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.
