I probably discussed it before but I thought I’d take another shot at explaining why instances of Pareto improvements, changes that make one person better off and no one worse off, are not ethically controversial when controversial distributional issues are set aside in what I’ve been calling the Fairy Land of Economic Theory, but are ethically controversial in real life where they come packaged with controversial distributional issues. Ready to take another trip to the mysterious Fairy Land of normative neoclassical welfare economics? Fine. Get out your pointy hat, old clay pipe, and trusty staff, and let’s take a quick look at the changeable normative status of Pareto improvements this week.
The reason we talk about Pareto improvements in the context of neoclassical welfare economics is that they’re meant to be normatively or ethically uncontroversial, and the laboriously created and maintained conceit that motivates neoclassical welfare economics is that it contains only simple, widely accepted, uncontroversial value judgments or ethical propositions. Well, actually I suppose it does when properly interpreted, so perhaps conceit is not the right word in the context of the theory itself, but in my experience hardly anyone properly interprets the real theory substituting instead what I call bad economics, which contains plenty of controversial ethical content, and in that context the claim in question clearly qualifies as a conceit.
The issue I’d like to think about this week is whether Pareto improvements are uncontroversial in real life, or only in the partially unspecified Fairy Land of Economic Theory in which certain relevant ethical issues have been set aside. In the words, whether the notion that Pareto improvements are ethically uncontroversial is yet another bit of mathematical formalism never correctly evaluated in a normative sense when applied to realistic situations.
Let’s try to imagine a Pareto improvement so we have something concrete to talk about. Let’s say hard working A makes $50 K per year. Layabout B makes $5 K per year, part time, and is perfectly happy. We drop $1 billion into B’s bank account. Would A find it ethically controversial? Is the only reason he or she would object to what just happened envy at B’s good fortune?
That’s what they call a trick question. You saw what I did there, right? I switched out the “utility” on which Pareto improvements in neoclassical welfare economics are meant to be based upon for money. However, as I established in a previous post or probably several previous posts, “utility” in neoclassical welfare economics is not money; “utility” is meant to have different characteristics than money. What I just described is not a true Pareto improvement. Person A was made worse off in terms of relative economic power, buying power, which may translate into very real results in terms of the preferences he or she is able to express in the market, let’s say his or her preferences for the mysterious one-off gem everyone is so excited about that previously he or she could lay hands upon but no longer, so that’s not a true example of a Pareto improvement.
Let’s try to do it right. Let’s say layabout B gets a boost in his or her “utility” or ability to express his or her preferences using economic power in markets by a factor of one billion, whatever that means, and his or her moving up along his ranking of preferences by that factor has no effect on hardworking A, who still fulfills his or her preferences exactly as before. Is that a real thing or are we back to talking conceptual nonsense again? What happens if A wants the one-off gem but it also figures somewhere in the string of preferences B is moving up? That would be funny if the concept doesn’t even really make sense in realistic contexts, wouldn’t it? Shortest blog post ever! But I still have a point I wanted to make so let’s just get out the old broom and sweep that one under the rug this time, shall we? Let’s say B moves up his or her preference rankings by a factor of one billion but none of it has any effect on A, who still manages to fulfill exactly the same preferences as before or, if you’re a fan of funny talk, he or she has the same “utility” as formerly. Now that’s a Pareto improvement, right?
Let’s consider the same issue. Is the change in question ethically or normatively controversial or uncontroversial? Does A have any reason beyond envy to object? If not, then I suppose our Pareto improvement would be uncontroversial because I suppose rejecting ethical propositions based solely on envy would generally be considered uncontroversial. Well, if you’re asking me, I suspect hardworking A may be a little miffed for reasons that go beyond simple envy. I know I would be in his or her place. For example, A may believe the results of our little economy no longer comport with his or her distributional ethics, which let’s say propose the ability to meet one’s preferences, or “utility” if one insists, should be related in some way to individual merit or activity or behavior. Interestingly though, it would becomes uncontroversial were we to remove consideration of distributional ethics, and oddly enough that’s one of the distinctive characteristic of the ethical half-theory of neoclassical welfare economics.
So, yes, I suspect what’s going on here is that we’re looking at another artifact from the Fairy Land of Economic Theory, which is normatively evaluated one way in its proper context, the Fairy Land, but evaluated rather differently in real life. That is to say, it seems real instances of Pareto improvements are not really all they’re cracked up to be, similar to how real instances of Pareto optimality are not all they’re cracked up to be. Both are controversial in realistic settings because of the inevitable ethical and in particular distributional aspect or component. Concepts like Pareto improvements and Pareto optimality work just fine and as intended in the Fairy Land of Economic Theory, but don’t mistake the Fairy Land for reality. When one returns to reality and begins discussing real, defined, instances of Pareto improvements or Pareto optimums, one must confront the ethical or normative issues and controversies that were banished from the Fairy Land. The noncontroversial becomes controversial. Don’t end up forever wandering dark and twisted Fangorn Forest. Step into the light, behold reality, and adjust your ethical reasoning accordingly.
All joking aside, I think the answer must be to remove the confused, complicated, misleading normative or ethical content from neoclassical welfare economics. We should make economics a science. When purveyors of bad economics, including alas many economists, try to do ethical philosophy, the results are just not very pretty. Comes out a bit of a mess, really. Economists should leave the ethical and normative issues involved in evaluating economic systems and outcomes to the people and democratic government to resolve.
