The Utility of Efficiency
At the risk of beating a dead horse, for the record, I’d like to disagree with Justin’s disagreement with my "focus on aggregate utility as a value judgment." I think that Justin’s argument stemmed in part from my departure from Michael Pakko’s original article on smoking bans in Missouri. I didn’t intend to make it seem as though my blog entry was a summation of Pakko’s ideas far from it. I merely used that article as a jumping-off point for a few further ideas. After the second paragraph, my own blog entry about smoking bans had nothing to do with Pakko’s excellent article.
My objection to Justin’s objection is that using aggregate utility or "efficiency" as a method of measuring a policy’s worth is not particularly controversial among economists. As the economist David Friedman pointed out, it’s an old solution to the problem of measuring a policy’s overall cost or benefit to the people it affects:
A little over a hundred years ago, an economist named Alfred Marshall proposed a solution to that problem. It is not a very good solution. It is merely, for many although not all purposes, better than any alternative that anyone has come up with since. The result is that economists, in both law schools and economics departments, continue to use Marshall’s solution, sometimes concealed behind later and (in my view) less satisfactory explanations and defenses.
Marshall’s argument starts by considering some changethe imposition or abolition of a tariff, a revision of the tax code, a shift in tort law from strict liability to negligence. The result of the change is to make some people better off and some worse off. In principle, one could measure the magnitude of the effects by asking each person affected how much he would, if necessary, pay to get the benefit (if the change made him better off) or prevent the loss (if it made him worse off). If the sum was positive, if total gains were larger than total losses, we would describe the change as an economic improvement; if it was negative, an economic worsening.
Several things are worth noticing about this way of evaluating changes. One is that we are accepting each person’s own judgement of the value to him of things that affect him. In measuring the effect of drug legalization on heroin addicts we ask not whether we think they are better off with legal access to heroin but whether they think they arehow much each addict would pay, if necessary, to have heroin made legal. A second is that we are comparing effects on different people using dollars as our common unitnot dollars actually paid out or received, but dollars as a common measure of value, a way of putting all costs and benefits on the same scale.
Justin, in his disagreement, says that he opposes smoking bans not because they decrease the overall level of utility, or "happiness," but because "they are a direct infringement upon personal liberty." This is a fine normative sentiment, and one I share myself, but it’s not an economic position. An economist would ask whether a particular infringement on personal liberty is likely to make people better or worse off. Fortunately, honest economic analysis shows that individual freedom, in the vast majority of cases, increases aggregate utility precisely because of the decentralized feedback loops that markets provide:
People often argue that wide-ranging government restrictions on our freedom are necessary to promote efficiency. But economic efficiency is impossible without freedom because it is not the narrow concept many accuse it of being. It is about increasing value as determined by the diverse and subjective preferences of hundreds of millions of individuals. The only way people can effectively communicate information about their values to those best able to respond is through the freedom to engage in market transactions for whatever and with whomever they choose.
The opposition that most people have to infringements on personal liberty stems from their instinctual recognition that such infringements make people, in general, worse off by using an approximation of utility as a value judgment. Freedom is such an important concept because it tends to maximize aggregate utility just another way of saying that freedom, by and large, promotes human happiness and flourishing. If freedom didn’t have that going for it, people would value it much less, if at all, as an abstract ideal. (Indeed, some economists insist that concerns of efficiency need to be balanced with "equity," which tempers their support for individual liberty; Ludwig von Mises wrote a nice rejoinder to this tendency.)
All that said, I’m not a utilitarian in the sense that it’s an absolute value, and that supposed measures of aggregate utility can always give us a useful analysis of policy (and not all free-market economists agree about the utility of efficiency as a valid economic concept). As Justin aptly noted:
Maximizing aggregate utility is not necessarily a good thing. Abusing certain minority groups might “maximize aggregate utility” if the benefits to the aggregate abusers outweigh the negatives of the abused. That’s why utilitarianism is a dangerous value judgment, especially for governments.
Economists who use efficiency as a general guide still acknowledge its weaknesses, such as this one. Remember, in the quote above, David Friedman noted that the Marshallian solution "is not a very good solution. It is merely, for many although not all purposes, better than any alternative that anyone has come up with since." Another economist, Paul Heyne, pointed out that it’s a concept that works best in the aggregate:
Critics of economic efficiency contend that it is a poor guide to public policy because it ignores important values other than money. They point out, for example, that the wealthy dowager who bids scarce milk away from the mother of an undernourished infant in order to wash her diamonds is promoting economic efficiency. The example is strained, not least because the pursuit of economic efficiency almost always makes milk available to the infant as well as the dowager. Most economists would agree that such dramatic examples can remind us that economic efficiency is not the highest good in life, but that does not mean that we should discard the concept.
The moral intuitions that enable us to arbitrate easily between the child’s hunger and the dowager’s vanity cannot begin to resolve the myriad issues that arise every day as hundreds of millions of people attempt to cooperate in using scarce means with varied uses to achieve diverse ends. Moreover, the remarkable feats of social cooperation that actually make wholesome milk available to hungry infants far removed from any cows would be impossible in the absence of the monetary values that express and promote economic efficiency.