Technocratic Solutions and Moral Dilemmas

Steve Randy Waldman at Interfluidity has taken to batting at what I regard as the hornet's nest that is the boundary between positive and normative economics. I guess I'll take a few swings, too. Let me start with something that was said a few weeks ago in a gathering of economists:

"Well, if you make a normative judgement then you are not a real economist."

I know what you're thinking (if you're not an economist). You're thinking this is just some outlier economist taking an extreme stance. Or you're thinking, "Gosh darn, when I read Wealth of Nations, it seemed like Adam Smith made the occasional normative judgment. In fact, doesn't the very concept of national wealth seem to embody a normative judgement that it is a Good Thing, else why waste time inquiring into its nature and causes?" Or you're thinking, "Didn't Maynard Keynes occasionally opine normatively on certain aspects of what we now call macroeconomics?" I could go on and on, but you get the idea.

No. Not an outlier, I fear. It was said with conviction by someone whose work I greatly admire and who has a national reputation in his particular corner of economics. It reflects the mainstream of economics as we know it today.

It caused me to reflect.

There is a real beauty in math and the hard science that we have tried to make economics. It stirs me in much the same way that poetry stirs me. At the same time, it satisfies some part of me that really doesn't like to haggle much over solutions to technical problems. The part of me that prefers hard technical problems to soft, squishy human problems. Math has the added advantage that you can often say in 5 equations or a graph or two what would otherwise take you 5 pages to say in words.

I remember the first time I contemplated an Edgeworth box. I took such comfort from it. Me, a child of the merchant class. There it was, this beautiful system where everyone traded to the point where no one could be made better off without making someone worse off, resources were used in the right relative (efficient) proportions to produce the right (efficient) mix and amount of output. It made me happy that I had grown up in the core of this marvelous, poetic construct, scion of the class that reduces friction and makes it work. It seemed to solve all the economic problems that could trouble a generous and benevolent soul.

Or so I thought, young innocent that I was.

After I had lived in the world a bit, questions began to occur to me. What if one person has waaaayyyyy more than the other in our two person, two good, two input world? Under what circumstances might that be fair (or unfair)? What if the person with more of the resources produces children and grandchildren who are, say, lazy, yet over time they retain the resources that could, in the hands of the other person, produce more output? What if the budget constraint that the less advantaged person faces is wholly exogenous in the sense that no amount of industry, frugality, or investment in human capital will yield an outward or upward shift in it because of discrimination by the other person in this little economy? What if the person with more resources is able to control and set prices, thereby relegating the other to permanent resource deprivation? What if the advantaged person obtained his advantage by enslaving or killing the ancestors of the disadvantaged person?

You begin to see why there might be strong preferences to avoid normative questions and their answers, yes?

Fortunately, in grad school I discovered Francis Bator's The Simple Analytics of Welfare Maximization. It helped me to see that that I was not alone in recognizing the beauty of the technical aspects of the problem, nor was I alone in recognizing the ethical limitations of the framework. A few years later, I discovered Amartya Sen, who had this sensible, normative thing to say about Pareto efficiency:

“Being in the core [of the economy], however, is not as such a momentous achievement from the point of view of social welfare. A person who starts off ill-endowed may stay poor and deprived even after the [market] transactions, and if being in the core is all that competition offers, the propertyless person may be forgiven for not regarding this achievement as a ‘big deal.’”

The beauty and underappreciated (by non-economists) strength of economics is that we appreciate, understand, and can offer technocratic solutions to problems that have moral dimensions. Our weakness is that we don't always appreciate that economics is, in fact, a morality play whether we like it or not. My take on Waldman's critique of technocrats was not that he was faulting technocrats for being technocrats or for the technical solutions they were offering. He was making the point that a technically sound solution, no matter how brilliant, is doomed if it doesn't engage voters, taxpayers, lawmakers on moral grounds. (He has posted an follow up here, that I think is consisent with this. If I'm wrong and misrepresenting him, I apologize in advance).

Whether we like it or not, our technical solutions are competing in a morality play scripted by interest groups and mama grizzlies who in 25 words or less conflate small government and something they imagine to be "free markets" with individual liberty, a key justice principle. Most sound techocratic solutions are difficult to convey, must less motivate, in 25 words or less (and the motivation is often moral as well as technical: more for most, more for less, prices as reliable signals of marginal social cost, reducing unemployment, increasing inflation to discourage saving and stimulate spending ... you get the idea). But the larger problem, I think, is that allegedly "amoral" economists view the moral sequelae of sound economic policy, such as banksters' gains (at taxpayer expense), as "side issues" that are irrelevant to restoring the economy, while some of "we the people" view it as one of the most important issues. We end up with....the Tea Party (or, at least, with a large portion of the population who are extremely resentful and angry at being unemployed and underwater while the economy romps upward at least for those whom we bailed out).

Robert Frost once wrote that "something there is that does not love a wall." I think it is also true that something there is that does not love injustice or unfairness. That same "something" is why economics is very much a morality play. We ignore this at our peril. Like Frost's neighbor who could not see the circumstances that rendered a fence unnecessary, I wonder if we in economics aren't sometimes deaf and blind to the changing cirumstances that necessitate recognition that the "fence" we like to imagine between our "amoral" technical solutions and their moral context and sequelae is not only no longer needed, it is harmful in formulating sound policy.

He moves in darkness as it seems to me~
Not of woods only and the shade of trees.
He will not go behind his father's saying,
And he likes having thought of it so well
He says again, "Good fences make good neighbors."

It has been drilled into us from the first day that we set our feet on the path to "economist" that "real economists" do not make normative judgments. The greats who went before us (at least some of them) did not and, so, nor should we. Yet who would be better than we with our technical knowledge to understand and communicate the normative ramifications of it?

This "fence" is not making us good neighbors. Maybe it's time to let the wall between technocratic economics and moral discourse crumble. It seems already to be weakening. I think we would become a better science if we acknowledged at least some of the moral aspects of our technocratic solutions with the same scholarly attention we devote to the technical aspects. An additional unintended benefit of such a change might be that undergrads and non-economists would become more interested in the causes of economic downturns and in reading the Financial Times because we will have helped them to see that both have moral, as well as economic, significance.

Comments

[rjs]

thanx, maxine; that's certainly better than my snarky comments on krugman's blog...

[steve]

Thx, I was hoping you would pick up on Wladman's work. It still amazes me how many bright people, educated at the same institutions, can look at the same data and reach totally different conclusions. Is there any other realistic way to explain this other than people making normative judgments?

Steve

[Richard Knox]

Some ramblings triggered by your essay, which I enjoyed immensely.

Regarding the Science of Economics - I would suggest that Econ lies at the intersection of Anthropology and Psychology and is “scientific” only in the sense that Descriptive Biology is scientific – i.e. it benefits from careful observation.

You may recall in The Ugly American how Eugene Burdick describes giving advice to a developing country. “Raise the price of rice and the production of rice will go up.” They raised the price of rice and production went down. When interviewed farmers explained “I used to need to raise more rice to support my family. Now that it sells for more, I can raise less.”

Thus Economics is a way of describing the functioning of a set of institutions and cultural values. Institutions and cultural values change from time to time and differ from location to location. In Finance – somewhat related to Econ - you can calculate the probability that a stock will change in value by 10%, but you must first assume that the mind set of today's investing public is the same as the mind set from which your data sample set is drawn. And guess what – mind sets change. Same deal with macro economic models.

While one can assume that people act to maximize their interest, in my experience people act out of emotion without too much real focus on their interest cf. “What's the matter with Kansas?”

While the trajectory from Earth to Moon is knowable and can be calculated, the trajectory from depression to good times is not. If you tried to promote a computer program that would tell you the outcome of an election you would be seen as a knave. Elections and economics are not computable. Oh those pesky Animal Spirits – you just can't compute when a baby deer will spook and run away.

Of course, equations that restate the idea that the whole is equal to the sum of the parts are valid, but they are not predictive. If we have a surplus here it must be that we have a deficit there. Ho hum.

And I am not trying to be a fatalist – good judgment is still good judgment, but there are no guarantees and no mathematical solutions.

Disclaimer – my education is in one of the “physical sciences”., but I am reasonably fluent in the math used in Finance and Economics.

For an extended time I had a computer programming company. I have done my share of economics calculations. Salesmen take the results of computer calculations and use them to create an aura of authenticity to the things they want to promote – and unsophisticated people apparently think that if you take an idea and wrap it in mystery, somehow the idea becomes valid.

Regarding normative – my mother (b 1899) used to complain that economics had gotten off track. According to her, when she studied econ (she had an MS from Smith) it was taught as having 2 components – (1) how to maximize production; and (2) how to determine the fair and proper way to divide the results. She complained that part 2 had been lost somewhere. She may have been biased being the daughter of a clergyman.

She and many others have trouble seeing Pareto optimality as being the answer to question 2, for the reasons advance by Amartya Sen and also for reasons advanced by religious figures who would like to believe that we have some interest in helping one another.

As an aside – I just saw “My name is Khan” - it should be required viewing for all US citizens curious to see how a part of the world sees the white population of the US.

And yes, there is a sub-field for non-normative. Just as doctors know what constitutes poison, and leave it to judges to decide where it should be used, it is ok to have some specialized sub-field of economic study that ignores values, and attempts to understand how changing x modifies y given our current set of values and institutions.

As regards "Well, if you make a normative judgment then you are not a real economist." - apparently he identifies the whole field with what I consider to be a sub-field.

[Peter T]

Maxine

Would not ANY "solution" take for granted some normative assumptions - about the equivalence of winners and losers, the acceptability of different forms of compensation (if any), the validity of combining material wealth and psychological well-being into a single calculation (most religious thinkers would dispute this), and much more?

I think the economist in question made lots of normative judgements - he just did not know what he was doing.

[Stephen Heyer]

Peter: “I think the economist in question made lots of normative judgements - he just did not know what he was doing.”

Exactly! In fact, in trying to be non-normative (if in fact that is what they are trying to do) all that those economists do is switch to being blindly, extremely normative for the “Dark Side”. Though, as many others have pointed out before, as it is predominately that Dark Side that is paying them, perhaps they are not quite all that unconscious of what they are doing.

Incidentally, for a look at the positive economic worth of some good social values have a look at Washington’s Blog article on trust at:
http://www.washingtonsblog.com/2010/11/economy-will-not-recover-until-economic.html

This is all actually quite old stuff that my lecturers discussed many decades ago. In fact, trust in transactions was often given as the single most important reason why Western Europe was wealthy and dominated the world (this was a lot of decades ago) whereas, say, Turkey, Iraq and Iran, which had looked much more promising a thousand years ago, were neither successful nor nice places to live.

Stephen Heyer

[Bruce Wilder]

When I was a young pup, Milton Friedman and John Kenneth Galbraith, both acting as public intellectuals, argued at length over the place of normative assessments in economics. Galbraith argued the Economics should encompasss what he tried to do in his books, such as the New Industrial State, in the tradition of Veblen; that is, Galbraith argued that Economists should use judgement to critique results and the overall institutional system and outcome. Friedman and the Chicago boys (including my old teacher, Demsetz) argued that Galbraith had no methodological justification to distinguish his critique from an arbitrary expression of his personal tastes. Friedman's "positive economics" won the day.

From Pareto to the Lucas Critique, the right-wing in Economics has enjoyed its greatest triumphs fighting on the methodological flank. But, this intellectual history has neither freed economists to be value-neutral, nor done much to enhance the quality of the technical project.

Brad DeLong wrote, in the last piece you linked to: "What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course . . . was of little or no use in helping people who had read or taken them to read publications like the FT as they chronicled the downturn or understand the policy debates hosted by the FT."

That's pretty damning, coming from an economist, who has spent most of his blogging history, asking why we cannot have a better press corps.

Far from protecting the technical project, these methodological committments to a value-neutrality, as advocated by the Right, have impoverished and undermined Economics. And, it is the Right, reactionaries and authoritarians-disguised-as-libertarians, who press hardest for Pareto-optimality, the efficient-market-hypothesis, rational-expectations, and the rest, and it is all hypocrisy and rot, in the end.

Economics, as a science, must seek to understand function and mechanism. As such, it must reject doctrines of meaning and ritual symbolism, just as chemistry rejected alchemy and astronomy shed astrology.

Yet, those, who campaign hardest out-of-doors for an ideology of "free markets", and legitimate a mad macroeconomics of "business confidence" in the op-ed pages, come within the walls of the academy to parse hard and fast against values?

[reason]

Bruce,
I think both Friedman and Galbraith were BOTH very wrong. You don't have to take sides on their dispute. To put it in philosophical terms, Galbraith was a Sophist and Friedman a Platonist. We need much more empiricism than that. But it is correct to point out that empiricism is not value free, what we measure is what we value.

[Quentin]

Maxine,
I liked the post and the links but missed the reason for the link to Krugman. He does use the same words 'morality play' but seems to be using them in a very different sense from what you write about. Could you please explain the connection because I just don't see it.

[Bruce Wilder]

reason: ". . . Galbraith was a Sophist and Friedman a Platonist. We need much more empiricism . . ."

Yes, yes, and yes.

The better angel of Galbraith's nature wanted, but failed, to be an effective heir to institutionalism. It was the loss of institutionalist approaches, (including their laborious search for facts and appreciation for complexity), in the wake of Keynes' technical insight, and Samuelson's elegant Euclidean theorems, which left Economics so vulnerable to Friedman's neo-platonic approach.

Friedman succeeded, not because a majority of economists adopted his right-wing ideological viewpoint -- they didn't -- but because Economics largely accepted his* viewpoint on methodological questions, including but not limited to the jagged boundary separating normative from positive economics.

[*I'm using him as a representative agent for a whole movement; I don't mean just *his* personal viewpoint or methodological contributions.]

Far from making economics a "hard science", the tendency has been to legitimate a macroeconomic empiricism of "stylized facts" and inconclusive pseudo-experiments married to a theoretical scholasticism. I really don't see how the enthusiasm for the rational expectations revolution or DSGE models can otherwise be explained. Arrow-Debreu-McKenzie was a brilliant, capstone accomplishment, but any sensible person could see that it was a dead-end, instructive mainly for the constrasts between the model and the observable economy: the dialectic of economics had to move into antithesis. Which it did, despite heavy resistance, in some microeconomic fields; but macro after 1980 went wholehog into the Platonic Cave, never to see the light of day again, herded there by methodological critiques that celebrated "full rationality" and the like, while attacking the "loose ends" and kludges of a Keynesian macro-economics, which needed more mechanism and conflict, not the fairy princess of representative agent microfoundations.