Economics cannot define uniquely correct policy

Though I’ve written before about the limitations of welfare economics, it’s valuable to be reminded of them. Paul Kelleher brought to my attention a brief paper by Daniel Hausman and Michael McPherson (pdf) that serves that role.

Although the value of freedom lurks inarticulately within the standard economic argument for cash benefits, the argument remains within the terms set by orthodox economic theory. There is no mention of needs, of the presuppositions of individual dignity, of opportunity, of rights or of fairness. There is no concern with the moral reasons that make individuals willing to pay taxes to provide such benefits. Are people motivated by a general concern to satisfy the preferences of others, or do they instead see themselves as obligated to help others in need? Might they regard people as having rights to food or medical care which justify taxing others? What freedoms and opportunities do justice demand? These are hard questions even to ask within the framework economists employ.

In the background is the familiar trade-off between efficiency and equality. Moreover, those terms–efficiency, equity–are themselves not uniquely definable. Most of Hausman’s and McPherson’s paper is devoted to exploring what underlies efficiency, namely what “utility” or “satisfaction of preferences” means and is taken to mean by economists.  They write of the domain of neo-classical welfare economics, which offers one sense of efficiency (that which would be maximized by perfect markets) that is broadly invoked today in defense of markets and limited government.

But few are exclusively interested in economic efficiency, however defined. There are some things we value that extend beyond its purview: freedom, rights, fairness, and the like. For that reason, it is never valid to argue that action A is the correct one because it leads to greater economic efficiency than action B. It may be so that A is more efficient that B. But that does not make it “correct.” If A also restricts rights we cherish or reduces freedom we hold dear, many would reject it.

Noncontroversial examples are not hard to find. So long as I’m not a convicted felon, my freedom to cast a vote for president is an inviolable right. I can’t legally sell my vote for president to you, for example, though I might prefer the cash you’d be willing to offer in exchange for it (the hallmark of an efficiency increasing transaction). Some degree of health care is also a right. A hospital doesn’t legally turn away a penniless, uninsured patient in mortal danger no matter what choices he may have made in the past. Even though the hospital exchanges a service for a price below cost (something that would not happen in a free market), very few (though not zero, perhaps) people would find it acceptable otherwise.

What other rights and freedoms do you wish to protect even at the expense of economic efficiency? Though your list may not agree with mine, so long as our lists are not empty we have demonstrated that economic efficiency is not the only metric of value. Economics offers useful, if limited, tools. They should neither be ignored nor over-applied. At a minimum, they are insufficient to determine anything like uniquely correct policy.

PS: If you’re following the welfare economics discussion between Paul Kelleher and Julian Jamison, Paul has a follow-up post. Links to earlier posts are here.

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