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.
