Positive Economics and Normative Economics - Revised

I was talking to a helpful fellow the other day about “positive economics” and how I might be unaware that economic concepts like “optimality” and “economic efficiency” were not always really used in a normative sense in the context of neoclassical economic theory because they have technical and formal definitions that make them really part of positive economics. It was an interesting point of view that made me wonder whether it might be worthwhile to just take a step back and say a few words about what we mean by positive and normative in the context of economics.

Positive economics is about what is true empirically, factually, scientifically, or about what is true formally, logically, mathematically. In contrast, normative economics is about what one believes one or others should so, evaluating and assessing economic systems and outcomes, defining goals and objectives, giving policy recommendations. Neoclassical welfare economics is, at least under normal conditions, normative economics. It purports to evaluate or assess economic systems and outcomes. It purports to show the advantages of market systems. It carries implicit or explicit recommendations about what people should do as far as economic arrangements that go beyond the question of what is. It can and should be distinguished from neoclassical economics more broadly in the sense the theoretical framework or structure of neoclassical economics more broadly can be used to construct positive, scientific economic theories or models meant only to predict or explain empirical phenomena. One can take seriously someone who claims to do positive neoclassical economics; however, one cannot take seriously someone who claims to do positive neoclassical welfare economics.

The potentially confusing bit is that even a normative or ethical theory like neoclassical welfare economics will always have positive bits. Ethical arguments typically involve value premises, factual premises, and logic or math to tie them together. The latter two maybe considered positive elements or inputs to the normative argument. Neoclassical welfare economics doesn’t contain any real factual or scientific premises I can think of right now anyway. The famous behavioral assumptions are tautological and other potentially factual elements are generally considered false but useful simplifications. However, neoclassical welfare economics does, of course, use logic and math. If one confines oneself to the mechanics of the normative argument presented in neoclassical welfare economic, the logic and math, one may suppose one is doing positive neoclassical welfare economics. However, that is incorrect in nearly all cases.

If neoclassical welfare economics is being used in a normative way, what one is actually doing when one confines one’s attention to the positive bits is not really positive neoclassical welfare economics but bad normative neoclassical welfare economics. One is basically doing normative economics but failing to identify and evaluate some or all of the necessary normative or value inputs for consistency, philosophical plausibility, and ethical controversy, and hence ignoring the crucial issue of whether the logic and math combined with whatever value inputs one has chosen to specify leads to the normative or value outputs or conclusions one is purporting to establish. One is restricting oneself to evaluating the form of the argument rather than the content of the argument, but when it comes time to actually use a normative theory in a realistic or practical setting the content matters.

Technically, of course, one could do a purely positive form of neoclassical welfare economics as a sort of parlor game with no significance for the real world and by strenuously refuting anyone who tried to misuse in a normative way to, for example, to evaluate or assess economic systems and outcomes, to recommend market resolutions to resolving interpersonal conflicts of needs, wants, and desires. However, if we’re going to keep it real, no economist really does that. Not only do economists fail to confront those who use neoclassical welfare economics as a normative theory, they typically end up doing so themselves, if not explicitly then implicitly, which is probably pretty much inevitable given the normatively charged language and concepts involved. If economists want to continue working with neoclassical welfare economics, they should acknowledge it as normative economics, take the identification and assessment of the  normative or ethical or value inputs and the issue of whether those inputs support the normative or ethical or value conclusions seriously. They should pause their mathematical research and brush up on their ethical philosophy.

The Harm Neoclassical Welfare Economics Has Done

It occurs to me the obvious success neoclassical welfare economics has had these many years shutting down the social conversation about important economic issues involving the distribution of economic power and other potentially controversial ethical issues associated with resolving interpersonal conflicts of needs, wants, and desires on the basis of relative economic power in markets has come at a great cost to society. I think it’s quite reasonable to suppose many of those driven to extremist political, social, and economic ideologies in the past including especially communism and fascism were motivated in no small part by confusion caused by bad economics. More recently, the link between bad economics and various anti-democratic and indeed arguably anti-social creeds such as so-called “libertarianism” and “anarcho-capitalism” should be readily apparent to even the most casual of observers. When people can’t discuss the important normative or value or ethical issues associated with evaluating and assessing economic systems and outcomes in a reasonable and systematic way, when the proverbial wool is pulled over their eyes by those in academia in particular, when they’re told their ethical views have no standing and can’t be considered or discussed, when they’re misled into thinking certain normative or value or ethical propositions are simply a matter of logic and math and science, that’s when they start thinking in peculiar ways, saying funny things, and eventually doing funny things. And what makes it even more disheartening is it seems rather unlikely the bright minds of the economics profession stumbled willy-nilly into the opaque, misleading, needlessly complicated, rhetorical claptrap that makes up the normative content of neoclassical welfare economics and the popular and ubiquitous misinterpretations of it. Indeed, the more one looks into it, the more one considers the intellectual history and development of the field, the more one realizes the number and variety of rhetorical tricks and stratagems associated with neoclassical welfare economics all apparently designed to achieve the same end, the more one must conclude active obfuscation of normative issues is or anyway was high on the agenda of many or most academic economists in the neoclassical tradition. Indeed, one suspects the entire motivating spirit of neoclassical welfare economics was quite likely to create confusion about the normative aspects of economic issues, to shut down reasonable discussion of the ethics of evaluating economic systems and outcomes, to get one over on people, to set up a system by which clever, glib, fast-talking teachers and professors and pundits could run rings around their sincere but rather confused students and broader audience using a combination of funny terms, mathematics, and rhetorical tricks of various kinds. Academic economics and the academic economists who developed and continue to promote neoclassical welfare economics have a lot to answer for in my opinion. As scholars and intellectuals, they should be ashamed of themselves.  

The Equity Efficiency Tradeoff and Fake Distributional Indifference

I had an interesting exchange with another economist online the other day about the chimerical “equity efficiency tradeoff.” I commented it doesn’t really make sense to talk about such a tradeoff because economic efficiency is only defined, or at least only normatively significant, with respect to a particular distribution of economic power and hence pattern of supply and demand. If one is having a disagreement relating to distributional ethics, efficiency is only important once that disagreement has been resolved. He readily agreed, but it got me thinking how the ubiquity of this particular bit of nonsense is yet another example of fake distributional indifference.

What one must understand about economic efficiency is that all the normative content associated with economic efficiency in neoclassical welfare economics derives ultimately from utility. That’s why it’s important. That’s why we discuss it. It doesn’t have its own independent normative significance beyond utility. That means when we encounter an issue that cannot be addressed using utility as defined in economic theory because of the impossibility or undefined status of making interpersonal utility comparisons (depending on which version of utility one is using, perception utility or preference utility respectively), such as the distribution of economic power (or really any other ethical issue related to resolving interpersonal conflicts of wants or desires or needs on the basis of economic power in markets, a point I’ve discussed previously and will no doubt discuss again in the future) “efficiency” cannot emerge as a distinct criterion. It is not correct to say one should apply whatever external ethical principles one likes to an issue that cannot be addressed with utility as defined in economic theory, but one must then consider the tradeoff of those values with “efficiency.” If utility as defined in economic theory is irrelevant to assessing or resolving an issue, so is economic efficiency.

In the vernacular, economic efficiency, like efficiency in general, is only normatively significant if one is talking about an end one accepts or desires, for example, a distribution of economic power one feels is ethically acceptable. If one has the choice of going to hell very efficiently in a hand basket or not, and one chooses not, one doesn’t worry about the tradeoff between not going and the resulting lost “efficiency.”

In more specifically economic and theoretical terms, in neoclassical welfare economics we are, or should be, indifferent between Pareto optimal (economically efficient) outcome A and non-Pareto optimal (non-economically efficient) outcome B if we cannot get from B to A via Pareto improvements, that is, if it requires the sort of interpersonal tradeoffs we cannot address using utility because of the impossibility or undefined status of interpersonal utility comparisons. It is not theoretically correct to say something like we’re indifferent to A and B on the basis of utility, but we should prefer the Pareto optimal outcome because it is economically efficient. That’s a form or version of what I’ve been calling fake distributional indifference. A different way of saying the same thing is that economic efficiency only has normative significance with respect to a given distribution of economic power and hence pattern of demand and supply. If one gives economic efficiency independent normative weight, what one is really doing is giving the current distribution of economic power and hence pattern of demand and supply independent normative weight, thus breaking distributional indifference.

It’s funny when the purveyors of bad economics, including alas many economists, try to do science, math, and ethical philosophy at the same time and make a complete hash of it. They may like doing it for whatever reason, such as the opportunity to express their own value judgments in obscure ways they may hope will insulate them from criticism and debate, but we all end up paying the cost in terms of the resulting confusion and conflict. We should fix bad economics by taking out the normative or ethical content and putting it back with the people. Let economics become a true science. Let it be the rigorous intellectual discipline it has always aspired to be or has always pretended to aspire to be anyway.

The Ubiquity of Distributional And Other Ethical Issues

I wonder if anyone in the world has ever objected to economic policies or recommendations based on anything other than distributional concerns or possibly other ethical concerns lying outside neoclassical welfare economics? That’s what the entire debate about real economic policies and issues is nearly always about, isn’t it? Who is getting what, winners and losers, someone suspecting someone isn’t getting what he or she should be getting as a matter of ethics? How many real world economic debates take place in a context in which everyone involved says they don’t see any distributional issues at all, they think everyone has exactly as much economic power as they should have, they see no other ethical issues relating to the resolving interpersonal conflicts of needs or desires based on economic power in the marketplace of the sort that lie outside economic theory, but they think we should jump in and interfere with what people choose to do with their economic power for shits and giggles or because they just can’t figure out the simplistic normative arguments of economic theory that apply to that situation? Because you know that’s really the only context neoclassical welfare economics, properly interpreted, is capable of addressing, right? It’s not really applicable to policy questions involving distributional issues or more broadly ethical issues that go beyond those found in economic theory. And yet you may have noticed conservative economists presume to offer advice on pretty much every economic issue and policy that comes around the bend, including the most controversial, blithely assuming away all ethical issues at the outset, triumphantly proclaiming their little findings while arrogantly shutting down all sincere attempts to discuss the real and often complicated ethical issues involved, often in the most childish way possible by flashing their supposed mathematical credentials at everyone. Annoying, isn’t it? Academic economists and academic philosophers seem incapable or uninterested in rocking the boat. They clearly have no intention of lifting a finger. And yet a great deal of damage can be done to a society when people refuse to discuss real economic and especially ethical issues relating to economics in good faith. One can end up with a great many angry, frustrated people who may go looking for answers in the oddest of places. You should help me fight bad economics.

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Sorry about the formatting changes again. Seems Blogger has now disabled line spacing. If they put it back I'll come back and fix it.

The Ethical Propositions Associated With Markets

Last time out I looked at the legal specification of ownership, so-called “property rights,” as one of the ethical propositions of unknown provenance but certainly unrelated to preferences or “utility,” per se, that enter neoclassical welfare economics via the implication that resolving interpersonal conflicts using economic power and the market mechanism is preferable to the alternative. I characterized these ethical propositions as belonging to the mysterious middle layer of the onion of bad economics, propositions that clearly seem to be part of neoclassical welfare economics or implied by it, but are not based on preferences or “utility” as defined in economic theory or even expressed using the word “utility.” This time I’d like to look at the other example I wanted to talk about in this middle layer of the onion: propositions relating to the use of the market mechanism to resolve interpersonal conflicts on the basis of economic power. Combined with my previous posts on the inner layer or core of the onion (propositions involving preferences or “utility”) and the outer layer (rhetorical add-ons designed to get around distributional indifference, like simple fake distributional indifference, restrictions to consider Pareto improvements only,  and references to non-existing distributional mechanisms), this post will complete the set of the various ways I’ve identified to date ethical propositions enter into neoclassical economic theory. Of course, as I’ve noted before, these sorts of projects are always works in progress. Who knows what might cross my mind tomorrow. However, this is it for the time being.

Markets resolve interpersonal conflicts of needs and desires on the basis of relative economic power.  As such the ethical desirability of using the market mechanism to resolve those interpersonal conflicts, compared to resolving them on the basis of any other decision mechanism, cannot be derived using utility as defined in economic theory, which has nothing to say in the context of resolving interpersonal conflicts because of its inability to support interpersonal utility comparisons.

We broke out and discussed the basis of economic power itself, the legal specification of ownership at the time of market transactions or “property rights” last time. For this post, let’s assume we have the requisite legal specification of ownership and people have various amounts of economic power.  Let’s also set aside issues relating to the ethics of the distribution of economic power, which is conventionally broken out in discussions of economic theory and was really the focus of the ethical propositions I discussed in the context of the rhetorical funny business in the dubious outer layer of the onion of the bad economics designed to get around distributional indifference. Here let’s just think about the assumed desirability of using the market mechanism. That is, let’s assume for the moment we’re fine with people owning things and having various degrees of economic power, and we’re fine with the amount of economic power everyone has, we feel all that is ethically justified and correct, and now we’re wondering whether we should resolve any or all interpersonal conflicts of needs, wants, and desires on the basis of economic power in a market or whether we should sometimes or always consider other means. Are there any independent ethical issues to consider at this stage? Yes, I think so.

Four areas of concern that jump immediately to mind are future generations, information, rationality, and situational ethics. Let’s talk about some of the ethical or normative propositions associated with assuming the desirability of the market mechanism as a way to resolve interpersonal conflict in these areas, just to get a notion of the sorts of ethical propositions that enter into neoclassical welfare economics in this middle layer of the onion of bad economics

Let’s do future generations first. We previously discussed this issue in the context of the ethical propositions implied by the proposition we should maximize total social utility as defined in neoclassical economic theory and, in particular, whether the presumed interests of future generations constitutes an interpersonal conflict for purposes of working out the implications of maximizing utility. Future generations is an interesting case because it can be addressed, or not, in various ways in various layers of the onion of bad economics. One could certainly imagine someone making the argument future generations have no standing with respect to utility itself because utility is only defined or only ethically relevant for people currently existing and expressing preferences or having internal perceptions, so we don’t need to concern ourselves with the probable preferences or projected internal perceptions of people who don’t yet exist. One could also imagine someone making the argument based on economic power and the distribution of economic power that future generations are irrelevant because they have no economic power. However, one can also take up this issue in terms of the implicit ethical propositions associated with supporting the use of market mechanisms to resolve interpersonal conflicts, which is the approach we’re interested in here. In this context, one might argue the preferences of future generations do not have standing and do not create an interpersonal conflict of desires that renders utility irrelevant, and one might agree the distribution of economic power is fine and concede future generations have no economic power, but one might argue this represents a category of issues that should not be addressed using the market mechanism but in some other way. This is the sort of opaque and unresolved ethical issue that makes the epithet bad economics so apt. Does neoclassical welfare economics presume the desirability of resolving interpersonal conflicts of needs and desires using relative economic power and the market mechanisms in all cases? Does it involve the ethical proposition the presumed needs or wants of future generations have no ethical bearing on resolving interpersonal conflicts involving the living? Does it involve some implicit, unstated ethical proposition that puts some limits on when markets are presumed to be ethically correct and when some other mechanisms may be preferable? Not sure anyone really knows, do they? Does anyone really care? It’s what one might call bad ethical philosophy, the sort that blithely ignores the complicated bits and leaves everyone unsure and arguing about what is really being said.

How about information? Here, again, we previously discussed this issue in the context of utility, the inner layer or core of the onion of bad economics, but only as it applied to thinking about the ethical or normative propositions involved in allowing someone to express his or her preferences when other people are not involved and there are no interpersonal conflicts to be resolved. However, the issue seems also relevant to people interacting in markets. The potentially controversial ethical issue here is suppose one party knows something another party to a market transaction doesn’t know? Someone is trying to sell someone the Pink Panther diamond but the first person knows it’s fake and the real one is concealed in the chanteuse’s handbag? Is it relevant, as a matter of ethics, in terms of the desirability of relying on the market mechanism? Do we have an ethical duty to intervene and prevent the transaction going down until everyone knows what’s what? Many of the issues we raised in the context of maximizing total social utility are relevant here as well. How much information are we talking about anyway? Full and complete information or perfect knowledge so no one can ever pull a fast one on anyone else? But won’t there always be differences in the level of information for different parties to a transaction? Isn’t that indeed what drives a great part of the market transactions one actually sees in this world? Is it reasonable to say one supports the use of market mechanisms to resolve interpersonal conflicts but only when everyone involved has perfect information? What are the exact ethical propositions expressed by economic theory in this area? Who knows. It’s bad economics, and by that I mean above all else bad ethical reasoning, bad philosophy.

What about rationality? The potential ethical issues here are similar to those involving information. Let’s say everyone knows exactly what they’re talking about, but one side in a market transaction is acting irrationally for whatever reason. Is that relevant to deciding if the interpersonal conflict in question is best resolved through using the market mechanism? Let’s say one party is drunk or operating under an addiction of some sort or insane or being manipulated or just, in general, not thinking correctly? Are we still good with resolving all interpersonal conflicts on the basis of economic power and the market mechanism? Or are we talking about special cases? What about if everyone is just as rational as they ought to be? Just as subject to psychological influences and manipulation as the next person? What is the exact ethical proposition we’re expressing here about when to use the market mechanism anyway? Will we ever really know in the funny world of opaque and under specified ethical propositions in bad economics?

The role of information and rationality in this context raise the same issues relating to the unfortunate conflation of ethics and science in economics we discussed previously in the context of maximizing total social utility and the inner layer or core of the onion of bad economics. But on the principle that anything worth saying once is worth saying a thousand times, recall that in the context of a scientific theory behavioral assumptions need not be true for the overall theory to be evaluated highly under the scientific criteria of prediction and explanation. In a scientific context, assumptions can be convenient fictions, useful simplifications, things we know to be untrue but useful in the context of a particular theory. But when those same assumptions appear in the context of an ethical argument they don’t and can’t function the same way. They become factual premises relevant to evaluating the conclusions. Is the ethical argument well grounded or not? Does it apply to the real world or not? In a philosophical context, one must get a bit more rigorous than economists generally do with respect to one’s ethical concepts and language and logic. What exactly are the premises of the ethical arguments we’re making about the optimality of markets in neoclassical welfare economics anyway? Everyone has full information? Everyone is rational? Most of the people most of the time have most of the information they need? Most people are somewhat rationale about most things? Are we meant to change anything when people don’t have full information or are not acting entirely rationally? How do we decide, and what are the special arrangements? 

Consider situational ethics, which in the context of economic issues I associate with ethical issues that may arise when resolving interpersonal conflicts of needs or desires on the basis of relative economic power in markets that are difficult or impossible to address in terms of systematically manipulating the distribution of economic power. Let’s say we think our distributional system, which we’ve removed from the table here because of the explicit indifference to distributional issues in economic theory, is just fine in general but ends up creating some sort of awkward ethical result when economic power and the market mechanism are used to resolve certain interpersonal conflicts. Let’s say someone will die if a market transaction goes down, but that person just doesn’t have the economic power to prevent it. Someone can’t pay the medical bill for cancer treatment so the doctor attends to the concerns of Mr. Moneybags, who has a bone spur that may or may not be real but anyway needs looking at right away for legal reasons? Not the usual sort of situation one would see depicted in an economic model designed to illustrate how neoclassical welfare economics works, but certainly the sort of thing one might encounter in real life. Does that raise an ethical issue? Was this result part and parcel of our deliberations about the ethical status of the distribution of economic power, or is it more reasonable to suppose being fine with the distribution of economic power means being fine using it to resolve interpersonal conflicts in some cases but not necessarily all cases? Is it reasonable to suppose we could ever preclude this sort of situation via artful manipulation of the distribution of economic power, which is usually based not on specific transactions or results but characteristics and behaviors of the people involved? If we just jump in and give money to anyone who needs it in this situation to avoid this result, is that a non-market mechanism or is that a market mechanism with a special form of redistribution to address ethical concerns about which we should be indifferent in the context of economic theory according to distributional indifference? If economists were better ethical philosophers we’d know the answer and be able to assess their ethical arguments about the social optimality of markets. As it is, who really knows? 

And just as a little bonus observation another issue that crossed my mind the other day is if the reason economic theory is ostensibly indifferent to distributional issues is the ethical controversy involved, is it reasonable to suppose economic theory implies the ethically controversial bits we’ve been describing in the context of using the market mechanism to resolve all interpersonal conflicts of needs and desires on the basis of relative economic power? Is there something less than entirely consistent or logical with what economists choose to break out and what they choose to leave in? Could that be why so many people seem to have so much trouble holding the line when it comes to maintaining true distributional indifference in the context of economic theory? Because they can see the implicit ethical propositions in neoclassical welfare economics are already ethically controversial and it just doesn’t really make a lot of sense to break out distributional issues and treat them differently on that basis? 

The reason I think the ethical propositions introduced into neoclassical welfare economics via supporting resolving interpersonal conflicts of needs and desires using relative economic power and market mechanisms deserve to be considered part of the middle layer of the onion of bad economics is that all the dodgy or tricky situations, the situations one really wants to analyze and hash out and delve into, are typically ignored entirely when it comes time to explain what economic theory recommends. There are certainly ethical propositions involved, and they involve recommending the use of market mechanisms, but does anyone honestly know exactly what those propositions are? Are we meant to support the use of the market mechanism under any and all circumstances, or only sometimes and in some situations? Seems like it would an interesting issue to delve into, doesn’t it? Isn’t that the sort of thing a lot of real world economic controversies are actually about? Odd that economists aren’t interested. And it’s not like economists haven’t had time to think about these issues and decide exactly what they want to say about them. No, I suggest it’s rather apparent academic economists don’t really want to. They want to leave the ethical propositions involved vague and opaque. They have things to hide. They like having the rhetorical power bad economics conveys and they’re not about to give it up willingly. And that’s the funny thing about bad economics, isn’t it? Economists profess to be very interested in being intellectually rigorous, but they’re really only interested in being intellectually rigorous in certain contexts and with respect to certain matters. It’s really a bit of an intellectual shell game or confidence trick. The rest of us need to wise up and fix bad economics.

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.