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.
