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Should policymakers maximize aggregate utility?

Summary:
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

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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.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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