Positive Normative Economics

Last week I tried to push myself a bit by talking about a critique of neoclassical welfare economics I’ve always rather struggled to understand. As fate would have it, a helpful commenter on the Twitter Wednesday afternoon tweet storm version of that blog post promptly shared a lecture dealing with an entirely different perspective on neoclassical welfare economics I’ve always rather struggled to understand. How does the old adage have it? It never rains but it pours? But I’m just joking around. I actually enjoy trying to work through things I find initially puzzling. It’s a peculiarity of mine. Like doing a little logic problem. So let’s take up this issue of the popular, perhaps even orthodox, positive take on normative neoclassical welfare economics, the world of illustrious residents of the Villa of Academic Economics like Samuelson, Arrow, and Sen.

The link in question was to The Econometrics Society (Yale) 2020 Frisch Memorial Lecture by David Pearce (NYU). It’s about an hour long, so there’s a modest time investment involved. I’m generally a proponent of the written word. Talking heads make me exhausted. I’m always trying to hit pause and go back. Wait, who said what now? But I found it worthwhile viewing. Anyway, I hope my commentary will be sensible even without a prior viewing, if one isn’t quite up to that just now. I put a reference at the end of this post. One of the nice things about the lecture is that it gives a little historical overview of that stream of academic economics that purports to be a positive study of normative neoclassical welfare economics and related “choice theory,” how it all started, where it is now, and an indication of where some economists anyway would like it to go in the future. At its most general level, the theme of the lecture for me is the stultifying, oppressive weight of an existing literature when combined with an academic determination to incrementally advance that literature rather than going back and reconsidering fundamentals. But maybe that’s just me. I’m sure there’s a lot more going on in the Villa of Academic Economics than just that particular dynamic. Normally, of course, I avoid the Villa as much as possible. Too precious and clever by half for a simple man like me. Too hidebound and myopic, as well. But I know some people like that sort of thing, so I suppose I can visit, if only for the afternoon. 

As I noted above, I’ve struggled in the past to understand the ostensibly positive, scientific analysis of what seems plainly the evaluative, normative theory of neoclassical welfare economics, which clearly purports to evaluate economic systems and outcomes, explain what is optimal, tell people what they should do as far as economic policy. I could never really make out exactly what these particular economists thought they were really doing. But I think now I may be getting a glimmer. I think what’s going on is economists working in this tradition don’t think they’re evaluating anything, recommending what anyone should do, or indeed putting forth any substantive normative propositions at all, or at least they aren’t willing to publicly acknowledge doing any of those things, anyway. They see themselves as simply analyzing certain given, essentially arbitrarily defined issues and concepts under a certain given, essentially arbitrary set of conditions in a purely positive way. They’re about what’s “optimal” given these arbitrary definitions, conditions, and constraints, not what’s optimal in some generalized, commonplace, ethical sense. In their minds, they’re all about normative propositions relevant to the essentially arbitrary intellectual construct or artifact I call the Fairy Land of Economic Theory, not at all about normative propositions relevant to the real world. If other people choose to attach normative significance in the real world to the normative in form only conclusions of neoclassical welfare economics meant for the Fairy Land, choose to interpret “optimal” as optimal, maximizing “utility” as something desirable, that’s on them. It has nothing to do with economists or economics.

On that bit of confusions rests, I suspect, a great deal of what I call bad economics. Obviously, an empirical science about empirical preferences and a logical analysis of arbitrarily defined terms under arbitrarily defined conditions could never tell us what is ethically optimal in the real world. If we’re talking about normative propositions about individual preference rankings under a condition of no interpersonal conflict, well, someone may have an observable, empirically verifiable preference to unwittingly eat a poisoned apple in the real world, but what, if anything, we should do about it is a normative or ethical issue, not a positive issue. If we’re talking about internal perceptions of satisfaction from preference fulfillment in the real world, I suppose we might look at brain scans or whatever to define or get data on intensity of preference or perceptions of satisfaction. However, again, if we’re proposing attaching normative significance to intensity of preferences or intensity of perceptions of satisfaction from preference fulfillment in the real world, however defined or measured, that’s a normative or ethical issue, not a positive issue. Someone may have a verifiably intense preference to hit his or her depressed, nearly suicidal neighbor on the head with a rock, but what, if anything, we should do about it is a normative or ethical issue, not a positive issue. A megalomaniac may have a verifiably intense preference to enslave the world that let’s suppose is verifiably greater than the world’s combined preference to not be so enslaved, but what, if anything, we should do about it is a normative or ethical issue, not a positive issue. It’s ethics. It’s not science.

I tried to think of an example in a context other than economics to illustrate what I think these economists think they’re doing, and I came up with the following scenario, which I think works well enough, although I haven’t spent a huge amount of time thinking about it and something might always occur to me later. Usually does. Anyway, imagine some people decided to delve into the collected random scribblings of their dear departed neighbor, Joe Blow, in an effort to discern what Mr. Blow considered ethically “optimal” in those scribblings. They’re working in the context of a normative or ethical theory, but they’re not doing ethical philosophy, per se, not trying to evaluate Mr. Blow’s ideas, endeavor into the normative or ethical inputs, question the factual premises, assess the degree of ethical controversy, normatively evaluate the conclusions. No, they’re simply looking at positive, empirical data, the scribblings of Mr. Blow, and applying logical analysis to those scribblings, to try to answer the positive, empirical question: What did Joe Blow consider ethically optimal, according to his scribblings?

A couple of issues or questions leap immediately to mind. First, are they doing “science?” There’s a theory of sorts, a theory of what Mr. Blow meant to say is ethically optimal in his scribblings. And there are empirical data involved. But assuming the entire archive has been analyzed, there’s no real empirical prediction or testing of the sort one associates with conventional notions of empirical science. Second, why are they doing it? Absent any implication there’s something compelling or interesting about Mr. Blow’s ideas in this area, some merit to Mr. Blow’s ethical ideas, why are they taking up that particular research question? Why are we meant to care what Mr. Blow’s scribblings say? What’s it all about? Who gave them this positive research project? A normative theory without normative analysis and normative evaluation is basically worthless. Simply knowing what Joe Blow has to say about ethics said has no normative significance, per se. If we were wondering whether there was any value in Mr. Blow’s ideas as ethical philosophy, we’d have a whole lot more work to do, indeed in many ways the lion’s share of the work for that particular project. These are the sort of thoughts that occurred to me while listening to the lecture on the positive approach to normative neoclassical welfare economics, and some other thoughts followed close upon those. Let’s discuss them a bit in the context of the lecture itself. 

The tale told in the lecture begins in the 1920s with Mr. Frisch’s efforts to turn economics into a science “like physics” (of course), while cryptically warning against trying to “unreflectively” apply the methods of a science, like physics, to economics. This inauspicious start soon bore funny fruit as our aspiring scientist friends collided with those great proponents of science, the logical positivists, and their notion that normative or ethical statements are “nonsense,” that is, not meaningful, in a scientific context because they are not falsifiable. Of course, the insight of the logical positivists is correct in the context of science. Ethical propositions are not “falsifiable.” One can’t do ethical philosophy using the scientific method. One cannot derive an “ought” from an “is.” Normative is different from positive. There is no objectively, empirically correct ethics. No, what caused problems with logical positivism was not that proposition, per se, but misstating the status of “science.” Humans have subjective moral sentiments. They have a drive, a need, a desire to be ethical, to treat other people ethically, to be treated ethically, to live under a social system that exhibits good ethics, to do good and oppose evil. The error of the logical positivists was not their analysis of normative propositions in the context of empirical science, but the proposition the only thing intellectually important or relevant to humans and human society is empirical science.

Unfortunately for the field of economics, economists were unprepared to give up talking about normative issues, evaluating economic systems, dispensing advice, or seeming to anyway, even though it was “nonsense” in the true science they admired so much. Basically, they wanted to have their cake and eat it too. This is what may have led some economists to try to transform neoclassical welfare economics from an ostensibly substantive normative endeavor to a Joe Blow research project about arbitrarily defined concepts, conditions, constraints, in other words, to substitute an arbitrary, random, academic “optimal” for a real optimal. Economists in this tradition were no longer interested in actually evaluating the normative inputs or outputs of their normative theory, checking their relevance for the world, the degree of ethical controversy involved. To paraphrase Dr. McCoy, they were scientists, dammit, not ethical philosophers.

Soon enough they ran into the problem that absent normative evaluation of their normative theory their positive research project was underspecified. No one was entirely sure what they were meant to be analyzing or why. They had transformed a straightforward normative discussion into a vague, opaque positive one. In such an odd situation, it was only natural for critics to suppose the only criteria economists were using to determine what normative concepts to positively study were economists’ own uninformed, unexamined, unevaluated, unreported normative beliefs in their role as non-economists. To return to our example, imagine our researchers uncovered a trove of artwork by Mr. Blow. Was the project meant to be an analysis of his scribblings alone, or all his output, including his artwork? What about the material from Mrs. Blow about Mr. Blow and his ideas? Was that meant to be part of the project as well? What exactly was the positive research question? Unfortunately, no one wrote it down. There was no reference, no work order, no mission statement. Some people wanted to address one question, some another. “Why are you analyzing that? I don't know, aren’t we meant to? Why not analyze that? Who cares?”

Economists like Samuelson and Arrow added to the confusion by looking at the older inaccessible perception of preference satisfaction definition of “utility” and opining normative content going beyond the observable facts of revealed choice were “meaningless” in the context of their positive analysis of normative concepts. It’s fine. Why not? That’s one way to define “utility.” I explain often how different definitions of “utility” imply different normative propositions serving as inputs to neoclassical welfare economics, are more or less ethically controversial, but recall ethics was all meant to be nonsense to our wannabe scientists. They weren’t thinking of that at all. Ostensibly, anyway. However, there are many ways to think about “utility,” preferences, welfare, satisfaction, and all the other terms and concepts involved, and some economists wondered why we weren’t discussing the positive, empirical data relevant to some or all of those instead. In a normative analysis, it’s quite obvious why someone might support an ethical half-theory eschewing resolving interpersonal utility comparisons or not, one type of “utility” or another, normative evaluate “utility” under one set of conditions or another. But from this positive perspective, there’s no real reason to study anything in particular. 

To close out our discussion for today, here are some other notable bits from the lecture. When Arrow discussed the limitations of an ethical half-theory based only on observable individual preference rankings, under the guise of a positive analysis of the type of “utility” he accepted as his mission to analyze, it apparently led some to perceive the “death of neoclassical welfare economics.” That was circa 1978. How one kills a positive analysis of concepts is anyone’s guess, but one can perhaps find a clue in Sen’s statement that Arrow’s Theorem “generated further pessimism in an already gloomy assessment of the possibility of a reasoned and satisfactory welfare economics.” Not sure "reasoned and satisfactory” are common evaluative criteria of positive science, but there you have it. Seems likely there’s some funny business going on not only in determining the research project, the random normative concepts and issues to be positively analyzed, but in determining what that research project is meant to accomplish, how to evaluate it. In due course, our scientist friend, Dr. Arrow, is reported to have said, “most ethical systems purport to divine who is the deserving one.” It’s an odd word choice suggesting some lingering confusion about the distinction between normative and positive. No one divines anything via ethical systems. Ethics is not about making empirical predictions. Ethics is about people talking about their moral sentiments, trying to formulate and explain rational systems based on those moral sentiments, making ethical decisions and trying to communicate and reach common ground with others. It’s not science; it’s philosophy. Our guide reports Mr. Arrow’s comment as being remarkable, noting it’s not as though economists were “trying to divine the appropriate choice of the next Dalai Lama,” they’re “simply trying to allocate some resources.” Note “divine,” again. And simply trying to allocate resources? Doesn’t seem a very simple project to me, if I’m being honest, and certainly the stakes are potentially quite high, indeed, life or death for some. Our guide then makes a case for economists to do more work analyzing a cardinal form of “utility” incorporating intensity of preferences, but not a normative case, a positive case based on the notion we have empirical information, data, seemingly relating to preferences we’re not utilizing if look only at “utility” defined as ordinal individual preference rankings. The tale ends with modern choice theory and the search for voting systems conforming most closely to what our guide suggests is the “the ideal,” defined relative to what ostensibly arbitrary and meaningless subjective ethics I’m not entirely sure.

Hopefully, modern choice theory will be somewhat less conducive to bad economics and folk economics than traditional neoclassical welfare economics, but certainly that latter theory is still with us as well, and we know well the sort of problems that can cause. And so on it goes. I think I’m starting to have some insight into this tradition, but honestly, if I had to discuss normative neoclassical welfare economics the confused, inapt, “positive” way they discuss it in the Villa of Academic Economics, I suspect I’d drink a glass of sparkling wine and throw myself from the balcony straightaway. No, I’ll take my lonely mountain path. I’ll wage my battle against bad economics there, in the brisk air and unforgiving light of the bright afternoon sun, not in the cramped and oppressive atmosphere of the Villa.

References

Individual and Social Welfare: A Bayesian Perspective. Frisch Memorial Lecture. August 12, 2020. David Pearce. https://www.youtube.com/watch?v=upJadnNxxlQ.

Methodological Individualism

I don’t mind saying I’ve struggled in the past to understand the “methodological individualism” critique of neoclassical economics. However, I think I may be developing a faint glimmer of understanding. Even more interestingly, I think there may be a larger lesson in there somewhere. Let’s talk it out.

In neoclassical welfare economics, the definition of “utility,” the opaque relationship of the Fairy Land of Economic Theory to reality, and issues relating to two levels of ethics (that of the economist and that of the theoretical subject) can have interesting consequences. One interesting consequence is there are often multiple ways to talk about any given issue, which tends to create additional confusion and dilute the impact of any one presentation. It seems quite difficult to step outside one critical perspective to take up another. That’s what I suppose must lie behind the curious Tower of Babel aspect of criticisms of neoclassical welfare economics in which one finds critics speaking from different perspectives using language that is perfectly sensible to themselves but seems largely incomprehensible to even other critics, including those who perceive the very same problem but in a different light. The confusion often results in people simply talking past one another and then walking away in frustration in whatever direction seems best to them, leading to the unfortunate impression critics of neoclassical welfare economics cannot even decide among themselves what they’re talking about so why should anyone else care. However, I’ve come to realize many, or dare I say most, of these seemingly disparate critiques are about the same small handful of issues, which gives me hope if ever we managed to hit conceptual bedrock we’d be in a much better place to address the bad economics based loosely upon neoclassical welfare economics. Let me take up the “methodological individualism” critique of neoclassical welfare economics as a case study and try to relate it to the way I normally think and talk about bad economics and neoclassical welfare economics.

As far as I understand it, the “methodological individualism” critique involves the notion neoclassical economics is forced by its method of focusing on individuals to systematically ignore certain individual preference rankings (“utility”) relating to other people, society more generally, and ethics including distributional ethics. I’ve struggled in the past to perceive the proposed theoretical prohibition or restriction in neoclassical economics relating to those types of preferences. However, it occurs to me now the critique is quite likely referring to a problem I’ve discussed in different terms involving the relationship of the Fairy Land of Economic Theory to the real world.

Recall “utility” in neoclassical welfare economics, by either definition or practical constraint, is about the preference rankings of individuals. Consequently, the only normative or ethical propositions we can base on “utility” in neoclassical welfare economics are propositions about those individual preference rankings. So-called “social welfare functions” are simply ethical propositions exogenous to neoclassical welfare economics expressed in economic terms by manipulating “utility” in ways that cannot be justified within neoclassical economic theory itself. Conclusions based on any given exogenous ethical argument expressed in a “social welfare function” are different from the conclusions of neoclassical welfare economics proper relating to ostensibly socially optimal perfectly competitive, Pareto optimal, economically efficient markets.

One normative proposition about individual preference rankings, which may also be viewed as a positive issue about the definition of the word “preferences,” is that economists should not, or cannot, second-guess other people’s preference rankings but should, or must, accept them for whatever they are. That’s the famous “de gustibus non est disputandum” principle. If you're not into precious Latin formulations, it’s about economists not disputing other people’s “tastes” or preferences.

Another normative or ethical proposition relating to individual preference rankings in neoclassical welfare economics, and the primary one in my opinion, is that we should let people express their preferences (“maximize their own personal utility”) if their preferences don’t conflict with those of anyone else, a social policy which in the language of neoclassical welfare economics “maximizes social utility.” We need the latter stipulation because we cannot use “utility” as defined or used in neoclassical economics, that is, individual preference rankings, to resolve interpersonal conflicts, including conflicts involving the preferences of different people, because we cannot make so-called “interpersonal utility comparisons.”

Neoclassical welfare economics, the actual theory as developed in and for the Fairy Land of Economic Theory, is all about developing what we can say based only on ostensibly uncontroversial ethical or normative propositions about individual preference rankings, that is, about “utility” as defined or used in neoclassical economics. As a result, ethical issues relating to resolving interpersonal conflicts are exogenous to neoclassical welfare economics proper, and hence excluded or banished from the Fairy Land of Economic Theory. This is what generates the interest within neoclassical welfare economics in Pareto improvements defined with respect to “utility,” that is, defined with respect to individual preference rankings. However, as I pointed out in an earlier post, such Pareto improvements are only logically possible if one restricts preferences. If the theoretical ciphers standing for people in the Fairy Land have preferences relating to relative “utility” based on distributional ethics relating to where people should end up in their preference rankings, then such Pareto improvements are logically impossible. Any increase in “utility” for any one cipher, that is, an increase in the position that cipher can attain in its own preference rankings, will change “utility” relative to all the other ciphers, thus potentially causing another cipher to lose “utility,” that is, move down its preference rankings of ethically acceptable results.

That result seems tantalizingly close to the “methodological individualism” critique of neoclassical economics relating to the supposed restriction of individual preferences, which is why I say I have a glimmer of understanding of that critique. However, there’s also something a bit odd going on. One could never evaluate real economic systems or outcomes without taking up interpersonal conflicts of preferences and the allocation of goods and services, and the relevant ethics, nor can we really evaluate ethical propositions relevant to the real world under false factual premises like perfect information or perfect rationality. Neoclassical welfare economics is an ethical half-theory. The Fairy Land of Economic Theory is not the real world. So it’s difficult to understand the significance meant to attend the restriction of individual preferences in the Fairy Land. In real life, neoclassical welfare economics appears to express no prohibition against people having preferences about anything they wish including other people, society, distributional ethics, social ethics more broadly, or indeed any ethical issues at all.

I suspect what’s happening is that the “methodological individualism” critique is addressing the form of bad economics I discussed last time in which one is meant to be able to evaluate real world economic systems based only on normative arguments meant for the Fairy Land involving the ethical half-theory of neoclassical welfare economics. In that case, the restriction of preferences in the Fairy Land would transmit directly to the real world. But, of course, that’s bad economics, not real neoclassical welfare economics. We can’t really simply apply normative or ethical conclusions developed for the Fairy Land of Economic Theory to the real world, and for more significant reasons than that.

In the real world, the reason there is a Pareto optimal, economically efficient, perfectly competitive outcome that looks good for any given distributional ethics has to do with the distributional ethics of the economist / observer, not those of the ciphers in the Fairy Land. In the real world, interpersonal conflicts of preferences are resolved on the basis of economic power in markets, or democratic government, or other ways that involve ethics exogenous to the normative arguments in neoclassical welfare economics. In the real world, when we talk about “compensating” people pushed down their preference rankings with money or the equivalent, the practical implications depend crucially on the prior distribution of economic power and the distributional ethics that support it. In the real world, considerations of “utility” (preference rankings of individuals) are a minor, indeed trivial, component of the ethical issues associated with evaluating economic systems and outcomes compared to the ethical issues associated with resolving interpersonal conflicts of preferences or needs and desires, the distribution of economic power, the allocation of goods and services, when to use the market mechanism, etc. In the real world, neoclassical welfare economics says nothing of practical significance or relevance without additional and exogenous value inputs. Purveyors of good neoclassical welfare economics understand that very well. They understand it’s an ethical half-theory that cannot be used in isolation to derive conclusions relevant to the real world, that results developed in and for the Fairy Land must be revised, adapted, added to, if they’re to have any significance for the real world.

In other words, the “methodological individualism” critique seems to me predicated on the well-meaning but to my mind profoundly misguided attempt to informally improve or fix neoclassical welfare economics by introducing exogenous ethical content to convert it into a full ethical theory for evaluating economic systems and outcomes. But economists really have no business trying to resolve controversial ethical issues that should be decided by the people using democratic government. Economists have no real standing to decide subjective ethics for others or serve as the ethical arbiters of society. If we’re to fix neoclassical welfare economics, then we should fix it by improving awareness of the normative inputs in the half-theory, evaluating them properly under realistic conditions, distinguishing the ethical half-theory form of neoclassical welfare economics from full theories of social ethics such as for example philosophical utilitarianism, and identifying the controversial normative inputs that must be delivered from the people via democratic government when applying the ethical half-theory of neoclassical welfare economics to evaluating real world economic systems and outcomes. 

Ordinal and Cardinal Utility Review

I was going on about my “don’t say utility” lark online the other day, that is to say, I was arguing neoclassical economists should just stop talking about “utility” because of the potential for equivocation on different definitions of the term and start talking instead about interpersonal preference rankings of individuals, which is the relevant concept of utility for neoclassical welfare economics. As if on cue, the only real response my idea generated was from a fellow wanting to establish that individual preference ranking was actually a philosophically or ethically inferior way of defining utility because ordinal utility leaves out important considerations addressed by cardinal utility. In one way it was a depressing bit of the same old same old of precisely the type my “don’t say utility” challenge was meant to avoid, but in another way I suppose it was also an opportune comment in the sense it gives me a good reason to review ordinal and cardinal utility and at the same time clarify what I’m talking about when I discuss neoclassical welfare economics as it relates to what I call bad economics or sometimes folk economics. Yes, it’s a two for one this week.

I discussed ordinal and cardinal utility relatively recently in my post of October 21, 2020, rather prosaically entitled Ordinal and Cardinal Utility in Neoclassical Welfare Economics, but what the heck, I’ve noticed that by constantly talking over these issues online my thoughts are prone to a certain amount of development over time, a good sign surely, and at the very least I’m always finding new and better ways of saying the same old things. Anyway, let’s have another go at it now, and I’ll add a bit to the end about what I’m discussing when I discuss neoclassical welfare economics and how it relates to ubiquitous bad economics.

I would suggest the tendency among economics to want to talk about different conceptions of utility in terms of the mathematical attribute or characteristic of ordinal and cardinal is an interesting example of how mathematical formalism can complicate consideration of the underlying normative or ethical issues in neoclassical economics. One initial complication is that if we’re going down this road, we must distinguish ordinal and cardinal concepts of utility from ordinal and cardinal utility functions because one may have a cardinal concept of utility but choose to use, or even believe one is restricted to using, an ordinal utility function when discussing or expressing it in the context of neoclassical welfare economics. 

What’s important for us in terms of understanding normative neoclassical welfare economics is the concepts, not the potentially variable mathematical expression of those concepts, so let’s talk about concepts rather than functions. If one is using an ordinal concept of utility, then one is talking simply about the preference rankings of individuals. The only thing that matters is the order of the preferences for a given individual. There is nothing behind or beyond the preference rankings of individuals to which one is referring with the word “utility.” One may say the ordinal concept of utility doesn’t refer to anything that actually exists, per se, but is simply a word we can use when describing or discussing individual preference rankings. Under this ordinal conception of utility, an “interpersonal utility comparison” is quite literally nonsense or grammatical gibberish. Consequently, any normative propositions based on an ordinal concept of utility must refer to the preference rankings of individuals, not any of the various things referenced in other definitions of utility as being behind those preferences, such as happiness, satisfaction, etc. It makes grammatical sense to talk about those other things in interpersonal contexts, and one can sensibly talk about degrees of happiness or strength of perceptions of satisfaction and so on, which are attributes of a cardinal rather than an ordinal concept of utility and are indeed inconsistent with an ordinal concept of utility.

In contrast, a cardinal concept of utility necessarily refers to something behind or beyond observed preference rankings of individuals that continues to exist even in interpersonal contexts and to which one can attach some notion of intensity or strength, in old economics typically internal perceptions of satisfaction from preference fulfillment. The other traditional interpretation in old economics, happiness, lifted directly from utilitarian ethical philosophy, is a bit dodgy because preferences in neoclassical welfare economics are not necessarily restricted to things that make one happy in any traditional sense. Using a cardinal concept of utility, one can sensibly introduce ethical propositions relating to whatever is purported to lie behind preferences, satisfaction, happiness defined in certain ways, etc. In terms of normative economics, we’re obviously in a whole different realm from that of an ordinal concept of utility.

A cardinal concept of utility is consistent with neoclassical welfare economics if and only if we have no way of measuring or inferring the strength or intensity of the relevant internal perceptions, thus rendering interpersonal utility comparisons impossible. That’s because the internal logical of the normative or ethical argument in neoclassical welfare economics involving Pareto optimal, economically efficient, perfectly competitive markets being socially optimal requires interpersonal utility comparisons to be either gibberish or impossible.

Both the ordinal and cardinal concepts of utility that work in the context of neoclassical welfare economics lead to neoclassical welfare economics being an ethical half-theory, but they arrive there via subtly different routes. The ordinal concept of utility straightforwardly removes utility from the issue of how to ethically resolve interpersonal conflicts, which is what the lion’s share of ethics, and the evaluation of economic systems and outcomes, is all about. We could never have a full ethical theory based only on individual preference rankings. Such an ethical theory would be an ethical half-theory at best, and would obviously need to be supplemented with ethics relating to the important issue of resolving interpersonal conflict.

The cardinal concept of utility could serve as the basis of a full ethical theory if we could measure or infer the intensity or strength of the relevant internal perceptions and use that to resolve interpersonal conflicts, but we cannot, by assumption or definition. Thus, the cardinal concept of utility that works in the context of neoclassical welfare economics also cannot be used to construct a full ethical theory. It must also be supplemented with ethical beliefs relating to how to resolve interpersonal conflicts in practice. It also leads to at most an ethical half-theory.

If one considers the utter ethical implausibility of accepting the goal of maximizing the relevant cardinal concept of utility if it were possible, one may appreciate that result is likely not coincidental. To see the ethical implausibility, consider a dream where one could access the relevant internal perceptions and actually maximize social utility. Basically, the preferences of the person with the strongest internal perceptions would rule, be they benign or otherwise. That’s why I often point out that even with the potentially relevant cardinal concept of utility, the use of the word “utility” in neoclassical welfare economics should not be interpreted as representing any real or genuine support for utilitarian philosophy but really more of a rejection of it, confusingly expressed, a clumsy attempt to rule out utilitarian ethical philosophy be defining “utility” in such a way that it becomes irrelevant to the lion’s share of situations generating ethical issues that need resolving.

With the cardinal concept of utility, the temptation is always there to “fix” or “improve” neoclassical welfare economics by introducing exogenous ethical ideas from traditional utilitarian ethical philosophy or elsewhere, along the lines I often discuss in the context of “social welfare functions.” The ethical basis of those exogenous value inputs is not developed in neoclassical welfare economics. They’re really just the subjective views of whatever random economist is putting forward those inputs. In that sense the theory itself remains an ethical half-theory. The main point to remember in this context is regardless of how one feels about economists playing ethical philosopher and trying to decide subjective ethical issues that really belong with the people and democratic government, that activity is distinct from the normative argument presented in neoclassical welfare economics, per se. The normative economic argument that leads to bad economics and anti-democracy sentiment is the one involving Pareto optimality, economic efficiency, perfectly competitive markets, etc. It’s distinct from the quasi-economic subjective ethics of free-floating “welfare analysis.” We can clarify the relevant argument by considering the necessary features of any concept of utility that works in the context of that argument, and by talking about preference rank utility versus internal perception utility, or utility that is proposed to exist in some form or not exist, rather than about the mathematical attribute or characteristic of ordinal and cardinal.

If academic economists no longer wish to promulgate the normative or ethical argument presented in neoclassical welfare economics relating to optimal market systems and outcomes, if they no longer see any utility in teaching it (sorry, couldn’t resist), then they should stop teaching it, because it can easily lead to anti-democracy bad economics and folk economics. If academic economists continue to teach it, or worse, try to teach it and make a complete hash of it because they neither know nor care what it actually says, which seems all too often the case, then it will be sensible and indeed necessary for others to try to explain what it really says, how it really works, in order to fight the bad economics based loosely upon it. Academic economists are obviously in the best position to properly explain the argument in neoclassical welfare economics and dispel the confusion that leads to bad economics and anti-democracy sentiment, but if they’re onto other things, more general ethical philosophy and welfare analysis, social welfare functions, models, random optimization problems, stories, and can’t be bothered with anything as mundane as addressing the bad economics, folk economics, and anti-democracy sentiment they did so much to foster, then unfortunately it devolves upon others. You should help me fight bad economics by understanding what orthodox neoclassical welfare economics really says and addressing the incorrect versions of it associated with bad economics. 

Bad Economics Review

I feel I’ve been veering ever so slightly toward the esoteric in recent posts, so can I just go back and review one of the main expressions of what I mean by bad economics and differentiate it from normative neoclassical welfare economics this week? Get back to basics? Keep it simple?

Let me just assume for purposes of this post that readers understand the argument for the ostensible normative social optimality of economically efficient, Pareto optimal, perfectly competitive markets from neoclassical welfare economics one can find in such classes as the ubiquitous Econ 101. If I go over that as well, it will just to take too long to get through this post even for me, and you know I don’t mind going on about things in the least. Let me also assume, for now, that argument works as an uncontroversial ethical theory as far as it goes. I said assume, not agree that’s the case. As I’ve discussed on numerous occasions, I think there are some issues relating to specifying the normative inputs, the level of ethical controversy associated with those normative inputs, and the factual premises under which those normative inputs are evaluated for controversial content, but again we can’t do everything at once, and although those are issues that can also lead to bad economics, they’re not the expression of bad economics I want to discuss this week.

Recall that neoclassical welfare economics proposes an infinite number of Pareto optimal, economically efficient, perfectly competitive market results that differ from one another along the dimension of the distribution of economic power. Different pattern of economic power, different market outcome. In the Fairy Land of Economic Theory, where ethical reasoning relating to the distribution of economic power have been banished, those outcomes are all the same, and one can talk about a generic Pareto optimal, economically efficient, perfectly competitive market outcome. In the real world, where the ethics of the distribution of economic power cannot be so banished, all perfectly competitive outcomes are not the same. Some people may like one, some another. Indeed, some people may consider any given instance of a perfectly competitive market garbage, ethically speaking.

In the Fairy Land, it’s perfectly reasonable for economists to issue a blanket recommendation to move toward the generic Pareto optimal, economically efficient, perfectly competitive market system or outcome, or if at already at some theoretical expression of it then maintain it. In the real world, that’s bad economics. In the real world, that recommendation involves or leads always to a particular instance of such a market system or outcome, which involves economists in the distributional ethics meant to be exogenous to economic theory. In the real world, economic systems are aways an ongoing exercise in democratic government synthesizing potentially disparate views of distributional ethics (and other relevant ethics). There is no universal, society-wide ideal market in the face of ethical heterogeneity. The generic Pareto optimal, economically efficient, perfectly competitive market outcome is an artifact of the Fairly Land of Economic Theory and cannot exist outside it.

A great deal of confusion attends the result that for any given individual with any given set of distributional ethics there should be some Pareto optimal, economically efficient, perfectly competitive outcome that should be optimal under supposedly uncontroversial value inputs. One point to remember about that result is that although it may be true at a point in time it’s only true in a dynamic sense under a rather peculiar definition of a Pareto optimal, economically efficient, perfectly competitive market system. Because important parts of our system for distributing economic power are themselves markets, the labor and capital markets, it may well be logically impossible to have a dynamically stable, comprehensive perfectly competitive market system corresponding to some distributional ethics. The only way that result is logically possible over time is if everyone agrees changing incentives in labor and capital markets by adjusting the resulting distribution of economic power is consistent with the definition of a perfectly competitive market system, an unusual interpretation surely.

Another point to remember about the result relating to the theoretical existence of optimal markets under particular systems of distributional ethics at least at a point in time, is that even if we, as a society, decide using democratic government to adopt some particular form of distributional ethics appealing to some particular person or group of people and pursue some market outcome, democratic government has status to change or revise it. As far as accommodating democratic change, if we’re at some Pareto optimal, economically efficient, perfectly competitive outcome and decide to go to another, we’ll arguably have to diverge from those conditions unless, again, we interpret those changes to be part of that system, which seems inconsistent with current usage relating to perfectly competitive market systems.  In that respect, it should be noted neoclassical welfare economic does not restrict addressing distributional issues (and other ethical issues associated with markets) to only large, systemic, potentially costly or politically infeasible policies. Even if we consider a system of so-called “transfers” part of what we mean by a Pareto optimal, economically efficient, perfectly competitive market system, we must establish they are as politically and technically feasible and no more costly than other distributional fixes if we intend to argue for those policies as the only acceptable policies to address perceived ethical issues with markets. Why? Because otherwise one ends up inappropriately using neoclassical economic theory as a roadblock, demanding arguably first best but difficult solutions or nothing, when it really expresses indifference to even second best or worse solutions. In many cases less systemic, more focused policies to address particular distributional and other ethical issues may be more feasible, less costly, even less ethically controversial, especially under realistic factual premises (incomplete information, imperfect rationality, etc.). An example I’ve used before is virus vaccines. We could manipulate the distribution of economic power to ensure those with medical need can get the vaccine first, but it’s simpler and ethically uncontroversial to simply allocate vaccines on a medical basis rather than using the market mechanism. Again, in the real world, economic systems are aways an ongoing exercise in democratic government synthesizing potentially disparate views of distributional ethics (and other relevant ethics); there is no society-wide “ideal market” in the face of ethical heterogeneity.

I have no problem with economists when they talk about the Fairy Land, develop ethics relevant to the Fairy Land, discuss economic policy relevant to the Fairy Land. It’s their world, their creation, their imagination. They can do whatever they like in the world of their own creation. By the same token, I have no problem with economists going beyond neoclassical welfare economics in the real world when they lay aside their economist’s hat and make it clear they’re talking about economic issues from the perspective of a normal individual with subjective ethics and not discussing neoclassical welfare economics per se. But when economists and others enter the real world and attempt to misapply neoclassical welfare economics to it as though it were the Fairy Land, well, then we have a problem. That’s bad economics. That creates confusion and conflict. That’s something I’m afraid I really must address.

Is one supposedly talking about neoclassical economics and talking about the wonders of some real phenomenon called the “Free Market” or suggesting we must prevent democratic government “interfering” with ostensibly optimal real instances of markets? That’s bad economics.

Is one supposedly talking about neoclassical economics and talking about “distortions” from some imaginary ideal real instance of a market or people “rigging” what would be in its unrigged state be an ideal real instance of a market? That’s bad economics.

Is one supposedly talking about neoclassical economics and arguing for real world policies designed to pursue or retain real instances of perfectly competitive market structures despite distributional implications? That’s bad economics.

Is one supposedly talking about neoclassical economics and arguing against policies addressing objections to real market systems or outcomes based on distributional ethics (or other ethical issues really, but I passed on those earlier, so let’s save those for another day). That’s bad economics.

Want neoclassical welfare economics to say more than it really does? Fine. Add some ethical content and make it part of neoclassical economic theory. Explain it. Defend it. Say you’re doing full-on, not partial, ethical philosophy. Say you’re addressing the whole shebang. Don’t pretend you’re dealing only with ostensibly uncontroversial normative or ethical inputs. Stop playing games.

Academic economists should be taking steps to clarify normative neoclassical welfare economics, identify all the normative inputs, explain and evaluate the degree of ethical controversy associated with those normative inputs, explain and test any factual premises, explain the ethical half-theory structure of neoclassical welfare economics, take steps to avoid confusion such as professional codes of conduct prohibiting economists providing personal opinion under false pretenses that it’s all just economics or even that they have special insight into the relevant ethical issues because of their role as economists. But academic economists are typically not taking those steps. They’re usually playing with their models, doing random math problems, cracking wise, giving one another high fives, and just in general annoying more intellectually serious people concerned about the baleful effects of bad economics on our society.

Wonder why I’m out here writing these little posts every week, doing what I can to fight bad economics? I’m an economist, of sorts. It’s what I should do. It’s our theory. It’s our area of supposed expertise. It’s our responsibility to ensure it doesn’t cause confusion and conflict, to prevent unscrupulous people misusing it, misapplying it, misinterpreting it to take advantage of people. Are you an economist or at least someone who knows a little something about economics? You should help. By all means, carry on with whatever else you may be doing, but also do what you can to fight bad economics. Respect the truth. Follow the path of philosophy.