Bad Economics and Good Economics, One Way

I thought this week I might step back a bit and just say a few short words about the difference between “bad economics” of the sort I generally discuss, namely right wing misinterpretations of neoclassical welfare economics, and the corresponding notion of “good economics.” Just to clarify some things.

When I bang on about “bad economics” of the sort I mean, I’m not suggesting or implying there’s only one form of “bad economics” out there, nor that there might not be forms of “good economics” beyond neoclassical welfare economics, correctly interpreted. Indeed, I find the latter rather limited, as I’ve pointed out on numerous occasions. I wouldn’t be particularly put out if people decided eventually to throw it off entirely. I’m not raining on heterodox economists’ parade. No, I’m concerned with the particular form of “bad economics” I usually discuss, and the corresponding notion of “good economics,” because that’s the particular form of bad economics that is so ubiquitous and influential in our culture right now and creates so much confusion and conflict.

Bad economics proposes we obtain the most freedom or liberty, and generate an optimal economic system, under a “small” or “inactive” government committed to doing nothing beyond enforcing property laws and other laws needed to support economically efficient markets. Well, I suppose there’s an even further dumbed down version that doesn’t worry about market structure, “market failures,” etc., and just talks about things like laissez-faire, “capitalism,” and “The Free Market.” But I’m usually talking about the slightly more advanced version, the version many economists have trouble perceiving. Only an economist really committed to the cause of bad economics would discuss real economic issues using typically vague, ill-defined, misleading trigger words like “capitalism” and “The Free Market,” or fail to appreciate such long standing and established concerns in neoclassical economics as market structure and “market failures.” Bad economics and related folk economics like “libertarianism,” fake market based anarchism, and “Austrian" economics, lead inevitably to support for non-democratic, market supporting fascism, a fact surely appreciated by most purveyors of bad economics. It’s what makes addressing bad economics and folk economics so important.

When one gives up democratic government, yes, one prevents other voters having government “interfere” with the ostensible natural wonder of a particular instance of an economically efficient market, particularly in ways one coincidentally may not like, but one also gives up any say in the matter. One loses freedom or liberty.

When one gives up democratic government, one trusts the plutocrats and technocrats sitting atop the postulated “small” authoritarian government will choose to keep it that way. But one no longer has any say in the matter, and if they choose to take up some other issues later, well, I guess one is just out of luck, isn’t one? One loses freedom or liberty.

When one gives up democratic government, one no longer has a say in the social ethics of one’s society including issues like the ethics underlying the distribution of economic power, the ethical assessment of the economic system in terms of fairness or justice or human welfare, or the extent of the market, that is, decisions relating to when to use economic power in markets to resolve interpersonal conflicts of preferences, allocate scarce resources, etc., that are exogenous to neoclassical welfare economics. Those will be decided for you. One loses freedom or liberty.

Good economics, in rather stark contrast, highlights the need to address issues in social ethics including distributional issues and the extent of the market. An understanding of the subjective nature of ethics makes one realize the resolution of those ethical issues can only ever be temporary, contingent, subject to revision. Good economics helps one understand real freedom or liberty is maximized under an activist democratic government that is willing and able to revise the economic system as appropriate, and that talking about ethically optimal economic systems or outcomes is nonsense without the people, via democratic government, determining on a continual basis what that is.

Concerned to fight against right wing fascism arriving at least initially in the form of “small” market-based authoritarian government? Concerned about the erosion in the understanding of, and support for, political democracy? You should help fight the pervasive and baleful influence of bad economics.

De Gustibus For The Rest Of Us

Ever hear the ancient maxim “de gustibus non est disputandum” mentioned in the context of neoclassical economics? Do economists still use that phrase? Back in the old days, it was just a rather pretentious way of saying that in modern neoclassical welfare economics we’re not meant to second guess other people’s preferences when thinking about “utility.” There are some fun issues there that don’t involve my usual concerns relating to resolving interpersonal conflicts of preferences. Maybe we can spend a post or two on normative issues in this often neglected no-conflict case?

The use of the de gustibus principle in neoclassical welfare economics derives from the way we define “utility” in that theory, or rather the two ways we define it: preference rank utility (typical, explicit) and internal perceptions of satisfaction from preference fulfillment utility (occasional, implied).

Do I really have to say it every time? Fine. I’m talking about neoclassical welfare economics right now, the economic theory that underlies bad economics of the conservative sort. I’m not talking about general “welfare analysis,” where one defines “utility” any old way. In general welfare analysis one can, of course, dispute other people’s preferences all day long. Why not? One can do whatever one likes. The sky’s the limit. General welfare analysis may also lead to bad economics, but not the sort I mean here.

In neoclassical welfare economics proper, one can’t dispute other people’s preferences under the now conventional preference rank utility because all one is talking about with “utility” is someone’s preference rankings. There’s nothing beyond that on which to hang a dispute. Under the older and now less common but still occasionally used or at least implied internal perceptions of satisfaction from preference fulfillment utility, one can’t dispute other people’s preferences because one doesn’t have access to the relevant internal perceptions. It’s not a matter of common sense suppositions, inferences, assessments, etc.

Continuing a point from last week, say someone is about to eat a poisoned apple he or she may or may not realize has been poisoned, but we do. That’s their preference, to eat the (poisoned) apple. Should we stand idly by or dispute their preferences? Dispute? How? “Hey, buddy, your preferences are all wet! That’s a poisoned apple, that is!” Too common? Fine, cue the simplifying thought experiment. Let’s say we can’t dispute by providing the potentially missing information in a way the person can understand, we can only allow or prevent him or her eating the apple.

According to the ostensibly uncontroversial normative proposition at the core of neoclassical welfare economics, we should allow the person to eat the poisoned apple because that’s his or her preference, which we’re not disputing, and there’s no interpersonal conflict to muddy the water. In the idiosyncratic and misleading argot of economics, we’re “maximizing” total social “utility,” by doing nothing in this case, and the person in question is, of course, “maximizing” his or her own personal “utility” by expressing his or her own preference.

Is that something you would support? No, I’m just asking. I get it. Maybe he or she likes poisoned apples. Maybe he or she wants to make a grand gesture, dramatically biting the offending apple and descending gracefully to the ground in an elegant swoon, declaring on the way down, “I meant to do that!” And if not actually intentional, what do we care if he or she hasn’t chosen to expend sufficient energy investigating the status of the apple to discover it’s been poisoned? That’s not our responsibility, is it? We’re not that person’s nanny. “Drop dead, dumbass!” Don’t upset yourself now. I can see the other side as well. Maybe it would be better to intervene, just to make sure we’re all on the same page as far as the latest information on the apple? Maybe try to explain a little something about the science? If relevant, maybe discuss the potential suicidal ideation a bit? Do something beyond standing idly by watching the show? My point is not to provide an answer but simply to suggest there may be some controversial ethical issues that bear discussion even here, in the ostensibly obvious no-conflict case, but if one listens to purveyors of bad economics explain the relevant normative principle, one may never realize it. Why? Well, let’s just say they don’t try very hard, do they?

But wait. Is poisoned apple eating really that person’s “preference,” per se, in the sense we have in mind in neoclassical welfare economics? Isn’t the normative proposition about social utility meant to apply only when we have “perfect information” and so on? No, I don’t think so. Perfect information and so on are typically introduced at an entirely different level of the theory, when thinking of the conditions of so-called “perfectly competitive market,” an atypical, ideal, possibly entirely unreal theoretical construct. Actually, I don’t recall even mentioning the existence of markets in my thought experiment, did I? Is that significant? Are the normative propositions about “utility” in neoclassical welfare economics meant to apply only in a market context? If so, it’s news to me. Anyway, maximizing social utility is meant to always be good, isn’t it? Not just under unusual, ideal market conditions? No, I’m just asking. Funny how the ethical propositions of normative neoclassical welfare economics remain opaque after all this time, isn’t it?

And while we’re here, what is “perfect” information, anyway? Our belief the apple has been poisoned, based on whatever evidence, data, scientific reasoning we used to determine that? The bit of potentially false information we think the other person should know about? Because that’s actually all we have. I wonder, is “perfect” information even a real thing, or is it something only medieval monks and small winged creatures in the Fairy Land have access to? Well, I guess if we’re making things up, sure, let’s call it perfect information. Why not? Modeler’s Omniscience. Oh the power, the awesome power! And how about the companion piece, “perfect” rationality? No, not normal human levels of rationality. Perfect rationality. I’m talking Mr. Spock, on Vulcan, in full meditation mode. Is the poisoned apple eater perfectly rational? Are we perfectly rational? Well, I’m not sure. I suppose it depends.

Oh, heck, let’s just skip to the bottom line. According to the normative argument presented in neoclassical welfare economics, is the poisoned apple eater’s “utility” being maximized or not when he or she fulfills his or her preference and eats the apple, which we know has been poisoned but he or she may not know? Is it good or bad? Should we intervene or not, if that’s our only option? What does normative neoclassical welfare economics suggest? Not entirely sure, but I think it must be good, right? Ethics can be fun, albeit a tad confusing, when one uses random, false, unreal factual premises and casually defined terms. But that’s why people don’t study philosophy, isn’t it? So they can babble away about ethics without undo restraint? Keep things unsuitably simplistic? If you found that amusing, you’re in for a real treat in my other posts, because issues in the no-conflict case are a relatively insignificant side show compared to what happens when we apply normative neoclassical welfare economics in the context of resolving interpersonal conflicts of preferences, allocating scarce resources, etc., my usual focus.

Hey, here’s an idea. Take the normative content out of economics. Flag requisite normative or ethical inputs as such and receive them on a recurring, contingent basis from the people via democratic government. Make economics a science, at long last. Fulfill the dream. Oh, did I say that idea before? A million times? Well, let’s make it a million and one and call it a day, shall we?

Factual Premises And Simplifying Assumptions

I thought it might be worthwhile to go over the issue of false factual premises in normative neoclassical welfare economics versus false simplifying assumptions in positive neoclassical economics again. Pretty sure I’ve done it before, a number of times, and I consider it a bit of a sideshow compared to other issues in normative economics, but I keep reading funny commentary relating to the issue, such as a recent exchange about how odd it is we’ve been hearing the same criticisms of neoclassical economics based on these false simplifying assumptions (positive economics) / false factual premises (normative economics) for at least the past fifty years or so with no evidence of any advancement of the conversation. That commentary was from an economist suggesting critics of neoclassical economics consider giving it a rest, but I think it’s rather more appropriate as a criticism of academic economics, which has had plenty of time to address the criticisms and clear up the confusion but, alas, appears to have done very little in that area.

In positive economics, the presence of simplifying but false factual assumptions is generally accepted because of the understanding the model will be empirically evaluated as a whole, and some concessions may be made to practicality, tractability, etc. This, of course, gets to the whole distinction between a falsifiable, incremental scientific theory designed to reflect reality and a “model” that can be studiously, purposefully false in every particular. I’ve mentioned that issue before and surely will again, but another day.

The great danger, of course, is a sort of backward reasoning in which, if such a model proves empirically useful, any false simplifying assumptions are then considered true. In technical philosophical terms, that’s called having your cake and eating it too, pseudo-scientific style. The assumptions in question are either true or false. If we’re going to assess that issue, we must use whatever methods we have to determine the facts of the matter. A model with those assumption beat competitors? Nice. But that’s the only information we have? Because we just said five minutes ago a model can be highly evaluated in terms of empirical prediction even though it contains false, simplifying assumptions.

One might argue the use of simplifying assumptions in economics is simply an excuse to do bad science, and real science isn’t about making things easy for the investigator or muddying the water of empirical fact. Be that as it may, other issues may also be involved. Like what? The particular needs of normative economics, of course. The eternal bane of economics as a science in the persistent conflation of positive and normative issues one finds in economics. It creates problems here, as in so many other areas.

False factual premises like “perfect information” and “perfect rationality” simplify normative arguments no less than positive models, they eliminate potentially problematic situations, but their status is entirely different because ethics, of course, is not science. If one presents a normative or ethical argument with false factual premises, it’s simply inapplicable to the real world. One may evaluate and approve the conclusions for the real world, but one’s approval evidently involves some basis other than the inapplicable argument. For example, if someone is about to eat a poisoned apple he or she doesn’t realize has been poisoned, but you do, an ethical proposition based on “perfect information” isn’t approximately correct, it doesn’t simplify anything, it’s just inapplicable, inappropriate, incorrect.

Applying normative propositions to the real world that are based on false factual premises from the Fairy Land will never be correct, appropriate, honest, simple. It’s bad philosophy, bad ethics. Oh, as an economist, you don’t do philosophy? You’re not interested in ethics? You’re a scientist, like a physicist? Glad to hear it. In that case, stop telling people what’s socially “optimal” and dispensing policy advice. Explain what you’re doing when you do positive analysis, internal logic checks, of normative or ethical arguments based on random normative inputs and random, false factual premises. Because there may be some confusion about that, and that confusion may be generating a certain amount of conflict. In other words, you may be doing bad economics. Just saying.

Resolving Ethics

My last post, about whether economists should be the ethical arbiters of society, reminded me of a different but related issue, the distinctive form of fake distributional indifference in bad economics that uses the difficulties and controversies associated with ethical issues to support the status quo. I must have mentioned it before, but I suppose there’s no real harm in a certain amount of repetition. I’m referring to the argument that until economists or others can scientifically, objectively, empirically, logically resolve the controversial issues posed by ethics, especially distributional ethics, they logically must support the status quo. You know the sort of thing I mean. “We economists would love to help make the world a better, nicer, more ethical place, we just don’t know how.” As though they were addressing some great mystery of the world.

A few comments? If I may? Because of the ultimately subjective nature of ethics, neither economists nor anyone else will ever be able to scientifically, objectively resolve the issues of ethics including distributional ethics. Also, as a general point of ethical philosophy, one cannot avoid ethical issues by ignoring them or choosing to do nothing. In ethics, doing nothing is doing something, namely nothing. It has ethical significance. More particularly, economists cannot avoid the ethical controversy associated with revising our system for distributing economic power by not revising it and supporting the current one. The same level of controversy applies.

As I noted last week, it’s not the role of economists to be the arbiters of social ethics. That’s inconsistent with the ethical half-theory structure of neoclassical welfare economics. They’re meant to be indifferent to exogenous ethical issues. Rather than having the hubris (or perhaps ignorance) to suppose they might one day “solve” ethics like a math problem or perhaps with an experiment, economists should concentrate on what economics can offer society in terms of helping society implement its ethical decisions in reasonable, dare one say optimal, ways.

Word to the wise. It’s perfectly fine to say one can’t actually perform miracles of philosophy. One needn’t pretend, be the Wizard Behind The Curtain. One should clarify that which is exogenous, social, subjective, so the people can consider change. One should provide the people factual information or theoretical predictions that may be relevant to their ethical or normative decisions about what the economy should be doing. One should discuss real tradeoffs. Empirically, when X goes up, Y goes down. Theoretically, we expect this or that. Yes, one can use math and logic to do optimization problems contingent on arbitrary inputs, but social ethics requires a solid normative analysis of inputs and conditions including factual premises (“assumptions” in the context of positive models), as well as assiduous attention to the limitations of the conclusions. Many economists are clearly just not up to it. One can use optimization techniques appropriately, of course, but one shouldn’t use it to do clueless, uninformed, irrelevant, baby level ethical philosophy. One should know one’s strengths, accept one’s weaknesses. Stop playing and get real. Do something useful for society.