Is the Choice of a Welfare Criterion a Matter of Opinion?

Noah Smith has a post on Gul and Pesendorfer’s 2005 much-discussed manifesto on the methodology of economics, especially regarding the rise of neuroeconomics. Philosophers of economics tend to compare Gul and Pesendorfer’s essay to Friedman’s 1953 article which provides an instrumentalist defense of the rationality assumption. Their article has generated a significant literature, notably a book edited by Schotter and Caplin. A recent discussion of the significance of Gul and Pesendorfer’s essay regarding the relationship between economics and psychology is provided by Don Ross in book Philosophy of Economics.

Noah Smith highlights two points. First, Gul and Psendorfer’ claim that only choice data are relevant in economics. Second, they argue against the idea that neuroeconomics and behavioral economics are relevant for welfare economics. Regarding the second point, he writes (my emphasis):

To be blunt, all welfare criteria seem fairly arbitrary and made-up to me. Data on choices do not automatically give you a welfare measure – you have to decide how to aggregate those choices. Why simply add up people’s utilities with equal weights to get welfare? Why not use the utility of the minimum-utility individual (a Rawlsian welfare function)? Or why not use a Nash welfare function? There seems no objective principle to select from the vast menu of welfare criteria already available. The selection of a welfare criterion thus seems like a matter of opinion – i.e., a normative question, or what GP call “social activism”. So why not include happiness among the possible welfare criteria? Why restrict our set of possible welfare criteria to choice-based criteria? I don’t see any reason, other than pure tradition and habit.

The notion that the choice of a welfare criterion is a matter of “opinion” seems to me somewhat odd. This is even more the case when “opinion” seems to be synonym with “normative question”. Are all normative issues matter of opinion? Is normative economics devoid of any objective or scientific basis? Or is science as a whole nothing but a matter of opinion?

This issue is even more difficult to discuss in the context of Gul and Pesendorfer’s essay because the latter are somehow heterodox in their view of welfare economics. Contrary to the received view, Gul and Pesendorfer claim that standard welfare economics is not normative economics. Rather, welfare analysis is “a tool for analyzing economic institutions and models” (p. 25 in Caplin and Schotter’s book). They actually reduce the welfare analysis to revealed preference and the Pareto criterion because “it is the only criterion that can be integrated with positive economic analysis” (p. 25). According to them, economists “use welfare analysis to identify the interest of economic agents and to ask whether the understanding of the institutional constraints on policies remains incomplete. This use of welfare analysis requires the standard definition of welfare” (p. 25, my emphasis).

In other words, what Gul and Pesendorfer are doing is to completely ground welfare economics in positive, revealed preference analysis. Welfare economics has no justification outside positive economics. I said above that this is somewhat heterodox because the choice of a welfare criterion is generally regarded as outside the domain of positive economics, or at least this was the view of the pioneers of the “new” welfare economics like Samuelson. However, the suggestion that positive economics imposes constraints on the choice of a welfare criterion is not new: in the 1930’s, the rejection of the then standard Utilitarian view of welfare was made on the basis of a “positive” claim that interpersonal comparisons of utility were outside the realm of science but instead depend on “value judgments”.

As I understand it, Noah Smith’s claim that the selection of a welfare criterion is “a matter of opinion” is that we cannot tie the latter to scientific theories and facts. We can study facts on the basis of the scientific method and reject scientific theories on the basis of evidence but normative issues cannot be settled in this way. This sounds reasonable and indeed that has been the received view in the philosophy of science for decades. The problem is that this view relies on a distinction between the positive and the normative (or between facts and values) which is too strong. Consider Gul and Psendorfer’s argument that links welfare analysis to the revealed preference approach of positive economics. What is problematic or at least debatable is not the idea that welfare analysis should be coherent with or informed by positive analysis. The problem is the tacit presupposition that revealed preference and choice data are the only acceptable scientific input in the analysis (Noah Smith’s first point). What is the status of this presupposition? Well, at the most basic level, it is purely conventional in the sense that it reflects some consensus among economists. In itself however, it is not empirically testable and seems to be nothing more than “a matter of opinion”.

Now, consider the other way around: can (and should) normative economics inform and constrain positive economics as Amartya Sen (among others) contends? Given the fact that positive economics is also grounded on conventional choices, there is absolutely no reason to reject this possibility. But wait: if everything is a matter of opinion (i.e. is conventional), what remains of science? The answer is simply that we must recognize that the scientific endeavor is constituted by values and conventional choices. The point is that these choices are not totally arbitrary though and that we are constantly arguing about them (philosophers of economics more explicitly than others). From this point of view, the choice of a welfare criterion is no more a matter of opinion than the choice of the relevant data for positive analysis. But this is or should be  a “justified” or “reasonably argued” opinion based on facts and theories, but also on ethical considerations. This is no more “social activism” (Gul and Pesendorfer’s term) than a methodological manifesto like Gul and Pesendorfer’s one.

“Philosophy of Economics” or “Philosophical Economics”

The economist and philosopher Erik Angner has an interesting post on his blog about the proper label to give to academic works at the intersection between economics and philosophy. He claims that “philosophical economics” is the appropriate label, rather than the more usual “philosophy of economics” or “economic philosophy”. In some way, Angner is right that both philosophy of economics and economic philosophy are too restrictive. Not only they suggest that most of the work is done by philosophers from a philosophical point of view. “Economic philosophy” seems to refer to a particular kind of philosophy, while “philosophy of economics” tends to indicate that all the studies belong to a subfield of the philosophy of science. Clearly, this does not correspond to the actual practice: a great part of the work located at the intersection between economics and philosophy is done by economists; this work is not committed to a particular kind of philosophy ; a substantial part of this work as nothing to do with philosophy of science.

Still, Angner’s suggestion sounds awkward to me, in part because it is also restrictive. Maybe a better way to approach the problem is to look at the work done by economists and philosophers that can be reasonably considered as being at the intersection between economics and philosophy and to try to make some kind of typology. Here is my proposal. I see four not mutually exclusive types of work belonging to this intersection. A first category can be referred to as “economic analysis of philosophical issues” (in the same way that we have the economic analysis of law). In this category, we will find all the studies that use economic tools and theories to study what are generally considered as philosophical problems. The most significant examples are all the works using game theory (bargaining game theory, evolutionary game theory) and rational choice theory to study issues like the evolution of morality and moral norms. The references are too numerous to be cited (see some articles and books by Binmore, Gauthier, Skyrms, Alexander, Young, …). Also in this domain falls the works belonging to what is called the “economics of scientific knowledge”.

A second category is what is traditionally called “economic methodology”, i.e. the study of the methods and practices of economists to produce knowledge. Economic methodology is generally divided between two subparts: “Methodology” with a capital “M” and “methodology”. The former tackles the big questions which are standard in the philosophy of science (causality, scientific progress, measurement) but with an application to economics. The latter deals with more specific issues related to the practice of economists (e.g. how economists build and use models, specific issues related to the use of econometrics or natural experiments, …). The third category corresponds to what I would call the “ontology of economics”: the inquiry into the nature of economic kinds and objects (e.g. the work of Uskali Mäki). Writings in social ontology fall also in this category since they generally tackle the same issues. Finally, the fourth category corresponds to what I would call “philosophical investigations of economic topics” or maybe “philosophical economics”. This may sound similar to economic methodology but actually they are not identical. Works belonging to this category either attempt to clarify and to refine the economists’ use of some concepts (e.g. Dan Hausman’s work on the concept of preference), to assess the normative commitments of economists (e.g. the explosion of writings – most of them critical – about libertarian paternalism and the nudge approach) or more generally to investigate the ethical dimension of economic theories and categories (e.g. many of Sen’s writings on ethics and economics).

I said above that these four categories are not mutually exclusive. Indeed, they probably overlap. The use of Venn diagram may help to visualize this:

What about the intersections? First, note that the size of the intersections in the diagram is arbitrary and does not necessarily reflect the amount or the importance of works belonging to it. There are nine intersections and so I will not comment on them all. Maybe some of them are actually empty. For instance, I am not able to cite works belonging to intersection I, except maybe for the writings of Don Ross on economic agency and the relationship economics and other social sciences (Ross uses game theory to explain the emergence of economic agency, builds on a theory of intentionality, makes claim about the proper interpretation of economics concepts such as preferences and choices, …). Other intersections are clearly relevant. For instance, Dan Hausman’s work about the preference concept mentioned above belongs both to economic methodology and what I call “philosophical investigations of economic topics” (intersection B). The economics of scientific knowledge arguably both belong to the economic analysis of philosophical issues and economic methodology (intersection A). As an illustration of intersection C, I would modestly cite my work on salience and on constitutive rules in game theory. Tony Lawson’s and some of Mäki’s writings are clearly an instance of intersection D or even E. Michael Bacharach’s and Robert Sugden’s work on team reasoning seem to me as being great examples of intersection F. And so on. Note that the construction of the diagram assumes that some intersections are logically impossible: economics analysis of philosophical issues/philosophical investigations of economic topics, and ontology of economics/economic methodology. Maybe this is wrong, but it seems to me that in both cases a third category is required to make sense of such intersections.

In the end, how should we call the whole field represented by the four circles and their nine intersections? Maybe simply “Economics and philosophy” is the more appropriate, as it points out the intersection between two fields, without any commitment regarding any priority of one field over another or the preference for any particular perspective. By the way, this is also the name of one of – if not the major academic journal in this domain.

Welcome to “Bargaining Game”, a blog about the philosophy of economics

This short post marks the launching of a new blog mainly dedicated to the philosophy of economics. The philosophy of economics is a growing sub-field of economics and through this blog I intend to present and communicate research (including my own, but not only) and ideas that belong to it. Topics and issues belonging to economic philosophy are interesting and important for their own sake, but as I intend to show, they are also relevant for economists, social scientists and more generally for people who have a broad interest in understanding (and also influencing) the way human societies work.

Though this blog is only at its beginning, I am actually not a novice in this exercise since I have been the main contributor of the blog “Rationalité Limitée” for more than 7 years. I intend to cover essentially the same topics here, to write the same kind of (generally long) posts and more generally the use the blog in the same way, i.e. as a way to formalize my ideas and to communicate advancements in the field of economic philosophy. The main (arguably significant) difference is that all the posts here will be written in English. Details on myself and on the general purpose of the blog can be found here.

I would like to finish this inaugural post with a brief note regarding the name of the blog. It reflects one of the ways through which economic philosophy proceeds, namely by using tools from economics (or other social sciences) to tackle philosophical problems. This is of course the case with game theory, in particular through the use of the so-called bargaining game to reflect on the evolution and the working of social norms and morality. Two great examples are given by the philosopher David Gauthier’s book Morals by Agreement and the economist Ken Binmore’s two volumes book Game Theory and the Social Contracts (I, II). As I said, this does not exhaust economic philosophy, which is also concerned in appraising critically the theories and the practices of economists or even to contribute to economic knowledge directly. This is in this broad sense that I intend to cover economic philosophy here.