Joseph Delaney quotes Frances Woolley:
In other words, the reason we care about inequality is that it reduces the happiness achievable from a given amount of income. How much depends upon the happiness/income relationship. Does the marginal utility of income fall rapidly? Or is the happiness from the 100,000th dollar almost as great as the happiness from the 100th?
Delaney goes on to discuss the marginal utility of income, but I have a different point to make.
Woolley is a professor of economics.
Economists seem to rely heavily on a sort of folk psychology, a relic of the 1920s-1950s in which people calculate utilities (or act as if they are doing so) in order to make decisions. A central tenet of economics is that inference or policy recommendation be derived from first principles from this folk-psychology model.
This just seems silly to me, as if astronomers justified all their calculations with an underlying appeal to Aristotle’s mechanics. Or maybe the better analogy is the Stalinist era in which everything had to be connected to Marxist principles (followed, perhaps, by an equationful explanation of how the world can be interpreted as if Marxism were valid).
I can understand this from a historical perspective—this sort of insistence on microfoundations is a tradition in economics—but from the outside it looks a bit silly.
OK, now back to the Woolley quote, which reminds me a bit of another economics professor, Greg Mankiw, when he wrote about taxation as a moral issue, implying that that the state only has a right to tax things that are “unjustly wrestled from someone else.” This didn’t make much sense to me–whether it’s the sales tax, the income tax, or whatever, I see taxes as a way to raise money, not as a form of punishment.
Similarly, Woolley connects beliefs about inequality to attitudes about a utility function. There’s a difference, though. Inequality is macro, and it’s real (in the sense of being directly measurable), and utility is micro and doesn’t exist.
To return to the physics analogy, suppose someone said (correctly) that to understand solid structures, you need to understand electrons. Solid structures exist and can be observed; electrons are more hypothetical. The difference is that electrons are not merely hypothetical, they are also a fundamental part of a model that has been tested and applied a million times. In contrast, “utility,” like “the life force,” is a sometimes-useful construct but it’s based on an intuitive notion of psychology that we have no particular reason to trust (any more than we trust the various principles of folk physics, folk biology, and so forth).
Economists, though, are so used to requiring their microfoundations that I don’t think they reflect enough on how silly this can sometimes be. I have no problem with utility analysis in its place (we have a whole chapter on utility-based decision making in Bayesian Data Analysis, and I’ve published some papers on the topic too), but when it comes to taxation, there are some more direct principles at hand, such as the need to fund the government and ability to pay. I have a feeling that right now that various bankrupt governments have more pressing concerns than the (hypothetical) marginal utility of someone’s 100,000th dollar!
I do think there can be good reasons for opposing tax increases (starting with the feeling that the money, if taken, will be spent in some wasteful or distasteful manner), but I think here the irritation is coming more from the sense of powerlessness—these bozos are taking my money!—than a loss of marginal utility.
To put it another way, I think economists might benefit from acting a bit more like the stereotype—as accountants who carefully keep track of the dollars and cents—and consider the psychological modeling as an interesting sidebar rather than a foundation to their analysis.
P.S. More along similar lines from John Quiggin. He is making slightly a different point than I am, though. He is discussing the unfalsifiability of the rational actor model (as in Popper’s classic criticisms of Marxism and Freudianism), which is a fine point, but I’m making more of a sociological point here, which is that even those economists who do not follow any sort of “party line” still seem to see the utility model as a necessary microfoundation of any serious social-science analysis.
And that’s what’s particularly bugging me right now, the idea that we should be using 75-year-old psychology as a foundation for modern economics. Rather than making the usual analogy of a house with a foundation of sand, I prefer to think of it as a house that could stand on its own, with an unnecessary sand foundation introduced below, a foundation that makes the house itself that much less stable!
To get back to the title of this post, I’d rather see some really good accounting than some really clever but misinformed amateur psychology.
P.P.S. Further discussion in comments below. You can judge for myself if I have convincingly replied to the doubters.