Wednesday, August 26, 2009

Fairness in Economics

One of the first things you learn in a social science class is the difference between positive and normative analysis. The two are considered kind of like opposites: positive analysis seeks to understand how things are, whereas normative analysis seeks to figure out how things should be. Another way of putting it is that positive analysis is value based, whereas normative analysis is not. Positive analysis can inform normative analysis, but the two are kept decidedly separate.

Recently in my political philosophy class, the professor was discussing how economists view fairness. He cited surveys of economists about fairness where the economists did not understand how to answer the question; they could not understand what "fairness" meant, or what it was (and those with a background in Pareto-efficiency will have an inkling for why that is). He also talked about a book that goes on for pages and pages only to conclude that fairness is a preference--like your taste for wine or where you buy your furniture. Somehow, said my professor, it seems they're missing the point.

These economists seem to have come to understand the H. economicus model so well that they actually are starting to think it, to incorporate its values, to live it. Remember that H. economicus was meant to be a strictly positive model. Whether we like it or not, people are result-oriented (which is part of what the model says)--but that by no means implies that we should be that way. The model should fit you, not the other way around.

These economists, however, are going the other way around, converting themselves from H. sapiens to H. economicus; or, in other words, they are understanding their positive model in a normative way.

There are, broadly, two possible explanations for why this is occurring. First, it could be that H. economicus-type people self-select themselves into the economics discipline, so the study itself has no effect on them. Second, perhaps economists have trained themselves to think in the H. economicus direction for so long that it has in fact rubbed off on them, so that is all they see.

If so, that mindset needs to end. Fairness should be central to economics. What's the point of having wealth if various factions are going to waste it all fighting over it?

Update: I spoke too soon: it turns out that theories of rationality must necessarily contain normative notions--and H. economicus is a model of rational action. However, I stand by my broader point that fairness matters in economics, and it seems economists don't take it seriously enough. Intuitively, it seems that fairness is not only something people do care about, but should care about.

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