It’s a commonplace that economics in the industrial democracies in the years after World War II took on many outward aspects of an engineering discipline. A “new welfare economics,” pioneered in Britain by A.C. Pigou, Nicholas Kaldor, John Hicks and others, led in the next generation in the US by Paul Samuelson, supported the privilege of economists to give advice as experts on a wide variety of topics. Free trade might help some people and hurt others, for instance, but overall gains would be more than sufficient for the winners to compensate the losers. Thus government engineering could increase welfare across the board.
Two subfields of economics emerged in the 1950s which at first seemed to be at cross purposes, except that both had trouble with the newly dominant welfare economics. Social choice, from Kenneth Arrow, concerned itself with voting systems. Public choice, from James Buchanan and Gordon Tullock described itself as “the economics of politics”: legislative log-rolling, lobbying, pandering to the electorate and all that. Buchanan’s “politics without romance” seemed to exhibit a strong bias in his further explication of its underlying principle: “government is something to seek protection from, not to exploit.” But in fact his concern was simply that the motivations of policy-makers be examined as carefully as those of everyone else.
In her prize-winning article on the evolution of the system economists use to classify the literature of their profession, historian Beatrice Cherrier told how by the 1980s the two subfields had grown closer to one another and somehow seemed to be on the brink of becoming a major new field. Indeed, five percent of the profession was then described as working on problems of public choice. So editors of the Journal of Economic Literature came up with a new name to encapsulate both fields, as well as some related studies: “collective decision-making.” It turns out that the collision of collective decision-making with welfare economics conceals a pretty interesting story.
It had been Kaldor who first formulated the principle of compensation. Following the argument that John Stuart Mill had made a century before against Britain’s Corn Law program of price supports, Kaldor asked why not simply compensate those who suffered from a given policy adoption if everyone would gain something over all? There would be no need for the economist to prove that no one would suffer as a result of the adoption of the plan. A few years later, in “The Foundations of Welfare Economics,” John Hicks introduced production possibility frontier diagrams as “a perfectly objective test” of the efficiency of improvement plans – or their lack thereof. This would become the basis of the “scientific analysis” of welfare.
A few years after that, the young American economist Arrow asked if the same thing could be said of majority voting, where many voters of different views were involved. To make his model work, he made a key assumption: that individual preferences were given and couldn’t be changed by the decision process. Arrow concluded, to general surprise, that no system of voting would produce an ordering that was consistent with individuals’ underlying preferences. Bad enough that this seemed to undercut the new welfare analysis. What if the preferences were to change as a result of the process? Then new welfare economics would make no sense at all.
Three years later, in “Individual Choice in Voting and the Market,” Buchanan, then a professor at the University of Virginia, made precisely the counter-argument; that individual preferences can and do change in the process of decision-making; that this was the whole point of adducing evidence and learning from debate. Over time, Buchanan’s argument has carried the day. Forty years later, Amartya Sen, of Harvard University, wrote “[I]t is only through Buchanan’s expansion of Arrow’s departures that we can do justice to the Enlightenment enterprise of advancing rational decision-making in societies, which lies at the foundation of democratic modernity.”
I know all this (and have paraphrased much) from having read Escape from Democracy: The Role of Experts and the Public in Economic Policy (Cambridge, 2017), by David Levy, of George Mason University, and Sandra Peart, of the University of Richmond. Levy and Peart were interested in calling attention to the views of Buchanan’s teacher, Frank Knight, of the University of Chicago, who sank into relative obscurity after retiring from Chicago in 1955 – except for the half-year he spent lecturing at the University of Virginia, enough to become a founding member of the Virginia school of political economics. The two are at work now on a larger book about just what that Virginia school represented – as distinct from the Chicago school. You can expect to hear much more about it in a year or three.
Knight liked to quote James Bryce, Britain’s ambassador to the Unites States from 1907 until 1913, and author of The American Commonwealth: “Democracy is government by discussion.” Knight himself put it this way:
In contrast to natural objects – even with the higher animals – man is unique in that he is dissatisfied with himself; he is the discontented animal, the romantic, argumentative, aspiring animal. Consequently, his behavior can only in part be described by scientific principles or laws.
The new welfare economics is by now pretty well discredited, and not only by the widespread failure to compensate the losers. But the instinct of deference to experts is still pretty well embedded in our political culture. Perhaps it needs to be checked a little in favor of the virtues of democratic debate. George Stigler, who also had been Knight’s student, objected in 1943 to the supposed expertise of the new welfare economics with respect to policies by invoking goals: “The primary requisite for a working social system is a consensus on ends. The individual members of the society must agree upon the major ends that society is to seek.”
One of the perils of being a solo practitioner is the news business is that once you start thinking about something, there’s no one there to make you stop. This topic is indeed the topic I cut short last week. The moral this week is pretty much the same. The rest of us, not the experts, are the jury.
Whether you are worried about the future of a divided country, impatient of the debate about the policies of President Donald Trump, or eager to decide the appropriate policy against global warming, it helps to think of the question as akin to the process of jury deliberation, twelve persons making decisions together around a table in a room. Granted, 330 million souls, inhabiting 4.5 million square miles, is some As-if. But the basic principles are the same. Accept that opinions will be drawn from all walks of life, without regard to income or education. Expect to have to talk it out. Listen to the experts and the commentators. Consider the evidence that they (and nature) present. Cross-examine them as best you can. Talk some more. Strive for consensus, and be patient. Expect a verdict to be reached only when consensus is in sight.
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