The Methodology of Normative Economics

When economists distinguish between positive and normative issues, they traditionally add the caveat that economics has more to say about the former than the latter. While positive questions can be settled in principle by pure science, normative questions can be settled only by the introduction of values that come from outside any economic model. We can predict the consequences of a social planner’s behavior, but we are silent about what he ought to maximize. That’s completely up to him. This paper suggests otherwise. In the context of a very simple model, I will show that the social planner’s choice of an objective function is severely constrained by agents’ preferences. In this model, the social planner—if he is to maximize anything at all—must maximize an endogenously determined social welfare function; this is because it is literally impossible for him to maximize anything else. An extreme example will illustrate the flavor of the argument. Suppose that the planner’s goal is “equity at any cost,” in consequence of which he sets out to increase the welfare of the least well-off member of society. Having located that unfortunate soul, the planner asks what he can do to make him happier. The unfortunate soul replies that his greatest desire is to live in a world where social planners do not seek equity. In this example, the only way for the planner to achieve his goal is: To abandon his goal. Despite the example’s flamboyance, it illustrates a quite general phenomenon. If people care what the planner is up to, the rule for maximizing almost any social welfare function will entail switching to a different social welfare function. Typically, only a finite number of social welfare functions escape this paradox. In fortuitous circumstances, that finite number is one.