Thursday, July 1, 2010

The Most Basic Economic Question

The study of economics has had something of a renaissance since the recession hit. Everyone wants to know how to understand why we suddenly seem to be much less wealthy. Indeed, it's an intriguing question: how can the mistakes of some lenders and borrowers in mortgages result in a recession that shreds jobs all over the market? Economists have offered many competing and contradictory answers for why this crash happened and what needs to be done to fix it, but either way people seem to be listening.

I don't actually understand economics very well: it involves a complicated set of rules and understandings whose relation to reality is not entirely clear. One thing I do understand, however, and one thing that economists of any school will agree on is that good economic policy should serve to bring about the biggest growth. Some economists believe this growth comes better from a powerful consuming middle class, others feel that it relies on rich investors seeking ways to turn their money into even more money, but every economist I read seems to agree that maximum growth (often in terms of GDP growth) is the ideal.

Bundled into that question is an implicit endorsement of utilitarianism, or the philosophy that the greatest good is that which grants the greatest amount of happiness to a given group. That's necessarily endorsed by valuing GDP, because GDP is merely a way of measuring utility over a nation. It doesn't on its own give clues as to how that utility is divided among citizens, it just tells you on aggregate what utility the nation has. The interesting question here, it seems to me, is this: is the goal of economic growth in the form of GDP growth actually a good one to pursue?

To illustrate why this isn't a trivial question, consider the following common critique of utilitarianism: Say you're standing on top of a bridge with an exceptionally stout fellow. Below the bridge is a trolley track with five workmen on it wearing headphones to protect their ears from the sounds of their jackhammers and so on. Glancing up into the distance, you see an oncoming trolley car! It appears that someone forgot to hit the switch that would disallow the trolley from coming down this track while people were working on it. In your panic, your mind comes up with two possible choices for this situation. One is that you could just wait, admit there's no good choice and let the trolley hit the five workmen who wont hear it's approach. Your other option is that you could give the fat man standing next to you a shove off the bridge and onto the track and let him get hit by the trolley, slowing it down enough that you could save the five workmen. What do you do?

Many people, when faced with that question, find that it just doesn't feel morally right to push the fat man over. It certainly brings about the best outcome (5 men alive instead of 1 man alive), but something about the situation still seems morally repugnant. Another good illustrative scenario is this one: Say you're the head doctor at an experimental hospital that's got permission from the government to use whatever methods it sees fit. You have 6 patients in your ward, of differing conditions. 5 of the patients are suffering from severe maladies that require organ transplants very soon, otherwise the people will die. The other patient merely has a recurring headache that he came to you to get treated. One of your nurses comes up to you and mentions that by bizarre chance, all your patients have the same blood type. The thought comes to your mind: what if you killed your healthy patient and took his organs to treat the other five? You'd save five men's lives at the cost of one. If you did nothing, you'd merely have one person alive and five dead patients. Like the trolley car problem, the idea of killing the one man to save the five seems morally repulsive.

How does all this relate to economics? Well, in deciding economic policy there are many situations where you're pursuing utility gains that are not evenly divided between all those involved in the situation. One of the repugnant aspects to the thought games above is that while you may be granting the great gift of life to the road workers or ill patients, you're taking everything away from the fat man or the man with the headache. They don't share in the gains seen by the others: to them, it's merely a horrific situation of being pushed off a bridge and run over, or killed in a doctor's office when all you wanted was aspirin. Is it right to inflict that kind of harm on someone, given a situation where the life they have is the only life they'll ever have and they'll only have one time to live it?* While the situation isn't as dire in most economic contexts, you could certainly have a situation where optimum GDP growth results in some person's life getting ruined. For example:

Let's take the real-life example of free trade. It is generally considered to be prudent for an economic rule maker to not favor domestic businesses with tariffs or quotas. When such a rule is set, the price of the good that will be imported is higher than what would normally be paid for it, resulting in deadweight loss. The concept is slightly complicated, so I'm going to include a picture:

The point on the picture called the Free market equilibrium is where the intersection of supply and demand would meet under free circumstances to determine the price of the good. This is based on the basic logic of supply and demand curves. Anything colored in above that price line is consumer surplus, and anything below it is producer surplus. What adding a tariff does is forces a higher price on the good (by making what would otherwise be cheaper imports more expensive), forcing an artificial price line that is higher than the equilibrium line. In this graph, they use a price ceiling, which is the same thing but below the equilibrium. What you'll notice in the graph is that while the consumer surplus is bigger with the price ceiling than it was before, the producer surplus is much smaller and the sum of producer and consumer surpluses is smaller. The overall utility has fallen! With tariffs, the same situation applies, except that it is producer surplus that has grown, and consumer surplus that has fallen. Just as with price ceilings, however, the overall surplus is smaller.

Bringing it back to the topic, instituting tariffs makes for lower GDP growth and lower overall utility for the country. However, focus for a moment on the case of a hypothetical clothing maker. He's 50, not quite ready for his retirement but getting there all the same. Widower and childless, he's been in the clothing business for most of his adult life. The last few years have been worrying him, however: he's been finding it harder and harder to beat the prices of imported clothing from China. His clothing isn't really higher quality either; it's more that the American workforce expects higher wages and lower hours than workers in China. Employing them costs him more, which means he has to charge more for his clothes to make a profit. That can't keep him afloat, though, since the Chinese can just plain outcompete him. The simple fact is that the imported clothes are running him out of business. As an older man, he doesn't see his new employment prospects as being very promising, and he hasn't been able to keep very much for retirement since he's been combating the competing Chinese imports for years now, making things tight for him. If he continues having to compete with them, he's likely to lose much of his current wealth and have to readjust to life on the salary of a WalMart greeter.

You might attack this hypothetical guy on account of it being too extreme or too sympathetic as compared to reality, but the point is that his situation is not impossible or even impossibly unlikely. This guy could exist and probably has. For him, the policy that results in the best for the nation results in a catastrophic loss for himself. It doesn't matter that the rest of the nation prospers; he wont be able to partake in it. All he'll notice is the free-falling standard of living and the loss of his life's work. And the gain will be lower shirt prices for the rest of us. You could argue that the important difference lies in the direct action: in the clothing factory situation, no one took a direct action resulting in his ruin; it was just the course of events. In the hospital and trolley car, direct action was taken to ruin someone for the sake of others. Does it seem probable that the moral difference lies in the personal nature of events? It's moral when a preventable tragedy happens, but immoral when the tragedy is a pro-active action is taken? Is not deciding not to prevent the tragedy an action in its self? Aren't the people who decide not to install tariffs to protect domestic business taking an action, even if it's an action of not doing anything?

It seems a very serious moral consideration. When is utilitarian analysis the moral thing to do? When is it not? I certainly don't have the answers to those questions and for the record, I think tariffs are a bad policy, even though not having tariffs will mean that my hypothetical business man will be ruined. I'm not sure if I have a perfectly good justification for that belief, though. I tend to feel that the personal action effect is important, but I definitely don't have any answers to the questions I posed to challenge the idea that personal action is important. What do you guys think? And if we decide that it's not conscionable to allow the ruin of the clothing guy, should we reconsider the way we do economics? Would it make economics a null field?

*One workaround to this problem is to say that the fat man or the head-ache patient will receive recompense for their suffering in an afterlife. While they may suffer total ruin in this life, they'll be rewarded for the gains they gave other people in heaven, or something like that. While that does seem to answer the moral question, it's not really satisfying since it's not clear whether or not such an afterlife actually exists. So we'll consider this question under the assumption that there isn't an afterlife.


  1. "I don't actually understand economics very well: it involves a complicated set of rules and understandings whose relation to reality is not entirely clear."

    That sounds rather more like philosophy to me. ;)

  2. @Will: Well, to be fair to philosophy, it's not the rules which have no bearing on reality. The rules are quite nice, actually, and ensure that one doesn't go from true premises to false conclusions, which is the bane of many another truth seeking endeavor. The rules are fine.

    The problem is largely what one does with them. Unless one concedes that any fundamental premise that you'd need to construct a metaphysics is largely going to be a guess or an arbitrary distinction, then you're going to end up with something that most people are going to end up saying "Huh?" to. Like Idealism, for instance. The logic is fine, and you can't really argue that the conclusion can't be true, but you're left by saying "So, what is the point? What do you have to say that other people should listen to?" For those of you who care to have an answer to that question, I'm working on a post to explain why philosophy is useful to me.