I was really trying to move on to a new issue this week but this whole business of fake distributional indifference and the concept of Pareto improvements strikes me just now as rather fun and interesting, which I suspect may be a somewhat unusual state of affairs, so I thought I might do one more on that issue first. I actually tried to just go back and add a little something to my last post to dispose of this issue, but I got myself a tad confused, for reasons I’ll mention here maybe at the end as a bit of comic relief, so I put my previous post back the way it was and resolved to do another one today. I’ll save the rhetorical device of references to possibly non-existing distributional mechanisms for next time.
Last time out I discussed how the concept of Pareto improvements can generate fake indifference if one falls into the trap of adopting some sort of informal ethical proposition to look only at Pareto improvements from any given distributional starting point because, of course, according to utility as it is defined and used in economic theory, one should really be indifferent between those Pareto improvements and other policies or changes that involve redistribution, with at least some people becoming worse off relative to that starting point and those resources going to other people who some people may suppose have a stronger ethical claim to them. I believe the proposition one should consider only Pareto improvements is not a part of economic theory proper, which is why I think it belongs in the outer layer of bad economics with the other rhetorical tricks associated with defeating distributional indifference, but one can well understand how some people may come to suppose it is part of economic theory. Distributional indifference is ostensibly designed to avoid controversial ethical issues and if one isn’t paying close attention one may come to suppose a restriction to look only at Pareto improvements does the same thing.
However, there is another way the concept of Pareto improvements can generate fake indifference. If one considers two policies both representing Pareto improvements relative to any given starting point because they make at least one person better off and no one worse off, the choice of those Pareto improvements involves resolving an interpersonal conflict or distributional issue, namely, who should get the raise. People supporting one set of distributional ethics may believe one policy justified while those supporting some other set of distributional ethics may believe the other policy justified. In other words, Pareto improvements are rather unsurprisingly like Pareto optimums, everyone may like them in the abstract, and one can talk about the class of Pareto improvements and Pareto optimums without raising ethical conflict relating to distributions, but everyone doesn’t like the same one, and as soon as you start talking about instances of Pareto improvements and Pareto optimums you’re in a world of distributional indifference or should be anyway. Economic theory is indifferent between making Pareto improvements and redistributing resources, making one or another Pareto improvement, attaining one or another Pareto optimum, and maintaining any given Pareto optimum or moving to certain other non-Pareto optimums (those would be the non-Pareto optimums that are not dominated by that particular Pareto optimum, that is to say, the non-Pareto optimums that have the quality that one cannot get to that particular Pareto optimum from that particular non-Pareto optimum via Pareto improvements). Economists exhibit fake distributional indifference when they explicitly or implicitly treat one side of these oppositions differently than the other. If they consider or discuss or analyze or look at only one side of these oppositions, that’s fake indifference. If they give policy advice predicated upon or consistent with or accepting of only one side of these oppositions, that’s fake indifference.
So just by way of summary so we don’t lose our way entirely, what does economic theory actually say in this area anyway? Well, I think the simplest way to say it is that it shows for any given person, with a given set of distributional beliefs, there will be some path from any given distributional starting point through Pareto improvements consistent with that person’s distributional beliefs to a Pareto optimum consistent with that person’s distributional beliefs. That means for any given person there should be some Pareto optimal, economically efficient, perfectly competitive market outcome that should look better than other market structure under the famous conditions for perfectly competitive markets and setting aside some of the other ethical issues we’ll be discussing in other posts relating to utility and market systems. However, when one adds another person with different ethical beliefs relating to distributions one ends up with what should be very far reaching indifference indeed, but which is often ignored on various bases in practical situations, a phenomenon I’ve been calling fake indifference or more properly fake distributional indifference. Fake distributional indifference defeats real distributional indifference and makes economic theory appear to be a player in disputes about distributional ethics, supporting or accepting some distributional results, shooting down or blocking arguments for redistribution or other distributional results. It’s really a misuse of economic theory for rhetorical purposes. Adding explicit ethical propositions, necessarily relying on some basis other than utility, that address distributional ethics would be fine, propositions like one should accept any distribution one happens to find because it was there when one got there, or it was the result of some particular political or social mechanism, or it was supported by some group of people, etc. However, if one intends to add something like that in a context of a theory that makes as big deal about utility and distributional indifference based on utility that economic theory does, then one will want to be as clear and explicit as possible. One wouldn’t want to slip it in unawares, at least if one were being intellectual honest.
And just for fun, what was the issue I alluded to earlier that got me mixed up when I tried to do a quick revision of my previous post? Well, I started talking about Pareto improvements in terms of money or economic power and all manner of oddness ensued. It seems apparent Pareto improvements defined in terms of money or economic power are not necessarily real Pareto improvements because when one changes relative economic power one can change how interpersonal conflicts are resolved in markets. For example, if A has $1 and B has $2, and they both want unique good G, then B will get G, but if we make an apparent Pareto improvement based on money or economic power so A now has $3 while B stays at $2, A gets G and B is worse off. It wasn’t a real Pareto improvement. So what is the proper basis for defining Pareto improvements? Utility, I suppose, although talking about the level or amount of utility sounds like it involves a cardinal conception of utility that would not be consistent with the common ordinal only “preference utility” definition of utility often used in economic theory. Well, doesn’t really matter for what I’m talking about, so I won’t bother looking into it. Economic theory is funny. It’s been around for years but delving into it is like walking through Grimpen Mire or Fangorn Forest by moonlight. One false move and you may be lost forever. The Dark Forest of Economic Theory.
