Preferences may reflect past manipulation or distorting psychological influences Elster In addition, if preference satisfaction constitutes welfare, then policy makers can make people better off by molding their wants rather than by improving conditions. Furthermore, it seems unreasonable that social policy should attend to extravagant preferences. Rather than responding to these objections and attempting to defend the view that preference satisfaction constitutes well-being, economists can blunt these objections by taking preferences in circumstances where people are self-interested and good judges of their interests to be merely good evidence of what will promote welfare Hausman and McPherson , Hausman There are some exceptions, most notably Amartya Sen a,b,c, , but most economists take welfare to coincide with the satisfaction of preference.
Because the identification of welfare with preference satisfaction makes it questionable whether one can make interpersonal welfare comparisons, few economists defend a utilitarian view of policy as maximizing total or average welfare. Harsanyi is one exception, for another see Ng Economists have instead explored the possibility of making welfare assessments of economic processes, institutions, outcomes, and policies without making interpersonal comparisons.
A Pareto efficient state of affairs avoids this failure, but it has no other obvious virtues. For example, suppose nobody is satiated and people care only about how much food they get. Consider two distributions of food. In the first, millions are starving but no food is wasted. In the second, nobody is starving, but some food is wasted. The first is Pareto efficient, while the second is not. The notions of Pareto improvements and Pareto efficiency might seem useless, because economic policies almost always have both winners and losers.
Mainstream economists have nevertheless found these concepts useful in two ways. First, they have proved two theorems concerning properties of perfectly competitive equilibria Arrow The first theorem says that equilibria in perfectly competitive markets are Pareto optimal, and the second says that any Pareto optimal allocation, with whatever distribution of income policy makers might prefer, can be achieved as a perfectly competitive market equilibrium, provided that one begins with just the right distribution of endowments among economic agents.
This interpretation is problematic, because no economy has ever been or will ever be in perfectly competitive equilibrium. The second theorem provides some justification for the normative division of labor economists prefer, with economists concerned about efficiency and others concerned about justice. The thought is that the second theorem shows that theories of just distribution are compatible with reliance on competitive markets. The two fundamental theorems of welfare economics go some way toward explaining why mainstream economists, whether they support laissez-faire policies or government intervention to remedy market imperfections, think of perfectly competitive equilibria as ideals.
The other way that economists have found to extend the Pareto efficiency notions leads to cost-benefit analysis, which is a practical tool for policy analysis Mishan ; Sugden and Williams ; Adler and Posner , ; Broadman et al. Suppose that S is not a Pareto improvement over R. Some members of the society would be losers in a shift from R to S. In other terms, the amount of money the winners would be willing to pay to bring about the change is larger than the amount of money the losers would have to be compensated so as not to object to the change.
Economists are skeptical about what one learns from asking people how much they would be willing to pay, and they attempt instead to infer how much individuals are willing to pay indirectly from market phenomena. According to cost-benefit analysis, among eligible policies which satisfy legal and moral constraints , one should, other things being equal, employ the one with the largest net benefit. Note that the compensation is entirely hypothetical. Potential Pareto improvements result in winners and losers, the justice or injustice of which is irrelevant to cost-benefit analysis.
Justice or beneficence may require that the society do something to mitigate distributional imbalances. Despite the practical importance of cost-benefit analysis, the technique and the justification for it sketched in the previous paragraph are problematic. One technical difficulty is that it is possible for S to be a potential Pareto improvement over R and for R to be a potential Pareto improvement over S Scitovsky , Samuelson !
Cost-benefit analysis weights the preferences of the rich more than the preferences of the poor Baker It is possible to compensate roughly for the effects of income and wealth Harburger , Fankhauser et al. A further serious difficulty for traditional welfare economics, which has been as it were hiding in plain sight, is the fact that choices are imperfect indicators of preferences, which are in turn imperfect indicators of what enhances well-being. The same facts that show that preference satisfaction does not constitute well-being false beliefs, lack of information, other-directed and non-rational preferences show that choices and preferences are sometimes misleading indicators of well-being.
Moreover, once one recognizes that preferences are good indicators of welfare only if agents are good judges of what will benefit them, one is bound to recognize that agents are not always good judges of what will benefit themselves, even when they have all the information they need. In some contexts, these problems may be minor.
In other contexts, such as environmental protection, preferences for ignoring the problems are often badly informed, while preferences to take action are typically not self-interested. Either way, popular preferences among policies to address environmental problems are unlikely to be a good guide to welfare. Ignoring these problems has been a great convenience to normative economics. But whether or not it is advisable, successful paternalism is not impossible; and recent work by behavioral economists, which document a wide variety of systematic deliberative foibles, has put questions concerning paternalism back on the table Ariely , Kahneman Others have argued that policy makers must respect the preferences of agents among their ends or objectives, while overruling preferences among means when these are distorted by bad judgment or false beliefs Thaler and Sunstein , Le Grand and New Although welfare economics and concerns about efficiency dominate normative economics, they do not exhaust the subject, and in collaboration with philosophers, economists have made important contributions to contemporary work in ethics and normative social and political philosophy.
Section 5. In addition economists and philosophers have worked on the problem of providing a formal characterization of freedom so as to bring tools of economic analysis to bear Pattanaik and Xu , Sen , , , Carter , Sugden Others have developed formal characterizations of social welfare functions that prioritize the interests of those who are less well off or that favor equality of resources, opportunity, and outcomes and that separate individual and social responsibility for inequalities Pazner and Schmeidler , Varian , , Roemer b, , Fleurbaey , , Fleurbaey and Maniquet , Greaves , McCarthy , John Roemer has put contemporary economic modeling to work to offer precise characterizations of exploitation Amartya Sen and Martha Nussbaum have not only developed novel interpretations of the proper concerns of normative economics in terms of capabilities Sen , Nussbaum and Sen , Nussbaum , which Sen has linked to characterizations of egalitarianism and to operational measures of deprivation There are many lively interactions between normative economics and moral philosophy.
See also the entries on libertarianism , paternalism , egalitarianism , and economic justice. The frontiers between economics and philosophy concerned with methodology, rationality, ethics and normative social and political philosophy are buzzing with activity. This activity is diverse and concerned with very different questions. Although many of these are related, philosophy of economics is not a single unified enterprise. It is a collection of separate inquiries linked to one another by connections among the questions and by the dominating influence of mainstream economic models and techniques.
The following bibliography is not comprehensive. It generally avoids separate citations for methodological essays in collections. It does not list separately the essays on economic methodology from special issues on philosophy and economics. A large number of essays on philosophy of economics can be found in the journals, Economics and Philosophy , The Journal of Economic Methodology and the annual series Research in the History of Economic Thought and Methodology.
Readers may want to consult the Journal of Economic Methodology , Vol. For a comprehensive bibliography of works on economic methodology through , see Redman Since , works on methodology can be found under the number B4. Works on ethics and economics can be found under the numbers A13, D6, and I3. There are now a large number of blogs by prominent economists.
Though not predominantly concerned with methodology and typically not exclusively concerned with economics, these blogs show economists arguing with one another, responding to current events, and formulating and reformulating their views. The following are of particular interest, but there are many more:.
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Introduction: What is Economics? Six central methodological problems 2. Influential approaches to economic methodology 4. Rational choice theory 5. Economics and ethics 6. Six central methodological problems Although the different branches and schools of economics raise a wide variety of epistemological and ontological issues concerning economics, six problems have been central to methodological reflection in this philosophical sense concerning economics: 2. Those who have wondered whether social sciences must differ fundamentally from the natural sciences seem to have been concerned mainly with three questions: i Are there fundamental differences between the structure or concepts of theories and explanations in the natural and social sciences?
Influential approaches to economic methodology The past half century has witnessed the emergence of a large literature devoted to economic methodology. Here is a list of three of the many areas of current interest: 1. Rational choice theory Insofar as economics explains and predicts phenomena as consequences of individual choices, which are themselves explained in terms of alleged reasons, it must depict agents as to some extent rational. P if P then Q Q Individual 1 true true true Individual 2 false true false Individual 3 true false false Society true true false The judgments of each of the individuals are consistent with the principles of logic, while social judgments violate them.
Economics and ethics As discussed above in Section 2. Conclusions The frontiers between economics and philosophy concerned with methodology, rationality, ethics and normative social and political philosophy are buzzing with activity. Bibliography The following bibliography is not comprehensive.
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Economic methodology Ackroyd, S. Fleetwood, Alchian, A. Alt, J. Levi, and E. Ostrom eds. Amariglio, J. Cullenberg, D. Ruccio eds. Angyrous, G. Ardalan, K. Ariely, D. Arrow, K. Hahn, Aruka, Y. Auerbach, P. Ayer, A. Backhouse, R. Hausman, and U. Medema, Fontaine eds. The Unsocial Social Science? Bateman, Balzer, W. Hamminga eds. Philosophy of Economics , Dordrecht: Kluwer-Nijhoff. Bardsley, Nicholas and Robin Cubitt, Barker, D.
Kuiper eds. Bateman, B. Baumberger, J. Bear, D. Orr, Becker, G. Beckert, J. Beed, C. Begg, D. Bell, D. Kristol eds. Ben-Ner, A. Putterman eds. Berger, L. Bhaskar, R. Archer, A. Collier, T. Lawson, and A. Norrie eds. Critical Realism , London: Routledge. Billings, D. Binder, C. Heilmann, and J. Vromen, Birks, S. Birner, J. Dissertation, University of Amsterdam. Blaug, M. The Cambridge Revolution. Success or Failure? Blinder, A. Boehm, S. Is There Progress in Economics? Boettke, P. Coyne, eds. Boland, L. Bonar, J. Boulding, K. Boulier, B. Boumans, M. Davis, Boylan, T.
Branas—Garza, P. Cabrales eds. Experimental Economics , 2 volumes, London: Macmillan. Bray, J. Brennan J. Jaworski, Brennan, T. Bronfenbrenner, M. Broome, J. Brousseau, E. Glachant eds. Brown, Andrew and Steve Fleetwood, Critical Realism and Marxism , London: Routledge. Bruni, L.
Brunner, K. Brzezinski, J. Coniglione, R. Kuipers, and L. Nowak eds. Buchanan, J. What Should Economists Do? Indianapolis: Liberty Press. Vanberg, Buechner, M. Cairnes, J. Kelley, Caldwell, B. How Should It Be Practiced? Camerer, C. Loewenstein, and M. Rabin eds. Loewenstein and D. Prelec, Cohen, E. Fehr, P. Glimcher, D.
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Laibson, G. Loewenstein, and R. Montague, Kagel and A. Roth eds. Loewenstein eds. Caplin, A. Schotter eds. Carter, M. Maddock, Rational Expectations: Macroeconomics for the s? London: Macmillan. Chipman, J. Martindale ed. Clift, E. Coase, R. Coats, A. Coddington, A. Cohen, I. Daniels, and N. Eyal eds. Colander, D. Klamer, Cole, K. Cameron, and C. Edwards, What Economists Disagree , 2nd ed. London: Longmans. Coleman, J. Collins, H.
Cook, S. Cooter, R. Rappoport, Coyne, C. Storr eds. Crespo, R. Cross, R. Cullenberg, S. Amariglio, and F. Postmodernism, Economics, and Knowledge , London: Routledge. Cyert, R. Grunberg, Pottinger, Danner, P. Cartelier eds. Is Economics Becoming a Hard Science? Davies, William, Davis, J. Boumans, Wade Hands eds. Marciano, and J. Runde eds. De Alessi, L. Deaton, A. Debreu, G. Theory of Value , New York: Wiley. Dekker, E. Delorme, R. De Marchi, D. Blaug eds. DeVroey, M. Diesing, P. Dietrich, F. List, Dillard, D. Dolan, E. Dolan, Paul and Daniel Kahneman, Dopfer, K.
Potts, Dow, S. Dugger, W. Durlauf, Steven and Lawrence Blume eds. Dyke, C. Edwards, P. Mahoney, and S. Vincent eds. Eichner, A. Eichner ed. Sharpe, pp. Elster, J. Roemer eds. Engle, R. Hendry, and J. Richard, Engelskirchen, H. Etzioni, A. The Moral Dimension. Fama, E. Ferber, M.
Nelson eds. Fisher, R. Fleetwood, S. Foldvary, F. Fox, G. Frank, R. Frankfurter, G. McGoun eds. Fraser, L. Economic Thought and Language. Freedman, C. Frey, B. Friedman, M. Rima ed. Fullbrook, E. The Crisis in Economics , London: Routledge. Furubotn, E. Richter eds. Gani, M. Gaus, G. Gay, D. George, D. Gerrard, B. Georgescu-Roegen, N. Geweke, J.
Hildenbrand ed. Gibbard, A. Varian, Giocoli, Nicola, Glimcher, P. Foundations of Neuroeconomic Analysis. New York: Oxford University Press. Camerer, R. Poldrack, and E. Fehr eds. Neuroeconomics , second edition, New York: Academic Press. Gonzalez, W. Gordon, D. Granger, C. Granovetter, M. Grapard, U. Hewitson eds. Green, E. Grossbard-Shechtman, S. Clague eds. Grundberg, E. Guala, F. Gugerty, Mary Kay and Dean Karlan, Gul, F. Pesandorfer, Gurak, H. Gustafsson, B. Knudsen, and U. Haavelmo, T. Hahn, F.
Hagedorn, H. Hollis eds. Hall, R. Hitch, Hamminga, B. DeMarchi eds. Idealization in Economics , Amsterdam: Rodopi. Hammond, J. Hands, D. Mirowski, Harcourt, G. Kriesler eds. Hardt, L. Harrod, R. Hausman, D. Journal of Economic Methodology. The Philosophy of Economics: An Anthology , 3rd. Cambridge: Cambridge University Press.
Hausman, J. Hayek, F. Heilbroner, R. Helm, D. Henderson, W. Dudley-Evans, and R. Backhouse eds. Economics and Language , London: Routledge. Hendry, D. Econometrics — Alchemy or Science? Herrmann-Pillath, C. Herzog, L. Hey, J. Experiments in Economics , Oxford: Blackwell. Hicks, J. Allen, Hirsch, A. Hirsch, F. Hirschman, A. Hodgson, B. Hodgson, G. London: University of Chicago Press. Knudsen, Holcombe, R. Holland, J. Holyoak, R. Nisbett, and P. Thagard, Hollis, M. Nell, Hoover, K. Horn, K. Horwitz, S. Hull, D. Hume, D. Rotwein ed. Humphries, J. Gender and Economics , Aldershot: Edward Elgar.
Hutchison, T. Infante, G. Lecouteux, and R. Sugden, Jacquemet, N. Jacobs, M. Mazzucato eds. Jalladeau, J. Janssen, M.
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Tan, Jarvie, I. Zamora-Bonilla, Jensen, M. Meckling, Jespersen, J. Jevons, W. Johnson, J. Nowak, P. Ormerod, B. Rosewell, and Y. Zhan eds. Kagel, J. Kahneman, D. Knetsch, and R. Thaler, Kaldor, N. Kamarck, A. Karlan, Dean and Jacob Appel, Katouzian, H. Kaufmann, F. Keen, S. Keynes, J. Kelley, ; 1st edition, Kincaid, H. Ross eds. Kirman, A. Kirzner, I.
Equality, Planning, and the Market Economy: An Interview with Austrian Economist Ludwig Lachmann
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Cronin eds. Lehtinen, J. Ylikoski eds. Leibenstein, H. Leijonhufvud, A. Leonard, Thomas C. Leontief, W. Lester, R. Levine, A. Sober, and E. Wright, Reconstructing Marxism , London: Verso. Lewis, P. Transforming Economics , London: Routledge. Lichtenstein, S. Slovic eds. Linsbichler, A. Was Ludwig von Mises a Conventionalist? Lipsey, R. Lancaster, —7. List, John and Anya Samek eds. Little, D. Loasby, B. Loewenstein, G. Rick, and J. Cohen, On Economic Knowledge. Lucas, R. McClelland, P. McCloskey, D. McCloskey, Deirdre N. Ziliak, Machlup, F. Essays on Economic Semantics , ed.
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