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.
