Welcome friends!
Did you ever run across the idea that liberals just don’t understand basic economics? That was the point of an op ed piece in the Wall Street Journal a few months ago that discussed the results of a little survey the authors believed established“the Left flunks Econ 101.” I don’t really want to take up the issue of the survey itself except to say I don’t think it shows what the authors think it shows. Basically, the survey asked a handful of questions with answers that appear (to me anyway) to be open to dispute or interpretation and then credited the more stereotypically conservative answers with showing a greater level of economic knowledge (or economic “enlightenment” as the authors somewhat fatuously put it). In other words, I think what that particular survey actually showed is conservatives are more conservative than liberals, not that they are more knowledgeable about economics.
The more interesting issue to me about all this is the more general issue of what we mean when we talk about liberals and conservatives understanding economics. Of course, there are many facets to the field of economics (empirical v theoretical, micro v macro, econometrics, game theory, etc.), but let’s just consider the case of standard (neoclassical) microeconomic theory. My personal take on how well conservatives understand that theory is they may well understand the simplistic models and reasoning one finds in Econ 101 but they don’t necessarily understand the limitations or complexities of that theory that one might discuss in, say, Econ 401.
Let’s have an example. You may recall one of the major conclusions of Econ 101 is that a perfectly competitive market system will lead to a socially optimal outcome in terms of maximizing “utility.” This proposition is easy to demonstrate; you can do it with pictures. (I should know, I taught it for a short while.) So that would be Econ 101. However, it turns out this superficial simplicity doesn’t really do justice to the issues raised by the concept of “utility” as it is used in economic theory. That would be Econ 401.
Just to set the stage, let me tell you a funny story about one of my first economics classes. The professor was trying to explain what “utility” means in the context of economic theory and when he got to the point about how one cannot measure utility and therefore cannot compare utility levels across different people (“interpersonal utility comparisons” in economic terms) he apparently found the class response a little exasperating. (As I recall, it was a mixture of acute boredom and “if no one can measure it then why are we talking about it?”) Anyway, he said something that struck me as rather paradoxical and hence interesting, which was that we didn’t seem to appreciate how important it is we can’t measure utility because if we could measure it, and we could compare utility levels across people, then we might find maximizing it quite distasteful. Now that’s really a rather remarkable statement when you think about. There we were, sitting in a class that was ostensibly all about how to maximize utility and the professor tells us, “Thank goodness we can’t measure utility because, if we could, then we might be able to really maximize it, and we wouldn’t want that!”
Well, after a bit more study I eventually came to realize this makes sense in a weird sort of way. You see, economic theory uses a rather peculiar definition of utility, and it uses that definition for a very particular purpose. At the most basic level, utility in economic theory supposedly means one’s subjective feelings of happiness or satisfaction. This conceptualization of utility doesn’t cause any particular problems if you’re only talking about a single person in isolation. In that context, you would maximize utility by allowing that person to do whatever he or she wants, and what that person wants would be revealed in his or her choices (“revealed preferences” in economic terms). That is perfectly consistent with philosophical utilitarianism, which is after all just an elaboration of the idea it’s nice when people are happy.
Things start to get a bit more interesting when we have more than one person and each person has needs or desires that conflict with those of other people, which is the usual situation in the real world. Now serious philosophical utilitarians faced with this type of situation will try to find some utilitarian basis on which to resolve this type of interpersonal conflict. A subjective notion of utility won’t work because we can’t compare subjectives feelings of happiness between different people since we don’t have any interpersonally valid baseline or way to measure it (i.e., one person’s report of extreme happiness might correspond to another person’s report of mild happiness). Therefore, they move on to developing theories about what they, themselves, think we should mean when we talk about making people happy, typically invoking some sort of hierarchy of needs or desires. I don't really want to take up the variety of theories these people have generated. My point is simply that the one conclusion serious philosophical utilitarians are not going to take is to throw up their hands and say, “Well, I don’t know. Utility seems to be irrelevant in all the ethically complicated and interesting situations because I can’t measure it or compare it across different people.” Saying something like that would obviously put one firmly in the non-utilitarian camp of moral philosophy.
Economists are entirely different in this respect. Indeed, they don’t seem to be concerned at all about their ability to use the concept of utility to address these types of ethically controversial issues. Instead, they simply start with a particular conceptualization of utility, as subjective happiness, and then work through the implications. And if the implications happen to be that utility is irrelevant in a practical sense for resolving any ethically controversial issue, such as shedding light on how to resolve the thorny issue of reconciling the conflicting needs and desires of different people, then they’re perfectly fine with that. In fact, they’re more than fine with that: as my old economics professor took pains to establish, they prefer it. Why? Well think about it. If you start with idea utility is just one’s subjective feeling of happiness, and you had a way to actually measure it, then the implication of maximizing total utility would be if someone happened to be born who had a highly unusual capacity for feeling happy and generating utility then we should just assign all available resources to that person and basically tell everyone else to drop dead. Now who in the world would find that a compelling ethical objective? Maximizing utility as it is defined in economics is only an acceptable objective if it is combined with the important caveat we cannot actually do it.
OK, so why play the role of a philosophical utilitarian and pretend to be interested in maximizing utility but then use a definition of utility no one would actually have any real interest in maximizing at all if they really could? Well, that’s where things really get interesting in my opinion. Basically, my impression is economists use that particular concept of utility precisely because it cannot be used to address any ethically controversial issues but they feel it can nonetheless be used to develop certain conclusions about optimal market structures and outcomes. The basic idea seems to me to be that since maximizing this type of utility is not ethically controversial (i.e., it’s OK with most people in the single person case and one cannot apply it in the ethically controversial multi-person conflicting desires case because no one can measure it), then their conclusions about optimal market structures and outcomes are also ethically uncontroversial.
Now this general form of argument would actually be OK if economists restricted themselves to the non-controversial results of their theory when delivering their policy recommendations. Unfortunately, that’s not usually the case. Their general argument plays out something like this. Using this relatively empty and ethically innocuous definition of utility we can show that any outcome that is not a perfectly competitive market outcome is inferior to some perfectly competitive market outcome. Therefore, it is not ethically controversial to suggest regardless of what position we are in, we should always move toward a perfectly competitive market outcome.
The problem with this argument is that policies designed to move us from whatever position we happen to be in toward a perfectly competitive market outcome often preclude us from pursuing policies that move us toward other potential outcomes, and it turns out we cannot use utility to show that many of these other outcomes are inferior to either our current position or to whatever perfectly competitive market outcome we are currently pursuing or might achieve. Significantly, this includes other outcomes that are themselves perfectly competitive market outcomes as well as outcomes that are not perfectly competitive market outcomes. Thus, in the “real world,” one is not actually avoiding ethical controversy by simply supporting policies that move us toward a perfectly competitive market outcome. One is simply ignoring the ethically controversial part of the issue. (I say real world because this problem doesn’t really exist in the world of economic models. In that world you can very well keep a perfectly competitive market and simply revise the starting distribution of resources with a stroke of the pen to arrive at whatever perfectly competitive market outcome you would like to achieve. It’s like magic! But try changing the distribution of the resources in the real world without encountering the objection you’re interfering with the free market. See what I mean?)
This is all pretty obvious if you think about it. It would be quite a trick if one could start with an uncontroversial ethical proposition about how to treat one person in isolation and through some logical manipulation and without adding any other value inputs arrive at a conclusion about the relatively controversial social issue of how we should resolve interpersonal conflicts of needs and desires through an economic system. That’s roughly the philosophical equivalent of creating a perpetual motion machine. (I have a slightly more detailed but economic jargony discussion in Appendix 1.)
So the conclusion I draw from all this is economists apparently only use the definition of utility they do so they can support real world policies that are consistent with their own personal value judgments about how we should resolve interpersonal conflicts of needs and desires while avoiding explicitly discussing those value judgments by using the conceit they have developed their policy recommendations using only a very ethically innocuous definition of utility. That is why, rather than thinking of free market economists as a rather strange and anachronistic subspecies of philosophical utilitarian, I think it makes more sense to think of them as “status quoians,” that is, people who reject certain non-free market policies that might change the status quo resolution of interpersonal conflicts of needs and desires for unspecified ethical reasons. And I think that is also why many conservatives are naturally drawn to the field of economics and tend to accept its conclusions a little more readily and uncritically than many liberals.
Of course, as I’ve said before (see my intro pieces for example), I believe economists should be free to do whatever they like. No one ever said economics had to present a coherent system for evaluating economic outcomes or social structures, or economists had to be upfront about their value judgments, or people holding any perspective on economic fairness or justice should be comfortable with their policy conclusions and recommendations about “optimal” social outcomes. But if I see something on a survey somewhere about the significance or desirability of moving toward some more perfectly competitive market outcome I might just think to myself, “Wow, that’s a tricky question,” and depending on the wording of the question I might just neglect to check the “Yes, we should always pursue policies that move us toward a perfectly competitive market outcome” box. And that’s really my point. I suppose that type of response would make me one more lefty who flunks Econ 101, but I’m just not sure I agree with the conservative idea of what that implies about my knowledge of economics.
Appendix 1
Here’s another explanation of what I’m talking about for readers with a bit more background in economics. Neoclassical economic theory establishes that any market outcome that isn’t a perfectly competitive market outcome will be Pareto dominated by some outcome that is a perfectly competitive market outcome (i.e., there will be some perfectly competitive market outcome that will make at least one person better off and no one worse off), such that moving toward that particular perfectly competitive market outcome will increase total utility. As we have seen, most people would agree maximizing the type of utility used in economic theory is an acceptable goal in practice because it doesn’t really contain much that is ethically controversial (with the important caveat that you can’t measure it and therefore can't apply it in the controversial interpersonal case), basically, we should allow people to make themselves happy when their needs and desires don’t conflict with anyone else. (Well, OK, there is a bit of an issue about the difference between having a “potential” Pareto improvement and actually arranging things so everyone is indeed either better off or no worse off. However, that isn’t my point right now, so let’s just sweep that one under the table for now.) However, economic theory does not establish that any perfectly competitive outcome Pareto dominates any outcome that isn’t a perfectly competitive outcome, nor of course that any particular perfectly competitive outcome Pareto dominates any other such outcome. That’s my point. If your real world policy recommendation is to push for policies that would generate a perfectly competitive market then your recommendation will often preclude policies that would generate certain other outcomes that are not Pareto dominated by the perfectly competitive market outcome one would achieve by following your recommendation. To be consistent with economic theory one should be indifferent between the two sets of policies because evaluating the resulting outcomes involves making interpersonal utility comparisons. Nor does the idea that one’s policy recommendation would not change irrespective of the starting position render the policy recommendation neutral; it simply implies one’s determination to express an unjustified (within economic theory) preference for whatever distributional regime one happens to be operating under.
Properly considered, neoclassical economic theory has precious little to say about optimal social outcomes other than if you happen to find yourself with a distribution of resources you feel leads to an ethical resolution of interpersonal conflicts of needs and desires (based on some ethical theory that can support such a finding, which requires content beyond that found in the sort of utility discussed in economic theory), and you find you can actually maintain that distribution under a perfectly competitive market structure, then it is not ethically controversial to say you should do so. Oh, I’m sorry, were you expecting something a little more? Well, like a lot of things, you only get out of a logical / mathematical theory what you put into it. And in this case, since we’re putting in precious little in terms of value premises, we should expect to get precious little out of it in terms of value judgements about optimal social structures.
Appendix 2
If you don’t find the implications of maximizing some particular conceptualization of utility to be ethically compelling, then guess what? You should stop talking about it and try to think of something you would actually like to maximize. Now, I’m no ethical philosopher but I would suggest the feature of the sort of subjective utility economists discuss that makes the hypothetical objective of maximizing it ethically unpalatable (that is, if you could measure it and hence really maximize it) is that it’s missing one half of Jeremy Bentham’s famous early formulation of the goal of utilitarianism as “the greatest happiness of the greatest number.” It certainly captures the greatest happiness part, but what happened to the greatest number part? I think if you’re going to have an ethically compelling formulation of utility, one you would actually want to maximize if you could, and you would want to use to address the ethically controversial issue of resolving interpersonal conflicts of needs or desires, then you probably have to conceptually set each person’s highest utility to be equal in some sense so what we mean by maximizing utility is bringing as many people as possible as far up their personal scale of utility as possible. In practical terms, I suppose that would imply we should address basic wants first. That is, before we worry about whether Mr. Fancypants can buy a second yacht we should worry about whether the guy living under the bridge can buy dinner. And since people tend to address their own most pressing needs and desires first I guess that would carry some redistributive and egalitarian implications. Of course, I’m not suggesting utility is the be all and end all of moral philosophy. I can think of plenty of other ethical considerations we should probably consider. But I think it’s something we might want to keep in mind, at least when no other ethical considerations come into play. I guess I agree with the old utilitarians to some degree: it’s nice when people are happy.
