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.
