What is wrong with welfare economics
Due to its success in academia, welfare economics has expanded and over-extended itself.
The expansion has been at the expense of tackling the central problem of society: balancing the needs of the individual (i.e., freedom, autonomy, and so on) and the needs of society.
The expansion has been justified by the assumption that questions surrounding quality of social life, economic progress, and growth, can be solved using the utilitarian calculus that the profession has laboriously perfected for this very purpose.
In Joseph Stiglitz’s “Wither Socialism”, for example, “Pareto efficiency”—i.e., the conditions under which “no one can be made better off without making someone worse off” (p. 7)— is thought to provide a sufficient guide “on the vital question of the choice of economic systems” (p. 5). See also Mises among others.
Economists may, at first, grumble as to why such a fundamental tenet is even being called into questioned. Isn’t it a waste of time
However, the questioning is necessary considering that the recent rise of socialism (almost everywhere) has been based on the notion that collectivism is a progressive force. Welfare economics erroneously assumes that these three goals — quality of social life, economic progress, and economic growth — are interchangeable, or at least strongly correlated, internally and externally. In technical terms, welfare economics erroneously associates the pursuit of individual freedom with utility maximization. In defining individualism, self-sufficiency is dislodged from self-interest so that the former becomes a cause of underdevelopment while the latter becomes a source of development. Self-sufficiency is depicted as an indicator of subnormal economic activity, a growing output gap relative to the technology frontier. Therefore, rather than contributing to welfare, self-sufficiency is a minus (Keynesian shortfall in aggregate demand) in comparative GDP calculations.
In expanding itself, welfare economics has failed to take into account the underlying sources and causes of individualism as well as the underlying sources and causes of collectivism. Individualism occurs because many of the choices that we, as individuals, face are not collective or utility maximization problems. Witness for instance, billionaire George Soros who is reported to have said that witnessing his father’s heroism in Nazi occupied Hungary made 1944 the happiest year of his life and Elon Musk’s recollections on living on just a dollar a day. Our values, tastes, and preferences are uniquely our own; indeed, individual idiosyncrasy defines and distinguishes our species. However, this source of individualism is not sufficient to cause individualism. In William Riker’s “Liberalism Against Populism”, for example, individualism is linked to self-control in the effort to achieve one’s potential and enjoy the pride of one’s worthiness. Presumably this sense of worthiness is validated by others; thus, Riker’s individualism is merely the individual’s perspective on a social process.
Causes of Individualism
Individualism is caused, it can be argued, by the failure, or inability, of collective institutions to self-correct. Put differently, structural change in collective institutions is not an autonomous processes. Collective institutions do not self-correct because they cannot hold mutually exclusive, contradictory, or incompatible, value systems. Correction must be initiated and driven from the outside, by the actions of entrepreneurial individuals. Consequently, individualism is notable precisely when it is antagonistic, incompatible, and incommensurable, to collectivism. In this manner, the indiscriminate use of welfare economics to examine individual decision-making processes is, first and foremost, bad science; and secondly, cannot do better than the individual can do for himself (i.e., the best that it can hope for is to be redundant).
A concrete example. William Riker’s social choice theory, an offshoot of welfare economics, argues that electoral voting is the method by which “the tastes, preferences, or values of individual persons are amalgamated and summarized into the choice of a collective group or society.” While social choice theory can tell us useful things about the paradox of democracy — “the coexistence of coherent individual valuations and a collectively incoherent choice by majority rule”(see Arrow, 1951) — this paradox is not the central conundrum of the political system. Unaccounted for is the choice not to participate in the voting decision as individuals who are disaffected with the scope, structure and value system of government often do. Significantly, nonparticipants increasingly outnumber participants. How has social choice theory accounted for such nonparticipation? Can the choice to participate and not participate be examined within the same model? Can nonparticipation be examined within the utilitarian calculus framework?
How, then, if at all, should economists model individual decision-making processes? Is it possible to disentangle the collective domain from the individual domain?
Causes of Collectivism
Collectivism is pursued because specialization and division of labor increases productivity and technological progress. However, this source of collectivism is not sufficient to cause collectivism. Social formations do not occur merely because they are more productive. To keep things simple, I argue that the drivers of collectivist organization can take two institutional forms. First, nation states under the firm control of a centralized governing body within a formalized human-designed institutional structure. Secondly, decentralized [ethnic] groups loosely unified by language, culture, beliefs, religion, norms, habits and traditions. The interaction between them — the rise of tribalism in politics— has been a source of angst everywhere.
Nation States
Because nation states operate within a formalized human-designed, human-managed institutional system, there is considerable confusion on whether the observed social behavior is due to autonomous, or organic (exogenous) processes or due to induced, or man-made (endogenous) processes (see Deepak Nayyar). This debate is sometimes reduced to a contest between ideas (idealism) and concrete conditions (reality); or ignored, implicitly, by the focus on education, science and technology as instruments with which civilized societies tame nature. The former depicts ideas — what Amartya Sen (Development as Freedom, p. 249) has called “using reason to identify and promote better and more acceptable societies” or John Maynard Keynes oft-quoted observation that the “ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood” — as the main driver of observed social behavior. The latter, often promoted by Marxists, argues that behavior is compelled by material conditions and that material forces and ideas interact in opposition to each other (hence, dialectical and historical materialism).
Welfare economics, through its emphasis on “evidence-based” policy emulation—that is, promoting empirical research whose findings, implications, and conclusions are widely generalizable and externally valid — has obfuscated this distinction by expropriating and misrepresenting the ideas view of the world. Take, for example, Paul Romer who has advanced the notion that technology itself is the central idea that explains the recent rapid advancement in welfare. Rather than using ideas, or reasoning, as the foundation of a rhetorical debate on what constitutes “economic growth” within the plurality of value systems (see Frank Knight’s The Ethics of Competition, 1935), ideas is used to describe improvement in methods (i.e., technology). Thus, policy emulation preempts the reasoned discussion on the identification of achievable, as opposed to ideal, “better and more acceptable societies” because that question has been settled by the utilitarian calculus. The consequence is a singularities approach to interpretative reasoning based on an artificial world (model) that is constructed with selected materials (instrumental and other variables) so that the institutional means specified (interventions) leads inexorably to desired outcomes. Richard G. Olson has used the term scientism to describe this extension of scientific tools and methods to human social relations. Rhetorical argumentation, by contrast, is concerned with generating dualities in interpretative reasoning. Its raw materials are fantasy folklore, legend, metaphorical proverbs, aphorism, and so on.
Proponents of policy emulation have been visibly frustrated and annoyed by rhetorical argumentation, especially when the content of counter-arguments has been littered with misinformation, conspiracy theories, and other pseudo-scientific nonsense. Yet, close examination of the main institutions of government reveals that rhetorical argumentation is the reasoning that dominates. Our legal and political systems are based on antagonist rhetorical confrontations between opposing parties, each presenting their partisan view in an impassioned and theatrical manner. Due to this and other reasons, the policy emulation strategy performs poorly in the real world. The strategy fails to reach, and therefore, ignores individuals who are, from time to time, disaffected with the scope and methods of the government and choose not to participate its activities, for example, by not getting vaccinated, by not voting, by operating in the so-called informal sector, by not reporting crime and demanding that we defund the police, and so on. For policy emulation to work, it must be structured to punish and banish nonparticipation. Therefore, policy emulation tends to promote unfreedom. Even though its prescriptions are promulgated in normative terms, their implementation is decidedly negative, i.e., they enumerate reductions, rather than additions, to individual freedoms.
Having said that, assuming the strong connection between technological progress, economic capacity, and military capabilities holds, the utilitarian calculus can assist the state by providing the information that guides its policies on the defense of the nation against powerful foreign aggressors. However, this concern over foreign aggression must be balanced with the real fear that a powerful state may itself become the aggressor. Secondly, the utilitarian calculus may provides the cover that allows the inevitable development of a corrupt symbiosis between military and industry. This corrupt symbiosis would frustrate the push for welfare improvements in the general population.
Ethnic groups
Ethnic groups are inward looking, their approach to welfare is primarily through the control of sexual reproduction and demographic makeup of the society. As Thomas Malthus suggested over 200 years ago, and subsequently ignored by almost every major and minor economist, the demographic age distribution and genetic constitution (i.e., race, caste, class, ethnicity, family history as the perceived, rightly or wrongly, proxies for industriousness and laziness) matters — perhaps even more than the raw population total and aggregate production output. Amartya Sen (Development as Freedom, p. 213–217) begins his exposition on population by noting the disagreement between Condorcet and Malthus. According to Sen, Condorcet thought that the progress of reason would lead people to voluntarily reduce their fertility rates while Malthus disagreed. This Condorcet-Malthus debate — which Malthus is presumed to have lost — has come to hinge on whether fertility rates “come down sharply with social and economic development.” However, this framing is an oversimplification of the issue. To appreciate Malthus, we must excuse and excise the scientism in his famous book and read him merely as an astute observer of 18th century English life. If we do so, we will find that Malthus not only concurs with Condorcet but has extended his ideas on this question. If the fertility rate reduced sharply as social and economic development occurred, then the fertility rate of the rich will fall sharply even as the fertility rate of the non-rich remained unchanged. The consequences would be a decidedly skewed demographic composition: we would leave to future generations a population with inferior character traits.
It is curious that while voters privilege socio-cultural issues over economic issues, welfare economic has not dared to broach on this subject. For the most part, the utility of extant cultural practices has been a taboo topic for the profession. For example, welfare economics has not prescribed on the relative utility of having, and raising, children in familial households; marriage equality and the relative utility of monogamous versus polygamous households; the extravagance of funerals; abortion, and so on. Because welfare economics is silent on these matters, it is difficult to see how the profession can contribute meaningfully to tackling problems arising from the rapid and uncontrolled population explosion, such as climate change.
