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.
