Equivocation And Purely Economic Evaluation

I wasn’t sure I even wanted to do a storm this week because of the holidays, but then I saw some bigwig economist had delivered a funny policy pronouncement on Twitter and I thought maybe we should do one on what it means to evaluate a policy solely on economic terms. (If you really insist upon knowing the details, it was Larry Summers talking about some policy or other relating to student debt, although that’s not really important here. Might just have easily been any one of many such economists talking about any one of many such policy issues. I classify Mr. Summers as a bigwig economist because he’s a former Secretary of the Treasury, former director of the National Economic Council, and former president of Harvard U, but I don’t mean it like that. I’m just saying we’re not talking about Dr. Joe Blow, assistant professor of economics who teaches Economics 101 down at the local community college, if that’s what you had in mind. That would be an entirely different issue.)

The bigwig economist began his string with a rather obvious oxymoron in which he claimed to base his policy evaluation “purely in terms of economic impacts,” which would be quite a trick given the latter are conventionally considered positive phenomena. It’s an oxymoron because, of course, one can’t really derive an “ought” from an “is,” normative is different from positive, etc. Although positive facts about reality may be important and relevant, one must have some normative or ethical content in there somewhere if one is to make an evaluative statement. I don’t really want to make a big deal about it here because a casual attitude to the positive / normative distinction is hardly an unusual problem in academic economics, is it? Interpreted benignly, it’s an occupation hazard generated by trying to be jack of all trades, master of none. A common culprit is simply assuming everyone has the same goal in mind, maximizing “utility,” welfare variously defined, fairness variously defined, output, employment, whatever, without really identifying, analyzing, or evaluating those normative goals, or considering how they work with one another. A common result is delivering some policy prescription or other with enormous levels of normative controversy without identifying, understanding, or addressing the controversy at all or transferring it to a question about some positive issue that might also be involved.

Although evaluating anything “purely on the basis of economic impacts” is risible nonsense, there is some explicit normative content in neoclassical welfare economics, a component of “economics” surely, so a sympathetic reading might convert the phrase to something like  “purely on the basis of economics” or “purely on the basis of economic theory.” Unfortunately, the bigwig economist’s policy evaluation also obviously went beyond the normative content of neoclassical welfare economics, as he delved, in part, into issues like whether the policy in question was regressive or progressive, who it helped, who it hurt, etc. Although those issues are perfectly acceptable positive issues for economists to study, the normative significance of such positive information for policy evaluation, per se, is famously exogenous to the normative content of neoclassical welfare economics. But I don’t really want to make a deal about that right now either because supplying one’s own personal normative inputs while claiming they’re part of economic theory is also hardly an unusual problem in academic economics. Another occupational hazard, similar to the first, perhaps, or perhaps something else.

No, I’m rather more interested in a somewhat more advanced, or perhaps simply rhetorically cleverer, version one sometimes encounters that may appear less obviously peculiar than the version that particular bigwig economist provided in that particular string. According to the advanced version, if one is evaluating some policy or other “strictly from the perspective of economic theory” or “purely in economic terms,” or “purely as an economist,” etc., then one will ignore distributional ethics and issues.

What’s wrong with that? Distributional issues and ethics are famously exogenous to the normative content of neoclassical welfare economics, are they not? Of course they are. The difficulty involves the meaning of evaluating a policy involving those issues. What exactly does that mean? This is where the ethical half-theory structure of neoclassical welfare economics can cause problems. If it were a full ethical theory, one could simply evaluate the policy under the ethical theory presented, similar to how one might evaluate any policy under any ethical theory. However, when it comes to ethical half theories, one has a choice of how to present the situation. On the one hand, one might simply say one cannot really evaluate the policy in question under the ethical half-theory because doing so involves exogenous ethical issues. Easy peasy. On the other hand, one might say one can evaluate the policy with respect to the limited ethical issues covered by the ethical half-theory, but such an evaluation has no particular significance in a broader context involving the excluded considerations as well.

Why so complicated? Although an ethical half-theory may choose to not take up certain issues, those issues are still there and still relevant in reality, barring an explicit, endogenous argument one should not consider them normatively or ethically significant, of course. If neoclassical welfare economics contained an explicit argument we should place no ethical or normative significance on how to resolve interpersonal conflicts of preferences, neoclassical welfare economics would be an absurdly controversial full ethical theory. It would be absurdly controversial because most people likely have ideas about the ethical resolution of interpersonal conflicts of preferences, whether it be by welfare, need, strength of preference, fairness, justice, rights, or any other basis.

Purveyors of bad economics in the conservative style play games in this area. They deliver policy evaluations “as economists,” or “from the perspective of economic theory,” without explaining the significance of such evaluations in the peculiar context of ethical half-theories. It’s hard to avoid the suspicion they’re playing rhetorical games, hoping those reading or listening will confuse neoclassical welfare economics with an oddly simply and uncontroversial full ethical theory, and thus attach exaggerated significance to what one can say solely on that basis. In a sense, one can think of the issue as equivocating on terms such as “evaluating policy X on purely economic terms” between the sense relevant to the context of an ethical half-theory and the sense relevant to a full ethical theory.

As a nice example of the sort of rhetoric typically involved, the bigwig economist’s string ends with noting politicians may be unable to act according to his sage policy evaluation because they may need to “compromise” with “important constituencies” and “political imperatives.” He couches the statement in the faux or mock humility so typical of economists of a certain type, proclaiming he “can not judge the overall wisdom of the decisions made,” or to paraphrase, he supposes we must accommodate the unethical idiots of the world in some old way. By now you must recognize the language of anti-democracy bad economics in the conservative style when you see it, right? The issue under consideration involves conflicting ethics, not objectively correct or even uncontroversial ethics versus exigencies posed by important constituents and political imperatives. If we’re talking about neoclassical welfare economics, it’s an ethical half-theory that cannot be used to evaluate policies on its own. Exogenous and controversial ethical inputs are involved, and there’s nothing suspect or illegitimate about voters delivering them via democratic government. We’re not really talking about wise technocrats / ethical arbiters delivering uncontroversial normative or ethical prescriptions only to have clueless democratic government unethically and unfortunately “interfere” with them in practice to accommodate the ignorance of voters. That’s bad economics in the conservative style, not real neoclassical welfare economics.

Have you made out your new year’s resolutions? If not, may I suggest adding addressing anti-democracy bad economics in the conservative style? Good time for it. Just saying. 

Bad Economics and Macroeconomics

Can we talk this week about the relationship of bad economics in the conservative style to so-called macroeconomics? It’s a bit of a digression from my usual concerns, but the term came up the other day and it got me thinking about it.

If one is familiar at all with the field of economics, one may have encountered one way of dividing it up in terms of so-called microeconomics and macroeconomics. As with everything else in economics, the distinction is complicated by the confusing hash of normative and positive. In a positive context, there is some sense to the reference to scale whether microeconomics is defined as a dodgy sort of “science” of individual and firm behavior, arbitrary and consciously unrealistic engineering “models” of the same, or a random toolbox of mathematical optimization techniques. In a positive context the basic idea is that microeconomics addresses smaller scale economic phenomena than macroeconomics, which studies systemic outcomes like output, employment, growth, etc. That bit seems fairly reasonable.

However, as anyone who has ever read one of my tweets will surely appreciate, I’m rather more interested in normative economics than positive economics, and in the context of normative economics, neoclassical welfare economics, the distinction between microeconomics and macroeconomics appears rather less sensible. That’s because neoclassical welfare economics is really macroeconomic in scale, dealing with markets, market systems, economic systems in general, but closely related to the theory and method used in microeconomics, so-called neoclassical economic theory. That means the subject matter of neoclassical welfare economics overlaps that of macroeconomics, and indeed can be seen an alternative or competitor to macroeconomics, serving at times as an impediment to policy prescriptions emanating from macroeconomics.

Recall that neoclassical welfare economics is a normative or ethical half-theory based on normative inputs about how to behave toward other people expressing preferences, but confusingly discussed in terms of an idiosyncratic definition of “utility,” and generating normative outputs relating to social optimums based on that utility. As I point out often enough, it’s an ethical half-theory because the normative argument it contains is developed in and for an arbitrary, stylized world that differs from the real world in certain respects and from which certain real world ethical issues have been banished.

If neoclassical welfare economics is an ethical half-theory, then macroeconomics (defined to exclude it) can be viewed as an ethical non-theory. That is to say, there are no normative inputs in macroeconomics, no definition of normative optimality, no normative conclusions. One may infer someone is interested in certain outputs and so on, but there is no explicit argument in macroeconomics they should be. If there are normative inputs, they operate as with other sciences through the interest and motivations of practitioners, the issues studied, etc.

The important point here is that among the outputs of interest in macroeconomics one notable omission is “utility” of the sort defined in neoclassical welfare economics, the maximization of which is the ostensible goal of neoclassical welfare economics. That means policy prescriptions emanating from neoclassical welfare economics and macroeconomics will always address entirely distinct goals or objectives. There’s no reason to expect congruity between the policy prescriptions of the two theories. The vacuity, the practical emptiness and irrelevance, of real neoclassical welfare economics properly applied in real contexts can easily disguise this fact. However, that is not at all the case with expansive bad economics in the conservative style, which adds normative content relating to economic power and markets. Viewed through the lens of bad economics in the conservative style, the relationship between neoclassical welfare economics and macroeconomics can become quite fraught and contentious leading to confusion and conflict, popular misunderstandings, etc. That is particularly the case when one considers the tendency of bad economics in the conservative style to conflate “utility” with outputs of interest in macroeconomics, adding to the confusion.

Addressing ubiquitous bad economics in the conservative style should be of at least as much interest to macroeconomists as to microeconomists working with the neoclassical economic theory that underlies neoclassical welfare economics. It’s really an issue for all economists. Macroeconomists may not be interested in the methods of neoclassical economics as a basis for studying macroeconomic issues, or in real normative neoclassical welfare economics, but they may be interested in addressing bad economics to make space to discuss macroeconomic policy.

Fake Distributional Indifference, One More Way

It’s just getting comical now, but I thought of yet another nice way to explain the rhetorical technique of fake distributional indifference in bad economics in the conservative style. I know I just did two versions, but maybe I can do one more before I move on? Again, sorry to keep banging on about this one thing, but to me it’s a significant thing, rarely acknowledged, that creates a lot of confusion and conflict. It seems worthwhile to try to find ways to explain it different people may have find intuitively obvious.

Imagine, counterfactually, that neoclassical welfare economics demonstrated every (economically) “efficient” (defined with respect to “utility”) outcome was superior to every (economically) inefficient outcome, under the normative inputs endogenous to that theory. (And to simplify matters, let’s say, again counterfactually, there are no other differences between the stylized word of neoclassical welfare economics and reality relevant to applying the normative argument developed in and for the world of neoclassical welfare economics to reality.) That would mean someone working strictly within the framework of neoclassical welfare economics and applying it to reality could suggest always moving to any economically efficient outcome, although choosing the overall ethical optimum from among such outcomes would be exogenous.

Now contrast that case to the factual case in which neoclassical welfare economics demonstrates merely that particular (economically) “efficient” outcomes are normatively superior to particular (economically) inefficient outcomes under the endogenous normative inputs to that theory. In a realistic context, what could one working strictly within the normative framework of neoclassical welfare economics be able to suggest in that case? The same as before? The change is irrelevant? Again, we should just get to any economically efficient outcome? That’s odd.

It’s odd because it’s incorrect. It’s an expression of the rhetorical technique of fake distributional indifference from bad economics in the conservative style. Obviously, what one can say under the new conditions is different from what one could say before. In a realistic context, one working only with the normative inputs endogenous to neoclassical welfare economics would be unable to offer up any generalized policy prescription to move toward economically efficient outcomes. Why? Distributional indifference, of course. Any possible (economically) efficient outcome to which we might move will have (economically) inefficient outcomes to which one operating only under the normative inputs in neoclassical welfare economics will be, or anyway should be, indifferent. That fact we can show any possible (economically) efficient outcome to which we might move is superior under the normative argument in neoclassical welfare economics to some (economically) inefficient outcomes is not enough to sustain the former general policy prescription.

Correctly applying neoclassical welfare economics under realistic conditions implies indifference to (economic) efficiency unless one is also expressing exogenous normative or ethical inputs serving to eliminate distributional indifference. The rhetorical technique of fake distributional indifference in bad economics in the conservative style consists of purveyors of bad economics, often economists, supplying the requisite exogenous normative or ethical inputs themselves, but not identifying or evaluating them. That can easily lead to anti-democracy sentiment, as the ignorant view politicians responding to the normative or ethical views of voters to be “interfering” with the ostensibly more correct and well developed ethics of purveyors of bad economics in the conservative style.

Saying the exogenous normative decisions have already been delivered via existing laws relating to markets and the definition, distribution, and use of economic power, and can therefore be treated as givens for purposes of applied neoclassical welfare economics, is disingenuous. The presence and status of those exogenous normative inputs are not typically discussed in bad economics in the conservative style, and the issue of whether voters operating through democratic government should revisit, revise, amend, modify those inputs is quite often, indeed typically, the issue at hand. The normative or ethical proposition current democratic government should not revisit, revise, amend, modify the decisions of past democratic government is in some sense just as exogenous and anti-democratic as the proposition some technocrat acting as ethical arbiter should decide those issues. 

Everyone, including economists, should fight bad economics in the conservative style because of the close association of that essentially rhetorical and misleading intellectual artifact with the rise of anti-democracy sentiment in the USA and elsewhere. Conservative economic ideology, policy, and anti-democracy sentiment are not simply the result of applying the few, relatively uncontroversial normative inputs of the ethical half-theory of neoclassical welfare economics to reality.

Equivocation On Efficiency In Bad Economics

Let me do a quick follow-up to my post from last week about what I called the dual nature of labor, and capital, in neoclassical welfare economics, but this time from the perspective of equivocation on the term “efficiency,” before I forget about it entirely. I know, I know. “How many ways can one say the same thing?” Or maybe, “Hansel, do you ever stop talking once you get started on some issue?” Sorry. Sometimes I have a bit more to say about some issue but my initial post seems already overly long. Should I just walk away? Doesn’t sound like me. 

“Production efficiency” and “economic efficiency” are two different concepts or, if one prefers, the same concept applied in two very different contexts. The former is about output, goods, services, money, etc.; the latter is about “utility” as it is defined in neoclassical welfare economics. Money, goods, services, “utility,” are related in some ways, but they’re not identical or interchangeable. One can say things about output, goods, money, one can’t say about “utility.” Confusion in that area allows bad economics in the conservative style to thrive.

“Economic efficiency” relates to a situation where we cannot increase anyone’s “utility” without reducing someone else’s absolute (as opposed to relative) “utility.” “Economic efficiency,” viewed as a synonym for “Pareto efficiency,” can be applied to things other than “utility,” but in the context of neoclassical welfare economics, when we talk about some system or outcome being “economically efficient,” we mean with respect to “utility” specifically. “Economic efficiency,” based on “utility,” is important in neoclassical welfare economics because, and only because, of what it says about “utility,” about which neoclassical welfare economics is ostensibly all about. When used in the normative proposition we should only consider policies that are “economically efficient” or promote “economic efficiency,” it involves an exogenous normative input that goes beyond neoclassical welfare economics. Neoclassical welfare economics is indifferent to interpersonal changes in “utility” because we famously cannot make interpersonal comparisons of “utility” using the type(s) of “utility” used in neoclassical welfare economics. “Economic efficiency” is not a combination of two normative criteria, one about “utility” and one about “efficiency” in general, defined with respect to anything and everything. Efficiency defined with respect to anything and everything is nonsense.

“Production efficiency,” defined relative to output, goods, services, money, etc., is normatively significant in neoclassical welfare economics only to the extent it relates back to “utility” as defined in neoclassical welfare economics. Neoclassical welfare economics is a normative or ethical theory based on the proposition we should “maximize” total social “utility” (if one insists upon expressing the normative or ethical argument in that indirect, awkward, and misleading way), not maximize total output, goods, services, money, economic power, etc. If one doesn’t know what happens to “utility” under some policy or other, then neoclassical welfare economics has nothing to say about it and is indifferent.  An economist limiting his or her recommendations to what that theory says will thus express indifference. It is theoretically incorrect in neoclassical welfare economics to break distributional indifference derived from an inability to distinguish outcomes on the basis of “utility” by introducing other random normative criteria, such as “production efficiency” relative to output. 

If one misplaces “utility” and concentrates on disembodied “efficiency,” one may suppose efficiency relative to other random goals also has normative significance in neoclassical welfare economics, allowing one to rank outcomes even if one doesn’t know anything about “utility.” That can lead to funny notions like neoclassical welfare economics attaches normative significance to the size of the “pie” but not the distribution of the “pie,” that the former issue is endogenous to neoclassical welfare economic and the latter exogenous. That is incorrect. That argument simply takes the equivocation on the term “efficiency” and transfers it to the term “pie.” Yes, equivocation on various terms relating to “utility,” money, output, goods, services, is a theme of this week’s post. Distributional indifference means we don’t actually know what happens to the size of the utility pie when we change the size of the output pie while also changing the distribution of the output pie, if there even is a utility pie to talk about.

Under the old but still sometimes used or at least implied inaccessible internal perceptions of satisfaction from preference fulfillment “utility,” the utility pie may well get bigger even as the total output pie gets smaller, if we’re changing the distribution of the output pie at the same time. Under individual preference rank “utility,” there is no utility pie. It’s ungrammatical nonsense to even talk about it. But that doesn’t meant we can just substitute another random pie instead. “Sorry Hon, no utility pie today, or ever. How about some nice output pie instead?”

That’s what real distributional indifference is all about. One may have normative or ethical beliefs relating to whatever one likes, including output, but those are exogenous to neoclassical welfare economics. Real neoclassical welfare economics is about a particular definition (or in practice two particular definitions) of “utility.” When one draws the line between what’s endogenous and exogenous to neoclassical welfare economics incorrectly, one blurs the distinction between speaking as an economist about economic theory and providing one’s own random normative inputs, thereby creating confusion and conflict. What puts the “bad” in bad economics in the conservative style bad is dishonesty. It purports to stand in a certain relationship to neoclassical welfare economics when it actually goes beyond it without adequately identifying or evaluating the additional normative content.

And if we can just return to output pie for a moment, I suppose I should mention one can also commonly find in bad economics in the conservative style a sort of equivocation or conflation relating to different output pies. “Production efficiency” is defined relative to producing whatever level and mix of output falls out of meeting demand from some particular distribution of economic power. It’s about existing or status quo distributions of economic power. That is to say, one doesn’t normally see discussions of plain English “efficiency” defined relative to some theoretical maximum output, the largest output pie possible, regardless of whether that’s the output pie that would result on the market from a given distribution of economic power. “Production efficiency” defined relative to producing the output called forth by any given pattern of economic power can conflict with plain English “efficiency” defined relative to a theoretical maximum total output. One must keep in mind what output goal one has in mind, which is a particular instance of the general proposition that when thinking about efficiency one must keep in mind what goal one has in mind. It’s interesting because manipulating the distribution of economic power, including even through input prices, can increase demand and thus increase the size of the output pie, even while conflicting with “production efficiency” relative to the production of some status quo output pie.

What happens to output pies defined with respect to various output goals when various policies are undertaken is a positive, empirical issue. The main point, however, is that any normative significance is exogenous to neoclassical welfare economics unless those changes can be related back to “utility.” If one wants to do conservative economics as an extension of neoclassical welfare economics with additional normative inputs, and one identifies those additional normative inputs, discusses them, helps people evaluate them, then well and good. But one shouldn’t play games with neoclassical welfare economics, that creates confusion and conflict, that’s bad economics in the conservative style.