Social Utility — A Ubiquitous Concept

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There are a good many ways to evaluate laws. Three methods are its moral basis, the process of its creation, and its consequences or utility. We may test the law against a fixed moral standard that we hold high. We may examine the process by which the law came into being to see if it was corrupt or not. We may examine the overall or net effects of the law on the utility or well-being of individuals. This article discusses only the latter utilitarian approach. I argue that we human beings judge social utility constantly even if economists have not found a fully acceptable way to measure it. Social utility is not only a useful but also a necessary concept.

The moral and consequentialist approaches are distinct, yet they are intertwined. Why does one want well-being? Perhaps because one believes it is moral to live. Why does one want to follow a moral maxim? Perhaps one believes it results in well-being.

Suppose that a tariff is bad because it uses force (the moral argument.) Why is the use of force bad? One can maintain that the reason is solely a moral one: Because God said it is bad. But even God promised that the improper use of force would have bad consequences for society and one’s soul. Alternatively, one can maintain that the reason is that it has the consequence of preventing a man from surviving and flourishing. Why is this bad? Because life has value, which is a dual moral and utilitarian argument.

Or consider public schools. Why are they bad? Students are forced into a school (moral argument.) Why is this bad? Because the parents cannot control their children’s education. Instead the state indoctrinates their children and wastes their time (utilitarian arguments.) Why is this bad? Because it is morally wrong to decimate people’s lives.

Utilitarian statements in defense of free markets are common. Here is an example from Murray Rothbard: "As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few u2014 and an inefficient few at that: people who cannot make it in a free and unhampered market."

Rothbard makes both the moral and utilitarian arguments. The protectionism is bad because it uses force (the moral note) and because the result is to harm the many for the benefit of a few (the utilitarian note). The two arguments are intertwined. The consumer is worse off materially because the market is not free. It may be that Rothbard’s main purpose here is to inform the uninformed of the actual consequences of protectionism and let them decide, yet still he stresses more than the moral element. He underlines the actual effect of the swindle, which is to transfer wealth from the many to the few.

Utilitarian argumentation has a weakness. What if a law is passed that helps most consumers while harming a few? Or what if a law helps quite a few while harming some, and what if there are some intangible side-effects in the bargain? The free market advocate is placed on the defensive. By his own use of consequential arguments elsewhere, he is drawn into the utilitarian mud and must wrestle in it like everyone else. Yet he cannot avoid using utilitarian arguments in many contexts because that is what people respond to, and that is because the point of morality is often its consequences just as the point of consequences is often their morality.

The gist of these initial observations is that it is hard cleanly to separate moral and utilitarian arguments, and in practice they often appear together. We move on to the issue of social utility.

Political legislation almost invariably helps some people while harming others. To evaluate the overall effect of a law in a utilitarian way, observers make statements about the aggregate or overall net effects of the law on the well-being or utility of a set of people or on society. In referring to society here, we are not under the illusion that society is a living and thinking individual. But to use the utilitarian approach, which nearly all social critics do, we must judge how different individuals value goods. And since we do not have direct measures of utility, we use proxy measures of the value effects of a law. Such a method is tantamount to using the concept of social utility.

Technically, social utility is a hypothetical construct that ranks alternatives for a community of individuals. This is analogous to the preference orderings of individuals when they make choices. But for this concept to be used, one must assess community preferences from individual preferences. One must somehow measure interpersonal utilities and combine them. Statements by observers about the consequences of laws implicitly weigh individual preferences and judge social utility. If a community prefers measure A to measure B, then measure A can be said to have higher social utility. Social utility then becomes a shorthand way of speaking about group or social preferences.

Social science research is still groping toward ways of modeling social utility in relation to individual preferences. See here and here. Does economics deny group deliberation, group discussion, group preference, and group decision-making? Not really. Science proceeds by doing what it can scientifically and ignoring what it cannot. Economists want to be able to reduce social utility to its individual components, but the difficulties of doing this are formidable. The economic theory of social utility has not yet placed itself on a secure footing. Yet research in game theory is making significant headway. See here and here. This research will be finding its way into textbooks and influencing how people think about social utility. Foss has argued "that Austrians should approach and make use of game theory in economics. This is one important way in which Austrians can relate to those parts of the mainstream that are most congenial to Austrian thought. This is also where Austrians themselves may have something to contribute because of their long-standing concern with non-standard coordination problems and with the market process. Game theorists, too, need to be told about alertness, entrepreneurship, learning, etc."

The central question is this: Do group preferences form out of individual preferences? The answer is "Yes." In the real world, groups and organizations of all kinds routinely make many social decisions. Individuals in companies, for example, construct complex networks of communication with the intention of influencing each other heavily. They disperse decision rights and fix responsibilities for various actions. There is elaborate monitoring. There is a chain of command. There are systems of rewards that link the social utility of the company to the utility of the individuals within it. Individuals intentionally subordinate themselves within group and organization structures. The outcomes of all this organizing are group decisions made as if the group had preferences. Simultaneously, these processes do not contradict the fact that all human action is individual action. Group action comes out of individual action. The fact of the matter is that there are no groups and group actions without individuals and individual actions; but there are also few individual actions that are not done in the context of other individuals and groups.

Organizations are like mini-societies. The individuals within organizations face the same problem that observers outside face: they do not have a scientific method of obtaining social utility. Individuals know that each of them has his own preferences, they know that their preferences depend in part on the preferences of others, and they know that assessing and melding the utility of others is error-prone. They respond to these difficulties by arranging their internal contracting and operations so as to mitigate these problems. They create behavioral roles and positions that constrain what an individual can do. They create information-sharing processes so as to obtain greater consensus on means and ends. They impose a variety of budget and operating constraints. They have internal rules and laws, just as a society has. These create stability in the behavior and expectations of members. Organizations are always attempting, with greater or lesser success, to define their group goals and to align the behavior of members with those goals, just as individual members are always assessing whether or not they wish to belong to the organization. In their totality, these measures lower the exposure of group decisions to individual biases and preferences, create a mini-social order, and organize individual preferences into organizational preferences that achieve organizational ends. And just as the source of authority and the source of law within society are difficult to pin down, the same holds within organizations.

A society is an organization, but on a much larger scale than a business, a foundation, a club, a church, or an association. It is also far more diffuse. Its functional purposes and modes of operation are very much harder to assess. Yet because society has norms, laws, monitoring, communications, and roles, we can be reasonably sure that the society does amalgamate some preferences toward some ends. As with a business organization, a society is not merely a collection of individuals operating atomistically, even though it may be difficult to figure out how this aggregate arrives at decisions that affect many or all the individuals within the society. Looked at from the perspective of a typical organization, the concepts of social preferences and thus social utility have a useful meaning.

Economists, as I have said, have a problem peculiar to their science, that of analyzing group action objectively. While game theory is making headway and providing insights, almost all agree that they cannot at present aggregate preferences across individuals scientifically because the valuations of different individuals are not comparable. Their most useful and effective theories of valuation at present leave little room for cross-individual comparisons of value, or for the dependence of one person’s preferences on another’s. They have discovered no common valuation yardstick across human beings. Thus, for example, if a man living in a safe region is made to pay for another man’s damages in a flood-prone region, economic science provides no way of determining that the value of the aid to the damaged man exceeds (or is less than) the value of the aid to the safe man. An ethically-neutral economist cannot compare the money transferred from one person to another. He can say nothing about the value of the money to each party. Of course, in his role of social critic, he still says something.

The paradox here is that groups make decisions that involve a melding and weighing of individual values and utilities, yet economists tell us either that there is no objective way to accomplish this or that they haven’t found a way yet. Yet ordinary people who are participants in group and organization processes, not observers of them, solve this kind of problem every day. They make interpersonal comparisons of utility routinely and base decisions upon their assessments. They share, compromise, split up responsibilities, and come up with coordinated decisions. An entrepreneur estimates what products customers may buy and how much they will be willing to pay; and he does this across different demographic groups. An employer estimates what working conditions will make his employees happy and more productive. A husband decides what sort of present will please his wife. A political leader judges if a rival will make war or not. It is an ordinary part of social life to judge how our actions affect others and what others might do under certain conditions. We learn how to judge how different people value different things, and we learn how to assess what one person values compared to other people. Within groups, we learn how to amalgamate all of this sort of information and more. Even economists, when called upon to make judgments of social value, do not hesitate to make them.

The paradox is resolved when we realize that there is a difference between being an observer and being a participant or decision-maker. Observers (like economists) are either trying to replicate (or understand) the judgmental processes of participants in group decision-making, or are trying to tell participants how they should be forming aggregate judgments. The observers have a hard time doing this because they do not have access to the processes and values that affect the actual decisions of participants; but experiments are providing clues. Participants have to make interpersonal utility comparisons. They accept the inevitable failings of doing this because they believe the benefits outweigh the costs of error. In addition, participants know better what others are thinking than outside observers do, and they know their personal utility information better.

Wealth transfers are one public policy area where many economists and other social scientists want to make interpersonal utility comparisons and recommendations built around their estimates of social utility. They want to do this in a scientific manner. A very old approach to the problem is the notion that the incremental well-being (or utility) of wealth to a given person increases as that person becomes poorer and decreases as that person becomes richer. The idea is that there is diminishing marginal utility of wealth. Assuming a situation of fixed wealth, where further wealth creation is not an issue, and assuming that all people are more or less equivalent in how they assess the well-being brought about by wealth, then it follows that a transfer of wealth from a richer person to a poorer person increases the summed utility of both. Neither of these assumptions holds and there are other incentive and value issues involved in such wealth transfers. But these ideas have often captured the fancy of many who favor compulsory wealth redistributions.

There is nothing out of order with advising participants what decisions they should jointly arrive at, even if the basis for doing so is flimsy. After all, society could be making mistaken decisions and an economist like anyone else is free to point them out and suggest remedies. There is even nothing unethical with the advisor’s choosing an ethical position that advocates a forcible transfer. But a two-fold problem arises when the economist and social critics counsel forced, not voluntary, wealth transfers whilst the society has a rule against theft. In that case, the advice is wrong (1) because the forced transfer will lower social utility, not raise it; and (2) because a law that forces such a transfer is an illegitimate law, that is, unlawful. I will prove these conclusions in a subsequent article.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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