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.
