in Ethics

Normativity and Economics, cont.

Quick follow-up on my last post on the Is/Ought distinction. I argued there:

The very discipline of economics is loaded with normative assumptions. Consider two propositions:

  1. All goods can be exchanged.
  2. Money is a useful proxy for value.

Plenty of people reject these propositions.

In a post today, Mark Kleiman points out yet another normative assumption built into economics: the value of distribution.

Formal benefit cost analysis counts everyone’s gains and losses equally. But common sense and the principle of diminishing marginal utility agree that a dollar’s worth of gain is more valuable to someone with few dollars than it is with someone with many. Obviously, taking $1 each from 900,000 poor people to give $1 million to a hedge-fund billionaire doesn’t reflect a social gain, but a formal benefit-cost analysis will show that it does: after all, the net benefit is $100,000. Thus gains and losses should be adjusted by (at least) dividing each gain or loss by the income or wealth of the person bearing it, so that a $20 gain to a family with an income of $20,000 weighs as a heavily as a $10,000 gain to a family with an income of $1 million.

I don’t think that this framed quite right. Formal cost benefit analysis does take into account diminishing marginal utility. But what it doesn’t do is to take into account interpersonal comparisons of diminishing marginal utility. That is, while it’s certainly true that my one millionth dollar has less value to me than did my first dollar. But it doesn’t automatically follow from that that my one millionth dollar has less value to me than your one hundred thousandth dollar did to you. Knowing that would require us to accurately determine just exactly how much value you and I really got. Certainly there’s no particular reason to think that Kleiman’s exact calculation is correct.

Still while interpersonal utility comparisons cannot be rigorously calculated, there’s certainly something to Kleiman’s objection. I can be pretty confident that my one millionth dollar has less value to me than that same dollar would have to a starving Bengali, for whom a single dollar might represent half a year’s wages.

More to the point, though, questions about interpersonal utility calculations in general, and about the actual distribution of wealth rather than the maximization thereof in particular, are normative questions. They are questions about what sorts of things we ought to value. And, as Kleiman rightly points out, cost benefit analysis builds in a particular answer to that question.

Which once again leads us back to my earlier point. Policy doesn’t fall out of purely scientific economic analysis. Oughts are still necessary — and simply embedding them into your analysis doesn’t let you escape defending your normative commitments.

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