Speaking of normative and positive issues in neoclassical welfare economics, and the funny conflation of normative and positive issues in ubiquitous bad economics loosely based upon neoclassical welfare economics, how about “marginal productivity” theory? In the old days, that’s what we here in the USA might have called a real humdinger. When I speak of “marginal productivity” theory, do I mean the old normative theory from classical economics relating to distributional ethics, or the positive theoretical result from modern neoclassical welfare economics? Exactly. Yes. That’s what I’m talking about.
Distributional ethics are exogenous to modern neoclassical welfare economics. Did I mention? Distributional ethics cannot be addressed using the type of “utility” relevant to that theory because that type of utility cannot support “interpersonal utility comparisons” and thus cannot be used to resolve interpersonal conflicts of preferences, desires, needs, and so on, and hence resolve issues relating to the allocation of scarce resources. The marginal productivity theory of distributional ethics is not a part of neoclassical welfare economics. It’s exogenous. It belongs to the world of ethical philosophy, not economics.
I guess we can go home now, right? Because I’m all about neoclassical welfare economics. It’s some kind of record! Well, no, not really. I’m also about bad economics based loosely on neoclassical welfare economics, and one hears about marginal productivity a lot in bad economics, so let’s soldier on a bit, shall we?
Positive economics may be involved in discussions of marginal productivity in two ways. First, neoclassical economic theory demonstrates that under the unreal, arbitrary conditions of “perfect competition,” inputs are paid their marginal product. That’s just a formal matter of logic, definitions, math, etc. Second, we have the positive, empirical question of how productive inputs are actually paid in real markets. Is it similar to what happens in the “perfectly competitive” markets of economic theory? How similar? Or is it more a matter of relative bargaining power, how easy it is to replace those inputs, excess supply of labor, nepotism, etc.? Those are issues the empirical, scientific side of economics might take up.
But you know my primary area of interest is normative economics, not positive economics, so let’s do a little counterfactual dream experiment to consider marginal productivity specifically in the context of distributional ethics. Let’s think about a dream world that’s just like the real world except we have “perfectly competitive” markets and hence inputs are paid their marginal product. Our dream world isn’t the Fairy Land of Economic Theory I’m always on about. For example, as in the real world, we’re allowing subjects to hold distributional ethics. However, we’re introducing whatever unreal conditions or factual premises we need for “perfect competition” from the Fairy Land, perfect information and rationality, etc.
In our dream world, let’s say we’re at some particular instance of a perfectly competitive, economically efficient, Pareto optimal market outcome. Again, we’re not in the Fairy Land, so we’re not at a generic, unspecified outcome, but a particular real instance. We’re allowing distributional ethics for subjects, so some subjects think we’re in an optimal situation and others prefer we move, even if only to certain non-perfectly competitive outcomes, for reasons of distributional ethics. Imagine some people espousing the proposition there’s something normatively or ethically special or correct about the system for distributing economic power in this dream world based on the existing marginal productivity of productive inputs.
One point I think it’s probably worthwhile making is that if the people espousing that normative or ethical proposition are economists supposedly basing their distributional ethics on neoclassical welfare economics, we’re talking about bad economics. We haven’t changed economic theory in our dream world. Distributional ethics are still exogenous to that theory. Based on neoclassical welfare economics, economists qua economists are meant to be indifferent to such matters. To the extent the people in question flash their economist badges, they’re engaging in the underhanded, unprofessional behavior associated with economists who peddle bad economics. No, they’re simply giving their ethical views in their role as private individuals, similar to everyone else. Did I trip you up when I said distributional ethics were allowed, for subjects? Yes, that can happen. There are two levels at which distributional ethics may appear in neoclassical welfare economics: at the level of the subjects, and at the level of the economist / observer. And there are two contexts in which we can discuss distributional ethics: the real world, and the Fairy Land of Economic Theory. Subjects in the real world can have distributional ethics. Theoretical ciphers in the Fairy Land cannot have distributional ethics involving relative “utility” because that would play havoc with the concept of Pareto improvements based on “utility.” Economists / observers cannot have distributional ethics if they’re meant to confine their commentary to what they can say on the basis of neoclassical welfare economics. Economists / observers can, of course, have distributional ethics in their role as everyday people and potential subjects of other economists / observers.
I suppose since we’ve gone this far we might as well talk a bit about distributional ethics based in marginal productivity, whoever may be espousing them. Why not? It’s not economics, and I’m certainly no authority on the subject, but I’ve got a few minutes, so … anything interesting or noteworthy jump out at me? Funny you should ask.
Well, one interesting thing is that distributional ethics based on marginal productivity would seem to conflict with some other common forms of distributional ethics, such as merit based ethics, unless one simply equates merit to marginal productivity, and human welfare based real “utilitarian” ethics. If one restricts “merit” to things under one’s control like effort, hard work, etc., it will diverge from marginal productivity to the extent workers differ with respect not only to inherent talent, ability, intelligence, etc., but also accident of birth and upbringing, luck, etc. In addition, capital has a “marginal productivity” as well, so unless one’s notion of “merit” involves the “merit” of doing nothing in particular beyond owning capital, we have some divergence there as well. Distributional ethics based on marginal productivity obviously can’t support the rights based distributional mechanism of inheritance, so we have some issues there as well, unless we’re getting into some unusual inter-generational or family merit rather than the more common individual merit. Distributional ethics based on marginal productivity also conflict with human welfare based utilitarian ethics (not the fake utilitarianism of the ethical half theory of neoclassical welfare economics limited to propositions about people expressing preferences in situations with no interpersonal conflicts of preferences). Marginal productivity as a form of distributional ethics is very much in the “lottery of life” vein. Whatever happens happens. You may be destined to live like royalty or like a pauper, but it’s ostensibly all good because in some metaphysical sense any of us could have been born into any situation.
Should we do a few examples of marginal productivity based distributional ethics in practice, just to envision the sort of issues and potential controversies we might encounter? Fine, but I’m not doing a philosophical treatise, if that’s what you had in mind. It’s hardly the forum for that. No, let’s just set up a few scenarios and highlight the ethical propositions involved.
Something happens. Recession, depression, war, famine, natural disaster, whatever. Some people’s marginal productivity drops to zero. If they have no savings, they should drop dead. As a matter of ethics, they deserve no economic power based on their marginal productivity.
Lazy, pampered, layabout A has a shipload of money dropped in her lap when her parents die, the marginal productivity of her prodigious capital means she deserves vastly more economic power from sitting by the pool after investing her capital than conscientious, hardworking, materially suffering B.
Golden child A grows up with all the advantages: best education, supportive parents, resources, connections, endless second chances, opportunities, no responsibilities to struggling parents or relatives. Ethically, he deserves more economic power than overachieving B from a difficult background because he easily lands a job with higher marginal productivity.
Rare bird A has an unusual, innate ability or talent that is highly in demand under prevailing conditions. She has spent only five minutes working in all her life, but ethically she should have much more economic power than hardworking every-person B makes in her lifetime.
Are those enough to serve as an example of the sorts of issues we’d probably want to consider if we were going to take up marginal productivity as a form of distributional ethics in earnest? You know, I’m not a serious ethical philosopher by any means. I’m just throwing out a few random thoughts off the top of my head after spending five minutes thinking about it. Seems likely other issues may be involved.
To be honest, I’m not sure how I think about the marginal productivity theory of distributional ethics. Sounds a bit like something wealthy people with all the advantages might espouse. “Look at me, everyone! I have a good job! Yes, other people, family, society, upbringing, innate ability, luck had a lot to do with it, and I actually have much more than I could ever need or use, but the market has spoken, so all you struggling peons can just drop dead. My goodness, I’m special!” Maybe it sounds better when other people say it? If it makes sense to you, then by all means support it. Just don’t try to pass it off as neoclassical welfare economics. Marginal productivity has no ethical significance in neoclassical welfare economics. Did I mention?
