Sometimes when I’m discussing economics with random people online I get the vague or even not so vague impression some people think I’m doing something inappropriate, misleading, blatantly ideological when I talk about our economic system resolving interpersonal conflicts of needs and desires on the basis of economic power in markets. I get it, of course. Issues like interpersonal conflict and power are just the sort of things bad economics is typically most concerned to obscure, which ironically pretty much explains why I feel they’re so important to discuss. Indeed, I really think staying focused on the resolution of interpersonal conflict is the key to unraveling a lot of the rhetorical funny business one finds in bad economics. So let’s go over that this week.
Interpersonal conflict is pervasive, indeed omnipresent. Everyone is always in a sort of conflict with everyone else because everyone needs and desires things, but resources are limited. We only have only the one world. No Star Trek style replicators are in the offing just yet. Scarcity is the order of the day. Everyone can’t get whatever they want or sometimes even what they need, yet resources end up somewhere. How? Why? Well, in markets by whoever has the most economic power, given the requisite level of interest, of course.
Two people want or need the same resource. What does neoclassical welfare economics say about the ethics of who should get it? Nothing. What if one of the people needs the resources to survive and the other doesn’t? Nope. What if one seems a lot happier to get the resources than the other? Nope. What if getting the resources seems quite high in the preference list or ranking of one person and quite low in the preference list or ranking of the other? Nope. What if one person arguably has the right by nature, the heavens, common sentiment, or any thing else? Nope. The “utility” on which neoclassical welfare economics is based cannot support interpersonal utility comparisons of the type that would be required to resolve that interpersonal conflict. “Utility” is restricted to a sort of relatively inconsequential ethical side show about how we should treat people expressing preferences when there is no such interpersonal conflict or consideration of such interpersonal conflict has been consciously suppressed or held in abeyance, hence very significant in the Fairy Land of Economic Theory, but not really very significant at all in real life. The issue of what to do about interpersonal conflicts of needs and desires is a normative or ethical issue exogenous to economic theory. A failure to appreciate the implications of that fact for what one can say about real instances of markets and more generally economic systems and outcomes is really what underlies the entire rhetorical program of bad economics.
Distributional indifference and indifference relating to the extent of the market, that is, about which interpersonal conflicts should be resolved using markets and which using some other mechanism such as democratic government, are logical consequences of the inability to use “utility,” as defined in neoclassical welfare economics, to determine the ethically correct resolution of interpersonal conflicts. Let’s talk it through. Say two people A and B both want or need resource X. Consider the normative or ethical question who should get it. As I just mentioned, if one supposes neoclassical welfare economics says it should go to whoever gets the most “utility” from it, one would be mistaken. As I just said a moment ago, “utility” in economic theory cannot support statements of that kind, which involve interpersonal comparisons of “utility” that are impossible or undefined in economic theory (depending on that exact definition of “utility” one is using, a point I’ve discussed in previous posts).
Let’s say A has more economic power than B and therefore has the legal ability to claim X on the market if A prefers or desires to do so, and one thinks as a matter of ethics the issue should be resolved on that basis? That’s fine. That’s got nothing to do with “utility.” It’s an ethical judgment exogenous to economic theory based presumably on the ethical status of the mechanism for defining and distributing economic power.
Let’s say A gets X if legal specifications of property ownership, so-called property “rights,” and the other laws supporting a market exist, but B gets X under conditions of violent anarchy, and one thinks as a matter of ethics the issue should be resolved using law? That’s fine. That’s got nothing to do with “utility” as defined in neoclassical welfare economics. It’s an exogenous ethical judgment.
Let’s say A should get X under some particular social welfare function, and one thinks as a matter of ethics the issue should be resolved using that social welfare function. That’s fine. That’s got nothing to do with “utility” as defined in economic theory. That’s an exogenous ethical judgment expressed as “utility” using weights that cannot be justified within economic theory.
That’s what real neoclassical welfare economics says, anyway. But what does bad economics, ubiquitous misinterpretations of neoclassical welfare economics say? Well, some bad economics does an end run around indifference to distributional ethics and extent market to proclaim the existing pattern of economic power not just legally existing at some point in time but ethically justified and socially optimal. But as we just saw, those issues are exogenous to real neoclassical welfare economics. There’s nothing special about existing legal specifications of property ownership, property “rights,” in terms of “utility.” No reason to preserve them, to not alter them. Indeed, there’s no reason on the basis of “utility” or neoclassical welfare economics to even respect them.
Some bad economics portrays itself as normatively empty or neutral given the theoretical availability of social welfare functions. But as we just saw, some ethical conclusions are still endogenous to neoclassical welfare economics, derived within economic theory based on supposedly uncontroversial value inputs, and some are still exogenous and possibly quite controversial indeed. And bad economics typically ignores the implicit social welfare functions associated with any real market outcome, preferring instead to suppose they only become ethically relevant if one designates them as significant in that respect and explicitly introduces them as such.
Want to understand bad economics and how it works its dark magic? I would suggest concentrating on what someone suggests is the ethically correct resolution of interpersonal conflicts of needs, wants, and desires, on what someone has to say about the thorny and controversial question who should get what, where resources should go, and why. Because everyone has ideas about that, including economists, but whatever their beliefs, they aren’t based solely on normative neoclassical welfare economics under any sensible interpretation of that admittedly opaque theory. Don’t fall for the old switcheroo, the bait and switch, the big con of bad economics that suggests one can address the controversial ethical issue of how to resolve interpersonal conflicts of needs and desires using only trivial ethical propositions about how to treat people acting in isolation, with false factual premises like perfect information and perfect rationality to boot.
