Welcome friends!
A funny thought crossed my mind the other day. Yes, I was in that post-bagel mid-coffee state of contemplative tranquility when out of the blue it occurred to me there was yet another issue with neoclassical welfare economic theory that has never quite added up to me. I honestly don’t know why my mind happened to wander in that particular direction. I’ve previously discussed a number of what I consider fatal flaws with that theory so why in the world would I think of additional issues? Was it triggered by something I read in the newspaper? Can’t think what. Was it something happening on the other side of the window either figuratively or literally? Don’t really recall anything out of the ordinary. Well, I suppose it doesn’t really matter. Let’s just say the human mind works in mysterious ways and leave it at that. The point is I’ve decided to do yet another of my what’s-wrong-with-economic-theory posts as I hinted I might do the other day but with a new thought or two at the end to keep things interesting.
As you have surely discovered if you read my blog at all I have a certain antipathy toward neoclassical welfare economics. Why? I find it disingenuous, aggravatingly immune from criticism or at least quite heavily insulated indeed, annoyingly ubiquitous, and influential well beyond its merits. It’s a combination of characteristics I’ve found profoundly irritating ever since I took a few years to study the subject some time ago now. If you’ve never had that feeling and you’re wondering what it must be like a good example might be the reaction of crazed fashion designer Jacobim Mugatu to male model Derek Zoolander’s top model status and supposed modeling versatility in the movie Zoolander. In the immortal words of Mr. Mugatu, “Who cares about Derek Zoolander anyway? The man has only one look for Christ’s sake! Blue Steel? Ferrari? Le Tigra? They’re the same face! Doesn’t anyone notice this? I feel like I’m taking crazy pills!” Same thing but instead of Zoolander’s one look the thing that makes me sometimes feel I’m taking crazy pills is that neoclassical welfare economics is still discussed with a straight face by educated people and even taught at university despite it not really making a whole lot of sense. Let me just review the theory and some of my previous commentary then introduce a few new bits at the end. You can help me think it all out.
If it’s been a few years since your obligatory undergraduate brainwashing session in Economics 101 or heavens forbid Economics 201 let me start with a quick summary so we’re all on the same page. I know. Sounds like a good time right? If we just grit our teeth and get through it once we’ll at least be talking the same language and that’s half the battle so let’s just agree to save all questions for the end shall we? Because I’ll be having some questions of my own as you may imagine. If you’re familiar with the beast please feel free to skip the next paragraph.
OK, so here’s our little one paragraph refresher on neoclassical welfare economic theory. Assume first we’re trying to maximize something called “utility,” which has various interpretations ranging from simply an abstract term not really referring to anything per se but meant to facilitate talking about some common value judgements relating to preferences to something more akin to a particular conceptualization of happiness or satisfaction along the lines of the historical definition of utility from the field of ethical philosophy. Doesn’t matter for our purposes so let’s go with the simpler more concrete version for now and we’ll mention the funny way of talking interpretation later as necessary. Utility in economics theory has as one of its defining characteristics that we can’t observe it or measure it directly. Fear not. That doesn’t imply we should just stop talking about it right now. Wouldn’t make for much of a blog post if we took that attitude now would it? No, we can infer the relative utility for an individual of two potential courses of action based on that individual’s observed choices. For example, if an individual has a choice of either X or Y and opts for X rather than Y then X evidently generates more utility for that individual than Y. On the other hand there is no comparable mechanism for inferring the different levels of utility accruing to different individuals and hence no way to make what are known as “interpersonal utility comparisons.” In other words if one is confronted with the issue of two people, A and B, who both lay claim to something, which we may as well call X just to go with the faux algebraic flow of the discussion, the sort of utility used in economic theory will by definition be irrelevant because we will never be able to determine or infer who would get more utility from X. Assume next the simple and seemingly unobjectionable value judgement that we prefer any change that makes at least one person better off (in this context increases at least one person’s utility) and no one worse off (in this context reduces no one’s utility), which is called a “Pareto improvement” after the old Italian conservative or I suppose proto-fascist really who worked this all out. A situation in which no further Pareto improvements are possible is called a “Pareto optimum” and is said to possess the quality of “Pareto optimality” or “Pareto efficiency.” (I know. That’s an awful lot of Paretos but since we’re putting it in overdrive I don’t want to take any chances with the terminology. I’d hate for there to be any terminological equivocation based on other more common notions of improvements, optimums, and efficiency.) Turns out we can easily demonstrate a so-called “perfectly competitive” market system will lead to a Pareto optimal outcome. (The “perfectly competitive” qualifier here refers to certain assumptions regarding the characteristics of the market system in question, which is not really relevant for my discussion and which I’ll therefore ignore but is of course relevant to a whole other line of criticism of neoclassical economic theory dealing with the degree to which real world markets approximate these theoretical perfectly competitive markets and the implications and significance of any divergence). If one were to change the distribution of resources and then institute a perfectly competitive market one would still arrive at a Pareto optimal outcome but a different one and in particular one in which some people would be better off and some worse off relative to how they were doing in the first Pareto optimal outcome. Given our inability to make interpersonal utility comparisons we have no way of comparing the desirability of these different Pareto optimal outcomes in the context of economic theory, which means we have no way of comparing the desirability of the distributions that led to those outcomes. Indeed, every possible distribution of resources is associated with its own Pareto optimal outcome. If one imagines the set of all possible Pareto optimal outcomes resulting from all possible distributions of resources one gets a collection of Pareto optimal outcomes called the “Pareto optimal frontier” (or “Pareto frontier” or “Pareto front”) due to a common graphical representation of the concept in which, you guessed it, these outcomes appear on the outer boundary of the set of possible outcomes. Keeping in mind the theoretical relationship between Pareto optimal outcomes and perfectly competitive markets the implication is if we start with something other than a perfectly competitive market we’re apparently not at a Pareto optimum but if we adopt a perfectly competitive market system we could make Pareto improvements and end up on with a Pareto optimal outcome on the Pareto frontier. However, which exact Pareto optimal outcome we would end up at depends on the distribution of resources we started with.
Got all that? I mean got all that as just a theoretical thought exercise? I don’t necessarily mean got all that in the sense of buying into it in any more substantive way. That’s neoclassical welfare economics in a nutshell although in practice it’s usually gussied up with even more pompous and peculiar jargon and mathematical equations, proofs, graphs, and so on. It’s all fine as far as it goes. The equations and graphs worked out fine last time I checked and learning strange new words is a straightforward albeit sometimes tedious task. I wouldn’t worry about those bits. No, what I’ve always found more troubling and hence interesting are the substantive ethical propositions expressed in these mathematical expressions and academic blather. Indeed, along the lines of some of the criticisms to come I sometimes wonder if the impulse to express these concepts mathematically and via arcane terminology did not come at least in part from an earnest desire to make the arguments as inaccessible as possible to the ethical philosophers who would be their most natural critics. A movement designed not to ensure logic and precision as sometimes suggested as much as to obfuscate, obscure, and shield from criticism. No, that wasn’t really one of my criticisms. That was just a throw away. I think of funny things sometimes even when trying to write about other funny things but I don’t like to say anything seriously until I’ve thought about it seriously or at least for longer than the couple of minutes it took me just now to write that last bit. So let’s get into some of my real criticisms then shall we?
Probably the most fundamental issue I have with this entire pseudo-ethical theoretical framework is the concept of utility on which this theory is based. There is of course a well-known school of ethical thought known as utilitarianism and adherents of that school do carry out their ethical stylings in terms of maximizing something they call “utility.” I’m not sure how prevalent this school of thought is in serious philosophical circles right now but I assume it’s still going strong enough although there are many competing frameworks for thinking about ethics including notably duty based (deontological) systems, virtue based systems (what would a virtuous person do?) and contractual systems (what would people agree to?). Indeed if one were philosophically inclined the first thing likely to strike one about how social ethics is handled in the field of welfare economics is the way that theory has latched onto the terminology of philosophical utilitarianism but is missing entirely any of the corresponding discussions and disagreements and controversies and refinements and developments and so on one associates with real utilitarianism in the context of serious ethical philosophy. One must wonder if it is plausible to suppose economists and those interested in and ostensibly persuaded by neoclassical welfare economics are sincerely interested in philosophical utilitarianism at all. Because they don’t really act the way one expects such people to act. Certainly the unquestioning acceptance of one particular formulation of utility and the laser focus on developing the implications of that sort of utility seem difficult to square with the robust debates about the meaning of utility in real utilitarianism or discussions of the potential limitations of utilitarianism or its relationship to other common ethical theories one finds in serious philosophical contexts. Indeed economic theory has more the feel of a sort of abstract parlor game than serious ethical philosophy about it, which serves as the first sign all may not be as it seems.
Even more troubling is that the particular formulation of utility used in welfare economics is notably implausible even within the rarefied world of ethical utilitarianism. Keep in mind the particular conceptualization of utility invoked within economic theory is not based on any observable characteristic such as appearing happy or reporting being happy or having the parts of one’s brain typically associated with happiness firing to any particular degree or being in some condition our shared human experience might suggest would normally make one happy, etc. Indeed if taken literally and not just as a funny way of talking about preferences it would have to be considered more akin to the sort of mysterious and inaccessible ether one might associate with medieval theology than to anything one might encounter in modern empirical science or indeed modern ethical philosophy. And of course one can forget about common inferences relating to interpersonal utility comparisons along the lines of let’s say someone who needs something to survive, let’s say a ham sandwich, is likely happier (i.e, likely to derive more utility) from getting the ham sandwich than someone who doesn’t need it to survive, just ate a three course dinner with all the fixings, doesn’t like ham, doesn’t like sandwiches, but who will nonetheless condescend to stuff the object down his or her gullet if proffered on the principle of why not it was there. How does that work? It works because the sort of utility we’re talking about in economic theory is not defined or conceived to be relative to each individual but to exist in some weird disembodied sense almost as some sort of ineffable substance produced by happy people that theoretically or conceptually speaking could be collected and weighed. This peculiar feature means one could theoretically have what I’ve sarcastically described in previous posts as a “superconductor” of utility, that is, a person whose slightest whim generates so much utility that if he or she had a passing notion to kill off every other living person the utility-maximizing and hence ostensibly ethically correct outcome for whatever unfortunate society he or she belonged to would be to do exactly that. But who would sincerely agree to such an ethical proposition? Anyone? What is so special about utility that would lead one to support killing off the world’s population save the one postulated superconductor of utility to obtain the greatest level possible? Compare that unlikely formulation of utilitarianism to let’s say the formulation implied by Jeremy Bentham’s famous utilitarian dictum involving the “greatest happiness of the greatest number.” For the latter element to make sense one really needs some notion of happiness defined relative to each individual so it makes sense to add up happiness across people and not just delve into disembodied happiness. Well, I suppose if Mr. Bentham meant both happiness and the number of people to be distinct but equally important considerations maximizing utility might involve some algorithm involving both happiness and the number of people, in which case I suppose happiness need not be defined relative to a given person per se, but anyway the point is the utilitarian objective would involve more than just disembodied utility and thus rule out the superconductor of utility problem I just mentioned.
As I’ve discussed previously the only thing that keeps the theory of welfare economics from being laughed out of the room is that we could never find such a superconductor of utility. It’s important to note this is not because one could not theoretically exist or because our current technology is not up to the task of identifying this exalted personage but because of the way this sort of utility is defined. If one were ever able to observe or measure anything corresponding to utility as conceived of within economic theory and thus identify a superconductor of utility would one have violated those elements of the definition that rule out observing and measuring it or using it to make interpersonal utility comparisons. As I expressed it in an earlier post if viewed as a serious attempt at social ethics it’s a theory whose utter implausibility is saved by its total unworkability. This peculiar characteristic implies rather strongly the reason that particular formulation of utility is used and unquestioningly accepted within the field of economics does not involve the notion there is anything particularly attractive about it in the context of philosophical utilitarianism but merely that it gets some people where they want to go. In other words, the theory is not predicated on the notion there really is anything corresponding to what economists call utility that anyone really cares about maximizing but on the implied notion there is something desirable about what falls out of the theory if we pretend or talk as though there were such a thing and we were interested in maximizing it. Like what for instance? Well, based on the conceptualization of utility in question I suppose we’re talking about the implied value judgment that people are better off if they’re able to go with their chosen alternatives if there’s no interpersonal conflict in terms of other people laying claim to whatever it is and also the value judgement or really observation that resolving interpersonal conflicts of desires or needs or whatever else might generate happiness or satisfaction is difficult and potentially controversial. And that’s basically my first example of what I mean by economic theory being misleading. It’s not an honest discussion of an honest ethical objective but a backdoor sort of argument for something else entirely. And it’s nowhere near being a serious system of social ethics because it only looks at the easy case of someone deciding what to do when no one else is involved, which I would have supposed would be a no-brainer for pretty much everyone except maybe some religious types who may have ideas of what everyone should be doing even in that context. It doesn’t address at all the complicated bits that account for the bulk of serious ethical philosophizing, which involve the question of what to do when people’s interests and desires collide with one another. So what exactly are economists playing at? Well, read on my friends, read on. I’ll give you a little hint. It involves a backdoor defense of market systems. Oh, and the distributions of resources.
The next misleading bit in the grand edifice of subterfuge, falsehood, and double-talk lying at the heart of neoclassical economic theory involves a bit of intellectual legerdemain having to do with what it means to be indifferent between two outcomes. In order for economic theory to fulfill what one can only suppose is its intended function of recommending perfectly competitive market institutions if one doesn’t have them or maintaining them if one does have them one must address one awkward bit: there are many potential Pareto optimal outcomes all corresponding to a perfectly competitive market but all differing from one another along a dimension one can safely assume basically everyone would find very ethically significant indeed: some people are better off and some worse off. That is of course pretty much the only reason anyone might raise objections to a particular perfectly competitive market in the first place isn’t it? The feeling there’s something amiss in how different people are faring under that system? A careful economist will address this awkward bit by saying economic theory suggests we adopt perfectly competitive markets unless one has some concerns about distributional issues in which case economic theory becomes irrelevant to the discussion because economics has nothing to say about situations that would involve making interpersonal comparisons of utility in the context of economic theory. In other words, if let’s say we’re at some Pareto optimal perfectly competitive market outcome and someone has some objection such as, I don’t know, some people he or she feels are deserving of a better sort of existence are currently living under a bridge, and he or she advocates diverging from the perfectly competitive market system to deal with that issue, what does welfare economics have to say about it? Nothing. It does not contrary to some flawed popular presentations one encounters from time to time suggest we should maintain the perfectly competitive market system no matter what because for example we’re maximizing utility at that point but if we move away from it we’re no longer maximizing utility thus giving the unwary the impression we must have lost some utility along the way. Utility in the context of economic theory doesn’t really work like that as I just explained. One cannot compare utility across different distributions of resources because one cannot make interpersonal utility comparisons. If some change makes at least one person better off and one person worse off we can basically throw the sort of utility used in economic theory out the window because it becomes irrelevant to evaluating that situation.
In other words what welfare economics really says is quite limited indeed. If one likes some distribution of resources or equivalently some distribution of economic power one should find a perfectly competitive market system falling out of that distribution attractive. If one doesn’t like some distribution one should do whatever is necessary to fix it including diverging from the conditions of a perfectly competitive market. Makes perfect sense we would get something like that because we started with some pretty weak value propositions and all we did was manipulate them logically and mathematically so of course properly considered we were destined to get back some equally weak conclusions. But economists and their followers aren’t through yet! Not by a long shot. They use various stratagems to give the unwary the feeling they’re able to say more than they really are.
One approach is to argue getting to any point on the Pareto frontier is a logical first step no matter one’s distributional concerns so no matter what else is going on the recommendation to establish a perfectly competitive market will always be valid. If one doesn’t like the distribution at that point one can then just redistribute or transfer resources to get to a different Pareto optimal outcome always maintaining the perfectly competitive market system. The problem of course is the proposed transfer of resources is not really consistent with any common definition of a perfectly competitive market system, which is typically meant to include the labor market and other mechanisms for attaining, maintaining, and passing on wealth, so logically there is no way to maintain a perfectly competitive market system and simultaneously redistribute resources to arrive via express bus as it were at a different Pareto optimal outcome. At some point one must diverge from a perfectly competitive market in at least the one respect of redistributing resources and then if one is satisfied with the results at that point one may re-institute a perfectly competitive market system to get back to a Pareto optimum. Thus, one cannot really set up getting to or maintaining a perfectly competitive market system as an independent goal that holds regardless of one’s distributional concerns.
This is all the more obvious when one considers economic theory really implies indifference not only between different Pareto optimal outcomes but between any given Pareto optimal outcome and certain non-Pareto optimal outcomes, which as we suggested earlier are associated with systems other than perfectly competitive market systems. If we consider situations or outcomes that are not Pareto optimal we can get to some Pareto optimal outcome by making Pareto improvements, in which case that particular Pareto optimal outcome is said to “dominate” those non-Pareto optimal outcomes. However, we can’t get to any old Pareto optimal outcome on the Pareto frontier starting from any given non-Pareto optimal outcome because the only way to get to some of them would be to transfer resources in such a way that at least one person is better off and one worse off, which of course does not qualify as a Pareto improvement, and then work our way from that new starting point using Pareto improvements to get back to the Pareto frontier at the new Pareto optimal outcome. This corresponds roughly to the common sense observation it’s better to make progress toward one’s goals some old way than to arrive at an undesirable result even using the best means possible.
Another strategy unscrupulous or if we’re being charitable confused economists or followers use to try to make neoclassical economic theory appear to say more than it really does is to portray indifference to distributional issues as a substantive ethical principle in its own right rather than merely a refusal to take up those issues. As I just suggested before an honest economist’s correct response when confronted with someone recommending moving away from a perfectly competitive market in order to address distributional concern is to say based on economic theory we have no opinion on that, we’re indifferent, economic theory is silent on that issue, or something else along those lines. In the vernacular: knock yourself out, why not? However, a slippery economist or anyway some sort of slippery character may try to spin the findings of economic theory in such a way some people may be left with the impression it has something more to say. For example, one may say something like it’s perfectly fine for someone to have a problem with the distribution of economic power and hence the results of the perfectly competitive market but as economists we never think about such things because of the limitations built into our theory so as far as economists and economic theory is concerned there is and never can be any valid reason to diverge from a perfectly competitive market outcome based on distributional concerns.
What’s going on here is rather than expressing true indifference to distributional concerns this way of talking basically sets up economic theory as an alternative or competitor to ethical theories that address distributional concerns by appearing to pit the findings of economists and economic theory against the findings of those other ethical philosophers and theories. Basically we’re getting something like ethical philosophers following school X believe Y but we economists oppose that because economic theory does not support Y. Rather than displaying indifference to distributional concerns this way of talking puts economic theory squarely in the position of arguing against the distributional concerns generated by all other philosophical systems. But as I mentioned previously viewed as a competing complete theory of social ethics economic theory is very implausible indeed. You may recall the objective of economic theory was to start with some simple non-controversial ethical propositions and build up a defense of perfectly competitive markets, sorry, I meant investigate the implications of maximizing utility wherever that may lead. That’s fine as far as it goes. It’s mildly interesting to see how far those simple non-controversial value judgments can get us. However, if we add the implied negative substantive ethical proposition that all theories relating to distributional issues are invalid and consequently one can never apply ethical reasoning to resolving interpersonal conflicts of desires we immediately transform the non-controversial quality of the value inputs of economic theory to absurdly controversial. One can safely say no one in the world sincerely believes we cannot apply ethical reasoning to resolving conflicts of desires. Indeed, I suggested earlier those sorts of issues make up the lion’s share of what ethics is all about. No, I’m afraid economic theory can only be taken seriously at all if understood to concern itself with a small subset of the ethical propositions that would make up a complete ethical system and to be irrelevant to issues falling outside its purview. Economists and their followers have no business reversing course at the end of the day and jumping back in to these types of ethical debates to oppose others addressing distributional issues from which economists and their followers professed earlier to remove themselves.
Indeed far from supporting weighing in on substantive ethical debates about distributional issues “from the perspective of economic theory” the implication even within the constrained ethical half-world of economic theory of true indifference between the various Pareto optimal outcomes and even non-Pareto optimal outcomes we’ve alluded to earlier could never be correctly expressed by arriving at some Pareto optimum outcome and then refusing to budge under the argument indifference implies there is no valid reason to move because of course indifference implies equally there is no valid reason to stay. True indifference would imply supporting a random pell-mell never ending series of moves between the various points of indifference involving transfers of various sorts and sizes and other departures from perfectly competitive markets having distributional effects. If one is offered a sequence of choices between A and B and one chooses A every time because one sees no reason to switch to B one is not truly indifferent between A and B in any period save possibly the first. In every period after the first one clearly prefers A on some basis such as for example one believes one should go with whatever one went with the previous go unless one has some reason to do something different. In the context of Pareto optimal outcomes refusing to budge requires an additional value judgment along the lines we should always maintain whatever distribution we happen to have unless we recognize a valid reason to move. (And again this is not a matter of saying something like we have no reason to suppose we’ll come out ahead in terms of utility given the costs of moving because equally we have no reason to suppose we’ll not come out ahead given the costs of moving or equivalently we have no reason to suppose we’re not doing worse by staying where we are even considering the costs of moving.) Seems an easy enough proposition to add but I don’t think I’ve ever found any such proposition in economic theory. Why? I suppose because distributional indifference is rhetorically useful and breaking it even in this seemingly innocuous way would get economists and economic theory explicitly arguing for certain distributional outcomes in a way they’re eager to avoid.
So what’s really going on with all this economic theorizing? It’s basically an elaborate rhetorical exercise designed to support not only perfectly competitive market institutions but particular distributions of economic power not in an intellectually honest or rigorous way but in a misleading way by pretending to talk about something no one in the world really cares about or takes seriously at all, their peculiar and unique formulation of utility, and then saying all manner of confusing and misleading things about it. What would an honest defense of perfectly competitive markets and distributions look like? Well, as I suggested before the distributional aspect is the controversial bit so I suppose one would delve directly into why some people support certain distributional arrangements such as a perfectly competitive labor markets or maybe more to the point the rather different labor markets we observe in the real world and why some other people are dissatisfied with the results. We’d be talking about the whole gamut of ethical principles people might find relevant to assessing that situation and assuredly a large part of the discussion would involve what various people deserve and hence would not even really be consequentialist let alone utilitarian. We’d have people talking about the ethical relevance and significance of such matters as people having different innate skills and abilities including for example intelligence and mental and physical health, different educations, different levels of family support for studying or working, different access to wealth from parents or siblings or friends, different networks of social connections, and so on and so forth. We’d also take up differences in people’s willingness to work and more specifically to work on those things other people value including I suppose how to think about what other people value given the influence of economic power and hence distributions in determining one’s willingness and ability to pay on the market. Yes I suppose we might even take up true utilitarian concerns such as what people need to survive or what makes people happy or what makes the most people happiest relative to their own internal metric of happiness and so on. We might also get into how to think about children who are not yet responsible for their own decisions. Basically, we’d be talking about all the sorts of things one commonly encounters when talking casually about the ethics of the results of real markets. Then of course we’d also have to discuss the empirical facts informing the practical application of those ethical findings. In other words, while neoclassical welfare economics is busy setting up its elaborate and misleading parlor game designed to cheerlead market systems and shut down conversations relating to distributional concerns there is a parallel and much more real discussion going on in people’s minds about the things they really find important about how real markets operate and how well they are functioning that have nothing or at least precious little to do with anything going on within economic theory. Rather than shedding light on evaluating real world market systems neoclassical welfare economic theory obscures and shuts down discussion of the real issues. That’s why it annoys the heck out of me.
Everything I just said I’ve said in various ways in various other posts so that was all in the nature of a recapitulation. Sorry. I guess I like periodically howling at the moon. Makes me feel better. Gets it all out of my system so I can move on to other things for a while. But wait, I said I was going to add a little something new this time right? Fine. If you really want me to I’ll carry on a bit longer but I must warn you I’m getting a little tired.
The thought that crossed my mind recently is there may be something a bit odd even with the ostensibly non-controversial notion of a Pareto improvement. On that point you may recall we’re meant to all agree yes of course if we can make at least one person better off and no one worse off we should prefer that result. How petty and envious would we be if we did not? However, now I’m thinking about it that may gloss over some potentially awkward bits. Let’s have a little thought example to set the stage. Imagine an island of happy folk who although unable to manufacture, raise, or hunt their own food nonetheless live a contented life based on laboriously digging up the highly prized local rocks and selling them to the next island over in exchange for that second island’s unusually nutritious and delicious potatoes. Let’s imagine one day we dropped a shipload of money onto one of this happy breed. I said shipload. We have made one person better off and no one worse off so I suppose we must be talking about one of those so-called Pareto improvements. Presumably this should be a no brainer ethically speaking. Everyone on the island should prefer this result to the previous result. But would they really? Well, one thing that jumps out to me is if the islanders had any ideas about fairness as it relates to rock digging and potato eating they’re going to have get over those pretty quickly because in our scenario ship boy didn’t do anything special in the rock digging area but just had a shipload of money / potatoes dropped in his lap. I rather suspect a few of our islanders might actually be a bit annoyed. I suppose we could fix this up by postulating that prior to dropping the money we discussed it with the islanders and they agreed it would be fine as long as we did it in a way they considered fair let’s say by equal probability or maybe probability weighted by rock digging activity or some other mutually agreed upon mechanism. That would probably work, right? So maybe in order for the concept of a Pareto improvement to be as ethically benign as we would like it to be we need to add a little something about everyone agreeing it would be fair? In the context of using the concept to think about moving from a non-perfectly competitive market result to a perfectly competitive market result maybe we’re fine as long as the people who are losing out in relative terms agree it’s fair. Of course, fairness is not usually considered a utilitarian concept although one of the fun characteristics or aspects of utilitarianism is anything can be theoretically made relevant to utility so for example maybe we can say these islanders derive utility from fairness. But of course in that case dropping the money on ship boy actually reduced the utility of the other islanders and possibly even the utility of our lucky winner by rendering the distributional results less fair and was thus never truly a Pareto improvement in the first place. My head is starting to hurt so let’s just stop for now shall we? All I’m saying is there may be some issues I hadn’t considered previously.
But there seems to me yet something else going on. In our example let’s say ship boy decides to buy all the available potatoes and build a potato tower for shits and giggles. He has more than sufficient economic power to do so. His fellow islanders promptly die from starvation. Oops. We addressed fairness in terms of relative results above but wasn’t part of the deal with Pareto improvements no one would be made worse off in objective or non-relative terms? Something didn’t work right here but what? Did we diverge from the conditions of a free market in some way? Nothing really jumps out at me. All that happened is we changed the relative economic power of those involved and given the way the market allocates goods and service to those with the economic power to pay for them we ended up making some people worse off in real terms hence contradicting the requirements of our Pareto improvement. Are we also missing something relating to the potential effects of changing relative economic power in market systems? I suppose we may need some other sort of arrangement before we drop the shipload of money? Something along the lines of whoever gets the money will not use his or her newfound economic power in such a way as to make the material situation of anyone else worse? Doesn’t really sound like a conventional market to me. OK, my brain is starting to act up again. I’m getting the odd sensation that rather than discussing these issues in good faith some people may have been more concerned to slip one by me. It’s not a nice feeling.
While I was writing this all this out just now another couple of examples occurred to me so let’s just quickly do those as well. Make a complete set for now.
First, how about the opportunity for equivocation based on the plain language definition of “efficiency” and the rather more specialized notion of “Pareto efficiency,” which is just another way of saying Pareto optimality? Under common usage one would never be indifferent between an inefficient solution and an efficient solution because inefficiency implies wasting resources. But Pareto efficiency doesn’t work that way. Translating into the terms we used earlier if we confine ourselves to the value judgements involved in welfare economic theory we should be indifferent between a Pareto efficient outcome and a Pareto non-efficient outcome not dominated by that particular Pareto efficient outcome. Pretty funny way of talking right? We’re indifferent between the efficient and inefficient solutions? (I pointed out the same phenomenon in terms of the correspondingly odd relationship between utility maximizing and non-utility maximizing but this efficiency versus inefficiency formulation seems even more confusing to me because people talk about efficiency all the time in everyday speech but probably rarely talk about maximizing anything unless they’re in the trade.)
Second, how about the distinction between the “perfectly competitive” market we’ve been discussing this entire time and the famous “free” market so beloved of conservative pundits? Are they meant to be synonyms in the sense one could go back over what we just said and substitute “free” market for “perfectly competitive” market? It’s a safe bet no honest economist would do so. The problem with equating the two is it misleadingly implies if we simply refrain from messing about with real world markets in terms of regulating them and so on and instead allow them to run free so to speak they will naturally tend toward perfectly competitive markets or at least approximate them sufficiently to take on their desirable features, which of course is not really the case at all. There are many sorts of markets and they do not all tend toward or approximate the perfectly competitive. Indeed, a great deal of regulatory effort may be required to create and sustain perfectly competitive markets, a point memorably implied by Adam Smith, one of the earliest practitioners of what might be considered modern market economics, in his famous quote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” So why the ubiquity of the misleading expression “the free market” in conservative pseudo-economic writing? Are you being serious right now? Why do you suppose?
I suppose that should do for now. I’ve been discussing for some time now how conservatives don’t seem very interested in good old fashioned intellectual honesty and instead tend to employ speech rhetorically and strategically. Well, this whole business with neoclassical welfare economics is basically just more of the same isn’t it? Is it any wonder academic economics departments tend to be such magnets for conservatives? In many ways it’s right up their alley. A fake, confusing, twisted bit of conceptual nonsense designed to bolster some people’s economic situation by shutting down consideration of the real issues. Well so be it. When we’re fighting the cancer of conservative thought let’s not forget the legion of unscrupulous economists and their followers. Vincit omnia veritas.
