Normative questions belong to economists too

@DavidA on Twitter points us to an old post by Joe Seydl arguing that economists are no longer allowed to speak about normative social problems, like inequality or climate change:

I propose a new rule: economists are no longer allowed to speak about normative social problems, such as rising inequality or climate change. Let’s leave the discussion of such problems to the philosophers.

The justification for this rule comes from the fact that solutions to normative social problems require selfless thinking. And there is ample evidence to suggest that economists behave in more self-interested ways than do noneconomists.[1]

Consider rising inequality. The philosophical justification for rising inequality can be found in John Rawls’ philosophy. In “A Theory of Justice,” Rawls argues that it is just to increase inequality up to the point where any further increase would leave the position of the least-well-off member of society unchanged. In other words, any increase in inequality that is worth bearing, according to Rawls, must benefit the worst-off members of society in some discernible way. This is known as Rawls’ Difference Principle.

A starting point for Rawls’ Difference Principle, however, requires that one at least has concern for the least-well-off members of society. Economists clearly don’t meet this criterion, because the distribution of efficiency gains rarely matters to them; why else would the majority of economists support a whole host of free-trade agreements that put manufacturing workers in direction competition with workers overseas, while at the same time protecting highly paid professionals, such as doctors and lawyers, from the same competition? The answer, of course, is that economists do not care about the well-being of manufacturing workers.

[…] Or consider climate change. It is all well and good if resources are allocated in such a way that leads to high productivity growth and rising living standards in the near term, but what about the longer term? Efficiency gains are “worth it,” according to the philosophers, if the gains are sustainable; and, importantly, if the gains are sustainable over many generations. If rising living standards over the next few decades come at the expense of more frequent droughts, floods, and devastating heat waves for future generations, then the near-term gains are probably not be worth pursuing.

Economists are incapable of thinking about sustainable development, because sustainable development requires a concern for the well-being of future generations. The rational-choice model that dominates neoclassical economics assumes that individuals are always in pursuit of their own material self-interests, saying nothing about the interests of future generations.

The rational-choice model may or may not be an accurate description of human behavior; there is evidence to suggest that humans often act irrationally, especially when it comes to their evaluation of sunk costs or charitable givings.[2] But it doesn’t matter, because so long as exposure to the rational-choice model increases the likelihood of selfish behavior, the implication is that economists will be in an increasingly poor position to evaluate normative social problems.

Economics wasn’t always this way. For example, in the 1940s, 1950s, and 1960s, Paul Samuelson wrote a great deal about the mixed-economy model, which stressed the importance of development on three fronts: efficiency, fairness, and sustainability.[3] (The latter two requiring selfless thinking.) But it’s unlikely that the profession will ever adopt a more outward stance on human behavior, as the standard rational-choice model can be thought of as a relentless force that only grows stronger with time.

For this reason, it makes sense to limit what economists are allowed to speak about, rather than sit around wondering whether economists will one day incorporate selflessness into their behavior models. If economists would like to speak about profit maximization in a particular market or how economies of scale differ across markets, then fine. But, please, let’s leave the normative questions to the philosophers.

Anyone who’s fully content with the way modern economics works needs to wake up. Even pretty ardent supporters of the EMH (like Larry Summers or Alan Greenspan) accept this. The recent financial crisis gives full life to this concern. However, the concern voiced in this quote is misguided in theory, and can be dangerous in practice.

Consider the Rawls’ Difference Principle. Without economic reasoning and analysis, how exactly is one supposed to figure out “the point where any further increase [in inequality] would leave the position of the least-well-off member of society unchanged” ? More importantly, what way to philosophers have to determine the “right” philosophy (at least economists are getting to the point where their convictions are either justified or falsified by data).

A radical philosopher (I’m thinking his name starts with an ‘M’ and ends with an ‘X’) might suggest that any level of concentrated capital ownership breaches this principle. In ideality, we would have an equally poor society, and in reality we would get Josef Stalin. Full disclosure, I think Marx was a terrible economist, but a pretty fantastic sociologist, ahead of his time.

This post also ignores that there are plenty of philosophers who are okay with an entirely self-interested society. Conversely, many economists are in favor of a kind and caring society. Indeed, the father of classical economics, Adam Smith, was himself believed that charity and trust ought to underpin any capitalistic society. Note the normative claim.

On the other hand, we have philosophers like Ayn Rand who believed love and marriage were for idiots, and atheistic selfishness was the way of the future.

The idea that economists can’t handle climate change is equally dubious. Indeed, I think global warming can be solved, entirely, in the hands of modified neoclassical thinking. The problem with simple economic models is the consideration of oil, gas, and coal as cash flow rather than capital stock while treating a sustainable environment as a public good rather than eroding resource. This is an idea embraced by E.F. Schumacher in Small is Beautiful. Though, unlike me, he prefers a Gandhian-agrarian society to capitalism. It was also this idea that compelled one of history’s most brilliant men, Buckminster Fuller, to suggest that the natural cost of oil is over a million dollars per barrel.

Within neoclassical models, were these assumptions of measure to be changed, we would very quickly move towards rapid carbon taxation and renewable energy. Further, it requires science and calculation to solve this problem, not the normative whims of an armchair philosopher. Indeed, it is the social philosopher within the economist that averts a wider cry for high carbon taxes.

Even conservative mainstream of economists, like Professor Mankiw, believe in an economic solution to our environmental problem. However, it is the the knowledge that a rapid decarbonization will corrode our society and political institutions that prevents a move towards this tax. 

If we’re going to talk about mistakes economists have made why not John Locke’s idiotic defense of slavery. Indeed, it’s quite a bit easier to contrive philosophy towards a defense of slavery than it is any form of economics, which would argue that the abridgment of individual agency in commerce would broke a society. An economist’s argument; but a right argument.

The rational-choice model is widely criticized, at least in its simplistic form, even within the economics community. Not because it doesn’t yield the fair outcome, but because in our modern society it makes inane assumptions (no, I don’t consider my potential income in the year 2050 and raising interest rates against my utility function for a given tomato in making my purchase). That doesn’t mean the economics mindset is wrong, it means it has to change.

This post further assumes all economists would fall under the narrow realm of ‘mainstream’ economists. Plenty, have argued for a more equal society. What makes a philosopher more suited to judge “what is just”. Or, a more potent question, what makes a philosopher?