The economist’s economic growth bias

“Whether the social trade-offs required to create this product is worthwhile is a question that must be answered before policy is implemented – it is not a question that most economists will attempt to answer.”

Hold on, economists are responsible for concepts like pareto and kaldor-hicks efficiency, and welfare economics is a pretty big field too. Economics has plenty to offer in these areas.

GDP has its faults, but in reality increasing GDP has almost always proved to be a pretty good shorthand for increasing whatever variable you might prefer to measure: education, health, life expectancy, happiness. So the economic focus on increasing efficiency, which had become synonymous with increasing the size of the GDP pie, really isn’t that much of a distortion.

And although pro-growth policies may have trade-offs, a bigger pie tends to reduce the number of trade-offs we face in a way that no other solution does.

“Should economists …stick to positive statements that the ‘experts ‘ can work with?

I have no problem with normative statements, just as long as we remember that these should have no particular weight in our decision (much like the political opinions of actors). The problem is that it is not “experts” working with the statements, it’s usually the fairly uninformed public that decides these issues. If you know that the political process will produce biased results from objective facts, can you increase efficiency through providing biased facts?

“Hold on, economists are responsible for concepts like pareto and kaldor-hicks efficiency, and welfare economics is a pretty big field too. Economics has plenty to offer in these areas.”

It is difficult to apply these concepts if you can’t quantify the costs and benefits. The ‘social tradeoffs’ are issues that the economist cannot quantify – I don’t know how we can apply pareto optimality if we can’t measure something.

The only time we can have pareto optimally it when we know that everyones welfare will rise from a policy – these policies are very rare but definitely an area where economists can suggest policy (as for kaldor-hicks, I’m not interested unless the policy comes with the required redistribution – otherwise we are trading off between different individuals, which involves making assumptions about the cardinal ranking of peoples utility).

“So the economic focus on increasing efficiency, which had become
synonymous with increasing the size of the GDP pie, really isn’t that much of a distortion”

I never said it was a distortion – the method is great. For things economists feel they can objectively measure this is perfect – however in the case they can’t quantify something the method is useless (beyond framing a problem). Now I believe this is what economists actually do, I’m defending us economists not bagging us.

I feel that people think we are assuming away their social trade-offs, when actually we are leaving these details up to the policy analysts and other social sciences to determine.

“And although pro-growth policies may have trade-offs, a bigger pie tends to reduce the number of trade-offs we face in a way that no other solution does’

They don’t reduce the number of trade-offs – they offer a benefit which changes the payoff associated in each trade-off. This benefit then needs to be compared with a cost that economists aren’t trained to measure.

“I have no problem with normative statements, just as long as we remember that these should have no particular weight in our decision’

Fundametally we are actually agreeing here – we only want to frame the problem, not fill in the juicy assumption gaps where we need to make specific normative statements by defining the weight of different value judgments.

The issue is though, when we make a normative statement we are applying a weight to the value judgment, which does have an impact on the optimal decision. By changing the weight on our value judgments we can create almost any result we want.

“The problem is that it is not “experts” working with the statements, it’s usually the fairly uninformed public that decides these issues”

How can we say that the public has a worse idea at applying value judgments than we do. How do we determine value judgments? These are public choice problems that we are not trained to cover – we have a great method but I think applying it requires a wider range of skills.

Even if you do believe that we are more effective at policy than the general public – this does not exclude the situation when there is a better way to form policy. The economist combined with social scientists that are more comfortable with normative statements could form some beautiful policy.

bah, you’re such a normative nihilist. 🙂 You seem far to willing to pass the buck for normative judgments, and have too much faith in other professions to solve them. There are no solutions. Market prices, which economists do know a lot about, are often one of the most valid methods of hazarding a guess.

You’re right to point out that seemingly objective instruments often include normative judgements. But taking your position to the extreme seems to suggest there is no point in economics at all. Why study allocative decisions if we can never quantify anything? Your view of economics seems to be one where every choice is 3 apples vs 2 oranges.

“How can we say that the public has a worse idea at applying value judgments than we do?”

We don’t have to, I was just saying that the public can have worse ideas about objective values e.g. that they over or underestimate the costs/benefits or risks from certain policies. And pointing out their wrongness objectively doesn’t cause them to stop being wrong.

Oh, and as a sidenote, how can you be against kaldor-hicks? I think its a good principle (given that pareto improvements are close to non-existent). Without it, I don’t see how you can support any government intervention. Bye bye externality taxes 🙂

Hi Moz. To clarify I meant that the public can be wrong about specific facts, and that can inform their decisions. An example (which i think is true but it doesn’t really matter) is that the American public strongly supports reducing government spending on foreign aid. However the American public also thinks that the US government spends around 5 times as much on foreign aid as it really does. In this situation, what validity does the public opinion have?

This is a good article on similar issues. (There is also some great comments to the post about the correlation between political ignorance and voting in NZ).

Just in case my earlier comments seem too critical, I’ll point out that I mostly agree that Matt’s views represent best practice in a theoretical ideal world. I just don’t think that they’re of much use in reality. In reality, I would say that most economics writings for public consumption feature plenty of normative judgements. Matt’s columns certainly do (petrol tax, fat tax). All economist’s have normative opinions, and surely these tend to affect their research, career choices etc.

In reality it is also very hard to identify normative from objective arguments. Most of us would claim our opinions are shaped by facts not prejudice.

I’d phrase that as “the primary advantage with it is that it does not take distributive consequences into account”. Surely all non-pareto policy interventions (ie all policy interventions) are based on a philosophical appeal to the idea that it is OK to do things that increase aggregate welfare, even if some people are worse off? What’s the alternative (apart from anarcho-capitalism)?

Technical objections duly noted, Wiki says Kaldor-Hicks overcomes the Scitovsky problem but is still non-transitive. I’d also assumed that you can allow individual utility functions to include a value for distributive consequences, at which point Kaldor-Hicks becomes a pretty solid criteria all by itself. Maybe that assumption is against the rules…

“This of course implies that using it involves making a significant value judgment – which economists have not been aptly trained to make.”

I really don’t understand this: who’s trained to make value judgments? How do you make ‘better’ value judgments? Isn’t the whole point of them that there’s no objective criterion for them being better or worse, there are just different judgments based on different value sets? I don’t see why economists can’t make an effective judgment, given a specific value set. I don’t see why our training in optimisation routines doesn’t equip us to do this. If you’re suggesting that we don’t know what the value set is, then I’d say that the policy makers you’re talking about are just bolder about picking their own value set and imposing it upon people than we are.

“Other people are better placed to make value judgments than economists are”

I suppose what I’m asking is this: if there are no objective criteria for rating a value judgment, how is it possible to meaningfully say that one person makes them better than another. By that, I don’t mean that we don’t know the objective criteria for rating them, I mean that there is, by definition, no appropriate concept for rating such judgments. If there is no way to be ‘better’ at making them then why would experience or training make one iota of difference?

“however, a value judgment is necessary in this case to define who should be determining policy.”

As you say, this is awfully circular: we can’t know who’s best at making them without making one. Yet, if we’re not best, can we accurately make a value judgment about who is best? It makes my head hurt; I’m going to go and do some equations on the whiteboard and then maybe the world will make sense again 🙂

I’m all for economic imperialism. Bring it on!

“The confusion in the general public about when economists are doing economics or making normative statements tends to make them dis-trust everything we say.”

I think that this is a plausible explanation. The WSJ op-ed page has a lot to answer for. But I think there is a lot of shooting the messenger that goes on. A lot of economic criticism comes from people who simply don’t like the results that consensus economics spits out. Example: the idea that fiscal and monetary policies don’t have any impact on long-run unemployment is about as close to an objective truth as economics gets, but it’s a concept that a lot of lefty types clearly hate. If the economic consensus was still advocating Keynesian type policies, would these same people criticize economics to the same extent?

And a lot of criticism seems directed purely at the methodology: people are rational, respond to incentives, systems move to equilibrium. I don’t see greater objectivity helping here. No matter how objective you try to be, some people are still going to claim that the methodology is intrinsically bound with value judgments.

CPW, I was with you until “people are rational”. Then I went “see, the problem is that economists assume so many proven falsehoods are true and run from there”. Could you explain why you think people are rational and what evidence you have for that? The evidence I’m aware of says that even in the economic domain people are wonderfully irrational.

The link between fiscal policy and unemployment is much loved by many in politics, left and right. Politicians in general are keen to claim credit for lowering unemployment (or anything else that’s popular and usually have economic rationalisations for why it’s their fault. Except John Key, of course, who would rather claim credit for raising unemployment, lowering wages and increasing disadvantage. Why, I don’t know, but hopefully the Nats will keep him on.

“The evidence I’m aware of says that even in the economic domain people are wonderfully irrational.”

CPW is right here in saying that rationality is true by default as it is a tautology. People make decisions that maximise their utiltiy – therefore people maximise their utility which is rational. Such a claim is empirically unfalsifiable – but also empirically worthless.

The point of it is too frame a problem – given the problem we can then apply value judgments and see if this holds empirically. However, if the data rejects the model is is rejecting the value judgments not the underlying premise that people are rational.