Property Rights As An Element Of Bad Economics

Thus far in my survey of the various ways normative or ethical content enters into neoclassical welfare economics I’ve looked at the outer layer of the onion of bad economics in the form of fake distributional indifference and references to non-existing distributional mechanisms, and I’ve looked at the rotten core of the onion in the form of the funny business associated with utility in economic theory, so I suppose to keep my little scheme going I should now take up the ethical (or value or normative) content introduced in the middle level of the onion of bad economics, propositions implied by the ostensible demonstration of the social optimality of perfectly competitive markets but that cannot be derived from utility as used in economic theory. These propositions are different from the rhetorical claptrap in the outer layer of the onion of bad economics because these propositions seem necessary if neoclassical economic theory is to do what it is meant to do. I previously mentioned two areas that spring immediately to mind: normative propositions relating to market mechanisms and normative propositions relating to property rights. Let’s do property rights this time and market mechanism next time.

If one interprets neoclassical welfare economics as presenting the argument that perfectly competitive markets are socially optimal in some sense one issue is whether we’re meant to be talking about socially optimal in terms of resolving interpersonal conflicts in general, or socially optimal given that we’re resolving interpersonal conflicts on the basis of economic power in markets. I feel the former interpretation is the conventional and really only sensible one because if we go with the latter we leave a big unanswered question whether we should be looking at markets at all, which seems to me inconsistent with the general tenor of neoclassical welfare economics. I feel it’s more sensible and conventional to suppose neoclassical welfare economics is meant to express a normative argument that relative economic power and the market mechanism represents the best way to resolve interpersonal conflicts that cannot be addressed directly on the basis of preferences (or “utility” as defined in economics) because of the famous impossibility, or undefined nature in the case of so-called “preference utility,” of interpersonal utility comparisons. The normative argument for the use of markets can I think be usefully broken out into two elements: the notion we should recognize property rights, so people can own things and hence have economic power, and the notion we should accept the market mechanism, so people have a context in which to wield their economic power to resolve interpersonal conflicts.

The only ethical proposition relating to property rights required for neoclassical economic theory to do what it purports to do is we should have some. That sounds quite general and seems like it should be fairly non-controversial, and it is, but some people may disagree with even that, and by some people I mean anarchists. Real anarchists, not the fake ones that are so common these days. Real anarchists, who reject the idea of people owning property as an assault on their person liberty to do what they like with any property they come across, can pretty much toss the arguments in neoclassical welfare economics about the optimality of perfectly competitive markets in the trash because they disagree with at least one of the ethical premises on which that argument is based, which is the premise we should respect property rights. The notion we should respect any form of property rights is a proper normative or ethical proposition.

The ethical proposition that enters into economic theory in this area of property rights is noteworthy I think more for what it doesn’t say than for what it does say. Basically, we need to have some way of specifying ownership and defining economic power if we’re going to have transactions on a market. If we accept the ethical proposition that resolving interpersonal conflict on the basis of economic power in the market beats lawless property-free anarchy, then we need some form of specification of ownership, commonly called “property rights,” to be in effect at any given point in time. However, and this is the point I’d like to stress here, neoclassical welfare economics doesn’t require or imply any particular sort of property rights, any particular conception of what property rights mean, any prohibition on changing property rights, any theory about the acceptable ethical basis for changing property rights or about the proper mechanisms for changing property rights, etc. 

Indeed, calling the specification of ownership required for markets to exist property “rights” is in some ways already misleading because of the philosophical baggage that often goes along with the notion of a “right.” Is a right a right if other people, including for example government broadly conceived, can change it? Well, if one is thinking only about the sort of property rights required to have a market and implied by the normative argument about perfectly competitive markets one finds in neoclassical welfare economics, the sort that shows up in the implied ethical proposition we should prefer markets to anarchy, then yes, a property right is still a property right even if people can and do decide to change it by any particular means. If you think that’s not what a right means in a philosophical sense then good for you. However, again, economic theory expresses or implies no such theory. It’s fine if one subscribes to such a theory, but it’s not economics, it’s ethical philosophy and should be discussed as such. If you perceive a linguistic contradiction of this sort then the answer is not to start making things up and tacking them onto economic theory; the answer is to call what we need for economic theory by its rightful name, a quite possibly temporary legal specification of ownership.

I’m taking pains to establish these issues because in order for neoclassical economic theory to maintain distributional indifference neoclassical welfare economics cannot really be interpreted as supporting a particular conception of property rights. Once one does that, one is locked into a particular distribution of economic power and hence is no longer truly indifferent to distributional issues. One sees this sort of thing all the time in folk economics where people recognize the necessity of some form of property rights in economic theory and before one knows what’s happening they’re off to the races with what they feel represent acceptable systems of property rights based often but not necessarily on natural law and other philosophical theories of that sort. They then continue on their merry way imagining they’re still simply discussing the implications of neoclassical welfare economics, when in fact what they’re actually discussing are the logical implications of an ethical theory relating to the distribution of economic power that has nothing to do really with neoclassical welfare economics and is indeed entirely tangential to it.

The notion we should support a possibly temporary legal specification of ownership of property, or some form of “property rights,” is an example to me of a normative proposition implied by neoclassical welfare economics that seems relatively non-controversial based on substance but that I feel is still properly considered part of the onion of bad economics because of how it is handled and presented in that theory. It just sort of appears out of nowhere, with no particular apparent ethical foundation, and certainly no attempt to base it on preferences or “utility” if you will, that is, to show that interpersonal conflicts resolved on the basis of respecting these legal specifications of ownership generate more utility than those resolved on the basis of any other method such as anarchy or bashing the other fellow over the head with a rock, and with no attempt to establish clearly the generality and emptiness of the proposition involved or to shut down those who would like to use it as a convenient entry point for surreptitiously bringing in their own views on distributional issues thus breaking the distributional indifference so laboriously introduced though the imaginative redefining of utility.

Addendum

I’ve lately moved away from the idea of implicit normative propositions not based on “utility” being a legitimate part of neoclassical welfare economics in favor of the line we should treat as exogenous any normative proposition going beyond what we can say based on “utility.” However, it should be noted taking that line implies neoclassical welfare economics expresses indifference to whether we choose to use markets to resolve any particular interpersonal conflict of preferences, or any such conflicts at all, or indeed whether we even have the legal framework to create or sustain such a market. I think it clarifies the normative content of neoclassical welfare economics, but at the expense of removing much of the normative relevance of that theory for the real world. For example, see the post Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021.

The Ethical Implications of Utility in Neoclassical Welfare Economics

In the previous few posts I discussed two of the more interesting ways ethical or value or normative propositions not based on “utility” are informally added to neoclassical welfare economic theory. I described those rhetorical constructions as belonging to the most ethically controversial outer layer of the metaphorical onion of bad economics. That’s the layer that deals with ideas and sentiments that seem to me the most distinct from the core elements of that theory and, in fact, aren’t really part of that theory at all but tend to get associated with it in practice. This week I thought I’d go back to the basics and discuss the explicit or implicit ethical proposition we express when we say or imply we should maximize total social utility in neoclassical welfare economics. Drawing out the logical implications of that proposition is really the whole point of neoclassical economic theory. If one isn’t interested in that proposition, one should just not bother reading that particular economic theory at all. This is the bit I described previously as the core of the onion of bad economics because if we don’t have this proposition, then we don’t really have the neoclassical welfare economics on which bad economics is based. Fair warning, this one is a long one. Didn’t necessarily plan it that way, but that’s the way it worked out.

The first thing we must address is the inevitable philosophical baggage that goes along with the word “utility.” Fortunately, I did that in a previous post, Preference Utility and Fake Utilitarianism (April 15, 2020), so hopefully I won’t have to go over that again here and I can just dive straight into what the ethical propositions involved actually are rather than explaining yet again what they are not. Just a quick reminder, the crucial element of the concept of “utility” as defined and used in neoclassical welfare economics is that it cannot support interpersonal utility comparisons, which means it cannot be used to resolve interpersonal conflicts. What we’re really expressing in the proposition we should maximize total social utility is we should allow other people to do what they prefer to do or want to do if there is no interpersonal conflict involved. The concept of “utility,” per se, is superfluous and serves no role other than to act as a red herring. That’s the case under both common interpretations of utility one finds in discussions of neoclassical economic theory: “preference utility,” the easy case where utility doesn’t actually exist at all, and what I call “perception utility” where utility exists, in a weird sort of internal perception sort of way, but does not represent anything anyone would sincerely be interested in wanting to maximize if he or she could.

Seems simple enough but, of course, not really. Nothing ever is. The world can be quite annoying that way. To think about the implications of maximizing total social utility without the additional and unrelated normative or ethical content associated with accepting property rights and using market mechanisms to resolve interpersonal conflicts based on economic power, let’s consider a world with no property rights, no money, no markets, no market transactions, no compensating people for externalities, and so on. Let’s just think about the proposition we should maximize total social utility in isolation. Don’t worry, I’ll discuss what happens when we add the unrelated propositions about property rights and markets when I get to the normative propositions introduced in what I’m calling the middle layer of the onion of bad economics, which concern normative or ethical propositions that appear to be part of neoclassical economic theory but are not based on utility and not even expressed using the word “utility,” because of course one can derive rather different results from combinations of ethical proposition than just the one.

So let’s break it down. First of all, we need to distinguish between the normative proposition of interest here, the fundamental ethical proposition on which neoclassical welfare economics is based, that we should maximize total social utility, from the tautological statement one finds in economic theory that people act so as to maximize their own personal utility, which basically translates in plain English to people preferring what they prefer. The ethical or normative proposition on which neoclassical welfare economics is based addresses what one should do with respect to other people. It’s basically a form of social ethics. So the first thing to realize is that to analyze this proposition we need at least two people to be involved in some way, the person reading neoclassical welfare economics and trying to evaluate the ethical proposition about maximizing social utility, and another person, who can give the first person some context in which to apply the ethical proposition in question.

After a bit of head scratching, it occurred to me there are actually two ways to think about what’s going on here. One approach, the approach I think is the easiest and most intuitive and the one I’m taking here and also took in my most recent book on the subject, is to imagine the person reading economic theory and thinking about the normative proposition we should maximize total social utility looking in from the outside as it were, which allows us to imagine the observer applying it to someone else in a one person world, which has the advantage of allowing us to assess the proposition in the absence of interpersonal conflict. An alternative approach is to place the person reading economic theory and thinking about the normative proposition we should maximize total social utility in the world along with the person acting as the subject. The complication in that case is that the observer becomes a part of the society he or she is studying, which means the assessment of the normative proposition we should maximize total social utility by the observer shows up in practical terms as an introspective determination of his or her own ethical beliefs about the behavior of the other subject and hence a determination of interpersonal ethical conflict with the other subject that cannot be resolved on the basis of utility, which in turn makes the proposition we should maximize total social utility empty, irrelevant, inapplicable, devoid of practical implications. I think the two ways of looking at this issue are comparable and the difference is really only a matter of how one chooses to talk about it. When ethical objections to the proposition arise the resolution in the one case is to reject the proposition and act presumably on the basis of some other ethical proposition, and in the other case to discover the proposition is empty and act presumably on the basis of some other ethical proposition. To demonstrate the equivalence I may try to write up the following bit of this post in the second style in a future post. Really, I suppose the choice depends on how comfortable one is evaluating ethical propositions relating to how one should treat another person in a one person world.

For now, say we have two people A and B. A is reading neoclassical welfare economics from a great height and wants to think about the implications of maximizing total social utility in terms of how he or she should act toward B were he or she to descend the great staircase and start interacting with B, who currently is on his or her own in a sort of one person world down in the valley somewhere. What is the implication of A trying to maximize total social utility in this context? What does it really mean? It means A should allow B to follow his or her preferences, whatever those may be, since by the way we’ve constructed the scenario none of those preferences could generate an interpersonal conflict that would be unresolvable if we confined ourselves to thinking about utility as it is defined in economic theory. So let’s imagine A evaluating the ethical proposition we should maximize total social utility.

The easiest case would be where B is considering doing something ostensibly innocuous like choosing between eating an apple or an orange. B determines he or she prefers to eat the apple, and A imagines himself or herself maximizing total social utility by saying, sure, I’m not interesting in stopping B from eating the apple, that is, in interfering with B’s attempt to express his or her preferences in the absence of any interpersonal conflict. Why would A think otherwise? Of course, A is not a simple minded fool. He or she knows an accepted principle of ethical philosophy is that one doesn’t just look at the simple case and move on. One tests one’s ethical propositions by trying to think of difficult or tricky situations. So let’s do that.

Let’s say A realizes B does not have full information about the choices B is making and further A knows something B does not. Let’s say, for example. A knows the apple in question has been infected with a deadly pathogen, but B does not. B prefers to eat the apple, unaware it will likely kill him or her. What does A think about the ethical proposition he or she should maximize total social utility in this case? Seems like that one might be a bit more ethically controversial. A may have to think about that one a bit more. He or she may indeed still support the proposition we should maximize total social utility saying something like, I’m not B’s nanny, or if B can’t be bothered to determine if the apple contains pathogens it’s not my job to explain it. On the other hand, A might feel he or she has an ethical responsibility to intervene to help B better understand what he or she is doing. In that case, A would reject the ethical proposition he or she should maximize total social utility in this case. A could, of course, maintain support for that proposition by introducing some sort of stipulation or condition that would preclude this issue, so something like, we should maximize total social utility as long as B has full information about what he or she is doing, or since full information seems a practically difficult and costly prospect, maybe something a little more modest like a reasonable level of information, or maybe something like as long as A provides B with any relevant information A might have.

Interestingly, this discussion of the potential relevance of information and information asymmetries for evaluating the ethical proposition we should maximize total social utility may bring to mind to students of economics anyway the discussion of full information or perfect knowledge as a condition for an ostensibly socially optimal perfectly competitive market. It’s clearly relevant there as well, albeit in a somewhat different way, and I’ll discuss it again when we get to that middle layer of the bad onion of economics. However, the role of information is clearly rather more foundational than defining perfectly competitive markets. One thing I think worth mentioning here is that in the context of defining a perfectly competitive market the assumption of full information is often introduced in the context of a scientific theory or model, and in that context the assumption of full information can famously be treated as what is known in science as a simplifying assumption, a pseudo-factual assumption one understands may not be true but is instrumental in a theory that may nonetheless be highly evaluated as a whole on a scientific basis, that is, in terms of its ability to predict or explain observable phenomena. That is not the context in which we’re raising the issue here. We’re talking about evaluating an ethical argument in which this issue of information appears as a factual premise. In the context of an ethical or normative argument, whether or not the factual premises in the argument are true or not is crucial to the evaluation of the argument. If this issue is relevant to our ethical argument, and we’re meant to take the proposition we should maximize total social utility seriously, then we need to know how much information people actually have, or if there are information asymmetries, and so on. In that sense, when doing ethical philosophy one needs to be rather more rigorous in one’s language than in the context of a scientific theory, no matter how much math may appear in the scientific theory.

Moving on, let’s imagine a different situation in which A notices B does not appear to be acting rationally. B may have all the information in the world, so A is satisfied on that account, but let’s say B’s thinking seems impaired or incorrect in some way that makes A wonder about B’s state of mind and concerned B may not be responsible in a normal or usual way for what B is choosing, maybe B is addicted to some substance in apples, maybe B has incorrect beliefs relating to what happens when he or she eats the apple (which could, of course, also be an information problem, but could be an illogical or irrational generalization as well), maybe B read something (presumably by someone no longer alive in our little one person world) that applied psychological manipulation that predisposed B to eat apples but on a basis A suspects B would not care about if the psychological manipulation were explained or addressed with some counseling or countervailing arguments or what have you. Doesn’t really matter for our purposes, the main point is A believes he or she has some reason to doubt B is thinking rationally when expressing his or her preferences.

Here again we’re in an analogous situation to full information. If A doesn’t really care whether B is acting rationally or not and, in particular, does not feel he or she has any ethical responsibility to help B by rendering his or her preferences consistent with what A imagines a rational person might do, then A can would go along with the proposition he or she should maximize total social utility. If A does care, then he or she may reject the proposition he or she should maximize total social utility. Again, A could preserve his or her support for the proposition in question by adding some sort of stipulation or condition that addresses this complication, for example, some condition that we should maximize total social utility as long as the people involved, B in this case, appear to be acting rationally. As with information, this case is interesting because an assumption of rationality is often considered part of economic theory, not as a condition of a particular market structure as with information, but as a condition for economic models and theory in general. However, again, it is typically addressed in a scientific context as a simplifying assumption that can be left either true or false but, again, in terms of evaluating the ethical proposition we should maximize total social utility the issue of the degree of rationality of those involved appears as a factual premise the truth of which is crucial to the our evaluation of that proposition. In a philosophical and ethical context we need to know, exactly, what we’re saying about rationality. Are we saying everyone is always perfectly rational or rational to some particular degree, some people are perfectly rational or rational to some particular degree, everyone is sometimes perfectly rational or rational to some particular degree, etc. If we’re going to get serious about evaluating the ethics involved, we have to get rigorous in terms of defining the argument we’re actually making.

Let’s do one more example of issues in this one person world (plus an observer) case, say a few quick words about the multi person case, and then call it a day, shall we? Another complicated situation in this one person no interpersonal conflict case is what happens when we allow the possibility of future generations. We still arguably have only the one subject to think about, but we have more on the way. Let’s say B is thinking about eating the last apple and A has every reason to suppose future generations would have also enjoyed eating applies if Little Piggy, sorry, B didn’t eat the last one. One issue is whether this situation counts as a sort of interpersonal conflict that would render the proposition we should maximize total social utility irrelevant because we cannot make interpersonal utility comparisons. Could A still support the proposition we should maximize total social utility in this case without a second thought because it has no implications in this situation because of the interpersonal conflict and A would thus be free to intervene of behalf of future generations or not on the basis of some other ethical argument? It’s not entirely clear. However, I think the conventional view is probably that utility in economic theory is only defined with respect to the preferences of actual living people who can express them via their choices, or the internal perceptions of people who are actually alive to experience them if you’re using that other definition of utility, so future generations would really have no standing in terms of utility, and this situation would not represent an interpersonal utility comparison, per se. As such, A would again have to think about whether he or she agrees with the proposition he or she should ignore his or her assessment of the likely preferences of future generations and whether or not they would be harmed by B expressing his or her own preferences. Again, A may want to reject the proposition we should maximize total social utility on this basis. Alternatively, A could try to maintain support for the proposition by adding some stipulation or condition, such as we should maximize total social utility after accounting for the interests of future generations.

What happens when we start adding more people to our little world? A is now considering not just B but the rest of the alphabet as well. In that case we not only open the door to interpersonal conflict but we lose the capacity to know conclusively when interpersonal conflicts are present or not. The more people we add the more likely someone may have ethical beliefs or concerns about what B is doing that would generate an interpersonal conflict and render the proposition we should maximize total social utility irrelevant. A could support the proposition we should maximize total social utility with no problems, but only because the proposition would be rendered empty and devoid of practical implications, thus allowing A to resolve the interpersonal conflicts on whatever basis he or she found reasonable. Alternatively, A could try to maintain some practical implications to the proposition we should maximize total social utility by adding some condition relating to the standing of other people, maybe something like we’re not going to give other people standing as far as registering an interpersonal conflict unless the conflict involved reaches some arbitrary level of directness or intensity or concreteness or what have you. Otherwise, I’m afraid we pretty much have to say the proposition we should maximize total social utility has no practical implication in realistic situations.

So what have we learned from this laborious analysis of the implications of the proposition we should maximize total social utility when that proposition is not combined with other unrelated ethical propositions relating to property rights and market mechanisms designed to resolve interpersonal conflicts on the basis of economic power in markets? Well, one thing we discovered is that it’s not as ethically uncontroversial or philosophically innocuous as economists seem so eager to suggest. There are a few rough bits. One issue is that those accustomed to utilitarian ethical theories in which utility plays such a major role will naturally look to the concept of utility to find the ethical content of neoclassical welfare economics, but when they look at utility as used in economic theory they will find only a small portion of the ethical or normative content of neoclassical welfare economics. Another issue is that the proposition we should maximize total social utility can easily become ethically controversial in practical situations unless we start adding stipulations or conditions to head off the potentially controversial bits, and although those stipulations and conditions sometimes appear in economic theory in one guise or another and one context or another, they don’t appear in the form and context in which they really should as far as the ethical arguments go. I think it’s fair to call this initial, fundamental level of ethical thinking the core of the onion of bad economics because the defining feature of bad economics for me is the presence of opaque, unclear, unsystematic ethics, and that seems certainly what we have here.

By the way, if one likes, one can do as I did in my little book and suppose a final ethical implication of accepting the definition of utility used in neoclassical economic theory and the ethical proposition we should maximize total social utility is that economists qua economists will not take up the ethics of resolving interpersonal conflicts; however, that one doesn’t seem entirely correct given the addition of other ethical propositions, not involving utility, introduced into economic theory later, some of which may be part of neoclassical welfare economics proper and some not. The relevant ethical proposition is probably something more like economists qua economists will not take up issues relating to the ethics of resolving interpersonal conflicts on the basis of utility, although they may address them or partially address them on other bases. (I say partially because of distributional indifference.) Not sure this adds anything to the mix, but explicitly introducing such a proposition would help one keep in mind that the word “utility” in neoclassical economic theory is there mostly to serve as a red herring and preclude the broader use of utility in an ethical context and in particular in the context of resolving interpersonal conflicts, thus demonstrating that neoclassical welfare economics is not a utilitarian ethical theory as much as an anti-utilitiarian partial ethical theory, given the importance of resolving interpersonal conflicts in any ethical system.

Appeals to Nonexistent Mechanisms for Addressing Distributional Concerns

In my last couple of posts I discussed a couple of rhetorical stratagems purveyors of bad economics including unfortunately many economists commonly use to get around the distributional indifference implied by the way utility is defined in economic theory. The first approach was fake indifference, or fake distributional indifference more properly, which I characterized as an important element of the outermost layer of the metaphorical onion of bad economics, the layer composed of rhetorical devices that are not really a part of economic theory, per se, but commonly added on. I noted the addition of ethical or value or normative propositions via these supplementary rhetorical devices was one of the distinctive features of bad economics and one of the things that makes it so difficult to analyze. In my experience, if one tries to explain these rhetorical devices many or most economists will haughtily retreat back into theory proper claiming, of course, everyone knows the rhetorical devices of which one speaks are incorrect and if only one understood economics a little better oneself one would know that perfectly well, but turn around for five minutes and, hey presto, there someone will be spouting the same nonsense and pretending or implying all they’re talking about is economic theory, and you’ll be hard pressed to find an economist taking any effort at all to set the record straight. Incidentally, one of the versions of fake distributional indifference I discussed was the proposition one should restrict one’s attention to so-called Pareto improvements, a proposition that breaks distribution indifference by locking in certain elements of existing distributions. Although I described that argument as essentially a version of fake distributional indifference, I think now it may be slightly different in that the added proposition approach seems a bit more explicit than what I had in mind with true fake indifference, which involves pretending to exhibit indifference when one is actually not. But close enough. Anyway, let’s put those issues aside for now. This week I thought I’d take up another important bit of rhetorical claptrap from this outer layer of the onion of bad economics that is also about trying to make an end run around distributional indifference so people can incorrectly use neoclassical welfare economics to discuss policies with distributional implications despite distributional indifference: appeals to nonexistent mechanisms to address distributional concerns.

In popular presentations of neoclassical economic theory a common conceit is to suppose one can offer a blanket recommendation to adopt or maintain perfectly competitive markets (often incorrectly called the free market in the vernacular) in the face of ostensible distributional indifference because theoretically there should be some perfectly competitive market outcome corresponding to any particular set of distributional beliefs, and if one then had to choose between different market structures consistent with those distributional beliefs one would choose the perfectly competitive market structure under the usual conditions and assumptions. Thus, the argument goes, no matter one’s distributional concerns, one should always support getting to any perfectly competitive market structure and then, if necessary, one can use some redistributive mechanism to arrive at the particular perfectly competitive market outcome one finds ethically correct. Thus, the recommendation to create or maintain perfectly competitive markets is entirely neutral with respect to distributional ethics.

The problem with this argument is that it hinges on the availability of a redistributive mechanism consistent with perfectly competitive markets that would allow one to jump between perfectly competitive market outcomes corresponding to different distributional ethics without ever diverging from perfectly competitive markets. That would be fine except that the labor and capital input markets are also markets, and under casual or maybe even conventional interpretations would cease to function as perfectly competitive markets if one got in there and changed incentives by playing around with wages and returns to capital or even the overall distribution of economic power resulting at least partially from wages and returns to capital. For the blanket argument for perfectly competitive markets to work in the presence of distributional indifference one must be clear that changing incentives in labor and capital markets and hence the allocation of labor and capital to account for distributional ethics is entirely consistent with perfectly competitive markets.

The confusing bit, and the bit that I thinks puts this theory firmly in the outer layer of the onion with other funny rhetorical ploys like fake distributional indifference, is that this phantom redistributive mechanism never seems to be discussed in the context of perfectly competitive markets in actual economic theory. One can find all manner of discussions and descriptions relating to the allocation of labor and capital based on wages and returns to capital in depictions of perfectly competitive markets, but personally I’ve never seen a mechanism to then take the wages and returns to capital and move them around included in that same context. I suggest at a minimum it’s very easy for people to suppose a perfectly competitive market system contains no such redistributive mechanism and is indeed inconsistent with any such mechanism. And, of course, if there is no such mechanism, then addressing distributional concerns may indeed necessarily involve departing from perfectly competitive markets in at least some respect, and the blanket recommendation to create or maintain perfectly competitive markets is unsustainable in the context of distributional indifference. Distributional indifference would then imply indifference to diverging from perfectly competitive markets, and I don’t mean fake indifference where one looks at one side of the equation and says something like there is no reason to not create or maintain a perfectly competitive market and leaves it at that, but real indifference where one looks at both sides and says economic theory says there is no reason to create or not create a perfectly competitive market or maintain or not maintain a perfectly competitive market.

As we saw with fake indifference, what neoclassical welfare economics actually says about market structures really has very little or perhaps no practical significance. One must add informal ethical propositions to make it relevant to real world situations. Purveyors of bad economics should either use economic theory correctly and treat it as a parlor game with little or no practical significance, or they should explicitly acknowledge and defend the additional ethical or value propositions they add and differentiate them from what’s in economic theory, or I suppose have economists revise economic theory by designating those ethical propositions part of economic theory. If there is no redistributional mechanism consistent with perfectly competitive markets, then drop the pretense one can make a blanket recommendation to create or maintain such a market structure based on economic theory. If there is such a redistributional mechanism, if redistributing wages and return to capital is consistent with a perfectly competitive market, then include that mechanism in descriptions of perfectly competitive markets, talk about it, explain how it works, call it by its name, dispel confusion. Purveyors of bad economics, including many economists, should feel free to express any ethical or value or normative propositions they like, but they should be honest about them and how they relate to economic theory.

Fake Distributional Indifference As An Ethical Argument

This is just getting comical at this point but, yes, I’ve thought of yet another thing to say about fake distributional indifference in misinterpretations of neoclassical welfare economics as a component of the outer layer of the onion of bad economics. It’s short, which is something to be thankful for anyway, but significant if not exactly sweet, and definitely worth saying. It occurred to me the other day one way the purveyors of bad economics run off the rails in this area is by mixing up distributional indifference, the element of economic theory meant to avoid the controversial ethical issues associated with resolving interpersonal conflicts and the distribution of economic power that is used to resolve interpersonal conflicts in markets, with the ethical proposition or argument that all ethical beliefs relating to distributions or more broadly resolving interpersonal conflicts are unjustified or unacceptable according to economic theory because utility as defined in economic theory cannot be used to address such situations. This, I think, is fairly characterized as a type of fake distributional indifference because it takes what should be theoretical indifference to ethical issues, a determination to not get involved or to assess or evaluate those arguments, a determination to be neither for nor against any such theory, a determination to not be a player in distributional disputes, and turns it into something else entirely, specifically an ethical proposition in its own right that says no one else’s ethical beliefs relating to distributional ethics or more generally the resolution of interpersonal conflicts are acceptable under economic theory, that they’ve all been assessed within economic theory and found lacking.

If one thinks about it seriously for five minutes the argument that economic theory expresses the positive ethical proposition that all ethical beliefs relating to distributional ethics are unacceptable is rather comical. Interpersonal conflicts will always be resolved one way or another in any society, economic power will always be distributed one way or another, and goods and services will always end up someplace and not someplace else, so the argument that economic theory says ethics cannot be involved portrays economic theory as making a general argument for amorality in human relations. But, of course, it’s a pretty basic impulse for humans to want to treat other people ethically, and it’s a safe bet everyone or just about everyone does in fact have beliefs and opinions about what that means, so the best one could say about a general ethical argument for amorality as far as the distributional issues that play into the way interpersonal conflicts are revolved in markets is that it would clearly be absurdly philosophically controversial and hence entirely at odds with the ostensible intent of economic theory to avoid ethical controversy, and really it doesn’t seem much of a stretch at all to just say bluntly that it seems entirely philosophically implausible. In practice, of course, no one uses this argument consistently. It’s something that is pulled out of the bag whenever a purveyor of bad economics perceives some ethical argument about distributional issues he or she doesn’t like and put back in the bag when things are going more along the lines of what he or she finds acceptable. In other words, it functions in practice more as a rather transparent bit of rhetorical nonsense than as a serious bit of ethical philosophy.

Of course, it’s not difficult at all to see how the philosophically inept might end up getting the wrong end of the stick on this issue. Honestly, who writes a partial theory of social ethics anyway? Who makes a big deal talking about utility and bringing to mind complete ethical theories based on utility but then defines utility so that it is relevant to only a small subset of the ethical issues one actually encounters in our world? Who attempts to establish or explain what economic arrangements are socially optimal while avoiding the controversial ethical issues that are obviously involved? It’s bad economics surely, a misinterpretation of what economic theory really says, but it’s based on the awkward structure of economic theory itself, which seems tailor made to support such misinterpretation. When I say we should fix bad economics I understand one can’t make a silk purse out of a sow’s ear, but we can certainly try a little harder to explain what neoclassical welfare economics really says as an antidote to the errors peddled by the typically glib and arrogant purveyors of bad economics.