Actors and Roles In Neoclassical Welfare Economics

I was thinking the other day a good way to avoid certain common types of confusion when addressing the normative or ethical arguments in bad economics, popular and ubiquitous misinterpretations of purposefully opaque normative neoclassical welfare economics, is simply to keep track of the various actors and roles. That’s because neoclassical welfare economics portrays different actors and even the same actors in different roles differently. Keep track of who one is talking about and what role they’re playing and one will avoid equivocating on actors and roles. To understand what I’m talking about here, let me go over a few possibilities.

Orthodox economists qua economists are meant to accurately express and follow the normative argument of neoclassical welfare economics, explain how to maximize total social “utility,” be indifferent to controversial distributional ethics (and by extension other controversial ethical issues not always clearly identified in opaque neoclassical welfare economics). They are not meant to maximize their own utility. That is to say, normative neoclassical economic theory is not a theory about how economists themselves can best create monopolies, set themselves up as kings and queens of the world, screw people over, etc. Orthodox economists qua economists are meant to take a social perspective, talking ostensibly about normative matters that involve and appeal and apply to everyone. Orthodox economists qua economists are not meant to interpret the normative bits of economic theory however they like, adding things and leaving things out, misleadingly portraying their own personal and potentially controversial exogenous value judgments as a part of neoclassical welfare economics, playing the old bait and switch. Incidentally, the fact that neoclassical welfare economics involves the use of an oddly defined and indeed idiosyncratic notion of “utility” that removes it from the lion’s share of ethical issues involving resolving conflicts of interests, needs, wants, desires between people does not make that theory a utilitarian ethical theory, and economists qua economists are not proponents of potentially controversial philosophical “utilitarianism” in any serious way beyond a superficial sharing of some terms, a point I’ve discussed frequently in previous posts. Orthodox economists qua economists are not meant to pretend they can evaluate real instances of market system or outcomes based on neoclassical welfare economics alone without acknowledging the need for input on exogenous distributional ethics and other controversial ethical issues. 

Regular folk in the role of voters in a democratic political system, including orthodox economists in their role as regular folk, are meant to supply the rather more controversial exogenous normative or ethical inputs required to evaluate any real instance of a market system or outcome and transmit their preferences and ethical judgments by voting for politicians promoting different economic policies. As such, orthodox economists qua economists are not meant to oppose the influence of regular folk and their political representatives or oppose political democracy by suggesting regular people are not qualified to register an opinion on the relevant exogenous, controversial normative issues; should not participate in the assessment or evaluation of real instances of market system and outcomes; and should not use democratic government to “interfere” with the economy. Although neoclassical welfare economics does not explicitly assign this role to the people or their political representatives and implies merely that some decision maker or other supply the required normative or ethical inputs, a logical lacuna leading to a sort of intellectual free for all in which various actors including unscrupulous orthodox economists have attempted to seize the much coveted crown of ethical arbiter for themselves, a charitable reading of neoclassical welfare economists suggests that power can only reasonably reside with the people and their democratic political representatives. As a general point of philosophy, these potentially controversial ethical issues cannot be resolved by experts, technocrats, scientists, politicians, priests, philosophers, orthodox economists, or anyone else on objective, positive, scientific grounds because of the fundamental subjective nature of ethics. To respect the subjective nature of ethical belief, the ethical proposition derived from the democratic ethos that an economic system should reflect the will, and the ethics, of the people, and the practical advantages of a flourishing, stable, peaceful society that addresses controversial ethical issues via public discussion and voting rather than brute force, the potentially controversial ethical inputs required to evaluate market system and outcomes can only be based on the ethical beliefs of the people delivered via democratic government. The exogenous normative or ethical inputs added by the mysterious decision maker, or in my gloss regular folk and their political representatives, to the conclusions of neoclassical welfare economics when evaluating economic systems and outcomes can express any form of ethical theory or no form. They needn’t express philosophical utilitarianism in style or substance, nor any other particular ethical theory including those based on fairness, justice, “natural law,” “natural rights” or anything else.

Moving from people using or adding normative content to neoclassical welfare economics for the purposes of evaluating real instances of economic systems and outcomes to people portrayed within neoclassical welfare economics, the real subjects of applied neoclassical welfare economics, the people applied neoclassical welfare economics is meant to be about, in their various roles as consumers, workers, business people, and so on, have the attributes of real people, that is to say, they are potentially ignorant, confused, irrational, emotional, prone to manipulation, etc. They may base their preferences on narrow self interest or ethical principle or emotion or any other motivation.

The abstracted ciphers that represent people in the models of positive or normative economic theory may have all manner of counterfactual qualities, that is to say, they may be portrayed as having perfect information, perfect rationality, whatever one likes. However, when applying to real people normative propositions derived with respect to these theoretical, abstracted ciphers, one must account for any differences that may involve the normative or ethical evaluation of inputs or conclusions. In other words, one shouldn’t perform what is known in the vernacular as the old bait and switch.

Consumers of both the real and theoretical cipher variety, including businesspeople in their role as consumers, tautologically “maximize” their own personal “utility” by expressing preferences through revealed choices. Consumers making choices and tautologically “maximizing” their “utility” doesn’t mean, on the one hand, that they follow utilitarian ethical philosophy or, on the other hand, are amoral and follow only their narrow self interest or lower level appetites, etc. In the context of neoclassical welfare economics, the use of the word “utility” is just a way of talking about individual preference rankings.

Workers similarly tautologically “maximize” their own “utility” when making decisions about employment. Normative neoclassical welfare economics does not entail the factual premise that workers care only about pay or express the normative proposition they should care only about pay. Their function or role is not constrained to be “maximizing” money. Although it may seem a little less obvious, the same situation applies to private investors of capital. Neoclassical welfare economics doesn’t imply private investors necessarily concern themselves only with returns and cannot or should not reject investments if they find the business unethical, inappropriate, or unacceptable in some way.

In contrast, business people qua business people of both the real and theoretical ciphers variety maximize profit, that is to say, money. They don’t maximize “utility.” Money does not equate to “utility” in neoclassical welfare economics.  The function or role of business people qua business people in a market system is to maximize profit, and if they fail to do that they will not survive as business people in a competitive business environment. 

The ostensibly socially beneficial economic function of business people acting in their role as business people, as entrepreneurs, planners, coordinators, and so on, lies behind the adage sometimes attributed to neoclassical welfare economics that “greed is good.” However, neoclassical welfare economics does not claim or recommend business people maximize money or be greedy in their roles as consumers, regular folk, voters evaluating economic systems and outcomes, etc. For example, business people acting in their alternate role as consumers tautologically maximize their own personal utility like anyone else, and as voters they participate in the normative evaluation of economic systems and outcomes like anyone else. Nor does neoclassical welfare economics portray any and every expression of greed on the part of business people qua business people as good or socially useful. The “greed” that is ostensibly “good” is the sort expressed by business people qua business people in certain controlled conditions. Greedy monopolists are not portrayed as “good” in neoclassical welfare economics. Greedy criminals and shady business people are not portrayed as “good” in neoclassical welfare economics. 

How does neoclassical welfare economics address human behavior in both the positive and normative sense? Well, that depends on who and in what role. Are we talking about economists qua economists, decision makers, real subjects of applied economic theory, theoretical subjects of economic theory, consumers, workers, private investors, business people qua business people, business people in other roles? Decide first what actor and in what role, because it matters. One will want to keep a handle on that or one might just end up going in circles forever, as I’ve observed is quite commonly the case. Bad economics is an intellectual artifact built upon the studiously opaque normative program of neoclassical welfare economics with copious amounts of additional confusion, misdirection, conflation, equivocation, and rhetorical subtleties of all types painstakingly added on. One can fight bad economics by simply speaking clearly and carefully when discussing neoclassical welfare economics, and clarifying and keeping track of the various actors and roles is as good a place to start as any.

Relative Utility and Pareto Improvements

I had an interesting thought the other day relating to the concept of Pareto improvements, that is to say, changes that make one person better off and no one worse off. Well, interesting to me, anyway. In a previous post, I explained that in the Fairy Land of Economic Theory, that is from the point of view of economic theory or economists qua economists, any Pareto improvement is equivalent to any other and they’re all equally ethically uncontroversial because issues relating to distributional ethics have been explicitly set aside, but in real life everyone evaluating economic systems or outcomes holding any form of distributional ethics, so basically everyone including regular folk and economists in their more general role as regular folk, will not only prefer some Pareto improvements to others, but may feel any particular Pareto improvement makes their society less ethical, less consistent with their distribution beliefs than before the improvement. In that sense, Pareto improvements are like Pareto optimums. They’re all the same in the Fairy Land, but in real life some people will prefer one and some another, and the decision between them, or even the decision to move toward any particular one in the presence of distributional consequences, will be external to the normative scheme presented in neoclassical welfare economics. However, it occurs to me now there may be even more serious problems with the concept that apply equally to real life and the Fairy Land. 

Let’s say we’re happily ensconced in the Fairy Land, so we’re not going to take up controversial distributional ethics ourselves. Let’s talk about how Pareto improvements in that land work. The first notable thing about these Pareto improvements is that one must take some care about the basis on which one is evaluating being “better off.” In particular, the ostensibly non-controversial quality of accepting Pareto improvements in the Fairy Land requires that we define “better off” in terms of “utility,” not as more conventionally in real life in terms of money. This is an issue that slipped me up on a regular basis to comical effect before I sat down and thought about it for five minutes. The problem with trying to define “better off” in terms of money is that money in the form of relative economic power can have real consequences in terms of “utility,” that is, the expression of individual preferences that forms the basis of neoclassical welfare economics. For example, say we have two people, A and B, who let’s say both like some precious one off gem. Currently, A has more money, economic power, and hence can gain possession of the gem by wielding that superior economic power and buying it on the market. However, suppose we then drop a shipload of money into B’s lap so B now has the upper hand in that department while A has just as much money or economic power as he or she had before. One might be tempted to think of this as a Pareto improvement, but that’s not really correct, is it? The change in relative economic power means B now gets the one off gem that A had gotten formerly. A must have less “utility” than previously in the sense A cannot fulfill preferences of the same rank he or she fulfilled before the change. A has been made worse off in terms of “utility.” No, trying to define Pareto improvements in terms of money or economic power does’t really work in a logical sense if one intends to return at some point to the “utility” used in neoclassical welfare economics.

However, we’re not out of the woods even if we define the concept of Pareto improvements in terms of changes in “utility.” One issue is what exactly is the real world equivalent of increasing one person’s “utility” while keeping everyone else’s “utility” the same in the context of an economic model? We may have a bag of money we can imagine dropping on someone’s lap, but we don’t have a bag of “utility.” But we’re talking about the Fairy Land right now so let’s not fret about it. I suppose it must just mean some policy by which one person does better in terms of moving up his or her ranking of preferences fulfilled than formerly, and everyone else fulfills preferences of the same rank as formerly. However, if that’s what we have in mind, then it seems logically impossible to pull off a Pareto improvement if the people involved, the subjects economists are studying, not the economists themselves looking in from on high, have preferences in the form of ethical beliefs about relative “utility,” or to address the particular expression of a Pareto improvement in which everyone is made better off together and no one’s “utility” is held constant, there is any variation in those preferences. To make the issue here a bit more intuitive or obvious, let’s say A and B are quite different sorts. A is relatively poor but hard working and conscientious and just in general full of everything anyone might associate with merit, while B is your classic silver spoon playboy, shiftless, lazy, totally lacking in what anyone might consider merit. Say we drop a shipload of “utility” into B’s lap so now B is fulfilling preferences way up his list or ranking of preferences while A remains stuck back at level one. Is there anything about this result that may appear ethically controversial not to us but to A? Well, I think if A has any ideas linking relative “utility” to merit or fairness or justice or has any utilitarian concerns involving human welfare or let’s just say any preferences relating to distributional ethics at all, A might actually be a little annoyed or put off at the change. A might suppose that as a matter of ethics we should have dispensed the shipload of “utility” some other way. More troubling, if we accept that subject A may have preferences on such matters, then it becomes clear A may no longer be attaining or expressing preferences of the same rank as formerly with respect to that particular aspect of the society in which he or she lives. In other words, I think this concept of a Pareto improvement really only makes sense if no one involved as subjects of economic theory holds any form of distributional ethics or, I suppose, if everyone involved holds the same form of distributional ethics so everyone is on board with the change in question. That would clearly not be the case in real life, in which we can safely say everyone holds beliefs relating to distributional ethics and there is variation in those beliefs, which is what generates the controversy “utility” in economics was designed to avoid, so Pareto improvements based on “utility” would be logically impossible in that context, but I’m suggesting the same result seems to apply equally to the ciphers standing for human subjects in the Fairy Land of Economic Theory itself. At least, I’ve never run across an explicit assumption or proposition that the theoretical constructs that stand in for people in the economic models of the Fairy Land are prohibited from holding preferences relating to distributional ethics or must all hold the same distributional ethics. The preferences that underlie “utility” in modern neoclassical welfare economics are famously meant to be neutral with respect to motivation, thus allowing preferences motivated by ethical beliefs to be associated with “utility” just as much as preferences based on other motivations. “Utility” generating preferences are no longer limited to amoral expressions of narrow self interest as in the old moral philosophizing of the Deists struggling to explain certain seemingly unfortunate characteristics of their fellows in light of the good lord’s benevolence, although of course the factual premise of profit maximization on the part of business people qua business people remains parts of the theory. It would be a little strange if ethics were allowed with respect to some issues but not others.

It’s an interesting area because it seems to me to get back to one of the distinctive claims about neoclassical welfare economics one finds in bad economics, which is that rather than economists qua economists setting aside controversial distributional ethics and by extension other less commonly recognized controversial ethical issues, neoclassical welfare economics proposes the very controversial ethical proposition regular folk evaluating economic systems or outcomes, including economists in their more general role as regular folk, should not have any beliefs relating to distributional ethics or any beliefs relating to any of the other controversial ethical issues. I’ve discussed before how that error can result from a failure to acknowledge or come to terms with the distinctive ethical half-theory structure of neoclassical welfare economics in which some ethical inputs relevant to evaluating real instances of market systems and outcomes are endogenous to the theory and some exogenous, or to put it another way, a failure to distinguish reality, in the form of defined situations in which all relevant ethical considerations must be addressed, from the Fairy Land of Economic Theory, partially undefined situations hedged about with false factual premises in which one can ignore certain relevant ethical considerations one finds in real life. Is the entire concept of ostensibly ethically uncontroversial Pareto improvements built on this error? Is it based on some strange journey from the Fairy Land to reality and then back to the Fairy Land? Or perhaps on a journey from modern economics to archaic Deism and then back to modern economics? In other words, does it depend upon an assumption both the real and theoretical subjects of economic theory follow the prescription of what is now bad economics and hold no distributional ethics or, if they do, they must all hold the same distributional ethics? 

Actually, now I’m thinking about it, I may have over complicated the situation a bit just then. What if the postulated decline in A’s “utility” following B’s windfall were not generated by preferences relating to distributional ethics at all but simple greed or envy as purveyors of bad economics typically propose? What if A follows the dictates of bad economics and holds no ethical beliefs including those suggesting the emotion of envy is not a proper basis for ethical thought? What if A simply prefers B not get one over on him or her? A greedily prefers the windfall himself or herself? Would the change in rank of A’s preferences being fulfilled relating to the characteristics of the world in which he or she lives, his or her relative situation in that world, and the “utility” associated with the fulfillment of those preferences no longer count? Are we in the business now of assessing the motivations that underlie preferences expressed by the subjects of economic theory and determining in our role as economists which preferences are acceptable and generate “utility” and which are not and do not? The de gustibus principle is out the window? We economists declare being greedy is fine, but not that greedy? Or must we also banish envy from the Fairy Land and institute a corresponding false factual premise in terms of our description of the real world in an applied context, not just deliver our own normative assessment of the sentiment, to make sure everything turns out right? 

It’s funny when economists try to do ethical philosophy, isn’t it? Has there ever been a more comically confused, non-rigorous subject than normative neoclassical welfare economics? We should fix bad economics by taking out the casual and typically just bad normative or ethical philosophizing, putting value judgments and ethics back in the hands of the people and democratic government, and making economics a true science. 

Law And Bad Economics

I thought I’d revisit, yet again, that most important and pervasive of the rhetorical tricks associated with bad economics: fake distributional indifference. However, let’s this time come at it from what I hope anyway may be a slightly different angle. Let’s discuss the issue in the context of the perceived status of existing laws relating to legal specifications of property ownership, contracts, markets, and just in general resolving interpersonal conflicts on the basis of economic power in markets, and the use of those existing laws to complicate or block consideration of potential future laws.

The funny thought that spurred this post, which was probably triggered by something or other I read online but have since forgotten, is that conservatives, in general, seem often quite concerned about potential unintended consequences when it comes to law and government policy generally, except in certain areas relating to economics, such as legal specifications of property ownership, contracts, and other laws relating to markets. In that particular area, and seemingly only in that area, conservatives commonly consider past iterations of democratic government and the laws they generated to have already anticipated, considered, and disposed of all relevant ethical issues in a way that henceforth forever removes those issues from the public realm. One supposes that’s why conservatives feel any further attention to what most people perceive as the potentially controversial ethical issues relating to resolving interpersonal conflicts on the basis of economic power in markets is unjustified, unwelcome, annoying, irritating, and just in general something to be avoided, ignored, or opposed. It’s already been decided. It’s all over. Time to move on. Nothing to see anymore. However, that markedly inconsistent determination to ossify certain aspects of our legal system as ethical gems of timeless perfection seems to fly in the face of the underlying presumption of democratic government that nothing is ever really conclusively over, no one can ever anticipate everything, anything may have unintended consequences, new ethical issues may always arise, and social opinion on previous ethical issues may always change. Democratic government is meant to be a never ending evolutionary process and that includes laws and regulations relating to our economic system, the use of economic power in markets, and our system for distributing economic power.

Specifically in the language of fake distributional indifference, passing along distributional ethics and other potentially controversial ethics expressed in law from past iterations of democratic government does not make one neutral or indifferent with respect to those distributional ethics and other ethics. Support for distributional mechanisms or outcomes based on existing law is a normative position like any other. Like any other form of distributional ethics, it goes beyond what one can derive from “utility” as defined in economic theory and hence is inconsistent with distributional indifference. Good economics, real neoclassical welfare economics, which clearly identifies exogenous normative inputs and distinguishes those from the normative inputs of economic theory itself, can handle that. Bad economics, misinterpretations of neoclassical economic theory, the sort of economics typically espoused by conservatives for obvious reasons, cannot. By submerging the normative or ethical issues associated with resolving interpersonal conflicts using economic power in markets that require inputs from outside economic theory, by trying to ossify certain exogenous value inputs and take them off the table, bad economics essentially sets itself up as the champion of the status quo and the enemy of legal change and the democratic political process by which that legal change takes place.

In an economic context, it’s important to acknowledge an exogenous value input even if the value input in question is simply that one should support the status quo, whatever it may be, or should pass along existing value judgments based on past iterations of democratic government that are not really one’s own. One may suppose that amounts to avoiding ethical controversy, but that is incorrect. It only avoids controversy for those supporting the status quo. It doesn’t avoid controversy about the status quo. Sometimes the normative or ethical significance of received law relating to markets and distributional mechanisms derived from past democratic government is the whole issue. In a democratic system, nothing is ever meant to be conclusively decided, set in stone, taken off the table. Any value input relating to resolving interpersonal conflicts based on economic power in markets received from democratic government, including distributional ethics but also other potentially controversial ethical issues such as the extent of the market, can be revised by subsequent democratic government. It’s all forever on the table. It’s all always a suitable subject for intellectual inquiry and philosophical debate. A good economist will flag those normative inputs and clearly differentiate them from economic theory proper to facilitate consideration of such issues.

First Anniversary

Seems it’s the first anniversary of my little blog addressing bad economics. My goodness, how the time has flown. I’ve learned a lot from the many economists and others I’ve talked to online, so I must thank them for that. (I’m moderately active on Twitter and contrary to my initial expectations have had quite a few helpful discussions and conversations there, along with the all but obligatory insults and inanity from the peanut gallery.) I did a sort of recap of the initial part of our journey in my post Bad Economics Redux from August 12, 2020, but I thought this week I might take another quick look back and mention some highlights that stand out to me from my first year of battle.

I feel we made some progress on the notion neoclassical welfare economics entails the ethical proposition “greed is good.” I started out thinking there was nothing to it at all because of the open ended nature of preferences and “utility” as defined in economics under the de gustibus non est disputandum principle, but talking it through with others made me realize this issue can appear different depending on what part of the theory one is discussing and, in particular, whether one is looking at the theory from the perspective of a consumer or a businessperson. In neoclassical welfare economics consumers, and I guess everyone in their normal capacity as human beings, are cast as “maximizing utility,” and the preferences that lead to “utility” can relate to anything, including ethical theories or propositions inconsistent with greed. In that context, I had initially thought the notion neoclassical welfare economics suggests “greed is good” was due to a simple misunderstanding of how “utility” is defined in modern neoclassical welfare economics. However, I’ve come to appreciate that businesspeople in their role as businesspeople are indeed presented in neoclassical economic theory as maximizing not “utility” but something rather more prosaic: profit, that is, money. For any businessperson who wants to remain in business for long in a competitive market context, this sort of constrained “greed” in the business world is basically a requirement, and whether economic theory suggests that’s what they ought to do or is simply stating a factual presumption about what we presume they actually will and indeed must do seems not very important. The relevant issue here, of course, is that maximizing profit under existing legal requirements in one’s role as a businessperson in a market system does not equate to “greed” more generally. For example, neoclassical welfare economics does not propose there’s anything particularly attractive or useful about greed in the context of a monopoly or oligopoly or as a motivation for illegality or criminality. Similarly, the constrained goal of profit maximization for businesspeople qua businesspeople does not equate to an ethical proposition they should be greedy more generally, in other roles, in their private lives as it were, as consumers, regular folk, citizens of a political democracy. For example, it does not suggest nor establish they should hoard economic power or fight attempts by democratic government to generate an ethical distribution of economic power. So although I think it’s still incorrect to say neoclassical welfare economics proposes “greed is good,” I must admit this is yet another area where certain features of neoclassical welfare economics may easily lead to bad economics, confusion, and conflict. 

We also made some progress in the area of the definition of ethically controversial “distributional issues” and, in particular, how such issues relate to other equally controversial ethical issues associated with resolving interpersonal conflicts on the basis of economic power in markets that should really be treated similarly to distributional issues. We discussed that when people mention “distributional issues” they seem often to have in mind issues relating to the characteristics and behavior of the people involved rather than the situational context, for example, someone’s merit versus whether we should use the market mechanism to distribute the latest video game or vaccine. We noted any ethical concerns related to the resolution of particular interpersonal conflicts using economic power in markets could theoretically be handled by artful point of purchase distributional fixes, doling out economic power to ensure the situation turns out the way one finds ethically correct, but it can be awkward, impractical, and likely not what many people may have in mind when they think of addressing distributional issues more generally. For that reason, I’ve begun to think it may be more sensible to consider those latter more situational or contextual issues in a different category I call “extent of the market,” that is, potentially controversial ethical judgments relating to when we should use economic power and the market mechanism to resolve interpersonal conflicts and when we should use some other mechanism. Examples of controversial ethical issues that seem only sensible when discussed in the context of the extent of the market are situations involving people or entity incapable of wielding economic power, so issues like future generations or really I suppose even children, the environment, animals, etc.

We spent some time discussing the concept of “utility” used in neoclassical welfare economics. I distinguished the two contexts in which utility features in neoclassical economic theory, the tautological faux behavioral assumption relating to individual behavior, which is really about preferences and just a funny way of saying people prefer what they prefer, and the actual normative or ethical proposition we should arrange our economic system to maximize total social “utility.” We established that what seems generally accepted as the most common definition of “utility” in modern neoclassical welfare economics, “preference utility,” in which “utility” is interpreted as just a funny way of talking about individual preference rankings, does not and cannot support a sincere from of philosophical or ethical utilitarianism. We suggested the use of the word “utility” in that context appears designed to serve no purpose beyond removing traditional utilitarian or welfare considerations from that most important of ethical contexts, resolving interpersonal conflicts. We also mentioned the other now less common but older definition, a sort of internal perception of satisfaction from preference fulfillment I’ve taken to calling “perception utility,” and showed why the normative or ethical proposition we should maximize it is completely ethically implausible and the only reason anyone might accept such a proposition is the inability to actually ever do such a thing, thus expressing the same intellectual or conceptual relationship to sincere ethical utilitarianism we saw with “preference utility.” We discussed how neoclassical welfare economics would be rendered much less confusing and hence greatly improved if economists simply stopped using the unnecessary word “utility” and started talking directly about preference rankings of individuals and normative propositions relating to individuals expressing preferences.

I thought of a fun way to portray the various pathways by which normative or ethical content makes its way into bad economics, what I call the “onion of bad economics,” with layers ranging from values explicitly presented in neoclassical welfare economics but often misstated and misunderstood, to values that appear to be implicit in neoclassical welfare economics but not generally acknowledged or discussed, to values tacked-on at the end and then misleadingly presented as part of neoclassical welfare economics. That was an attempt above all else to get people out of the bad habit of assuming the only value inputs to the normative arguments made in neoclassical welfare economics and bad economics based on neoclassical welfare economics are those relating to “utility,” which is little more than a simple bait and switch.

We spent a good deal of time on the various ways the particular instance of add-on ethical content I call fake distributional indifference generates bad economics. One particularly memorable discussion concerned the conceptual difficulties associated with separating out distributional issues from discussions of ostensibly optimal market structure when the market structure itself appears to entail a continuous distributional mechanism in the form of labor and capital markets. Another interesting discussion involving fake distributional indifference addressed the common faux tradeoff between economic efficiency and equity, which really involves a tradeoff between two different conceptions of equity, and perhaps a tradeoff between total output and equity, but certainly not a tradeoff between economic efficiency and equity.

We devoted a certain amount of time to differentiating the normative and positive elements of neoclassical economics and establishing positive critiques are really only relevant to the positive bits and normative critiques relevant to the normative bits. I contrasted and compared, a number of times, the significance of “false simplifying assumptions” in the context of positive scientific economic models from that of “false factual premises” in normative or evaluative welfare economics. I suggested most, or dare I say all, real controversies associated with neoclassical welfare economic are about normative, not positive issues, about what normative neoclassical welfare economists suggest we do as a society, not about ostensibly annoyingly imprecise empirical predictions from arguable flawed economic models. Rather recently I realized this issue is likely related to the popularity of a certain sort of bad philosophy that denies any useful distinction between positive and normative statements, as opposed to the useful and rather obvious observation that normative issues may impinge upon positive scientific theories in various ways and positive statements will appear in normative or ethical arguments meant to apply to the real world in which we live. I remarked this whole normative versus positive issue relates to what economists think they’re doing and how they present what they think they’re doing to others, with the main contenders in that area being empirical science, mathematical optimization problems with random inputs (by which I mean value inputs that are not meant to have been evaluated by economists, as well as potentially false factual premises), social ethics in the form of optimization problems with ostensibly evaluated normative inputs and true factual premises, and story telling or myth making designed to foster certain ways of thinking and so on.

I was quite happy with my discussion of the peculiar and indeed idiosyncratic “ethical half-theory” structure of neoclassical welfare economics in which certain normative or ethical considerations relevant to evaluating market system and outcomes are endogenous to the theory and some exogenous, and how that feature of economic theory is likely behind the risible notion from bad economics that economic theory can serve as a stand alone system for evaluating economic systems and outcomes, including the idea neoclassical welfare economics proposes that distributional issues and other controversial ethical issues associated with real market systems are irrelevant or unimportant. We discussed how one can easily develop sensible ethical propositions that apply only in what I call the Fairy Land of Economic Theory in which certain problematic elements of reality are set aside, but one cannot expect such propositions to relate directly to realistic situations, which require the reintroduction and consideration of the controversial ethical issues that had been set aside.

We finally made some progress on the confusion introduced by so-called “social welfare functions” and the notion the availability of these functions renders neoclassical welfare economics ethically neutral or devoid of normative content. I showed how the availability of social welfare functions does not change the fundamental form or structure of neoclassical welfare economics from that of an ethical half theory because the defense or justification for some relevant ethical issues will still be endogenous and some exogenous to economic theory. We discussed how social welfare functions are much more suited to addressing certain ethical considerations than others and suggested some considerations may be incapable of being expressed in that way. I also pointed out bad economics in the form of fake distributional indifference is unaffected by the availability of social welfare functions except for a slight change in terminology from ignoring the distributional and other ethical issues associated with real markets and market outcomes to ignoring the implicit social welfare functions that capture at least some of those issues.

I respectfully disagreed with those who argue the most appropriate way to address bad economics is for economists to learn to be better ethical philosophers and improve the normative or ethical content of neoclassical welfare economics and instead argued that because of the fundamentally subjective nature of the ethical decisions required it would be more appropriate to simply remove the normative or ethical content from economics and allow democratic government to provide that content by forever temporarily combining and reconciling the relevant subjective ethical views of the affected population. We spent some time establishing how the unhealthy belief economists in their role as social technocrats should themselves resolve the controversial ethical issues related to evaluating market systems and outcomes, or simply accept and pass along certain value inputs as ossified relics of past government decisions and law thus becoming the champions of the status quo, is associated with anti-democracy sentiment. However, I did suggest a role for neoclassical welfare economics as an intellectual framework demonstrating where normative inputs are required from the people and democratic government. I also acknowledged that as an intermediary or perhaps even second best solution it would be helpful for economists to become sufficiently adept at philosophy and ethics to render the current normative content of neoclassical welfare economics clearer, more sensible, more consistent, more easily evaluated, and so on.

I don’t know about you, but that seems quite a lot for one year. I’ll be interested in what further developments the new year may bring, and I look forward to constructive criticisms and conversation on my Twitter feed. I hope you’re enjoying the journey as much as I am. Fighting bad economics is a big project, with many different aspects or components, and it will take a lot of people writing and talking for a great many years before we can finally and conclusively vanquish the beast. And vanquish it we must because it spreads confusion and conflict wherever it appears. You should help in this, the great battle of our age: the fight against bad economics. 

Addendum

More recently, I’ve changed my mind about the middle layer of my onion of bad economics. In particular, I now believe it’s more sensible to present the choice to use economic power in markets to resolve interpersonal conflicts, and even the choice to support the legal conditions required to create or sustain markets, as exogenous to neoclassical welfare economics. It’s a point of interpretation, of what one believes reasonable to suppose neoclassical welfare economics is meant to say, but recently I’ve concluded it makes more sense to say neoclassical welfare economics says a good deal less than many people seem to suppose. For example, see the post Law Over Anarchy In Neoclassical Welfare Economics from June 2, 2021.