Tuesday, May 6, 2014

Policy proposals and utilitarianism

I was recently having a debate with some of my economist friends about  French economist Thomas Piketty's book Capitalism in the 21st Century. Over the course of the debate I started thinking about how we judge policy proposals. For example, when it comes to the minimum wage economists who are for a higher minimum wage often argue that the wage gains experienced by those who keep their jobs more than offset the impact that a higher minimum wage has on those who lose their jobs. Often this is demonstrated by pointing to evidence such as that provided by the CBO in their minimum wage report.

In this report, the CBO claims that approximately 500K people would lose their job if a $10.10 minimum wage was implemented and 16.5MM people would have higher weekly earnings. Minimum wage proponents conclude that the benefit of 16.5MM people making more money outweighs the cost of the 500K people who lose their job. But this calculus is subjective. There is no direct way to compare the benefits that accrue to the people who earn more money to the costs that accrue to the people who lose their jobs.

Utilitarianism is a branch of normative ethics that argues that a good policy is one that maximizes utility or total benefit. But calculating total benefit implies that the utility of individuals can be summed together. This is nonsense. Utility, as economists use it, is ordinal and does not have magnitude. It cannot be added together across individuals. People prefer things, but only in relation to the options that they have. Preferences are relative and do not have numeric values that can be easily calculated, added, or subtracted.

As I was thinking about this I realized that public policy compels us to become utilitarians. In order to make "good" policy we are forced to engage in the ridiculousness that is adding up utility across individuals. That is why implementing any policy that alters the free decisions that others have made is dangerous and should be done with care. There is no way to ensure that the correct policy is done because there is no way to correctly calculate the costs and benefits. It is better to leave people be whenever possible rather than engage in meaningless utility calculations. The outcomes that result from voluntary exchange do not require any action from a third party who intervenes based on some utility (mis)calculation.

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