Neoclassical Welfare Economics As Ethical Half Theory

I probably mentioned before but I’ve become quite interested recently in the distinctive and unusual structure or form of normative neoclassical welfare economics, which is what I call an “ethical half theory.” I call it that because there are clearly some normative or ethical bits meant to be included in the theory, which support the normative conclusions that take the form of an evaluation of market systems, structures, outcomes, and so on. Those normative or ethical propositions are ostensibly included because of their non-controversial quality. So that would be the ethical propositions about what we should do or not do with respect to other people expressing their preferences, or “maximizing their utility” if you insist upon that bit of misleading terminology and rhetorical fakery. There are some others as well involving resolving interpersonal conflicts using economic power in markets; however, those are sometimes a bit less obvious. Let’s keep it very, very simple right now and just discuss the normative propositions involving preferences or “utility” that I think everyone must agree are a bona fide part of neoclassical welfare economics. However, there are also some normative or ethical issues that are explicitly excluded, which as what might expect are ostensibly excluded because of their controversial quality. That would be distributional issues and, again, should really include some other similarly controversial ethical issues associated with resolving interpersonal conflicts on the basis of economic power in markets, as I’ve discussed in previous posts. This unusual form or structure, ethical half theory, generates a great deal of confusion and conflict relating to economic matters.

Purveyors of bad economics, including alas a great many economists, would clearly like to fudge it and suggest the ostensibly non-controversial normative or ethical quality of the normative content that is included means it doesn’t really count as normative or ethical content, per se, and hence it’s sensible to suggest the normative conclusions of neoclassical welfare economics are the result of positive economics alone, the idea being that if there’s any controversy involved it can’t be derived from the non-controversial normative content and hence must derive from some sort of confusion relating to the positive content.  Ah, the perils of sloppy, non-rigorous, amateur philosophizing. If only the situation with respect to neoclassical welfare economics were that simple. There’s nothing very confusing or difficult about the normative versus positive distinction. Basically, one cannot derive an “ought” solely from an “is.” If that’s all that was going on we’d be golden. Draw a graph, write a couple of equations, done! Alas, no, what we actually have is that rare and remarkable beast, the ethical half theory.

The ethical half theory structure generates certain distinctive problems in the context of neoclassical welfare economics. One issue is that the special, ostensibly non-controversial normative or ethical elements or components that are explicitly included may actually be more controversial than one supposes, but presented in a misleading way to makes them appear less controversial. In the context of an ethical half theory, what’s in and what’s out become of paramount importance at least in a practical rhetorical sense. It’s akin to agenda setting in a political context. If one is only going to cover certain ethical issues and one has any rhetorical intent at all it becomes very important to determine what gets discussed and what not. As one might expect, in practice games will be played. This is what happens in neoclassical welfare economics when the ostensibly non-controversial normative or ethical proposition we should let other people follow through on their preferences, at least if no interpersonal conflict is involved, which is the most basic of the normative propositions in that theory appearing before even those normative propositions supporting resolving interpersonal conflict on the basis of economic power in markets, is combined with false factual premises involving things like perfect information and rationality. It’s one thing to say it’s ethical to allow someone who wants to eat an apple (that let’s say no one else wants or needs or claims) to eat the apple; it’s another thing to say we should allow the person to eat an apple if we happen to know the apple in question has been poisoned but the prospective eater does not. One statement is rather more ethically controversial than the other. It’s also what happens in neoclassical welfare economics when certain inconvenient situations are simply ignored, such as the ethical evaluation of the normative proposition we should resolve issues on the basis of economic power in markets even when considering the interests of future generations who have no current economic power with which to express their interests and arguably don’t have yet even have interests of their own, per se, only other people’s assessments of their likely interests. It’s significantly less controversial to think about resolving issues on the basis of economic power in markets if one simply ignores future generations, which is generally what happens in conventional treatments of neoclassical welfare economics. 

Another very significant and distinctive problem generated by the ethical half theory structure of neoclassical welfare economics is that applying that theory in realistic situations involving the ethical issues not covered in that theory will, of course, be inappropriate. Obviously, one would need to augment the normative content of the ethical half theory to convert it into a complete ethical theory covering all relevant ethical issues, or simply dismiss the ethical issues not covered, which may be quite controversial indeed and really constitutes a type of complete ethical theory anyway, just one that proposes certain ethical issues conventional considered relevant are actually irrelevant. This is what happens in the context of neoclassical welfare economics when purveyors of bad economics incorrectly interpret it either directly or indirectly as favoring the status quo distribution of economic power, or the distribution of economic power resulting from certain markets such as labor and capital markets, or as an ethical argument that distributional ethics are unimportant or irrelevant, rather than interpreting it correctly as expressing indifference to such issues.

It appears manifestly difficult for many people, including many economists, to perceive or accept the limitations of the normative half theory structure of neoclassical welfare economics. Their desire for practical relevance appears to get in the way of their intellectual acuity or honesty. Not especially surprising, I suppose. They want to be relevant in a practical sense, to proffer advice, to present themselves as experts on economic matters in general, even when those matters plainly involve normative or ethical issues external to the neoclassical welfare economics they’re meant to be using to inform their recommendations. The ethical half theory structure of neoclassical welfare economics leads directly to the distinctive pattern of ubiquitous errors and misinterpretations I call bad economics. To a great extent, bad economics is simply an attempt to bridge the gap between what neoclassical welfare economics actually says and what some people would rather obviously like it to say.

An entirely different but interesting issue is whether the economists who originally developed neoclassical welfare economics understood bad economics would be the likely result. One can’t help but wonder if that is indeed why they chose the rather unusual form or structure of normative or ethical half theory in the first place. Was the entire edifice of neoclassical welfare economics developed specifically to deceive and misdirect? That’s the million dollar question as far as ill intent goes, isn’t it? Just how false and intellectual insincere were the people who came up with neoclassical welfare economics, people like the Italian social Darwinist, elitist, and proto-fascist Vilfredo Pareto, whose name appears all over the project? Not sure, but it’s certainly an intriguing historical issue. I have my suspicions, of course, but that’s really neither here nor there right now. What we need to do now is to fix bad economics by explaining the real normative content of neoclassical welfare economics, all of it, as well as the normative limitations of the theory, the rhetorical tricks and stratagems used to informally add normative content to the theory in practice, and, hopefully, finally fix it entirely by removing the normative content, all of it, and putting it back with democratic decision making bodies where it belongs.

Fixing Bad Economics By Removing References to Utility

I was talking with someone online the other day about some of the funny ideas people have about “utility” in the context of neoclassical welfare economics and it occurred to me, probably for the tenth time or so but every time seems as fresh as the last, that a simple fix that would do a lot to clear up some common points of confusion in bad economics would be for economists to just stop talking about “utility” altogether and confine their commentary to “preferences,” which is what “utility” as defined in modern neoclassical welfare economics comes down to anyway. I felt rather like the monkey boy in the original Jumanji film using an axe to break into a shed to find an axe. Why do I spend so much of my valuable time explaining what “utility” is in economic theory, differentiating it from utility in proper utilitarian economic philosophy, when the concept really adds nothing in the context of neoclassical welfare economics anyway, as I discussed in my previous post on the topic Preference Utility and Fake Utilitarianism, from April 15, 2020?

What exactly am I saying? Well, it’s perfectly simple. Instead of talking about “utility” functions, talk about  “preference” functions that give preference rankings or orderings indexed by the individuals holding or expressing those preferences. Instead of talking about the faux behavioral assumption that people “maximize utility”  talk about commonplace observation that people “express preferences.” Instead of talking about the normative goal of “maximizing total social utility” talk about “generating situations consistent with certain normative propositions about the expression of preferences.”

That simple change would cause no loss in the content of neoclassical welfare economics while doing a lot to reduce confusion caused by equivocation on terms involving, on the one hand, the unique “utility” defined in a funny way in neoclassical welfare economics to be irrelevant in most ethically controversial situations, that is, situations involving interpersonal conflicts and needs, wants, and desires, and, on the other hand, more common and familiar forms of “utility” defined in utilitarian ethical philosophy to address exactly those situations.

It would also help people make sense of the origin and importance within neoclassical welfare economics of the inability to make so-called “interpersonal utility comparisons,” that is, distributional indifference. Indeed, one wouldn’t have to expend time explaining the concept at all. If we’re talking about preference rankings or orderings for particular individuals who would even be tempted to suppose one could make an interpersonal comparison of those preference rankings across individuals? Think of the time savings alone.

In the arena of positive, scientific, predictive economics, it would help people appreciate the tautological nature of the faux behavioral assumption that people “maximize utility” in favor of what is really being expressed, the simple observation that people express preferences, and hence reduce the possibility that people will fall into the “greed is good” fallacy, which comes from mistaking the faux behavioral assumption for a real one and then attaching unwarranted content to the term “utility” presumably under the influence of similar sounding terms from certain older versions of utilitarian ethical philosophy. Modern neoclassical welfare economics doesn’t propose people are greedy, self-centered, or simple minded. Someone basing his or her preferences on a concern for others is just as much “maximizing” his or her “utility” as someone basing his or her preferences on selfish desires alone. Why? Because all we’re talking about is expressing preferences. In neoclassical welfare economics, we don’t have to worry about the intellectual content of the term “utility,” as we do in proper utilitarian philosophy. In economic theory the term “utility” is superfluous. It adds nothing. We’re really just talking about preference rankings or orderings for particular individuals. 

I must be some sort of economic genius, right? To think of such a simple fix for such a ubiquitous source of confusion? I guess that would be one explanation why academic economists haven’t hit upon this approach for eliminating so much of the confusion and conflict associated with bad economics these past several decades. Of course, I suppose there may be other, rather more plausible explanations as well. Like what? Well, maybe academic economists aren’t interested in this simple change because the rhetorical power of neoclassical welfare economics in the normative arena depends on misinterpretation and errors from little tricks like confusion caused by redefining utility in a peculiar way then conflating it with the same term defined in different ways in other contexts. Maybe that’s the whole point. Maybe neoclassical welfare economics is a theory that was purpose built to be misinterpreted in certain predictable ways so people holding certain normative or ethical views relating to distributional and other issues could promulgate their views in a confusing, intellectually underhanded manner. Just a little theory of mine. Something to consider anyway. 

What Neoclassical Welfare Economics Really Says

Can we just review for a moment what neoclassical welfare economic really says and doesn't say? Sometimes when I’m discussing my little issues I’m afraid people may lose sight of the bigger picture.

My simplified rendition of what neoclassical welfare economics really says is that if one has no ethical issues with some set of distributional mechanisms (labor and capital markets, inheritance, property rights, taxes, social welfare program, lotteries, etc.), and one doesn’t see any other special ethical issues associated with resolving interpersonal conflicts of needs, wants, and desires using relative economic power in markets, and one has a choice of potential market structures, then it’s not especially ethically controversial to suggest one should find the perfectly competitive market structure superior to alternatives like monopoly and oligopoly.

If you were thrown a bit by that clause in the middle of my little summary, the potential ethical considerations relating to using relative economic power in markets to resolve interpersonal conflicts of need, wants, and desires, I’m talking about situations involving awkward issues like the needs of future generations or people acting under duress or certain awkward situations meant to be avoided by the false factual premises in neoclassical economic theory such as perfect rationality and full or perfect information, so situations involving people not acting entirely rationally, not having full information, being manipulated, in the vernacular having other people get one over on them, etc.

What neoclassical welfare economics doesn’t say, but is often misinterpreted as saying, is that accepting any real instance or example of a perfectly competitive market is ethically uncontroversial. Neoclassical welfare economics shows there are many perfectly competitive markets and potential market outcomes that differ according to their distribution of economic power, which governs the pattern of demand and supply, and thus are consistent with different ideas of distributional ethics. Suggesting any real instance or example is preferable to any of the others toward which one might move, or indeed to particular non-perfectly competitive markets exhibiting different distributions toward which one might move, is theoretically incorrect. It’s also problematic in another sense, as I’ve discussed in previous posts, because distributional indifference in neoclassical welfare economics implies one should not associate the returns and hence incentives in labor and capital markets with a perfectly competitive market system. If one does, then one will defeat distributional indifference and make neoclassical welfare economics a player in the ethical dispute between those who support the ethical significance of those particular distributional mechanisms and those who do not. In realistic situations, it implies one will inevitably prefer some particular perfectly competitive market outcome to others, not to mention prefer some particular competitive market outcomes to those non-perfectly competitive outcomes to which one should really be indifferent under the theory of neoclassical welfare economics.

While it may be true everyone may theoretically like some perfectly competitive market, defined in such a way their distributional ethics are met and no other ethically problematic issues or situations arise relating to resolving interpersonal conflicts using economic power in markets, and similarly everyone may like some Pareto optimal outcome, and everyone may agree with some Pareto improvement, it does not, of course, follow that they will agree on the ones they like. Any particular real instance of any of them will be ethically controversial. That, indeed, is the whole point of distributional indifference in neoclassical welfare economics. In general, when issues of distributional ethics and by extension certain other controversial ethics associated with using economic power in market to resolve interpersonal conflicts of needs, wants, desires are present, then neoclassical welfare economics and concepts like efficiency and Pareto optimality become irrelevant.

All real world economic controversies and conflicts involve particular market systems, particular market outcomes, distributional ethics, and situations involving other potentially controversial ethics related to resolving interpersonal conflicts using economic power in markets. That’s the reality. The conclusion must be that normative neoclassical welfare economics, correctly interpreted, is irrelevant in realistic contexts without additional value premises and revised factual premises. If one believes it is practically relevant in real situations, then one has a moral duty to be intellectually honest about what one is doing and to investigate, identify, and discuss the additional value premises one is using, differentiate those value premises or normative propositions from the value premises or normative propositions appearing in neoclassical welfare economics proper, and establish whether one is or is not proposing revising that theory or simply expressing personal ethical beliefs bearing no particular relationship to that theory.

The Equity Equity Tradeoff

I discussed in a previous post the logical error involved in the so-called “efficiency equity tradeoff” and how it’s really an “equity equity tradeoff,” that is, a tradeoff necessarily involving distributional ethics lying outside what one can address using utility as defined in neoclassical welfare economics. (If that doesn’t ring any bells see my blog post for July 15, The Equity Efficiency Tradeoff and Fake Distributional Indifference.)

The bit of nonsense expressed in the fake “efficiency equity tradeoff” is the quintessential example of one form of what I’ve been calling fake distributional indifference. That form involves introducing random value premises that are not really part of neoclassical welfare economics or based on anything in that theory, such as the granting of “economic efficiency” independent normative status so it ends up being something we can use to rank outcomes we cannot rank on the basis of “utility.” Other forms of fake distributional indifference I’ve discussed before include selective perception, playing with words, and simple mischaracterization of theory.

All real instances of economic systems and outcomes will necessarily and inevitably be consistent with one set of distributional ethics and not others. One cannot adjudicate between them or rank them or compare them without going beyond “utility” as defined in economic theory. Real economic systems or outcomes associated with the status quo or with any particular instance of perfectly competitive markets or what have you are the same in that respect to any other economic system or outcome. They will be consistent with one set of distributional ethics and not others. They don’t represent the absence of a distributional system or the absence of controversial distributional ethics, even if economists choose to ignore them at least explicitly. They don’t represent a neutral ground one can support on the basis of “utility” alone. They don’t represent the avoidance of the controversy associated with distributional issues and ethics. If one finds oneself arguing for or against policies designed to implement or reflect someone’s views on distributional ethics or opinions relating to so-called “equity,” for example, economic fairness or justice, real utilitarianism, religious ethics, or what have you, and one is ostensibly doing so on the basis of neoclassical welfare economics, then one is not being entirely honest. The only real questions are what are the additional value inputs one is using to do that, and will one have the intellectual honesty to identify and discuss them and differentiate them from the normative argument presented in neoclassical welfare economics on the basis of “utility” as defined in economic theory, which would imply indifference to such matters? Alternatively, if one is sure no such additional value premises are involved, then the question becomes will one have the intellectual integrity to review one’s own logic to discover the source of the fake indifference, possibly in selective perception, possibly in some bit of confused word play, possibly in some plain old fashioned errors in interpreting economic theory?

Let’s have some examples of fake distributional indifference in action to make it concrete. I’ve talked about it a number of times already, but if something is worth saying once, I suppose it’s worth saying a hundred times. So, let’s say someone proposes we diverge from some real instance of let’s say a perfectly competitive market in a way that makes at least one person better off and one person worse off in order to address that person’s distributional ethics. What does neoclassical welfare economics say about it? Nothing. Evaluating that proposition would obviously involve going beyond what one can say on the basis of “utility” as defined in economic theory.

What does bad economics say? Well, unlike what neoclassical welfare economics says, which is necessarily one thing, bad economics in the form of misinterpretations of that theory might say any number of things. The sky’s the limit, as they say. One thing it might say is we should oppose such a policy because there is no valid reason based on “utility” in neoclassical welfare economics to pursue it. That’s an example of bad economics because, of course, there is also no valid reason on that basis to not pursue it either. It’s an example of fake distributional indifference taking the form of selection perception: pretending an argument that works both ways works only the one way. 

Another thing bad economics might say is we should oppose such a change because, although neoclassical welfare economics is indifferent to distributional issues, it establishes we shouldn’t address them in a way that involves diverging from perfectly competitive markets, but only in some other specified way, such as direct transfers. That’s bad economics because, as I’ve pointed out before, it suggests continuously changing returns and hence incentives in (let’s say) perfectly competitive labor and capital markets, even using direct transfers, is consistent with what we normally mean by a perfectly competitive market system, which it plainly is not. Basically, that argument portrays neoclassical welfare economics as expressing indifference to people addressing their distributional concerns with the caveat they must address them in a way that is logically impossible. That’s an example of fake distributional indifference taking the form of playing with words. According to neoclassical welfare economics one should be indifferent between any given perfectly competitive market and certain non-perfectly competitive markets that differ from it in certain ways (basically those cases in which one cannot get to that particular instance of a perfectly competitive market from those particular instances of non-perfectly competitive markets via Pareto improvements). 

Even if we go ahead and interpret perfectly competitive markets in a funny way to make continuous transfers affecting incentives in capital and labor markets logically consistent with what we mean by perfectly competitive markets, there is no theoretical argument based on “utility” as defined in economic theory that restricts the policy choices for addressing distributional ethics to particular policies or approaches, which may after all prove practically difficult, infeasible, or unacceptable. Distributional indifference applies even if people choose lesser policy choices, second best solutions or worse, for one reason or another. Neoclassical economic theory doesn’t involve the value premise that when it comes to policy changes addressing distributional issues only the best will do and it’s all or nothing. Throwing up random roadblocks to prevent people expressing their distributional ethics by limiting their policy choices is an example of fake distributional indifference taking the form of misinterpretation of neoclassical welfare economics or possibly the introduction of random value premises.

They’re all examples of the rhetorical technique of fake distributional indifference in bad economics: pretending one is restricting one’s attention to what one can say on the basis of “utility” in economic theory, giving oneself a hearty slap on the back for avoiding controversial distributional issues and ethics by ostensibly restricting one’s attention to “utility” as defined in economic theory, then merrily going beyond it and involving oneself in those distributional issues in obscure ways that are inevitably consistent with some distributional ethics and not others. Bad economics creates confusion and conflict by submerging the normative or ethical issues involved in resolving interpersonal conflicts of need, wants, desires on the basis of relative economic power in markets. We should fix bad economics.

Social Welfare Functions And Bad Economics

I seem to hear a lot from various quarters about how the theoretical availability of so-called “social welfare functions” means neoclassical welfare economics is now value free or neutral as far as normative content. I don’t think that’s correct. Social welfare functions are fine for what they do, but the problems with which I’m concerned when I discuss bad economics seem to me largely unaffected. Let’s discuss how and why.

Social welfare functions allow one to re-introduce certain elements of the controversial distributional ethics neoclassical welfare economics was explicitly designed to avoid. In particular, they set up mathematical schemes by which “utility” as defined in economic theory can be added up across people, at least along certain dimensions.

Social welfare functions play off the idea that for any distributional ethics there should be some perfectly competitive, economically efficient, Pareto optimal outcome consistent with those beliefs and the only real issue is choosing one. However, as I’ve pointed out previously, that argument has some issues. It really only works if one accepts changing returns and hence incentives on labor and capital markets is consistent with perfectly competitive markets. If not, a logical contradiction ensues. In particular, if one’s distributional beliefs do not correspond to the results of perfectly competitive labor and capital markets, one will not be able to maintain a perfectly competitive market addressing one’s distributional concerns. (For more on that issue see my earlier post Appeals to Nonexistent Mechanisms for Addressing Distributional Concerns, from June 10, 2020). Social welfare functions do not eliminate that problem. 

In addition, there are other controversial ethical issues associated with resolving interpersonal conflicts of needs, wants, and desires using economic power in markets under realistic conditions beyond what are normally considered distributional issues, and those ethical issues may not be amenable to being addressed by social welfare functions. To take two random examples, it’s not very clear social welfare functions can be used to address controversial issues relating to the status of future generations or to issues that involve situational ethics, that is, particular categories or types of conflicts or transactions rather than the people involved. In a sense, social welfare functions are tacked on at the end of the normative argument in neoclassical welfare economics and do not affect problems or issues with that argument prior to that point.

Social welfare functions also represent yet another opportunity to engage in fake distributional indifference. The opportunity arises under particularly favorable conditions because expressing ethical propositions not based on “utility” as defined in economic theory in terms of that “utility” can make those propositions appear arbitrary or even nonsensical. For example, the idea of a social welfare function that adds up across people a form of “utility” that is undefined in interpersonal contexts, an adding up of personal preference rankings only really defined with respect to individual people, is a notably awkward way of expressing any system of distributional ethics. When incorporated into neoclassical welfare economics, social welfare functions represent a weird hybrid of conclusions developed using, and relying upon, “utility” as defined in economic theory, and other normative propositions not based on that sort of “utility,” but confusingly possibly involving other definitions of utility from philosophical utilitarianism, oddly expressed using “utility” as defined in economic theory. In that sense, social welfare functions are really a multiplication of the misleading elements of “utility” as defined and used in neoclassical welfare economics I’ve discussed in pervious posts.

Fake distribution indifference can then be introduced if one ignores the implicit social welfare function associated with any particular real world instance of a perfectly competitive market and argues or implies instead that such odd and controversial creations are relevant only when considering changing an economic mechanism or outcome, not when considering rejecting those changes. That argument generates what is for me the hallmark of fake distributional indifference, the idea that controversial ethical issues are associated with certain distributional mechanisms or outcomes but not others, that there is a value free or normatively neutral default position one can adopt without taking up such issues. There is no such value free or normatively neutral economic mechanism or outcome in this world. Supporting any real expression of a perfectly competitive market will always involve taking a position on controversial distributional issues. If those distributional beliefs do not involve an explicit social welfare function or the inevitable implicit social welfare function, then they evidently involve some other normative proposition or propositions every bit as arbitrary or unjustified from the perspective of the “utility” defined in economic theory as social welfare functions, perhaps an ethical endorsement of the existing mechanism of distributing economic power, or perhaps a generalized ethical proposition supporting the status quo.

The theoretical availability of social welfare functions does not eliminate bad economics, the misuse of neoclassical welfare economics to advocate for certain market systems and outcomes in situations that logically require additional value premises.