The Morality of Economics

by Cameron K. Murray, aka Rumplestatskin, Macro Business

Published 03 April 2013 at Macro Business.

Tyler Cowen has an article in the New York Times about the egalitarian tradition of economics. It is genuinely an effort to promote economic analysis and rationale as the tool for social analysis, since it is the only value-free objective way to look at society. My experience in the profession gives me strong reasons not to be easily convinced. In fact economics has a very distinct moral alignment, and even the basic notion of utility reflects an individual’s interpretation of contemporary morals.

Cowen builds this backdrop of value-free objectivity as a foundation for his pro-immigration arguments (by the way, some good comments are made on Mark Thoma’s site and Cowen’s own blog).

Let’s take it one point at a time.

Economic analysis is itself value-free, but in practice it encourages a cosmopolitan interest in natural equality.

What is “natural equality”? No seriously. What is it? A recent paper that has caught the attention of some serious thinkers in the profession basically admonishes the discipline for being unable to incorporate the concept of equality in core models. “Why has mainstream neoclassical economics traditionally had little to say about the causes and effects of inequality? … the blindness is inherent in the very structure of the discipline. If you think of representative agents maximizing utility in a competitive environment, inequality has nowhere to come from unless you impose it ad hoc, say in the form of “skilled” and “unskilled” workers.”

So why frame the discipline as value -free and interested in natural equality if the core theories have nothing to say at all about equality?

Turning to the next key claim.

Many economic models, of course, assume that all individuals are motivated by rational self-interest or some variant thereof; even the so-called behavioral theories tweak only the fringes of a basically common, rational understanding of people. The crucial implication is this: If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently.

Behavioural theories that economists themselves accept could be considered minor tweaks – by definition the discipline won’t accept a rewrite of their fundamental belief structure. A genuinely objective, or value-free, observer of the behavioural tradition would reject the notion of rational self-interest, especially rationality as defined by consumer theory.

Further, treating all individuals the same in theory is not what economists have set out to do, but what they are required to do to gain mathematical tractability of their core model. It is equivalent to assuming a single person is the average of all. Economic models can and do treat different people and groups differently. For example the overlapping generations model. To claim this as some kind of value-free foundation is obviously misguided. It is rather a mathematical simplification that allows for aggregation in the form of ‘representative agents’. Unfortunately this simplification also means that questions about inequality cannot be addressed by these models, as Foster and Markey-Towler so clearly point out.

And what of the role of economists in history? Cowen writes:

And the classical economists Jeremy Bentham and John Stuart Mill promoted equal legal and institutional rights for women long before such views were fashionable. Their utilitarian moral theories placed individuals on a par in the social calculus by asking about the greatest good for the greatest number.

Bentham and Mill didn’t support personal liberty in every instance — Mill was a proud imperialist when it came to India, and Bentham’s idea for a Panopticon prison was a model of state-sponsored surveillance. But they prepared the way for dissecting the prevailing defenses of hierarchy and injustice.

So basically if you look hard you can find instances where economists historically appeared to be value-free or egalitarian, but if you look even harder you realise that this is perhaps simply by chance, and you are equally likely to find what we would now regard as value-laden analysis.

But what of more contemporary economists?

Gary Becker, the Nobel laureate who is one of the founders of this approach, used the economic method to lay bare the selfish motives behind racial and ethnic discrimination.

In my view Thomas Schelling was perhaps more influential on the motives, or lack thereof, necessary to generate systematic discrimination. But of course doesn’t identify as an economist, so his ideas can be dismissed. Also, Becker’s modelling “often includes a variable of taste for discrimination in explaining behavior”. So if people have a taste for it, they derive utility, the economic answer is that discrimination is good.

At this point Cowen turns to immigration and makes the point that we should include the benefits to immigrants in the cost-benefit analysis of immigration, rather than just the current citizens.

The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country.

In fact the key point of the whole article is in the following two paragraphs:

In any case, there is an overriding moral issue. Imagine that it is your professional duty to report a cost-benefit analysis of liberalizing immigration policy. You wouldn’t dream of producing a study that counted “men only” or “whites only,” at least not without specific, clearly stated reasons for dividing the data.

So why report cost-benefit results only for United States citizens or residents, as is sometimes done in analyses of both international trade and migration? The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

I can tell you a good answer why to report costs and benefits only for the US when considering new laws, particularly with respect to trade and immigration.

Imagine you analyse the ‘with’ and ‘without’ immigration cases. Since you don’t draw the line at national borders so you need to include potential immigrants staying in their home country to understand the current situation. But you don’t know who they are. So you have to take the whole origin country, and since you don’t know which countries immigrants will all come from, you have to take all countries. If you can’t draw the line as Cowen argues, you have to conduct a global analysis of every decision.

If, as Cowen suggests, there are massive benefits from immigration at destination countries, then there may very well be massive costs to emigration from origin countries. Yet Cowen expressly ignores these in his supposedly value-free analysis, even though they may very well be higher in welfare terms because of wealth disparities – small benefits are valued more highly the lower your wealth. One could imagine a doctor migrating to the US from a developing country. Good for the doctor, by probably not good for their native country, which may very well be receiving medical services via foreign aid from the US anyway.

So much for value-free analysis then. How about we actually consider important issues like immigration from a moral standpoint instead? At least then we are debating our shared group values rather than using economic analysis to disguise one particular moral judgement.