The limitations of welfare economics

Here is yours truly again, from his latest book.  I tried to condense the limits of welfare economics into a few simple sentences; here is what I came up with:

On the negative side, the economic approach considers only a limited range of values, namely those embodied in individual preferences and expressed in terms of willingness to pay. This postulate is self-evident to many economists, but it fails to command wider assent. It wishes to erect “satisfying a preference” as an independent ethical value, but is unwilling to consider any possible competing values, apart from preferences. It is hard to see why non-preference values should not be admitted to a broader decision calculus.

Typically economists retreat to their intuition that satisfying preferences is somehow "real," and that pursuing non-preference values is religious, mystical, or paternalistic. The rest of the world, however, has not found this distinction persuasive. They do not see why satisfying preferences should be a value of special and sole importance, especially when those same preferences may be ill-informed, inconsistent, malicious, or spiteful. The decisions to count all preferences, to use money as the measuring rod, and to weight all market demands equally must themselves rely on external ethical judgments. For that reason, the economist has no a priori means of dismissing non-preference values from the overall policy evaluation.

Comments

I think you´re wrong to say that "the economic approach considers only a limited range of values". Indeed we cannot make explicit all values, but the approach can be applied to any value. What are the competing values, apart from preferences, you have in mind? Just take any value and the only relevant question is the individual´s wilingness to pay for it (that is, to sacrifice some other value). The ongoing debate is about what values are relevant to explain social behavior other than market transactions, not about a distinction between preferences and other values.

I sympathise with Gabriel Mihalache, but I think he is trying to eat his cake and have it too. You can either have a realistic model of preferences or you can have revealed preference, but you can't have both.

Once you go beyond a hopelessly simplistic model of utility then you have to include the fact that utility functions depend on the actions of others and the outcomes for others. And once you have these pervasive externalities, revealed preference vanishes (you cannot infer preferences from actions or outcomes). What you want is not what you get.

As just one example, the eye-opening (for me at least) work of Kranton and Akerlof on identity (http://www.econ.umd.edu/~kranton/publications/identityandtheeconomicsoforganizations.pdf) argues that we make many choices in order to express our identity (what kind of person we are). This is surely the case when it comes to the arts. And our sense of identity and the prescriptions that go with that sense are tangled up with the attitudes of others. You can still say something about predictions (and Kranton and Akerlof do so), but such predictions are very conditional at best.

For me, "revealed preference" is prediction based on an unrealistic modesl of utility, and that's no use to anyone. Actions are indeed real, but they don't reveal preferences.

I agree with Edgardo; any moral value I hold is a preference just as much as any bodily desire is. I fail to see the distinction between preferences and "non-preference" values. If you will not post a longer explanation, I suppose I will have to read your book...

Tyler's critique is very nicely put. The "elephant in the living room" right now in this respect is the success of open content production in displacing exchange mediated production processes (software, book reviewing, scholarly publication, encyclopedias, new analysis, ...). At a minimum something like Akerlof and Kranton's analysis is required.

Rather than "identity" I find the concept "esteem" more useful in this analysis; it is less static and institutionally bound. If we see contributors to open content production as working for esteem from a self-selected reference group, much of that activity makes sense in a quasi-economic framework.

The question of the role of money as a measuring rod (as mentioned in the penultimate sentence of Tyler's quote) is more complex. Partly money drops out of these interactions because of transaction costs that do not fall with the cost of the underlying infrastructure (networks, computing, etc.) But we should also note that attempts to purchase esteem are generally viewed with contempt, which is of course the opposite of esteem. (Think, for example, of someone buying an economics Nobel for a few billion.) It is difficult or immpossible to directly buy esteem with money. So esteem seems very resistant to measurement in terms of monetary value, even aside from transaction costs.

Yetter-
One way to construe non-preference values is in terms of what the philosopher Harry Frankfurt calls "second order desires". We might imagine someone who has certain immediate preferences which they satisfy and thus reveal, but then who does not identify with those choices. Think of the weak willed addict. He may not desire to be the sort of person who desires the things he does. That desire to be a person with different immediate desires is a second order desire. It's a desire to be a different person.

It seems to me that all economic systems necessarily express *someones* preferences. The real question is who's preferences should be heeded and why. In capitalism, one's preferences are heeded because of a demonstrated capacity to heed the preferences of others. In other words, those who satsify other peoples preferences most effectively have the greatest probability of having their preferences satisfied. In a welfare state, those who control the guns (through whatever means they gained control of them) have the right to force their preferences on others.

This is muddled-headed.

For one thing it is not true that

"the economic approach considers only a limited range of values, namely those embodied in individual preferences and expressed in terms of willingness to pay",

particularly the "expressed in terms of willingness to pay" part. If anything the approach of welfare economies points to the very restrictive assumptions needed in order to evaluate value as willingness to pay.

At best I'd say that I can't quite understand what your point is because you're not expressing it clearly and precisely. At worst it seems like you're just slappin' in deep sounding language about spirituality and religious values purely for the sake of the rhetorical value.

Maybe I should read the whole thing, but then the promo blurb fails to entice me. Like there's economists out there who really believe that non pecuniary phenomenon are not important. Are there?

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