Equivocation And Purely Economic Evaluation

I wasn’t sure I even wanted to do a storm this week because of the holidays, but then I saw some bigwig economist had delivered a funny policy pronouncement on Twitter and I thought maybe we should do one on what it means to evaluate a policy solely on economic terms. (If you really insist upon knowing the details, it was Larry Summers talking about some policy or other relating to student debt, although that’s not really important here. Might just have easily been any one of many such economists talking about any one of many such policy issues. I classify Mr. Summers as a bigwig economist because he’s a former Secretary of the Treasury, former director of the National Economic Council, and former president of Harvard U, but I don’t mean it like that. I’m just saying we’re not talking about Dr. Joe Blow, assistant professor of economics who teaches Economics 101 down at the local community college, if that’s what you had in mind. That would be an entirely different issue.)

The bigwig economist began his string with a rather obvious oxymoron in which he claimed to base his policy evaluation “purely in terms of economic impacts,” which would be quite a trick given the latter are conventionally considered positive phenomena. It’s an oxymoron because, of course, one can’t really derive an “ought” from an “is,” normative is different from positive, etc. Although positive facts about reality may be important and relevant, one must have some normative or ethical content in there somewhere if one is to make an evaluative statement. I don’t really want to make a big deal about it here because a casual attitude to the positive / normative distinction is hardly an unusual problem in academic economics, is it? Interpreted benignly, it’s an occupation hazard generated by trying to be jack of all trades, master of none. A common culprit is simply assuming everyone has the same goal in mind, maximizing “utility,” welfare variously defined, fairness variously defined, output, employment, whatever, without really identifying, analyzing, or evaluating those normative goals, or considering how they work with one another. A common result is delivering some policy prescription or other with enormous levels of normative controversy without identifying, understanding, or addressing the controversy at all or transferring it to a question about some positive issue that might also be involved.

Although evaluating anything “purely on the basis of economic impacts” is risible nonsense, there is some explicit normative content in neoclassical welfare economics, a component of “economics” surely, so a sympathetic reading might convert the phrase to something like  “purely on the basis of economics” or “purely on the basis of economic theory.” Unfortunately, the bigwig economist’s policy evaluation also obviously went beyond the normative content of neoclassical welfare economics, as he delved, in part, into issues like whether the policy in question was regressive or progressive, who it helped, who it hurt, etc. Although those issues are perfectly acceptable positive issues for economists to study, the normative significance of such positive information for policy evaluation, per se, is famously exogenous to the normative content of neoclassical welfare economics. But I don’t really want to make a deal about that right now either because supplying one’s own personal normative inputs while claiming they’re part of economic theory is also hardly an unusual problem in academic economics. Another occupational hazard, similar to the first, perhaps, or perhaps something else.

No, I’m rather more interested in a somewhat more advanced, or perhaps simply rhetorically cleverer, version one sometimes encounters that may appear less obviously peculiar than the version that particular bigwig economist provided in that particular string. According to the advanced version, if one is evaluating some policy or other “strictly from the perspective of economic theory” or “purely in economic terms,” or “purely as an economist,” etc., then one will ignore distributional ethics and issues.

What’s wrong with that? Distributional issues and ethics are famously exogenous to the normative content of neoclassical welfare economics, are they not? Of course they are. The difficulty involves the meaning of evaluating a policy involving those issues. What exactly does that mean? This is where the ethical half-theory structure of neoclassical welfare economics can cause problems. If it were a full ethical theory, one could simply evaluate the policy under the ethical theory presented, similar to how one might evaluate any policy under any ethical theory. However, when it comes to ethical half theories, one has a choice of how to present the situation. On the one hand, one might simply say one cannot really evaluate the policy in question under the ethical half-theory because doing so involves exogenous ethical issues. Easy peasy. On the other hand, one might say one can evaluate the policy with respect to the limited ethical issues covered by the ethical half-theory, but such an evaluation has no particular significance in a broader context involving the excluded considerations as well.

Why so complicated? Although an ethical half-theory may choose to not take up certain issues, those issues are still there and still relevant in reality, barring an explicit, endogenous argument one should not consider them normatively or ethically significant, of course. If neoclassical welfare economics contained an explicit argument we should place no ethical or normative significance on how to resolve interpersonal conflicts of preferences, neoclassical welfare economics would be an absurdly controversial full ethical theory. It would be absurdly controversial because most people likely have ideas about the ethical resolution of interpersonal conflicts of preferences, whether it be by welfare, need, strength of preference, fairness, justice, rights, or any other basis.

Purveyors of bad economics in the conservative style play games in this area. They deliver policy evaluations “as economists,” or “from the perspective of economic theory,” without explaining the significance of such evaluations in the peculiar context of ethical half-theories. It’s hard to avoid the suspicion they’re playing rhetorical games, hoping those reading or listening will confuse neoclassical welfare economics with an oddly simply and uncontroversial full ethical theory, and thus attach exaggerated significance to what one can say solely on that basis. In a sense, one can think of the issue as equivocating on terms such as “evaluating policy X on purely economic terms” between the sense relevant to the context of an ethical half-theory and the sense relevant to a full ethical theory.

As a nice example of the sort of rhetoric typically involved, the bigwig economist’s string ends with noting politicians may be unable to act according to his sage policy evaluation because they may need to “compromise” with “important constituencies” and “political imperatives.” He couches the statement in the faux or mock humility so typical of economists of a certain type, proclaiming he “can not judge the overall wisdom of the decisions made,” or to paraphrase, he supposes we must accommodate the unethical idiots of the world in some old way. By now you must recognize the language of anti-democracy bad economics in the conservative style when you see it, right? The issue under consideration involves conflicting ethics, not objectively correct or even uncontroversial ethics versus exigencies posed by important constituents and political imperatives. If we’re talking about neoclassical welfare economics, it’s an ethical half-theory that cannot be used to evaluate policies on its own. Exogenous and controversial ethical inputs are involved, and there’s nothing suspect or illegitimate about voters delivering them via democratic government. We’re not really talking about wise technocrats / ethical arbiters delivering uncontroversial normative or ethical prescriptions only to have clueless democratic government unethically and unfortunately “interfere” with them in practice to accommodate the ignorance of voters. That’s bad economics in the conservative style, not real neoclassical welfare economics.

Have you made out your new year’s resolutions? If not, may I suggest adding addressing anti-democracy bad economics in the conservative style? Good time for it. Just saying. 

Bad Economics and Macroeconomics

Can we talk this week about the relationship of bad economics in the conservative style to so-called macroeconomics? It’s a bit of a digression from my usual concerns, but the term came up the other day and it got me thinking about it.

If one is familiar at all with the field of economics, one may have encountered one way of dividing it up in terms of so-called microeconomics and macroeconomics. As with everything else in economics, the distinction is complicated by the confusing hash of normative and positive. In a positive context, there is some sense to the reference to scale whether microeconomics is defined as a dodgy sort of “science” of individual and firm behavior, arbitrary and consciously unrealistic engineering “models” of the same, or a random toolbox of mathematical optimization techniques. In a positive context the basic idea is that microeconomics addresses smaller scale economic phenomena than macroeconomics, which studies systemic outcomes like output, employment, growth, etc. That bit seems fairly reasonable.

However, as anyone who has ever read one of my tweets will surely appreciate, I’m rather more interested in normative economics than positive economics, and in the context of normative economics, neoclassical welfare economics, the distinction between microeconomics and macroeconomics appears rather less sensible. That’s because neoclassical welfare economics is really macroeconomic in scale, dealing with markets, market systems, economic systems in general, but closely related to the theory and method used in microeconomics, so-called neoclassical economic theory. That means the subject matter of neoclassical welfare economics overlaps that of macroeconomics, and indeed can be seen an alternative or competitor to macroeconomics, serving at times as an impediment to policy prescriptions emanating from macroeconomics.

Recall that neoclassical welfare economics is a normative or ethical half-theory based on normative inputs about how to behave toward other people expressing preferences, but confusingly discussed in terms of an idiosyncratic definition of “utility,” and generating normative outputs relating to social optimums based on that utility. As I point out often enough, it’s an ethical half-theory because the normative argument it contains is developed in and for an arbitrary, stylized world that differs from the real world in certain respects and from which certain real world ethical issues have been banished.

If neoclassical welfare economics is an ethical half-theory, then macroeconomics (defined to exclude it) can be viewed as an ethical non-theory. That is to say, there are no normative inputs in macroeconomics, no definition of normative optimality, no normative conclusions. One may infer someone is interested in certain outputs and so on, but there is no explicit argument in macroeconomics they should be. If there are normative inputs, they operate as with other sciences through the interest and motivations of practitioners, the issues studied, etc.

The important point here is that among the outputs of interest in macroeconomics one notable omission is “utility” of the sort defined in neoclassical welfare economics, the maximization of which is the ostensible goal of neoclassical welfare economics. That means policy prescriptions emanating from neoclassical welfare economics and macroeconomics will always address entirely distinct goals or objectives. There’s no reason to expect congruity between the policy prescriptions of the two theories. The vacuity, the practical emptiness and irrelevance, of real neoclassical welfare economics properly applied in real contexts can easily disguise this fact. However, that is not at all the case with expansive bad economics in the conservative style, which adds normative content relating to economic power and markets. Viewed through the lens of bad economics in the conservative style, the relationship between neoclassical welfare economics and macroeconomics can become quite fraught and contentious leading to confusion and conflict, popular misunderstandings, etc. That is particularly the case when one considers the tendency of bad economics in the conservative style to conflate “utility” with outputs of interest in macroeconomics, adding to the confusion.

Addressing ubiquitous bad economics in the conservative style should be of at least as much interest to macroeconomists as to microeconomists working with the neoclassical economic theory that underlies neoclassical welfare economics. It’s really an issue for all economists. Macroeconomists may not be interested in the methods of neoclassical economics as a basis for studying macroeconomic issues, or in real normative neoclassical welfare economics, but they may be interested in addressing bad economics to make space to discuss macroeconomic policy.

Fake Distributional Indifference, One More Way

It’s just getting comical now, but I thought of yet another nice way to explain the rhetorical technique of fake distributional indifference in bad economics in the conservative style. I know I just did two versions, but maybe I can do one more before I move on? Again, sorry to keep banging on about this one thing, but to me it’s a significant thing, rarely acknowledged, that creates a lot of confusion and conflict. It seems worthwhile to try to find ways to explain it different people may have find intuitively obvious.

Imagine, counterfactually, that neoclassical welfare economics demonstrated every (economically) “efficient” (defined with respect to “utility”) outcome was superior to every (economically) inefficient outcome, under the normative inputs endogenous to that theory. (And to simplify matters, let’s say, again counterfactually, there are no other differences between the stylized word of neoclassical welfare economics and reality relevant to applying the normative argument developed in and for the world of neoclassical welfare economics to reality.) That would mean someone working strictly within the framework of neoclassical welfare economics and applying it to reality could suggest always moving to any economically efficient outcome, although choosing the overall ethical optimum from among such outcomes would be exogenous.

Now contrast that case to the factual case in which neoclassical welfare economics demonstrates merely that particular (economically) “efficient” outcomes are normatively superior to particular (economically) inefficient outcomes under the endogenous normative inputs to that theory. In a realistic context, what could one working strictly within the normative framework of neoclassical welfare economics be able to suggest in that case? The same as before? The change is irrelevant? Again, we should just get to any economically efficient outcome? That’s odd.

It’s odd because it’s incorrect. It’s an expression of the rhetorical technique of fake distributional indifference from bad economics in the conservative style. Obviously, what one can say under the new conditions is different from what one could say before. In a realistic context, one working only with the normative inputs endogenous to neoclassical welfare economics would be unable to offer up any generalized policy prescription to move toward economically efficient outcomes. Why? Distributional indifference, of course. Any possible (economically) efficient outcome to which we might move will have (economically) inefficient outcomes to which one operating only under the normative inputs in neoclassical welfare economics will be, or anyway should be, indifferent. That fact we can show any possible (economically) efficient outcome to which we might move is superior under the normative argument in neoclassical welfare economics to some (economically) inefficient outcomes is not enough to sustain the former general policy prescription.

Correctly applying neoclassical welfare economics under realistic conditions implies indifference to (economic) efficiency unless one is also expressing exogenous normative or ethical inputs serving to eliminate distributional indifference. The rhetorical technique of fake distributional indifference in bad economics in the conservative style consists of purveyors of bad economics, often economists, supplying the requisite exogenous normative or ethical inputs themselves, but not identifying or evaluating them. That can easily lead to anti-democracy sentiment, as the ignorant view politicians responding to the normative or ethical views of voters to be “interfering” with the ostensibly more correct and well developed ethics of purveyors of bad economics in the conservative style.

Saying the exogenous normative decisions have already been delivered via existing laws relating to markets and the definition, distribution, and use of economic power, and can therefore be treated as givens for purposes of applied neoclassical welfare economics, is disingenuous. The presence and status of those exogenous normative inputs are not typically discussed in bad economics in the conservative style, and the issue of whether voters operating through democratic government should revisit, revise, amend, modify those inputs is quite often, indeed typically, the issue at hand. The normative or ethical proposition current democratic government should not revisit, revise, amend, modify the decisions of past democratic government is in some sense just as exogenous and anti-democratic as the proposition some technocrat acting as ethical arbiter should decide those issues. 

Everyone, including economists, should fight bad economics in the conservative style because of the close association of that essentially rhetorical and misleading intellectual artifact with the rise of anti-democracy sentiment in the USA and elsewhere. Conservative economic ideology, policy, and anti-democracy sentiment are not simply the result of applying the few, relatively uncontroversial normative inputs of the ethical half-theory of neoclassical welfare economics to reality.

Equivocation On Efficiency In Bad Economics

Let me do a quick follow-up to my post from last week about what I called the dual nature of labor, and capital, in neoclassical welfare economics, but this time from the perspective of equivocation on the term “efficiency,” before I forget about it entirely. I know, I know. “How many ways can one say the same thing?” Or maybe, “Hansel, do you ever stop talking once you get started on some issue?” Sorry. Sometimes I have a bit more to say about some issue but my initial post seems already overly long. Should I just walk away? Doesn’t sound like me. 

“Production efficiency” and “economic efficiency” are two different concepts or, if one prefers, the same concept applied in two very different contexts. The former is about output, goods, services, money, etc.; the latter is about “utility” as it is defined in neoclassical welfare economics. Money, goods, services, “utility,” are related in some ways, but they’re not identical or interchangeable. One can say things about output, goods, money, one can’t say about “utility.” Confusion in that area allows bad economics in the conservative style to thrive.

“Economic efficiency” relates to a situation where we cannot increase anyone’s “utility” without reducing someone else’s absolute (as opposed to relative) “utility.” “Economic efficiency,” viewed as a synonym for “Pareto efficiency,” can be applied to things other than “utility,” but in the context of neoclassical welfare economics, when we talk about some system or outcome being “economically efficient,” we mean with respect to “utility” specifically. “Economic efficiency,” based on “utility,” is important in neoclassical welfare economics because, and only because, of what it says about “utility,” about which neoclassical welfare economics is ostensibly all about. When used in the normative proposition we should only consider policies that are “economically efficient” or promote “economic efficiency,” it involves an exogenous normative input that goes beyond neoclassical welfare economics. Neoclassical welfare economics is indifferent to interpersonal changes in “utility” because we famously cannot make interpersonal comparisons of “utility” using the type(s) of “utility” used in neoclassical welfare economics. “Economic efficiency” is not a combination of two normative criteria, one about “utility” and one about “efficiency” in general, defined with respect to anything and everything. Efficiency defined with respect to anything and everything is nonsense.

“Production efficiency,” defined relative to output, goods, services, money, etc., is normatively significant in neoclassical welfare economics only to the extent it relates back to “utility” as defined in neoclassical welfare economics. Neoclassical welfare economics is a normative or ethical theory based on the proposition we should “maximize” total social “utility” (if one insists upon expressing the normative or ethical argument in that indirect, awkward, and misleading way), not maximize total output, goods, services, money, economic power, etc. If one doesn’t know what happens to “utility” under some policy or other, then neoclassical welfare economics has nothing to say about it and is indifferent.  An economist limiting his or her recommendations to what that theory says will thus express indifference. It is theoretically incorrect in neoclassical welfare economics to break distributional indifference derived from an inability to distinguish outcomes on the basis of “utility” by introducing other random normative criteria, such as “production efficiency” relative to output. 

If one misplaces “utility” and concentrates on disembodied “efficiency,” one may suppose efficiency relative to other random goals also has normative significance in neoclassical welfare economics, allowing one to rank outcomes even if one doesn’t know anything about “utility.” That can lead to funny notions like neoclassical welfare economics attaches normative significance to the size of the “pie” but not the distribution of the “pie,” that the former issue is endogenous to neoclassical welfare economic and the latter exogenous. That is incorrect. That argument simply takes the equivocation on the term “efficiency” and transfers it to the term “pie.” Yes, equivocation on various terms relating to “utility,” money, output, goods, services, is a theme of this week’s post. Distributional indifference means we don’t actually know what happens to the size of the utility pie when we change the size of the output pie while also changing the distribution of the output pie, if there even is a utility pie to talk about.

Under the old but still sometimes used or at least implied inaccessible internal perceptions of satisfaction from preference fulfillment “utility,” the utility pie may well get bigger even as the total output pie gets smaller, if we’re changing the distribution of the output pie at the same time. Under individual preference rank “utility,” there is no utility pie. It’s ungrammatical nonsense to even talk about it. But that doesn’t meant we can just substitute another random pie instead. “Sorry Hon, no utility pie today, or ever. How about some nice output pie instead?”

That’s what real distributional indifference is all about. One may have normative or ethical beliefs relating to whatever one likes, including output, but those are exogenous to neoclassical welfare economics. Real neoclassical welfare economics is about a particular definition (or in practice two particular definitions) of “utility.” When one draws the line between what’s endogenous and exogenous to neoclassical welfare economics incorrectly, one blurs the distinction between speaking as an economist about economic theory and providing one’s own random normative inputs, thereby creating confusion and conflict. What puts the “bad” in bad economics in the conservative style bad is dishonesty. It purports to stand in a certain relationship to neoclassical welfare economics when it actually goes beyond it without adequately identifying or evaluating the additional normative content.

And if we can just return to output pie for a moment, I suppose I should mention one can also commonly find in bad economics in the conservative style a sort of equivocation or conflation relating to different output pies. “Production efficiency” is defined relative to producing whatever level and mix of output falls out of meeting demand from some particular distribution of economic power. It’s about existing or status quo distributions of economic power. That is to say, one doesn’t normally see discussions of plain English “efficiency” defined relative to some theoretical maximum output, the largest output pie possible, regardless of whether that’s the output pie that would result on the market from a given distribution of economic power. “Production efficiency” defined relative to producing the output called forth by any given pattern of economic power can conflict with plain English “efficiency” defined relative to a theoretical maximum total output. One must keep in mind what output goal one has in mind, which is a particular instance of the general proposition that when thinking about efficiency one must keep in mind what goal one has in mind. It’s interesting because manipulating the distribution of economic power, including even through input prices, can increase demand and thus increase the size of the output pie, even while conflicting with “production efficiency” relative to the production of some status quo output pie.

What happens to output pies defined with respect to various output goals when various policies are undertaken is a positive, empirical issue. The main point, however, is that any normative significance is exogenous to neoclassical welfare economics unless those changes can be related back to “utility.” If one wants to do conservative economics as an extension of neoclassical welfare economics with additional normative inputs, and one identifies those additional normative inputs, discusses them, helps people evaluate them, then well and good. But one shouldn’t play games with neoclassical welfare economics, that creates confusion and conflict, that’s bad economics in the conservative style. 

Dual Nature Of Labor, And Capital

Someone mentioned the dual nature of “labor” in neoclassical welfare economics the other day. It’s something I find interesting, as well. Maybe I can say a few more words about that this week? If you’re keeping track and amused by it, we’re back in the core of the onion of bad economics: funny bits of neoclassical welfare economics itself that may lead some people to bad economics in the conservative style.

In neoclassical welfare economics, “labor” can refer to both an input or factor of production, on par with capital, for a mental picture let’s say like a wrench, but also often people, the locus of the “utility” about which the theory is ostensibly about, unlike a wrench. Where this dual nature of labor tends to cause problems is in the context of policies designed to change the distribution of economic power, not as in the Fairy Land of Economic Theory by changing the “initial endowment” of economic power, but in reality.

In a perfectly competitive market, the price of a wrench, as a productive input, should tend to whatever it adds in value (money) during the production process under some pattern of demand based on the distribution of economic power, its “productivity.” If one pays more for a wrench than it adds in monetary value during the production process (setting aside other potential sources of value), one is wasting money, not getting as much from one’s productive resources as one might, not expressing production efficiency. The price of the productive input of labor, the wage, is subject to the same market forces and presumably also tends in perfectly competitive markets to whatever value it adds under some pattern of demand based on the distribution of economic power. The price of labor or wrenches may be less than the marginal product if the labor or owners of wrenches are desperate, need money, competing to get it. And if one productive input is paid less than its productivity, another may be paid more. But let’s keep it simple, shall we? Let’s just suppose all productive inputs are paid according to their productivity.

You see where I’m going with this, right? Ready for the inevitable train wreck? You’ve seen it all before? Well, if something is worth saying once, it’s worth saying a thousand times. That’s my motto. Or one of my several mottos, anyway.

Let’s add an example to keep things simple. Let’s say some laborer, Tom, doesn’t really add much monetary value for one reason or another. Doesn’t matter why. Again, let’s keep it simple and say he’s just not the sharpest tool in the shed. His “productivity” is low. His wage is low. He’s barely scraping by. Let’s say someone else, Jeremy, has some ethical beliefs about the distribution of economic power and supports non-market mechanisms to increase Tom’s economic power, subsidized wages, unions, minimum wage laws, regulations, whatever. Why? Doesn’t matter here. Maybe Jeremy thinks Tom is giving his best effort and defines “merit” in terms of hard work or trying hard. Maybe Tom is suffering from want and Jeremy takes a utilitarian interest in his welfare. Maybe Jeremy thinks Tom has certain rights. Whatever. What does neoclassical welfare economics say about it? Nothing. Because we’re talking about people, and the funny thing about people in modern neoclassical welfare economics is we can’t resolve interpersonal conflict on the basis of “utility.”

If one forgets the person and thinks only of productive inputs, one might suppose neoclassical welfare economics suggests taking manipulation of wages off the table as far as addressing ethical concerns about the distribution of economic power, allowing only so-called direct transfers. That’s meant to ensure the productive input is not misallocated in the production process, that it continues to be paid its marginal product even as the pattern of demand changes with the change in the distribution of economic power. That’s an expression of what I call fake distributional indifference. Mechanisms to manipulate or revise wages may be more feasible, practical, possible, than direct transfers. Neoclassical welfare economics doesn’t limit distributional indifference in that way. Neoclassical welfare economics doesn’t demand first best solutions when addressing distributional ethics. It doesn’t require people to jump through hoops, find the mythical Chimera, perform amazing feats, do the politically or practically impossible.

Does manipulating wages lead to an “economically inefficient” allocation of the productive input of labor relative to the pattern of demand generated by the current distribution of economic power? Doesn’t really matter under the normative argument presented in neoclassical welfare economics. There is no “equity” versus “efficient” tradeoff in neoclassical welfare economics. Did I mention? If one is discussing “economic efficiency” defined in terms of “utility,” and “equity,” normative beliefs relating to ethically optimal outcomes, also defined in terms of “utility,” the fact one doesn’t know what happens to “utility” if one changes the distribution of economic power cannot correctly be described as a “tradeoff.” As I’ve discussed many times now, the notion of an “efficiency equity tradeoff” is false and misleading because it presents “efficiency” as a normative value endogenous to neoclassical welfare economic and “equity” as exogenous, which presents the theory as not being indifferent to outcomes to which it actually is indifferent based on “utility.” 

Might the change also affect “production efficiency” defined in terms of money or goods? Might we have a tradeoff between “equity” and total output? Sure. However, that’s normatively irrelevant in neoclassical welfare economics because it doesn’t say anything about what happens to “utility.” Also, it’s empirically dodgy, given potentially more robust demand. Incidentally, changing the distribution of economic power using direct transfers also changes incentives on the labor market. Do you really suppose Tom is going to risk his life for pennies to make you lunch during a pandemic unless he feels financial distress? Just saying.

Yes. We’re talking about conflation again, in this case “utility” with money or output, “labor” as a factor of production with people, “wages” as a means to distribute economic power with a means to allocate a productive input. And, yes, as I hinted at earlier, the same issues really apply to wrenches, which are productive inputs as well as assets owned by people, with a price featuring in both the allocation of that input and the distribution of economic power. That is to say, one can conceive of labor not as people, as I just did, but as a productive resource, like a wrench, owned by laborers in the same way a wrench is owned by others. But wasn’t it easier, at least initially, to show the issue with “labor” as the people themselves? Shouldn’t I really try to simplify the presentation when I can?

Given the ubiquitous conflation of positive and normative issues in economics, we should probably say a few words about the ethical theory that proposes we distribute economic power according to one’s productivity, the value one adds. The marginal productivity theory of distributional ethics has nothing to do with the normative argument in neoclassical welfare economics about “utility.” Like all other such ethical theories, it’s exogenous to neoclassical welfare economics. It has no significance in the Fairy Land of Economic Theory. But we can say a few words about it. Why not?

As an ethical theory about the distribution of economic power, it seems to be a form of fairness argument, if one adds X amount of value, it’s fair and ethically appropriate one should get X amount of economic power back in return. But, of course, there are a few issues. Potentially relevant issues include why some workers have higher productivity than others, how productivity relates to merit, effort, hard work, trying hard, things under one’s control and not, etc. Basically, ethical considerations relating to fairness, but otherwise conceived. Other potential issues might involve utilitarian concerns about whether we’re getting the most from our limited resources in terms of human happiness or satisfaction, fulling human wants and needs, etc. Yet other issues may involve “rights” of one sort or another, various religious precepts, etc. And what about the ethical beliefs relating to the distribution of economic power as it applies to owners of capital? Oh come on. Yes, there are issues there as well, some the same, some a bit different. Life is a rich tapestry, but I’m already running a bit over this week.

I have ethical beliefs like anyone else, and I’m willing to argue those and sometimes do. All I’m really suggesting here is people refrain from pretending things are part of neoclassical welfare economics when they’re not. It’s bad economics and creates confusion and conflict. Want some hints on overcoming the tricksy rhetoric of bad economics in the conservative style? Be rigorous about words, terms, concepts. Keep firmly in mind what you’re talking about. Talk about one thing at a time. Distinguish normative from positive. Slow down. Simplify.

A Bit Of Context

Maybe I should step back this week and look at the broader context. Does everyone understand why I keep talking about neoclassical welfare economics? Its significance? Why one might care if certain ethical issues are endogenous or exogenous to it?  Not really? Fine. Let’s talk about it.

I won’t bore you with details or history this week, let’s just say neoclassical welfare economics is a normative or ethical theory that purports to establish the social optimality of “perfectly competitive” markets free of market failures. Neoclassical welfare economics is the starting point for most folk economics about “the free market” and “capitalism,” as well as more extreme derivatives like so-called libertarianism, fake market-based “anarchism,” Austrian economics, etc. When one hears people talking about what economic theory declares “socially optimal” or “efficient,” about market “distortions” or people “rigging” otherwise optimal markets, they generally have in mind neoclassical welfare economics.

The reason many consider neoclassical welfare economics an interesting and intriguing ethical theory is that it is ostensibly based on very limited normative inputs about which most people would agree; the implication being most people should therefore be interested in the conclusions. Indeed, sometimes the normative inputs are considered so uncontroversial people forget entirely they’re talking about an ethical theory, with normative inputs and conclusions one might evaluate and accept or reject based on subjective moral sentiment. It’s a problem exacerbated by the ubiquitous and risible positive approach to normative economics associated especially with mid-century logical positivism and the perennial quest of economists to be more like physicists while incongruously maintaining their own normative role in recommending economic policy. Economists working in the tradition of positive normative economics treat the normative inputs and factual premises as arbitrary givens and view the ethical theory being expressed as someone else’s ethical theory, about which they are simply checking the logic and math. In positive normative economics, economists aren’t meant to advocate, recommend, suggest, persuade anyone what is socially “optimal” or “efficient” or anything else. They simply report, as scientists, about what someone else’s random, unevaluated ethical theory says. Don’t like the normative conclusions? Take it up with whoever said we should maximize “utility,” whoever defined “utility” the way it’s defined in economic theory, whoever wrote the theory. Don’t take it up with them. They’re scientists, dammit, not ethical philosophers. But I think we all understand rhetorical claptrap when we see it, don’t we? They’re involved in normative economics rather more than simply checking someone else’s internal logic and math. Economists wrote economic theory, defined “utility” as they found appropriate, and now evaluate policy, recommend people do things on the basis of normative economics. Hardly disinterested scientists confining themselves to logic and math.

To return to the main plot for today, the vaunted ostensibly normatively uncontroversial nature of neoclassical welfare economics, the aspect that makes it of widespread interest, really only applies in a rarefied theoretical context I call the Fairy Land of Economic Theory. When neoclassical welfare economics is applied in the real world, all manner of interesting and controversial things can happen that lead directly to bad economics in the conservative style, a rhetorical artifact or construct based loosely on neoclassical welfare economics. Explaining how bad economics in the conservative style works, why it’s rhetorically powerful, how exactly it relates to actual neoclassical welfare economics, is what I’ve been talking about the past two years or so.

Neoclassical welfare economics is ostensibly about “maximizing” a certain sort of “utility.” I’ve argued before it’s really about some normative propositions relating to people expressing preferences under various conditions but expressed in an awkward, opaque, insincere way. Well, that, and preventing people considering and discussing certain other awkward and controversial ethical issues relating to resolving interpersonal conflicts on markets, like the definition, distribution, and use of economic power, etc. One needn’t attach normative significance to “utility” as defined in neoclassical welfare economics. Ethical philosophers have suggested many potential definitions of “utility.” Economists, as well, in so-called “general welfare analysis.” That’s not neoclassical welfare economics. That’s just the amateur ethical philosophizing of some random economists. It can be moderately interesting, albeit typically not as interesting as ethical theories discussed by philosophers familiar with the relevant methods and issues. The reason it’s an entirely different kettle of fish from neoclassical welfare economics, beyond the conclusions, is that there’s no claim the normative or ethical inputs involved are particularly simple or noncontroversial. It’s just normal, everyday, if typically rather inept, ethical philosophy.

Inquiring whether particular normative or ethical propositions are endogenous or exogenous to neoclassical welfare economics is important for avoiding the classic confidence game of bait and switch typical of bad economics in the conservative style. The bait and switch in bad economics in the conservative style involves portraying one is working with neoclassical welfare economics and its limited normative inputs, then delivering controversial conclusions requiring additional and rather more controversial normative inputs. The entertaining and engaging part of addressing bad economics is trying to figure out how it’s done. Like any good bit of stage magic or rhetorical chicanery, how it’s done can often be quite tricky, clever, even amusing.

If an ethical proposition necessary for some conclusion is exogenous to neoclassical welfare economics, that means one can agree with everything in that theory, but disagree with that normative conclusion. In that case, one’s issue is not inside but outside that theory. If one’s disagreement with bad economics in the conservative style involves ethical issues exogenous to neoclassical welfare economics, there is little point in arguing with purveyors of bad economics in the conservative style about neoclassical welfare economics.

If all the ethical propositions necessary for some conclusion are endogenous to neoclassical welfare economics, that means if one rejects that conclusion one apparently has some issue with supposedly uncontroversial neoclassical welfare economics itself. If one’s disagreement with bad economics in the conservative style involves only ethical issues endogenous to neoclassical welfare economics, then one’s issue is not with bad economics in the conservative style, per se, not with anything added onto neoclassical welfare economics, not with any errors made in the interpretation of neoclassical welfare economics, but with neoclassical welfare economics itself.

The two situations are entirely different. A great deal of confusion and conflict is generated by people taking issue with some aspect or conclusions of bad economics in the conservative style but being unclear about whether they’re talking about issues inside or outside neoclassical welfare economics. My goal is simply to help people differentiate real neoclassical welfare economics, and its normative inputs and factual premises, from bad economics in the conservative style based loosely upon it, with the goal of reducing unnecessary confusion and conflict. Neoclassical welfare economics is an ethical half-theory about what is optimal, efficient, ethically desirable relative to certain missing, exogenous, normative inputs. If one applies it in the real world one must supply those inputs in order to generate conclusions.

Are we good on the broader context of why I talk about what I talk about? Can I just get back to talking about it? Over and over and over again? With no discernible effect on anyone or anything? Because trying is really the thing for me, not the doing, which depends upon many factors beyond my control.

Extent Of The Market And False Factual Premises

This week I’m concluding the simplest, shortest explanation of the basics of bad economics in the conservative style this side of forever. Three easy blog posts. But they’re so long! Fine, I’ll power through extent of the market and false factual premises in one go.  Satisfied?

Recall the first part of my three part summary dealt with some potentially confusing aspects of superfluous and idiosyncratically defined “utility” in neoclassical welfare economics, which contribute directly to bad economics. The second part of my three part summary dealt with a common rhetorical trick associated with bad economics: fake distributional indifference. Unlike “utility,” the rhetorical trick of fake distributional indifference is clearly not part of neoclassical welfare economics proper.

Under my old “onion of bad economics” scheme, we may say part one involved the inner layer or core, potentially confusing bits in neoclassical welfare economics itself, and part two involved the outer layer, issues that are clearly not part of neoclassical welfare economics, per se. This final third installment addresses issues from the difficult to delineate middle layer of the onion of bad economics; issues that are not really part of neoclassical welfare economics, per se, but some knowledgeable people might suppose are.

My first issue today is an ethical issue I call “extent of the market,” the choice of when to resolve interpersonal conflicts of preferences using economic power in markets and when to resolve them using some other mechanism, such as voting in a democratic political system. Does neoclassical welfare economics contain a normative or ethical argument about when we should use economic power in markets to resolve interpersonal conflicts? I would say, no, clearly not. That issue is exogenous to that theory. Why do I say that? The “utility” on which neoclassical welfare economics is based cannot support interpersonal utility comparison and thus cannot be used to resolve interpersonal conflicts. Deciding when to use economic power in markets to resolve such conflicts is no exception.

Supposing neoclassical welfare economics contains such a proposition would mean the theory expresses indifference to the distribution of economic power but not to the proposition interpersonal conflicts should be resolved on the basis of economic power. Why? What ethical theory is that? No, I’m just asking. If that were the case, some of the normative inputs to neoclassical welfare economics would not be based on “utility,” and would be not well identified, analyzed, evaluated, or discussed. That, I think, not only unfairly maligns the theory, but creates confusion and conflict.

Conservative bad economics in this context involves supposing neoclassical welfare economics does contain a normative or ethical argument relating to extent of the market in the case of particular or even all interpersonal conflicts. For example, a purveyor of bad economics may suggest neoclassical welfare economics says a vaccine should be distributed by economic power in markets, not by medical need. That’s an ethical position one might discuss, but it’s not one expressed in neoclassical welfare economics.

One can, of course, calculate a “social welfare loss” predicated on accepting the resolution of that interpersonal conflict based on economic power in markets, but attaching normative significance to that calculation is, in fact, exogenous to neoclassical welfare economics. The “social welfare loss,” when applied to reality, is just another bit of potentially misleading wordplay designed to trip up the inattentive and unwary, along the lines of (economic) “efficiency,” “social welfare” and “optimal” market outcomes. They don’t mean what one might suppose they mean in everyday speech. They mean something rather less than that.

One manifestation of confusion relating to the exogenous ethical issue of the extent of the market involves property “rights.” One can’t resolve interpersonal conflicts of preferences on the basis of economic power in markets without defining economic power (i.e., legally defining property). One often sees purveyors of bad economics trying to slip the necessary normative propositions into neoclassical welfare economics through the back door by saying, well, of course, one needs legal specifications of property to have markets. Yes, of course. That’s not the issue. The issue is whether the relevant normative propositions are inside or outside neoclassical welfare economics, endogenous or exogenous. That is, does the theory contain an argument against anarchy? Does it argue we should resolve interpersonal conflicts on the basis of law? If so, it’s not based on “utility.” If we’re looking at an interpersonal conflict, let’s say between two people over possession of a wallet, we don’t know if the person with a legal claim to the wallet will get higher “utility” from it than the other person, if indeed it even makes sense to ask that question. (Again, it only makes sense to ask that question if one is using the old fashioned internal perceptions of satisfaction from preference fulfillment “utility,” not if one is using the ostensibly standard individual preference rank “utility,” in which case “utility” would be undefined in interpersonal contexts.) The argument one would like to apply neoclassical welfare economics to reality, and one can’t unless one accepts some other random ethical propositions, so those other random propositions must be part of the theory, is not really a serious argument. That’s bad, as in inept, philosophy.

Next, consider false factual premises. When one evaluates the normative inputs relating to “utility,” which are really about how to treat other people expressing their preferences, if there are no interpersonal conflicts to muddy the ethical water, certain conditions are relevant. Like what? Well, does the person know what he or she is doing or talking about? Does he or she seem rational? That sort of thing. If those conditions are met, the proposition one should let him or her do whatever he or she likes is relatively ethically uncontroversial. (Note that for purposes of this blog post I’m setting aside the issue of whether the “no interpersonal conflict” case defined with respect to “utility” has any application to reality, given the variety and ubiquity of interpersonal conflict in real life. I’ve argued before, if one expresses the relevant ethical propositions in terms of how to treat other people expressing preferences under certain conditions, rather than in terms of the rhetorical and misleading “utility,” one can easily enough set parameters on what qualifies as ethically relevant interpersonal conflict.)

So does the ethical proposition in neoclassical welfare economics we should “maximize” total social “utility” involve conditions, like perfect information and perfect rationality, that render it non-controversial in the relevant no conflict case, or does it not? Again, I would say no, clearly not. “Utility” is about choices, observed preference rankings, not people’s knowledge or state of mind. It’s bad philosophy to pretend things are part of an ethical theory that are not actually there because one finds it convenient to imagine they are there.

If one wants to ascribe those conditions to neoclassical welfare economics itself, and say the relevant ethical proposition involves maximizing social “utility” only under particular, unreal conditions, then spell it out so everyone understands it’s not meant to apply to reality. In that context, it may be worth noting that factual premises in normative economics are often conflated with simplifying assumptions in positive economics, leading to the risible notion it doesn’t really matter if the factual premises in normative economics are true or false. Again, that’s just inept ethical philosophy. It would seem conservative bad economics involves not only tacking on controversial normative propositions to neoclassical welfare economics without identifying those exogenous ethical inputs as such, it also involves misstating the level of controversy associated with the inputs that are there, to make the bait and switch that much more effective.

Neoclassical welfare economics is an ethical half-theory that gives conclusions relevant to the real world only if one holds particular exogenous ethical beliefs about the definition, distribution, and use of economic power, and the significance of ignorance, irrationality, etc. It’s fine to supply those exogenous inputs yourself, or to argue they should be decided by the people through democratic government, but be honest about it. Identify, explain, evaluate them. Don’t just pretend they’re part of neoclassical welfare economics. That’s bad economics.

Fake Indifference, In General, Without Economics

Can I just interrupt my own schedule of events this week and do an addendum to my post from last week on fake distributional indifference? I thought of a fun way to say it without reference to economics and wanted to quickly share that before moving on. I meant to do the final installment, part three, of the shortest, simplest explanation of the main elements of bad economics in the conservative style you’ll likely ever see, but maybe I can hold that back until next week? It’s not like bad economics is going anywhere soon, is it? I suppose some may be thinking, “Why is Hansel always banging on about fake distributional indifference? He’s like a broken record out there.” Why? Because apparently there’s some confusion about it. Everyone understands it’s wrong, but one sees it everywhere. Because it’s a big part of bad economics. Because it’s annoying as heck. One minute one is talking about the theory of neoclassical welfare economics, with distributional indifference. Everything is fine, everyone knows what everyone else is talking about, everything is clear, then ... Bam! Fake distributional indifference shows up and everyone falls over.

So let’s do fake indifference in general, without the reference to economic theory. Say there are two possible outcomes under consideration, A and B, and some people have ethics that support A, call them Team A, and some people have ethics that support B, call them Team B. Makes sense, right? However, in addition there are wonky versions of A and B that are nearly but not quite as good, call them Wonky A and Wonky B. Team A thinks both A and Wonky A beat anything on the B side. Team B thinks both B and Wonky B beat anything on the A side. Still with me? Both teams agree as far as the minor issue of wonkiness is concerned. Everyone agrees A beats Wonky A, and B beats Wonky B, no matter what team he or she is on. If you've got all that, you should be all set to see how fake indifference works generally, and in bad economics.

Say we’re currently at Wonky B and we have two policy proposals on the table, two possible things we might do: move to B, move to Wonky A. Joe, the local purveyor of sometimes dubious philosophy, says, “Well, I recommend we avoid ethical controversy and choose to move to B.” Team A gets a tad annoyed. “Hello, we’re standing right here. We’re saying we prefer Wonky A to B. How is choosing B over Wonky A avoiding ethical controversy? Let’s just try to hash out the essential, substantive issues between A and B in good faith and get on with it.”

Joe then begins to adduce all manner of arguments about how moving to B avoids ethical controversy. He explains, “I’m indifferent to A and B. I’m just opposed to wonkiness, as are most of us. Yes, I’m a proud member of the uncontroversial, bipartisan League Against Wonkiness.” Team A responds heatedly, “Yes, that’s fine, but here, in choosing B over Wonky A, you’re not simply delivering an opinion on wonkiness, the relative position of Wonky B and B, you’re also delivering an opinion on the much more controversial ethical issue of Wonky A versus B.”

But Joe’s got plenty more where that came from. “No, I disagree. As soon as we fix the wonkiness problem, the uncontroversial problem I’m concerned with, you’re still free to move from B to A if you like. You will have lost nothing, and you’ll be in a better position than now. In that sense, although it may appear I’m choosing the policy that leads to B over the one that leads to Wonky A, that’s incorrect. What I’m actually saying is that that particular policy question or choice is, or should be considered, irrelevant right now.” Joe continues, “And, honestly, I don’t really understand how you could possibly be in favor of wonkiness, the rejection of which is not very controversial at all. I really think you need to slow down and think about things a bit more carefully.”

Team A responds, “Joe, your reasoning is all wet. We find the policy question relevant and important to address now, and since you’re not suggesting moving toward anything in the A family, which is our main concern, your policy suggestion is, in fact, ethically controversial. Also, we find the idea of postponing discussing serious ethical issues until we attain B peculiar. Will you even ever acknowledge arriving at B? Or will we be forever in the state of trying to move from some Wonky B to B? Chasing an ideal that doesn’t actually exist?” Team A goes on. “And, for the sake of argument, if ever we actually arrived at B, is there really a mechanism to move from B to A without wonkiness? As your argument works now, as soon as we revise B in any way we have Wonky B, which you oppose, or is it Wonky A? We’d basically be stuck at B, forever. And even if you revised your arguments to make it logically possible to revise B, it may well be easier to go from B to A via wonkiness than via whatever specially approved non-wonky route you have in mind, which may be practically infeasible, difficult, costly.”

Joe rejects all such arguments and continues his support for policies leading to B. Team B, which actually has substantive ethical arguments ready about why people should prefer B to A, finds its arguments unnecessary while Joe is around. It kicks up its heels, takes it easy. Jane, from Team A, growing increasingly irate at Joe for sidelining and essentially blocking discussion of A and B, gets tough with him one day. “Joe, didn’t I see you emerging from the Team B clubhouse the other day, laughing, giving everyone high fives, and counting a big wad of cash?” Joe, offended to his core, snaps back angrily, “How dare you, Madam!  How dare you! Are you insinuating I secretly support B for filthy lucre? Why don’t you prove it? I’ve only ever had the best interests of all of humanity in mind.” Joe, in fact, considers himself a very ethical person indeed, who thinks about the ethics of everything he says and does. It’s really rather remarkable he has no ethical opinion on A or B, the great ethical issue of the day that divides Team A and Team B. He prides himself on being always true to his own ethical motto: do no harm.

Team B rejoices. Their ethics prevail. Team A despairs. They feel their ethical views are not even being heard and great harm is being done. They look for ways to get around the stultifying influence of Joe, the local purveyor of sometimes dubious philosophy, but it isn’t easy. Joe and Jane stop working together, but they do sometimes exchange snarky comments on social media sites, where Joe marvels at length on Jane’s supposed inability to grasp the obvious while Jane marvels at length on Joe’s inability to perceive real and significant ethical issues. Confusion and conflict ensue. The calm and reasoned public discussion of ethics, and support for an always temporary and contingent resolution of subjective ethical views through democratic government, begin to lose their appeal. Other ideas appear more compelling to the people. Support for the ethos of democracy begins to wane, democratic society begins to wobble. Anger, emotion, unreason, insults, calls to violence are the order of the day.

And that, my friend, is fake indifference, in general, without economics. It’s a simplified, playful version of fake distributional indifference, and the disputes about it, one can find playing out in discussions of conservative bad economics any day of the week. Did you find it useful? Or not really? So difficult to think exactly how to say things in a way that seems sensible to others. Makes one really appreciate the fascination in the old fairy tales with the idea of “magic words” and “incantations” and so on.

You want the translation to neoclassical welfare economics? Really? Oh, come on. Fine. A and B are (economically) efficient, Pareto optimal, perfectly competitive market outcomes that differ along the dimension of the distribution of economic power. A Pareto dominates (economically) inefficient, non-Pareto optimal, non-perfectly competitive market outcome Wonky A but not Wonky B. B Pareto dominates (economically) inefficient, non-Pareto optimal, non-perfectly competitive market outcome Wonky B but not Wonky A. Team A and Team B are two groups of people with different ethical beliefs relating to the distribution of economic power. Joe is the stereotypical purveyor of bad economics. Jane is a person of generally liberal disposition.

What should Joe be doing? Explaining that the policy choice between B and Wonky A really requires Team A and Team B to discuss the ethical issues involved between A and B and reach some temporary agreement via democratic government on which way to go. 

Next time: The delayed final part of the shortest, simplest three part presentation of the essentials of bad economics in the conservative style one is ever likely to find, addressing the ethical issue of the extent of the market, and false factual premises in ethical arguments.

Fake Distributional Indifference, Again

Ready for part two of the shortest, simplest three part explanation of conservative bad economics based on misinterpretations of neoclassical welfare economics you’ll likely ever find? Last week was some funny business relating to “utility.” This week it’s “fake distributional indifference.”

Fake distributional indifference is a rhetorical trick used in bad economics to create the impression neoclassical welfare economics is capable of generating a general recommendation to move toward real economically efficient, “optimal” market structures or, if already at one, stay there. It’s what lies behind arguments like moving away from economically efficient outcomes “distorts” an ostensibly “optimal” state of affairs and the implication from casual folk economics that neoclassical welfare economics recommends something called the “Free Market.” It’s what lies behind risible arguments often made by purveyors of bad economics that others simply can’t understand the simple ethics establishing the mutual benefit of voluntary trade of, let’s say, a starving slave’s day of labor for a crust of bread, never comprehending or acknowledging everyone understands that trivial part of the issue, and the part everyone else is thinking about, the much more significant part, concerns the thorny ethical issues leading up to that transaction and the conditions under which that transaction takes place. It’s largely what generates the offensive, bullying, bad neighbor quality associated with purveyors of bad economics, often economists, as they ridicule the ethics of the people and lambaste democracy for interfering with their own incompetent ethical stylings and judgments.

The rhetorical trick of fake distributional indifference can be used with both types of “utility” I discussed last time, with individual preference rank “utility” and internal perceptions of satisfaction from preference fulfillment “utility,” with both Neoclassical Welfare Economics One and Two. However, one must be invoking distributional indifference to use fake distributional indifference. If one is operating with internal perceptions of satisfaction from preference fulfillment “utility,” Neoclassical Welfare Economics Two, and one is endorsing a particular “social welfare function,” then fake distributional indifference is less of an issue. In that case, it only works with any normative conclusions made on the basis of distributional indifference up to the point of the introduction of the “social welfare function,” so typically with respect to conclusions relating to certain market structures, etc. On the other hand, fake distribution indifference works normally if one simply acknowledges the idea of social welfare functions but casts them as exogenous, inconsistent with the relevant definition of “utility,” unjustified, arbitrary, inappropriate when speaking as an economist, etc.

Fake distributional indifference is most clearly and obviously perceived in the context of individual preference rank “utility,” the world of Neoclassical Welfare Economics One under the somewhat facetious classification I used last week, so I’ll discuss it in that context here. As I’m so fond of pointing out, the interesting thing about defining “utility” in terms of the preference rankings of individuals is that it becomes undefined in interpersonal contexts. It no longer makes sense to ask who gets more “utility” from good X, person A or B. It’s what generates the often reported but rarely appreciated point that interpersonal utility comparisons are not simply “impossible” using preference rank “utility,” they’re undefined, the very expression of the issue represents a misuse of language. The only reason that point is not more readily appreciated is there are so many different definitions of “utility” out there, and hence so many opportunities to equivocate on terms, something many purveyors of bad economics are only too eager to do and to encourage others to do. It’s why I always encourage sincere, conscientious economists working with individual preference rank “utility” to just stop talking about “utility,” per se, and instead talk consistently about individual preference rankings. The time and ink savings are simply not worth the risk of confusion.

The interesting thing about “utility” being undefined in interpersonal contexts is that it removes it from the ethical issue of resolving interpersonal conflicts of preferences, needs, desires, the sorts of issues that make up the lion’s share of ethical philosophy in the real world. Neoclassical welfare economics using individual preference rank “utility” could never identify an ethically optimal allocation of scarce resources because it could never solve the ethical issue of how to resolve interpersonal conflicts of preferences relating to those resources. That’s why I so often remark that the use of individual preference rank “utility” should lead straightaway to the recognition of neoclassical welfare economics as an ethical half-theory, a theory in which some potentially relevant consideration are taken up, but not others.

However, and this gets to the heart of the matter here, if one artificially holds some ethical issues in abeyance, as one does in the Fairy Land of Economic Theory, one can make certain conclusions relevant for the Fairy Land based on neoclassical welfare economics alone. What happens in bad economics is that one presents oneself as restricting oneself to the theory of neoclassical welfare economics, with distributional indifference, but then inappropriately draws conclusions about the real world. That shift, that having of one’s cake and eating it too, that missing discussion of real ethical issues, that suggestion one can generate controversial conclusions from less controversial inputs, is what is covered up by the rhetorical technique of “fake distribution indifference" in bad economics.

Fake distributional indifference can take various forms, but it always involves implicitly taking sides in controversial distributional ethics exogenous to neoclassical welfare economics by arguing for economically efficient, “optimal,” “perfectly competitive” markets. The problem, of course, is that any such recommendation in the real world inevitably leads to a particular instance of such a market with a particular resolution of interpersonal conflicts corresponding to particular distributional ethics and not others. Anything beyond indifference between pursuing that particular market structure or outcome and any other result implying a different resolution of interpersonal conflict, including non-economically efficient, non-“optimal,” non-perfectly competitive market structures and outcomes, is fake distributional indifference, bad economics.

Another typical expression of fake distribution indifference relies on the notion of finding a way to move between different economically efficient, “optimal” market outcomes without departing from economically efficient, “optimal” market structures. Here again, it’s fine in the Fairy Land of Economic Theory. Tap, tap on one’s keyboard, change the initial endowments, transfer this there, done and done. But that’s not how things work in the real world, is it? To get a different result in the real world, one must actually do something. That tricksy quest for the fabulous but mythical chimera, an insubstantial shadow from the Fairy Land, is what converts straightforward policy choices designed to implement ethical views involving the distribution of economic power into fake scientific conundrums. It’s what lies behind purveyors of bad economics saying things like, of course they’d like to address perceived ethical issues relating to the distribution of economic power, they just can't work out how to do it. As though it were some great mystery of the natural world. Everyone understands the issue is fake, right? It’s bad economics, not neoclassical welfare economics. Distributional indifference holds in neoclassical welfare economics whether the policy option on the table is first best, last best, or anything in-between. The theory doesn’t throw up random road blocks, demand the difficult, the unlikely, the logically impossible.

So that’s fake distributional indifference in a nutshell: people arguing indirectly for certain resolutions of interpersonal conflicts ostensibly using a theory that cannot support such conclusions and throwing up random, often impossible conditions for others to meet to implement their ethics. There’s nothing preventing purveyors of bad economics from saying they can recommend policies leading to any real instance of an economically efficient, “optimal” market because they ignore many relevant ethical issues, but democratic government will want to consider those, nothing but the will to deceive, to play games, to mislead, to manipulate, to express their own prior underlying ethical beliefs that typically just happen to coincide with the ethics expressed in the recommended real instance of an economically efficient market. Allow me to just end my post for this week with a special plea to my fellow economists. The intellectual sloppiness and insincerity of past economists created bad economics. Let it be the intellectual rigor and sincerity of present economists that ends it. It’s our mess, let’s clean it up. 

Next time I'll complete the set with part three of my express review of what I see as the main elements of ubiquitous bad economics in the conservative mode with a discussion of the ethical issue of the extent of the market and the role of false factual premises.

Social Welfare Functions and Utility Two Ways

Someone mentioned “social welfare functions” the other day, so I thought I’d say a few words about that this week. I’m sure I did it all before, multiple times, but it’s been a while, so let’s have another go, shall we? I’m mostly talking this week to people who know a little something about neoclassical welfare economics, but if you’re just along for the ride, “social welfare functions” are mathematical functions meant to “weight” different people’s “utility” to define an overall social optimum.

One point I’d like to stress is that if one is using “social welfare functions” to manipulate “utility,” one cannot be talking about the most typical definition of “utility” in neoclassical welfare economics: “utility” defined as individual preference rankings, typically referred to as preference rank “utility.” Preference rank “utility” can only sensibly be used in the context of a given individual. With this definition of “utility,” it’s grammatical nonsense to look at two different people and ask, “Who is getting higher ‘utility’ from good X?” It’s like asking the square root of red or whatever nonsense question catches one’s fancy. If we take two individual preference rankings, “weight” them using a social welfare function, and add them up, what do we get? Gibberish. Nonsense. It’s the sort of thing an inattentive engineer might do if he or she forgot the substantive context or content relating to some equations. If one is listening to someone who has previously defined “utility” in terms of individual preference rankings but suddenly starts talking about “social welfare functions,” one is listening to bad economics. One will want to exit the bus, as soon as possible.

If we’re not talking about individual preference rank “utility” when using social welfare functions, what sort of utility are we talking about? Well, I suppose the older definition of “utility” defined as internal perceptions of satisfaction from preference fulfillment. Why do I think that? Well, it must have to do with preferences if we’re still meant to attach significance to revealed preference, and it must be empirically inaccessible if we need to come up with a “social welfare function” to make interpersonal utility comparisons.

That switch, so insignificant in a mathematical sense, is momentous in a substantive normative or ethical sense. It changes the entire interpretation and evaluation of the normative or ethical argument made in neoclassical welfare economics. Indeed, one must appreciate normative neoclassical welfare economics is really two theories: Neoclassical Welfare Economics One, and Neoclassical Welfare Economics Two. Talk about one at a time and you'll feel better in the morning.

Using “utility” defined as internal perceptions of satisfaction from preference fulfillment, one might reasonably suppose accepting the ostensible goal of maximizing “utility” means one should use that criterion to resolve interpersonal conflicts, if one could. The funny thing is, as I’ve argued before on numerous occasions, no one really would, or at the very least it would be very controversial indeed. If we had a dream where we could peer into people’s minds and observe and measure the strength of these elusive internal perceptions and thus actually maximize that type of “utility,” and someone like, say, the infamous Mr. Hitler was the biggest producer of “utility” around, well, that would get a bit awkward, wouldn’t it? No, the proposition we should maximize that type of “utility” is basically a faux or fake ethical objective that is acceptable only as long as one can’t actually do it, hence making room for other more sensible forms of ethical reasoning to be applied to resolving interpersonal conflicts in practice.

Neoclassical Welfare Economics Two, based on internal perceptions of preference satisfaction “utility,” is a weak, implausible, full ethical theory based on adding up and maximizing a certain type of “utility” across people. Neoclassical Welfare Economics One, based on individual preference rank “utility,” is an ethical half-theory. It isn’t really about adding up and maximizing “utility” across people. Indeed, that doesn’t even make sense with that type of “utility.” It’s about what one can say when limiting oneself to certain propositions about how to treat other people expressing individual preferences. It can be viewed as either clever rhetorical word play to muddy the water or a simplistic attempt to make economics more “scientific” in the old logical positivist sense by defining concepts by their observable attributes. See the difference?

So how about those “social welfare functions?” Well, those are simply attempts to introduce exogenous ethical content on top of ethically implausible internal perception of satisfaction from preference fulfillment “utility” by “weighting” different people’s “utility.” They’re an attempt to convert Neoclassical Welfare Economics Two into a more acceptable full ethical theory, very unlike the explicit ethical half-theory of Neoclassical Welfare Economics One with its individual preference rank “utility.” Comically, and confusingly, the exogenous ethical or normative content added on might (but needn’t) relate to commonly accepted indications of human welfare, the most typical definition of “utility” one finds in serious utilitarian ethical philosophy. So “social welfare functions” often represent real, sincere ethical utilitarianism being re-introduced into a weak, controversial, arguably insincere form of “utilitarianism” by “weighting" the wonky, implausible “utility” of the latter according to the rather more sensible “utility” of the former.

Is it even internally consistent? We start out with an inaccessible sort of “utility” as internal perceptions, but since that implies nothing useful beyond individual preference rankings if no interpersonal conflict, we take up potentially conflicting ethical principles for that. And what funny business do you suppose occurs because we started our normative journey talking about one type of “utility,” making arguments based on that, but ended up manipulating it to correspond to other ethical beliefs, possibly involving other forms of “utility?” Do you suppose “social welfare functions” are just about choosing between defined economically efficient, Pareto optimal, perfectly competitive, socially “optimal” outcomes? That’s just the sort of funny business I’m talking about. A mash-up of two ethical theories, really. Because once one has a “social welfare function,” there’s nothing significant about the “wrong” economically efficient, “optimal” outcomes. Indeed if market institutions are inconsistent with or cannot produce the desired optimal outcome, well ...

Of course, there’s nothing inherently wrong with an ethical theory combining propositions about how to treat people expressing preferences if no interpersonal conflict under various conditions, and recommending various criteria for resolving interpersonal conflict, but say it right. Say it in a way that makes the ethical argument clear so people can discuss the potentially problematic bits, the controversies, evaluate the arguments. Talk sensibly. Don’t just play fast and loose with terms to make it come out right. That creates confusion and conflict.

Because you know the ethical stylings of individual economists have no special significance, or shouldn’t anyway. It’s the subjective stylings of the people delivered via democratic government that’s significant, or should be. They should be involved, not hoodwinked. For consumers, students, if you’ve come to realize economists aren’t necessarily always talking about the same thing when they discuss “utility,” don’t stop there, shrug your shoulders, and walk away. Don’t settle for baby level analysis. It’s your economy. Stick up for yourself. Consider why someone might play games with terms in that way. Investigate what happens when one sticks with one definition of “utility,” identify and evaluate the real normative inputs involved, see what conclusions really follow from particular definitions of “utility.” Don’t settle for bad economics.

Got all that? Well, if you do, you’re halfway to overcoming bad economics. Take up fake distributional indifference, the exogenous ethical issue of the extent of the market, and the role of false factual premises, and you will have gotten what I suppose are the essentials. As I’ve just now reviewed some of the funny business associated with “utility,” which is a major component of bad economics, maybe I'll treat this as part one of a three part series and do a quick review of the other bits in the next couple of storms.  

Small Government

So, how about that “small government,” huh? Although I suppose everyone surely agrees government ought be no bigger than it should, one does hear a lot about the ideal of “small government,” defined in various way. One way is with metrics like revenue or expenditure, manpower, office space, etc. Metrics linked to physical presence. Another way is in terms of function rather than physical presence, as proposed by people who believe government has no business worrying about market failure, distributional issues, the poor, the sick, education, infrastructure, pretty much anything beyond police, prisons, maybe the military, sometimes not even that. And you know how interested I can get in language, especially when some word or phrase looks ready to head in two directions at once. Not hard to figure out where that’s going, but let’s spell it out anyway, shall we?

Yes, talking about “small government” by function in an economic context is particularly fertile ground for certain sorts of confusion. That’s because setting the conditions for peaceful resolution of interpersonal conflicts is a necessary function of government and, indeed, what distinguishes civil society from anarchy, at least of the real, observable sort as opposed to the fantastical sort dreamers and young people seem prone to imagine.

One may propose such resolution can handled by a one time, infallible, eternal, clockwork system of laws relating to economic power and markets, as opposed to a system allowing continuous revisions, reassessments, refinements, corrections. But the function remains the same.

One may propose fewer resources be spent on that function, that we should defund the police, disband prisons, eliminate government programs designed to address perceive economic problems, etc. But the function remains the same.

One may propose we reduce government by shutting down voting, clearing out legislatures, sending democratic politicians packing. But the function remains the same.

When one thinks in terms of function, one realizes “small government” in an economic context doesn’t really mean reducing government involvement in society, it means favoring one form or expression of government involvement or power over another, one resolution of interpersonal conflicts of preferences, needs, desires over another. Confusion on this point is the primary link between “libertarianism” and fascism. Some people concerned about state power oppose “activist” democratic government, but then see government as necessary for property and markets and the orderly wielding of economic power to resolve interpersonal conflict and thus support “small,” non-democratic, authoritarian government, i.e., fascism.

Of course, there may be perfectly sensible reasons to support eliminating democratic government. One may believe, as a matter of ethics, our method of distributing economic power is ethically correct, market failures are rare or insignificant, and resolving interpersonal conflicts using economic power in markets leads always to ethically optimal results. In that case, one may oppose democratic government because of the ever present possibility voters may choose to “interfere” with what supposes the ethically correct situation, the natural optimality one may associate with the unimpeded expression of economic power in real markets. But the idea one is opposed to government involvement or the expression of government power in economic life is not one of those sensible reasons. Government, and government power, is still very much there and indeed omnipresent, enforcing legal property arrangements, contracts, market institutions, etc.

Interested in “small government?” Fine with me. Just take some care about the sense of “small government” one has in mind, the ethical positions on economic, political, and social issues one is endorsing, or one might end up that most comical of contemporary figures, the fascist clown. What’s a fascist clown? Well, for me, it’s someone who frets a blue streak about unassailable government power then does a backward pratfall into fascism, never comprehending what he or she has done. It’s funny. One sees a lot of it in bad economics. Always good for a laugh. And, by the way, history suggests fascist governments, once freed from the constraints of public opinion and democratic constraints, can do the darnedest things. Rather like writing someone a blank check, isn’t it? Just hoping it all works out? Having faith? Or doing a bit?

Bad Economics and Good Economics, One Way

I thought this week I might step back a bit and just say a few short words about the difference between “bad economics” of the sort I generally discuss, namely right wing misinterpretations of neoclassical welfare economics, and the corresponding notion of “good economics.” Just to clarify some things.

When I bang on about “bad economics” of the sort I mean, I’m not suggesting or implying there’s only one form of “bad economics” out there, nor that there might not be forms of “good economics” beyond neoclassical welfare economics, correctly interpreted. Indeed, I find the latter rather limited, as I’ve pointed out on numerous occasions. I wouldn’t be particularly put out if people decided eventually to throw it off entirely. I’m not raining on heterodox economists’ parade. No, I’m concerned with the particular form of “bad economics” I usually discuss, and the corresponding notion of “good economics,” because that’s the particular form of bad economics that is so ubiquitous and influential in our culture right now and creates so much confusion and conflict.

Bad economics proposes we obtain the most freedom or liberty, and generate an optimal economic system, under a “small” or “inactive” government committed to doing nothing beyond enforcing property laws and other laws needed to support economically efficient markets. Well, I suppose there’s an even further dumbed down version that doesn’t worry about market structure, “market failures,” etc., and just talks about things like laissez-faire, “capitalism,” and “The Free Market.” But I’m usually talking about the slightly more advanced version, the version many economists have trouble perceiving. Only an economist really committed to the cause of bad economics would discuss real economic issues using typically vague, ill-defined, misleading trigger words like “capitalism” and “The Free Market,” or fail to appreciate such long standing and established concerns in neoclassical economics as market structure and “market failures.” Bad economics and related folk economics like “libertarianism,” fake market based anarchism, and “Austrian" economics, lead inevitably to support for non-democratic, market supporting fascism, a fact surely appreciated by most purveyors of bad economics. It’s what makes addressing bad economics and folk economics so important.

When one gives up democratic government, yes, one prevents other voters having government “interfere” with the ostensible natural wonder of a particular instance of an economically efficient market, particularly in ways one coincidentally may not like, but one also gives up any say in the matter. One loses freedom or liberty.

When one gives up democratic government, one trusts the plutocrats and technocrats sitting atop the postulated “small” authoritarian government will choose to keep it that way. But one no longer has any say in the matter, and if they choose to take up some other issues later, well, I guess one is just out of luck, isn’t one? One loses freedom or liberty.

When one gives up democratic government, one no longer has a say in the social ethics of one’s society including issues like the ethics underlying the distribution of economic power, the ethical assessment of the economic system in terms of fairness or justice or human welfare, or the extent of the market, that is, decisions relating to when to use economic power in markets to resolve interpersonal conflicts of preferences, allocate scarce resources, etc., that are exogenous to neoclassical welfare economics. Those will be decided for you. One loses freedom or liberty.

Good economics, in rather stark contrast, highlights the need to address issues in social ethics including distributional issues and the extent of the market. An understanding of the subjective nature of ethics makes one realize the resolution of those ethical issues can only ever be temporary, contingent, subject to revision. Good economics helps one understand real freedom or liberty is maximized under an activist democratic government that is willing and able to revise the economic system as appropriate, and that talking about ethically optimal economic systems or outcomes is nonsense without the people, via democratic government, determining on a continual basis what that is.

Concerned to fight against right wing fascism arriving at least initially in the form of “small” market-based authoritarian government? Concerned about the erosion in the understanding of, and support for, political democracy? You should help fight the pervasive and baleful influence of bad economics.

De Gustibus For The Rest Of Us

Ever hear the ancient maxim “de gustibus non est disputandum” mentioned in the context of neoclassical economics? Do economists still use that phrase? Back in the old days, it was just a rather pretentious way of saying that in modern neoclassical welfare economics we’re not meant to second guess other people’s preferences when thinking about “utility.” There are some fun issues there that don’t involve my usual concerns relating to resolving interpersonal conflicts of preferences. Maybe we can spend a post or two on normative issues in this often neglected no-conflict case?

The use of the de gustibus principle in neoclassical welfare economics derives from the way we define “utility” in that theory, or rather the two ways we define it: preference rank utility (typical, explicit) and internal perceptions of satisfaction from preference fulfillment utility (occasional, implied).

Do I really have to say it every time? Fine. I’m talking about neoclassical welfare economics right now, the economic theory that underlies bad economics of the conservative sort. I’m not talking about general “welfare analysis,” where one defines “utility” any old way. In general welfare analysis one can, of course, dispute other people’s preferences all day long. Why not? One can do whatever one likes. The sky’s the limit. General welfare analysis may also lead to bad economics, but not the sort I mean here.

In neoclassical welfare economics proper, one can’t dispute other people’s preferences under the now conventional preference rank utility because all one is talking about with “utility” is someone’s preference rankings. There’s nothing beyond that on which to hang a dispute. Under the older and now less common but still occasionally used or at least implied internal perceptions of satisfaction from preference fulfillment utility, one can’t dispute other people’s preferences because one doesn’t have access to the relevant internal perceptions. It’s not a matter of common sense suppositions, inferences, assessments, etc.

Continuing a point from last week, say someone is about to eat a poisoned apple he or she may or may not realize has been poisoned, but we do. That’s their preference, to eat the (poisoned) apple. Should we stand idly by or dispute their preferences? Dispute? How? “Hey, buddy, your preferences are all wet! That’s a poisoned apple, that is!” Too common? Fine, cue the simplifying thought experiment. Let’s say we can’t dispute by providing the potentially missing information in a way the person can understand, we can only allow or prevent him or her eating the apple.

According to the ostensibly uncontroversial normative proposition at the core of neoclassical welfare economics, we should allow the person to eat the poisoned apple because that’s his or her preference, which we’re not disputing, and there’s no interpersonal conflict to muddy the water. In the idiosyncratic and misleading argot of economics, we’re “maximizing” total social “utility,” by doing nothing in this case, and the person in question is, of course, “maximizing” his or her own personal “utility” by expressing his or her own preference.

Is that something you would support? No, I’m just asking. I get it. Maybe he or she likes poisoned apples. Maybe he or she wants to make a grand gesture, dramatically biting the offending apple and descending gracefully to the ground in an elegant swoon, declaring on the way down, “I meant to do that!” And if not actually intentional, what do we care if he or she hasn’t chosen to expend sufficient energy investigating the status of the apple to discover it’s been poisoned? That’s not our responsibility, is it? We’re not that person’s nanny. “Drop dead, dumbass!” Don’t upset yourself now. I can see the other side as well. Maybe it would be better to intervene, just to make sure we’re all on the same page as far as the latest information on the apple? Maybe try to explain a little something about the science? If relevant, maybe discuss the potential suicidal ideation a bit? Do something beyond standing idly by watching the show? My point is not to provide an answer but simply to suggest there may be some controversial ethical issues that bear discussion even here, in the ostensibly obvious no-conflict case, but if one listens to purveyors of bad economics explain the relevant normative principle, one may never realize it. Why? Well, let’s just say they don’t try very hard, do they?

But wait. Is poisoned apple eating really that person’s “preference,” per se, in the sense we have in mind in neoclassical welfare economics? Isn’t the normative proposition about social utility meant to apply only when we have “perfect information” and so on? No, I don’t think so. Perfect information and so on are typically introduced at an entirely different level of the theory, when thinking of the conditions of so-called “perfectly competitive market,” an atypical, ideal, possibly entirely unreal theoretical construct. Actually, I don’t recall even mentioning the existence of markets in my thought experiment, did I? Is that significant? Are the normative propositions about “utility” in neoclassical welfare economics meant to apply only in a market context? If so, it’s news to me. Anyway, maximizing social utility is meant to always be good, isn’t it? Not just under unusual, ideal market conditions? No, I’m just asking. Funny how the ethical propositions of normative neoclassical welfare economics remain opaque after all this time, isn’t it?

And while we’re here, what is “perfect” information, anyway? Our belief the apple has been poisoned, based on whatever evidence, data, scientific reasoning we used to determine that? The bit of potentially false information we think the other person should know about? Because that’s actually all we have. I wonder, is “perfect” information even a real thing, or is it something only medieval monks and small winged creatures in the Fairy Land have access to? Well, I guess if we’re making things up, sure, let’s call it perfect information. Why not? Modeler’s Omniscience. Oh the power, the awesome power! And how about the companion piece, “perfect” rationality? No, not normal human levels of rationality. Perfect rationality. I’m talking Mr. Spock, on Vulcan, in full meditation mode. Is the poisoned apple eater perfectly rational? Are we perfectly rational? Well, I’m not sure. I suppose it depends.

Oh, heck, let’s just skip to the bottom line. According to the normative argument presented in neoclassical welfare economics, is the poisoned apple eater’s “utility” being maximized or not when he or she fulfills his or her preference and eats the apple, which we know has been poisoned but he or she may not know? Is it good or bad? Should we intervene or not, if that’s our only option? What does normative neoclassical welfare economics suggest? Not entirely sure, but I think it must be good, right? Ethics can be fun, albeit a tad confusing, when one uses random, false, unreal factual premises and casually defined terms. But that’s why people don’t study philosophy, isn’t it? So they can babble away about ethics without undo restraint? Keep things unsuitably simplistic? If you found that amusing, you’re in for a real treat in my other posts, because issues in the no-conflict case are a relatively insignificant side show compared to what happens when we apply normative neoclassical welfare economics in the context of resolving interpersonal conflicts of preferences, allocating scarce resources, etc., my usual focus.

Hey, here’s an idea. Take the normative content out of economics. Flag requisite normative or ethical inputs as such and receive them on a recurring, contingent basis from the people via democratic government. Make economics a science, at long last. Fulfill the dream. Oh, did I say that idea before? A million times? Well, let’s make it a million and one and call it a day, shall we?