Tuesday, July 12, 2016

The Purchasable Versus The Good: Economic Theory And The Problem Of What Gets Counted

I was reading this interesting post about the role that the "credentialed class" plays in creating societal disasters -- like the opioid epidemic -- when I got thinking about the connections and disconnections between economics, capitalism, and value judgements about what is good and worthwhile.

The post tries to trace some of the particular mechanisms through which pharmaceutical companies used aggressive and questionable tactics to market opioids after they were introduced, so that they made a fortune, without regard to the fact that part of that fortune was being made as a result of usage leading to addiction, overdose, and death.

It reminded me immediately of the somewhat strange role that concepts like "economic growth" and "preference satisfaction" play in economic theory and policy making. It's always seemed odd to me that from a theoretical point of view, economic theory understands "preferences" in a formal neutral sense, while at the same time, policy makers tend to regard maximizing preference satisfaction as somehow a "good thing."

The disconnect between these is well brought out by examples of consumer goods that are successfully marketed but also bad for people over the long term. From the standard theoretical point of view of "revealed preference theory," it's all sort of a tautology: if a person drinks a Coke, they are simply satisfying a preference they had for Coke; if a person gives 10 dollars away, they are simply satisfying a preference for giving money away; if a person educates their children, they are simply satisfying a preference for educating their children.

This means that using economic theory to figure out what would be "best overall," we should just do the things that maximize the satisfaction of all these preferences, where they are all on a par. It wouldn't matter whether what the preferences are. Coke, schooling, it's all the same.

But most of use don't regard these preferences as all being on a par. We want our society to be full of people who are healthy, generous, and educated. So, taking up a different perspective, we do things like taxing and benefiting when people do one thing instead of doing another.

It's like we have two completely different systems for evaluating how things are supposed to work. We have the capitalism system, where free trades promote individual preference satisfaction. Then we have a completely different value-based system, where we try to figure out what is and isn't working well in our society and try to fix it. The two systems are not the same. And we're constantly bouncing around about which one to use.

I think this same disconnection is at play in the recently debated question about whether black market activities should count for GDP. The EU has always had a policy that since GDP should measure "everything," calculations should include black market exchanges -- like the buying and selling of drugs, sex, and smuggled goods. In 2014, they started requiring countries to actually start measuring.

You can see the incentive for the inclusion. All kinds of decisions are based on GDP. The EU has a policy that restricts expenditures to a percent of GDP. So having a higher number puts more options on the table.

How far are we willing to go with this? Should payment to a hit man to carry out a murder count as "economic activity"?

This New York Times story says that Italy refuses to count "business conducted by the Italian mob" -- even though that would add to GDP astronomically -- and that France refuses to count drugs and sex work -- "out of concern that prostitution, for example, often stems from sexual slavery and should not be given the veneer of economic legitimacy."

And this critic of the policy wonders how far things will go. Will we count "forced labor, human trafficking and illegal organ trade"? If we do, doesn't this lend legitimacy to such behaviors?

Again, I think this shows how we have two different evaluative systems which only sometimes overlap. We have the capitalism system, which counts economic activity as economic activity, and we have the actual evaluative system, in which we know that mafia activity and forced labor are Bad Things.

The Times points out that moral considerations cast doubt on using GDP to measure anything at all, quoting Robert F. Kennedy as saying that GDP measures everything "except that which makes life worthwhile." In response to objections related to values, one EU economist said black market activity should not be included in GDP:
If you think that drugs and prostitution are things that do not necessarily improve the quality of life in a country, then including them undermines G.D.P. as measure of well-being.
But if I am right about the disconnect between the capitalist system of evaluation and the value-judgment system, there are real problems using GDP as a measure of anything to do with "goodness" or "well-being." Which market things increase well-being and which ones don't? And where do aggressively marketed opioids and Coca-Cola fit in?

It seems to me that sometimes the two systems for how things should work seem, at least to a lot of people, to run closer to parallel, so that with a little fudging, it appears like we can sort of nudge the capitalist system and the how-things-should-work system toward one another.

But I feel like at other times, they start to look far, far apart, so that the economically efficient ways of proceeding seem radically unlike the how-things-should-work ways of proceeding. Other times -- that is, like maybe now.

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