I favor a utilitarian approach to public policy. One common objection to this criterion is that we cannot measure utility, and hence there is no objective way to use utility maximization as a guide to policy.
I certainly agree that it is impossible to measure utility with any sort of precision, a fact that does somewhat reduce the attractiveness of utility maximization as a policy criterion. Nonetheless, I believe utilitarianism is the least bad option, for two reasons:
1. Individuals who engage in charitable activities seem to use something close to utility as a guide to their decisions. Thus it is far more common to see charity that involves redistribution from the rich to the poor than vice versa.
Suppose it was literally true that we had no idea whether the marginal utility of an extra dollar was higher for the poor than for the rich. Then there would be no basis for the sort of income redistribution that we often see from philanthropists.
One counterargument is that philanthropists rarely engage in simple income redistribution, rather they often devise more paternalistic schemes such as helping the poor have access to more food, clothing, education or health care. But that’s not really a criticism of utilitarianism; it’s an implied criticism of the view that something like a Universal Basic Income is the best policy from a utilitarian perspective. Between 1973 and 1981, I was “poor” in an income sense, but I doubt there would have been much value in a billionaire donating money to me. Alternatively, if a poor person is addicted to drugs or alcohol, it’s not obvious that giving them money will make them better off.
2. While it’s true that one cannot directly measure utility, it’s also true that one cannot directly measure many of the alternative potential goals of public policy. Thus suppose your alternative criterion for public policy was simply “protect natural rights”. We would have the same problem as with utility maximization—it’s difficult to measure natural rights.
Consider gun rights. If people in some sense have a natural right to bear arms, that then forces us to define exactly which arms they have a right to bear. Ordinary rifles? Semi-automatics? Machine guns? Artillery? Truck bombs? I am sympathetic to Jeremy Bentham’s argument that the concept of “natural rights” is just “nonsense on stilts”. When I try to think about what sort of legal or constitutional right to bear arms make sense, I’m unable to do so in anything other than utilitarian terms. Which legal definition of this right works best? If I did try to come up with a definition of a “natural” right to bear arms, I’d be using the same sort of judgment or intuition that utilitarians get criticized for using in other areas of public policy—trying to base policy on things that cannot be directly measured.
One thing that we can measure (imperfectly) is GDP (or consumption.) So perhaps we should simply have public policymakers maximize GDP and call it a day. And indeed for many policy areas–including my own field of monetary policy–maximizing GDP does provide a rough approximation of success. But in other areas such as environmental policy it does not.
An alternative approach would be to maximize GDP adjusted for externalities. To some extent we can use market prices to estimate external effects, say by comparing the price of a house next to a noisy airport and an equivalent house somewhere quieter. But once we start down that road, it’s hard to know where to stop. How about maximizing GDP adjusted for externalities and inequality? It might even be possible to measure how fast the marginal utility of an extra dollar declines as income rises. You could have a billionaire or a wealthy institution go to a low-income country and offer very poor people the choice between a certain $10,000 and a 50-50 shot at $100,000, and other similar wagers. Over time they’d be able to estimate the utility function for income or wealth. That information might provide data of interest to policymakers designing the optimal tax system.
My point is not that utility can be directly measured; I don’t believe that. Rather I am arguing that it’s not clear that trying to measure utility is any more difficult than trying to measure any other plausible policy goal. No one who contributes to charity knows for certain how it will impact the persons they are trying to help, or indeed even their own welfare. And yet people still give money to charity. We all make life decisions based on our best guess, and that will inevitably be true of the government as well.
READER COMMENTS
Garrett
Jul 28 2021 at 1:47pm
So you’re saying we can’t be precise in measuring utility, but we can be accurate, in that we can draw useful conclusions as to direction (good/bad) and (relative) magnitude of utility from policies.
I’m reminded of the Iron Law of Evaluation. If most social programs were measured accurately and judged in terms of their impact on aggregate utility, would they be kept?
bb
Jul 28 2021 at 2:41pm
Scott,
I generally agree with this post. I do wonder how this squares with your views on inequality? Inequality does seem to me to be a good indicator of where a dollar can find the highest marginal utility. I’m guessing that from 1973 to 1981, you were a student without children. While the additional income may not have added much utility for you (I’m skeptical), the median low income, low wealth, 24 year old is probably not building up significantly human capital pursuing a doctorate in economics from a world class university, and probably would receive a boost in utility from some sort of additional income. I’ve read you in the past, and know that you view income as a poor target and prefer consumption. This has always made me uneasy, because debt fueled consumption does not provide the same utility to me as income fueled consumption. Should household wealth, which can provide both current and future consumption as well as security, be included as the less that perfect, but still pretty good, list of measures of marginal utility.
And if anyone is doubting that wealth, and comparative wealth with your peers, doesn’t effect marginal utility, look no further that Bezos and Branson. I can make any neighbor jealous by buying a really cool grill.
ssumner
Jul 29 2021 at 10:52am
I’m not sure what you are asking. I do agree that the marginal utility of a dollar tends to fall as income rises.
nobody.really
Jul 28 2021 at 5:39pm
Uh … kinda. I explain gifts to charity the same way I explain any other expenditure: It tends to maximize the SPENDER’s utility function. And I expect that government social programs tend to promote the GOVERNMENT’s utility function (which might be some function of the utility function of policy makers, campaign donors, etc.)
In fairness, I expect that spenders/donors often act with compassion–that is, spenders consider the welfare of their neighbors as part of their own utility functions. But my utility function his heavily influenced by matters about which I have knowledge/beliefs. I cared about black victims of apartheid in South Africa because I was raised in the United States where we focused attention on injustice to black Americans. I regarded helping black South Africans as a proxy for helping black Americans. I gave no thought to black people in neighboring countries because I had no knowledge/beliefs about their plights.
Mostly, I expect that donors get their reward (a boost in utility) immediately upon making the donation. If the donation actually helps another human being, that’s nice, too–but only indirectly related to the donor’s utility.
Frank
Jul 28 2021 at 6:18pm
Well, under completely general conditions, there can be no aggregate utility function [Arrow, 1950]. One way, not the only way, to get to an aggregate utility function is to restrict ourselves to people whose utility functions are “single peaked” on individual issues [Black, 1948], and learn that the median voter determines maximum social welfare on any one issue. My guess is that that’s usually [?] OK. Then, we can find the aggregate utility function by majority vote. Which is what we have. 🙂
Except for political tricks.
Kevin Dick
Jul 28 2021 at 6:50pm
I would be a little more precise.
Policymakers should work to build institutions and promote norms that maximize expected utility.
They should also dismantle institutions and undermine norms that decrease expected utility.
The former distinction is important when it comes to issues like expanding federal criminal laws and enacting bailouts.
The latter may seem superfluous in a technical sense, but policymakers seem to have a strong bias for “helping” by adding something new and helpful rather than eliminating something old and harmful.
ssumner
Jul 29 2021 at 10:54am
I agree.
Andrew_FL
Jul 28 2021 at 6:56pm
People engage in charity because they derive utility from doing so, not because the recipients do.
Whether a poor person would derive greater utility from a dollar more of income than a wealthy person isn’t just a question we can’t know the answer to, it’s a nonsensical question, akin to asking which of them loves vanilla ice or cream or the color blue more the the other.
nobody.really
Jul 29 2021 at 1:30am
How do we explain the backward-bending labor supply curve? This curve illustrates that a typical worker will begin to work LESS when hourly income gets large enough. In other words, people seem to regard leisure as a superior good: As they get richer, they buy more of it by willing surrendering the opportunity to earn an extra dollar–opportunities that a poorer person would not have surrendered.
To me, this suggests a very common economic phenomenon: Diminishing marginal returns. In this case, it’s the diminishing marginal returns on each extra dollar.
Thus, even if I could not establish that any specific human being would derive more utility from a dollar than any other, I still expect that an extra dollar would tend to have a greater effect on the life of a destitute person than on the life of a millionaire.
Christophe Biocca
Jul 29 2021 at 8:47am
Maybe the millionaire started out valuing each dollar way higher, such that even at the 1 millionth unit, his marginal utility is still higher than the destitute person’s.
There’s some weak evidence for that, in that the millionaire didn’t stop working, or cut back on his work hours, at the 1/2 million mark, or 250k, etc. That argument doesn’t work for people whose income isn’t correlated with their effort (lottery winners, heirs), but for those people that have the choice to keep trading leisure vs money, you should expect a weak positive correlation between “subjective value of Nth dollar relative to everything else” and “actual wealth”.
Whether that makes up for the diminishing marginal return is another question. As is the validity of using cardinal utilities in the first place (as I understand it, Austrian economists are very adamant that we only have evidence of ordinal utilities, cardinal utilities being at best a mathematical convenience that gives equivalent results, at worst misleading/meangingless – interpersonal comparison falling into the latter category)
Andrew_FL
Jul 29 2021 at 3:15pm
None of what you just said requires any interpersonal utility comparison to be made, so I don’t understand what I have to explain.
ssumner
Jul 29 2021 at 10:57am
Andrew, You said:
“People engage in charity because they derive utility from doing so, not because the recipients do.”
But it’s often the case that the giver derives utility because the receiver is better off, or at least the giver thinks the receiver is better off..
Thomas Lee Hutcheson
Jul 28 2021 at 9:28pm
The objections to utilitarianism seem to usually come down to extreme cases. If we restrict ourselves to marginal changes in policy, utilitarianism seem like the only way to discuss things.
Rajat
Jul 29 2021 at 1:32am
I haven’t much studied philosophy, but I wonder whether your implicit definition of utilitarianism is a bit tautological. You refer to paternalistic schemes as consistent with a utilitarian perspective, because it’s not clear that just giving people money will make the recipients better off. But once we move away from subjective values of utility (or at least, revealed preference), we can describe any policy in utilitarian terms – and in fact, most proponents of policies do. I think a negative income tax would be better than a progressive income tax system (replace with consumption taxes if you prefer) because I think it will encourage people to work hard and to accumulate human, social and financial capital and those are some of the things that make life rewarding. Under current policy settings, I believe people are deterred from realising and acting on this insight. But I could say the same about pro-natalist policies (see Yglesias’s recent post) , or encouraging religiously, or dare I say, protecting ‘natural rights’. This is not to say I have a better idea, but that I’m not sure how much information is conveyed when someone claims to subscribe to utilitarianism.
ssumner
Jul 29 2021 at 11:03am
I’d say that revealed preference is just a technique. Utilitarianism itself is about maximizing aggregate utility, not maximizing things that people may or may not believe makes them happier. Revealed preference is often a useful tool, just as GDP maximization is often a useful tool. But it’s not utilitarianism itself.
I don’t think my definition is even controversial. There’s pretty widespread agreement that destructive addiction is a real thing, although there is disagreement as to what to do about it.
ChrisA
Jul 29 2021 at 3:49pm
Nice to see Tyler has similar view on utilitarianism as myself (from his recent conversation with Niall Ferguson). For instance a poor person may not have greater marginal utility for a dollar than a rich person, if the poor person uses that dollar to get drunk and then beats their spouse, versus the rich person investing the dollar and creating additional wealth for society.
However I think there is something in when someone advocates a particular action using utilitarian arguments, we can evaluate this argument to see if it is actually consistent. Sort of like if someone says they like chocolate but then refuses to eat chocolate which suggests in fact they don’t. I think there are a lot of public programs in this category.
John Alcorn
Jul 30 2021 at 11:32am
Re:
Unlike utilitarians, those who favor natural rights aren’t trying to measure and maximize something.
Take your example, the right to bear arms. If this is a right, then there is presumption that adults may bear arms. But the right is not absolute. Citizens argue about the margin. Almost everyone will agree that private citizens may not bear nuclear arms. The argument takes place at a different margin. Econometricians might adduce tentative evidence about impacts of firearms policies on crime, but those “measurements” aren’t dispositive. The debate is, and should be, also qualitative, to the points, as each side tries to rebut counter-arguments.
Scott Sumner
Jul 30 2021 at 11:51am
I don’t think that actually addresses my argument. I am saying that arguments against utilitarianism that reply on an inability to measure utility are weak because we have the same problem for other potential policy goals.
Thus one person might say “In my judgment, a person has a right to bear arms.” Another might say “In my judgment, the marginal utility of income falls as income rises.” Both are reasonable arguments, reasonable judgments, but neither can be established using scientific techniques of measurement.
John Alcorn
Jul 30 2021 at 2:27pm
My understanding is that utilitarians are a subset of consequentialists. Not all consequentialists emphasize a common metric of outcomes. But utilitarians do.
Unlike utilitarians — but like some other consequentialists — most people who favor natural rights don’t emphasize metrics, much less any aggregate metric of rights.
John Alcorn
Jul 30 2021 at 11:46am
Re:
I’m not an expert in patterns of philanthropy. However, casual observation suggests that much philanthropy mimics at least the first half of the Matthew Effect: “For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.”
This pattern is evident in gifts to prestigious colleges and universities in America.
Scott Sumner
Jul 30 2021 at 11:53am
I doubt that many poor people donate money to rich universities. Furthermore, some of the donations are for programs to allow scholarships for low income students, who tend to pay far lower tuition than rich students.
John Alcorn
Jul 30 2021 at 2:08pm
My point is not that “many poor people donate money to rich universities.” Rather, much philanthropy (by the rich) consists in gifts to an alma mater already rich in assets (endowment). John Cochrane has called university endowments “hedge funds with a football team.” Most current-use gifts and income from endowment aren’t restricted to needy students. Roughly 40 – 50 percent of students at Ivies don’t qualify for need-based financial aid, but enjoy large benefits of philanthropy. Perhaps half of philanthropy to prestigious universities provides education and amenities to youths from prosperous families. Much of the remainder is a transfer to currently needy youths who soon will prosper.
Perhaps readers who have empirical expertise can shed more light about patterns of philanthropy in higher education and medicine.
My hunch is that taxpayer funding of public universities, Medicare, and Medicaid has an unintended consequence, shifting philanthropy away from the poor. But I will follow the evidence where it leads.
Scott Sumner
Jul 31 2021 at 3:56pm
You said:
“My point is not that “many poor people donate money to rich universities.” Rather, much philanthropy (by the rich) consists in gifts to an alma mater already rich in assets (endowment). John Cochrane has called university endowments “hedge funds with a football team.””
Fine, but then it has no bearing at all on anything I said in the post or the comments.
You said:
“rich in assets (endowment)”
“Rich in assets” is an interesting phrase. Would you agree that the federal food stamp program is rich in expenditures?
John Alcorn
Jul 31 2021 at 9:53pm
My comment does bear on your post. You wrote:
My comment raised a relevant empirical question: Do the rich mainly give to the poor? I conjectured a major counter-example of intergenerational philanthropy among the rich (from old to young, on the basis of alma mater lineage): philanthropic gifts to prestigious universities.
Now, the thrust of your post is that charity is utilitarian. Maybe intra-elite philanthropy on the basis of alma mater lineage maximizes utility. (As you say, a judgment call.) But is it redistribution from the rich to the poor?
I raised a similar question about philanthropy to medicine. I conjectured a mechanism: crowding out of charity from rich to poor by public subsidies (taxpayer-funded public universities, Medicare, and Medicaid.)
These are empirical questions, which bear on your post, and which experts in patterns of philanthropy might answer.
PS: The Federal food stamp program (a means-tested program) is redistribution from rich (and middle class) to poor. Your analogy to universities isn’t apt. At the Ivies, gifts to endowment and current-use gifts provide major subsidies (largely or mainly?) to students who wouldn’t qualify for any financial aid, even under to the Ivies’ very generous “institutional formula” for aid. Most charity to elite universities is not means-tested. (Some gifts are earmarked for needy students, in ways that cannot be diverted to “budget relief” — easier said than done.)
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