I thought recently of yet another way to describe or illustrate the distinctive, layered, onion-like structure of normative neoclassical welfare economics, and hence also of the bad economics based upon it, in which unrelated and inconsistent normative or ethical propositions enter into the theory in unexpected ways and places. Maybe I can talk about that this week.
The first step in developing this new perspective is to appreciate people have preferences not only with respect to goods and services exchanged in markets but also with respect to any number of other issues, such as the subjective distributional ethics they endorse and would prefer to live under. If one is interested in talking funny, like an economist, we can say people derive “utility” not just from fulfilling their preferences about goods and services and so on, but also from fulfilling their preferences about living in what they feel is an ethical society. (If you follow my blog at all, you’ll know I question the value of using the word “utility” when talking about the normative proposition we should allow other people to follow their preferences if there are no interpersonal conflicts involved to complicate the situation, which serves as one of the fundamental value inputs to neoclassical welfare economics. Saying it in plain English eliminates all or most of the conceptual nonsense and confusion associated with equivocating on the term “utility” as it is used in economic theory and other potential definitions of “utility” one finds in ethical philosophy.)
Preferences relating to living in societies expressing different forms of distributional ethics, and the “utility” associated with those preferences, if one insists upon talking that way, are explicitly set aside in normative neoclassical welfare economics as belonging to a class of so-called distributional issues considered exogenous to that theory. Even when the philosophical crazy quilt of “social welfare functions” are admitted as a legitimate feature of neoclassical welfare economics, those distributional issues remain exogenous to the theory because the distinctive weights that feature in social welfare functions are not part of that theory and because normative results or conclusions resting upon indifference to the weights would typically also be accepted as part of that theory.
The ostensible reason distributional issues are explicitly set aside in neoclassical welfare economics is that they involve controversial ethical preferences or judgments or beliefs about how to resolve interpersonal conflicts of needs and desires, which again may involve not only goods and services but also the sort of society one prefers to live in, that cannot be resolved on the basis of ethical propositions about how to treat individuals expressing preferences when no such conflict exists or, again, if one insists on talking funny, because of the inability to make interpersonal comparisons of “utility.”
However, some preferences (and the “utility” associated with those preferences) are not similarly set aside but are taken up in the context of normative neoclassical welfare economics. Which ones? The preferences involving demand for goods and services expressed using economic power in markets. Why the differential treatment of preferences, or “utility” if one must? Because the fundamental normative propositions involved in, and required for the conclusions of, neoclassical welfare economics don’t just involve individual preferences or “utility” as defined in economics. Other normative or ethical or value inputs are involved. And those other normative propositions pertain to some preferences but not others.
What other normative propositions? Well, as I’ve discussed in previous posts, one normative or ethical or value input required for the normative argument presented in neoclassical welfare economics about the supposed optimality of perfectly competitive, Pareto optimal, economically efficient market outcomes is the implied ethical proposition we should resolve interpersonal conflicts on the basis of economic power in markets, which in turn implies or relies upon yet another ethical proposition that says we should respect, if not necessarily support as ethically optimal, some specification or definition of economic power in the form of legal specifications of property ownership to make such market resolutions possible.
The additional ethical proposition saying we should resolve interpersonal conflicts using economic power in markets, that is, resolve interpersonal disputes using the market mechanism, cannot be derived from the unrelated normative proposition about how to treat other people expressing their preferences when there are no interpersonal conflict involved, that is, from the ethical propositions about “utility” as defined in economic theory. It’s an entirely different, independent normative proposition.
So under what conditions does the normative or ethical or value proposition required for the conclusions of neoclassical welfare economics suggest we resolve interpersonal conflicts on the basis of economic power in markets? Always? Sometimes? Under certain factual conditions? Under every possible set of factual conditions?
This rather undeveloped, and indeed generally left entirely implicit, normative or ethical proposition is the one that causes problems when one tries to apply the conclusions of neoclassical welfare economics in certain difficult real world contexts involving things like future generations, the environment, animals, or even seemingly less complicated issues like education and medical care. It’s also what’s behind the controversial, if not downright dubious, ethical proposition we would create a more ethical society by increasing the extent of the market wherever and whenever possible, for example, if rather than resolving interpersonal conflicts involving preferences about social ethics including distributional ethics via one person one vote democracy, we instead instituted some sort of virtual market mechanism that could resolve those interpersonal conflicts on the basis of the economic power of those holding different beliefs or preferences.
To study the normative program of neoclassical welfare economics seriously, one must understand the normative content that enters at the stage of “utility,” that is, how to treat other people expressing their preferences in a no conflict case, at the stage of specifying or defining economic power, that is, so-called “property rights,” and at the stage of deciding which interpersonal conflicts to resolve on the basis of economic power in markets, that is, issues relating to the extent of the market. That’s the structure I’ve previously called the “onion” of bad economics to indicate the different layers or levels or stages at which controversial normative or ethical content enters normative neoclassical welfare economics. And don’t forget the all important and most pungent outer layer, which involves propositions that aren’t even really properly part of neoclassical welfare economics but often added on in practice to create the illusion pure neoclassical welfare economics is more relevant in realistic contexts than it really is, including the plethora of funny rhetorical stratagems associated with fake distributional indifference.
Interestingly, the various ways I’ve discussed this issue all seem to me to be different perspectives on what is essentially the same phenomenon. One can use the same observations to illustrate the notion of neoclassical welfare economics as an insincere form of ethical “utilitarianism.” Normative neoclassical welfare economics has a small role for what it calls “utility,” but not much really, and certainly not only that. One can also use the same observation to illustrate the notion of neoclassical welfare economics as an ethical half theory. Some relevant ethical issues are endogenous; some exogenous. Agenda control is so important in such cases, isn’t it? One can also use the same observation to illustrate the notion of normative neoclassical welfare economics as an ethical system that properly applies only to a sort of fairy land in which certain ethical issues relevant to the real world are explicitly banished, but can only be correctly applied to real world issues if those relevant ethical issues are reintroduced and addressed.
Unfortunately, economists typically aren’t very interested in serious discussions or explications of the normative program of neoclassical welfare economics. Economists typically prefer to express their personal ethical beliefs in policy prescriptions any old way they can, without worrying about clarity, consistency, evaluation, degree of controversy, or anything else. Basically, economists are bad ethical philosophers, which is why we should take the normative or ethical content out of economics and make it a true science.
Addendum
I’ve lately changed my mind about the middle layer of my onion of bad economics. In particular, I now believe it’s more sensible to present the choice to use economic power in markets to resolve interpersonal conflicts, and even the choice to support the legal conditions required to create or sustain markets, as exogenous to neoclassical welfare economics. It’s a point of interpretation, of what one believes reasonable to suppose neoclassical welfare economics is meant to say, but recently I’ve concluded it makes more sense to say neoclassical welfare economics says a good deal less than many people seem to suppose. For example, see the post Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021.
