Plain Talk About Neoclassical Welfare Economics

Maybe this week I can talk plainly about ... um ... talking plainly ... in the context of neoclassical welfare economics. You know, saying things directly, honestly, clearly? Not playing rhetorical word games? It’s one of my pet issues. Academic economists often rather fatuously laud themselves for their supposed intellectual rigor. Must refer to them using math in the context of theory or engineering models because, if you read my posts at all, one may wonder how rigorous they really are on other matters.

Consider the following proposition: Policy A results in everyone reaching his or her own highest ranked preference possible, given exogenous, external, pre-existing ethical decisions relating to how we should resolve interpersonal conflicts of preferences. Also, we’re assessing Policy A not in the real world but in an artfully contrived world explicitly involving false factual premises, and thus pertaining only to what might be termed theoretical ciphers, not real people. How high an individual preference rank can any given cipher thus attain, given ubiquitous interpersonal conflicts of preferences, scarce resources? Perhaps not very high at all, depending on exogenous ethical inputs relating to resolving interpersonal conflicts of preferences. On the other hand, some ciphers may manage very high individual preference ranks indeed, may get everything they want, again depending on the exogenous ethical inputs relating to resolving ubiquitous interpersonal conflicts of preferences over scarce resources.

Does that seem reasonably clear, rigorous? Exogenous ethical inputs? So for example, exogenous decisions relating to whether to use markets to resolve particular conflicts of preferences or, as with vaccines, some other system of distribution, allocation. Or also exogenous ethical decisions on how we define and distribute economic power, so labor and capital markets, unions, inheritance, lotteries, tax policy, government programs of various sorts, Social Security, and so on. So, if we assume all issues relating to the ethical resolution of all interpersonal conflicts of preferences have been addressed (by someone or other), as the definition, distribution, use of economic power for that purpose, then Policy A has the advantages we discussed earlier.

Now consider the following potential restatements of our proposition: 1) Policy A is efficient. 2) Policy A leads to a socially optimal result. 3) Policy A maximizes social welfare. 4) Policy A maximizes total social utility. 5) Policy A is Pareto optimal or efficient. Also, Policy A is still assessed in an artfully contrived world explicitly involving false factual premises, theoretical ciphers rather real people, but may be presented as a meaningful approximation of the real world for normative or ethical purposes. 

Did you get the same impression from those restatements? It’s a bit trickier, isn’t it? One reason is because they use special economic interpretations of words like “efficient,” and “welfare,” and “utility,” and “social,” and even “optimum.” The terminology is recondite. A good deal of neoclassical welfare economics involves taking up specialized economic definitions of common words, using them in new and confusing ways, then lambasting others for misinterpreting them, which others and often economists themselves often seem to do. Also, there seems a confusing issue relating to the significance to the real world of a normative or ethical theory using false factual premises, a potential inappropriate application of methods from positive engineering models relating to false but simplifying assumptions. It all seems unnecessarily awkward and rhetorical, like a big old circle of nonsense. Start out with something simple enough, then complicate it by using words oddly, applied in odd contexts, then propose to laboriously explain all the unnecessary complications, terms, etc.

Why do you suppose they do that? To promote intellectual rigor and logic? To bring the light of positive science and math to ethics and philosophy? Or something a bit more prosaic? To pull a fast one on the people? Pull the wool over their eyes? Trick them? Con them? Or perhaps it’s more defensive than offensive? A laying down of logical and linguistic impediments, roadblocks, traps to prevent non-economists getting involved in economists’ special province? To keep other interfering with economists’ self-defined role as ethical arbiters?

Do I propose neoclassical welfare economics, with its tricksy word play, unclear relation to reality, is “bad” economics? Well, it’s misleading, arch, rhetorical, confusing. However, if one attends to the terms, conditions, it says what little it says, it’s not “bad” that way. On the other hand, it does seem purpose built to support the errors and confusion that lead to bona fide bad economics in the conservative style, which presents neoclassical welfare economics as saying something other and more than it does. So might we say, “bad-ish?”

Economists: Talk plainly. Take the Don’t Say Utility Challenge. Explain how the ethics of resolving interpersonal conflicts of preferences enters or does not enter into your theory. Stop talking rot in an effort to mislead and deceive. Fulfill your intellectual responsibilities.

Non-economists: Wise up. Don’t sit there like wide-eyed children when conservative economists try to con you, waving their arms, getting all defensive and weird whenever challenged. Think critically. Don’t just accept whatever you’re told, or you’ll be told nonsense, and how.

Positive Economics

I thought this week I might step outside my usual area of interest and take up positive, predictive economics, and the normative influences on that, philosophy of science, that sort. There are a few moderately interesting issues there, as well.

In an academic economic context, if one expresses any interest in the normative aspect of economic theory, one will quite likely quickly be shuttled to discussions in philosophy of science, under the conceit economics is a science and that’s where such issues are discussed. Let’s just play along today. As I’m normally concerned with normative neoclassical “welfare” economics and related bad economics in the conservative style, let’s first take up the issue of whether neoclassical economic theory, used for empirical prediction, is a proper “science.” I find that question, about neoclassical economic theory specifically, rather easier to discuss than whether “economics” is a science because “economics" is a pretty general category, and some parts of it may be rather more scientific than others.

So let’s consider what to make of neoclassical economic theory ostensibly used for the positive purpose of predicting empirical economic phenomenon. I typically characterize it as an “engineering model,” but others have it a “science.” Let’s briefly discuss. I suppose a proper scientific theory should reflect or incorporate what we know about the world, which is what leads to its accretive quality, its ability to grow piecemeal as research takes up this or that part of the puzzle and then synthesizes those data and results. Attempting to account for any awkward divergence of reality from what particular scientific theories might present, express, suggest, predict is what fuels much research in any real science. But the final test of a scientific theory must involve successful empirical prediction.

An “engineering model” used for predictive purposes seems to me to stand in a different relationship to reality than a scientific theory. For one thing, it makes no presumption that the “simplifying assumptions” on which it is based reflect reality. They’re arbitrary, made up. For another thing, incorrect empirical prediction is not necessarily a problem because one is making an ostensibly self-conscious decision involving simplicity, tractability, and predictive ability. Predictive failure does’t necessary imply any presumed need to revise a model. When it comes to engineering models, the evaluation is a softer matter of advantages relative to other engineering models for that purpose, and unless one is presenting a better, sufficiently simple, tractable theory, there may be no perceived problem with the existing model. I would suggest those are the primary reasons neoclassical economic theory, price theory, doesn't seem to exhibit the piecemeal, accretive quality of a real science. Indeed, quite the opposite. It has existed in the same basic or general form for literally decades.

Importantly for my concerns and interests, engineering models give researchers relatively more leeway than proper scientific theories to construct models they find useful as they subjectively weigh criteria such as descriptive realism, simplicity, and predictive results. This greater leeway of researches using arbitrary engineering models to pick and choose models and elements of models they find useful in the moment clearly allows much more scope for normative interests and biases to be reflected in such models than in proper scientific theory. I noted before the basic form of neoclassical economic theory has remained the same for decades. It raises the question, is it because of its combination of predictive ability and simplicity, success relative to competing models for the very practical purpose of prediction? Or may there just be something about the model itself some researchers find appealing? Its elegance, simplicity, beauty, intuitive appeal? Or indeed its use in normative or evaluative economics, in applied neoclassical “welfare” economics, often lumped with the positive form? Or, going yet a step further, might it involve its rhetorical usefulness for promoting anti-democracy bad economics in the conservative style, the dodgy normative theory based on flawed interpretations of normative neoclassical welfare economics? Within economics, there does seem a curious fascination with, or exaltation of, one particular, arbitrary, engineering model, a curious lack of interest in presenting engineering models with entirely different false but simplifying assumptions to be used for predictive purposes. And certainly it seems unusual, notable the same neoclassical economic theory can be used for normative, evaluative purposes in the guise of neoclassical “welfare” economics as well as positive, predictive purposes. It’s not dispositive, but suggestive, surely.

This has led some or let’s just say many to suppose it folly to try to draw any distinction between positive and normative economics in the context of neoclassical economic theory. And, I see the issues, the difficulties, that generate such sentiments. But I must disagree. As I’ve argued many times, I feel a useful distinction can be drawn between positive economics, at least ostensibly about empirical prediction, which may have normative influences, and normative economics, about evaluation, goals, values, ethics, appealing storytelling. The big controversies about economics are about normative economics, ethics, values. Although economists may also be bad at empirical prediction, may slavishly adhere to models inadequate to the task for some old reason, may pretend to be scientists, that’s really a side issue.