Bad Economics And The Rise Of Anti-Democracy Sentiment In The USA
A commonly neglected feature of our public conversation about political and economic issues here in the USA is the role ubiquitous misinterpretations and misunderstandings of orthodox economic theory play in fostering increasingly common anti-democracy sentiment. Academic economists seem simply not up to the task of preventing the spread of populist pseudo-economics and what might be termed folk economics, and unfortunately it has become incumbent upon educated non-economists to take up some of the burden.
Economics is, of course, a large and diverse field. Unfortunately, the part of economics that seems to be driving our present difficulties involves the core of traditional, orthodox economic theory, neoclassical microeconomics, and more specifically the evaluative, normative component, neoclassical welfare economics, which involves social utility maximization, Pareto optimality, economic efficiency, and so on, which most educated people will have encountered at some point or other as part of their general education. A great deal of popular confusion exists about this intellectual artifact partly because of the theory itself and partly because of the way it’s commonly taught or presented. One commonly encounters academic economists lambasting lower level economics courses and disavowing their content. To put the issue in a nutshell, many people today appear to believe neoclassical welfare economics says something other than what it actually says, which leads to a great deal of confusion and conflict. Fortunately, most of the confusion seems to revolve around a small set of conceptual issues and can be cleared up straightaway if one attends to some basic issues both in the theory itself and in flawed interpretations or presentations of the theory.
One major area of confusion relates to the use of the term “utility” in neoclassical welfare economics, which is a legacy from the earlier “classical” version of economic theory that was rather more closely aligned to the economics as moral philosophy of early economists like Adam Smith. In modern neoclassical economics, “utility” is simply an unusual and rather misleading way to refer to the preference rankings of individuals. Indeed, perhaps the single most useful thing anyone interested in avoiding some of the common sorts of confusion that attend modern neoclassical economic theory can do is replace the word “utility” with the phrase “preference rankings of individuals” whenever one encounters it to avoid potential terminological equivocation with unrelated and irrelevant definitions of utility, of which there are many and varied. In modern economic theory, the preference rankings of individuals may be based on any motivation one likes, including ascetic ethical principles, and is entirely unrelated to support for utilitarian ethical philosophy or to expressions of greed, narrow self interest, or anything else along those lines. Indeed, the notion that people “maximize their utility” when they make choices based on their own preference rankings is entirely tautological. Whatever one chooses to do, one will necessarily be “maximizing” one’s personal “utility” as presented in neoclassical economic theory. One might chose to shoot one’s foot off, and if one does, then that is evidently what maximizes one’s utility. (The closest analog in modern neoclassical economics to the old Deist concerns relating to invisible hands and celestial watches and so on is the supposed social benefit of profit maximizing behavior on the part of business people in their role as business people specifically, albeit not in their other roles such as consumers or voters, and even then only in the context of certain market structures. Of course, even that is only tangentially related because in neoclassical economic theory “utility” is not money and maximizing profit does not equate to maximizing “utility.”) Because of the way “utility” is defined or at least actualized in economic theory as the preference rankings of individuals, it logically cannot be applied in the interpersonal contexts that make up the lion’s share of the situations addressed by ethical theory, which rather strongly suggests neoclassical welfare economics cannot be considered a serious form of utilitarian ethical theory. Indeed, the fact that the normative or ethical content of neoclassical welfare economics is based on the preference rankings of individuals and is not applicable to resolving interpersonal conflict means neoclassical welfare economics is most properly understood as a sort of ethical half-theory, a theory having a modicum of normative or ethical content but ignoring or treating as exogenous the lion’s share of ethical issues.
The fundamental normative or ethical proposition of neoclassical welfare economics is simply it’s nice when people can move up their preference rankings, and we should therefore let other people do as they like, unless there are other ethical issues involved that have not been addressed in the ethical half-theory of neoclassical welfare economics. What other ethical issues? Well, one group of issues involves what we should do about people making choices and expressing their preferences under various problematic conditions such as ignorance, irrationality, addiction, manipulation, desperation, and so on. In the models of positive or scientific economics, those types of problematic conditions are famously eliminated through the use of false, simplifying assumptions meant to be instrumental to theoretical tractability and insignificant for the eventual evaluation of the overall theory on empirical grounds. However, in normative or evaluative neoclassical welfare economics, these assumptions appear in a rather different guise, false factual premises, which must be corrected or somehow accounted for during the normative assessment or evaluation of the proposition we should allow others to do as they like and express their preferences. Briefly, one may find allowing people to express preferences based on unhealthy addictions, false beliefs, irrational thought processes, and so on, perfectly acceptable, but that proposition seems a good deal more ethically controversial than that one should allow others to express their preferences under more favorable conditions.
Arguably more significant ethical issues arise when we consider the existence of other people and take up the question of how to resolve interpersonal conflicts generated by the interaction of different people each expressing their own preferences, which necessarily entails moving beyond the proposition it’s nice when people move up their preference rankings. If the same resources feature or are instrumental in the preference rankings of different individuals, which is inevitably the case under conditions of scarcity, deciding some ethically acceptable way of resolving those conflicts becomes necessary. Markets, of course, resolve interpersonal conflict on the basis of relative economic power and interest. In a market, resources go to the highest bidder. One must, of course, have enough interest in whatever is being contested to obtain it by bidding upon it, but preferences without the economic power to back them up don’t really count for very much. This leads to the famous principle of indifference toward the distribution of economic power one finds in modern neoclassical welfare economics that is enshrined in its idiosyncratic definition of “utility,” which is designed to eschew the ethical controversy associated with who has what level of economic power and why and hence also the ethical controversy of where resources end up going and why. Of course, most people have ethical beliefs, and typically very strong ethical beliefs indeed, about those issues, but the development of those ethical beliefs is exogenous to neoclassical welfare economics itself. In realistic conditions, the relevant ethical issues are resolved ultimately with reference to the ethical views of voters, delivered by democratic government via laws relating to the legal specification of property ownership, contracts, the details of labor and capital markets, tax policy, the provision of government services, and so on. In that sense, the frequently attempted strategy of turning around and using neoclassical welfare economics to evaluate new or revised laws can be seen to represent little more than a risible putting of one’s cart before one’s horse.
One might suppose distributional indifference would make neoclassical welfare economics largely irrelevant or at least very much a secondary consideration when evaluating real market systems and outcomes, which necessarily involve some distribution of economic power that will drive the results. However, in practice, various bits of rhetorical cleverness are often added on to neoclassical welfare economics to get around that issue, a collection of tricks that can most usefully be described as involving fake distributional indifference, basically pseudo-economic arguments that appear to respect and reflect distributional indifference but really do not. The quintessential example of fake distributional indifference plays off the idea that for any given distribution of economic power one can theoretically demonstrate the ethical superiority of a perfectly competitive market structure based only on the ostensibly uncontroversial ethics proposition it’s nice when people to move up their preference ranking, and we should therefore allow people to do as they please unless there are other ethical considerations exogenous to economic theory to consider. According to this argument, that result establishes that regardless of one’s ethical views on the distribution of economic power, one should support establishing a perfectly competitive market structure, or if one is fortunate enough to already have that market structure one should oppose moving away from it. The problem, of course, is that neoclassical welfare economic actually says no such thing. It’s only when one considers market structures in the abstract, without the content attending real instances or examples of any market structure, and without the ethical decisions required by that content, that every instance of a particular market structure appears ethically equivalent. When it comes to real instances of perfectly competitive markets, some people will like some and some people will like others, based on their views on the underlying distribution of economic power. They’re not all the same. Depending on one’s ethical beliefs, there may be precious little to recommend any given instance of a perfectly competitive market. Furthermore, moving from whatever instance of a perfectly competitive market one happens to be at to whatever instance is consistent with one’s ethical beliefs relating to distributional issues may well involve departing from the conditions of perfectly competitive markets. Indeed, if one accepts the incentives appearing in capital and labor markets as part of a perfectly competitive market system, it’s not even clear one can talk sensibly about an instance of a perfectly competitive market that expresses distributional ethics inconsistent with the distribution of economic power generated by those capital and labor markets, at least in a dynamic sense that requires continual distributional adjustments. Really, what one can say about market structures and outcomes based on modern neoclassical welfare economic with distributional indifference is very limited indeed, basically if one has a choice of market structures all consistent with one’s ethical beliefs about the distribution of economic power, then the perfectly competitive structure ostensibly looks pretty good (setting aside the complications associated with evaluating normative inputs using false factual premises we mentioned earlier); otherwise, neoclassical welfare economics is silent on whether we should revise or modify market structures or mechanisms to generate a different pattern of resource use and resolution of interpersonal conflicts.
A final bit of confusion relates to an issue that can most usefully be described as the extent of the market. The issue of the extent of the market is closely related to the issue of the ethics of the distribution of economic power, but instead of addressing whether the distribution of economic power is ethically acceptable, the extent of the market addresses the question of whether we, as a society, should resolve some particular category of interpersonal conflict or social issues on the basis of economic power in markets or on the basis of some other decision mechanism such as one-person one-vote democratic government. A good example of the issue of the extent of the market might be the ethical question of whether we should distribute a vaccine based on medical need or to the highest bidder in a market. One can see the essential connection between distributional ethics and extent of the market by the fact that one way of expressing the belief the vaccine should be distributed by medical need would be to identify people with greater medical need and provide them with sufficient economic power to become the highest bidders on the market. However, that seems potentially complicated and rather difficult in a practical sense, and the question naturally arises what does neoclassical welfare economics say about just not using markets at all and relying instead upon some other system for distributing the vaccine? Interestingly, neoclassical welfare economics doesn’t say anything explicitly. It takes up the issue of market structures assuming markets are in place, which can easily lead the unwary to incorrectly suppose some ethical proposition relating to using markets must have been introduced somewhere. However, if we return to the fundamental issue of the exogenous nature of the ethics involved in resolving interpersonal conflicts including about resources in neoclassical welfare economics, it makes no more sense to suppose neoclassical welfare economics demands resolution on the basis of economic power in markets than that it demands a particular distribution of economic power and hence a particular resolution on that basis. This is an interesting result because it implies that although one can always calculate what economists refer to as the social “welfare loss” that results when any resources, such as those going into a vaccine, fail to go to the use most highly valued by the market, such as the highest bidder in our example, neoclassical welfare economics is actually agnostic about the ethical significance of that intellectual construct. In other words, neoclassical welfare economics doesn’t actually contain the normative or ethical proposition we should always prefer the market mechanism to other potential mechanisms for resolving interpersonal conflicts including over resources.
Everyone should feel free to argue for any normative or ethical proposition they like, persuade other voters to support it, and use democratic government to express it in law, including ethical propositions relating to the distribution of economic power and the specification of what interpersonal conflicts of desires should be decided on that basis versus some other basis. However, to respect the ethos of political democracy reasonable, educated voters should demand they do so in an intellectually honest way. We should oppose the realpolitik approach of cultivating and using confusion relating to the ostensibly uncontroversial normative content of neoclassical welfare economics to further one’s goals by intellectually underhanded means. We should demand academic economists do a better job presenting normative neoclassical welfare economics and confronting the ubiquitous bad economics ostensibly based upon it. Far from suggesting democratic government is unnecessary and should be prevented from interfering with markets, modern neoclassical welfare economics establishes democratic government has a central role to play in resolving the fundamental social issues addressed by any economic system and, in particular, market systems.
