Posts Tagged Values in Economics

Value Judgments in Economics

Simply stated, economics is the science of how society produces and distributes scarce resources. In this sense, economics necessarily requires that economists make value based judgments when prescribing economic policies – is this method/pattern of distribution desirable? Says who?

Despite this, mainstream economists generally insist that their science is value free. In this post I will discuss some of the main value judgments I believe are implicit in economics, though I will not really evaluate them – the post is mainly aimed at establishing value judgments exist in economics.

I consider much of what I am claiming about economic theory uncontroversial, so I will not offer extensive supportive evidence, but am happy to if any claims are disputed.

Economists emphasise the distinction between normative and positive economics, but they often forget that – even presuming we can reliably separate the two – the decision to study one over the other is itself a value judgment, and therefore a normative decision. This is, quite simply, because a value judgment is about whether something is desirable or not – if we believe it is more desirable to study either positive or normative economics, we have made a value judgment. So from the beginning, value judgments enter into the equation, no matter how hard we try to make it otherwise.

Furthermore, the decision about which area to study has normative implications, even if it is studied from a purely positive perspective. It is important which questions economics asks. Does economics ask questions about either work or consumption? Does economics ask questions about recessions, or booms? Time itself being a scarce resource, the economist must choose what to study. This too implies a judgment about how time should be distributed – studying something implies the area is important; not studying it implies the opposite.

The assumption that efficiency is desirable is a core value judgment in economics. Efficiency generally translates as ‘more stuff for cheaper,’ at least in the absence of externalities, and is sometimes equated with social welfare. Policies are often judged on the grounds of whether or not they are ‘pareto efficient’ – whether nobody can be made (materially) better off without making somebody worse off.

So, according to economists, why is a higher quantity of goods and services at a lower price a good thing? Because people gain utility from consuming goods and services – utility is, by definition, a good thing, as it represents people’s underlying ‘preferences’ – what they judge that they want.

By extension, choice is good because it allows consumers more avenues by which to maximise their utility. Markets, as well as capitalism, are generally desirable, because they provide choice and utility for consumers. Competition is generally presumed to increase the quantity of goods provided and lower the price. Again: this is more ‘efficient,’ and efficiency is good, so competition itself is good. Growth is good on similar grounds (though also on other ones, such as creating employment). Even though economists admit that there may be negatives to growth, it is generally presumed that we’d want growth in absence of these negatives: taken in isolation, growth is desirable.

However, as the above quote shows, the desirability of policies is not limited to a lower price and higher quantity. If externalities are present, then we shift from merely ‘higher quantity, lower price’ to ‘the right quantity and price.’ Another value judgment – that imposing costs (benefits) on others must be disincentivised (incentivized) – has entered the equation, and textbooks generally presume that these injustices must be corrected.

Economists often counter that efficiency is simply studied technocratically, and the judgment about it being desirable is external. But, as above, that efficiency is deemed the appropriate criterion by which to study a market economy is already a judgment. And most textbooks/lecturers make the jump from descriptive to prescriptive:

First we show how a perfect market economy could under certain conditions lead to ‘social efficiency.’ … [we then] show how markets in practice fail to meet social goals. These failures provide the major arguments in favour of government intervention in a market economy.

‘Social efficiency’ here is defined as above – more stuff for cheaper; with externalities, the ‘correct’ amount of stuff at the correct price.

There are also some obvious economic value judgments which are so ingrained into everyone’s minds that few would disagree with them (Austrians might take exception to the 2nd): too much inflation is bad, deflation is bad, and too much unemployment is bad. Economic theory emphasises the (supposed) ‘trade-off’ between inflation and unemployment, and where we want to draw the line is also a value judgment.

I don’t think it is possible to study economics without some value judgments. But these should not be cloaked in the guise of objectivity and inevitable economic ‘laws,’ which usually contain judgments about how important efficiency and production are (‘it will impact the consumer’). Instead, economists should be open about the values implicit in their subject, and how these impact their analysis and policy conclusions.


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Mankiw’s 10 Value-Laden Principles

The claim that economics is value free is a common one, and one of the many things Mankiw asserts in defence of his classes. I thought a good way to demonstrate that economics is not value free would be to highlight how many of his 10 principles are actually value-ridden. The 10 principles have been poked fun at elsewhere, and rightly so – they are simply a series of assertions about the nature of the economy. Real science sometimes starts with assertions, but the crucial difference is that those assertions are not contradicted by empirical evidence, anywhere, ever.

However, I digress. Here are the 10 principles – I have highlighted and discussed the values I deem to be implicit or explicit (please note that I do not necessarily disagree with these values; I’m merely showing they exist):

#1 People face tradeoffs#2 The cost of something is what you give up to get it#3 Rational people think at the margin, #4 People respond to incentives

These are all reflective of a view of how people value decisions; that they make decisions based on  costs and benefits. In reality, people respond to incentives based on a number of other criteria, such as the motives of the person rewarding or punishing them. These motives or ‘values’ are swept under the rug in economics, in favour of a mostly monetary/self interested view of human behaviour, where people value things based on outcomes.

#5 Trade can make everyone better off

The sentence itself is clearly a value judgement – trade increases value, so it is good for it to take place. Related is the ‘trade must be mutually beneficial otherwise people wouldn’t do it’ line of thinking, which effectively asserts that ‘market’ transactions are always beneficial. Whether this is true or not is up for debate, but it is certainly loaded with value judgements about what is desirable.

#6 Markets are usually a good way to organize economic activity & #7 Governments can sometimes improve market outcomes

‘Markets’ in this case meaning private property and contracts, and some hidden regulations like limited liability laws, with no thought as to the social relations and institutions required to sustain them, and no thought as to the historical context of those institutions. The government is somehow separate from these institutions, which we take as a given. That we choose not to judge these institutions based on their values is in and of itself a value judgement that they are desirable or natural.

#8 A country’s standard of living depends on its ability to produce goods and services

This equates material abundance with standard of living, and effectively amounts to a judgement that growth will always increase happiness*:

You may say I’m putting words in his mouth a bit here, as he is talking about objective standard of living. But what is objective standard of living? If people aren’t happier then does telling them that their stuff is shinier change that? This is exactly the kind of thing that instils an implicit value judgement in economists, leading them to assert that people should be happier with their lot despite stagnating median incomes, and that we should measure income as consumption. Consumption is higher, and our models say that should make you happier, so stop complaining!

#9 Prices Rise When the Government Prints Too Much Money & #10 Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

Implicit here is that both inflation and unemployment are bad past a certain point, and in different situations one is desirable whilst the other is not. Again, a value judgement.

Economics is a study of how people behave and so by definition cannot be value free – it must contain judgements about people’s actions and the motivations for those actions, as well as judgements about what is or isn’t desirable for them. As Rod Hill and Tony Myatt highlight here and here, your average textbook is full of value judgements. This is inevitable, and would be fine if they were explicit. But the fact that academic economists continue to deny it is just another indictment of their discipline.

*Red = happiness, black = GDP per capita. Source: Scholarpedia

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