Social Utility and Envy

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In a previous essay the present author commented on the role of envy in relation to greed. This short post will seek to comment on the relationship between social utility and envy, elaborating on a position put forward by Murray N Rothbard.

Rothbard treated the problem of envy and societal wealth in the following way:

If A and B trade two goods or services, they each do so because they will be, or rather expect to be, better off as a result of the trade. Surely it is legitimate then to say that A and B are both better off, and “therefore” that “society is better off,” since no one demonstrably loses by the exchange. It is implicit, and even explicit from the use of the value-loaded term “optimal,” that this exchange is therefore a “good thing.” I am sympathetic to the view that this exchange is a good thing, but I do not believe that this can be concluded merely from the fact of exchange, as the Pareto Optimum does. In the first place, there might well be one or    more people in existence who dislike and envy A or B, and who therefore experience pain and psychic loss because the object of their envy has now improved his lot. We cannot therefore conclude from the mere fact of an exchange that “everyone” is better off, and we can therefore not simply leap to the valuation idea of social utility. In order to pronounce this voluntary exchange as “good,” we need another term to our syllogism: we must make the ethical pronouncement that envy is evil, and should not be allowed to cloud our approval of the exchange. But in that case we are back to the need for a coherent ethical system. I believe, as an “ethicist,” that envy is evil, but I see no willingness among economists to admit the need for, much less set forth, any sort of coherent ethical position.1

In an earlier article he provided an elaboration as to why the potential for envy does not prevent us from saying that societal wealth increases from free exchange:

But what about…the envious man who hates the benefits of others? To  the extent that he himself has participated in the market, to that extent he reveals that he likes and benefits from the market. And we are not interested in his opinions about the exchanges made by  others, since his  preferences are not demonstrated through action and are therefore irrelevant. How do we know that this hypothetical envious one loses in utility because of the exchanges of others? Consulting his verbal opinions does not suffice, for his proclaimed envy might be a joke or a literary game or a deliberate lie. We are led inexorably, then, to the conclusion that the processes of the free market always lead to a gain in social utility. And we can say this with absolute validity as economists, without engaging in ethical judgments.2

In other words because of the concept of preference demonstrated through action it is not possible to determine whether a third party is envious:

Actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis.3

Nevertheless I believe a stronger and more precise elaboration can be made. From the fact of action we are able to deduce that a person acts to bring about a set of circumstances that he prefers to those that exist prior to the action. But this valuation of circumstances is made ex-ante, a fact to which Rothbard alludes but passes over, in the first passage quoted above. It is an assessment of the value of that which is against that which he/she wants to bring about. It is only in this ex-ante sense that we are able to say that if A and B participate in a voluntary exchange that they are “better off”. The envy of a third party, however, can only arise at the ex-post stage, that is after the completion of the action – the envy is of the circumstances that have arisen as a result of the action. In the ex-ante position the action exists only in the mind of the acting individual/s. Any feelings of third parties must necessarily arise because of the state of the world as it is prior to action, not because of it. When we say that societal wealth increases from a voluntary action we mean that this is true only ex-ante.

The situation ex-post is markedly different. At this point we are, in fact, not able to deduce if anyone is better off, even the parties to the exchange let alone potentially envious third parties. So not only may third parties be envious and bitter at what has arisen from A and B’s exchange but A and/or B themselves may feel that they have suffered a psychic loss and, if they could have their time again, would not repeat the exchange. Once the actions are completed and the desires of the minds of the acting individuals have expressed themselves through real actions we move into the ex-post world where nothing more about the action can be said.

Why are we not able to determine this ex-post situation? Precisely because of the concept of demonstrated preference elaborated above. Unless valuations are expressed through action we cannot deduce at all the ex-post position. A person may be profitable, loss-making, envious, hurt or whatever but this is merely hypothetical without the specific evaluation of the individual being deducible through his actions.

It follows that when different methods of economic organisation are being compared, it is only the ex-ante consideration that is relevant as this is the only one that can be deduced through actions. For the actions of all individuals, whether they are of an individual, a corporation, a Government or the Central Planning Board only demonstrate their ex-ante valuations. And it is only with free exchange that both parties to the transactions expect to be better off. All other forms of organisation necessarily involve involuntary actions where at least one party does not expect to benefit (otherwise they would have made the action voluntarily), the impossibility of measuring this loss meaning that we cannot conclude there has been any increase in societal wealth.

In sum, therefore,

  • Under conditions of voluntary action all parties to an action will benefit ex-ante;
  • Ex-ante an action exists only in the mind of the acting individual/s. Third parties can neither gain nor lose ex-ante as nothing has happened in the world for them to assess;
  • It can therefore be said that voluntary action will increase societal wealth ex-ante.
  • Under conditions of involuntary action at least one party will not benefit ex-ante. It cannot be said, as a consequence, that societal wealth increases;
  • Ex-post it is not possible to deduce whether anyone has gained or lost; this can only be evaluated through further, concrete actions which themselves can only be analysed according to the criteria just elaborated.

Nevertheless it must be stressed that this is insufficient to justify free exchange unless we insert ethical norms that state why we should want societal wealth to be increased; indeed, why should we want everyone to be better off? Why not a majority or a minority? There is nothing to stop someone from saying “I accept that free exchange makes everyone better off but I don’t want everyone to be better off. I think that a person should make sure that himself and his friends are better off regardless of the consequences to everyone else.” Rothbard again:

The fact that the free market maximizes social utility, or that State action cannot be considered voluntary, or that the  laissez-faire economists were better welfare analysts than they are given credit for, in itself implies no plea for laissez-faire or for any other social system. What welfare economics does is to present these conclusions to the framer of ethical judgments as part of the data for his ethical system. To the person who  scorns social utility or admires coercion, our analysis might furnish powerful arguments for a policy of thoroughgoing Statism.4

Such a possibility cannot be ruled out from the fact of free exchange alone. They can be ruled out praxeologically but this must be the subject for a later essay.

1Murray N Rothbard, Value Implications of Economic Theory, Ch. 12 in Economic Controversies, p. 243.

2Murray N Rothbard, Towards a Reconstruction of Utility and Welfare Economics, Ch 14 in Economic Controversies, p. 320.

3Ibid., p. 290.

4Ibid., p. 333.

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Greed

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All too often one hears the repeated lament that the reason for boom and bust, widespread poverty, the increased inequality of incomes, endless warfare and whatever else happens to be plaguing the world today in the eyes of the saintly commentator are because people are afflicted by greed. “If only people weren’t so greedy then everything would be fine!” chants the typical appeal.

However even a brief thought will reveal the empty nature of this word as a basis for criticism of the current social, political and economic order. This is not to suggest for a moment that the order is perfect or even right, nor that some people are not endowed with malicious intent. Merely that pursuing the problem with reference to “greed” is simply meaningless.

There seem to be two strands to any accusation of “greed”. First, that the alleged perpetrator desires to “possess wealth, goods, or objects of abstract value with the intention to keep it for one’s self, far beyond the dictates of basic survival and comfort” (as Wikipedia puts it) – i.e. that greed is the desire for some form of excess. Secondly, that only some people are afflicted by this menacing motivation whereas the rest of us are apparently content to languish in undemanding modesty.

Taking the first problem, if some people want or desire some kind of excess then we are entitled to ask excess of what. If something is excessive then what we are measuring, what is the unit of measurement and at what point of the scale is acceptability divided from excess?

One plausible possibility is that we attempt to gauge the value that a person’s desires or possessions would bring to him/her subjectively, what might be called “psychic income”. But why should this condemn a person as being the epitome of moral filth? If I get an immense amount of utility out of something that is, to all intents and purposes, useless to other persons what harm is this causing? Is it wrong for me to gain pleasure where others do not? What if I possess an object that gives me unimaginable psychic income, that makes me the happiest person alive, yet is, to everyone else, of little or no value? What has it got to do with anyone else that I enjoy this thing so much? This may sound like an exaggeration, but when you consider that many people have in their possession objects that to them carry great moral sentiment – wedding rings, photo albums, etc. – whose market value is but a pale reflection of the value they hold for the owner then it is not so far fetched.

In any case, even if gaining “undue utility” from an object was reprehensible, how do we measure this excess of subjective value? What is the cut off point? Utility is ordinal not cardinal – we can only rank things in order of how much we value them, not in precise quantities of value. A simple order never gives us any clue about how much something is valued, only how it is valued relative to anything else.

A second possibility is that we attempt to determine a person’s greed by the market value of his desires or possessions. But the market value of an object is simply a hypothetical price that someone might pay if offered the object for sale. It is dependent entirely upon the valuation of everyone else and is subject to constant and unceasing change. Indeed, strictly, market prices are only estimates. Real prices are historical events that bear no relation to future events. But leaving that aside let’s assume that a person’s possessions and/or desires command an exceptionally high market price. All this tells us is that everyone else values those possessions or desires extremely highly also. Why is a person to be condemned for this? Is it my fault if everyone also wants what I want or have? What if my family photo album was discovered to contain the prized, lost work of a celebrated artist or my wedding ring was found to contain a precious mineral and suddenly these objects, overnight, go from being practically worthless to potentially fetching millions of pounds in a sale. Am I now guilty for wanting or possessing these objects? Why should the fact that other people have changed their view of my possessions condemn me as being “greedy” for wanting to retain this property for myself? Should I be divested of my photo album and my wedding ring and the proceeds distributed to combat my alleged greed?

This unravelling of any accusation of greed begins to show the true motivation of the accusers – that it is really based on their envy rather than the possessor’s “greed”. This leads onto the next problem which is the idea that only some people are greedy – the “haves”. Everyone else is spared the condemnation. But would any of the latter turn down the offer to have their wealth increased beyond the so-called “dictates of basic survival and comfort”, even if it meant that no one else’s was? According to elottery-syndicates.com more than 32 million people play the UK National Lottery each week, well over half the eligible population. All of these people want to advance their own wealth to a great height (at least several million pounds worth in the regular lottery game while the jackpots in “Euromillions” game can run to over £100m after repeated rollovers) while leaving everyone else’s in exactly the same place. “Greed” therefore appears not to be an isolated motivation but one that is shared commonly.

Indeed, it is part of the human condition to always seek improvement to the current state of affairs as they are appraised by the individual. Every human action is an attempt to substitute more desirable ends for less desirable ends with the means available. To seek an end to this is to replicate the fallacy on which so many political philosophies have foundered – that the natural condition of man, with all of his qualities and faults, can somehow be moulded or changed. Any viable political philosophy must account for the true nature of man, warts and all. Further, as a result of humans’ unceasing appetite for improvement “the dictates of basic survival and comfort” change with each generation. In the second decade of the twenty-first century no one thinks that you are greedy if you can afford a house, a car, a telephone, a refrigerator and an annual foreign holiday. In the same decade of the twentieth century such possession would have been the utmost display of ostentatious luxury. As demand is often elastic it has always been the case that what has started out as luxury consumption of the rich has inspired entrepreurial activity to mass production until supply can be increased so heavily that even the poor can afford what was once a symbol of great wealth. Any attempted measure, therefore, of “the dictates of basic survival and comfort” is entirely arbitrary.

There are numerous related fallacies to the so-called greed problem. One is the idea that because one person has something another person must necessarily be without – that one person’s gain is necessarily another’s loss. If I have an iPad does that mean that someone does not have an iPad? No, it does not. I have an iPad because I went to work and created goods or services that I exchanged for money which, in turn, I exchanged for the iPad. The iPad only comes into existence because I created the resources that enabled me to purchase it. If I did not it would not mean that someone else would have it – it simply wouldn’t exist. Now there are definitely people in the world who do not fund their lifestyles from such production and voluntary trade but rather from violent appropriation of other people’s product, and some of them are very rich. But this should be dealt with for what it is and condemned accordingly. Per se one individual being a “have” does not mean that another is a “have-not”.

Another thread that seems to weave itself through social and political commentary is the idea that the net wealth of the rich is sitting around in a bank account somewhere, ready to be enjoyed as luxury consumption. This could not be further from the truth. The productive rich (as opposed to those who live off Government privilege and violently appropriated revenues) are rich because they have abstained from consuming what they have and invested it in real, productive assets – factories, machines, equipment, and things that must be run by people with jobs. Their increased net wealth reflects the success of this enterprise. It means more jobs for the rest of us to go to every day and cheaper goods for us to buy when we go shopping. The rich are rich precisely because their investment decisions have proved to be so productive. If this wealth was to be liquidated and distributed amongst everyone else in the name of “sharing” or “combating greed” then you would have to destroy the entire productive apparatus of the economy and place it in the hands of those who do not have the capacity to save rather than consume and, even if they did wish to save, have no or less of a proven ability to direct resources to their most productive uses. In contrast the amount of consumption spending by the rich, if distributed equally, would barely be enough to give everyone a few extra pennies.

In sum all of this reveals that it is a mistake to concentrate on people’s motivations or desires in achieving their ends. If somebody does something that inflicts no violence on either me or my property or if I trade with him peacefully and voluntarily then it is no business of mine why that other person engaged in those activities. What matters to me is the method of achieving those ends. Let us, therefore, banish any more talk of “greed” and focus instead on ensuring that more of our “greedy” entrepreneurs and businessmen make their wealth the honest way – voluntary trade, saving and capital investment that provides us with jobs and affordable products – rather than through violently enforced Government privilege, tax revenue and bailouts that definitely leaves them richer and us poorer.

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