A New Economics — Against the Economists?

Economists get blamed for a lot by layfolk and commentators on all sides of the ideological spectrum. Based on my unscientific assessment of friends, neighbors, relatives and social media, on the right, it’s as if the rational expectations revolution never occurred in macroeconomics, let alone real business cycle theory. In this popular mind, Milton Friedman aside, economists remain big government Keynesians. They point to New York Times columnist Paul Krugman and, perhaps, Joseph Stiglitz as exemplars of the pro-government bias among economists. On the other hand, many on the left regard economists as little more than capitalist apologists, those who glob a thin veneer of intellectual respectability on the inequality and exploitation wrought by markets.

Among much of the commentariat on the left and within the communitarian right, modern microeconomics is held responsible for eroding community in modern society, the transition from Gemeinschaft to Gesellschaft, because of the instrumental reasoning the discipline promotes, and its use of subjective “preferences” in its models. On the left this is the background to much of, say, T.J. Jackson Lears’ work, on the right, the background to, say, Patrick Deneen’s efforts.

Writing broadly in the spirit of this latter vein, albeit writing from within the profession, is a recent article by Richard Spady, an economics professor at Johns Hopkins University, “Economics as an Ideology.” While critical of aspects of economics, as I mentioned, Spady writes as one firmly nested within the academic profession. His career has focused mainly on solving problems in econometrics, that is, high-powered statistical models economists (and other quantitative social scientists) use.

While written for a popular audience, Spady develops his argument carefully, he avoids painting his criticism of his own profession with too broad a brush. There is a lot to chew on in his short, albeit serious and restrained, article. I plan to chat about different topics Spady raises in the article in my next few blog posts.

I start where Spady starts, with his characterization of what he terms one of economics’ “great principles,” which he states this way: “Being able to do something you couldn’t do before is always good, or at least not bad.” He then identifies “three leading expressions of this principle,” namely, expanding trade, greater mobility for labor and capital, and technological innovation. He argues, however, that none of the three are unalloyed goods that economists claims they are. He points out that there are consequences to these changes that leave some people worse off, therefore these phenomena do not in fact align with this great principle, despite many economists invoking them as though they did.

Spady is certainly right that the three cases he points to do not in fact leave everyone better off and no one worse off. There are two items of note in his discussion, however. The first is that his argument ultimately becomes one of economics against the economists. That is, instead of showing that ideological economists are economists who are far gone in following the consistency of their first principles, he in fact shows that ideological economists are those who do not consistently implement their disciplinary models.

Secondly, and relatedly, I think there’s a more natural setting for Spady’s arguments as a criticism of liberalism, classical liberalism, specifically, although also a criticism of important parts of the social-legal domain of modern liberalism, rather than as a criticisms of economics.

Let me first discuss what Spady posits (correctly, in my understanding) as a great principle of economics, “Being able to do something you couldn’t do before is always good, or at least not bad.”

I take Spady to be referring implicitly to the concept of Pareto optimality (or Pareto efficiency). In economics, a state of the world is Pareto optimal if there is no feasible alternative state of the world in which at least one person can be made better off without making at least one other person worse off.

While the formulation strikes the uninitiated ear oddly, the intuition it reflects is basically that of a unanimity rule. To wit, a suboptimal, or inefficient, state is one in which there is at least one (feasible) alternative state in which no one would object to moving. And people “object” to the move only if they would lose something in the transition. So, if there would be unanimous agreement to move to state B from state A (in the sense that no one would object to moving to state B from state A, and at least one person actually prefers to move to state B), then state A is a suboptimal state.

On the other hand, if there is no alternative, feasible state to which the set of people could move from state A without at least one person being made worse off, then state A is optimal, or efficient.

Here’s how Pareto optimality implies Spady’s statement of the principle, “Being able to do something you couldn’t do before is always good, or at least not bad”: Let’s say we’re in a country in which some ruler in the past prohibited serving pizzas with anchovies on them. The ruler did so because the ruler did not like anchovies on pizzas, and rebelled at the very thought of anchovies being served on pizzas. The ruler then passes away. Some years later a proposal is made to the new ruler to decriminalize putting anchovies on pizza.

The new ruler takes a poll of his subjects, and learns that 95 percent of the people would not eat a pizza with anchovies on it. That does not end the discussion, however. In trying to persuade the new ruler to repeal the law, the proposer invokes a version of the principle in this way: Legalizing anchovies on pizza “Pareto dominates” their prohibition. While few people actually prefer to eat pizzas with anchovies, those few who actually do like anchovies would now be better off with decriminalization than they were before. They can now eat the type of pizzas they like. The many people who hate anchovies on pizza, well, they’re not left worse off at all. They will continue to eat anchovy-free pizzas. So legalizing anchovies makes some people better off, and leaves no one worse off. Therefore repeal the prohibition.

A couple of observations.

First, the discerning reader will already have noticed the principle is basically a version of J.S. Mill’s harm principle, that any action some people may want to choose should be permitted as long as allowing that choice does not harm other people.

Despite the fact Mill wrote this over a century ago, the intuition behind the harm principle is, I believe, the driving force behind the revolution in social expectations and behavior over the last several generations in the U.S. Sex outside of marriage? Don’t do it if you don’t want to do it. But the fact that you don’t want to do it should not constrain those who do want to do it. People who want to “do it” aren’t hurting the others who do not want to do it. So eliminating social mores against sex outside of marriage, let alone decriminalizing it, Pareto dominates sustaining those mores. So with divorce, smoking pot, pornography, buying beer on Sundays, praying in school, etc., etc., etc.

To be sure there’s pushback on specific applications of the harm principle, as, for example, whether divorce harms children, and, if so, how that harm should count against the parents’ desires to split up. But this does not implicate the principle itself, it pertains whether it applies in one or another case.

This is the basis of the Millian presumption, that more liberty, or more choice, is presumed to Pareto dominate less choice unless proven otherwise. The Millian presumption powers the liberal case for more choice from the popular level to the Supreme Court, from relaxing social mores to relaxing legal regulations.

The thing is, it’s not true in general, and economics has taught us that. The great, dismal implication of the Prisoners’ Dilemma is that, in situations in which the incentive structure holds true, more choice leaves people worse off. Or we can reverse it. In prisoners’ dilemma situations, less choice leaves people better off.

Importantly, the claim is not that prisoners’ dilemmas are ubiquitous. The claim is only that they exist. But the mere existence of prisoner dilemma situations destroys the power of the Millian presumption. Rather than “Being able to do something you couldn’t do before is always good, or at least not bad,” the principle instead is indeterminate, “Being able to do something you couldn’t do before is sometimes good and sometimes bad.”

The indeterminacy destroys the Millian presumption. There is no more reason to presume that more choice leaves people better off than there is to presume that more choice leaves people worse off. One outcome is no more natural than the other. Proposals for more choice face the same burden of proof as proposals for less choice.

Spady’s argument strikes me as more radical and wide ranging than he frames it. It is more a criticism of liberalism than it is a criticism of the abuse of modern economics.

Indeed, there is an irony is Spady framing his article as a criticism of the ideology of economics: Spady does not actually criticize ideological economists for being far gone in economistic thinking, but for not thinking economistically enough. As he points out, the three examples he references — expanding trade, greater mobility for labor and capital, and technological innovation — do not represent unalloyed Pareto improvements. Spady’s argues for a consistent application of economic first principles against inconsistent application of those principles by ideologically blinkered economists.