Efficiency As Equity

Speaking of economic theory, it occurs to me the concept of “Pareto Optimality” that defines “economic efficiency” is the only proposition in interpersonal ethics, only equity issue, treated as endogenous to neoclassical welfare economics. Weird, isn’t it? Let’s discuss.

In my previous posts, I followed neoclassical welfare economics to stress the distinction between what one can say on the basis of individual preference ranks called as “utility” versus the interpersonal ethics that may be used to resolve interpersonal conflicts of preferences. I noted that normative statements based on individual preference ranks were considered endogenous to neoclassical welfare economics while normative statements dealing with interpersonal ethics, equity, had standing in that theory but were considered exogenous. However, when talking about the so-called “Pareto Optimality” proposition that underlies “economic efficiency” and odd claims of “welfare” maximization, it occurred to me I had to introduce it as a separate proposition as it is not, itself, based on individual preference ranks. That is to say, one may accept, particularly under unreal factual premises like perfect information and perfect rationality, the significance of individual preference ranks without necessarily agreeing Pareto Optimality. That proposition is, in fact, an equity proposition. It’s an ethical proposition that purports to resolve interpersonal conflicts because it calls as ethically optimal a situation where one cannot move anyone up his or her preference rank without moving someone else down their own, so if interpersonal conflicts of preferences, that’s the resolution. Why? If we’re meant to not consider interpersonal ethics, equity, if we’re meant to look only at individual preference ranks, surely the answer to interpersonal conflicts of preferences must be indifference, not proclaiming as optimal or efficient one solution or another.  In that sense, Pareto Optimality and thus “economic efficiency” are part of the larger rhetorical program in neoclassical welfare economics to suggest propositions supporting status quo equity arrangements are neutral, express indifference, or as here are not really equity propositions at all.

Want more? Consider what happens to Pareto Optimality and hence “economic efficiency” if one addresses (a part of) the so-called Methodological Individualism critique and allows the ciphers to have preferences over interpersonal ethics, equity issues, economic systems and outcomes, as in reality. If the subjects have preferences over relative positions in preference ranks based on equity, justice, welfare considerations, what have you, the notion of a Pareto Improvement becomes rather excessively rarefied if one also allows variation in interpersonal ethics. Any movement of one individual up his or her preference rank may move another down his or her preference rank if he or she supposes that result inconsistent with justice, fairness, equity, welfare maximization, etc. Pareto Optimality and economic efficiency become simply the status quo. Nor do the characteristics of the status quo seem to have any relevance. Ninety-nine percent may disapprove it and one percent approve it, but because of the way Pareto Optimality is defined, that result will be Pareto Optimal, thus economically efficient. 

So why does neoclassical welfare economics propose to treat equity propositions as exogenous then slip in an undeclared, internally unjustified equity proposition on the sly and in a way so fundamental to its conclusions relating to the economic efficiency and optimality of markets? Why indeed. One assumes for the same reason ciphers in normative economics don’t have preferences over interpersonal ethics and equity concerns, for the same reason it’s constructed as an odd ethical half-theory, for the same reason it’s presented under false factual premises, and so on. And an economic efficiency versus equity tradeoff? Doesn’t look like it. Looks like economic efficiency involves an equity proposition, so equity versus equity, although granted that equity proposition appears at a different level of the theory than typically, in the Fairy Land rather than reality. 

Neoclassical welfare economics is above all else a bit of conservative political rhetoric purpose built to support bad economics in the conservative style, which is meant to confuse, deceive, and manipulate readers into supporting conservative economic values. Apprehend it for what it really is.

The Rhetoric of Welfare Maximization

Maybe this week we can continue our series on misleading wordplay in conservative economics, set up in neoclassical welfare economics for use in bad economics in the conservative style. I’ve done “utility” and “efficiency,” so how about “welfare” this week? Good times.

To understand the idiosyncratic rhetorical use of the word “welfare” in neoclassical welfare economics, one must understand and keep in the mind the ethical half-theory nature of that theory as well as the status-quo protecting features. I’ve discussed the ethical half-theory nature of neoclassical welfare economics often enough, but just to review, that theory cannot process and thus holds as exogenous interpersonal ethics. The only normative argument endogenous to the system relates to preference ranks of individuals. Normative propositions developed in neoclassical welfare economics are based on individual preference ranks, called idiosyncratically as “utility,” thus “interpersonal comparisons of utility” are famously undefined (old style: impossible) in that theory. It’s not a full utilitarian ethical theory.

However, to riff off Ned, I mean Dewey, in School of Rock, just because interpersonal ethics are not in neoclassical welfare economics doesn’t mean they’re not in neoclassical welfare economics. That theory acknowledges the status and relevance of the exogenous ethics in the form of “equity.” Neoclassical welfare economics doesn’t say interpersonal ethics, equity issues, are irrelevant. It says they’re relevant but exogenous, not discussed within that theory. Big difference and one that conservative economic rhetoricians are often keen to suppress. That is to say, the better sort of economist will take pains to include in any normative suggestions based on neoclassical welfare economics that the suggestions are contingent on one not having any objections based in equity concerns, interpersonal ethics. Incidentally, the use of “equity” in neoclassical welfare economics probably deserves its own entry in our lexicon of dodgy terms because in plain English it normally means fairness, justice, but in neoclassical welfare economics it can also mean interpersonally valid definitions of “utility.”

The status-quo protecting feature shows up in the concept of the “Pareto Optimum,” which is all about doing the best one can in terms of individual preference ranks with the proviso one cannot move any person down his or her preference rank to move another up his or her preference rank. The concept is consistent with, and developed alongside, the treating of interpersonal ethics, equity issues, as exogenous in neoclassical welfare economics. It’s the innovation that really puts the “neo” in neoclassical welfare economics and differentiates it from the classical economics.

Putting these two elements of the status-quo preserving ethical half-theory of neoclassical welfare economics together and one ends up with conclusions as a Pareto optimal market result in which, say, one percent thrive and ninety-nine percent starve, “maximizes social welfare.” Why? Because changing anything that might conflict with the preferences of the one percent would be inconsistent with the definition of a Pareto Optimum based on individual preference ranks, which is the relevant criterion for the partial concept of “welfare maximization” in that theory. Basically, starving is not a relevant observation or fact in neoclassical welfare economics. It’s not a preference rank. The starving people might prefer not to starve, but if the only way to prevent it is to reduce the preferences of the one percent, then they’re at a welfare maximizing outcome. Now, of course, if one wants to take up the surely much more common interpersonally valid notion of “utility” as used in ethical philosophy and indeed in outmoded classical economics, then no, of course such an outcome would not be associated with social welfare maximization. That’s just repackaging the bit about exogenous interpersonal ethics or equity issues. If one is concerned about issues that may involve the relation of one person to another, one is introducing equity issues, which have standing in neoclassical economics and basically cancel those conclusions. Thus again in Ned’s, I mean Dewey’s words, just because something maximizes social welfare doesn’t mean it maximizes social welfare, if the first concept of welfare is a partial one excluding interpersonal ethics and the latter concept of welfare includes them.

Are you starting to get the game? Do you detect patterns in the dodgy uses of terms like “utility,” “welfare,” “efficiency,” “equity,” “maximum,” “social,” and so on? If so, you’re starting to understand neoclassical welfare economics and the bad economics in the conservative style built upon it.

Efficiency, Efficiency, Efficiency

Let’s have another run at “efficiency” as used variously in plain English, neoclassical welfare economics, and anti-democracy bad economics in the conservative style, shall we? Always good for a laugh or two.

In plain English, efficiency must be defined with respect to some objective or goal. As I’ve suggested before, nothing is ever efficient with respect to any and every goal one likes, so how efficient anything is depends always on what one is trying to accomplish. Moving up a level (and you know I love a good level issue), there is a context in which one may set aside evaluation of the goal or objective, leave that to someone else, and talk about efficiency with respect to whatever that goal or objective may be. At that level, efficiency is preferable to inefficiency because at least one isn’t unnecessarily wasting resources. This is the sense in which people extol the supposed efficiency of the old Nazis based on their murder camps being efficient killing machines. If one doesn’t care to evaluate the goal or objective, then the efficiency appears good: no resources were wasted during the killing process. However, if one objects to the goal, one may be at least indifferent to efficiency in that context or indeed one might suppose inefficiency superior.

Now in the context of neoclassical welfare economics, issues relating to interpersonal ethics are exogenous as the idiosyncratic form of “utility” (as individual preference ranks) cannot support interpersonal comparisons. So-called “economic” or “Pareto” efficiency is about doing the best one can with respect to individual preference ranks without considering interpersonal ethics. However, what one see as the proper goal or objective of an economic system involves interpersonal ethics: who should get what and why.

An “economic” or “Pareto” efficient outcome will not necessarily be an efficient way to maximize the welfare of the people along any observable interpersonally valid dimension, or justice, or fairness, or equity. So is that sort of “efficiency” even good, desirable? It’s desirable in the sense the efficiency of murder camps is desirable. Certainly, if one agrees the interpersonal ethics that inform the market outcome in question, if one sees no equity, fairness, justice, welfare, real utilitarian issues, then the efficiency of that outcome is also good. If one disagrees the interpersonal ethics that inform the market outcome in question, the fact that it’s “economic” or “Pareto” efficient may be entirely irrelevant. It surely won’t be dispositive. It may still be good in some minor, abstract sense, as arriving at an outcome one finds morally reprehensible without even doing the best one can along individual preference ranks seems inferior to at least performing well on that last dimension, but there are surely more significant issues. This, of course, is just my usual point about neoclassical welfare economics being, at most, an ethical half-theory that cannot, on its own, tell people what economic policies they should pursue, re-packaged in the rhetoric of efficiency.

An economist will say, “As an economist, I cannot take up interpersonal ethics and talk about efficiency with respect to reaching any objective identified by any full ethical theory, I can only speak of Pareto or economic efficiency.” And that’s fine, as long as he or she explains the limited normative relevance of that sort of efficiency. However, a bad economist will then continue on to suggest it dispositive and argue one must not interfere with or distort any system or outcome that is economic or Pareto efficient. A bad economist will bang on about the efficiency of markets hoping no one follows the word games involving different senses of efficiency defined with respect to different goals, hoping people will just simplistically say something like, “Well, efficiency beats inefficiency, so...”

One shouldn’t walk around talking about the efficiency of markets if one doesn’t understand the argument. Decide ethically desirable economic outcomes, then think of efficient ways to get there. Don’t simply pursue efficiency on minor issues losing sight of the larger issues.