Efficiency As Equity II

I thought I’d say a few more syllables this week about that efficiency as equity post I did last time, including the possibly cryptic bit at the end that called out a potential level issue relating to equity in neoclassical welfare economics. Good times.

I’m a bit concerned that rather than appreciating the point about an equity proposition underlying Pareto optimality and hence (economic) “efficiency,” readers might suppose the issue was about evaluating the equity proposition in question. I’ll address that in a moment, but no, it wasn’t. The point was equity propositions that can resolve interpersonal conflicts of preferences by going beyond individual preferences ranks as “utility” are meant to be exogenous to neoclassical welfare economics. They’re qualitatively different from the endogenous normative propositions. But the equity proposition that underlies Pareto optimality and hence (economic) efficiency isn’t exogenous; it’s right there at the heart of the argument about the supposed social optimality of markets. It’s a biggie, as people once said. It’s also weird. Awkward combination for any theory.

Turning now to the issue of the evaluation of that proposition leads me to a possibly cryptic statement I made previously about equity arriving at different levels of theory. Recall for me a level issue is when the same term, concept, idea applies at different points in an argument or theory. Level issues are an important rhetorical device or stumbling block, depending on one’s perspective, because they provide a hook beyond simple terms or concepts on which one may hang equivocation, that is, switching between issues in an unconscious or more typically sly, artfully deceitful way.

One level issue here relates to context. An interesting aspect of the ethical half-theory of neoclassical welfare economics is it’s not developed in, nor evaluated in, realistic contexts, but in an artificial, artfully contrived, theoretical context I call the Fairy Land of Economic Theory. It’s a very atypical sort of ethical philosophy and can lead to problems associated with properly evaluating ethical propositions under the conditions that apply in the Fairy Land then incorrectly supposing that evaluation also holds in the very different context of reality. One useful way to think about what’s going is only part of the ethical content of neoclassical welfare economics arrives as explicit normative propositions, another part arrives as artful manipulation of the theoretical context, the introduction of false factual premises affecting evaluation. Need a non-economic example? Suppose I proposed to discuss the ethics of murder in an artfully constructed unreal world is which no one ever intends to kill anyone else. Then suppose I took propositions developed in that world, sensible in that world, and applied them to reality. Awkward, right?

Let’s consider context specifically in the context of equity. When one evaluates the equity proposition associated with Pareto Optimality / “economic efficiency” in the Fairy Land, it may seem entirely unobjectionable; however, I would suggest much of that is due to the theoretical context. There is simply not enough detail typically provided in theoretical contexts for that equity proposition to seem notable at all, indeed possibly not even enough to recognize it as an equity proposition. However, consider the same proposition in reality and the equity element becomes more obvious. Let’s say in reality A just hit B over the head with a rock and stole her wallet. B’s preference is to get it back. A’s preference is to keep it. The Pareto Optimal / “economically efficient” outcome is for A to keep it as we’re not meant to consider moving anyone down his or her preference rank. That’s clearly an equity judgment. We looked at an interpersonal conflict of preferences between A and B and resolved it in favor of A. That cannot be done solely on the basis of individual preference ranks. It’s an equity proposition like any other equity proposition. So one level issue concerns context. Equity issues in realistic contexts typically involve details some may find relevant to some theory of interpersonal ethics. However, we may also have equity issues in theoretical contexts in which such details are missing. They have the same status. 

That observation leads to another potentially relevant level issue to consider, which I’ve discussed before but might as well do here again, not so much involving what constitutes an equity proposition, but moving on to what it means to be indifferent to an equity proposition or to equity issues. At one level, one is indifferent to typical real equity propositions or issues in the case of the stolen wallet because one’s judgment of optimality doesn’t hinge on how the fellow came to have the wallet, so one is indifferent to any equity arguments others find appropriate to apply to that issue. However, at another more theoretical level of equity issues, one is not indifferent to how the relevant interpersonal conflict of preferences is resolved, the issue that cannot be addressed via “utility” as individual preference ranks, one calls as optimal one resolution, not the other. 

On may say, well, Pareto optimality and “economic efficiency” are only meant to be dispositive in the ethical half-theory of neoclassical welfare economics until other exogenous equity concerns, propositions are introduced. That’s fine. But they’re also equity propositions. Another way of saying it is one may find Pareto optimality and “economic efficiency” normatively significant if one agrees the underlying equity proposition relating to the ethical significance of the status quo, if one agrees preserving status quo relations, equity at both levels. 

Pareto As Conservative Fascist

Speaking of conservative grifters, have I discussed Vilfredo Pareto (1848-1923), the fellow who developed the notion of Pareto Optimality seen in neoclassical welfare economics and was an early follower of Italian fascism?

Interesting character. Mr. Pareto was the scion of a “noble,” establishment elite, Italian family exiled to France. He had what is described as a middle-class upbringing and received a top notch technical education eventually earning a doctorate in engineering. Mr. Pareto became a very typical market utopian conservative while at university, detested the idea voters should be able to use democratic government to express their economic values and concerns, hated leftism and socialism, and was thus drawn to the politics of nascent European fascism. As what in the US would be called a “conservative,” Mr. Pareto is also described by some as a “classical liberal” or even by some non-US writers as simply a “liberal,” not to be confused with the traditional left “liberal” opposed to “conservative” in the USA. As I mentioned previously, old “classical liberalism” as anti-monarchism referenced both democracy and markets, so calling market utopian conservatives that is half-true. Calling them simply “liberals” only works when using non-US definitions of “liberal” in which it means conservative, not US liberal.

Mr. Pareto was an early supporter of the originator of European fascism, Benito Mussolini, because he saw Il Duce’s authoritarian conservative movement as a means to weaken or shrink democratic government and voter influence on the economy, thus fighting leftism, socialism, US liberalism, etc. In the field of economics, Mr. Pareto is famous for finding a way to misleadingly characterize market outcomes in normative terms as “socially optimal” and “welfare maximizing” while excluding considerations relating to interpersonal ethics, equity, justice, that would normally apply. Briefly, Mr. Pareto’s idea was if no interpersonal ethics were involved, including views on relative outcomes, on utilitarian or other grounds as fairness, justice, it should be normatively uncontroversial to make one person better off if no one worse off and to define optimality in those terms. That restricted normative concept is very useful for the economic status quo or establishment elite because it excludes from economic discussions of normative optimality any consideration of changes involving reducing their own economic power. It functions to defend status quo economic power. That concept laid the foundations for the misinterpretations of neoclassical welfare economics I call “anti-democracy bad economics in the conservative style,” in which the ethical half-theory of the former is swapped out for the ethical full-theory of the latter.

Real neoclassical welfare economics is an ethical-half theory, at best, because it considers the normative aspects of economic arrangements without taking up any relevant ethical issues relating to resolving interpersonal conflicts of preferences, economic power, markets, allocating resources. Of course, ethical views on such matters make up the lion’s share of what most mean by socially optimal or welfare maximizing economic outcomes in normal discourse, rendering the conclusions of neoclassical welfare economics quite limited in scope and significance indeed in general contexts. Anti-democracy bad economics in the conservative style equivocates on the economics-specific restricted sense of socially optimal, welfare maximizing, and the normal general sense of those terms including relevant considerations as interpersonal ethics to swap out the half-theory for the full.

There are often attending rhetorical flourishes, as suggesting what presents as a full ethical theory is only the normative, ethical position of economists qua economists, while omitting the relevant fact that role involves excluding relevant normative considerations as interpersonal ethics. When one leaves out that bit, it sounds as though one means merely it’s the ethical full-theory of economists, who presumably have delved into the matter, but may not be shared by those who endorse other and opposing ethical full-theories who haven’t studied economics. In a sense, that rhetorical line rests on popular ignorance of the explicitly partial normative argument in neoclassical welfare economics and the implied notion economists qua economists are meant to restrict themselves to that theory and thus ignore most of the relevant normative issues. One ends up with bad economists telling others what they ought to do as far as economic policy, ostensibly not considering interpersonal ethics but because policies always have interpersonal effects by just passing on their own ethical views in arcane ways, but only as economists, of course. 

My point this week? Simply to highlight the connection between the false rhetoric of bad economics in the conservative style, its basis in neoclassical welfare economics, and the relation of both to the anti-democracy, anti-left, conservative, right wing fascism we see in the USA today.

Addendum: To avoid confusion relating to how I described Pareto Optimality in the context of neoclassical welfare economics, the “better off” in that sentence is the tautological one of moving up one’s preference rank, no matter how self-destructive or unfortunate, not “happiness” or what have you.