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.
