Economics and the Good: Part I

How does the discipline of economics approach ethical issues?  A standard answer goes something like this.  We can separate economics into two categories.  Positive economics concerns itself solely with explaining the social world.  Normative economics deals with moral concerns in a way that may build upon, but cannot be reduced to, positive economics.  In other words, positive economics deals in statements of is; normative economics, of ought.


An important concept that acts as a bridge from positive to normative economics is economic efficiency.  In reality, economic efficiency can mean several things.  The strictest definition of efficiency is that no individual can be made better off without making at least one individual worse off.  An alternative way of phrasing this is that all potential gains from exchange have been exhausted.  Another definition of efficiency, one not so strict, is that the dollar value of society’s scarce resources has been maximized.  Frequently these criteria go together, but they do not have to.


But we are getting ahead of ourselves.  We still need to explore how efficiency is operationalized.  Positive economics can say whether a given situation is efficient or not.  It cannot recommend efficiency as a value, of course, without losing its purely positive status.  Normative economics frequently invokes efficiency as a standard against which economic outcomes are judged.


However, economists frequently get into trouble when they make statements about efficiency that contain both positive and normative elements without realizing it.  Consider the following thought experiment.  Allan is auctioning off an apple.  Bob and Charlie both bid for the apple.  Bob bids $1, and Charlie bids $2.  Allan gives the apple to Charlie.  Note that this is an efficient result, in both the strict and the loose sense.  (Instead of letting the results of the auction stand, we could take the apple won by Charlie and give it to Bob.  That would make Bob better off, but would make Charlie worse off.)


What if Allan knowingly gives the apple to Bob instead of Charlie, voluntarily accepting $1 instead of $2?  This situation seems inefficient in the looser sense.  But as long as secondary bargains are not forbidden, Bob can always sell the apple to Charlie.  Since Bob bid only $1, whereas Charlie bid $2, at any price for the apple above $1 and below $2 there is room for a mutually beneficial exchange.  Either way, the apple will end up with the person whose valuation of it is highest in dollar terms.


Why is this dangerous territory?  Because economists themselves frequently forget the boundaries of each kind of efficiency.  If Allan gives the apple to Bob, economists will often say something like, “That’s inefficient; the apple should go to Charlie.”  Furthermore, they frequently would support something like a redistributive policy that reallocates the apple from Bob to Charlie.  Even if they don’t support that particular policy, they would endorse efficiency as a valid metric for determining public policy, asserting that such policy “merely helps people get what they want.”  And economists will do so thinking they are still doing purely positive economics.  Clearly any issue pertaining to the distribution of goods and services beyond the purely descriptive is normative, in that it involves value judgments.  The problem is the concepts economists work with, and the way they apply those concepts, makes it hard for even careful economists to know where descriptive economics ends and prescriptive economics begins.


You may have noticed two controversial statements in the above explanation.  The first is that efficiency should be a criterion for crafting public policy.  The second is that promoting efficiency, because it means giving people what they want, is not controversial.  But both of those statements are in fact normatively loaded.  I will explore further how and why economists overlook these issues in subsequent posts.



3 thoughts on “Economics and the Good: Part I”

  1. One further complication/confusion arises related to retrading, sometimes called “hidden trading.” Generally, this literature on hidden trading leads to conclusions that such retrading is actually a bad thing. Usually, it is because the retrading hurts the social planner’s ability to redistribute or fix some market imperfection. This seems to fly in the face of your conclusion, although I think that whole literature is confused.

    You should be back to McCloskey’s chapter on welfare economics in Applied Theory of Price and see how she relates laissez-faire, free trading, and efficiency. Her argument should lead to your conclusion, but she doesn’t actually take it that way. While that is a textbook and obviously simplifies and glosses over the complexities, she obviously is a subtle thinker on these issues.

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