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.
