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.
