Principles of Economic Reasoning: How Are Expected Costs and Benefits Distinct from Ethical and Moral Judgments?

This question relates to principles of economic reasoning in a non-financial context:

How are economic principles applied to non-financial models, such as a democratic election?

One may reverse the assumption and ask how benefits and costs in a financial context would be evaluated without recourse to making ethical and moral judgments?

For brevity one may describe an ethical philosopher as a person who makes an effort to answer two questions:

1. What is good?
2. How should one act to cause the good?

Terse principles of economic reasoning might be stated as follows:

1. Maximum benefits are good.
2. One should act to maximize benefits and minimize costs in the social context.

Public good would be an effort to maximize benefits and minimize costs for a group of individuals. Private good would be an effort to maximize benefits and minimize costs for each individual while interacting with members of the social group. Edit: Pareto efficient outcomes occur when no one is worse off.

How then is economic reasoning distinct from more general efforts to determine what is good and how one should act to cause the good? If people demand government solutions to social problems and economists debate the costs and benefits of different types of government institutions then is this not a political, ethical, and moral debate which cannot be resolved via recourse to an independent economic reasoning skill?

The following is simply not accurate statement about economics:

Terse principles of economic reasoning might be stated as follows:

1. Maximum benefits are good.
2. One should act to maximize benefits and minimize costs in the social context.

In order to answer this question, and see why the statement is inaccurate, it is important to recognize that inquiry in economics (an other sciences as well), can be split into two categories:

Positive Economics: Positive economics deals with questions of what is. For example, what is the elasticity of demand for market for potatoes? What is the effect of rising minimum wage on employment? etc. (see Mankiw Principles of Economics pp 27.). Most economics as practiced today (in academic research) is positive economics.

Normative Economics: Normative economics deals with question what ought to be? If we estimated a differences-in-differences model that shows small increases in minimum wage do not significantly affect employment should we increase it or not? (ibid. Principles of Economics). Normative economics is mostly dealt with in public economics or in practical public policy.

Now it is plain to see that positive economics and research about positive economics simply does not concern itself with maximum benefit or whether one acts to maximize benefits and minimize costs (from moral perspective that is). When we model rational behavior of profit seeking firm in positive inquiry we are not implying that firm should act that way - we are attempting to just be descriptive and describe the behavior of firm. When we say people are trying to maximize their utility (or when behavioral economists tell us sometimes they don't) we are not claiming this is moral thing to do or they should behave in such way. This is done without any moral judgement or prejudice similar way as physicist would describe motion of a gas or planets (of course, the precise techniques will differ but in principle on fundamental level there is not much difference).

Hence already from onset we can safely say that whole corpus of positive economics is distinct from making any moral or ethical judgements so let us turn our attention to normative economics.

Normative economics deals with ethical and moral issues but not by any means in such overtly reductionist way as suggested in the 'terse principles' you stated.

Normative economics will nowadays start with recognition that although economics originated in moral philosophy* it is no longer part of it and we economists are not anymore specialist in moral philosophy (of course, a person can have multiple specializations one can be both economist and moral philosopher the same way as one can be biologist and moral philosopher, or as someone who can be both physicist and chemist at the same time). Consequently, when we make normative inquiry we won't start by trying to deduce what is moral or not from first principles.

Rather in normative economics we start by looking at past work of moral philosophers and moral frameworks that are already developed (yes sometimes those moral philosophers happened to also be economists - e.g. Adam Smith - theory of moral sentiments, Amartya Sen - Capability and Well-Being etc.). The three widely popular moral frameworks used across public econ literature are moral philosophies based on Rawls' theory of justice, classical liberalism and utilitarianism but there are of course many more different frameworks used (see Ross (2014) Philosophy of Economics for short overview).

In both Rawls theory of justice or classical liberalism the objective is neither to maximize benefits or minimize costs in either private or social context (see Rawls (1971) A Theory of Justice; Nozik (1974) Anarchy, State, and Utopia). Rather a Rawlsian economist would recommend to conduct economic policy in accordance with maxmin principle i.e. maximize welfare of the poorest member of society and nobody else (although once you raise one person someone else becomes the poorest so Rawls is not implying to take care of only one person). A classical liberal/libertarian economist would favor any policy that minimizes the use of force and coercion by state (even if it would not necessary maximize utility - classical liberals are not utilitarians). Utiliterians would indeed want to maximize benefits and minimize cost in terms of utility.

However, note in athe above cases it is not really the economist who postulates what is good or bad. Rather the economist will defer to moral philosophers. Furthermore, when doing normative economics an economist will not necessary even pick a side. Vast majority of the corpus of public economics literature usually makes comparative analysis that takes into account several different moral philosophies. For example, in optimum income taxation literature people routinely estimate optimal taxes and transfers using Rawlsian, utilitarian, classical liberal (also known as conservative - due to US politics where conservatives tend to be economically libertarian) or other welfare function (see Saez 2001 as an example of a study that does this).

Of course, ultimately in a democracy it will be people to decide which social welfare function society adopts, and people should decide based on their own values and moral principles. I think most economists nowadays humbly acknowledge this.

This being said economists are also people and most people love discussing politics and moral philosophy so many economists will frequently make statements that go way beyond even normative economics. Some will even dabble in moral philosophy more professionally. This is not unique to economics. You will find many physicists such as Einstein for example who at some point started to dabble in moral philosophy. While in case of physics it can be easy for people to make distinction in economics this can be more difficult due to the historical roots in moral philosophy that economics has but that does not make 'principles of economic reasoning' any more close to it.

* I am specifically putting emphasis on 'moral' as it can be argued no science can be divorced from metaphysics and other branches of philosophy that deal with epistemological questions (see Ross cited above). How do we even know we can know anything? Is there even such thing as a 'fact' or 'objective truth'?

• Descriptive statements in physics do not have any normative component because natural systems do not have attributes of "human will". The presence of "human will" in the actions of economic agents evokes ethical and moral judgments in the social context. I think Pareto efficiency implies ethical judgment because every moral agent in the model must simultaneously agree that a transition of economic relations from state A to state B would be a beneficial (good) outcome. Pareto efficiency may be descriptive only of a utopian world where ethical disputes (coordination problems) don't manifest. – SystemTheory Oct 8 '20 at 0:22
• @SystemTheory physics can have normative component as well. For example, we know how to split atom. Should we split atom? Many people will consider splitting atom in thermonuclear explosion immoral some will consider it immoral to split atom even for industrial uses (e.g. nuclear plants). Just saying free will does not make descriptive statements moral or not. For example, if I state A is beating B I am not making any moral judgement about the act just stating fact that is observable and testable. Yet there is free will. Saying we should/shouldn’t beat other is ethical statement. – 1muflon1 Oct 8 '20 at 0:27
• @SystemTheory stating that an outcome is Pareto efficient also does not imply outcome is good. We can set up behavioral experiments where we can just set up pay-off structure in a way that there is a Pareto-optimal outcome and then observe if people reach that equilibrium etc. saying something is Pareto optimal does not in principle requires any more ethical judgement than when measuring temperature. In fact concept of Pareto optimality is widely used in evolutionary biology and applied to behavior of various animals birds/insects etc. do ants have free will? Are we making moral judgements? – 1muflon1 Oct 8 '20 at 0:34
• Do you agree that natural systems have no attributes of human will? If so then optimization models of natural systems have only "optimization" in common with Pareto efficiency because only human agents making ethical and moral judgments can have the normative experience of being better or worse off due to an outcome. – SystemTheory Oct 8 '20 at 0:38
• @SystemTheory I think you should have look at some modern economics textbook with core about what utility is. Because you are simply not using the word utility in its economic meaning. For example, according to MWG - ‘bible’ of microeconomics: A function $u:X \rightarrow \mathbb{R}$ is a utility function representing preference relation $\succsim$ if, for all $x,y \in X$, $x \succsim y \equiv u(x) \geq u(y)$. This does not involve values directly. In plain English it just says utility is some preference ordering. Preference ordering can be measured empirically and it is reality precisely in... – 1muflon1 Oct 8 '20 at 20:00

Many modern practitioners of economics follow the model of "social engineer" as defined by Max Weber.

The normative and positive distinction as 1muflon1 puts it absolutely holds.

As such, normative decisions are made by society through some means, e.g. democracy. The positive decision on how to implement these are left to policymakers/economists.

As a starting point, society somehow makes a normative judgement on it's desired goals. For example, to minimize inequality. Or to maximize the benefit of the worst off person (Rawls). Or to maximize the sum of income in an economy with no regard to redistribution (utilitarian). That starting point is a moral decision not up to the economist.

From there, the economic thinker will try to come up with the best policy given the parameters and objectives set out by the moral decision makers (leaders). Typically the set of "best policy" options simply means those that minimize unnecessary waste.

Hence, to keep the normative vs. positive distinction as clean as possible, economists have sought to impose the lightest of moral imperatives in their work. Something that anyone would agree with at a minimum. This has lead to the concept of (Pareto) Efficiency. Basically, the guiding moral principle is simply that nothing should go to waste. If it is possible to make someone better off without making anyone worse off, that opportunity should be taken. That's often the extent of moral judgement.

As such, economists often try to achieve the most efficient outcome in the situation they are tasked with. All other moral concerns are decided by society/government.

This is complicated by the fact that policies involve trade-offs. A good economist will make the options and associated trade-offs clear. Those trade-offs can involve moral decisions which should be made by society at large. This is often the case, to the point that Presidents have complained about it.

To quote Harry Truman: "Give me a one-handed Economist. All my economists say 'on hand...', then 'but on the other..."

Those economists were doing their job perfectly, as it was up to the democratically elected leader and not up to them to make the moral decisions involved in those trade-offs.

• Ethical disputes usually follow a pattern where people disagree over what is good (they desire distinct outcomes) or they disagree over the means to cause the good (they desire different modes of cooperation to cause the good). In the domains of economic policy these disputes often revolve around the presence or absence of regulations or social institutions as the choice of means to an end. If stable prices and full employment are good then disputes arise over using monetary policy or fiscal policy as means to cause the good. So economists who disagree express attributes of ethical disputes. – SystemTheory Oct 8 '20 at 23:57
• Whether stable prices are good is determined by the mandate the government gives to the central bank. Economists wouldn’t say something is “good”. They would say X leads to Y but also to Z. People often perceive Y as good and Z as bad, but that statement is simply a positive statement of fact. (E.g stable prices can prevent crises but also reduce government revenue through seigniorage). To the extent economists argue over moral notions on how to cause good, it is based on efficiency - a very light form of normativity as discussed. – BB King Oct 9 '20 at 8:28
• Efficiency in thermodynamic models means a normative effort to get more desired work and/or heat from a scarce natural source of energy used to develop power in a natural process. There are no money units in the laws of thermodynamics so the development of money and finance are a second normative effort either to price scarce goods and services for more efficient use or to game the system by getting others into debt so one can accumulate financial assets in a social game. Pareto or economic efficiency refers also to normative efforts to maximize benefits which could be wasteful in other terms. – SystemTheory Oct 9 '20 at 15:10
• I am saying the only commonly used normative argument in economics is efficiency, which is a rather light and limited normative aspect. By definition, economic efficiency requires the elimination of waste, much like maximum heat should be extracted from a given resource. Monetary units don't make much of a difference there. Accumulation of assets is a question of distribution, for which again the normative starting point is not given by economists. Rather, economists try to minimize waste for a given objective of wealth redistribution. – BB King Oct 9 '20 at 15:24
• Perhaps human beings cannot make objective determinations of waste or efficiency because these are normative (Pareto) values. The Pareto criteria means no agent says "I am worse off due to social interacation". So if no one complains "I am worse off" when scarce fuel is spent to race cars in a circle this is Pareto efficient independent of the thermodynamic efficiency which will vary with technology available and the racing rules. If an ounce of prevention is worth a pound of cure then we should spend or sacrifice 1 unit now to save 16 in future. But GDP goes up by 16 if we fail at prevention. – SystemTheory Oct 9 '20 at 18:13

One should be particularly careful in philosophy.

I noticed your question, as explicitly stated, is "How do we apply economic principles to democratic elections?"

And the answer to that is that we do not apply them to democratic elections. Democracy is normative in economics. So formally, in my capacity as an economist, I do not have an opinion about the level of democracy in a country in and of itself.

However, we could apply it to positive (ie. measurable) consequences of elections:

• Do democratic countries have higher growth rates? Here
• What are the consequences of democratic elections on wealth distribution? Here

So, while I do not in any formal capacity have any opinion on the level of democracy, I can say that I have concerns about the consequences of elections, even if those consequences are not tied to who won, but tied to how the elections are ran.

Other unusual points: I could, for example, have observed a person that is willing to pay for a fair election (for the sake of concreteness, they are willing to pay to avoid ballot stuffing). This means it must be part of their utility function. Common points of confusion here are as follows:

• They don't have to be willing to pay me. Just willing to pay, in general.
• There doesn't have to be a working mechanism by which they could pay and see a reduction in ballot stuffing.

But because they have that preference, one could craft it as an economic issue. There could be a supply of ballot security and a demand of ballot security (see Gary Becker on crime). Or a market failure if no such method to purchase "ballot security" exists. Again, we are not treating ballot security as a moral good, but rather as a measurable objective that can be counted, enumerated, and worth some amount of utility to some users.

• Helpful essay. I link to a question about elections however my question is how cost benefit analysis (utility) could be measured without incorporating a model of economic agents making subjective ethical and moral judgments? So what if A causes B or correlates with B using some measure of such things if one is indifferent about A and B with no ethical or moral judgments? If growth is good then democracy can be a good means or bad means to that end. Is it measurement for measurement sake or for the sake of identifying the good and means to cause the good? Normative values motivate human effort. – SystemTheory Oct 9 '20 at 2:19
• You observe people's measures of values by their actions all the time. If I purchase an item A with good B during a barter process, then A is preferred to B by that person at that time. This is called "revealed preference." Typically, people purchase things with cash, so its role as a medium of exchange allows us to estimate the relative value of products. So I know a house is preferred to a thimble in most cases, etc. – RegressForward Oct 9 '20 at 18:38