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.
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.
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.
 The great John Broome discusses this on p.15 here - http://users.ox.ac.uk/~sfop0060/pdf/Valuing%20policies%20in%20response%20to%20climate%20change,%20some%20ethical%20issues.pdf