I was reading yet another article in the long standing but never particularly fruitful vein of establishing that neoclassical welfare economics involves unrealistic assumptions and does not accurately reflect how people really think and so on, and it occurred to me maybe I should say a few more words about that sort of thing this week. I’ve been reading such arguments for quite a few years now and they never seem to go anywhere useful, I suppose because there isn’t any real dispute neoclassical economic theory is unrealistic in the sense proposed. I would suggest the real issue is whether the unrealistic elements are acceptable or not. With respect to that issue, some people seem to feel these “false, simplifying assumptions” as they’re known, more than make up for any decrement in explanatory power or predictive accuracy by the increase in theoretical tractability they provide. Others disagree, sometimes in the strongest terms. Some years ago the argument was all about establishing the significant theoretical issues that arise when we give up the assumption people are “perfectly” rational in their behavior. Apparently, that doesn’t lead to small changes in predictions but rather significant ones. However, it seems quite difficult in this context to get beyond opinions and feelings and into the realm of scientific, empirical verification. One rarely sees an attempt to actually characterize or measure or quantify the potential gain in predictive accuracy or the potential loss in theoretical tractability from replacing false, simplifying assumptions with more realistic assumptions. One rarely see any sort of head to head competition in the form of natural experiments involving the relative predictive ability of economic theories with false, simplifying assumptions and economic theories with more accurate but complicated assumptions. And when I say rarely, I mean basically never in my case. I’m just saying rarely to cover myself in case someone somewhere has ever done such a thing. Certainly not very well publicized if they have, is it? Why does the argument typically peter out at this all important stage of relative empirical accuracy? Well, if you’re asking me, I’d say it’s probably because the idiosyncratic mix of positive and normative elements in neoclassical economics prevents normal scientific processes.
The comical element to the whole discussion to me is that so many critiques of neoclassical economics focus on the positive side, on issues of scientific method and empirical accuracy, while so many negative reactions to neoclassical economics and controversies involving neoclassical economics are obviously normative or ethical in nature and involve objections to what the normative or evaluative side of the theory designates socially optimal and so on. Now I’m thinking about it, I honestly don’t recall ever hearing anyone object to neoclassical economics because its empirical predictions are not all they might be. In contrast, I’ve heard plenty of people object to dodgy ethical propositions from normative neoclassical welfare economics, or more often bad economics based in normative neoclassical welfare economics, like we need to accept homeless people living under the old bridge or vast imbalances in economic power because it’s socially optimal or efficient or what have you.
Everyone does understand they’re two different issues, right? Positive is different from normative? Fact different from value? Philosophy different from science? Everyone understands ethical philosophy has a different way of evaluating propositions and arguments than does science? That science and philosophy in the form of ethics have different methods?
Just to illustrate the difference in the context of my previous example, the whole issue of “unrealistic assumptions” and the ostensible tradeoff between theoretical tractability and predictive accuracy is an issue in positive economics. In normative economics, the comparable issue is the presence in normative or ethical arguments of false factual premises and the resulting inapplicability of the conclusions of such arguments to realistic situations, or to put the same issue a different way, the improper evaluation of normative inputs by considering their ethical plausibility in the false light of unrealistic conditions rather than under realistic conditions.
I contend all the big, controversial issues associated with neoclassical economics are normative in nature. Consequently, the proper critique of normative neoclassical welfare economics must take place in the realm of normative economics, that is to say, in the realm of philosophical ethics. The relevant issues creating problems include hidden value inputs, improperly evaluated value inputs, contradictory value inputs, value inputs combined with false factual premises, additional value inputs tacked on from outside economic theory, and simple logical or conceptual errors typically involving conflation of terms. Relevant methods include checking the ethical plausibility of potentially controversial value inputs in the most difficult or unfavorable realistic conditions and using counterfactual thought experiments to analyze concepts and evaluate value inputs. It’s not rocket science. But things surely get difficult quickly if one tries to use the wrong tools for the job. One cannot address normative issues associated with economic theory by talking exclusively about positive issues associated with economic theory. One cannot do philosophy using the scientific method, no matter how many times one tries.
