Is It Time to Reboot Welfare Economics?

Before we begin, interested readers should note that this blogpost (and the paper it covers) are a welcome violation of Betteridge’s law. In this case, the paper argues (and I agree), the answer is very much yes.

The paper in question is written by Diane Coyle, Mark Fabian, Eric Beinhocker, Tim Besley and Margaret Stevens. It was published about a week ago or so, and the abstract is below:

The contributions of economists have long included both positive explanations of how economic systems work and normative recommendations for how they could and should work better. In recent decades, economics has taken a strong empirical turn as well as having a greater appreciation of the importance of the complexities of real-world human behaviour, institutions, the strengths and failures of markets, and interlinkages with other systems, including politics, technology, culture and the environment. This shift has also brought greater relevance and pragmatism to normative economics. While this shift towards evidence and pragmatism has been welcome, it does not in itself answer the core question of what exactly constitutes ‘better’, and for whom, and how to manage inevitable conflicts and trade-offs in society. These have long been the core concerns of welfare economics. Yet, in the 1980s and 1990s, debates on welfare economics seemed to have become marginalised. The articles in this Fiscal Studies symposium engage with the question of how to revive normative questions as a central issue in economic scholarship.

Coyle, D., Fabian, M., Beinhocker, E., Besley, T. & Stevens, M. (2023), Is it time to reboot welfare economics? Overview. Fiscal Studies, 00 1–13.

Positive economics is describing the world as it is, and normative economics is describing the world as it ought to be. Or as I prefer to explain it in class, positive economics is me standing in front of a normal mirror, and normative economics is me standing in front of a mirror that makes me look thinner than I am.

This paper, the one we’re talking about today, focusses on welfare economics, which concerns itself with the normative side of things. Which fits just fine with question number three in macro – this paper is about answering the question that goes “what can we do to make the world a better place?”

The first section of the paper after the introduction explains why the authors think that revisiting the ideas of welfare economics is a good idea in 2023. The tweet version of this section is that in 2023, efficiency is overrated, and welfare economics is underrated. As a person who has explored themes related to maximizing soul, this is an idea that resonates. This section is worth lingering over for two other reasons.

One, it covers Jim Buchanan’s definition of economics:

“Buchanan (1964) defined economics as the study of exchange relations. He distinguished it from the study of power relations (politics) and moral relations (sociology and anthropology).”

It is worth quoting the relevant paragraph from the original paper:

Economics is the study of the whole system of exchange relationships. Politics is the study of the whole system of coercive or potentially coercive relationships. In almost any particular social institution, there are elements of both types of behavior, and it is appropriate that both the economist and the political
scientist study such institutions. What I should stress is the potentiality of exchange in those socio-political institutions that we normally consider to embody primarily coercive or quasi-coercive elements. To the extent that man has available to him alternatives of action, he meets his associates as, in some sense, an “equal,” in other words, in a trading relationship. Only in those situations where pure rent is the sole element in return is the economic relationship wholly replaced by the political (See pages 220, 221)

To what extent do people today have “alternatives of action”? In other words, when person X meets person Y today in India, do they meet as equals? Might income have a role to play? Might language have a role to play? Might caste have a role to play? Might religion have a role to play? Might gender have a role to play? To what extent is trade then purely economic in India? Or does politics (not to mention sociology and anthropology) have a role to play too?

Second, this nice little line that hides a world of pain: “What discount rate to use is a normative question.” Ask ChatGPT to tell you more about it, with examples. But in general, if you are starting off on studying economics, think carefully about time, and what time-horizons you keep in mind when you evaluate policies. Most underrated thing to do, in my opinion.

The next section begins thus:

One area in which the normative shortcomings of traditional economics are readily apparent is the way we measure progress. Businesses are freely depleting or damaging natural resources, the financial sector enriches the top 1 per cent, the food system is contributing to obesity and promoting antibiotic resistance, pharmaceutical firms rely on people being unwell for the pursuit of profit, and new AI technologies create value for a few technology firms mostly by learning from existing creators without compensation. It is, not surprisingly, widely perceived by citizens that the economic model encourages extraction and exploitation. Yet conventional economic statistics say that society is doing better than ever. The measurement focus on unidimensional metrics of ‘the domain of socially organised production’ calculated using exchange values or market prices is under sustained challenge from a demand to go ‘Beyond GDP’.

Coyle, D., Fabian, M., Beinhocker, E., Besley, T. & Stevens, M. (2023), Is it time to reboot welfare economics? Overview. Fiscal Studies, 00 1–13.

You might say this is getting into the weeds a little bit, but please do read the whole section carefully. How we measure progress, why current methods are limited, and why willingness-to-pay methodologies are today overrated are topics that more young students of economics should be reading about.

“The desire to trade away realism for tractability in service to cost–benefit analyse is one of the most common critiques of ‘neo-liberal’ public administration.” And there is some merit in these critiques. How much merit is a question that will never see full agreement, and that is just fine. But I begin to worry when extreme solutions are favored! Too much realism with next to no tractability is as bad as too much tractability with next to no realism. The truth always lies somewhere in the middle.

When I say that I will skip the next two sections, it is not because they’re unimportant. On the contrary, they’re important enough to merit separate blog posts in their own right. These sections are behavioral economics, and inequality and power. I’ll write more about them tomorrow and day after.

But I would like to end this blogpost with a paragraph that resonates a lot with me:

As Erik Angner argues in his paper, our students need better guidance than this if they are to make practical judgements, as citizens, policymakers, employers and employees, about the economic challenges facing society. Those teaching economics to decision-makers of the future should provide a framework that encompasses both normative and positive aspects of economic decisions. If we focus only on those where we feel comfortable, we convey the message that other considerations do not matter to us.

Coyle, D., Fabian, M., Beinhocker, E., Besley, T. & Stevens, M. (2023), Is it time to reboot welfare economics? Overview. Fiscal Studies, 00 1–13.

It is something that I need to keep in mind when I teach, and I don’t think I’ve always succeeded. Onwards!