Fake Distributional Indifference, Again

Ready for part two of the shortest, simplest three part explanation of conservative bad economics based on misinterpretations of neoclassical welfare economics you’ll likely ever find? Last week was some funny business relating to “utility.” This week it’s “fake distributional indifference.”

Fake distributional indifference is a rhetorical trick used in bad economics to create the impression neoclassical welfare economics is capable of generating a general recommendation to move toward real economically efficient, “optimal” market structures or, if already at one, stay there. It’s what lies behind arguments like moving away from economically efficient outcomes “distorts” an ostensibly “optimal” state of affairs and the implication from casual folk economics that neoclassical welfare economics recommends something called the “Free Market.” It’s what lies behind risible arguments often made by purveyors of bad economics that others simply can’t understand the simple ethics establishing the mutual benefit of voluntary trade of, let’s say, a starving slave’s day of labor for a crust of bread, never comprehending or acknowledging everyone understands that trivial part of the issue, and the part everyone else is thinking about, the much more significant part, concerns the thorny ethical issues leading up to that transaction and the conditions under which that transaction takes place. It’s largely what generates the offensive, bullying, bad neighbor quality associated with purveyors of bad economics, often economists, as they ridicule the ethics of the people and lambaste democracy for interfering with their own incompetent ethical stylings and judgments.

The rhetorical trick of fake distributional indifference can be used with both types of “utility” I discussed last time, with individual preference rank “utility” and internal perceptions of satisfaction from preference fulfillment “utility,” with both Neoclassical Welfare Economics One and Two. However, one must be invoking distributional indifference to use fake distributional indifference. If one is operating with internal perceptions of satisfaction from preference fulfillment “utility,” Neoclassical Welfare Economics Two, and one is endorsing a particular “social welfare function,” then fake distributional indifference is less of an issue. In that case, it only works with any normative conclusions made on the basis of distributional indifference up to the point of the introduction of the “social welfare function,” so typically with respect to conclusions relating to certain market structures, etc. On the other hand, fake distribution indifference works normally if one simply acknowledges the idea of social welfare functions but casts them as exogenous, inconsistent with the relevant definition of “utility,” unjustified, arbitrary, inappropriate when speaking as an economist, etc.

Fake distributional indifference is most clearly and obviously perceived in the context of individual preference rank “utility,” the world of Neoclassical Welfare Economics One under the somewhat facetious classification I used last week, so I’ll discuss it in that context here. As I’m so fond of pointing out, the interesting thing about defining “utility” in terms of the preference rankings of individuals is that it becomes undefined in interpersonal contexts. It no longer makes sense to ask who gets more “utility” from good X, person A or B. It’s what generates the often reported but rarely appreciated point that interpersonal utility comparisons are not simply “impossible” using preference rank “utility,” they’re undefined, the very expression of the issue represents a misuse of language. The only reason that point is not more readily appreciated is there are so many different definitions of “utility” out there, and hence so many opportunities to equivocate on terms, something many purveyors of bad economics are only too eager to do and to encourage others to do. It’s why I always encourage sincere, conscientious economists working with individual preference rank “utility” to just stop talking about “utility,” per se, and instead talk consistently about individual preference rankings. The time and ink savings are simply not worth the risk of confusion.

The interesting thing about “utility” being undefined in interpersonal contexts is that it removes it from the ethical issue of resolving interpersonal conflicts of preferences, needs, desires, the sorts of issues that make up the lion’s share of ethical philosophy in the real world. Neoclassical welfare economics using individual preference rank “utility” could never identify an ethically optimal allocation of scarce resources because it could never solve the ethical issue of how to resolve interpersonal conflicts of preferences relating to those resources. That’s why I so often remark that the use of individual preference rank “utility” should lead straightaway to the recognition of neoclassical welfare economics as an ethical half-theory, a theory in which some potentially relevant consideration are taken up, but not others.

However, and this gets to the heart of the matter here, if one artificially holds some ethical issues in abeyance, as one does in the Fairy Land of Economic Theory, one can make certain conclusions relevant for the Fairy Land based on neoclassical welfare economics alone. What happens in bad economics is that one presents oneself as restricting oneself to the theory of neoclassical welfare economics, with distributional indifference, but then inappropriately draws conclusions about the real world. That shift, that having of one’s cake and eating it too, that missing discussion of real ethical issues, that suggestion one can generate controversial conclusions from less controversial inputs, is what is covered up by the rhetorical technique of “fake distribution indifference" in bad economics.

Fake distributional indifference can take various forms, but it always involves implicitly taking sides in controversial distributional ethics exogenous to neoclassical welfare economics by arguing for economically efficient, “optimal,” “perfectly competitive” markets. The problem, of course, is that any such recommendation in the real world inevitably leads to a particular instance of such a market with a particular resolution of interpersonal conflicts corresponding to particular distributional ethics and not others. Anything beyond indifference between pursuing that particular market structure or outcome and any other result implying a different resolution of interpersonal conflict, including non-economically efficient, non-“optimal,” non-perfectly competitive market structures and outcomes, is fake distributional indifference, bad economics.

Another typical expression of fake distribution indifference relies on the notion of finding a way to move between different economically efficient, “optimal” market outcomes without departing from economically efficient, “optimal” market structures. Here again, it’s fine in the Fairy Land of Economic Theory. Tap, tap on one’s keyboard, change the initial endowments, transfer this there, done and done. But that’s not how things work in the real world, is it? To get a different result in the real world, one must actually do something. That tricksy quest for the fabulous but mythical chimera, an insubstantial shadow from the Fairy Land, is what converts straightforward policy choices designed to implement ethical views involving the distribution of economic power into fake scientific conundrums. It’s what lies behind purveyors of bad economics saying things like, of course they’d like to address perceived ethical issues relating to the distribution of economic power, they just can't work out how to do it. As though it were some great mystery of the natural world. Everyone understands the issue is fake, right? It’s bad economics, not neoclassical welfare economics. Distributional indifference holds in neoclassical welfare economics whether the policy option on the table is first best, last best, or anything in-between. The theory doesn’t throw up random road blocks, demand the difficult, the unlikely, the logically impossible.

So that’s fake distributional indifference in a nutshell: people arguing indirectly for certain resolutions of interpersonal conflicts ostensibly using a theory that cannot support such conclusions and throwing up random, often impossible conditions for others to meet to implement their ethics. There’s nothing preventing purveyors of bad economics from saying they can recommend policies leading to any real instance of an economically efficient, “optimal” market because they ignore many relevant ethical issues, but democratic government will want to consider those, nothing but the will to deceive, to play games, to mislead, to manipulate, to express their own prior underlying ethical beliefs that typically just happen to coincide with the ethics expressed in the recommended real instance of an economically efficient market. Allow me to just end my post for this week with a special plea to my fellow economists. The intellectual sloppiness and insincerity of past economists created bad economics. Let it be the intellectual rigor and sincerity of present economists that ends it. It’s our mess, let’s clean it up. 

Next time I'll complete the set with part three of my express review of what I see as the main elements of ubiquitous bad economics in the conservative mode with a discussion of the ethical issue of the extent of the market and the role of false factual premises.

Social Welfare Functions and Utility Two Ways

Someone mentioned “social welfare functions” the other day, so I thought I’d say a few words about that this week. I’m sure I did it all before, multiple times, but it’s been a while, so let’s have another go, shall we? I’m mostly talking this week to people who know a little something about neoclassical welfare economics, but if you’re just along for the ride, “social welfare functions” are mathematical functions meant to “weight” different people’s “utility” to define an overall social optimum.

One point I’d like to stress is that if one is using “social welfare functions” to manipulate “utility,” one cannot be talking about the most typical definition of “utility” in neoclassical welfare economics: “utility” defined as individual preference rankings, typically referred to as preference rank “utility.” Preference rank “utility” can only sensibly be used in the context of a given individual. With this definition of “utility,” it’s grammatical nonsense to look at two different people and ask, “Who is getting higher ‘utility’ from good X?” It’s like asking the square root of red or whatever nonsense question catches one’s fancy. If we take two individual preference rankings, “weight” them using a social welfare function, and add them up, what do we get? Gibberish. Nonsense. It’s the sort of thing an inattentive engineer might do if he or she forgot the substantive context or content relating to some equations. If one is listening to someone who has previously defined “utility” in terms of individual preference rankings but suddenly starts talking about “social welfare functions,” one is listening to bad economics. One will want to exit the bus, as soon as possible.

If we’re not talking about individual preference rank “utility” when using social welfare functions, what sort of utility are we talking about? Well, I suppose the older definition of “utility” defined as internal perceptions of satisfaction from preference fulfillment. Why do I think that? Well, it must have to do with preferences if we’re still meant to attach significance to revealed preference, and it must be empirically inaccessible if we need to come up with a “social welfare function” to make interpersonal utility comparisons.

That switch, so insignificant in a mathematical sense, is momentous in a substantive normative or ethical sense. It changes the entire interpretation and evaluation of the normative or ethical argument made in neoclassical welfare economics. Indeed, one must appreciate normative neoclassical welfare economics is really two theories: Neoclassical Welfare Economics One, and Neoclassical Welfare Economics Two. Talk about one at a time and you'll feel better in the morning.

Using “utility” defined as internal perceptions of satisfaction from preference fulfillment, one might reasonably suppose accepting the ostensible goal of maximizing “utility” means one should use that criterion to resolve interpersonal conflicts, if one could. The funny thing is, as I’ve argued before on numerous occasions, no one really would, or at the very least it would be very controversial indeed. If we had a dream where we could peer into people’s minds and observe and measure the strength of these elusive internal perceptions and thus actually maximize that type of “utility,” and someone like, say, the infamous Mr. Hitler was the biggest producer of “utility” around, well, that would get a bit awkward, wouldn’t it? No, the proposition we should maximize that type of “utility” is basically a faux or fake ethical objective that is acceptable only as long as one can’t actually do it, hence making room for other more sensible forms of ethical reasoning to be applied to resolving interpersonal conflicts in practice.

Neoclassical Welfare Economics Two, based on internal perceptions of preference satisfaction “utility,” is a weak, implausible, full ethical theory based on adding up and maximizing a certain type of “utility” across people. Neoclassical Welfare Economics One, based on individual preference rank “utility,” is an ethical half-theory. It isn’t really about adding up and maximizing “utility” across people. Indeed, that doesn’t even make sense with that type of “utility.” It’s about what one can say when limiting oneself to certain propositions about how to treat other people expressing individual preferences. It can be viewed as either clever rhetorical word play to muddy the water or a simplistic attempt to make economics more “scientific” in the old logical positivist sense by defining concepts by their observable attributes. See the difference?

So how about those “social welfare functions?” Well, those are simply attempts to introduce exogenous ethical content on top of ethically implausible internal perception of satisfaction from preference fulfillment “utility” by “weighting” different people’s “utility.” They’re an attempt to convert Neoclassical Welfare Economics Two into a more acceptable full ethical theory, very unlike the explicit ethical half-theory of Neoclassical Welfare Economics One with its individual preference rank “utility.” Comically, and confusingly, the exogenous ethical or normative content added on might (but needn’t) relate to commonly accepted indications of human welfare, the most typical definition of “utility” one finds in serious utilitarian ethical philosophy. So “social welfare functions” often represent real, sincere ethical utilitarianism being re-introduced into a weak, controversial, arguably insincere form of “utilitarianism” by “weighting" the wonky, implausible “utility” of the latter according to the rather more sensible “utility” of the former.

Is it even internally consistent? We start out with an inaccessible sort of “utility” as internal perceptions, but since that implies nothing useful beyond individual preference rankings if no interpersonal conflict, we take up potentially conflicting ethical principles for that. And what funny business do you suppose occurs because we started our normative journey talking about one type of “utility,” making arguments based on that, but ended up manipulating it to correspond to other ethical beliefs, possibly involving other forms of “utility?” Do you suppose “social welfare functions” are just about choosing between defined economically efficient, Pareto optimal, perfectly competitive, socially “optimal” outcomes? That’s just the sort of funny business I’m talking about. A mash-up of two ethical theories, really. Because once one has a “social welfare function,” there’s nothing significant about the “wrong” economically efficient, “optimal” outcomes. Indeed if market institutions are inconsistent with or cannot produce the desired optimal outcome, well ...

Of course, there’s nothing inherently wrong with an ethical theory combining propositions about how to treat people expressing preferences if no interpersonal conflict under various conditions, and recommending various criteria for resolving interpersonal conflict, but say it right. Say it in a way that makes the ethical argument clear so people can discuss the potentially problematic bits, the controversies, evaluate the arguments. Talk sensibly. Don’t just play fast and loose with terms to make it come out right. That creates confusion and conflict.

Because you know the ethical stylings of individual economists have no special significance, or shouldn’t anyway. It’s the subjective stylings of the people delivered via democratic government that’s significant, or should be. They should be involved, not hoodwinked. For consumers, students, if you’ve come to realize economists aren’t necessarily always talking about the same thing when they discuss “utility,” don’t stop there, shrug your shoulders, and walk away. Don’t settle for baby level analysis. It’s your economy. Stick up for yourself. Consider why someone might play games with terms in that way. Investigate what happens when one sticks with one definition of “utility,” identify and evaluate the real normative inputs involved, see what conclusions really follow from particular definitions of “utility.” Don’t settle for bad economics.

Got all that? Well, if you do, you’re halfway to overcoming bad economics. Take up fake distributional indifference, the exogenous ethical issue of the extent of the market, and the role of false factual premises, and you will have gotten what I suppose are the essentials. As I’ve just now reviewed some of the funny business associated with “utility,” which is a major component of bad economics, maybe I'll treat this as part one of a three part series and do a quick review of the other bits in the next couple of storms.