Consumer Surplus And Bad Economics

Someone mentioned “consumer surplus” the other day and I couldn’t remember when I last discussed that one and its potential relationship to bad economics in the conservative style. Consumer surplus is a concept from neoclassical economics that refers to the difference between what a consumer pays for some good or service and what he or she would have been willing to pay, which one can then sum across all consumers if one likes. 

It’s an interesting idea, particularly when contrasted with “utility” as defined in neoclassical welfare economics. For example, consumer surplus is a cardinal number. A particular individual’s consumer surplus for some purchase might be $30 — $20 = $10. As such, consumer surplus is obviously not the same thing as “utility.” The most typical, conventional definition of “utility” in modern neoclassical welfare economics is preference rank utility, which is an ordinal concept.

Consumer surplus also doesn’t correspond to the other, older definition of “utility” that works with neoclassical welfare economics, inaccessible internal perceptions of satisfaction from preference fulfillment, or what we might call perception “utility.” That type of “utility” is a cardinal concept, one can have a certain amount or level, but it’s meant to be inaccessible and, as such, unavailable to use as a means for resolving interpersonal conflicts of preferences via the making of interpersonal “utility” comparisons. Consumer surplus is accessible via estimation, experiment, survey, etc., and can serve as the basis to resolve interpersonal conflicts of preferences. X’s consumer surplus is $10, Y’s is $20. Y gets more. Nothing particularly difficult about the calculation, is there?

So what the heck is consumer surplus, anyway? Well, it’s a measure of consumer benefit combining information about preferences with information about economic power. And you know where I’m going with that, right? Yes, of course. Where I always go. The ethics of the distribution of economic power and, relatedly, when to use economic power in markets to resolve interpersonal conflicts of preferences, like the legal specification of economic power in the first place, are exogenous to neoclassical welfare economics.

That means the significance of “consumer surplus” is exogenous to neoclassical welfare economics. In other words, there’s no endogenous normative argument in neoclassical welfare economics suggesting anyone should care which policy maximizes consumer surplus. One’s assessment of the normative significance of the relative amount of consumer surplus will be tied up with one’s assessment of the exogenous ethical issues associated with the distribution of economic power, extent of the market, definition of economic power.

Note we’re not talking here about someone rejecting neoclassical welfare economics. One may agree entirely with the normative argument in neoclassical welfare economics, yet prefer a policy that does not maximize consumer surplus based on exogenous ethical considerations. We’re not simply saying a person speaking as a neoclassical welfare economists will care about consumer surplus, but others might not. A person speaking as a neoclassical welfare economist will or should be indifferent, neutral with respect to levels of consumer surplus. Recall we’ve discussed the distinction between certain ethical issues relevant in reality being exogenous to neoclassical welfare economics and the implausible ethical proposition people should consider all such issues irrelevant. We’re talking about the former, not the latter. This gets, again, to the peculiar, confusing, idiosyncratic status of neoclassical welfare economics as an ethical half-theory that takes up some relevant ethical issues but not others. That’s what generates the ostensibly ethically uncontroversial nature of the theory.

Want some examples? Fine. Well, for the ethics of the distribution of economic power, consider the consumer surplus lost by allocating random good X to poor people rather than selling it to the economically powerful.. Is the lost consumer surplus normatively or ethically significant? Well, not if one thinks poor people have rather less economic power than they ought to have as a point of ethics, which is an issue that’s exogenous to neoclassical welfare economics. A good neoclassical welfare economist will not provide an answer, ostensibly from the point of view of economic theory, for example, consumer surplus shows X should be allocated to the economically powerful. He or she will express indifference to exogenous normative issues.

An example for extent of the market I’ve used before is the consumer surplus lost by allocating a vaccine on the basis of medical need rather than economic power. Does it matter? Not if you think, as a point of ethics, vaccines should go first to those with medical need. What does neoclassical welfare economics say about it? Nothing. One can’t use “utility” defined in a way that makes it relevant to neoclassical welfare economics to resolve interpersonal conflicts over scarce resources like vaccines, to determine whether we should give the vaccine first to the sick person or the rich person. That’s exogenous. A good neoclassical welfare economist will not provide an answer, ostensibly from the point of view of economic theory, for example, consumer surplus shows we should allocate vaccines first to those with economic power. He or she will express indifference on exogenous normative issues.

Any policy recommendations based on consumer surplus in the real world will be contingent on no one having ethical objections to the result based in how economic power is defined, distributed, or used in that instance. Otherwise, democratic government must decide the issue. One can, of course, support the status quo distribution of economic power and support using economic power in markets as the basis of resolving this, that, or all interpersonal conflicts of preferences. Knock yourself out. Just don’t pretend it’s neoclassical welfare economics.

What’s my point? If you’re an economist talking about consumer surplus, say it right. Dispel confusion and conflict, don’t add to it. If you’re someone listening to policy advice from an economist, be an educated consumer, not a patsy. Some economists are also purveyors of bad economics. Yes, it can happen, I’m afraid. Don’t let anyone bamboozle you into thinking you should support the policy with greater consumer surplus because it’s “just economics.” No, it’s not. If you have ethical objections exogenous to neoclassical welfare economics, you needn’t take up the issue with economists. Just say, “Thanks, but I have some ethical concerns that are entirely consistent with economic theory but exogenous to it.” You needn’t get their buy in. If necessary, explain the ethical half-theory structure of neoclassical welfare economics to them because they may very well not understand it, or may profess not to, anyway. Stand up for yourself. Economists are not the bosses of you. They’re not the ethical arbiters for society.

Equivocation On Neutrality In Bad Economics

I feel it’s been a while since I discussed terminological equivocation on terms like “neutral” and “neutrality” in the context of bad economics in the conservative style and neoclassical welfare economics. Seems always a lot of it about. Maybe we can review that issue this week?

One sense of neutrality I’m talking about here is neutrality relative to maintaining the status quo resolution of some interpersonal conflict of preferences. The other sense of neutrality is neutrality relative to the resolution of that interpersonal conflict itself. To state the obvious, those are two different things. When the latter sense of neutrality is relevant, but one swaps it out for the former sense, one gets what I think of as “fake neutrality,” closely related and analogous to the “fake distributional indifference” I often discuss. Of course, it’s real neutrality in some sense, just not the relevant one. It’s similar to equivocation on the term “efficiency” relating to different goals or objectives. Much as one must always ask efficiency with respect to attaining what goal, one must always ask neutrality with respect to what consideration.

Say two people, A and B, both want, desire, need some scarce input X, and we’ve set up laws to define economic power, distribute economic power, and set the mechanism for allocating X to be economic power in markets, in such a way that X goes to A. Fake neutrality in the context of neoclassical welfare economics involves having as one’s goal or one of one’s goals preserving that resolution of that conflict, making sure A is not harmed and still gets X, on the grounds doing so is “neutral” in the sense of “neutrality” relevant to that theory. It isn’t really.

It’s rhetorically powerful because, of course, another potential way to define “neutrality” is defending the status quo whatever it may be, so neutrality relative to the specifics of the status quo and to the ethical rationale used to support the status quo. Neutrality in defense of the status quo is ethically controversial because it does not evaluate the status quo resolution of that interpersonal conflict. Confusingly, that way of defining neutrality is partially, but not entirely, consistent with the neutrality relevant to neoclassical welfare economics. Obviously, if a theory sets aside the relevant ethical issues, the rationale for supporting the status quo becomes exogenous. However, it’s quite different from neutrality defined with respect to the resolution of the interpersonal conflict itself, which avoids ethical controversy on that point. Economists will recognize this second sense of neutrality as the one relevant to neoclassical welfare economics, as famously expressed in distributional indifference and the less commonly acknowledged indifference with respect to the ethical issue of the extent of market. The type of neutrality or indifference relevant to neoclassical welfare economics is simply the logical consequence of the way “utility” is defined in that theory. We cannot determine on the basis of that sort of “utility” the ethically best or optimal way to resolve any interpersonal conflict.

Of course, the cost of choosing to talk about some but not all the ethical issues one accepts as relevant to a real life situation, to avoid controversy, or for any other reason, is that one converts one’s theory into an ethical half-theory that cannot be applied to reality on its own. If one is evaluating some change that affects how interpersonal conflicts are resolved, who gets what, the allocation of scarce resources, then logically one must go beyond the limited normative content of neoclassical welfare economics. As I often point, the interpretation of neoclassical welfare economics as a full ethical theory containing the proposition no one, rather than simply economists qua economists, should care how interpersonal conflicts of preferences are resolved is ethically implausible and would render it very, very controversial indeed. 

One way to think of fake neutrality is that it introduces an exogenous normative proposition into neoclassical welfare economics suggesting there’s something ethically significant about the status quo that cannot be established on the basis of “utility.” One sees this sometimes in connection with the concept of Pareto improvement in the context of neoclassical welfare economics. The concept says what it says, it plays a certain role, but like much of neoclassical welfare economics, one can easily get the wrong end of the stick. The ethical or normative proposition one should only consider Pareto improvements from any given starting point is not part of neoclassical welfare economics, it goes beyond what one can say on the basis of “utility,” it’s meant to preserve elements of the status quo, it’s exogenous. If one restricts oneself to real neoclassical welfare economics one will be indifferent to changes that make at least one person worse off and at least one better off because one doesn’t know what happens to “utility” under those conditions or the question is undefined, depending on which of the two interpretations of “utility” relevant to neoclassical welfare economics one has in mind. One will not reject out of hand, fail to consider, take off the table, changes to which one is meant to be indifferent. One will simply express indifference to them. 

Of course, supporting the status quo doesn’t require fake neutrality or fake indifference. One can simply explicitly say one supports the status quo based on some specified ethical theory or other and clarify one is not talking about neoclassical welfare economics. Some economists working in the neoclassical tradition are purveyors of bad economic in the conservative style. They deliver misleading and essentially undefended subjective judgments relating to exogenous normative or ethical issues typically in loud, blustery voices. However, some neoclassical economists are careful with their words, express the underlying normative or ethical issues properly, understand the limitations of their theory, exhibit professionalism and intellectual humility. One can find good economics, if one looks for it.

One’s impression of what neoclassical welfare economics says shouldn’t be a matter of who one hears it from. Economists should help people recognize and avoid anti-democracy bad economics in the conservative style, and good economists, real economists, will.

 

Second Anniversary

It’s my blog birthday! Yes, the big o two! I wonder what that is in human terms? A thousand years? I jest. I could easily go another two or twenty to defend democracy from anti-democratic bad economics in the conservative style. Perhaps I should make a few comments in honor of the august occasion?

Everyone must know by now what I’m about mostly about, right? Neoclassical welfare economics, anti-democratic bad economics in the conservative style (and the related forms of folk economics) loosely based upon it, and the sometimes surprisingly subtle relationships between the two. I cycle endlessly through a small set of issues I’m trying to raise awareness about, saying them in various ways, in case anyone is interested in addressing intellectually stultifying, misleading, bad economics in the conservative style. Few are, of course, but just in case.

Many, or let’s say most, critics of bad economics in the conservative style prefer to talk around it, avoid it, ignore it, but with the indifference or active patronage of many academic economists, it won’t go away if simply left alone. It must be confronted, addressed. When critics do try to directly address bad economics in the conservative style, they quite often miss the mark, in my humble opinion, because they conflate it with neoclassical welfare economics, and then fail to discuss the latter seriously or sympathetically. They tend toward hasty, confused criticisms that although apparently dispositive for themselves and others of like mind are rather easily deflected by those concerned to do so. They fail to appreciate the subtleties, the nuances, the clever rhetoric stratagems and word games involved. Of course, one may also criticize neoclassical welfare economics itself on certain bases, such as its vacuity or its ability to sustain confusion on certain points, but those criticisms will not be identical to those relevant to bad economics in the conservative style.

I sometimes get the complaint I make things too complicated, but honestly I feel I’m just dealing with the complexity that’s there. I’m not really adding anything. It’s just that, like most things, it’s not really as simple as many would like to suppose. Yes, I suppose my commentary sometimes requires some basic knowledge of neoclassical welfare economics. I summarize the relevant bits often enough, but I can’t really present a course on the subject. And how could I address the relationship between it and bad economics in the conservative style without discussing it? Some of my commentary is even more general than that. No prior experience required. But, honestly, if one is in the habit of thinking or talking about what one supposes is orthodox economics, one may want to familiarize oneself with neoclassical welfare economics. Don’t get me wrong. I’m certainly not suggesting it’s the end all and be all. Far from it. But it’s certainly a good starting point for understanding the issues in bad economics in the conservative style. Correctly perceived, it’s also consistent with many normative views, other economic theories as well, so it’s got that going for it.

I’m not one of those economists with a capital E who wanders hither and yon across all of mathematics, blithely ignoring the practical consequences of bad economics in the conservative style. I’m a practical man, interested in people and the affairs of this world. They don’t call me the outsider, the old man of the mountain paths, the hobo at the gate, because of my shabby clothes, my weathered visage, my diffident mien. They call me that because I’m a simple man and I follow a simple path, the Path of Philosophy, wherever it leads.

I’m always interested to hear from fellow travelers.  Helps me think of new ways to say old things. I haven’t set up this blog to facilitate that type of interaction, but you know I’m on Twitter as well, and my blog posts are coordinated with Wednesday “tweet storms” that go over the same material, often word for word. Drop me a response sometime. Or just find a random tweet and respond with some other issue you’re concerned about, doesn’t matter. I don’t bite. I mute, occasionally, if bothered, and I suppose further interaction pointless. I block, rarely, because who has time for that? I don’t mind a modicum of snark. Par for the course these days. Mixing the pot, keeping it spicy. We don’t have to always be so formal. I’m not. But there has to be some point, some development. Listening to someone spout rubbish all day long is exhausting. I just can’t do it. Sometimes I have things on my mind. Need a little space and quiet time.

You should help me fight ubiquitous bad economics in the conservative style by understanding it, neoclassical welfare economics, and how the two relate. Help me fight also the monstrous, dumbed down offspring of bad economics in the conservative style. Stand up for democracy.

Perspectives On Bad Economics In The Conservative Style

Have you noticed the same fundamental issues with bad economics in the conservative style can be discussed in different but equivalent ways leading critics to suppose they’re at loggerheads when they actually agree on substance? I was thinking about that the other day, so let me just say a few words about that this week.

To understand the different ways of criticizing bad economics in the conservative style, first consider two different but equivalent perspectives on the neoclassical welfare economics on which it is based. Neoclassical welfare economics is a full, complete, stand alone, ethical theory for the arbitrary, artificial Fairy Land of Economic Theory, where certain realistic conditions and certain ethical issues have been banished. However, it’s a partial ethical theory in reality, where those conditions and ethical issues cannot be so banished.

One may say neoclassical welfare economics (applied) has hidden, unstated normative premises. One may say neoclassical welfare economics (theoretical) cannot be applied to reality without exogenous normative content. Do mind the potential equivocation on terms, won’t you? One will criticize bad economics in the conservative style one way if one starts with neoclassical welfare economics (applied) and another way if one starts with neoclassical welfare economics (theoretical). The former line of criticism will talk about how bad economics in the conservative style obscures, fails to identify, discuss, evaluate the additional normative content required for neoclassical welfare economics (applied). The latter line of criticism will talk about how bad economics in the conservative style incorrectly attempts to apply neoclassical welfare economics (theoretical) to reality, about confusing the Fairy Land of Economic Theory with the real world.

What is this hidden or missing or surreptitiously supplied normative content? Normative or ethical propositions relating to the definition, distribution, and use of economic power in markets to resolve interpersonal conflicts of preferences, and possibly in the no-conflict case the significance of things like ignorance and irrationality. If the hidden or missing normative or ethical content is assumed expressed in politics or law, we have purveyors of bad economics in the conservative style ignoring “embedded” politics and law or “losing the political element of the old political economy,” etc.

One may try to fix bad economics by converting the ethical half-theory of neoclassical welfare economics into a full ethical theory by playing with the definition of “utility,” introducing explicit exogenous normative inputs such as social welfare functions. One may attempt to fix bad economics by establishing the limits of the constrained ethical half-theory of neoclassical welfare economics and the need to combine the results of neoclassical welfare economics with exogenous ethical inputs in applied contexts.

What’s going on? Seems mostly a matter of equivocating on the term “neoclassical welfare economics” in the theoretical and applied senses, leading to different perspectives on the relationship of bad economics in the conservative style to neoclassical welfare economics.

Want an example not involving resolution of interpersonal conflicts of preferences? Does neoclassical welfare economics propose we “maximize” total social “utility” in the no-interpersonal conflict of preferences, one person (plus observer) case, even if that person is ignorant of the facts or irrational? Do ciphers with those characteristics exist in the world of neoclassical welfare economic theory, that is, the Fairy Land of Economic Theory? Or are they part of that world, excluded only in one particular region or village, when it comes time to specify the conditions of the “perfectly competitive market?” No, I’m just asking. It can be a little tricky to determine what exact normative propositions are expressed in neoclassical welfare economics, the conditions under which “utility” is meant to be ethically significant in that theory.

One view is neoclassical welfare economics (theoretical) proposes we “maximize” total social “utility” under the conditions that exist in the Fairy Land of Economic Theory, where people know what they’re doing and are rational. That’s the ethically uncontroversial version.  Another view is neoclassical welfare economics (theoretical) proposes we “maximize” total social “utility” under the conditions that exist in the Fairy Land of Economic Theory, where people may be ignorant or irrational. That’s the ethically controversial version. I would argue the second view is the correct one because I’ve only ever encountered conditions relating to information and rationality in the context of market structure, not in the context the proposition it’s nice if we maximize total social “utility” or the definition of “utility.” But maybe that’s just me? It’s not like we’re dealing with a carefully documented ethical theory put together by a rigorous ethical philosopher. We’re talking economics right now.

Does bad economics in the conservative style misuse a noncontroversial normative proposition  from neoclassical welfare economics (theory) meant for the Fairy Land by applying it to the real world where the necessary conditions relating to perfect information and rationality are not met? Does bad economics in the conservative style add controversial normative content to neoclassical welfare economics (theory) to handle the difficult or potentially controversial cases of the normative significance of social “utility” maximization under conditions of ignorance and irrationality? Or did I say it wrong and does bad economics in the conservative style actually get it right in the no-conflict case? Does neoclassical welfare economics (theory) itself contain the ethical proposition we should always strive to “maximize” total social “utility” in the real world, that is, even when preferences are based on ignorance and irrationality?

So many questions, right? What’s my point? Don’t get hung up on superficial differences in perspectives or presentations. Look to what ties them together, the underlying issues. Don't sweat the small stuff. It’s not complicated. It might be a little odd, strange, awkward, but it’s not complicated.