Common Equivocations Relating to Efficiency and Pareto Improvements

I recently did a post on what is known in philosophy and presumably elsewhere as equivocation on terms in the context of bad economics involving the much storied term “utility.” However, I neglected to mention the same point applies to some other concepts in neoclassical economic theory defined with respect to “utility,” including “efficiency” and Pareto improvements. I’ve discussed issues with those concepts before in previous posts, but this may be a good opportunity to go over them again with an emphasis on the potential multiple interpretations of the terms involved.

Let’s take “efficiency” first. “Economic efficiency,” the type we’re normally discussing in neoclassical welfare economics, is defined in terms of “utility,” not output. Any time neoclassical welfare economics espouses indifference between two systems or outcomes based on how it defines “utility,” it also espouses indifference to “economic efficiency.” In particular, if two outcomes differ along the distributional dimension in such a way that one cannot go from one to the other using only “Pareto improvements,” economic theory espouses indifference, even if one outcome is “economically efficient” and the other is not.

What drives that result is that an outcome being “economically efficient” does not necessarily imply it is associated with any more “utility” than an outcome that is economically inefficient. In the context we just described, we’re not losing any “utility” when we go with the economically inefficient outcome. One can’t compare the “utility” of two outcomes that differ along the distributional dimension in the way we just discussed, even accepting maximizing “utility” as an appropriate goal. That’s obviously rather different from how “efficiency” is used in everyday speech when defined with respect to output, let’s say, in which an “efficient” outcome will always be preferable to an inefficient outcome, accepting maximizing output as an appropriate goal.

Equivocation on different definitions of “efficiency” can give “economic efficiency” the illusion of normative significance beyond that of the “utility” by which it is defined. It’s called bad economics. It leads to talk of an “efficiency - equity” tradeoff as opposed to an “output - equity” tradeoff. An economic efficiency versus equity tradeoff, with both defined with respect to “utility,” is incoherent nonsense. An output versus equity tradeoff is something that might actually exist, but not necessarily. It’s an empirical issue.

A similar sort of equivocation can take place with respect to Pareto improvements on phases like “better off” and “worse off.” In neoclassical welfare economics those phrases in that context are defined relative to “utility,” not money, economic power, output, etc. When we discuss a Pareto improvement making at least one person better and no one worse off, we mean in terms of “utility.” That is, we’re describing a situation in which one person is moving up his or her preference rankings while everyone else is staying at preferences of the same rank, or better, in their own preference rankings.

A Pareto improvement defined in terms of money, economic power, output, goods and services, is not the same as one defined in terms of “utility.” Anything that changes relative economic power in the market has material consequences for everyone’s “utility.” In a world of people competing for scarce resources in markets, it is implausible to suppose increasing the relative economic power of any one person will have no negative effect on others as far as retaining particular positions in their preference rankings with respect to those resources.

Pareto improvements defined in terms of “utility” are also interesting in their own right. They can really only exist if the implied change in relative “utility” is consistent with the preferences of those involved as far as distributional ethics; otherwise, again, we have repercussions for everyone’s “utility.” Someone with a preference for a fair or just society based on, let’s say, some conception of merit, will move down his or her preference rankings if some policy gives only his or her unworthy, merit-free neighbor an ethically unwarranted shot of undeserved “utility.” The idea that neoclassical welfare economics itself proposes the ethical proposition people ought not have distributional ethics that would have a problem with that breaks distributional indifference, and the implied overriding of other people’s potential ethical preferences breaks the de gustibus non est disputandum principle. It’s something one hears people proposing, but it’s bad economics. It introduces ethical or normative propositions that are not based on “utility” and are, in fact, inconsistent with those based on “utility.” Pareto improvements are yet another intellectual artifact of the Fairy Land of Economic Theory made possible by theoretically holding certain relevant ethical issues in abeyance in a way that cannot be applied in the real world. It’s mildly interesting to talk about them in a fabricated, unreal, arbitrary theoretical setting, but it’s not anything that has any direct application to the real world.

Want to help fight bad economics? Pay attention to terms. Talking about “economic efficiency” is certainly a bit clearer than just talking about “efficiency.” However, even “economic efficiency” can sound to the uninitiated rather like getting the best price on a box of nails. There are better options than even that. “Utility efficiency” let’s everyone know one is talking about something a tad out of the ordinary, and since in modern neoclassical economics “utility” is just a funny way of talking about the preference rankings of individuals, even better is something like “individual preference rank efficiency,” which should certainly provide anyone ample opportunity to realize we’re not talking about your average, everyday “efficiency.” Similarly, when discussing theoretical concepts like Pareto improvements one should stress the basis on which one is measuring “better off” and “worse off.” Again, the clearest way to say it is something like “worse off in terms of individual preference rankings.”

Much of rhetorically clever bad economics hinges on this type of equivocation on terms as well as conflation of concepts and cons of various sorts including jumping willy-nilly back and forth between the Fairy Land of Economic Theory and reality. As such, overcoming bad economics depends above all else on clearly distinguishing sometimes opaque neoclassical welfare economics proper from the ubiquitous bad economics based loosely upon it but with errors, misinterpretations, arbitrary add ons, and so on. Addressing and overcoming bad economics is not especially difficult, if one has the will. Bad economics is useful and appealing to many people for various reasons, but it generates confusion, conflict, and anti-democracy sentiment. You should take the path of truth and philosophy and help fight bad economics.

Bad Economics and Bad Philosophy

I’m all about addressing bad economics but sometimes when addressing bad economics I can’t help but notice certain connections to bad philosophy. Maybe I can say a few words about that this week in relation to two ideas from bad philosophy: the idea that normative or ethical propositions are nonsense from logical positivism, and the idea there is no useful distinction between positive and normative propositions from bad philosophy of science.

I’ve mentioned before one very typical expression of bad economics is to propose neoclassical welfare economics contains or expresses the absurdly controversial ethical or normative proposition distributional ethics don’t matter for the evaluation of economic systems and outcomes rather than the uncontroversial ethical or normative proposition they do matter, but will not be taken up in neoclassical welfare economics because they are controversial. It’s a way to misuse neoclassical welfare economics to defend certain real world instances of economic systems or outcomes without trotting out the fake distributional indifference I’ve discussed in many previous posts. I’m just throwing out ideas here, but I suspect one thing some purveyors of bad economics may have in the back of their minds or may at least rely upon for rhetorical effect when they take this approach is the old idea from the now defunct philosophical theory of logical positivism that normative or ethical propositions of the sort associated with distributional ethics are grammatical “nonsense” because they aren’t science, aren’t falsifiable. My impression is that many economists in particular may be attracted to this sort of thing because of their often desperate desire to establish the supposed scientific credentials of economics. And has anyone in the world of philosophy ever been more myopically preoccupied with empirical science than the old logical positivists?

Of course, it’s bad philosophy. People have known that for many decades now. People sensibly discuss normative or ethical propositions all the time, even though it is not science. The whole logical positivist idea that value, normative, ethical propositions are grammatical “nonsense” is really simply a failure to understand what ethics is all about. Coming from that perspective, one would never be able to recognize or understand bad economics, which is bad above all else because of the sloppy, unrigorous, misleading, confusing normative or ethical theorizing involved.

The old logical positivist perspective is also inconsistent with what I call the ethical half-theory structure of neoclassical welfare economics in which some ethical issues relevant to evaluating economic systems and outcomes are in and some are out. Normative neoclassical welfare economics is an ethical half-theory, not a purely positive, scientific, ethical non-theory. It purports to evaluate economic system and outcomes, albeit only partially, explain which systems and outcomes are socially optimal, provide policy advice, recommend what people ought to do. It includes explicit normative propositions relating to “utility” (individual preference rankings) when there is no interpersonal conflict, and may imply others, and generates (partial) normative conclusions. More to the point, the unique ethical-half theory structure of neoclassical welfare economics is not based on the idea the normative or value inputs that are in are scientific, positive, verifiable, falsifiable, or different in any fundamental way from those that are out, only that they less controversial. (Of course, as I’ve suggested in previous posts, much of the apparent uncontroversial quality of the endogenous normative inputs is derived from that the fact they are not presented clearly and are evaluated in conjunction with false factual premises, but we can go over that again some other day.) The 1950s have left the building, but if one really wants to be the last logical positivist, one should at least be consistent about it and treat any discussions of “optimal” economic systems or outcomes, any normative or evaluative discussion of economic issues, any policy advice, as grammatical “nonsense.”

A completely different connection between bad economics and bad philosophy draws on the notion from themes in the philosophy of science from the 1970s and 1980s that because normative concerns, biases, ideology can affect positive theory, and positive factual premises can show up in normative or ethical arguments, there is no useful distinction between fact and value, normative and positive, is and ought, science and ethical philosophy. Again, just throwing out ideas here, but my impression is many economists may be drawn to this sort of thing because of the complications associated with the peculiar mix of positive and normative one finds in neoclassical welfare economics, and the pervasive conflation of the methods appropriate to each. If there’s no real difference anyway, well then, problem solved. Easy peasy.

Again, we’re talking about bad philosophy. The argument takes a useful and valuable point about the interaction of positive and normative statements and arguments and misstates and exaggerates its significance and relevance. Positive and normative statements remain fundamentally different from one another. Surely it would be quite difficult to understand why neoclassical welfare economics exhibits distributional indifference if one doesn’t understand the distinction between positive and normative propositions. Why not just solve the controversial normative issues? Do a bit of math or run an experiment? Or maybe one supposes that’s what neoclassical welfare economics already has done? That it has demonstrated using math, logic, and science alone that we should adopt some economic system or prefer some economic outcome regardless of the distributional issues involved? One hears that sort of thing all the time; it’s called bad economics. Or taking a step back, one imagines one who cannot appreciate the difference between positive and normative propositions and thus cannot see the point of distributional indifference in neoclassical welfare economics may be quite amenable to what I’ve been calling fake distributional indifference. Just informally fix up the funny, inexplicable bits of neoclassical welfare economics in practice. Improve it. Make it a bit more sensible. The 1970s have left the building, but if one wants to join American conservatives in the fantasy Land of Alternative Facts, in which the only criterion for what is true is what one wants to be true, where there is no distinction between value and fact, positive and normative, science and ethics, is and ought, then go for it. You don’t need neoclassical welfare economics to do that, just make something up. 

Addressing the dodgy normative content of bad economics becomes that much more difficult when combined with bad philosophy. Ethics, values, normative ideas, beliefs, propositions are important. They are fundamentally different from positive, empirical, factual, scientific propositions on the one hand and from positive, logical propositions on the other hand, yet one can think and talk about them sensibly nonetheless, and one should if one wants to avoid the confusion and conflict of bad economics.

Don’t Say Utility Challenge

A while ago I did a series of posts about the confusion I contend is caused by the idiosyncratic concept of “utility” in neoclassical welfare economics. I’d like to re-visit that issue this week and propose, or rather re-propose, a simple solution.

The essential problem with how the term “utility” is used in neoclassical economics is the ease with which one can equivocate on the idiosyncratic, heavily attenuated concept of “utility” meant to serve in the distinctive ethical half-theory of normative neoclassical welfare economics on the one hand, and other common and rather broader definitions of “utility” from ethical philosophy meant to serve in full ethical theories on the other hand. That problem is further complicated by equivocation involving two different idiosyncratic definitions of “utility” specific to economics itself. Let’s start with the latter issue.

The now standard, conventional, most common explicit interpretation of “utility” in the context of neoclassical welfare economics is that it is simply a funny word we can use to discuss the preference rankings of individuals. The other, older, typically implicit interpretation of “utility” is that it refers to subjective perceptions of satisfaction from preference fulfillment. In practice, the two definitions amount to the same thing because according to the subjective perception of satisfaction interpretation of “utility,” the only acceptable observable or empirical indication of such perceptions is, yes, the preference rankings of individuals. However, the distinction does, of course, have conceptual and philosophical consequences in the context of normative economics.

Under the preference rankings of individuals interpretation, talking about interpersonal utility comparisons is grammatical nonsense because the word “utility” is undefined in that context. It would be like talking about the intensity of a square root or some other bit of nonsense. Under the preference ranking definition  of “utility,” “utility” doesn’t exist, per se. It’s not a thing. There is no “utility.” How can we say that? Because if it referred to anything that actually existed, whatever it was would still exist in an interpersonal context, and we would be able to talk perfectly sensibly about interpersonal utility comparisons, which we cannot do if we define “utility” in terms of the preference ranking of an individual. In contrast, under the definition of “utility” as an inaccessible internal perception of preference satisfaction, the phrase “interpersonal utility comparison” makes grammatical sense because, of course, the internal perceptions to which “utility” would then refer are actually meant to exist in some sense, albeit only as subjective perceptions, and they wouldn’t simply vanish into a puff of smoke when another person arrives on the scene. However, under the perception of satisfaction from preference fulfillment interpretation of “utility,” interpersonal utility comparisons are impossible because the perceptions involved are meant to be inaccessible and subjective in some way. So, again, the practical results are the same.

The funny word to refer to preference rankings of individuals interpretation of “utility” is certainly the standard, formal, most commonly accepted explicit definition, but one commonly hears statements that at least appear to imply the perception of preference satisfaction interpretation of “utility” involving, for example, interpersonal “utility” comparisons being impossible rather than undefined, distributing “utility” using distributional policy, weighting and combining the “utility” of different people, conflating “utility” with money or total economic output, and so on. Similarly, one hears people talking about cardinal versus ordinal “utility” functions with little confidence they understand the implications of those mathematical expressions for the underlying meaning of “utility” and the consequences for the normative evaluation of those concepts. I’ve discussed the issue previously, but briefly, a cardinal utility function obviously is clearly inconsistent with a preference ranking definition of “utility” while an ordinal utility function leaves the underlying concept of “utility” indeterminate.

Moving to the other definition, one philosophically interesting feature of the subjective perception of preference fulfillment interpretation of “utility” is that it clearly bears some relationship to the more traditional definitions or interpretations of “utility” one finds in ethical philosophy, which typically have to do with human welfare or happiness. However, what makes this interpretation stand out from a philosophical perspective is that accepting the goal of maximizing “utility” defined in terms of these subjective perceptions would not only be absurdly ethically controversial but entirely ethically implausible. One can establish that result easily enough by setting up a little thought experiment, a dream let’s say, where one postulates access to the normally inaccessible subjective perceptions and then works out the consequences of trying to maximize them. The problem occurs when one entertains the possibility of what I usually call “superconductors of utility,” individuals who can generate perceptions of such passion or strength or whatever governs the size or level of intensity of such internal perceptions they dwarf the perceptions of others.

Incidentally, I should point out that the need to continually discuss two different and conflicting definitions of a word or concept that is really at the heart of neoclassical welfare economics, a theory that is at least nominally all about maximizing total social “utility,” really demonstrates the sloppy, non-rigorous aspect of orthodox neoclassical economics when it comes to the all important normative content. It’s almost as though economists working in that tradition don’t really care what the underlying concepts are, let alone if they’ve properly evaluated the normative arguments they’re making. They’re clearly quite interested in manipulating the mathematical expression of those concepts, but again in practice the math in this case works out the same, so one infers it may appear to them not very important to sort out, which is rather comical given the two interpretations lead to two entirely different theories in a normative or ethical sense. Indeed, I’ve had other economists suggest to me “utility” is basically undefined in neoclassical economic theory and can mean whatever one likes it to mean, which again is comical to me because one could never establish the core result of neoclassical welfare economics, the ostensible ethical superiority or optimality of a Pareto optimal, economically efficient, perfectly competitive market system or outcome, based upon maximizing an undefined concept, that is, maximizing whatever one feels inclined to maximize. No serious, honest philosopher would proceed with an ethical or normative argument while purposefully refusing to define the terms in an obvious attempt to complicate and confound his or her readers. The refusal of the economics profession to conclusively take a stand on what “utility” is actually meant to represent very nicely demonstrates why economists have no business dabbling in ethical philosophy or normative issues.

I’ve discussed all this material in previous posts, so I won’t belabor it again here. No, what crossed my mind the other day, which is again an idea I’ve discussed previously and not a new idea by any means (see, for example, my post Fixing Bad Economics By Removing References To Utility, September 23, 2020), is that there seems a pretty easy way to eliminate much of the confusion caused by the use of the term “utility” in neoclassical welfare economics, which is to simply stop using the term and instead replace every instance of “utility” with “preference rankings of individuals,” which is its conceptual or practical equivalent, depending on which definition of “utility” one is using.

Instead of saying individuals maximize their “utility,” say individuals express preferences. 

Instead of talking about an economic system that “maximizes total social utility,” talk about a system consistent with certain ethical or normative propositions relating to how one should act toward other individuals expressing their preferences in certain context. (And in case you don’t get where I’m going with that from my previous posts, by “particular contexts,” I mean above all else the context in which those preferences do not conflict with the preferences of anyone else, a one person world, as opposed to the context in which they do conflict and we need to get into resolving interpersonal conflicts of needs and desires.)

Instead of talking about social welfare functions that weight the “utility” of different people, talk about social welfare functions that weight the preference rankings of different individuals.

Instead of talking about aggregating “utility” across individuals, talk about aggregating the preference rankings of different individuals across individuals.

Instead of talking about expected “utility,” talk about expected rank in the preference rankings of a given individual.

I contend this simple act alone, which could easily be made with a minimum of fuss, would do a great deal to clarify the ethical half-theory structure of normative neoclassical welfare economics and distinguish that unique, idiosyncratic structure from the more conventional, full or complete ethical theory structure of proper utilitarian theories one finds in ethical philosophy. Let’s call it the Don’t Say Utility Challenge. Economists, and purveyors of bad economics, I wonder, can you do it? For the next month? The next week? How about the next five minutes?

Did I sound a bit sarcastic just then? You know although I’m quite serious when I recommend this approach to intellectually serious readers of economic theory, I don’t expect purveyors of bad economics to entertain the idea for even a moment. Why? Because bad economics is to a large degree an exercise in rhetoric rather more than a serious intellectual endeavor. It is useful for some people in a very practical, financial sense, and as one might expect it is very generously financially supported by them, precisely because of the confusion and darkness it generates about the normative aspects of economic issues, the ability bad economics has to pull the proverbial wool over some people’s eyes and submerge important and relevant ethical issues relating to evaluating market systems and outcomes. We should all work to fix bad economics, but as this business with the funny and continued use of “utility” in economics demonstrates, we probably shouldn’t expect too much help from purveyors of bad economics.

Two Types of Normative or Ethical Neutrality

I know I just discussed the important concept of ubiquitous “fake distribution indifference” a few weeks ago, but I’ve been meaning for some time to write something on a closely related but I think somewhat more general version of the same concept that involves potential equivocation on different interpretations of what it means to be neutral or indifferent to normative or ethical concerns. Maybe I can get that out of the way this week.

Let me start by observing there is certainly a difference between a normative proposition that supports the status quo for substantive reasons relating to that particular arrangement as the status quo and would not apply to any other potential arrangement were it the status quo, and a normative proposition supporting that same status quo simply because it’s the status quo, a proposition that would apply equally to any other potential arrangement were it the status quo. However, the proposition one should support the status quo simply because it’s the status quo is a normative proposition just as much as a normative proposition that provides substantive reasons for supporting the status quo. It doesn’t represent neutrality or indifference in the broadest sense. It doesn’t represent the absence of normative or ethical propositions.

Furthermore, the normative proposition one should accept the status quo simply because it’s the status quo is a pretty implausible and at least enormously controversial normative proposition, certainly entirely inconsistent with the supposed aim of neoclassical welfare economics to avoid controversial ethical issues that underlies the definition of “utility,” the rendering of distributional issues and ethics exogenous, and indeed the entire ethical half-theory structure of neoclassical welfare economics, where some supposedly uncontroversial ethical issues relevant to evaluating economic systems and outcomes are handled endogenously and other supposedly controversial ones exogenously. What’s so special about the status quo by virtue of it merely being the status quo anyway? Nothing relating to “utility” as defined in neoclassical economics, that’s for sure. Indeed, one can’t help but wonder how many people would sincerely accept such an implausible normative or ethical proposition. “The Queen of the World owns everything, the workers are starving right and left, but that’s the status quo, so I support it, as a point of ethics.” Does that sound ethically uncontroversial to you? Does it sound even remotely plausible as an ethical proposition to you? Because it sounds pretty dodgy to me.

And while it certainly could never be proven, how likely is it anyone who supports the status quo ostensibly merely by virtue of it being the status quo, is actually simply supporting it because they like something about that particular arrangement as the status quo but are too lazy, timid, or disingenuous to express it? Leads to the same result in practice because at the end of the day, one is still supporting the status quo just as if one had introduced particular, concrete reasons for supporting that particular arrangement as the status quo. So why knock oneself out giving particular reasons for supporting the status quo? Why open up one’s ethical reasoning to analysis, criticism, debate? Why not take the easy road? Rhetorically speaking at least, it seems like a no brainer.

But it’s certainly an intriguing conceptual difference or imbalance, isn’t it? No one argues for changes from the status quo based on the normative proposition one should always support changes from the status quo, no matter what those changes may be. People introduce particular normative propositions in support of particular changes, not propositions in support of changes in general. So, and drum roll please because this is finally the point of this post, is supporting the status quo ostensibly simply because it’s the status quo more ethically “neutral” or more indicative of, or consistent with, normative indifference than particular normative propositions supporting particular changes from the status quo? Yes, in one manner of speaking. The proposition is clearly indifferent to particular substantive reasons for supporting the status quo or making particular changes. But in another manner of speaking, no. It’s certainly not neutral with respect to the normative issue of retaining or changing the status quo. And the main point in the context of “fake distributional indifference” in ubiquitous bad economics is that the sense in which that proposition is not neutral is the sense that’s relevant to neoclassical welfare economics. The former sort of “neutrality,” defined with respect to particular substantive reasons for supporting the status quo or particular changes, simply moves one to a less plausible, more controversial ethical or normative position that is also exogenous to neoclassical welfare economics. That’s not what neutrality or indifference to normative or ethical issues means in neoclassical welfare economics. In that respect, fake distribution indifference in bad economics may in some cases be due to underlying terminological equivocation involving different possible senses of what it means to be neutral or indifferent to normative or ethical issues.

One can, of course, support the status quo, such as the status quo mechanism for distributing economic power or the resulting status quo distribution of economic power, on whatever ethical basis one likes, including an implausible love of the status quo simply by virtue of it being the status quo, but one should be honest about it. One should not pretend by doing so one is being consistent with the distributional indifference required by neoclassical welfare economics and, more broadly, one should not pretend one is being neutral or indifferent with respect to the ethical or normative values associated with evaluating economic systems and outcomes including, of course, those associated with the status quo.