Last time I mentioned one way people try to link normative economics in a macroeconomic context and a neoclassical welfare economics context involves the concept of diminishing marginal “utility.” Let me say a few more words about that this week.
Diminishing marginal “utility” is the idea any given individual’s preference rank (“utility”) for units of any particular good or commodity tends to fall with the number of units of that good consumed, so one prefers the first unit to the second, the second to the third, etc. The concept seems straightforward and plausible enough in certain contexts, which are the contexts usually used when describing or explaining it. For example, if one is eating cheeseburgers, in one sitting at least, one may well prefer the first to the second and so on. However, in other contexts it seems rather less obvious. It’s commonly referred to as a “law,” although in economics a “law” is often just something economists need to make some equation or model work out. A law of the Fairy Land, so to speak, not of reality. So not sure I’d take it all that seriously, but often plausible enough.
Like many elements of economic theory, the seemingly simple concept gets complicated rather quickly if one starts thinking about it in a context other than the preferred, best case, least potentially problematic context. Way back then, Alfred Marshall discussed the concept in the context of a “specific commodity.” However, one sometimes sees the concept applied to consumption of all goods or commodities generally or even the economic power (money) making at least some of that consumption feasible. It seems a little less intuitive the marginal “utility” of consumption in general or economic power (money) declines with the units consumed. Indeed, I sometimes wonder if the idea is being inappropriately conflated with revealed preference arguments. Revealed preference says if someone has a choice of A and B and chooses A, then for that person A tautologically has higher “utility” than B. However, that reasoning doesn’t work if B is not really capable of being chosen, given one’s current economic power. If one accepts A as a sort of stop gap to save up an additional unit of economic power to get preferred B, it become a bit odd to suppose the “utility” of the second unit of general consumption B, or the instrumental economic power (money) to get it, was less than the first.
Fortunately, none of this really matters for our present purposes. One can think of diminishing marginal “utility” as a law or not, applying to general consumption or not, applying to economic power (money) or not, endogenous to neoclassical welfare economics or not. I’m just setting the stage. My main point here is that accepting diminishing marginal utility of economic power (money) or general consumption alone is insufficient to link the normative argument about “utility” from neoclassical welfare economics to the one about issues of concern in macroeconomics. We’re not really going to get anywhere in terms of linking up those two normative theories until we have some way of calibrating the “utility” of economic power (money) or general consumption of different people. That is to say, one’s marginal “utility” of economic power (money), general consumption, or really even specific goods, may diminish a great deal yet remain logically incapable of being compared to someone else’s undiminished “utility” or indeed greater than it. The former is the case with preference rank “utility,” while the latter is a possibility with inaccessible internal perceptions of satisfaction from preference fulfillment “utility,” which are the two types of “utility” relevant to neoclassical welfare economics. However, if we propose some interpersonal calibration such as that the “utility” of the initial unit of economic power (money) or general consumption is the same for everyone and diminishes from there, then we can link “utility” to endpoints of interest in macroeconomics.
The addition of that exogenous ethical content clearly takes us out of the world of neoclassical welfare economics proper and into the world of “general welfare analysis,” which also takes us out of the realm of the bad economics in the conservative style that is my focus. In this case, we're talking about an ethical theory based on human equality and commonsense notions of human welfare, akin to many traditional forms of real utilitarian ethical philosophy, not the ethical half-theory in neoclassical welfare economics. That is to say, it’s not an ethical theory that places special significance on someone’s most highly ranked preference if that preference happens to require immense economic power to accommodate, it’s not about preference rank based “utility,” albeit maybe another sort.
General welfare analysis is just economists trying to do ethics in a somewhat more comprehensive way than in the ethical half-theory of neoclassical welfare economics, by manipulating “utility” in incongruous ways or just redefining it wholesale. As I noted before, it can lead to anti-democracy bad economics involving technocratic overreach of ethical decisions that belong with the people and democracy, but not the rhetorically sly, misleading, conservative, variety I typically discuss. Again, it’s fine if one is making explicit normative or ethical arguments, identifying the issues, helping people evaluate the normative inputs and conclusions for subsequent democratic decision making, doing proper ethical philosophy. That’s not what I’m talking about when I talk about bad economics in the conservative style, which involves a sort of bait and switch, a contention one is confining oneself to one set normative inputs then not actually carrying through on that, instead adding other normative inputs in obscure, unannounced ways.
I suggest we don’t pay enough attention to normative economics in various contexts like neoclassical welfare economics, bad economics in the conservative style, and applied macroeconomics, or relating them to one another, general ethics, and political democracy. Normative economics generates the lion’s share of confusion and conflict relating to economic issues and policy. Real economic policy always involves often controversial and contentious normative issues. Economic policy must and will address it, one way or another.
