Allocations and Distributions

Don’t you find words interesting sometimes? I occasionally talk popular economics to random people online and I’m always amused at the funny way they think about certain words related to economic theory, one of my favorites being “distribution,” as in distributional indifference or neutrality, ethical issues relating to distributions, mechanisms for distributing economic power, and so on. One fellow told me my fundamental problem was that I started out from an incorrect premise. In his opinion, no one should be distributing anything, we just need to let markets do their thing and leave well enough alone. When I explained labor and capital markets are distributive mechanisms and just the sort of thing I was talking about, he apparently concluded I was mentally deranged and left the building. But seriously, we all know what we’re talking about, right? An economic system inevitably distributes economic power in some way, and when people express that economic power in markets goods and services end up being distributed in some way. If you don’t have that, you don’t really have an economic system. Even anarchy ends up being a distributive system of sorts, with the final distribution of goods and services depending on the prior distribution of economic power in the form of rocks, swords, axes, guns, or whatever the weapon of choice happens to be at the moment.

Another amusing aspect of the use of the word “distribution” in economic contexts is the relationship to another word one commonly hears in economic contexts, “allocation.” Linguistically the terms seem quite similar, don’t they? They’re listed as synonyms on some word sites. But in economics my experience is they’re used slightly differently. One of the words, “distribution,” is usually used in reference to economic power or the goods and services one can command using that economic power. “Allocation,” on the other hand, is usually used in reference to productive resources or inputs such as labor and capital. Market incentives, in the form of wages and returns to capital, function to allocate productive resources, and the results of that allocation of productive resources, in the form of goods and services, are then distributed via the market to those with previously distributed economic power. So, in addition to the actual productive resources involved, does the market “allocate” economic power in the form of wages and returns to capital? Or does it “distribute” economic power in the form of wages and returns to capital? When economists claim to be indifferent to distributional issues are they talking about wages and returns to capital? They’re indifferent to changing the wages and returns to capital that allocate those productive resources on the market? They’re indifferent to the redistribution of economic power?

That was what they call a rhetorical question. The answer is yes, of course. That’s what distributional indifference means. It doesn’t matter if you call wages and returns to capital part of a system of distribution or allocation. The mechanism for assigning economic power to different people is what we’re talking about. There are ethical issues involved in doing that. Should it be based on hard work, innate talent, rights, contribution to the economy, what mommy and daddy did, needs, etc.? I don’t know the answer. The issues can be controversial. I have opinions, but other people probably have different opinions about how that ought to work. That’s why neoclassical economic theory is officially neutral or indifferent about such matters. It’s meant to avoid the controversial ethical issues associated with distributional issues. It doesn’t matter if you also call wages and returns to capital incentives governing the allocation of productive resources. There’s nothing ethically special about wages or returns to capital in neoclassical economic theory. An optimal allocation can only be defined with respect to a particular distribution of economic power and a given pattern of demand flowing from that distribution of economic power.

However, when people aren’t paying attention they can easily get confused on that point. They can come to believe economic theory says one cannot or should not change the distribution of economic power generated by wages and returns to capital because it leads to a non-optimal allocation of productive resources or equivalently that it renders the economic system less “efficient.” One ends up with the curious spectacle of the market itself, the economy, appearing to tell us what is ethical, rather than us discussing among ourselves what we think is ethical. This is the sort of thing that leads many confused popular economists to believe they’re not doing ethics at all when they try to establish that certain economic results are socially optimal and so on. They’re just passing on what the market or the economy says.

Are academic economists trying to clear up this sort of confusion? Or are they actively trying to generate it? Is there some reason they use the words “distribute” and “allocate” in different contexts?  Why are so many people so confused about what seems a rather simple issue to set straight? Why, after the decades of time neoclassical welfare economics has been around, is this still an issue? Well, I don’t know. But this is the sort of thing that makes me wonder sometimes about the intellectual integrity and seriousness of academic economists. Nothing anyone can do anything about right now, apparently.  But let’s all at least just do what we can to explain it to one another, shall we?

The Free Market, Capitalism, And Economic Theory

I was thinking the other day about the curious and enigmatic term the “free market.”  One reads about it constantly in popular economic contexts, yet it’s not really defined in standard neoclassical welfare economics, in which the ostensibly optimal market structure is something called a “perfectly competitive market,” not a “free market.”  Indeed, I’m not sure I’ve ever heard the “free market” defined exactly in a rigorous economic context.  I guess I had always assumed it was just some ancient and now economically illiterate but not particularly troubling way of talking about standard welfare economics, perhaps expressing some sort of quaint, unstated folk belief that if one lets markets run free, however one might care to define that, then one ends up with the perfectly competitive markets of real economic theory.  However, it occurred to me recently the ubiquity of the phrase may have a rather more sinister explanation. I wonder now if it thrives not because it’s a relatively harmless bit of simple-minded nonsense no one can be bothered to address but because it provides a crucial pathway to conflating or combining the conclusions of economic theory with other beliefs external to economic theory, beliefs that express ethical beliefs relating to distributions of economic power, in particular, that are not part of economic theory, per se. 

Here’s what’s on my mind.  Proper neoclassical welfare economics is famous for its ostensible indifference to the distribution of economic power, which is a result that flows necessarily from the form of “utility” it uses to establish the supposed optimality of perfectly competitive markets.  Thus, economic theory, properly considered, is indifferent to the redistribution of economic power generated by labor and capital markets, for example.  That’s where all the funny rhetorical business and word play associated with economic theory and the ethics of distributional mechanisms and results come in, what I’ve been calling on this blog “bad economics.”  If you don’t know what I’m talking about here just yet feel free to skip to the next paragraph. I’ll be explaining all these mechanisms in detail sooner or later. However, if you do know what I’m talking about and I can just review, I’m talking about the notion, for example, that “indifference” as it applies to distributional issues means supporting the distributional mechanism we have, or the one that falls out from some particular legal and political system, or some other mechanism on whatever basis, rather than true indifference in the sense of a refusal to take a stand on such issues.  Or again, that distributional “indifference” applies not just to economic theory and economists using that theory but more generally, so economic theory shows no one should have any ethical beliefs about resolving interpersonal conflicts and distributional systems, although again sustaining or not objecting to the system that’s already there is paradoxically fine because acceptance or support for that system is not based on distributional ethics but some other ethical proposition involving the resolution of interpersonal conflicts, such as maintaining existing power structures unless one recognizes there could be a reason to change them. Or again, the ever present opportunity to put one’s horse before one’s cart and say things like we can’t alter the distribution of economic power because the result of changing the existing incentives for labor and capital would “interfere” with the “optimal” allocation of those productive resources, neglecting the fact one cannot define an optimal allocation of inputs except in reference to a given distribution of economic power.  Or again, the notion that changing the distribution of economic power is “inefficient” unless done is some obscure and quite possibly nonexistent way consistent with perfectly competitive labor and capital markets, which use wages and returns to capital to simultaneously allocate those productive resources and distribute economic power.

Yes, all those rhetorical sleights of hand might be awkward and cumbersome, but what economist in his or her right mind would want to follow what economic theory actually says and refrain from offering any policy advice that has distributional consequences, including being neither for or against policies that would change the distribution of economic power including changing incentives in the labor and capital markets? What generally conservative leaning economist, confronted with the choice of moving from a perfectly competitive market system and outcome to a non-competitive market system and outcome would honestly want to say, look, does it involve changing the distribution of economic power, because if it does I have no opinion so stop asking me about it.  I mean, what would be the fun of that?  How could an economist ever slip in his or her own views on the matter, unstated, hidden, immune from criticism, if one just stepped away from such issues as economic theory implies one should?

Well, one rhetorically elegant way to escape all the awkwardness and inconvenience of what real economic theory has to say about distributional issues is to pull what I believe is called in philosophy the Old Switcheroo, set aside the concept of “perfectly competitive markets” (and the assumptions required for that), distributional indifference, funny definitions of utility, and so on, and start talking instead about the “free market” or some other ill defined word of that sort such as the famous old time trigger term “capitalism”  (the exact definition of which must forever remain a mystery given the mix of markets and government one sees in all successful advanced economies right now).  What’s the point of that?  Well, I’m not sure many people interested in discussing the marvels of the “free market” or “capitalism” are particularly concerned about the issue of distributional indifference in real economic theory.  I believe the common formulation of what the “free market” or “capitalism” entails is whatever happens on the market or the market in a state of freedom, however that may be defined, is ethical gold, and if economic power is distributed in some way by labor and capital markets (and inheritance and whatever else), then that’s the way it ought to be.

Of course, I must say this sort of conflation isn’t necessarily always involved whenever one starts talking about the “free market” or “capitalism.”  There are economic theories other than neoclassical welfare economics.  For example, I had one fellow attempt to explain to me in very animated terms why the “free market” was special for reasons that had nothing at all to do with traditional economic theory, welfare economics, utility, etc.   It seemed to involve some sort of confusion about the use of government power to enforce property rights, contracts, and just creating the framework required to have what this fellow was calling a “free market.”  I found it all rather incomprehensible and idiosyncratic, but at least the fellow knew what he was about and gave it a shot.  I suspected, at first, that he perhaps had a vague notion of economic theory in the back of his mind, and although he didn’t really understand how it works he liked the results and had busied himself reinventing the wheel, but on reflection I think maybe that’s not being entirely fair.  He made no bones about rejecting the distribution indifference one finds in contemporary economic theory and was quite happy to explain why the distributional mechanisms of labor and capital markets in the “free market” were ethically superior because they were especially consistent with and conducive to freedom in his mind.  I don’t remember him mentioning the word “utility” at all.  So the “free market” and “capitalism” are not always weasel words.  They can be used perfectly sensibly and consistently in other economic and ethical frameworks and in that case would need to be evaluated in those contexts.  That’s well beyond what I’m trying to do here, which is to focus on neoclassical welfare economics.  But I’ve certainly seen the words used inappropriately often enough.  It doesn’t seem unusual to me at all to hear statements like, if you don’t appreciate the superiority of the “free market” or “capitalism” then you need to go back and have another look at economic theory, or retake Econ 101, or basically get your head out of whatever you’ve managed to get it stuck into, etc.

So what’s the point?  I guess just be careful out there.  If you’re talking popular economics take the time to figure out if you’re dealing with arguments based or ostensibly based on standard neoclassical welfare economics or about arguments based on some other philosophical or ethical or economic tradition because if you don’t you’ll probably be wasting a lot of time in the always amusing and comical Conflation Town.  I guess another point is that if academic economists and philosophers would like to take a little time off from their busy schedules and throw the confused man and woman in the street a bone now and then, one thing they could do that might help quite a lot is to get a little more active dealing with some of these terminological issues.  There is no “free market” or “capitalism” in standard economic theory.  Academic economists need to make that clear.  Stress it.  If you have some other theory that uses those terms that’s fine, but in that case put a little effort into explaining what theory you’re talking about and clearly differentiating that theory from standard economic theory.  Explain, in particular, what ethical beliefs that theory entails and whether those beliefs cover the distribution of economic power especially.  Don’t just do some incomprehensible mash up and waste everyone’s time.

Preference Utility And Fake Utilitarianism

I had a fun conversation with another economist the other day who objected to my contention neoclassical welfare economics represents a fake and insincere form of ethical utilitarianism.  It was rather interesting, for me anyway, so I thought I might go over that issue today.

The discussion started with the fellow repackaging my statement in the form that appears in the following question, “Have you written something about how standard welfare economics isn’t ‘sincere’ preference utilitarianism?”  I wouldn’t normally use the phrase “preference utilitarianism” myself, but I proceeded to carry on as though he had said, “ethical utilitarianism,” which was the concept that appeared in my version of my argument.  Well, as you can imagine, a comedy of errors then ensued involving the temporarily unrecognized distinction between the two.  Word to the wise: if someone rephrases what you say but substitutes words or phrases you didn’t use and you’re not familiar with and you’re not exactly sure about, take the time to sort it out before continuing.  Because you’re probably on the road to Conflation Town, that funny place where nothing makes sense and people fall over constantly.

Anyway, the fellow went on to describe one of the two common interpretations of utility as the word is used in the context of welfare economics, much as I discussed in my own little book, in this case the interpretation of utility in which it doesn’t exist, per se, but is just a word we can use to discuss preferences.  He then argued rather cogently that with respect to that definition of utility, economic theory sincerely does what it claims to do, which is to equate statements about utility to statements about preferences.  Thus, he concluded, economic theory does represent sincere preference utilitarianism.  Yes, as you may have surmised by now, turns out “preference utility” is the name at least some academic economists have apparently given to the interpretation of utility in which it doesn’t actually exist but is just a word we can use to discuss preferences.  Duh.  I mean, it does make sense.  Funny that didn’t occur to me.  Oh well.

It took me a few moments of walking in my garden, showering, and having a nice hot drink before it finally dawned on me what was going on.  You know, it all seemed a bit puzzling because everything he had said seemed eminently reasonable and correct to me, yet we had ended up at cross purposes.  It was like those movies that employ awkward humor where people are talking to one another with funny expressions because they clearly aren’t talking about the same thing but haven’t yet realized it.  The problem, of course, was that I had never actually claimed or meant to claim anyway that neoclassical welfare economics is not a sincere form of “preference utilitarianism,” but rather that “preference utilitarianism” is not a sincere form of ethical utilitarianism.

My unraveling of this bit of confusion was helped a great deal by yet another well-meaning fellow, who may or may not have been an economist, who commented about the same time in a different conversation about utility (yes, I seem to discuss utility quite a lot) that linguistically “utility” means “usefulness” and to use it correctly one really needs to have some end or objective in mind in relation to which one intends to measure usefulness.  Something may be quite useful for one thing and not at all for another.  Now, in traditional ethical utilitarianism and old fashioned economic theory, the end or objective is conventionally some conception or definition of human happiness or satisfaction.  That’s how the idea of assessing or measuring the “utility” of something or some course of action, that is, its usefulness in promoting the implied end or objective of human happiness or satisfaction, became re-cast or re-conceptualized as the amount of happiness or satisfaction thus generated, which is how in utilitarian ethical philosophy “utility” morphed into a rather funny name for the resulting happiness or satisfaction itself.  (Let’s just start saying happiness to save time, shall we?)

Of course, depending on how one defines happiness, the measurement of utility / happiness might be easy or difficult.  In the version in which happiness is meant to be an internal, subjective perception of happiness, which is the version one finds in old fashioned economic theory, it can be seen as impossible.  This is the original context in which economists discussed the “impossibility” of interpersonal utility comparisons.  This corresponds to the interpretation of utility in my book where utility is thought to “exist” in some sense, in this case as a subjective perception or feeling or sensation.  The point is that the word “utility” refers to something we’re meant to think of as ethically significant or valuable.

In contrast, “preference utility” does not exist even in that sense.  It’s just a word we use when discussing relationships between preferences for a given individual.  Under this interpretation of utility as used in welfare economics, it’s not that interpersonal utility comparisons are “impossible,” per se, it’s that the word is not defined in such cases.  People continue to exist in such cases, of course.  And those people may be happy or satisfied or express any attribute or characteristic or sensation one likes.  But whatever it is, it isn’t utility.  Thus, under this interpretation of utility, the word no longer refers to anything we’re meant to find ethically significant or to value for its own sake.  Working backwards from this result, “preference utility” basically equates to “usefulness” defined with respect to nothing, that is, usefulness with respect to no identified or implied end or objective.  The linguistic absurdity of using the word “utility” in this way may help one appreciate the fakery and insincerity of using this definition of utility in the context of ethical utilitarianism.  Not only does the concept of utility no longer fulfill the same function or role utility plays in a proper utilitarian ethical theory, the word “utility” itself no longer really even obeys the dictates of the English language.

So what are we maximizing when we maximize so-called “preference utility?”  Nothing.  It’s just a funny way of talking about a situation consistent with certain values about the expression of preferences.  The ethical propositions expressed in the theory of neoclassical welfare economics are about preferences, property rights, and market mechanisms.  They don’t really involve “utility” except in name.  It’s not a true or sincere utilitarian ethical theory.  In the version or interpretation of neoclassical welfare economics that uses “preference utilitarianism,” the word “utility” is basically just there to confuse people and throw them off the scent of the real values.  Really, one could do that sort of thing with any ethical theory.  For example, I could start with a rights based ethical theory and use “utility” as my special word for talking about a situation in which those rights are respected, “rights utility” if you will.  I could then try to pass off my rights based theory as a utilitarian ethical theory based on “maximizing (rights) utility.”  Pretty tricky, don’t you think?

What about the other common version or interpretation of neoclassical welfare economics that uses plain old school utility, where utility is meant to exist as subjective perceptions of happiness or satisfaction or what have you?  You know, old fashioned economic theory.  Well, I think that’s a true utilitarian ethical theory.  Utility exists and is meant to be intrinsically ethically valuable or attractive.  But it’s a totally implausible form of ethical utilitarianism because it uses an ethically unattractive form of utility no one would sincerely want to maximize if he or she could.  It’s not hard to demonstrate, as I do in my book.  In abbreviated form, say you had a dream where you had super powers and could make interpersonal utility comparisons.  Say it turns out one person’s capacity to generate utility is just a lot higher than everyone else’s, and he wants everyone else to be his slave.  Would you be interested in maximizing total utility and making everyone that person’s slave?  Would that seem the ethically correct thing for you to do?  Of course not.  There’s nothing really that ethically special about “utility” defined in that way.  It’s only attractive if one can’t actually maximize it, and it’s only attractive in that case because it takes utility out of the realm of controversial issues involving the resolution of interpersonal conflicts and, if we’re being honest, facilitates the underhanded insertion of other values that don’t involve utility at all.

The bottom line is simply that economists are not particularly adept at ethical philosophy.  They don’t express their propositions honestly or clearly, and when they do, they come up with things that are completely ethically implausible.  They don’t seem to understand the issues associated with real ethical philosophy at all.  That’s why I recommend when policies require ethical judgments, such as what constitutes a successful or optimal economy, those judgments be made democratically by the people, not by underhanded or perhaps just philosophically clueless economists pushing their own values, no matter how well intentioned they may be or profess to be.

Bad Economics In A Nutshell

I was chatting with a fellow economist online recently and I wanted to explain what I think is going on with bad economics in as short and telegraphic a way as possible to avoid wasting his valuable time, and I was so pleased with my handiwork I thought I might as well post it here as well.  

Here’s my take on how bad economics works in a nutshell.  This, in my opinion, is how neoclassical welfare economics manages to start from simple premises to generate such confusion, conflict, frustration, and anger.  I’ll do it in six steps and one appendix-like comment.

Step 1.  Follow standard neoclassical welfare economics in isolating ostensibly relatively controversial ethical issues involving resolving interpersonal conflicts from ostensibly relatively non-controversial ethical issues involving one person acting in isolation.

Step 2.  Exaggerate the non-controversial quality of one person acting “in isolation” by ignoring among other issues the potentially controversial ethical issues relating to effects on future generations, the environment, animals, etc.

Step 3.  Address the ostensibly relatively non-controversial ethical issues involving one person acting in isolation using the language of utilitarianism and get people talking and thinking about those propositions as the sole ethical content of economic theory.

Step 4.  Play some conceptual and word games, misinterpretations really, that make it seem as though economic theory has something to say about the relatively controversial ethical issues relating to resolving interpersonal conflicts by indirectly addressing distributional matters.

Step 5.  Minimize the complications posed by resolving interpersonal conflicts using economic power on markets by pretending all relevant ethical issues can be addressed practically via artful manipulation of distributions and ignoring ethics that are more situational in nature.

Step 6.  That’s it.  Bad economics.  Unstated, unclear, hidden, controversial ethical propositions relating to resolving interpersonal conflicts through economic power on markets disguised by the red herring of a trivial, ethically implausible, insincere form of “utilitarianism.”

Appendix.  How do the games and misinterpretations in Step 4 work?  Multiple ways.  Some of them are in my book, but they involve things like introducing ethical propositions not based on utility (property rights), ignoring distributional effects and pretending it equates to indifference, etc.  Those are the fun bits that really put the bad in bad economics.  Basically, the sorts of issues I raise in this blog, for example.

Given my current obsession with doing whatever I can to fight bad economics, which I’ve come to believe lies at the heart of a great deal of confusion and conflict in our society and others and has done for some time, most of what I have to say in my blog will likely involve one or more of the points I just mentioned.

Greed is Good Three: Society and the Individual Under Philosophical Utilitarianism

I was having a little discussion with someone online the other day about whether neoclassical economic theory represents a real or sincere utilitarian ethical theory, as opposed to just using the language of utilitarianism to express other ethical values entirely, and I had a somewhat interesting thought related to the always fascinating (to me, anyway) issue of whether economic theory implies greed is good, that is, whether it proposes everyone act like a greedy self-obsessed jerk for the good of society as well as oneself.  I know.  I’ve already written a couple of posts on the issue.  How many posts do I intend to do?  As many as it takes, of course.  But hopefully I’m running out of steam on this line of inquiry.  Indeed, I may have mentioned this idea before in passing, but let me do a bit more work on it now.  My recent thought was that if we assume for a moment, counterfactually according to the argument I’ve made in my books based on an entirely different line of reasoning, that economic theory is meant to represent a sincere form of ethical utilitarianism, and those paying attention to its assessment of market structures and outcomes are meant to be literally and sincerely interested in maximizing total social utility, the only way to make sense of their behavior in terms of the presumed normative directive to maximize their own utility is to assume such people maximize their own utility by expressing an interest in overall sociality utility, that is, by following the recommendations of economic theory in terms of trying to set up an economic system ostensibly designed to maximize total social utility.  If they were expressing a form of ethical utilitarianism based on some other more narrow and restricted conception of what is capable of generating utility that excludes ethical reasoning or a concern for others, that is, if they were themselves operating on the basis of narrow self-interest or the greed is good principle, it seems implausible they would have any sincere interest maximizing total social welfare, per se.  They’d be interested in what maximizes their own welfare narrowly conceived to exclude ethical considerations.  They’d be interested in economic theory only for hints on how to get in on a monopoly or oligopoly or maybe only as a rhetorical tool to get one over on other people.  In other words, a sincere interest in the normative, value-laden, ethical assessment of market mechanisms and outcomes presented in the neoclassical theory of welfare economics seems incompatible with the notion economic theory expresses or implies the ethical proposition one should pay attention only to one’s own narrow self-interest, that is, that greed is good.  I wonder if a subliminal appreciation of this issue is why so many people lose track of distributional issues, or profess to lose track of them anyway, and suppose, or profess to suppose, economic theory implies everyone must be personally better off in a perfectly competitive market system than any other economic system, even though it doesn’t really suggest that at all but implies monopolists and oligopolists, not to mention kings, emperors, dictators, criminal kingpins, the local warlords of violent anarchism, and all people of that general sort might and probably would make out rather better for themselves without it.  Seems likely the determined denial of interpersonal conflict, the refusal to acknowledge the existence of winners and losers, under any given market system including a perfect competitive market system considered in the abstract, let alone any real instance of such a market complete with a distribution of economic power that should really make the issue obvious to anyone, is generated by the realization it must be so if one is to reconcile an apparent interest in maximizing total social welfare with the ethical proposition greed is good.  In the context of sincere or real philosophical ethical utilitarianism, of course, this isn’t really a problem.  One clarifies at the outset the objective of one’s utilitarian ethical theory and in particular how it relates to one’s own welfare and the welfare of other people.  A real or sincere ethical utilitarian may very well conclude it’s worthwhile to take one for the team so to speak in order to maximize total social welfare, do a Spock in the wonky warp drive, without any apparent confusion between total social utility and his or her own utility or welfare or narrow self interest.  Funny what happens when people try to do ethics, science, and math at the same time, isn’t it?

Addendum

I’ve written quite a bit more on this theme of whether neoclassical welfare economics contains a general ethical proposition that greed is good. In later posts, I basically consign the greed is good proposition to the realm of bad economics rather than serious neoclassical welfare economics, although I do acknowledge the role of profit maximizing behavior on behalf of those acting in a certain capacity in our economic system. For example, see Actors and Roles from February 24, 2021. I’ve clarified in various posts that “utility maximization” as a description of behavior applied to the subjects of neoclassical welfare economics in other roles, for example, workers or consumers, is more of a tautology than an ethical prescription as presented here, although it doesn’t really matter for the point being made; if one is cast as maximizing one’s “utility” by following the conclusions based on neoclassical welfare economics based on maximizing social “utility,” then one cannot very well be concerned only with one’s own welfare. I’ve also clarified the distinction between the ethical views of the economist / observer and the subjects of neoclassical welfare economics. For example, see Two Levels of Ethics, June 9, 2021.