Welcome friends!
I think I’d like to revisit one of my pet peeves today, which is this whole issue of conservative free market ideology, neoclassical economic theory, utility, and Pareto optimality. I know I’ve discussed the issue before (Liberals and Econ 101, Nov 2010, and my two intro pieces as well), but I seem to be continually bombarded by conservatives insisting their free market ideology shows they have a better grasp of economics than their rivals, which I don’t believe to be the case and which I actually find a little irritating. So maybe it’s time for another go. Now I realize this type of post may be a little boring for many, especially those who skipped or slept through Econ 101 or who attended but thought it was all a big crock, so I promise I won’t bring it up again ... soon.
OK, now I’ve discussed before that economic theory uses a fairly distinctive definition of utility, the most salient point of which is that it does not allow one to make comparisons of utility between different people (i.e., “interpersonal utility comparisons”). This means economic theory really has nothing to say about the desirability of policies that have winners and losers, that is, that make at least one person better off and one person worse off. (Well, OK, I suppose there are situations in which the winners could compensate the losers, in which case you wouldn’t really have winners and losers because everyone would come out ahead — unless relative outcomes also matter to people, which they probably do, in which case you would still have winners and losers, but never mind. To simplify the discussion, let’s just talk about situations that generate true winners and losers, that is, situations in which the winners either cannot or will not compensate the losers.)
Now I doubt anyone would dispute that there are, in fact, winners and losers (in a strictly economic sense) in any more-or-less free market economy such as that of the US. Under our current arrangements some people become billionaires and some people live under a bridge. There is no reason to suppose making our arrangements conform even more closely to some abstract ideal of the free market would alter that fact. This raises the question of how conservatives have apparently come to believe economic theory supports the desirability of free market policies, with their associated pattern of winners and losers, when it really has nothing to say about the moral standing of the resulting pattern of winners and losers, that is, about the distribution of economic resources within such a system. I mean, let’s face it, to the extent some people have problems with free market systems, it’s usually that exact issue they’re thinking about: the distribution of the output.
Well, the short answer is you can’t actually get to where conservatives want to go with just economic theory. You need to add some additional ethical content in some way. So where can you get with just economic theory? Well, economic theory establishes that under certain conditions a “perfectly competitive” free market system will generate a so-called Pareto optimal result, which means a result with the characteristic that one cannot improve the utility of one person without diminishing the utility of at least one other person. What’s so special about that? Well, if you go beyond that point then you’re getting into the whole issue of interpersonal utility comparisons and we’ve already discussed that the definition of utility used in economic theory cannot support interpersonal utility comparisons. So Pareto optimality is really as far as one can go in terms of talking about desirable results within economic theory. When you go beyond that you’re in the realm of broader social philosophy.
Now I know many people interested in neoclassical economic theory and its relevance (if any) to the real world often like to discuss the whole issue of the conditions that are required for a free market to lead to this Pareto optimal result. That is, how likely are those conditions to occur and to be maintained, etc. And that is a somewhat interesting issue to be sure. However, I’d let to set aside that particular can of worms and instead just talk about a hypothetical situation in which all the necessary conditions do indeed hold. Now, in this situation, what does economic theory have to say about the desirability of pursing free market policies relative to pursing other policies that would render some people better off and some people worse off? Nothing. As I said before, economic theory cannot address situations involving interpersonal utility comparisons.
So how do many conservatives get the idea it does say something? Well, there seem to me to be two things that are probably going on.
First, we have the theoretical result that regardless of what distribution of resources (that is to say, what pattern of winners and losers) you’re currently operating under, if the necessary conditions are met, then a free market system will be Pareto optimal. Then you have the theoretical result that if you don’t particularly care for the free market result under the status quo distribution of resources, but you could generate a distribution of resources you thought was ethically preferable, then you would support the free market result associated with that particular distribution of resources because, again, that’s as far as you could go without making at least one person better off and one person worse off, that is to say, without changing the distribution of resources you think is ethically justifiable. I think these results sometimes generate a bit of conceptual confusion that implies if you just manage to get to any free market result then you’re somewhat close to all the other potential free market results so in a sense you’re halfway to wherever you want to go. All you have to do at that point is address the distributional issues and there you are. The problem is that this is really rather misleading. Moving to one particular free market outcome doesn’t actually bring you any closer or indeed necessarily anywhere near some other free market outcome you might prefer under whatever value system you happen to be operating under. In fact, it may actually prevent you from ever getting to that other free market outcome by preventing the change in resource distribution that would support the free market outcome you prefer. That is to say, one can indeed theoretically get to wherever one wants to go, at least at a particular point in time, by manipulating the distribution of resources under a free market regime, but there is really nothing in economic theory to suggest it will be easier or less costly to pull off changing the distribution of resources in this manner (again, possibly continuously if you wish to maintain some desired result) then it would be to pursue non-market solutions that make some people better off and some people worse off.
Second, I think sometimes people draw some erroneous conclusions from the fact that economic theory is neutral with respect to values that are outside the realm of utility as defined within economic theory. In particular, some people (and I mean some people who are conservatives) seem to interpret this to mean one should give preferential treatment to the status quo distribution of resources (that is, the current pattern of winners and losers) and the free market outcome that goes with that distribution because there’s no justification within economic theory for changing it. Again, this is incorrect. If you’re going to be neutral with respect to values that go beyond utility as defined in economics then you should be indifferent between any two results that involve interpersonal utility comparisons. If you prefer or privilege one result, such as the free market result generated by the status quo distribution of resources, then you’re making some type of additional value judgment. You’re saying either that there is something ethically preferable about the current distribution of resources relative to other potential distributions or you’re saying there is something ethically preferable about supporting the status quo whatever it may be, that is, whatever distribution of resources you happen to find yourself under. Needless to say, neither of these value judgments is justified within economic theory. (You can see this type of thinking in spades with the current crop of conservative Republican presidential candidates. According to these people, anything critical of the status quo represents a form of class conflict, but anything that preserves the status quo represents the absence of class conflict. In other words, it’s different when I do it.)
So in other words, I think the conservative notion that economic theory supports a simplistic free market social philosophy is based mostly on their ignorance of the theory or, I don’t know, maybe their understanding of the theory and how it can be misused to support their agenda. Now don’t get me wrong. As I’ve said before, I don’t actually mind free markets — usually. And I also don’t mind if someone supports the status quo distribution of resources. It doesn’t seem all that bad to me in general, although there is some obvious room for improvement. So heck, knock yourself out. I’m just saying that in terms of intellectual honesty you should be prepared to discuss the value judgments that lead you to those conclusions rather than trying to tie it in to economic theory because economic theory isn’t going to get you there by itself. So the irritating thing to me about conservatives is not necessarily their actual social beliefs, per se. We can discuss those. No, it’s the fact that they’re often not really very upfront about their social beliefs so there’s often no way to get to the value judgments one would really like to discuss. And it’s doubly irritating when conservatives suggest one’s failure to agree with their unstated value judgments is due to one’s ignorance of economic theory.
Oh, and one last point, if you happen to read anything about Vilfredo Pareto, the nineteenth century Italian economist who came up with the whole Pareto optimality argument then you may begin to wonder if some of the apparent confusion over the relationship of conservative social ideology and neoclassical economic theory wasn’t entirely intentional. According to the biography on Wikipedia Signore Pareto was something of the arch-conservative who was quite concerned with fighting the evils of socialism, reducing the role of government, etc. Yes, he eventually embraced Mussolini’s fascism but that was because he apparently saw it as a transition to the minimal state he thought would liberate economic forces. (Yeah, I know. The fascist thing doesn’t seem to make a huge amount of sense in hindsight but I think the popular belief at the time was that you first had to defeat socialism by any means necessary.) Anyway, among the more interesting of the various right wing beliefs he apparently espoused in his writings was that democracy is a fraud, there is no such thing as progress in human history, a very unequal distribution of wealth is a “social law” caused by something “in the nature of man,” and the weak should starve so society would not become degenerate. Yep, that’s right. Apparently, according to Signore Pareto one can “compare the social body to the human body, which will promptly perish if prevented from eliminating toxins.” (Move over Ayn Rand, I think conservatives might have found themselves a new icon!) Anyway, sort of makes one wonder how hard he was really trying to avoid confusion about the severely restricted policy implications of economic theory one gets when one uses a definition of utility that cannot support interpersonal utility comparisons and instead focuses on the notion of Pareto optimality or if that was not indeed the whole point of the exercise.
