Distributional Issues And The Extent Of The Market

I probably mentioned before, but I’m feeling too lazy right now to go back and check, so let me discuss again or maybe for the first time the distinction between so-called “distributional issues” in neoclassical welfare economics and the ethical issues associated with what I call the “extent of the market.” I think it’s an interesting area that probably leads to a certain amount of confusion and conflict, an element of bad economics from the inner and middle layers of the onion of bad economics according to my previous model, so maybe it’s something worth spending a few moments talking about.

So-called “distributional issues” are broken out for special treatment in neoclassical welfare economics because “utility” as defined in that theory does not provide a normative basis for resolving interpersonal conflicts of needs and desires on the basis of economic power in markets. However, the idea of “distributional issues” seems a bit under-developed. It’s not really clear whether it’s meant to address all of the ethical issues associated with resolving interpersonal conflicts of needs and desires using economic power in markets or just some of them.

Off the top of my head, I’d say there are at least two rather distinct sets of ethical issues related to using economic power to resolve interpersonal conflicts in markets we must consider. One is based on people. Does one agree everyone has the economic power he or she ought to have based on his or her characteristics and behaviors? One is based more on situation or context, the type of interpersonal conflict involved. For example, should a vaccine for a raging pandemic be allocated on the basis of economic power in markets like any other good, or should we allocate it according to medical need or some such basis?

Are both sets of issues sensibly considered “distributional issues” relating to using economic power to resolve interpersonal conflict? Or is it more sensible to consider the person based issues distributional issues and to consider the other set of issues as involving something else, such as the proper extent of the market? By extent of the market I mean the potentially controversial ethical issue of when we should use economic power and the market mechanism to resolve interpersonal conflict and when we should resolve such interpersonal conflict on some other basis. Should the vaccine be allocated to rich folk first or on the basis of medical need? That sort of thing.

Yes, we could contrive to ensure we give those with higher medical need the necessary economic power to outbid rich folk and make things turn out the way we want, so there seems some undeniable point of connection between the two, but that seems as though it might be quite cumbersome and difficult in practice, doesn’t it? We have quite a lot of very rich, that is to say economically powerful, individuals indeed. I would say the nature of the issue suggests a different sort of policy response might be advisable. Something that doesn’t involve adjusting the distribution of economic power so much as simply coming up with a different legal basis for allocating whatever it might be, let’s say a vaccine. 

Or to look at the issue a different way, I suppose one could certainly calculate a net “welfare loss” if rich people don’t get the vaccine first based on their relative ability (and willingness) to pay, but the real issue is whether we consider it normatively or ethically relevant in this situation. It’s not about the conditions of the market, per se, it’s about the issue of whether market mechanisms are even ethically appropriate in that context.

Unfortunately, as you may or may not have noticed, neoclassical welfare economics doesn’t really contain any explicit normative propositions relating to the extent of the market, about when using economic power in markets is ethically advisable, despite that issue seeming every bit as potentially controversial as the “distributional issues” it explicitly sets aside because of their ethically controversial nature (only to have that explicit exclusion happily ignored in practice by purveyors of bad economics using the rhetorical techniques associated with fake distributional indifference, which I’ve discussed many times before and no doubt will discuss many times in the future). Suggesting some interpersonal conflicts should be resolved on the basis of economic power in markets is a much weaker ethical statement than saying all such conflicts must be resolved on that basis alone. The latter statement is much more controversial than the former. Does neoclassical welfare economics contain the ethical proposition all interpersonal conflicts should be resolved on the basis of economic power in markets? Or is that issue meant to lie outside economic theory because of the ethical controversy, like distributional issues?

This is partially what I have in mind when I discuss bad economics, in this case involving problems built into neoclassical welfare economics itself as opposed to add-ons like fake distribution indifference. The value inputs used in normative neoclassical welfare economics are unclear, opaque, inconsistent. Economists make bad ethical philosophers. We should take the ethical content out of neoclassical welfare economics and put it back with democratic government and the people where it belongs.  

The Free Market As Rhetoric

I’m sure I’ve written on the pseudo-economic concept of the “free market” a couple of times now, but I find it an interesting concept. I seem to see references to it all over the place, and from people who really ought to know better. It makes me think the “free market” must be one of the great rhetorical inventions of all time. The epicenter of economic equivocation. The nexus of nonsense. The crux of confusion. You think I’m overdoing it? Well, maybe. Bad economics is a rather well developed field at this point. Anyway, let’s take another whack at it today, shall we?

The first question any reasonable person might have about this “free market” is whether it’s meant to be a theoretical construct, something like the “perfectly competitive market” discussed in the theory of neoclassical welfare economics, or it’s meant to be an actual, existing instance of a real market system. If I were to open my window some fine day might I behold the “free market?” Or is that taking things too literally? Is it more of an unreachable goal of abstracted perfection than a real thing that might exist in the world?

It matters because there are theoretical constructs from neoclassical welfare economics, like perfectly competitive market outcomes, Pareto optimums, and so on, that are typically meant to be evaluated in the rarefied atmosphere of what I call the Fairy Land of Economic Theory, in which certain ostensibly controversial ethical issues relating to markets and economic systems are set aside, including distributional issues but others as well if one is seriously interested in avoiding ethical controversy of the sort associated with distributional issues, or eliminated through use of false factual premises or incompletely defined sets of conditionals like perfect rationality or perfect information that are clearly designed to avoid ethically controversial situations. So discussing a “free market” presumed to exist in the real world is necessarily a rather different issue from discussing an artifact from the Fairy Land of Economic Theory.

If the “free market” is not meant to be just a dumbed down version of the theoretical construct of the perfectly competitive market from neoclassical economic theory, what sort of market structure or structures are we accepting into the definition? Just whatever happens happens? Unimportant? Doesn’t matter? Because it’s “free?” So, for example, monopoly is just fine in the context of the “free market?”

If the “free market” is meant to be just a dumbed down version of the theoretical construct of the perfectly competitive market, what is the “free” about, I wonder? Are we making the empirical claim that real markets will necessarily run to perfect competition once “free?” Why? Given the stringent requirements of perfect competition, one wonders if any instance of a perfectly competitive market exists anywhere in the world. Certainly seems a far cry from supposing every real market is destined to take on those characteristics as a matter of course. 

And what, I wonder, is the word “free” about anyway? Because surely we’ll need government monopoly of power, police, courts, prisons, property, contracts, and so on if we’re meant to have a market. We’re certainly not talking about anarchy. One may be free to do what likes under the legal conditions democratic government has set up to define and make possible the market, but one is certainly not free to do whatever one likes more generally. I suppose we’re just saying we won’t do anything to address market failures and distributional and other ethical issues? So the “free market” is really only “free” from improvement and correction by the same democratic government that created it in the first place and that actively maintains the conditions for it to continue to exist? Seems an interesting use of language.

Well, let’s cut to the chase, shall we? Whenever I read or hear someone talking about the “free market” rather than something sensible I recognize from real economic theory, like market structure, market failure, “utility,” distributional issues, legal property specifications, and that sort of thing, I usually assume the person is a purveyor of bad economics interested only in using sloppy, ill defined quasi-economic rhetoric in a rather transparent attempt to pull a fast one on people.

The odd thing is one can often hear trained economists waxing eloquent about the “free market,” so one must suppose quite a few economists are also purveyors of bad economics. Seems odd. Funny old field, isn’t it? Interesting pedagogy, that’s for sure. Are economists experts, fools, charlatans? Some of each? I wonder, has a less rigorous field than economics every found a home in higher education? A field less interested in correcting popular misconceptions and errors about its subject matter? Doesn’t seem likely, does it? We should fix bad economics.

Ideology and Ethics In Economics

I had a fun conversation the other day with another economist interested in addressing the normative content of neoclassical welfare economics, and we had a little disagreement relating to ideology and ethics. It occurred to me this is probably yet another source of confusion that complicates addressing bad economics, so maybe I can discuss that today.

Ideology is typically raised in the context of the philosophy of science to explain how normative values can affect positive theories evaluated on empirical, objective criteria. The basic idea is that one’s ideology can encourage one to generate new theories consistent with it and spur one to neglect theories inconsistent with it, affect one’s choice of what issues to study, recommend attractive and ostensibly promising theoretical approaches, etc. There is little question value judgments and normative or ethical propositions operating through ideology can affect the development of any sort of positive science, including positive economics. However, there is a natural limit to the role of ideology in positive science in the sense that scientific theories are meant, eventually, to be objectively evaluated by their ability to predict observable phenomena. It’s not just about what feels good or right to the scientist. If a scientist, perhaps operating with a different ideology, generates a theory that is more successful at predicting or explaining empirical phenomena, then that theory will eventually be accepted as the stronger theory. Well, that’s what one expects will happen in any healthy field of science anyway. In that sense, scientific theories are positive theories, not normative theories, despite the motivating influence of normative ideology. Scientific theories are ultimately about fact, reality, observable phenomenon. On their own, positive scientific theories can never tell anyone what he or she ought to do. One has to add normative or ethical content to do that. When it comes to intellectual artifacts like theories and propositions, the positive versus normative split is about whether the theory or proposition is question proposes to talk about what is or what ought to be, about empirical fact or about what people ought to do. It’s not really about the presence or absence of normative factors that may or may not impinge on the development or rate of acceptance of that theory or proposition.

When it comes to normative neoclassical welfare economics, a theory that purports to tell people what economic systems and arrangements and outcomes are socially optimal, which people should prefer, the role of normative value is more direct and obvious than the operation of normative values via ideology in positive economics. Normative neoclassical welfare economics is basically a form of ethical or moral philosophy. It takes normative or ethical inputs, including famously the ethical proposition we should try to maximize total social “utility” as defined in neoclassical economics, combines them with factual premises about the world (often misidentified in the context of normative neoclassical welfare economics as simplifying assumptions, which is a concept appropriate to positive economics but not normative economics), to arrive at obviously normative conclusions. Talking about the role of values and normative or ethical propositions in neoclassical welfare economics does not require the concept of ideology and, indeed, bringing up ideology tends to confuse the issue. If a philosopher presents a rights based ethical theory it seems a little nonsensical to talk about the potential role of “rights based ideology” on the person creating the theory or on the development of the theory. I mean, he or she is saying that value is involved. That’s what the theory is about. One can just discuss it directly at that point.

Confusingly discussing ideology when one has in mind the ethical or normative content of normative neoclassical welfare economics is a reflection of the confused mix of science and ethics, fact and value, positive and normative, one finds in neoclassical economics in general. It causes one to pause and ask whether one is talking about normative or positive economics. It confuses the issue, even more so when one jumps back and forth between discussing the role of ideology in positive economics and the value or normative or ethical inputs of normative economics. We should really simplify the situation. We should fix bad economics by taking out the normative content and making it a true science, with ideology the only route by which values would then affect the theory. Explicit normative or ethical judgments relating to evaluating market systems and outcomes belong with the people and should be expressed through democratic government.

What Are Economists About?

I’ve discussed a number of times in this blog the peculiar combination of activities, interests, and methods one finds among academic economists, even among the restricted cadre of economists working within the intellectual confines of neoclassical welfare economics, that is to say, conventional, traditional microeconomics. It occurs to me after talking with a wide variety of random economists online that the rather confused, non-rigorous state of economics as an academic discipline had created a situation in which different economists have entirely different conceptions of what they’re actually meant to be doing, about what the field of economics is meant to be all about. Seems to create quite a bit of confusion. Let’s take a quick look at the main contenders this week.

Some economists working with neoclassical economic models seem to believe they’re doing science, that is to say, predicting empirical phenomena. This is the group who views modeling assumptions like perfect information and perfection rationality as obviously false simplifying assumptions that are instrumental for model building and believe the resulting models can be evaluated as a unit with respect to how well they predict observable economic phenomena.

Some economists working with neoclassical economic models including the seemingly normative or evaluative models one finds specifically in neoclassical welfare economics seem to believe they’re simply doing mathematics in the form of solving random optimization problems. That is, they don’t believe it’s their role to actually evaluate any normative inputs or indeed factual premises that appear in their math problems or models. They’re working strictly with logic and mathematics and producing theories of the general form: if X, then Y. Other people can make of their theories and conclusions what they will. For these economists, assumptions like perfect rationality and perfect information have exactly the same status as inputs to their math problems as assumptions like the moon is made of green cheese and we need to get it to planet Earth. If we have X space ships traveling at speed Y, how many years will it take?

Some economists working with neoclassical welfare economics seem to believe they’re doing social ethics. They believe their role is to serve as ethical arbiters, explaining to others what economic systems and outcomes they should find optimal or preferable to others. They may be using logic and math to make their arguments, but they also pretend to understand and to have evaluated both the normative or ethical inputs and any factual premises required for their normative or ethical conclusions. They think they’re producing theories of the general form: X, therefore Y is normatively best. Other people can always disagree with them, but if they do they either don’t know how to do logic or math or their ethical beliefs are flawed in some way. They view assumptions like perfect rationality and perfect information as true factual premises that are logically required to deal with certain otherwise ethically dodgy implications of the proposition we should maximize total social utility. They’re likely to respond to doubts on the truth of those assumptions with a haughty, “Do you think people are stupid?”

Some economists working with neoclassical welfare economics seem to believe they’re engaging in the art of telling stories or making myths. They want to help other people “understand” markets and the economy by constructing psychologically appealing frameworks for thinking about such issues. They seem to care less about the empirical predictions of science and the normative or ethical inputs and conclusions of social ethics as they do about just getting other people to “think like economists,” to frame issues in a certain way, to adopt a certain perspective when thinking about economic matters. They don’t much care if assumptions like perfect rationality or perfect information are true or not. They’re all just part of the story, plot devices, like the Great Fairy Castle in the Sky the hero visits in chapter five. However, to work as intended some elements of the story must bear some relation to reality. This is the sort of thinking that leads some people to observe that economic theory only changes when the gap between theory and reality becomes too big to ignore, as a newspaper article I read recently had it.

Some economists working with neoclassical welfare economics seem to think they’re doing some combination of the preceding. A little bit of this, a little bit of that. Jack of all trades, master of none. Assumptions are sometimes interpreted one way, sometimes another. Normative inputs and conclusions are sometimes defended, sometimes not. These are the people who are fond of portraying economic theory as a magical, Mary Poppins sort of purse or toolbox such that nothing in particular is really entailed by the theory at all, it’s just a matter of whatever one feels like saying or doing from one moment to the next. This is the annoying sort of slippery, shape shifting economist who is likely to bring to mind the sarcastic rebuff, “Whatever you’re talking about, I’m talking about the other.”

It’s a comical sort of field, isn’t it? Has there ever been such a sloppy, intellectually ill-defined field of inquiry admitted into an academic environment that thinks so highly of itself and proclaims its own fake rigor with such pathetic persistence? We have to fight bad economics to be sure, but I wouldn’t really expect a lot of help from perpetually confused academic economists. Not until they decide amongst themselves what economics is all about, anyway. No, it will apparently depend upon non-economists learning the normative or ethical program of neoclassical welfare economics, interpreting it correctly, addressing bad economics, and working around the self-proclaimed experts on the subject.

The Power Of Myth In Economics

I had a sort of epiphany a while ago now related to what people might have in mind when they discuss “ideology” in the context of neoclassical welfare economics. I love it when that happens. Probably something everyone else figured out long ago. Took me a bit longer to get there, but you know my motto, or one of my many mottos anyway: better late than never. I’m never really satisfied with an idea unless and until it makes some sort of sense to me, personally. Maybe I can take a little break from more theoretical concerns and discuss ideology today?

I’m thinking now there seems an interesting gray area in discussions about what economics is all about that ostensibly involves “understanding” the economy and that seems confined neither to the purely scientific method of evaluating a positive theory by successful prediction of empirical phenomena nor to the philosophical method of evaluating a normative theory by investigating the plausibility and controversy associated with normative input and conclusions and by evaluating any factual premises and logic used to get from the inputs to the conclusions. A third way of theory evaluation, so to speak. This “understanding” may incidentally generate empirical predictions and normative or ethical propositions, but the actual evaluation of those intellectual artifacts seems curiously unimportant, irrelevant, secondary. I wonder now if this mysterious additional dimension of “understanding” may related in some way to the worlds of story telling.

To appreciate the significance for me, it may help to realize I’ve long wondered what people have in mind when then discuss “ideology” in the context of neoclassical welfare economics. For some time, I thought they must be referring to the typically opaque normative content or to a sort of internal wellspring of positive and normative theorizing. At the same time, I’ve long puzzled over this notion of “understanding” that seems to crop up along side of the perfectly sensible notion of predictive ability in the context of evaluating ostensibly scientific or positive economics in general. So it was a bit of a discovery to me to realize the concept of ideology may involve something rather more pervasive, powerful, and impenetrable than opaque ethics or a wellspring of ideas. What I have in mind is an entirely different mode of evaluating intellectual artifacts based not on the normal methods of evaluation proper to positive or normative theories but based on psychological criteria instead. An evaluative scheme in which it doesn’t necessarily matter if predictions turn out to be correct or normative arguments make any sense or are normatively plausible or acceptable or controversial because the important thing is achieving a mentally and emotionally appealing and coherent story or “understanding” of the economy. The power of myth.

Might the enduring power and influence of normative neoclassical welfare economic derive simply from the fact some or perhaps a great many people enjoy contemplating what I call the Fairy Land of Economic Theory? A beautiful realm where everything is simple, everyone is rational, everyone knows everything, there are no ethical controversies, and matters of interpersonal conflict and relative power are never an issue? Might it be that all or a good part of the problem of bad economics is simply that some people’s heads inhabit this lovely Fairy Land of the conservative imagination, but their bodies unfortunately inhabit this mundane, messy, and rather less than entirely beautiful world of interpersonal conflict, economic power, human diversity, suffering, and ethical controversy? That they much prefer to think about the one but perforce interact with the other? When it comes to bad economics are we talking about just a confused mix of science and ethics, or a confused mix of science, ethics, and myth?

Well, I suppose it’s really neither here nor there for me and my personal project anyway. My primary concern is straightening out bad economics by discussing the obscure and opaque normative content of neoclassical welfare economics in both theoretical and applied contexts. I’m concerned and indeed driven to establish the truth and to respect it. I’m not concerned at the moment if others can’t be bothered or don’t care or are not in an emotional or psychological state to contemplate the truth. I suppose I have a sort of faith that truth is important and always prevails in the long run. That truth will out. Vincit omnia veritas. But I think now I might understand and have a bit more respect for people who look at the issue from a different perspective, one focused less on what’s rational, logical, scientific, true, and more attuned to unconscious dreams, unstated desires, fundamental psychological needs. It’s all good. Seems plenty of room for different approaches when it comes to confronting the baleful influence of bad economics.