclassical welfare economics alone. That seems superior to the alternative that one can get quite far, or someplace anyway, on the basis of neoclassical welfare economics alone, which inevitably requires one to suppose additional normative inputs beyond “utility.”

Market Structures and Distributional Issues

Are you one of those people who thinks the issues associated with identifying optimal market structures and policies in neoclassical welfare economics can be neatly separated from distributional issues because logically or mathematically there should be some perfectly competitive market outcome corresponding to any given perspective on distributional ethics that should dominate all other market structures given only very general and unobjectionable value assumptions, so all we need to do is push always for a perfectly competitive market structure and then adjust for distributional concerns as necessary?  Let me ask you a question.  Are you talking about economic theory or economic reality?  Because in economic theory, where all owners of the factor of production we call labor  (i.e., workers) and all owners of the factor of production we call capital (i.e., investors) are identical ciphers, and we can move resources about with costless transfers at the stroke of pen, then maybe that’s plausible enough.  But what about economic reality?  In the real world, owners of labor and capital, or let’s just start calling them people at this point, have various characteristics, circumstances, and behaviors, that some people may associate with distributional ethics and that interact with whatever laws and regulations and institutions we’ve set up to govern capital and labor markets to produce a particular distributional result.  In other words, in the real world market structures and distributional results often go hand in hand.  So you do have in mind some legal and economic mechanism or mechanisms you’re prepared to clearly identify as consistent with perfectly competitive labor and capital markets that can move resources around as necessary to address perceived distributional issues, right?  And you do know whatever mechanism you have in mind must be a continuous system because capital and labor markets are continuous systems, right?  Can’t really be a one time deal.  If you don’t have anything like that in mind, I’m afraid your argument about indifference to distributional issues may be coming apart just there.  Might want to just step in the back room and adjust something.  No sense really talking about the theoretical perfectly competitive market result that goes with what considers an acceptable distributional result if one doesn’t have in mind any mechanism to make that result forthcoming or sustainable.  I wonder if that’s why so many people get so confused, with the active support and encouragement of many an academic economist of course, and suppose modern economic theory grants some special ethical status to the distribution of economic power resulting from perfectly competitive labor and capital markets?  That’s why I always say the best thing we can do to improve the public discussion of the important ethical issues associated with real economic issues is to confront bad economics and the confusion and conflict it seems always to create.

Addendum

If you’re interested in this sort of thing, I have a great deal more to say on this issue in later posts, for example, see my series of posts on Fake Distributional Indifference and Nonexistant Mechanisms from May and June of 2020.