Two Dispositions in Economic Analysis

This article makes what I consider to be the obvious argument for what economists should do. As all people should, economists should do what is good. Peculiar to economists is the tool set of economic analysis. I propose that a good economist makes use of the analytical tools of economics to achieve good things.

I want to claim that economic science is morally neutral, but economics can be used to increase output or productivity. Considering some independent moral process, then, the application of economics can in some sense increase the level of moral good in society through increasing the productivity of these processes. Setting aside my views on morality, it turns out that the productivity claim is somewhat controversial.

There are two dispositions in economics. The first is that properly applied, economics can lead to improved welfare at least in the material sense and possibly in a deeper sense. The second is that economics cannot improve efficiency, but it is an efficiency-neutral means of developing explanations for why the world appears as it does. To the layperson, the first exercise would appear obviously useful and the latter exercise would appear largely as a waste of time. I would like to argue that the layperson is correct.

We can call the first group the optimists and the second group the neutralists. I believe that Leeson and Wagner are neutralists and there is perhaps a much larger group of such individuals, the population of which may or may not be associated with the Austrian School or radical subjectivism a la George Shackle. The mainline view is optimism.

I think the difference rests along the following points:

  1. Differences in the concept of rationality.
  2. Differences in the concept of efficiency.
  3. Equivocation between various meanings of economic buzz words such including rationality, efficiency, value, and optimization.

The short story is that the neutralists argue that human action is tautologically rational and therefore irrationality does not exist. Since irrationality does not exist, the market is necessarily efficient. Neutralists argue that efficiency is ecological. This means that an individual will choose the best feasible means of achieving their desired end. Neither ignorance nor error are considered irrational, and neither is it granted that what a person wants to do might be other than what they should do. In contrast, the optimist will often define irrationality as error, and systematic error in particular. These optimists believe this error can be reduced through the proper employment of economic science.

My own two cents is that I see both sides have value. I think people are rational in the ecological sense but irrational in the sense that we are fundamentally error-prone. While I agree that the term irrational is not really appropriate to describe people’s tendency toward error, I think the empirical value in the behavioral literature is more than large enough to permit toleration of a semantic imperfection.

Really the optimists don’t engage in a discussion on morality either. That is, they don’t suggest that what people want to do might be other than what they should do, except in the morally neutral cases where they are caught speaking loosely by saying that a person should act rationally or efficiently. On closer examination that suggestion doesn’t hold. For example, I think the Nazis would have been morally better in some sense if they were less efficient at murder and their other bad activities.

I would love for the Nazis to have been more rational in the epistemic or moral sense, but this is not the sort of rationality conventionally referred to by an economist qua economist. An action is morally rational when it is justified, warranted, or at least undefeated. I’m a fan of Plantiga and William Lane Craig in this regard. Heumer has some good stuff too, but my priors render me cautious about him. Some other academic moral philosophers seem to have a confused understanding of morally rational action.

In this article I want to argue that the measure of the economist is the economy. Economists often speak of the market test. Why do we not apply it to ourselves?

Consider that a firm hires an optimist and a neutralist for a business consulting gig. The neutralist says, “Your employees are already perfectly rational and efficient, where’s my check?” The optimist, in contrast, says, “Your employees are behaving in a way that I would call irrational. They are making errors in sometimes predictable ways. You can improve your bottom line by adopting specific HR practices to counter these issues. You can also improve technical efficiency in your firm by adopting some of the software your competitors are using. Finally, surveys show that your customer service is lacking a bit causing your Yelp score to decline, which is likely impacting sales. Here are some ways to improve your perceived customer service.”

Which consultant would you rather hire? That shows the disposition I support. As Hayek said:

Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.

Ironically, the neutralist may be heard mocking the optimist as only an engineer, not an economist. Or perhaps a doctor who thinks he can heal an ailed economy. The approach of the neutralist is a key difference in attitude. Instead of trying to heal an ailed economy, the neutralist assumes the economy is already perfect, and seeks to understand the conditions and reasons that the economy appears formed in one context this way and in another context that way. Likewise at the individual level.

Why is it optimal for the Canadian economy to export maple syrup to the US? Because of the particular endowments and preferences of those countries. Why is it optimal for George to work as a web developer instead of a software developer? Perhaps simply because one job was located more close to home. Some neutralists eschew demonstrable reasoning in favor of plausible reasoning, while others admit data has a useful role in the comparative validation of theories. The former, the extreme case, ends up as something like a writer in historical fiction. The latter ends up acting like an empiricist, but curiously insists that he is not improving the economy. Rather, his empirical contributions are efficiency-neutral despite that they may lead to increased profit or utility for firms.

To come full circle, there is a great irony in the extreme case of the neutralist: He criticizes the optimist as a mere doctor or engineer while constructing in himself the role of an author of historical fiction. The irony is that engineers and doctors make great money while fiction writers live in the stereotypical poverty of an artist. In other words, this neutralist fails the market test.

Instead, I appeal to economists to consider the application of their science the primary objective and allow their theoretical interest to obtain a healthy second place, although I certainly do not advocate for the absence of theory. It’s much needed, but it becomes vain or even abusive when the theory is put before the practice. It’s like putting the cart before the horse.

A third weak point is that taking the role of economic optimist seems more enjoyable than the role of economic neutralist.

My final argument is my strongest. In fact it is perhaps the only strong one. It is again an appeal to the market test, but for real this time. That is, business economists are systematically different from academic economists. They are different in the manner suggested by the superiority of economic optimism. That is, business economists are trained to act as financial engineers for their firms. The information taught in a course for business economist certification is decidedly more quantitative and applied in nature compared to the education an economist program at a university will provide. Business economists are taught that efficiency means profitability. This is the optimistic approach to efficiency, which says that reductions in error will improve efficiency, profitability, and so on.

The market prefers the optimistic concept of rationality and efficiency. I second that. I think when an economist acts in this way they are acting efficiently. I think we need to extend the discussion into a discussion of morality on a separate occasion, because I think an economist qua economist is only able to act as a moral multiplier, not a moral generator, but the efficient economist obtains the greatest possible absolute moral contribution in the sense that he represents the greatest possible moral multiplier.

The caveat, of course, is that such an efficient economist also presents the greatest possible moral danger.

I’ll leave you with a related question: Does the market prefer an economist with an instrumentally subjective or objective concept of value? Does this suggest any change to the practice or theory of economics?

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