Economists have always aspired to an objective measure of overall satisfaction which policy could be tailored to maximize. Bentham believed that there was a unit of satisfaction that could literally be added up. That view no longer holds sway, but economists still hold on to the notion of some objective overall optimal. This is complete intellectual garbage. Anyone is free to defend it on moral grounds, but it is wrong to present it as having some scientific basis.

Vilfredo Pareto and his intellectual descendants took some very clever steps to try and overcome this problem. Cardinal utility does not exist, Pareto acknowledged, so why not think in ordinal terms? That is, instead of discussing some specific countable unit of satisfaction, just talk about people’s ranked preferences.

This was useful for illustrating two important but often ignored concepts. First, that every choice we make involves some trade-off. The five dollars you spent on a burger is five dollars you won’t be able to spend on five songs from iTunes, or two trips on the New York subway. The fact that you spent it on the burger instead of those things reveals your preference for that burger, at that point in time, relative to the alternatives. Trade-offs aren’t fundamentally about money — they’re about how you allocate anything scarce. Even though I’m not charging you anything to read this, you’re still revealing your preference for Ümlaut pieces, at this moment, relative to other uses of your time.

Second is the fact that there is some balance of trade-offs that is, for you personally, larger than the sum of its parts. Your rank of preferences aren’t literally a list in which you would want to devote all of your resources to the item at the top. All items experience what is called diminishing marginal utility; the more you spend on an item, the lower it falls in your ranking of what to spend the next unit of your resources on — be it dollars, minutes, something else, or all of the above. There is some optimal point at which economists speak of maximizing ordinal utility.

This is easier than saying “the point at which you have the greatest sum of how good ice cream makes you feel, but also how an afternoon with a friend when the weather is pleasant makes you feel, and all other kinds of good feelings you can have, within your current resource bounds”. It is a useful shortcut. But it is a shortcut. Ordinal utility does not actually exist. The idea of maximizing it is a useful way to describe the balancing act we all must do between the different trade-offs we face and the different sorts of desires we have, but it is an instrumental description, not a literal one.

Since ordinal utility is not a thing we can add up, we still face the problem of how to talk meaningfully about an economy or society as a whole, beyond individuals. Here economists resorted to another clever trick. Consider a simple trade: my two apples for your one orange. Clearly, I value your orange more than my two apples, and vice versa. So in terms of our own subjective preferences, the value of what each of us owns has increased. You could even say that the sum of what we have has increased in overall value, even though the same number of physical apples and oranges still exists within the grouping.

This is a useful framework, and economists immediately set about building an enormous theoretical edifice on top of it. A great deal of math was used to demonstrate that, given a few specific assumptions, a world of voluntary trades maximizes everyone’s ordinal utility and is a great place to be.

It didn’t take long to start poking holes in this elegant framework, though. At the turn of the 20th century, the economist A. C. Pigou presented the concept of externalities — costs and benefits that are created by trade but are not borne by those making the trades. This includes things like pollution, noise, and simple aesthetic displeasure at, say, the existence of a strip mall. The idea that there might be costs and benefits beyond the simple framework of individuals involved in a trade might seem obvious — common law has had the concept of nuisance for longer than the discipline of economics has existed — but economists have struggled with the implications ever since.

The problem is that economists keep trying to get back to that world where costs and benefits are internalized within transactions, because they know how to model things beyond the level of individuals in that world. Pigou himself argued that private cost needed to be taxed in order to bring it in line with social cost. This is perfectly meaningless. The whole strength of the ordinal utility, trade-based view of the world was that it avoided the messy question of what overall ordinal utility means, really. The answer is that it does not mean anything — individuals have to make trade-offs, which they evaluate the value of individually. To speak of an overall “social cost” is meaningless within this framework, because what I consider the cost of pollution or the benefit of a well designed building exterior to be is subjective and individual. You cannot add my subjective and individual valuation of these things to someone else’s. There are no units in common. The whole framework falls apart.

I cannot tell you how many times I have heard “the optimal number of <X undesirable thing> is greater than zero”, where X may be speeding tickets, building collapses, or murders. To the extent that this simply highlights the nature of trade-offs, this is fine. If all of society’s resources are spent trying to prevent murders, we will hit diminishing returns and miss out on other ways we could have saved lives at a lower cost, not to mention other things beyond staying alive that we (individually) value. But to the extent that they refer to an actual objective overall optimal, they are speaking in gibberish.