(cache)A distinction between “utility” in philosophy and “utility” in economics

Why macroeconomics is not utilitarian

A distinction between “utility” in philosophy and “utility” in economics

Matt Berkley

Draft, 16 June 2003

Introduction

There is in economics, and sometimes in moral philosophy, a confusion which is generally unacknowledged. A cross-sectional concept of “utility” is not a utilitarian concept.

Economists often write of increasing utility - better consequences for people.    The problem is that their measures of welfare do not measure consequences for people, but are based on the difference between welfare measures in living populations, whose members change.    Classical - Millian or Benthamite -   utilitarianism is concerned with the greatest good to the greatest number.   Economic theorists write of maximising utility.     They often use the word in a different sense from that of Mill or Bentham.

This article does not tackle other assumptions in economics which are also open to question:

a) the presumed linear relationship between [income] and [gains in purchasing power], on which see my “Inflation and poverty”;

b) the presumed linear relationship between [gains in purchasing power] and [increases in economic welfare], on which see “The Wealth of Persons”;

c) the presumed linear relationship between [increases in economic welfare] and [increases in well-being], on which ditto.

This article is purely concerned with the conceptual structure of thinking about welfare increases.    With that in mind, let us talk about income.

When a macroeconomist talks about raising average incomes, there is an ambiguity.    Do they mean raising the population average, which will happen if poor people die earlier, or increasing people’s average income?      The second of these is not knowable from the first.    There is an area of moral philosophy which is concerned with benefits to future generations.    But that is not in any way relevant to the primary aim of social science, which is to make reliable statements about trends - in the case of economists’ statements about aggregate gains, about trends for real people during a period.     I am not here talking about what is right or wrong.   I am talking about the conceptual structure of a system of thought which claims to measure aggregate gains to real people during a period.    The conceptual structure is not that of utilitarianism.

Average “utilitarianism” is not utilitarian

Economics is substantially[1] based, not on Benthamite utilitarianism, but on what has been called, misleadingly, “average utilitarianism”. There are many views which have been called “average utilitarianism”[2]; I am referring to the view that the best outcome results in the highest level of average welfare in a later population [3].

The term “average utilitarianism” as applied to this view is misleading, because it uses a different definition of utility. Classical utilitarianism does not compare

states of affairs for the people who happen to be alive at different times,

as macroeconomics does, but

aggregates of consequences for all people affected.

Utilitarianism looks at all consequences even at the level of the individual. A statement that

“decision X in 1990 caused me to be happier in 2000”

is not logically equivalent to the statement

“decision X in 1990 caused me to be happier during the period 1990-2000”.

The difference between these two statements, and the implications of this difference, become clearer once we think about more than one person.

Utilitarianism is not about states of affairs, but about consequences over time

Before going on to discuss this, I would like to comment on the phrase “states of affairs”. This phrase has been used by both the philosopher Bernard Williams and the economist Amartya Sen in discussing utilitarianism. I submit that the phrase is not clear enough for the purpose, and gives a misleading impression. It could be defined as equivalent to talking about histories or prospects for individuals. Either would make it fit utilitarianism, but the ordinary meaning of the phrase is not equivalent to those. I think it is clearer to stick to the word “consequences”. Otherwise, we may end up thinking about measuring static welfare levels of the living, which is not what utilitarianism is about.

A related problem concerns the use of the word “outcome”. The word, used in relation to consequences, or utility, is ambiguous: it can mean

a) overall consequences during a period or during a lifetime,
or

b) the state of affairs at the end of a period.

In discussing “averagism” below, I mean “future averagism”, in the sense of “aiming for higher average welfare levels in a future population”. This sense might be made clearer by my using a phrase such as “leapfrog averagism”. Such a phrase would help to clarify that what I am referring to - average “utilitarianism” - is a view which leaves out some intermediate consequences in its overall assessment of goodness and badness.

Whatever words are used, they must be clear as to which of (a) or (b) above they refer to - the outcome over time, or the outcome by the end.

Here is why, in relation to the most influential practical use of consequentialist philosophy in the world today.

Macroeconomics compares levels of welfare in two sets of people - not the consequences for one set

Any moral or social-scientific outlook which is concerned with the relative merits of later states of affairs among living people (for example, average welfare at a later date) involves comparing welfare at two times, using two sets of people -

a) one set of people at the beginning of a period, and

b) one set of people at the end.

This is the logico-mathematical structure used by the “averagist” and the macroeconomist. In economics, it forms the entire basis of calculation of “utility”. The fact that economists say their discipline has roots in Benthamism is irrelevant, because it isn’t true. An appropriate analogy would be that it has been grafted on.

The two sets of people may overlap or contain exactly the same members, but their memberships are irrelevant to the averagist. In other words, it makes no difference to the averagist - a “future-state-of-affairs-ist”, such as someone solely concerned with the state of the economy at a time in the future - whether the people in the two sets are

a) the same people, or

b) mostly the same people, or

c) different people entirely.

If there is more income per capita in the second set of people (the later population) then that is what is important to the person studying the economy. Economics uses cross-sectional studies: studies involving sets of people alive at particular times. Economists study the economy as a theoretical entity, not the progress of individual people or aggregates of the progress of individuals. They infer income gains from opinions about the insignificance of demographic change as mathematical determinants of averages. Whether these opinions in any particular case bear any relation to the truth is unknown. In practice, the speculation is justified in countries where the economist knows that demography was stable, and less justified where they have less knowledge, or knowledge of demographic change, or both.

Utilitarianism looks at one set of people. In contrast to the macroeconomic approach, utilitarianism with a direct line of descent from Bentham is a doctrine about consequences for one set of people - the set of all people affected by the events.

“Utility” in economics distinguished from “utility” in philosophy

Writings about “utility” in economics do not usually refer to the differences between the logical structures of economics and classical utilitarianism:

1) Economics uses cross-sectional studies, as described above.

2) In contrast to Benthamite utilitarianism, economics measures the duration of a benefit differently for the majority and the richer minority. If the rich live longer, the average rises. If the majority on below-mean incomes live longer, it falls. In all countries, more people have below-mean incomes than above-mean incomes.

3) Economics uses averages rather than totals as the basic method of aggregation.

4) In economics, the result (aggregate “utility” as state of affairs in a later population) is mathematically determined by changes in demographic composition, as well as individual welfare gains. Classical utilitarianism, on the other hand, looks at everyone affected, so demographic change isn’t an issue [4].

Moral philosophers sometimes say that “average utilitarianism” gives the same results as classical utilitarianism if the population size does not change. This is a mistake. A further condition relates to who ends up in the later population.

This is partly about birth rates, but also about the ratio of well-off to badly-off people who survive the period. If the well-off survive disproportionately, the average will rise, other things being equal. If the less-well-off survive disproportionately, the average will fall, other things being equal. So an additional condition is necessary for classical utilitarianism and averagism to give the same results: the condition is that there is insignificant demographic change.[5]

How people do better and make the average fall [6]

If people on below-mean income [7] live longer, then other things being equal, per capita income will be lower in the later population. No-one’s income has fallen, but “per capita income” as an abstract statistic has fallen. The statistic is essentially abstract, because the concept of a population is abstract. The population of a geographical area is not a real group of people over time - just as there is no constant set of (other) chimpanzees in the world. In Benthamite terms, though, what happens if someone in the majority lives longer? Assuming for the moment a perfect correlation between income and happiness - there will be higher utility - a greater good. The macroeconomist will say that there is lower utility, because the economist’s definition of utility is fundamentally different.

Logically, an inference that

“people’s incomes went down on average by x%”

based purely on

comparing averages for the two sets of people (earlier and later populations)

is invalid, if there is no information about demographic change.

In other words, if you know that

people later were better off on average than people before,

this doesn’t of itself tell you that

“people did better on average”.

This is a more subtle variant of the objection against averagism that if the best-off kill the others, average welfare in the population afterwards will be higher.

The flaw in economic thinking and its consequences

At present, if a government neglects the poor and extends the life length of the rich, and this makes per capita income 1% higher in the later population, economists are allowed by their training to state that “people’s annual incomes rose by 1%” - even if no-one’s annual income changed.

This is invalid, but economists are allowed by their training to make these kinds of statements for all geographical areas and all subsections of economies - even those segments of the economy containing the most malnourished people in the poorest country, and in situations where economists know least about birth rates and survival rates.

The fundamentals of welfare-economic theory about real people’s progress are based on the implausible assumption of no significant demographic change in any population which economists have studied or will study in the future.

(Average rise or fall in income among real people) is a function of (per capita income change) and (the impact of demographic change).

Where the impact of demographic change is unknown, the average percentage gain or loss is unknown.

Here is the muddled state of economic thinking.

1) At present, if the poor live longer, and as a result average income is lower in the later population even though no-one’s income has fallen, the current, incomplete, form of the equation - and the theory and philosophy of economics, both of which fail to make the relevant distinction - allow an economist to say that “people’s incomes fell”.

2) Where the economist does not know whether the changes in the average were caused by demographic factors or income rises/falls, they are still allowed by their training to make a categorical statement as if they knew the average rise or fall.

This logical problem is the result of a confusion between classical utilitarianism and leapfrog averagism. Utilitarianism comes to conclusions about benefits to real people, but averagism comes to conclusions about statistics. The difference between average welfare among those at the start and those at the end does not even fundamentally tell us whether those alive at a the end did better or worse, let alone how much better or worse.

This is of direct relevance to the interpretation of real-life macroeconomic studies claiming to measure income gains. The logical problems are more acute in relation to those studies claiming benefits or losses from particular policies in different countries. The logical relationships in these studies are more complex, because the studies involve comparisons of different countries and time periods, but the principle is the same. Average gain is mathematically a function of both income gains and demographic change. In real countries, there are great differences in how long poor people live. In some real countries, effective health care services have had a great impact on longevity for poor people. In others, disease and malnutrition have not been tackled so well. And yet in the present logical structure of economics, other things being equal, the survival of a poor person until the next time of measurement is necessarily counted as a “disutility”.

The implication is that some conclusions of economists, widely accepted, about what is good for poor people are unfounded.

How far the speculative nature of the assumptions about demography has made a practical difference in real-life studies is not known.[8] For the purposes of assessing the validity of some studies it is in practice impossible to find out in retrospect.

What is obvious is that there is a serious theoretical problem. The most striking examples are clear. If average income went up after the plague because of deaths, then the same may happen due to AIDS. An assertion that “the plague benefited people on average” would be a different statement. On the question of children, it is obvious that the one-child policy in China will have made rises in per capita income larger than average income gains to real people. Empirical research has confirmed the impact of this demographic change on economic growth statistics, as it has in the case of the “East Asian economic miracle” where a significant part of the rise in per capita income was due to the proportion of children going down.

In addition, there are some other facts about economic history which cannot be explained by the conventional “zero effect of demographic change on average income” hypothesis, but can be explained by a hypothesis that there are significant effects of demographic change: countries where people - mostly poor people - have made dramatic gains in life length but average income is low.

It is plausible that differences in life length between countries contribute significantly to economic statistics.

What is certain is that the present muddled logic of economics is open to severe abuse by sophists.   What is a sophist?   Someone who makes a fake point.    A person could say that people have done better when in fact they have done worse.

This conceptual structure is not adequate for thinking about past economic gains to people (think of the plague, or the huge famines in China in the early 1960s) or for thinking about possible future events.   Have the demographic changes induced by AIDS in some African countries had a “positive” as well as a “negative” influence on average income?    We do not know.    What we do know is that AIDS not only increases the death rate but also reduces the birth rate.   Where life expectancy has fallen - in several African countries -   it seems odd that any system claiming to measure aggregate welfare outcomes would ignore Bentham’s obvious point that more time doing something nice is better.    Since most people, even poor people, choose to stay alive, it is rational to conclude that they find the prospect of living better than that of dying.    Where life length falls, to an equal extent at different income levels, the average income gains to people during the period are less than otherwise.    It cannot be logical for a system of counting consequences to people to ignore life length.    The problem is, though, for those who would calculate welfare, that the value of life is not measurable objectively.    It is not a matter of social science, but a matter of philosophy.    There is no objective answer to the question of how much your life is worth.

Cross-sectional statistics include measures claiming to show the degree of inequality.   These are also influenced by demographic change.   Standard measures of inequality do not satisfy the Pigou-Dalton transfer principle.     Whether an outcome is Paretian is not knowable from static measures of welfare.

The question about the difference between [the change in the average] and [the average gain or loss] is a fundamental theoretical issue, not an empirical one.    It is an issue of economists recognising what the word “utility” means, and not confusing averagism with utilitarianism.    Averagism is only one form of cross-sectionalism:    the use of statistics about living people at different times to infer gains or losses to real people in the aggregate during a period.     The gains and losses are longitudinal statistics:   they are about the life courses of real people.

Another problem in economics is this: most economists think that “if the proportion of poor people in poor countries goes down, and certain other conditions are met such as that the depth of poverty among living people did not get worse, then poor people got richer”. This doesn’t follow, because birth and death rates may have changed. (In relation to the proportion of poor people, some people may have crossed the poverty line upwards while the majority had losses which were greater [9]).

I personally regard all this as good: it means that economists have been over-pessimistic about income gains to people where demographic changes have been in particular directions. The task of finding out what the average consequences for individuals were is not as simple as many economists (and most governments) say, but then life is complex. How much better people have done if they live longer is necessarily a matter, as I said, of opinion. For a social scientist to develop a measure of welfare and then to use it is not the same thing as to have measured welfare. Why not? Because the measure is necessarily subjective. Even if we could measure static welfare levels of people - which is perhaps more the realm of the psychologist than the student of financial transactions - what weight would we choose to give to a year’s extra life to a baby, or to a great-grandfather? One way to look at economic success might be to look at lifetime income. This is certainly more sane than using measures which look better if people in the majority die. But this would value a year of a poor person’s life as less than a year of a rich person’s life, thus getting into a similar problem which we were trying to avoid in the first place. And we are still left with trying to compare more money during people’s lives (both yours while you are alive and others’ lives while they are alive) with more life. If someone has the equation for this, then they are not human. And we still would not have tackled the relationships between income and purchasing power, purchasing power and economic gains, or economic gains and well-being. The problem with the practice of “welfare economics” seems to be that anything is OK as long as it’s conventional. It doesn’t matter if there is theory behind it or not, and it doesn’t matter if there are no data. There are data suggesting that people in Japan haven’t got happier just because they’ve got richer. This kind of thing is exactly what a scientist would look at if they were trying to measure variable x (income) and then use those statistics to make some statement about variable y (well-being).

The only thing which is rational to say about a social scientist’s measure of welfare is that this measure has gone up or down. If people have slight income falls in general (which is not the same as saying that the average fell!) but poor people live much longer, there is no objective way of deciding whether the outcome was on average better or worse. Bentham wisely avoided this question.

My own simple solution in the case of people who are poor in an absolute sense is to look at survival rates. Whatever we look at in terms of static measures of welfare, more of a good thing is always better for the individual - there is more utility to the individual from being alive longer. Longevity is correlated with most things which we think are valuable. And it has little, if any, effect of diminishing marginal returns.[10]