Economics As Something Other Than A Toolbox

I was having a little conservation with another economist online the other day who presented neoclassical economics as a normatively neutral collection of theoretical techniques and concepts one could use to argue for any normative or ethical position “if you’re clever enough.” You may have encountered this theory before. Economics as a toolbox or a collection of tools are common ways of expressing the idea. He seemed obviously a well meaning, socially conscious sort of fellow who had in mind using the toolbox to say something normatively or ethically sensible, so he clearly had good intentions, but we were at a bit of a loggerheads for a few moments because his train of thought seemed to run smack into my determination to establish that neoclassical welfare economics, in particular, is not neutral in a normative or ethical sense as many would like to suggest, but explicitly or implicitly contains opaque, contradictory, and indeed controversial and even implausible value propositions, dodgy factual premises, and frequently misinterpreted normative conclusions. As is usual in such cases, the problems was resolved once we realized we were equivocating on terms. Both statements are correct. He was discussing “neoclassical economics” broadly conceived. I was discussing “neoclassical welfare economics.” What a difference a word can make, right? 

In my writing in this blog, I try to remember always to spell out my primary concern is “neoclassical welfare economics” as opposed to just “economics” or even just “neoclassical economics.” That’s because what I’m mostly interested in talking about is a particular normative or ethical argument that comes complete with value inputs, factual premises, logic, and normative or ethical or value outputs or conclusions.

In this blog, I’m not talking about a neutral, content free, arbitrary collection of conceptual tools one can take up or not or revise or manipulate however one likes to say whatever one likes, which is one common formulation of what orthodox “economics” is all about. And if I do ever take that up for some reason or other, rest assured I’ll take pains to establish that’s what I’m talking about.

I’m also not talking about positive, scientific, essentially arbitrary models meant only to predict empirical phenomenon, in which the modeling assumptions can be as divorced from or as close to reality as one likes, which is a one common idea of what “neoclassical economics” is all about. Again, if I start talking about such a thing for some reason or other, I’ll be sure to let you know in no uncertain terms.

I’m also not talking about positive, arbitrary, mathematical optimization problems delivered in a neutral if-then format with the if statements accurately and completely identified and no explicit statement or implicit suggestion of endorsing the if statements, the value propositions, the normative or ethical proposition thus represented, which is another common idea of what “neoclassical economics” is all about. Yes, you got it. If I ever feel the need to start talking about that one for one reason or other, I’ll let you know.

No, what I’m talking about unless I indicate otherwise is the normative or ethical theory expressed in traditional neoclassical welfare economics involving evaluative, value laden concepts like total social utility maximization, social welfare, Pareto optimality, economic efficiency, the supposed optimality of perfectly competitive markets, etc. I’m talking about what amounts to a rather confused and disjointed ethical theory containing value inputs in the form of explicit or implicit normative or ethical propositions and factual premises and generating normative or ethical conclusions. What conclusions? The normative or ethical conclusions from the Fairy Land of Economic Theory stating we should move toward a generalized perfectly competitive, Pareto optimal, economically efficient outcome, or if already at one, stay there, and its evil twins from bad economics. Evil Twin One, that in realistic situations we should move toward any particular instance of a perfectly competitive, Pareto optimal, economically efficient outcome, or if already at one, stay there. And Evil Twin Two, that any particular instance of a perfectly competitive, Pareto optimal, economically efficient outcome is preferable to any real outcome without those characteristics.

I’m talking about economists giving practical economic policy advice, advocating for certain policies, in realistic contexts, based ostensibly on normative neoclassical welfare economics, and the normative and ethical issues, oversights, and errors generally associated with that project that lead directly to what I call bad economics.

I’ve found one of the main hurdles in addressing bad economics is that the field of economics is squishy, vague, amorphous, and difficult to pin down. No one seems ever to be talking about the same thing. The math may be rigorous, but that’s about all that is. Certainly not the normative or conceptual content. We should simplify economics. Talk about one thing at a time. Interested in the opaque, inconsistent, misleading, just plain old bad ethical philosophy expressed in normative neoclassical welfare economics and even more so by its monstrous offspring, bad economics? Great! So am I! Interested in predictive scientific modeling or econometrics? Sorry. Not really my cup of tea just now. 

Ordinal and Cardinal Utility In Neoclassical Welfare Economics

I’ve done a series of posts already on “utility” as defined in neoclassical welfare economics, including a post on social welfare functions in particular, but I’ve noticed whenever the word “utility” crops up in my various online conversations with other economists of both the professional and amateur varieties I invariably develop the uneasy feeling we’re not always on the same page as it were, not always using the word the same way. It’s comical to me because utility is probably the most fundamental concept in neoclassical welfare economics, which is ostensibly all about maximizing it. Maybe it makes sense to take yet another look at the ever so complicated albeit needlessly so heart of neoclassical welfare economics.

One element of normative neoclassical welfare economics I think creates enormous confusion and conflict is the simultaneous existence or discussion of both ordinal and cardinal conceptions of utility. They represent two very different versions or definitions of utility and the fact one is never entirely sure which version anyone else has in mind, or rather as soon as one starts talking about one whoever one happens to be talking to at that moment will invariably start talking about the other, adds a great deal of confusion to any conversation about normative economics.

Ordinal or ordinal only utility captures only the order or ranking of preferences for a given individual. It doesn’t really have any meaning beyond the preference rankings of individuals. In particular, it doesn’t refer to any underlying concept like “happiness” or “satisfaction.” One can see that easily enough when one realizes that, linguistically, one cannot discuss interpersonal comparisons of ordinal only preference rank utility because that type of utility is undefined in that context. Linguistically, grammatically, that would be nonsense, like talking about the square root of red, a fact which would be perfectly obvious were it not for the existence of other conflicting conceptions or definitions of “utility” in which that statement would not be grammatical nonsense and the ease with which one can equivocate on that term. Any concept of “happiness” or “satisfaction,” for example, that breaks no grammatical or linguistic rules, sounds sensible to the ear, when used in the phrase interpersonal comparisons of happiness or satisfaction cannot equate to ordinal only preference rank utility. Indeed, under preference rank utility it doesn’t matter if one’s preferences make one “happy” or more “satisfied” in any sense that adds content beyond the mere fact of the preference ranking itself. If one’s preference is to do something that makes one miserable that’s evidently what gives one higher utility. Under this definition of utility, the word “utility” could be removed entirely from economic theory and replaced with “preference ranking for individual X” with no loss of content. And, incidentally, that’s really what economists working with that sort of “utility” should do and would do if they were interested in intellectual clarity and honesty in the normative realm and not also in misleading rhetorical effect.

Cardinal utility, which adds the notion of an amount of “utility” so, for example, an individual can be said to get twice as much “utility” from fulfilling preference A than preference B, is an entirely different concept. In that case, one is obviously talking about something beyond merely a preference ranking. So what is the thing someone is doubling when we discuss someone getting twice the cardinal utility from A as from B? One likely suspect is we’re talking about some notion of happiness as with traditional philosophical utilitarianism. However, that doesn’t really fit with the notion of revealed preference and the idea it doesn’t really matter for utility if preferences lead to anything anyone would normally associate with happiness, per se, beyond the mere fact of the preference itself. The more relevant concept is really a sort of narrowly conceived satisfaction derived from preference fulfillment that applies even when one fulfills preferences that to an observer appear to make one miserable. 

It’s important to note we must be talking about an inaccessible internal perception of satisfaction from preference fulfillment for this type of utility to work with the logic of neoclassical welfare economics because we need to preserve the result we cannot make interpersonal utility comparisons, which is central to the normative argument in neoclassical welfare economics under both formulations of utility. We can’t be talking about observable indications of satisfaction as we could and would with respect to happiness in traditional utilitarian ethical philosophy. As we discussed a moment ago, under ordinal only preference rank utility, talking about interpersonal utility comparisons is gibberish. In contrast, under cardinal perceptions of satisfaction utility, making interpersonal utility comparisons is impossible because we cannot as a matter of fact access or measure the relevant subjective perceptions. Same theoretical significance in terms of the math. Two very different concepts in terms of the normative or ethical content.

In that sense, revealed preference is the only objective indicator of both ordinal only preference rank utility and cardinal internal perception of satisfaction from preference fulfillment utility, but it would be confusing to call both “preference utility,” wouldn’t it? Confusing? That was my little attempt at a joke. Add it to the list, right? I’m sure people do it all the time. But let’s not do it here. Let’s reserve the term “preference utility” for ordinal only preference rank utility and use “perception utility” for cardinal internal perceptions of satisfaction from preference fulfillment, just to keep track of what we’re actually talking about.

In a normative context, preference utility is obviously an entirely different beast from perception utility. One can’t just switch between them willy-nilly. Doing so amounts to the logical error philosophers call terminological equivocation. The flippant attitude of purveyors of bad economics toward the distinction seems to me an example of mathematical formalism masking conceptual confusion in the normative realm. People used to working in a positive, scientific, predictive modeling mode may suppose all they’re doing is changing the mathematical specification in a model so what’s the big deal? And they’re right, in a positive context in which a model may be unreal in its entirety and still be highly evaluated because of its predictive ability, it really doesn’t matter. Use this, use that, use whatever you like. But in a normative context, of course, it does matter. In ethical philosophy and really philosophy in general, one must use language carefully, precisely, consistently, or confusion and error will be the inevitable result.

In a normative context, it’s actually much more philosophically useful to distinguish a version or conception or definition of “utility” where it doesn’t exist per se (exemplified by ordinal only preference rank utility) and a version where it does exist in some sense, if only as an internal perception (exemplified by cardinal perceptions of satisfaction from preference fulfillment utility).

In the case of the version of utility that exists in some sense, perception utility, the ethical proposition we should maximize total social utility can be shown to be weak, normatively or ethically implausible, and certainly very controversial, if one takes the time to analyze it properly and doesn’t just wave one’s arms about hoping other people lose track of what one is talking about. I’ve done it before a couple of times, but just to give the short version imagine having a dream where one can access or measure perception utility and hence make interpersonal utility comparisons. Think about the normative ramifications of accepting as one’s goal maximizing total social utility if one person’s capacity to generate perception utility were much higher than everyone else’s. Not necessarily a pretty picture, is it? Basically just whatever that person prefers; others be damned. It’s only a dream? A thought experiment? Sure. Of course it is. But it’s a revealing dream or thought experiment that shows no one who supports maximizing total social utility defined as perception utility in the context of neoclassical welfare economics does so out of any genuine interest in maximizing that type of utility. They support it because it’s inapplicable to real world conflict situations, because we don’t actually live in the postulated dream / nightmare world where we could really access it and maximize it, and hence it makes room for other ethical values in those conflict situations. Well, that and support for the trivial normative proposition we should let other people do what they want to do when what they want to do doesn’t conflict with what anyone else wants to do.

In the case of the version of utility that doesn’t actually exist per se, preference utility, the ethical proposition we should maximize total social utility just means we should generate an outcome consistent with certain propositions about how to treat other people expressing their preferences in non-conflict situations. That’s it. Under this version of utility, ethical or normative propositions about “maximizing utility” aren’t really about increasing the amount or level of something called “utility” but about generating outcomes consistent with certain ethical propositions about how to treat other people expressing their preferences in non-conflict situations. The propositions are just expressed in a funny way in an apparent attempt to deceive or confuse the unwary. 

In previous posts, I discussed the distinctive form of neoclassical welfare economics as an ethical half theory. That applies to both preference utility and perception utility, but in the latter case only because of the unobservable or inaccessible quality of perception utility. Were it not for that problem one could, of course, base an entire ethical theory on the objective of maximizing perception utility, which would be somewhat similar to the program of traditional utilitarian ethical philosophy with respect to maximizing happiness variously defined. We already discussed it would be ethically implausible and certainly controversial to do that, but at least it obeys the laws of logic. However, if one does an end run around the inability to access or observe or measure internal perceptions of satisfaction directly by using a so-called social welfare function, where one introduces some weighting scheme to allow interpersonal comparisons of perception utility with the weights based on some criteria one finds ethically relevant, including for example criteria related to observable indicators or clues or beliefs relating to happiness or satisfaction (such as implicitly setting everyone’s capacity for utility or maximum utility to be at one level and then considering the implications of diminishing marginal utility), then one can mimic a more plausible ethical theory by expressing, using the type of utility used in economic theory, ethical concepts relevant to other definitions of utility from traditional utilitarian ethical philosophy or indeed other ethical principles entirely. It’s an awkward, unnecessarily confusing crazy quilt of an ethical theory, but it gets the job done in some respects. In contrast, trying to use social welfare functions with ordinal only preference rank utility doesn’t really make sense at all. Weighting something that doesn’t exist in the first place to facilitate interpersonal comparisons of a concept that is undefined in an interpersonal context is just gibberish. A confusing Frankenstein monster of unrelated ethical concepts and terms is one thing, but I think we really must draw the line at complete nonsense.

However, the mere availability of social welfare functions doesn’t convert neoclassical welfare economics using perception utility into a full ethical theory. The weights are not a part of the theory but exogenous to it, and are just as important or more important for the normative conclusions as the normative or ethical content and positive factual content that does appear in the theory. In addition, if one considers social welfare functions and the ethical or normative reasoning underlying the weights used in social welfare functions as applying only at the stage of deciding between perfectly competitive, Pareto Optimal, economic efficient outcomes, a great deal of the submerged normative content I’ve discussed in previous posts will remain. Honestly, it’s a bit of a philosophical mess, isn’t it? If we want people to be able to discuss these normative or ethical issues openly, honestly, transparently, then we really should remove the normative or ethical content from economics. Economists make bad ethical philosophers. They aren’t trained in it, aren’t interested in it, and produce risibly non-rigorous and amateurish normative theories when they set they hands to it. Ethical decisions relating to the evaluation of economic systems and outcomes belong with the people and should be addressed in the political arena by democratic decision making bodies, not in ivory towers by philosophically and in particular ethically clueless economists.

Property Rights Revisited

I’ve taken up the issue of the legal specifications of property ownership that define economic power, so-called “property rights,” in a previous post (Property Rights As An Element Of Bad Economics, June 24, 2020); however, given their importance for bad economics maybe it’s sensible to have another go at the issue.

A common conceit in bad economics is to try to slip in random value judgments, that is, ethical or normative propositions, in some cases possibly because one believes they are so noncontroversial they needn’t be discussed or even recognized as such. One area where this seems to happen quite frequently is with legal specifications of property ownership or as sometimes confusingly called, “property rights.” If we don’t have legal specification of property ownership to define economic power then we can’t have markets, and purveyors of bad economics in general are prone to skip the part of their normative argument that involves establishing and relying upon markets to resolve interpersonal conflicts often preferring instead to simply assume the existence of markets, and assume also that everyone agrees the application of economic power in markets is the most ethical way to resolve interpersonal conflicts of needs and wants, and moving directly on to assessing particular market structures and outcomes.  But if the argument is that certain market structures are the ethically optimal way of resolving interpersonal conflicts of needs and wants, one really needs to start at the beginning, not just jump in half way to one’s conclusions.

The controversy associated with the decision to have or not have any sort of specification of property ownership or “property rights” at all is that between utopian anarchists (the real sort, not the fake market sort) and pretty much everyone else. There is some ethical controversy there that should be acknowledged, but perhaps not a lot.

The bigger problems in terms of unstated normative or ethical premises start when one begins to overstate the conceptual or logical requirements of neoclassical welfare economics. The normative conclusions of that theory logically requires a normative proposition supporting the existence of some sort of legal specification of property ownership to support the existence of markets, but it doesn’t require one to conceive of those legal specifications in terms of the broader notion of an ethical “right.” In particular, it doesn’t involve any particular notions of whether one can change those legal specifications, why, how, when, under what conditions.

A related problem is minimizing the ethical controversy associated with particular legal specifications of property ownership based on the relatively noncontroversial notion one should support existing laws in the sense of abiding by them, assuming one endorses the system that produces those laws. One may support the enforcement of existing legal specifications of property ownership while also believing they are somewhat lacking on an ethical basis and should really be revised in some way. They’re really two different issues. Thus, the actual legal property specifications themselves may be associated with more ethical controversy than simple support for law abiding behavior at any particular moment suggests. One’s ethical assessment of legal specifications of property ownership may be complex. For example, one may think an existing pattern or mechanism of legal property specifications is generally reasonable, yet still support changing them in certain ways, such as revising inheritance laws, changing tax rates, adopting redistributional policies, etc. Similarly, one may support legal property specifications as an important determinant of the most ethical way of resolving interpersonal conflicts using economic power in markets in most situations, but not in certain ethically distinctive or unusual ones, such as let’s say health care or issues involving future generations or environmental concerns.

If one’s attempt to apply neoclassical welfare economics involves additional value premises that are not expressed in the theory itself, such as that existing legal specifications of property ownership are special, ethically correct, cannot be revised, or should be considered expressions of philosophical “rights” of one sort or another, then one needs to say so. If one endorses the normative or ethical proposition that resolving interpersonal conflicts of needs, wants, desires, on any basis other than economic power so defined on markets is always ethically unacceptable, then one needs to say so. Because those sorts of beliefs belong to the world of distributional ethics (and really even more general ethics) and thus contradict the distributional indifference in neoclassical welfare economics (in additional to the indifference on other controversial ethical issues that should be treated the same as distributional issues for consistency in neoclassical welfare economics but are often simply ignored instead). To avoid confusion and conflict, to accurately characterize the level and type of ethical controversy associated with the normative conclusions one ostensibly derives from neoclassical welfare economics, one must accurately and clearly specify all one’s value inputs.

Of course, on the other hand, if one associates no particular normative status to particular mechanisms for generating legal property specifications or to particular patterns of legal property specifications, if one is indifferent to retaining them or revising them in particular contexts or generally, if one is indifferent to resolving interpersonal conflicts on some basis other than economic power so defined in markets, if one wishes to avoid the controversy associated with distributional ethics (and with the other controversial ethical issues associated with resolving interpersonal conflicts on the basis of relative economic power in markets), then I suppose one doesn’t really have  to say that, because that’s ostensibly what neoclassical welfare economics already says. However, to avoid confusion one should probably say that as well.

Economists seem rather more interested in, and indeed one might say fascinated by, the level of ethical controversy associated with the normative propositions relating to “utility,” that is, propositions about how we should think about an individual expressing his or her preferences in the absence of interpersonal conflicts requiring ethical resolution, than with the level of ethical controversy associated with the entirely distinct and really inconsistent or incompatible value inputs or normative propositions related to legal specifications of property ownership and the proposition interpersonal conflicts of needs and desires should always be resolved on the basis of economic power in markets. Indeed, economists generally manage to mis-state and minimize even the relatively modest level of ethical controversy associated with preferences in the no conflict case, that is, “utility” as they’ve defined it, in realistic situations, by evaluating it in conjunction with false factual premises such as complete information, rationality, etc., which are typically and confusingly only explicitly introduced much later in the context of the conditions required for perfectly competitive markets in particular.

It’s rather difficult for a serious reader to suppose purveyors of bad economics including alas many economists are not trying to actively hide or misrepresent the normative or value or ethical inputs required to apply neoclassical welfare economics in realistic contexts, that is, to ignore some value inputs, ignore inconsistencies in the philosophical bases of those inputs, and hence misstate the level of ethical controversy involved with the value inputs taken as a whole and hence with the normative conclusions. But, of course, economists are famously bad ethical philosophers. They’re not trained in philosophy, and many or perhaps even most are happy to explain they’re just not very interested in such matters anyway. So the attribution of intent isn’t as clear as one might suppose, at least not now. However, one thing seems clear, we should not continue to use neoclassical welfare economics to derive bogus normative results based on bad ethical philosophy, but use it in a sensible way to identify where value inputs in the form of normative or ethical propositions are required for the evaluation of economic systems and outcomes, so they can be referred to democratic processes for temporary and continually revisited and potentially revised resolution according to the subjective ethical beliefs of those involved.

Addendum

More recently, I’ve argued the ethical issue I now call “law over anarchy” is more sensibly considered exogenous to neoclassical welfare economics, which is a step back from the argument presented here, which follows my old “onion of bad economics” model to portray neoclassical welfare economics as containing implicit normative or ethical arguments meant to establish we should use economic power in markets to resolve interpersonal conflicts of preferences, needs, and desires, and hence also implicit normative or ethical arguments addressing creating or sustaining the legal conditions for markets to exist. See the post Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021. 

Greed Is Good Three: Utility And Money

I was talking with an astute and bracingly concise fellow online the other day about whether or not modern neoclassical welfare economics involves the ethical or normative proposition greed is good, that is, the proposition people should act on the basis of narrow financial self interest, and he argued neoclassical economic theory does imply that at least for business people acting in their official capacity as business people because the normative conclusions are based on business people competing with one another on the basis of maximizing profit, that is to say, money, not expressing broader ethical principles or concerns about the welfare of their less clever or able competitors. Narrow financial self interest, greed, at least on the part of business people qua business people is the engine that is meant to drive the socially optimal results. In the context of that theory, if those particular economic actors don’t act the way they’re meant to act, then we don’t get where we’re meant to get. I say business people qua business people because I’m not talking about the behavior of business people more generally, in their private capacity so to speak, but in their official capacity, which in some sense involves simply agreeing to acknowledge the dictates of the market in the sense a business person who does not agree to maximize profit is not destined to be a business person much longer. The function of greed in that context is an interesting point because that does sound correct to me, profit maximizing behavior on the part of business people qua business people does seem generally presented as instrumental to attaining the ostensibly ethically optimal results of perfectly competitive markets in neoclassical welfare economics. I’m not sure there are any such general normative propositions relating to greed for other economic actors in their various roles. That is to say, I’m not sure neoclassical welfare economics explicitly or implicitly expresses normative propositions that labor should be concerned only about wages or capital owners only about returns on capital in order to get the ostensibly normatively optimal results with perfectly competitive markets. Actually, that’s as somewhat interesting question, but it’s not important for what I’m talking about here, so let’s just stick with the easy case which I think is definitely there, the proposition that business people acting in their official capacity should act on the basis of greed, that is, maximize profit. What makes that particular proposition interesting is that it clearly contradicts the more general normative propositions based on “utility” as defined in neoclassical welfare economics, which don’t appear to place any special emphasis on greed or narrow financial self-interest and instead involve preferences quite generally regardless of the underlying motivations involved. Somewhere along the lines, business people qua business people appear to have morphed from plain old people who maximize their “utility” like anyone else to a rarefied group of people whose behavior expresses their function in the economic machine and who may be encouraged or expected to maximize something rather more concrete, money, profit. Seems something a little funny is going on somewhere, and if you know me at all, you know I love that sort of thing, so let’s discuss it. Hint: It’s basically the same thing I always end up talking about, but in a slightly different guise. Intriguing, isn’t it?

One possibility we should probably acknowledge at the outset is that the whole issue of the existence of the normative proposition greed is good, that people or particular people anyway should be greedy, may be a simple error, and one can actually construct an argument within neoclassical welfare economics showing a perfectly competitive market maximizes “utility” that involves everyone, including business people qua business people, acting to maximize only the more general concept of “utility,” and not involving any normative propositions relating to business people qua business people acting any special way such as maximizing profit. I don’t want to dismiss that possibility out of hand. I don’t really see at the moment how that would work, but I just don’t really know for sure. Which is odd, since I’m an economist, and I’ve studied the issue, and one would think I’d know with absolute certainty something that basic, but then many things seem a bit odd to me, and more gets added to the list the older I become. Perhaps it’s theoretically perfectly fine if business people qua business people form and express preferences on other bases and maximize their “utility” along with every one else, except we’ll lose a little something when their businesses fail, as one supposes they must in a perfectly competitive market; which actually sounds pretty close to an implicit normative proposition business folk should just learn to maximize profit to begin with, although maybe it doesn’t work that way. Maybe we can’t compare the value on the basis of “utility” of whatever they chose to do as business people before their businesses failed with whatever we lost as a function of those businesses failing. Or maybe maybe what appears to be a normative proposition that business people qua business people should maximize profit is meant to be a simple factual premise, greed happens or greed must happen as opposed to greed is good, per se, and the normative conclusions of neoclassical welfare economics are meant to apply or not depending on the accuracy of that factual premise; which actually also sounds pretty close to an implicit normative proposition business folk should just maximize profit so we can all get the ostensibly desirable results. Anyway, if the normative conclusions of neoclassical welfare economics relating to the ostensible social optimality of perfectly competitive markets don’t actually depend on business folk maximizing profit, if the theory contains no explicit or implicit normative proposition they should operate on the basis of greed, narrow financial self interest, or if it’s just a factual premise predicated on how markets work that business people qua business people will, in fact, need to operate on the basis of greed, then I guess all we’d be talking about with the supposed normative proposition greed is good, the proposition people or some people anyway ought to be greedy, is just people not understanding neoclassical welfare economics, or to put it another way, a failure on the part of academic economists to accurately and effectively explain the normative component of neoclassical welfare economics so people avoid making that potentially rather significant normative error. I say potentially rather significant because certainly a world in which people believe there is some sort of general normative imperative to be greedy will end up quite different from a world in which people believe there is some general normative imperative to look after their fellows, which perhaps in certain limited and specific circumstances may or even must be set aside in favor of carefully circumscribed greed. But given all the funny business involved in how normative content actually enters neoclassical welfare economics, I think something a little more serious may be going on, so let’s move on to discuss that possibility.

To set the stage for what may be happening, let me just give a quick nod to my previous commentary about the curious conflating of “utility” as defined in economic theory with money, which appears to happen quite easily and frequently at least in the context of neoclassical welfare economics. In a previous post I mentioned an interesting pattern one commonly encounters in more casual forms of economic thinking in which “utility” as defined in economic theory morphs into various rather more concrete concepts like money, physical amounts of goods and services, or sometimes total economic output however defined. I opined previously it’s the sort of philosophical confusion or really conflation of concepts that leads so many purveyors of bad economics, including many economists, to mischaracterize the potential tradeoff between total economic output, generally discussed in terms of money, and “equity,” generally discussed in terms of “utility” as defined in neoclassical welfare economics (or more prosaically and less confusingly discussed in terms of certain ethical propositions involving how we should behave with respect to other people expressing their preferences in certain situations), as the conceptually entirely different tradeoff between “efficiency” and “equity,” both of which are generally discussed in terms of “utility,” thus magically transforming the money that should really appear on one side of the tradeoff into “utility.” I’m not going to repeat the whole argument here. You can look at my previous post on the topic if you’re interested in that. No, for now I’d just like to make one thing clear. Money is not “utility.” “Utility” cannot be expressed as money. One can compare amounts of money across people; one cannot compare amounts of “utility” across people. In modern neoclassical welfare economics, “utility” refers simply to preference rankings for a given individual. One cannot compare the preference rankings of individuals across people. One can talk about a big bucket of money one distributes to people this way or that; one cannot talk about a big buck of “utility” one distributes to people this way or that. The ostensible social objective of neoclassical welfare economics economists invoke when normatively evaluating economic systems and outcomes is maximizing total social “utility,” not maximizing the total amount of money produced or the total output of goods and services produced. The faux behavioral assumption that people maximize their “utility” is tautological in both the positive and normative contexts of modern neoclassical welfare economics because the theory places no restrictions on the ethically acceptable bases for one’s preferences. Preferences based on ethics have exactly the same significance as preferences based on any other motivation including greed and narrow financial self-interest, that is, money. That’s the whole point of the de gustibus principle. “Utility” in neoclassical economic theory may just be a funny term for “preferences,” but it is not also just a funny term for “money.”

Why am I so concerned to establish “utility” is not money here? How does that relate to our original puzzle relating to the apparent implication within neoclassical welfare economics that business people qua business people should act on the basis of narrow financial self interest by maximizing profit, in light of its theoretical companion, the tautological statement people in general maximize “utility” and the normative proposition we should all accept the objective of society maximizing total social “utility?” Well, I think to understand what may be going on in this curious nexus of the real and practical with the theoretical and insubstantial we have to go back to the funny ways some normative content is introduced into neoclassical welfare economics, the distinctive ethical half theory structure of neoclassical welfare economics, and the interesting distinction between what I think of as the ethics appropriate to the Fairy Land of Economic Theory, in which certain ethical issues relevant in the real world can be banished or indefinitely kept at bay, versus the ethics of real life, the here and now, in which those ethical issues cannot be banished or kept at bay. The clue I think is that when we’re talking about greed and business people qua business people we’re talking about behavior on the part of economic actors that is instrumental to the existence or function of markets, at least as presented in the theory of neoclassical welfare economics. This suggests the normative proposition relating to business people qua business people acting on the basis of greed, if there is such a normative proposition, is yet another one of those ethical or normative propositions related to establishing markets that enters neoclassical welfare economics through the back door so to speak, unannounced, and not necessarily entirely consistent with “utility,” which for some not very mysterious reason seems always to be given pride of place in discussions of the normative content of neoclassical welfare economics. In that sense, the normative propositions relating to supporting or accepting greed on the part of business people qua business people would be in the same category as similar normative propositions supporting legal specifications of property ownership or supporting the ethical superiority of resolving interpersonal conflicts on the basis of economic power in markets as opposed to some alternative mechanism, such as democratic government for example.

As with those other instrumental normative propositions, what one has to understand about the normative proposition relating to greed and business people qua business people is that it is only fully normatively significant in realistic situations after one has addressed the pertinent ethical issues that have gone missing from the ethical half-theory of neoclassical welfare economics, before that it is normatively significant only in the instrumental sense of setting the stage to potentially arrive at a normatively significant or acceptable result. For example, supporting a legal specification of property rights is instrumental to having a functioning market, but simply accepting that normative proposition alone doesn’t necessarily get one to an ethically optimal outcome because we have the pesky issue of the normative or ethical basis of those legal specifications of property rights and issues like whether we can change them, and if so how, why, under what conditions, and so on, which involve distributional and other ethical issues that lie outside the theory of neoclassical welfare economics. Supporting any old legal specification of property ownership may get one a market, but there will be nothing particularly normatively special about the results of that market. The results will be ethically controversial. Some people may find them perfectly ethically acceptable, others may not. For the results to have any special normative significance one must address the missing ethical issues at least in the temporary and changeable sense of reaching a social consensus about how we should address them. Simply accepting a generalized concept of a legal specification of property may be all one needs for an ethical half theory, it may suffice for ethical reasoning confined to the Fairy Land of Economic Theory, but not for ethical reasoning in the real world.

Along the same lines, the normative proposition supporting the ethical optimality of resolving interpersonal conflicts of needs, wants, and desires, on the basis of the economic power in markets seems fine, as long as it’s combined with distributional indifference and the elimination of certain other controversial ethical judgments required in real life, which in neoclassical welfare economics are eliminated or kept at bay via studious ignorance and neglect or the use of false factual premises like perfect information and rationality (which, as I’m always eager to point out, function rather differently in a normative context than in the guise of simplifying assumptions in a positive context). That’s all one needs in the Fairy Land of Economic Theory. However, back in the real world, that proposition alone doesn’t necessarily get one anywhere normatively special. Again, it gets one a market. And that market will give one a market outcome or result. But attaching normative significance to that outcome involves addressing ethical issues exogenous to neoclassical welfare economics.

So it is with the potential normative proposition greed is the proper basis on which business people qua business people should act, that is, the proposition greed is good. Business people qua business people acting on the basis of greed may be instrumental to the operation of markets at least as conceived of in neoclassical welfare economics, but there’s nothing normatively or ethically special about where those markets get one unless one combines that proposition with ethical beliefs missing from the ethical half theory of neoclassical welfare economics, beliefs relating to distributional and other controversial normative or ethical issues. Holding up greed on the part of business people qua business people as a complete, general, dispositive normative principle, ignoring its instrumental and normatively incomplete quality, is in the same general category of philosophical error as proposing there’s an “efficiency versus equity” tradeoff as opposed to a “total output versus equity” tradeoff, or granting “economic efficiency” independent normative significance from that of the underlying concept of “utility” on which it is actually based. It involves a denial or misunderstanding of the distinctive structure of neoclassical welfare economics as an ethical half theory.

One way to see this is to imagine a world in which all of one’s ethical concerns relating to markets have been met including distributional ethics and any miscellaneous ethics involving resolving interpersonal conflicts on the basis of economic power in markets, say involving future generations, the environment, particular situations like medical care, or people acting under realistic conditions of flawed information and rationality. In that situation, how would one think of business people qua business people acting solely on the basis of greed under the conditions of a perfectly competitive market? I’m thinking one would probably be perfectly fine with it because all one’s ethical issues relating to markets will have been resolved, by assumption. What’s not to like? How would one think of business people acting solely on the basis of greed in an economic system that doesn’t have those particular characteristics? Where one has unmet ethical concerns relating to markets or perhaps the market involved just isn’t quite up to the level of the ostensibly social optimal perfectly competitive market? Well, I suppose one might still accept the normative proposition business people qua business people should act solely on the basis of greed, the profit motive, as instrumental to markets in some general sense, but one would certainly have some ethical issues with the results of the particular market in question. One would want to change that system in some way so the instrument of greed on the part of business people qua business people leads to a market outcome one accepts as ethically attractive. The greed of business people qua business people wouldn’t appear as some sort of free floating, dispositive ethical principle. One wouldn’t say something like, the greed of business people qua business people is ethically acceptable behavior in the context of markets, so even though it’s leading the world to what I consider some rather unethical market results, at least they’re being properly greedy, so I’m satisfied that all is right with the world as far as ethics go. That would be ridiculous. That would be like saying we shouldn’t make changes that would lead us to one what one believes is an ethically superior market outcome because those changes might interfere with the “economic efficiency” of allocating productive inputs to generate what one believes is the current unethically or ethically inferior market outcome.

Looked at yet another way, what we have is different levels of normative propositions relating to greed on behalf of business people qua business people. We have propositions relating to greed specifically in the context of a driving force in a particular system or part of a particular system, the supply side of markets, and indeed possibly in a particular iteration or instance of that system, perfectly competitive markets, and then we have propositions relating to greed more generally, with respect to the behavior of business people in other than their official capacity as business people or the behavior of people other than business people, and with respect to more general issues such as deciding whether we should change or revise the system itself in some way, say by deciding to institute perfectly competitive markets where appropriate or altering the distribution of economic power or addressing problematic ethical situations like future generations or environmental issues using non-market decision mechanisms and so on. Greed is good as a general ethical principle is simply much too simplistic, one of the hallmarks of philosophically inept bad economics. Greed, at least on the part of business people qua business people, might be all one needs for ethical philosophy in the Fairy Land of Economic Theory, but assessing or evaluating the normative significance of greed in the real world is a rather more complicated affair. Popular confusion surrounding the normative proposition greed is good and its relationship to neoclassical welfare economics is yet another way bad economics retards and complicates the discussion of important normative or ethical issues and hence leads to social confusion and conflict. We should fix bad economics. At the very least we should accurately identify, express, and properly evaluate all the normative inputs and factual premises required to generate the normative conclusions of neoclassical welfare economics, and ideally we should take the next step and take the normative content out of economics and put it back with the people operating through democratic decision making and informed, hopefully, by serious ethical philosophers who can help people analyze these issues a bit more rigorously than most economists seem willing or able to do.