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Economics, prioritisation, and pro-rich bias  

 

tl;dr: Welfare economics is highly relevant to effective altruism, but tends to rely on a flawed conception of social welfare, which holds that the more someone is willing to pay for a good, the more utility or welfare they would get from consuming that good. (I use ‘welfare’ and ‘utility’ interchangeably here). This neglects the fact that differences in willingness to pay are often merely due to differences in initial resource endowments. As a consequence, welfare economics is biased towards policies that favour the rich. Effective altruists should be aware of these problems, and economists should adopt a revised conception of social welfare.

 

cross-posted from my blog

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Effective altruism is the use of reason and evidence to promote the welfare of all as effectively as possible. Welfare economics is highly relevant to effective altruism because it aims to show which policies or actions would best maximise social welfare. The modern discipline of economics was heavily influenced by early utilitarian thought, and economics has influenced effective altruism in numerous ways with tools such as cost-effectiveness-analysis and Disability Adjusted Life Years. Welfare economics is, in my view, the most useful and practically applicable prioritisation tool currently available to governments. However, as I will now argue, mainstream welfare economics relies on a flawed theory of social welfare, which leads to pro-rich bias in policy evaluation.

I hope this post will improve understanding of welfare economics among effective altruists. It would also be useful for economists to recognise these problems and take a revised approach.

Touting and social welfare

I will bring out this issue by discussing the question of ticket ‘touting’ or ‘scalping’. Economists are somewhat unusual in believing that touting is actually a good thing because it corrects for underpriced tickets. Here is The Economist on the issue:

“Flint-hearted economists might note that a secondary market suggests that the seats were underpriced. Cheaper tickets meant to boost equal access lure in touts, for whom low prices mean bigger premiums. And more scalpers means more disappointed fans in the queue.

Rather than allowing touts to profit, the play’s producers could take a cue from “Hamilton”, a wildly successful Broadway musical, and raise prices for the premium seats until demand falls in line with supply (even at up to $849 per ticket, some argue that “Hamilton” is too cheap). But the Potter producers seem to be more worried about impecunious wizarding fans losing out than about the prospect of touts swiping surplus.

Stamping out the secondary market entirely means preventing people selling their tickets to those who value them more. This inefficiency is wince-inducing for economists...” [emphasis added]

According to some economists, ticket touting improves allocative efficiency.

Allocative efficiency occurs when there is an optimal distribution of goods according to consumer preferences, or, in other words, when social welfare is maximised.

The argument goes as follows. By selling tickets at a single price on a first come first served basis, some people who really want to go to the show will be unable to go. When the ticket is underpriced, Pete, who is willing to pay no more than $50 for a Book of Mormon ticket, can get a ticket, but Rich, who is willing to pay up to $1000, doesn’t get a ticket.

Crucial Premise: Necessarily, the more someone is willing to pay for a good, the more welfare they get from consuming that good.

[UPDATE: I actually mean this more precise version of the premise. "Necessarily, if person A is willing to pay more for a good than person B, then person A gets more welfare from that good than person B. Thanks to rohinmshah]

So, by meeting the market demand of those willing to pay more or, in other words, ensuring that price is closer to marginal utility, touts ensure that social welfare is maximised.

The vast majority (>68%) of economists believe touting increases social welfare, as shown by this IGM poll (a good place to find the views of economists on lots of different topics). It’s somewhat unclear whether they do so on the basis of the argument from allocative efficiency and the Crucial Premise, but I would bet that a significant portion do endorse that argument.

What’s wrong with this argument?

I’m going to argue that the foregoing argument fails because the Crucial Premise is false. (Note that touting might be justified by other arguments).

I’ll first clarify the assumptions made in the argument.

Utilitarianism = Agents ought to perform the act which maximises total social utility or welfare. 

A large portion of economists accept preference utilitarianism, according to which utility is conceived of as preference satisfaction. When evaluating policy, many economists like to say that they put morality to one side, but this is seldom true. In actual fact, they are appealing to preference utilitarianism. This is a moral theory.

Some economists believe that allocatively efficient outcomes might involve large inequalities and therefore be unfair. Consequently, they endorse an equity or fairness constraint on preference utilitarianism. In philosophical terms, this is equivalent to preference utilitarianism with a welfare egalitarian constraint. Proponents of such a theory tend to recommend that governments correct inequality through redistribution.

The pro-touting argument combines preference utilitarianism and the Crucial Premise, concluding that touting is justified because it maximises social welfare.

With this clarified, we can now explore why the pro-touting argument does not work. The Crucial Premise is false. It is not necessarily true that willingness to pay for a good is an indicator of how much utility one would get from a good. This is obvious. For example, suppose that Pete is very poor and Rich is very rich. As a consequence, Pete willing to pay up to $50 for a Book of Mormon ticket, but Rich is willing to pay up to $1,000. But this does not necessarily mean that Rich would get more utility from watching the Book of Mormon than Pete. All it shows is that Pete doesn’t have as much money. It might be the case that Rich would mildly enjoy the show, but Pete would absolutely love it.

Indeed, imagine that Pete has no money at all. According to the view that, necessarily, the more one is willing to pay for a good the more utility one derives from it, Pete would not gain utility from the consumption of any good, even food or water. This is absurd.

We can avoid this by correcting for inequality in income or resources between individuals when assessing willingness to pay. We could, for example, ask what Pete would be willing to pay for a ticket if he had as much money as Rich. Thus, hypothetical, rather than actual, willingness to pay would determine consumer preference. Consumer preference would not be revealed by actual market demand. If so, then it is not necessarily true that touting tickets at higher prices increases social welfare by allocating tickets to those who would get most utility from them.

Not only is it not necessarily true that actual willingness to pay determines consumer preference, it is not even usually true. Differences in willingness to pay are to a significant extent and in a huge range of cases driven by differences in personal wealth rather than by differences in consumer preference. Rich people tend to holiday in exotic and sunny places at much higher rates than poor people. This is entirely a product of the fact that rich people have more money, not that poor people prefer to holiday in Blackpool. I think the same holds for the vast majority of differences in market demand across different income groups.

In sum, the argument for touting from preference utilitarianism and the Crucial Premise fails.

Implications for welfare economics

This is one instance of a serious general problem for contemporary welfare economics. Equating market demand and utility without correcting for inequality in income or resources leads economists to pro-rich bias. It is this same flaw that led the 1995 IPCC report to conclude, on the basis of a willingness to pay approach, that Indian lives were worth less than American lives.[1]

It is easy to see how this bias could come into play for pretty much all policies assessed by welfare economics. Economists will neglect inequality and tend to recommend that goods be distributed by market prices.

This is not a criticism of preference utilitarianism from equity or fairness. I am not saying that only aiming to maximise social welfare is inegalitarian, and I am not saying that equality is intrinsically valuable. I am saying that preference utilitarianism alone, properly conceived and without an equity constraint, favours more egalitarian outcomes than economists acknowledge.

One advantage of holding that actual willingness to pay determines preference is that it is easier to measure than hypothetical willingness to pay. For this reason, in some cases it may be more practicable to approximate preference utilitarianism (properly conceived) with the Crucial Premise + an independent equity constraint. This equity constraint would be justified on utilitarian grounds, rather than on the grounds that equality is intrinsically important.  

The downside of this is that economists would still be giving an inaccurate account of what constitutes preference satisfaction. The statement “touting optimises the distribution of goods according to consumer preference, but is inequitable” is false because the first conjunct is false.

 

Many thanks to Stefan Schubert for always helpful comments.

 

 

 

 

Comments (26)

Comment author: kbog  (EA Profile) 07 January 2018 07:45:28AM 0 points [-]

This seems like a rather mundane point and I would be surprised if there were a lot of welfare economics literature which overlooked it in relevant cases.

Comment author: MetricSulfateFive 04 January 2018 04:09:04AM *  3 points [-]

See responses to this post on /r/badeconomics.

Comment author: Paul_Christiano 03 January 2018 09:13:52AM *  6 points [-]

Here is a stronger version of the pro-market-price argument:

  • The producer could sell a ticket for $1000 to Rich and then give $950 to Pete. This leaves both Rich and Pete better off, often very substantially.
  • In reality, Pete is not an optimal target for philanthropy, and so the producer could do even better by selling the ticket for $1000 to Rich and then giving to their preferred charity.
  • No matter what the producer wants, they can do better by selling the ticket at market price. And no matter what we want as advocates for a policy, we can do better by allowing them to. (In fact the world is complicated and it's not this clean, but that seems orthogonal to your objection.)

This is still not the strongest argument that can be made, but it's better than the argument from your crucial premise. I think there are few serious economists who accept your crucial premise in the way you mean it, though many might use it as a definition of welfare (but wouldn't consider total welfare synonymous with moral good).

Comment author: Paul_Christiano 03 January 2018 09:24:04AM 2 points [-]

In actual fact, they are appealing to preference utilitarianism. This is a moral theory.

Economists are quite often appealing to a much simpler account of betterness: if everyone prefers option A to option B, then option A is better than option B.

Comment author: Halstead 06 January 2018 01:42:59PM 0 points [-]

They may well endorse that view of betterness, but I don't see how it lets them avoid the problem here. The people who disprefer a world with scalping to a world without are the people who would like tickets but can't afford to go.

Comment author: Paul_Christiano 06 January 2018 08:23:52PM 1 point [-]

This standard of betterness is all you need to conclude: "every inefficient outcome is worse than some efficient outcome."

Comment author: Halstead 03 January 2018 12:19:04PM 0 points [-]

Thanks for this. Option 3 "No matter what the producer wants..." is the only relevant world to consider because in almost all cases, the producer will not in fact compensate consumers or donate to charity. Could you then say more about why we as advocates for policy can do better by allowing the producer to sell at market prices?

Comment author: Paul_Christiano 03 January 2018 06:04:02PM *  5 points [-]

Obviously what is optimal does depend on what we can compel the producer to do; if we can collect taxes, that will obviously be better. If we can compel the producer to suffer small costs to make the world better, there are better things to compel them to do. If we can create an environment in which certain behaviors are more expensive for the producer because they are socially unacceptable, there are better things to deem unacceptable. And so on.

More broadly, as a society we want to pick the most efficient ways to redistribute wealth, and as altruists we'd like to use our policy influence in the most efficient ways to redistribute wealth. Forcing the tickets to sell below market value is an incredibly inefficient way to redistribute wealth. So it can be a good idea in worlds where there are almost no options, but seems very unlikely to be a good idea in practice.

Comment author: Halstead 06 January 2018 01:46:30PM 0 points [-]

Yes I am not defending banning scalping. I am criticising one argument against scalping, which appears to be the main one among a significant portion of influential economists, as I show in the comment below.

Comment author: Halstead 03 January 2018 12:07:50PM *  0 points [-]

On your last point about whether there are economists who hold this view, I'm not sure I agree. For example, if you look at that IGM poll of economists' views on scalping, of the eight people in favour of touting who gave a reason, one of them appeals to allocative efficiency, and Caroline Hoxby of Stanford says "Classic example in which good (tickets) are not allocated to those who value them most. Only exception:ticket-holder's identity matters." The remaining six don't say anything incompatible with the allocative efficiency argument.

I don't think it would be that hard to find lots of examples of economists defending particular policies on the basis that those willing to pay more should get the good.

Comment author: Paul_Christiano 03 January 2018 06:11:59PM *  3 points [-]

Economists who accept your crucial premise would necessarily think that there should be no redistribution at all, since the net effect of redistribution is to move goods from people who were originally willing to pay more to people who were originally willing to pay less. But "redistribution is always morally bad" is an extreme outlier view amongst economists.

See for example the IGM poll on the minimum wage, where there is significant support for small increases to the minimum wage despite acknowledgment of the allocative inefficiency. The question most economists ask is "is this an efficient way to redistribute wealth? do the benefits justify the costs?" They don't consider the case settled because it decreases allocative efficiency (as it obviously does).

I don't think it would be that hard to find lots of examples of economists defending particular policies on the basis that those willing to pay more should get the good.

People can make that argument as part of a broader principle like "we should give goods to people who are willing to pay most, and redistribute money in the most efficient way we can."

For example, I also often argue that the people willing to pay more should get the good. But I don't accept your crucial premise even a tiny bit. The same is true of the handful of economists I've taken a class from or interacted with at length, and so I'd guess it's the most common view.

Comment author: Halstead 06 January 2018 01:38:28PM *  1 point [-]

Thanks, I agree that opposition to all redistribution is an extreme outlier position among economists. I think the explanation is that the rationale that many of them accept for ticket touting is not carried over into other domains.

Some evidence that economists do make this argument. See this paper - http://www.jstor.org/stable/3216858?seq=1#page_scan_tab_contents in the Jnl of Econ Persp. In the first paragraph, Courty says "...economists usually argue that resale increases efficiency, because it channels tickets to those consumers who value them the most"

And the box in chapter 7 of Mankiw's principles of microeconomics textbook here - https://books.google.co.uk/books?id=xoztFMavGCcC&pg=PA148&lpg=PA148&dq=mankiw+ticket+scalping&source=bl&ots=5U_xzxQZvl&sig=T9PP88ufUkIFDPpR4j8kSG37kig&hl=en&sa=X&ved=0ahUKEwiPopLst8PYAhXJtxQKHZcpCrsQ6AEISTAF#v=onepage&q&f=false. I will quote in full: "If an economy is to allocate its scarce resources efficiently, goods must get to those consumers who value them most highly. Ticket scalping is one example of how markets reach efficient outcomes. By charging the highest price the market will bear, scalpers help ensure that consumers with the greatest willingness to pay for the tickets actually do get them."

I think one should interpret that as saying that those who are willing to pay more (in the actual world, not the hypothetical world after redistribution) value the good more. And that is the main argument appealed to in favour of scalping in one of the most famous textbooks on microeconomics. The main premise used in that argument is obviously false.

If they endorsed the view you say they do with respect to scalping, wouldn't they say "provided there was perfectly equitable distribution of incomes, scalping ensures that goods go to those who value them most". Missing out the first bit gives an extremely misleading impression of their view, doesn't it?

Comment author: Paul_Christiano 06 January 2018 08:21:44PM *  2 points [-]

If they endorsed the view you say they do with respect to scalping, wouldn't they say "provided there was perfectly equitable distribution of incomes, scalping ensures that goods go to those who value them most". Missing out the first bit gives an extremely misleading impression of their view, doesn't it?

When economists say "how much do you value X" they are usually using the dictionary definition of value as "estimate the monetary worth." Economists understand that valuing something involves an implicit denominator and "who values most" will depend on the choice of denominator. You get approximately the same ordering for any denominator which can be easily transferred between people, and when they say "A values X more than B" they mean in that common ordering. Economists understand that that sense of value isn't synonymous with moral value (which can't be easily transferred between people).

The reason that easily transferrable goods serve as a good denominator is because at the optimal outcome they should exactly track whatever the planner cares about (otherwise we could transfer them).

Expressing economists' actual view would take several additional sentences. The quote seems like a reasonable concise simplification.

Your version isn't true: an equitable distribution of incomes doesn't imply that everyone has roughly the same utility per marginal dollar. A closer formulation would be "Supposing that the policy-maker is roughly indifferent between giving a dollar to each person [e.g. as would be the case if the policy-maker has adopted roughly optimal policies in other domains, since dollars can be easily transferred between people] then scalping will ensure that the ticket goes to the person who the policy-maker would most prefer have it."

Immediately before your quote from Mankiw's book, he says "Equity involves normative judgments that go beyond the realm of economics and enter into the realm of political philosophy. We concentrate on efficiency as the social planner's goal. Keep in mind, however, that real policy-makers often care about equity as well." I agree the discussion is offensively simplified because it's a 101 textbook, but don't think this is evidence of fundamental confusion. If we read "equity" as "has the same marginal utility from a dollar" then this seems pretty in line with the utilitarian position.

Comment author: [deleted] 03 January 2018 07:44:18AM *  1 point [-]

It's generally agreed that Pareto efficiency is a very weak criterion; for any economy, there are always infinitely many Pareto efficient points and only one (or a few) allocatively efficient point(s). Wikipedia:

It is possible to have Pareto efficiency without allocative efficiency: in such a situation, it is impossible to reallocate resources in such a way that someone gains and no one loses (hence we have Pareto efficiency), yet it would be possible to reallocate in such a way that gainers gain more than losers lose (hence without such a reallocation, we do not have allocative efficiency).

The difficult problem of resource allocation is to get people to reveal their preference honestly. As you point out, someone's willingness to pay is a pretty poor proxy for marginal benefit to the person. But you do need a mechanism for deciding who will get the tickets. Price ceilings (underpricing the tickets) are generally thought to be a very bad way to do so. (In a very simple model, people will queue, or otherwise signal their willingness to "pay", until the costs to them are just as high as the market equilibrium price. Hence in real terms a price ceiling would be like the ticket company selling the tickets at market prices, but then using part of the revenue to pay people to stand in line uselessly. Something like this happened with the oil price ceiling.)

Comment author: Halstead 03 January 2018 12:14:27PM 0 points [-]

Thanks, yes I agree with all of that. My post was a critique of one argument for market prices, not an argument against market prices.

Comment author: [deleted] 03 January 2018 02:27:38PM 1 point [-]

I think there's some misunderstanding going on. The argument you critique is: "In a market, goods go to those with the highest willingness to pay. Hence the resulting allocation is socially optimal (according to some social welfare function)". I don't think anyone in economics makes that argument. The only claim is that allocations that result from a market are Pareto efficient (under some strong assumptions, which I'm sure you're familiar with. See the first fundamental theorem of welfare economics). Again, the real question is: if not markets, then what?

Comment author: Halstead 03 January 2018 02:48:56PM *  0 points [-]

but people in economics do make the argument that charging prices such that supply and demand are in equilibrium improves allocative efficiency.

Comment author: [deleted] 03 January 2018 02:58:54PM 0 points [-]

Relative to what?

Comment author: Halstead 03 January 2018 03:19:04PM 0 points [-]

relative to charging prices where demand is in excess of supply

Comment author: [deleted] 08 January 2018 12:25:07PM 0 points [-]

for the reasons i explained above, i think many economists believe this is true (in many situations). But they don't use the argument you attribute to them to do so.

Comment author: [deleted] 03 January 2018 07:13:46AM *  4 points [-]

Carl Schulman writes:

Thus in welfare economics it is common to assume that individuals have utility functions that are proportional to the logarithm of income, i.e. with a constant change in utility per doubling of income.

See also Wikipedia on cardinal social welfare functions.

Comment author: Halstead 03 January 2018 02:24:37PM 1 point [-]

I agree, but I think this often gets forgotten as the touting example shows.

Comment author: rohinmshah  (EA Profile) 03 January 2018 03:44:51AM 4 points [-]

Crucial Premise: Necessarily, the more someone is willing to pay for a good, the more welfare they get from consuming that good.

It seems to me that this premise as you've stated it is in fact true. The thing that is false is a stronger statement:

Strengthened Premise: Necessarily, if person A is willing to pay more for a good than person B, then person A gets more welfare from that good than person B.

For touting/scalping, you also need to think about the utility of people besides Pete and Rich -- for example, the producers of the show and the scalper (who is trading his time for money). Then there are also more diffuse effects, where if tickets go for $1000 instead of $50, there will be more Book of Mormon plays in the future since it is more lucrative, and more people can watch it. The main benefit of markets is mainly through these sorts of effects.

Comment author: Halstead 03 January 2018 11:55:40AM *  0 points [-]

Incidentally, I think the Crucial Premise as understood in the single person sense is also false. There are cases in which someone would be willing to pay more for something which is bad for them. e.g. drug addicts, tools to commit suicide with (in some cases) etc.

Comment author: Halstead 03 January 2018 11:51:00AM 0 points [-]

Thanks, yes my formulation was meant in the interpersonal way you suggest. Your formulation is more precise, so preferable and I will update in the main text.

I agree that the effects you mention are also important.

Comment author: Larks 04 January 2018 02:32:39AM 0 points [-]

Not only is it not necessarily true that actual willingness to pay determines consumer preference, it is not even usually true. Differences in willingness to pay are to a significant extent and in a huge range of cases driven by differences in personal wealth rather than by differences in consumer preference. Rich people tend to holiday in exotic and sunny places at much higher rates than poor people. This is entirely a product of the fact that rich people have more money, not that poor people prefer to holiday in Blackpool. I think the same holds for the vast majority of differences in market demand across different income groups.

This is probably empirically true between income groups, but I don't think it's true between individuals, even of different income levels. Most people have zero demand for most goods, due to a combination of geographic location, lack of interest and diminishing marginal utility, and this is the main determinant of differences in demand between individuals.

For example, I have 0 demand for sandwiches right now - hence why sandwiches can be bought all over the world by people with incomes <1% of mine. This sort of case, where markets do correctly allocate sandwiches, strikes me as being the norm in markets, rather than the exception.

(I realise this does not directly contradict your point but wanted to ensure readers did not draw an unnecessarily strong conclusion from it)