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.
