We're All Utilitarians Now?

by Levi Russell

As an avid EconTalk listener, I often hear Russ Roberts, the host, talk about his skepticism of many aspects of modern economics. I'm usually at least a little sympathetic with Russ's point of view, but a recent Wall Street Journal interview featuring Roberts threw me off:

Economics fancies itself a science, and Mr. Roberts used to believe, as many of his peers do, that practitioners could draw dispassionate conclusions. But he has in recent years undergone something of a crisis of economic faith. "The problem is, you can't look at the data objectively most of the time," he says. "You have prior beliefs that are methodological or ideological about the impact of things, and that inevitably color the assumptions you make." 

A recent survey of 131 economists by Anthony Randazzo and Jonathan Haidt found that their answers to moral questions predicted their answers to empirical ones. An economist who defines "fairness" as equality of outcome might be more likely to say that austerity hurts growth, or that single-payer health care would bend the cost curve. The paper's authors quote Milton Friedman's brief for "value-free economics" and reply that such a thing "is no more likely to exist than is the frictionless world of high school physics problems."

I certainly think our interests and ideology can steer us into asking certain questions, but I'm not sure I agree that it affects the results of our analyses as much as Roberts seems to think. The deeper issue just might be the following: our cost/benefit analyses implicitly assume a utilitarian worldview. Thus, when asked about our policy views, we are more likely to narrow our own morality to fit within the confines of utilitarianism. If a cost/benefit analysis comes out in favor of Policy X, are we not expected to favor Policy X even if our analysis didn't include other moral goods such as freedom or justice? Are we, as economists, all utilitarians?

The other day I happened to run across an article by philosopher Rutger Claassen in the Journal of Institutional Economics entitled "Externalities as a Basis for Regulation: A Philosophical View" that addresses this deeper issue. Here's an excerpt from the introduction:

Thus, the main question of the paper simply is: when should an externality be reason for state intervention? Which externalities deserve internalization? The aim of the paper is to show that the utilitarian criterion for answering this question which is embedded in economic analyses is implausible. Instead, I will argue that we need to follow those philosophers who have argued in the line of John Stuart Mill, in favor of the harm principle. Externalities are structurally analogous to harms in political philosophy. Work on the harm principle, however, points to the need for a theory of basic human interests to operationalize the concept of harm/externalities. In the end, therefore we need to fill in judgments about externalities with judgments about basic human interests. If my analysis  is convincing, then one overarching point of importance for the whole tradition of market failure theories emerges. This is what the customary attitude to the issue, to juxtapose economic theories and philosophical grounds for regulation, is highly problematic. It is telling that most handbooks on regulation start with an overview of market failures, and then add to these efficiency-based rationales some philosophical reasons for regulating: usually social justice (equity) reasons and moralistic/paternalist reasons. Instead we need to integrate both frameworks, by showing how philosophical pre-suppositions are at work within economic categories of market failure.

The author begins by discussing Pigovian and Coasean perspectives on externalities and how to deal with them. Claassen does a good job explaining both perspectives and mentions that transactions costs are a problem for both market participants and for government regulators.

The bulk of the article is dedicated to Claassen's criticism of the utilitarian perspective taken by the bulk of economic policy analysis, and discussing the harm principle as a better basis for normative analysis in economics. Specifically, he discusses 1) moral externalities which arise "from preferences about other people's behavior," 2) pecuniary externalities which are losses/gains due to changes in consumer preferences, technological innovation, or competition, and 3) positional externalities which "arise where consumers lose welfare because they compare themselves to others."

He concludes the section:

These cases point to different problems with a purely utilitarian calculus: it ignores issues of individual freedom (moralistic externalities) and justice (pecuniary externalities); and the calculus itself is highly indeterminate (positional externalities). However, philosophers thus far have been stronger at criticizing economic externality analyses than at providing an alternative. Can we find a more solid ground for a normative analysis of externalities?

The rest of the article develops his theory of "basic interests" and applies the theory to the Supreme Court's June 2012 verdict on the "individual mandate" found in the Affordable Care Act (Obamacare). I leave these to the interested reader.

Here's Claassen's conclusion:

This paper has aimed to establish three conclusions. First, economic externalities analyses are probelmatic because they ignore important normative considerations about individual freedom and justice, largely due to their utilitarian grounding (section 3). Second, some philosophers have proposed to exploit the analogy with the harm principle in liberal political philosophy. however, if we follow up on this suggestion and explore representative theories of harm (such as those by Joel Feinberg or Joseph Raz), this points to the need for a theory of basic human interests that does the real normative work in diagnosing harms. Such a theory is needed to evaluate which externalities call for state regulation (section 4). Third, what these basic interests are, in the end, is a matter of political dispute. Economists who have complained about the politicization of externality analyses have simply failed to accept the inherently political nature of questions about the organization of social and economic life. [emphasis mine]

Claassen's paper raises some important issues with the current moral underpinnings of economic analysis and challenges us to think more deeply about the assumptions we make about morality in normative analysis. As policymakers rely more and more on economic analysis, it's good to see these issues being addressed.