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Nov 11, 2014

Morality, Economics, and the Problem with Preferences

Economics is an excellent tool for judging policies, but economic theory alone is a highly impoverished lens through which to view morality.

Economics has brought a fair number of people to libertarianism over the years. It brought me and I know of many others who shared my experience. It seems to offer a perfect picture of how voluntary cooperation can solve problems even if we have exceptionally low expectations for what motivates people. And to the extent that economics since the time of Adam Smith has helped us to understand the opportunities that liberty provides us to enrich one another, it has provided a valuable contribution to the classical liberal project. However, the preference maximization model at the heart of modern, formal economics makes for terrible moral philosophy when standing on its own.

To understand the nature of the problem, we must go back to Jeremy Bentham. If Adam Smith is the intellectual father of economics, Bentham is in many ways its spiritual leader. Bentham is famous for his “principle of utility” that legislation, and for that matter actions of all types, ought to seek to produce “the greatest happiness of the greatest number” of citizens in a nation. If happiness was something with measurable units along a single scale, like weight or height, then the political economist could compare the effects of different legislation until arriving at the one that maximized happiness. Bentham really did believe that happiness was a single, homogenous thing, and for a time economists spoke of “utils”, the unit of happiness.

It did not take long for the absurdity of this to become apparent. John Stuart Mill, writing a generation after Bentham, described how there are many sorts of happinesses, none of which can be measured on the same scale. But once you give up on commensurability—the ability to lump one person’s happiness together and compare it to another person’s happiness—the practical viability of utilitarianism comes into serious doubt. How can we maximize happiness if we can’t even measure it in one person, never mind across multiple people?

Modern economics boasts an approach that has worked around this problem, owing a great deal to the contributions of Vilfredo Pareto. Pareto suggested that rather than seek to measure cardinal utility, or numerically quantifiable utility, economists should instead focus on ordinal utility, or the satisfaction of ranked preferences. In conjunction with the marginal revolution, ranked preferences provided a way of thinking about satisfaction across large numbers of people.

The basic model goes like this: given what I have now, I would prefer to get more apples than more oranges. In a marketplace, I might be willing to pay $4 for apples and $2 for oranges. But because each apple provides me with diminishing marginal utility, the price I’m willing to pay for the second apple is less than $4; say $3. Perhaps the third apple I’m only willing to pay $1 for, so at this point I actually value the next orange more than the next apple, even though initially I valued getting another apple more highly.

To this simple model is added the assumption that two people who voluntarily trade with one another are each made better off—because otherwise, why would they trade at all? Add in a whole host of assumptions about having perfect information and such and you get the outcome that freedom of exchange improves the general well-being of everyone.

Of course before this formal model had already been finished people were poking holes in it. For one thing, if two people voluntarily trade with one another but the production of the good being purchased, or the consumption of it, imposes costs on someone who isn’t a party to the trade, then we can’t say for sure that overall wellbeing has been increased. Problems like these however are framed in a way that suggests a theoretical solution, even if it isn’t available in the real world—if we could only know what the traders would be willing to pay the harmed party to be allowed to trade, and what price the harmed party would demand to be done the particular harm, we could figure out if it is possible for the trade to occur in an overall welfare-enhancing way. This is the basis of both Pigovian taxes and Coasian bargaining, each of which seeks to “internalize” the costs of the harm into the trade itself.

Such “market failure” matters form the battle lines along which economically literate libertarians and progressives often fight over matters of policy. But ultimately the basis of “market failure” arguments is the idea that, if we only had enough information, and could keep all costs internal to voluntarily chosen commercial relationships, we could maximize well-being in a way that might just do Bentham proud.

All this only works if you think one preference is just as good as another, and maximizing preferences is a wonderful goal for a moral philosophy. I, for one, think that this is a terrible goal for morality, especially taken in isolation.

My favorite example of this model’s utter failure to provide a sufficient moral compass comes from the play A Raisin in the Sun. In it, an African-American family seeks to move to a predominantly white, affluent suburban neighborhood. You can probably guess where this is going: the people who already lived there did not want this family as their neighbors. From an economics point of view, the family was imposing an externality on their racist neighbors. What’s more, the real historical phenomenon of “white flight” in such cases actually reduced demand for housing in the neighborhoods that were being fled. As a result, the housing prices fell in the neighborhoods that African-Americans moved into, making the existence of a formally-defined externality undeniable.

I challenge the committed Pigovian to explain to me how this is anything other than a clear-cut externality, and how they can avoid the conclusion that their model would have them impose a tax on the African-American family. Moreover, libertarians aren’t in a much better position, morally. In A Raisin in the Sun, we get to see an actual Coasian bargain in action—the white neighbors pool their resources to offer to buy out the African-American family from the house. Without spoiling the plot, I can’t say that the fact that this is a voluntary bargain inclines me to believe that the preference of the bargainers are on equal moral footing.

The philosophy of maximizing preferences does not distinguish between the family seeking the opportunity to rise above their circumstances and the racists who hate them. Nor does it distinguish between the heroin user who has let all real human connections fall by the wayside and all but killed himself, and the professional who provides for her family and also has made a career in a field that she is passionate about. The elegant simplicity that makes economics so analytically powerful in some respects makes it extremely deficient as a moral guide.

There is no way to measure satisfaction or happiness; no utils, no hedometers. And if there were, it’s unlikely that maximizing such things would be a morally defensible strategy. Economics is no substitute for serious moral philosophy, or religion, or the embedded moral wisdom in our traditions and practices. Stepping outside of the straightjacket of Pareto-style ranked preference analysis, it’s clear that most people intuitively feel many things are important beyond mere preferences. People care about non-preference consequences, as in the case of the heroin user whose life looks dire as a result of the choices they have made. They also care about duties, and about the kind of person that they have become, subjects treated in Kantian and virtue approaches to moral philosophy. This is not the space to discuss such subjects in detail, but suffice to say that economic theory alone is a highly impoverished lens through which to view morality.