Welfare economics in Econ 101


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.

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Rehabilitating the economist

Following up on my post Methodology, Ideology from a few days ago, I’ve started to dig in to Johanna Bockman’s Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism. It is a fascinating perspective on the history of economic thought and the sociology of economics. Importantly, it is explicitly concerned with separating the standard methodology of neoclassical economics from right-wing, capitalist ideology.

I have suffered from an unshakeable paranoia about being an economist ever since it looked like I was going to become one. To be an economist is, as I have written about a lot before, to be generally understood as someone concerned with finance, business, and money, a soulless being who sees human beings as automatons programmed to maximize their wealth. I began to feel—I still can’t shake the feeling—that we are forever condemned to this tragic, villainous role.

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Big picture

Neat little story related by Tim Harford:

Shortly after the Soviet Union collapsed, a Russian bureaucrat travelled to the west to seek advice on how the market system functioned. He asked the economist Paul Seabright to explain who was in charge of the supply of bread to London. He was astonished by the answer: “Nobody.”

I like that because it is astonishing that these things take care of themselves (well, not that bread is wandering in to London by itself, but you see what I mean). It’s also a fun reminder of the massive economic policy differences that are possible in the world – a reminder of the size of the question “how should I/we/the country allocate resources”. 

Economic systems in action

Here’s a neat article (found via the invaluable Arts and Letters Daily) which is, indirectly, about applied economics. How do you allocate scare places in college classes to a student body?

The article talks about the systems at a few colleges, ranging from sleeping in line to auction systems; the question at hand is “what should we do to allocate these places?”, a nice normative economic question. Wharton’s business school apparently gives students points which they spend in anonymous online auctions to bid for places in courses.

“In other words, Wharton has what may be the most sophisticated, and most confusing, course-registration system ever devised. And, arguably, the fairest. “It’s capitalism gone nuts, but it’s also absolute socialism because everyone is born with the same number of points,” says Justin Wolfers, an assistant professor of business and public policy.”

It’s certainly not “socialist” to give everyone the same number of points: capitalism and socialism are methods of allocating resources, not methods that decide who gets the resources to start with. A socialist system of allocating places would presumably get all the students on campus into a big room and have them decide, which would at least be good fun. I think Wolfers might mean it’s “capitalist but egalitarian”. Equality of opportunity is a different concept from resource allocation.

It’s interesting to see systems of resource allocation go off the deep end: the middle way of just allocating places randomly or having people line up is significantly simpler than either the auction system, or my hypothetical socialist system. How can we make the decision about what system to use? Just like all normative questions, we can’t say which system is “best” or “fairest”, only try to figure out what each system would mean and argue about the rest.

The ends versus means issue in economic systems is an important one. The thought experiment goes like this: if the people’s council knew how a capitalist system would allocate resources, they could choose that allocation. Would that make the socialist system the same as the capitalist system, or is there more invested in the resource allocation mechanism than just the end product? Even figuring out consequences is not enough to answer normative questions.

Here’s the clincher though, about the MIT lottery system:

“The lottery is supposed to be equitable and impersonal, according to Bette K. Davis, office director of the School of Humanities, Arts, and Social Sciences. But that’s not always how it works out. Ms. Davis says that often students who lose the lottery wheedle their way in by talking directly to the professor.”

Capitalist, socialist, anarchist: it’s all about who you know.