All posts by Alexander Salter

Economics and the Good: Part II

Let’s briefly go over what we covered last time. When economists talk about ethical issues, they usually start with economic efficiency as a normative benchmark.  Efficiency means you can’t make someone better off without making someone worse off.  For any given distribution of income, if you reallocate resources from Al to Bob, you improve Bob’s welfare only by diminishing Al’s.  In competitive markets, efficiency has the interesting property of maximizing the dollar value of society’s resources.  If society’s resources did not command as high as a price as they could, it would mean there are unexploited gains from exchange. Those exchanges, once made, would make parties to the exchanges better off, and we could have additional winners without additional losers.

 

So far, so good.  But there are many unexamined assumptions behind economic efficiency and its desirability.  What are some of these assumptions?  To start, it’s important to remember that efficiency is defined with respect to people’s preferences.  Efficient situations entail people getting what they want.  This is why many economists don’t think efficiency advocacy is controversial.  After all, what could be wrong about people getting what they want?  Actually, it turns out a great deal could be wrong with it!  Imagine Al hates Bob and is willing to pay a million dollars to take out an assassination contract on him.  Bob likes being alive but is only able to pay half a million to bribe the assassin not to kill him.  While the assassination contract clearly fails the strict efficiency definition (nobody better off without somebody worse off), it fits the less stringent one (dollar maximization of goods/services).  But I would hope that no economists would reason from this that we ought to make assassination contracts legal on efficiency grounds!

 

More generally, we should be cautious in approving the lofty place efficiency has in most economists’ public policy recommendations.  Once we realize that there are plenty of situations where individuals ought not get what they want, efficiency becomes much less appealing as a policy goal.  Furthermore, efficient situations often entail distributional changes in resource allocations that can further burden those who are already struggling.  Economists tend to overlook this as long as the economic pie is getting bigger.  But surely it is reasonable to worry not just about the size of the pie, but who gets how big a slice.  This does not mean calls for distributive justice—many made by non-economists who do not have the training to recognize the disastrous probable consequences of their demands—ought to be acceded to unquestioningly.  But it does mean that there are valid ethical concerns that economists tend to ignore, because of what their analytical window allows them to see.

 

There is an entire world of ethical discourse outside of economists’ relatively narrow brand of consequentialism.  Economists are selling themselves short when they restrict themselves to the role of efficiency technocrats, rather than adapting their discipline’s invaluable tools towards the cultivation and preservation of a humane society.

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.

 

 

Through the Looking-Glass

“Politics is downstream from culture.”  We’ve heard this phrase countless times.  But have we understood it?  Are we willing to enter into the subtle and profound worldview it implies?

I am an economist by training.  I received my Ph.D. in 2014 from George Mason University, a program known simultaneously for its commitment to the economic way of thinking and using this thinking in tandem with politics, philosophy, and the humanities.  I am now a professor at Texas Tech University, and a fellow at TTU’s Free Market Institute.

In recent years I have slowly awakened to the importance of practicing economics as a part of the Great Tradition—the conversation reflecting Western man’s self-understanding for more than 2500 years.  This includes recognizing that a society of free and responsible individuals cannot arise solely through clever institutional design.  Political economy rightly emphasizes that societies only flourish when they get the “rules of the game” right.  But there is so much more to that which orders our public life than statutes, court decisions, and even constitutions.  Free and self-governing societies require a certain ethos, which itself shapes and is shaped by the humane disciplines—history, literature, philosophy, music, and art.

Continue reading Through the Looking-Glass