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.
