Strawman at the centre of the discussion of economics

In an article in the Herald it is suggested that the separation of economics from moral philosophy is morally abhorrent, and as a result we should ignore what economists say about tax.

I will put the tl;dr up first:  Economic theory is “descriptive” – which in turn allows us to discuss how economic theory is actually a very useful thing for discussing these issues.  In my opinion it is important to make these trade-offs that are described transparent –  and that is all economists are trying to do.  In that context, economists don’t actually seem morally abhorrent 😀 .  Furthermore, by showing a willingness to discuss and identify trade-offs, we can find some issues and facts that seem to get slightly missed in the article 😉

Discussion of article


First let me go through some of the areas where I felt the article did not give the full story.

The article begins by discussing Mill and Smith, very good.  They were incredibly thinkers, and their writing is extremely readable.  And they are pretty much always right.

However, the article talks as if the principles of progressivity are being violated, and as if government has abandoned everyone.  This ignores the facts that:

  1. The tax system is progressive
  2. Governments share of GDP is historically high – and it is MILES higher than it was in the time that Mill and Smith were making the case for more intervention.

As a result, they are being quoted in a context that is inappropriate.

One could be forgiven, in the light of the jargon of government-appointed tax working groups and welfare working groups, for believing that the main tax policy objective is to stop tax dodging and the main redistribution issue is to end welfare bludging. That’s how dumbed-down and myopic the New Zealand discussion on tax and distribution has become.

Making the tax system more efficient, and making it face an issue that society feels strong about (people they feel are unwilling to work) is not dumbed down and myopic – it is democratic.  In essence these groups were discussing the trade-offs involved with policy, no economist can tell us what choice should actually be made.

Economists are like thermometers – great at giving you useful information, but they can’t directly tell you what to do with it.

This (a minimum living standard) is an inalienable right, not one conditional upon meeting the work-ready tests or whatever the latest set of eligibility hurdles or inquisition practices the Welfare Working Group recommends. It is a human right.

Morally, I agree 100%.  However, I don’t agree that this is something we need to hold society up to ransom for.  If society believes you HAVE to be willing or unable to work to get a minimum income, then society can have that – someone that is unwilling to work can be seen as removing themselves from society and the “social contract”.  This is a well known philosophical viewpoint that is still consistent with the UN – and we can’t just ignore it, or pretend that society may not feel this way.

How ironic that GDP, the modern economists’ yardstick of worth, doesn’t even recognise the contribution of these people. How insulting, how absolutely bereft of any values economics has now become.

GDP – like the unemployment rate – is a specific measurement we use to understand something quite specific, it is not a full measure of value.

I would also note here that value of “unpaid work” is not taxed – so it is implicitly subsidised by society.  We can argue whether the subsidy is enough, but we cannot say that it is degraded and ignored.

And those people in the streets of Tottenham don’t have to be materially poor, either. Social or financial alienation is sufficient to inspire such reactionism. An economic model that increasingly serves the interests of the few to the exclusion of the many is not sustainable. Polarisation promotes its own impoverishment.

During the riots, everyone used them of evidence of their prior viewpoint – since there has been no investigation yet, this is another case of that.  As a result, I don’t think this portion is really appropriate to focus on.

Our tax and welfare policy is in urgent need of reconstruction so it ensures equal opportunity for all to participate and fully realise their potential in society in its widest sense – whether it be the paid or the unpaid workforce.

I am ignoring the bits on consumerism, as they are irrelevant – after all, who am I to tell people what they value 😉

The statement about ensuring equality of opportunity is true – but if that is the goal, why attack economics and the tax working group.  As we will discuss below, what economics does is in fact the very thing that helps us do just that.

On economics

If economics is going to be mentioned, I should mention what economics is – and that can be found here.

Economics is the study of the allocation of scarce resources in society.  It is descriptive, it aims to explain “what is” not to say “what should be”.  Given the description of these trade-offs, policy makers can apply their judgments about what is right/moral and then come to an informed decision.

The tax working group did this, I read their pieces and they did a fine job – the attack on them in this article is completely unwarranted.  And the title attacking economics is also a bit out of place.

The reason why economists focus on the description is because they do not believe they know what is best for society – they just want society to know the trade-offs so it can make its own choices (hopefully through democracy).

When we come to “unpaid work” we need to think why it is unpaid – it is unpaid because there is no need to pay wages for supply and demand to meet.  Why is that?  Well people may value doing the work, people may not really value the job very much, or the bargaining position may be such that the wage rate is zero.  In this context there is no actual problem, at all.  If we believe there is some “social value” the argument should be that we subsidise it – not a complaint that GDP doesn’t measure it.

Conclusion

The hard thing for me is I agree with many of the personal value judgments (a minimum income for all, a value in community integration) but the refusal to admit the trade-offs, and the implication that the author can “tell society what is right” just bring this article down for me.

However, it also makes it a great example of how the “focus” of economics can get a little mixed up – economists are just “describing” trade-offs, they are not trained to prescribe to us regarding what we “should” be doing.  They inform this process by providing information – but they do not know what people value and by how much.

Economics is the study of what is – and the strawman version that at times gets beaten up in this piece is not what economics is.

  • I found myself conflicted on the article. The main issue is that he seems to be mixing up the study of economics as a field of research and enquiry with a dominant political ideology that ignores the interests of large sections of society. As you say though, citing JS Mill was a strength. As the “Right” (anywhere) gets further and further away from a realistic picture of how society/the world works I find, as what you could call a “classical liberal,” more and more of Mills work quite prescient. Mill for example was very comfortable with admitting that both public and private society could be tyrannical and could suppress free speech, knowledge transfer, and “free investigation,” so to speak, to the detriment of all. He had a special affection for the market, but not to the point he thought it was an object of worship or a political fetish. I guess Morgan is trying to play a similar sort of role in terms of the political discourse but I think he attacks the wrong people sometimes!

    • I feel that another Mill would be perfect about now – as the way he thought captures, with clarity, many of the issues that are truly missing from political discourse. 

      I fear that such clarity would be hard to get out at present given the sheer number of “accepted facts” that are actually empty fallacies in society – I find it constantly when I talk, people will have accepted ideas that are actually false because they just keep being brought back into public discourse (eg dutch disease).

      I would definitely enjoy it if Mill turned back up and went for it.

  • Philoff

    While I agree that “what is” exists, I do not agree that economics is or can be morally autonomous or neutral, because how we perceive “what is” is always affected by our values – even in hard sciences. No one is without cognitive bias, either.
    How do economists know they know they are studying “what is” rather than what they think/perceive “what is” is?
    I think economics is, like any human endeavour, affected by the limitations of human understanding, perception and knowledge, so in the end, even if economics was merely the study of “what is”, economic policy is still an inherently moral rather than an objective scientific exercise.

    • Agree with your comment 100% – there is no such thing as pure objectivity, not even in the hard sciences.

      However, I end up at a different conclusion …

      The very discipline of making our judgments transparent, and using an economic framework where these judgments have been opened up and everyone can see them adds massive value.

      Undeniably “what is” economic policy is very subjective – because we need to apply a value judgment on policy itself.  However, it is far more objective to say “what is” the measured impact of a change in tax policy on output or “what is” the way a change in taxes is disseminated through the economy.

      There has been a lot of empirical work done on this, often using only very simple value judgments (people value more stuff in an ordinal sense for example).

      This work, and the knowledge that comes from it, only exists because we ARE willing to step back from additional value judgments – rather than forcing them down our throat.

      I think the clearest way to explain it is:

      We want to strip out everything we can and make a model as broad as possible – then, when we have only the broadest model possible we have some “concepts” that rely on the smallest number of value judgments!  Then, if we want to apply these concepts we can stick in our value judgments to get figures.

      Arguing what level to place these value judgments at, is a lot more subjective than the process of broad explanation – that is the focus of economics, finding the “ordinal truths” that hold for a wide range of different value judgments and beliefs.

  • Philoff

    I think that a high degree of objectivity is possible when collecting raw data, but even then the decisions on what data to collect and how are subject to our limitations.
    Yes, having a broad model helps, but even in the act of measuring we have subjectivities. 
    That being said, I heartily approve that this should be the goal of economics, ‘finding the “ordinal truths” that hold for a wide range of different value judgments and beliefs.’
    Doesn’t that point to the neccesity for pluralism in our methodologies, the importance of interdisciplinary collaboration and in listening to heterodox economists?

    • “That being said, I heartily approve that this should be the goal of economics, ‘finding the “ordinal truths” that hold for a wide range of different value judgments and beliefs.’”

      Which is the underlying goal.

      “Doesn’t that point to the neccesity for pluralism in our methodologies, the importance of interdisciplinary collaboration and in listening to heterodox economists?”

      In so far as heterodox theories are willing to do they same then yes, and furthermore economics has a track record of including these things when they strive for objectivety (eg game theory).

      The problem is often that people define a heterodox idea in order to signal themselves as different – so they place themselves up against a strawman version of economics that doesn’t exist.  In truth, the current “mainstream” model is so incredibly broad almost all heterodox thought could comfortably sit in it – if heterodox economists didn’t want to create a false dichotomy to make themselves sound more important 😉

      There are no “conclusions” in true economics, just tools to allow us to understand and ask questions – the entire discipline strives to show trade-offs that exist under the least restrictive trade-offs possible, and to make those trade-offs transparent. It is about information, not about telling people what choices or policies to make.

      • Philoff

        So, when economists are quoted in the media advocating policies that sound a lot like Act’s policies, they are, then, not being “true” economists?

        • When economists are advocating a fixed “policy level” rather than discussing the trade-offs from policy they are not being true economists.  Yar.

          They are likely being people, which they are allowed to be – but they are not being economists.

          However, most of the time when I read economists they are just mentioning the trade-offs – many people just want to get annoyed if they don’t like thinking about the mentioned costs and benefits 😉

        • Philoff

          I am partial to an impartial cost-benefit analysis, but it is not what we get on the TV news…

        • The old TV news – the bank economists aren’t too bad, they just talk about what figures are doing.

          Do economists ever actually talk about policy on TV, the few times I’ve been on I’ve just talked about data myself.

      • There are no “conclusions” in true economics

        Now that’s just blatantly untrue, Matt! The welfare theorems are the most glaring example of policy-relevant conclusions but there are plenty of others in all areas of economics.

        Furthermore, while economists on TV may mix their normative and positive judgments there are plenty of things they say that follow directly from ‘true’ economic theorems.

        • I am going to have to disagree in part – but in part you are completely correct.
          I disagree with the idea that economic theorems can give clear, cardinal, conclusions without value judgments.  Even the welfare theorems require on underlying normative judgments – they just require so few that we are a lot more comfortable treating them as “fact”.
          In essence economic theory can be used to justify ANY policy conclusion, as a result I do not believe that theory in itself is sufficient – there is always some value judgment.
          However, I agree in so far as the economic framework makes these judgments transparent – and when we can use our “internal introspection” to make value judgments that are accepted by everyone this does lead to conclusions … many of the recommendations that economics make in an ordinal sense come from this – and this is justifiable because:
          1)  The value judgments are transparent
          2)  The value judgments are widely accepted.

        • To clarify myself:

          1)  By conclusion I mean a “policy point” – a single optimal thing to do.  A cardinal policy figure.

          2)  With very few value judgments (and ones that are widely accepted so are virtually facts) an economist can point out a conclusion in an ordinal sense – eg the amount demanded falls with price.  The ideas of the welfare theorems are like this.

        • As has been pointed out previously in this discussion, normative judgments are inherent in the methodology of economics and other sciences; it’s simply a matter of degree as to where you draw the line about what you think is ‘a fact’.

          I don’t think that ANY conclusion can be justified using a utilitarian approach and there are undoubtedly conclusions that follow from basic consumer choice theory without including further assumptions.

          It seems to me that you’re just saying most people don’t draw a line between commonly accepted and contentious value judgments when they make policy conclusions. I agree that is a problem but it doesn’t mean that the part of their argument drawn from ‘true economics’ doesn’t narrow their set of possible conclusions.

        • I see, that is a very subtle point.

          The way I read what you are saying is as follows.

          “The economic framework can be used to explain every conclusion imaginable – however, it limits the set of reasons why the conclusion occurs.  As a result, even the choice to use “true” economic theory limits the set of attainable explaination-conclusion sets.

          Given this, it is important to admit that the use of the economic argument does rule out potential “true” cases”

          This is a very good point.

          My view on it would be as follows:

          “There is a massive set of all possible worlds.  The use of the economic method restricts us to some subset.  As long as we believe our reality belongs to this subset it does not matter.  The same argument can be used for all additional value judgments.

          The conflict comes when there is an argument regarding whether the value judgment that is made selects a subset of this space that ignores the real world.

          As long as the real world does exist in the subset that is defined by economic logic, we can use economic methods to frame these judgments.

          Ultimately, it is part of the same continuum though – and one truth holds.  The more assumptions we make, the “stronger” our conclusion is if our reality still exists in this space – economic theory is just a first step on this process”.

  • DetMackey

    From my reading, when the authors talk about ‘how absolutely bereft of any values economics has now become’, they’re really railing against the particular value sets of economists in the public sphere.

    Everytime I see an economist on the news, they’re saying a particular course of action must be undertaken.  And seldom do you hear about the tradeoffs.  TVHE is about the only place where recommendations are few, and tradeoffs are plenty.

    • Thanks for the kind words.  We all appreciate it.

      Who are these TV economists, I thought economists only went on TV to say what has happened to the OCR …

    • I think “where recommendations are few, and tradeoffs are plenty” should be the new slogan for TVHE:)

  • DetMackey

    Philoff beat me to it.

  • tonyb

    Your claim about economics being ‘value free’ is stronger than it needs to be. Lots of economics was developed to engage in a discussion, usually from one side or the other (think Malthus on the Corn Laws, Walras on land ownership, Hotelling on immigration, Keynes on the great depression, Lucas on the “employment/inflation trade off”, etc). The point is not that they were value free but that they tried to create a framework that did not require you to agree with their values to agree with their conclusions.
    Welfare policy is a good example of why the attempt to be neutral is crucial for sensible policy. It is simply not possible in the current environment to discuss why people on benefit do or do not participate in work because any language you use is taken to imply some moral judgement – for the benefit beatifiers any claim that some people decide to be unemployed because of the benefit payment is to claim everyone on benefit is a bludger; for the benefit bashers, any suggestion the state should support people other than those so disabled they can not work is providing excuses for the moral failure of the poor…

    • “Your claim about economics being ‘value free’ is stronger than it needs to be”

      Agreed.  I try to pull back from values as much as possible in order to ensure that the discussion focuses on the trade-offs that exist that are the most “objective” … undeniably, there are ways to reach conclusions with relatively uncontentious value judgments.

      “The point is not that they were value free but that they tried to create a framework that did not require you to agree with their values to agree with their conclusions.”

      I would say they created a framework that made any required moral judgments obvious – and given that, a number of people found that they actually did agree with it, when it had been explained why.  That is the power of this type of framework.

      “Welfare policy is a good example of why the attempt to be neutral is crucial for sensible policy”

      I agree – we need to try to discuss what the trade-offs are and leave the value ladden concepts to one side.  When we have a framework that does that (which we do – and which the tax working group helped to illustrate) we can then ask “so what do we value”.  Once we take societies values we get a conclusion as to what “right policy” is.

      That was my main concern in the article I linked to – it berated economists for stepping back from these moral judgments, but it is only by doing so that we can clearly look at the trade-offs inherent in policy.  Once those are transparent, it is up to society to determine what it is willing to trade-off – it isn’t up to columnists or economists.

  • Philoff

    All this seems to imply there are solutions to problems that no one is willing to listen to, as if politicians, businesses and the general public are locked in a form of public discourse that myopically pushes disinterested (in the actual sense of the word) reason aside… … …
     
     
     

    • I would say the more fundamental issue is that the “problems” are never appropriately defined to start with …

      People act and talk in their own interest in the public discourse.  But that is why a clear, transparent, framework like economics is so important – rather than being morally repugnant it is morally awesome

  • Philoff

    Awesome being a technical term first used by Hegel 😉

    • I tried to find a different word – but the more I thought about it, the more appropriate “awesome” sounded.

      If we can find some philosophers maybe we can make these a recognised moral category 😉

  • Actually, the one thing I agree on with Big Daddy Gareth is that philosophy should inform tax policy, however, whereas I end up on laissez faire capitalism and libertarianz, he ends up at a position somewhere to the Left of Sue Bradford. Since he came into the Trade Me money he’s found some type of whacky religion, or something. I think he used to believe in limited government before that, although I’m questioning everything about him now. And I just wish he’d stop preaching the Nanny State as the answer to all my problems. She’s not.
     
    Eric Crampton has put up a good piece about the Herald nonsense also.
     
    (Have you heard of the rumour that interest.co.nz is going to start reporting the ipredictnz bets on Fonterra’s milk payout as real forecasts?  🙂 )
     

    • I agree the philosophy should influence the final level of tax we choose … but the framework we use needs to be more objective.

      Only by doing this can we make the trade-offs transparent, and discover what society is willing to trade-off.  That is why I went through the piece indicating areas where their focus had unduly “ignored” issues.

      “Have you heard of the rumour that interest.co.nz is going to start reporting the ipredictnz bets on Fonterra’s milk payout as real forecasts?”

      Good – it is a prediction market, it is a real forecast 😀