Welfare economics in Econ 101

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I’m wondering today, on an otherwise lovely Friday, how soon to introduce welfare economics into an introductory economics course.

I know. Bear with me.

I think one of the most fundamental jobs of introductory economics is to start to build the famous “invisible wall” between positive and normative economics. The textbook distinction is between questions about the way the world is—positive—and the way the world ought to be—normative.

Naturally, life is more complicated than that, as our biases seep across that porous barrier. But we can at least then start to dismantle any technocratic pedestal that economics is supposed to stand on, and to locate methodology away from ideology.

Most importantly though is the question of how you decide whether some outcome is good or not. Actually, I’ve already slipped up here, since there’s often an implicit assumption in economics that outcomes are what is either good or bad, without also thinking about whether processes are good or bad. Anyway. Good and bad are, of course, subjective. They’re subjective in a way that transcends more subtle notions of subjectivity in interpreting evidence or building a theory.

Welfare economics is in part about how we measure good and bad. We may all largely agree what will happen if we raise the minimum wage, say, but reasonable people may still disagree about whether it’s the right thing to do. What tradeoffs are acceptable to you? What would you do if you were in charge?

Let’s say you face a proposal that will enhance the wellbeing of one group but reduce the wellbeing of another group. Will you make that tradeoff? Does it matter what the identity of each group is? How big the gains and losses are? How the proposal will be implemented and enforced?

There are many ways one could interrogate these questions. A Rawlsian, Eugene Debs-esque focus on the lowest wellbeing is one point of view. A Proudhon-anarchic “property is theft” stance is another. Even if we restrict ourselves to outcome measures rather than process measures there are clearly legitimate differences of opinion to be had. How much is it OK to ding one person at the expense of another? These are the trolley problems of resource allocation.

And yet. In economics, we are all too often, and perhaps unthinkingly, locked into a point of view that takes an “adding up”, Benthamite utilitarian view of collective wellbeing: if it makes the biggest sum total of wellbeing, do it. An example of this thinking is in the basic rhetoric of the trade debate: international trade makes us all better off on average and those made worse off can just—“just”—be compensated later. Even if that compensation were realized, clearly we cannot claim to have found the “right” thing to do simply by adding up gains and losses. We have no power to override ethics, norms, culture, or morality by merely accounting.

It gets worse. There is another issue here. That sleight of hand that I just did with the phrase “better off” reveals that the elephant in the room is that wellbeing is not really an available metric. This problem is typically briefly mentioned in intro courses, but I think it’s impossible to overstate how much it infects the thinking of our students in the medium term. Why?

There’s a bias in introductory economics towards more tangible, measurable (though still in an important sense abstract) concepts like money and units of production, and away from the most fundamental methodological abstraction in contemporary economics: utility. This stems from math. Intro courses are dramatically less mathematical than courses at the next level up, and “utility” is an explicitly numerical representation of a person’s… something. Desires, purpose, wellbeing? Utility functions are a basic building block of mathematicized economic models, but we understandably shy away from them in intro courses to preserve a wide appeal.

So we fall back on things that are—allegedly—more “real”. But examples of how to evaluate outcomes read wildly differently when measured in dollars as opposed to wellbeing. We are blinded by the Benjamins and our cultural biases that take more money to mean more awesome. The supposedly “utilitarian” accounting takes on an inevitability that it doesn’t deserve. We are left with dollar-utilitarianism, and in many textbooks very little else, for alternative metrics and evaluations are mentioned in passing, if at all.

For example: supply and demand diagrams are the bread and butter of introductory economics. Students are typically encouraged to add up things called “consumer surplus” and “producer surplus”, with leftover losses in this account given the ominous name of “deadweight loss”. This is, to reiterate, one of the most basic components of these courses. And it is completely—completely—dollar-utilitarian.

This focus and emphasis matters to our students. They see our methodology as a dollar-utilitarian methodology. I don’t think that is all we have to offer them. I don’t think that honors our holier-than-thou insistence that positive and normative questions are separated by a bright line.

I will also, by the way, mention in passing one of my most strident beliefs about intro economics pedagogy—that social costs and benefits, i.e. externality theory, should be moved up and taught adjacent to supply and demand to defuse the individualist-atomic interpretation of our most basic tools. Supply and demand curves are the smallest of steps away from social cost and social benefit curves, so why must the analogy and connection wait until a distant chapter on “market failure”? It’s too late. The market “worked” for three quarters of the book! By the time markets fail, students’ brains are fried by the imminent prospect of final exams.

So where am I? I think, in sum, that welfare economics, by which I mean alternative theories of moral philosophy and social justice, and the measurability problem, is a week one topic. I think we, as instructors of introductory economics, can do the best justice to the methodology of our discipline by suffusing our courses with these issues. If that requires peeking into the can of worms that is utility theory, so be it. It’s a price worth paying. As an added bonus, these issues are, I think, a way for economics to engage more meaningfully with the fierce interest in social justice on campuses across the country. Win-win-win!

Finally, one of the very best things I read on economics pedagogy this summer is Branko Milanovic’s piece “In defense of equality (without welfare economics)“. It has informed much of what I’m currently thinking about this stuff as we inch closer to the new teaching semester. I strongly encourage you to check it out if you’re at all interested. I for one will be presenting its case for an argument for equality that doesn’t have to shy away from—or indeed even wade into!—the toughest problems in welfare economics. I think this may be a helpful way to get at some of these issues without having to digress too far into utility theory in a course that doesn’t really rely on it to be successful.

2 thoughts on “Welfare economics in Econ 101

  1. Have you seen the Sandel course which he gives undergrads at Harvard? It’s pretty basic ontological, utilitarian, consequentialist reasoning at first, but it shows the moral dilemmas that so much econ assumes away (and you allude to here). I would also make a plea to not just forget the sociology and politics, as well as the philosophy. One of the great works of political economy is Polanyi’s Great Transformation and I think it is sometimes worth stating that markets are political creations. They don’t emerge ex nihilo. And they are embedded in certain institutions. One of the great arguments of people like Daniel Bell and others is that markets rely on trust to function, but the atomised, selfish individuals who emerge through markets gradually erode the trust necessary to maintain them. Check out Dani Rodrik’s chart from my last Three to Read on winners and losers from globalisation: economics tells us (mainly through nice little parables like Ricardo’s two-good model) that everyone benefits on average from trade, but this is ceteribus paribus. At some point it might make sense for the U.S. to just pay its working classes to be on welfare as China, then Vietnam, then Laos makes things for cents on the dollar. But is this politically or sociologically viable? Is the will to redistribute money through taxation possible? Why does manufacturing get opened to trade but not the legal and medical professions?
    I know that this is kind of what you are getting at with this post, but there needs to be a kind of counter-reformation to the Gary Becker tendency to say that economics can explain all. In fact, economics is one small part of a question that is ultimately not just philosophical but political, sociological, historical, heck theological…
    Also, please write something on how dumb microfoundations are and that aggregation problems exist. Also, do you know Geoffery Hodgson’s work on institutional and evolutionary economics? If one believes that institutions play a huge role in working out the “correct” answer and that institutions are constantly evolving over time, can models (or indeed our thinking) only ever be contingent on a certain ephemeral constellations of factors that we encounter at any given time? Something I’ve been pondering… Anyway, keep up the good work.

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    • Great points, and lots of great references for me to dig into. I’m using that Rodrik post in class, by the way, so I’m grateful you brought it to my attention.

      Three thoughts. One, the concept of trade itself I think transcends markets and institutions to some degree, particularly since trade is inherently pro-social. So that to me is a microfoundation (oops!) that we can use to frame pretty much everything.

      Two, I teach Becker very sympathetically, also in week 1. I take from Becker the, I think, tautology that economic methodology can explain all (up to the point that the structure of any language carries constraints, at least). That’s the meat of it to me, essentially a technical point.

      Three, the rule of law that formalizes trust and markets. To what extent can they be untangled? Markets exist even in the absence of the rule of law, but contracts and legal recourse are fundamental to so much of the success of modern hybrid-market economies.

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