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Essay on Welfare Economics

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In this essay we will discuss about Welfare Economics. After reading this essay you will learn about: 1. Introduction to Welfare Economics 2. Meaning of Welfare Economics 3. Measuring Welfare 4. Value Judgments.

Contents:

  1. Essay on the Introduction to Welfare Economics
  2. Essay on the Meaning of Welfare Economics
  3. Essay on Measuring Welfare
  4. Essay on Value Judgments

Essay # 1. Introduction to Welfare Economics:

The literature on welfare economics has grown rapidly in recent years. The utilitarian’s were the first to talk of welfare in terms of the formula, ‘the greatest happiness of the greatest number’. Vilfredo Pareto considered the question of maximising social welfare on the basis of general optimum conditions.

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Marshall and Pigou, the neo-classical economists, concentrated on particular sectors of the economic system in their postulates of welfare economics. It was Professor Robbins’ ethical neutrality view about economics that led to the development of welfare economics as an important field of economic studies.

Kaldor, Hicks and Scitovsky have laid the foundations of the New Welfare Economics with the help of the ‘compensation principle’ avoiding all value judgements. On the other hand, Bargson, Samuelson and others have developed the concept of the Social Welfare Function without sacrificing value judgements.

In the discussion that follows we shall refer to certain basic concepts of welfare economics and then pass on to Pareto’s welfare conditions for an understanding of modern welfare economics.


Essay # 2. Meaning of Welfare Economics:

Welfare economics has been defined by Scitovsky as “that part of the general body of economic theory which is concerned primarily with policy.” It is thus a “normative” study which is concerned with judgement and prescription. But it does not mean that it is not a “positive” study. It has certain principles and standards on the basis of which the economist can judge and formulate economic policies.

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However, it is difficult to set welfare propositions which may be purely positive. In a positive study, as pointed out by J. De V. Graff, “The proof of the pudding is indeed in the eating. The welfare cake, on the other hand, is so hard to taste, that we must sample its ingredients before baking.” I. M.D. little is, therefore, right in characterizing welfare economics as a normative study. But all this does not make the meaning of welfare economics clear. For clarity, one must distinguish between general and economic welfare, and individual and social welfare.

General Welfare refers to all economic and non-economic goods and services that provide utilities or satisfaction to individuals living in a community. In this sense, general welfare becomes a very wide, complicated and impracticable notion.

Pigou, therefore, defines economic welfare as that part of general welfare which can “be brought directly or indirectly into relation with the measuring rod of money.” In the Pigovian sense, economic welfare implies the satisfaction or utility derived by an individual from the use of economic goods and services or those that can be exchanged for money.

But Dr. Graaf does not agree with Pigou’s concept of economic welfare for two reasons.

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First, money as a measure of welfare is neither accurate nor satisfactory because value of money changes with variations in the price level.

Second, economic welfare does not depend upon exchangeable goods and services because it is not possible to separate economic factors from non-economic factors, so far as an individual’s state of mind is concerned.

In fact, an individual’s welfare depends upon both economic and non-economic factors. Since non­economic factors are not capable of assessment, Graaf opines that in welfare theory only economic factors are considered, assuming non-economic factors to be constant.

Robertson while accepting Pigou’s distinction between general and economic welfare, prefers to use the world ecfare for economic welfare, Boulding, on the other hand, defines economic welfare in terms of the opportunity cost of exchangeable goods and services.

According to Prof. Pigou,’ an individual’s welfare resides in his state of mind or consciousness which is made up of his satisfactions or utilities. But modern economists explain it in terms of a given scale of preferences.

An individual’s welfare is said to have increased when he is better off, when he himself believes that his welfare has increased as a hypothesis. But it is not possible to ask every individual whether his welfare has increased or not. Dr. Mishan, therefore, suggests a choice expansion index. Whenever an individual’s choice index of hitherto unavailable goods expands his welfare is said to have increased, provided his tastes remain unchanged.

Thus economic welfare implies the welfare of a group or society comprising all individuals. In a way, it is the summation of individual welfares. But unlike an individual, a society has no mind or consciousness. In a society every person thinks and acts differently from others. Therefore, no social choice-expansion index can reflect social welfare. Social welfare thus implies the aggregation of the satisfaction or utilities of all individuals in a society.


Essay # 3. Measuring Welfare:

There are mainly two concepts for measuring welfare. The first relates to a Pareto improvement whereby social welfare increases when society as a whole is better off without making any individual worse off. This proposition also includes the case that when one or more persons are better off, some persons may be neither better off nor worse off.

It is, thus, free from making interpersonal comparisons. Hicks, Kaldor and Scitovsky have explained social welfare in the Paretian sense in terms of ‘the compensation principle’. In the second place, social welfare is increased, when the distribution of welfare is better in some sense.

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It makes some persons in society better off than others so that the distribution of welfare is more equitable. This is known as distributional improvement and relates to the Bergson social welfare function.

Dr. Graaf, however, refers to another concept which he calls the paternalist concept. A state or a paternalist authority maximises social welfare according to its own notion of welfare without any regard to the views of individuals in society.

Economists do not make use of this concept to measure social welfare because it is related to a dictatorial regime and does not fit in a democratic set-up. Economic welfare, thus, implies social welfare which is concerned primarily with policy that leads either to a Pareto improvement or distributional improvement, or both.


Essay # 4. Value Judgments:

Alt ethical judgments and statements which perform recommendatory, influential and persuasive func­tions are value judgements.

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According to Dr. Brandt a judgment is a value judgment if it entails or contradicts some judgment which could be formulated so as to involve any one of the following terms in an ordinary sense – ‘is a good thing that’ or ‘is a better thing that’; ‘is normally obligatory’; ‘is reprehensible’; and ‘is normally praiseworthy’.

Value judgments describe facts in an emotive way and tend to influence people by altering their beliefs or attitudes. Such statements as ‘this change will increase economic welfare’, ‘rapid economic development is desirable’, ‘inequalities of incomes need be reduced’, are all value judgments.

Welfare is an ethical term. So all welfare propositions are also ethical and involve value judgments. Such terms as ‘satisfaction’, ‘utility’ are also ethical in nature since they are emotive. Similarly, the use of a highly emotive word as ‘social’, ‘community’ or ‘national’ in place of ‘economic’ is ethical.

Since welfare economics is concerned with policy measures, it involves ethical terminology, such as increase of ‘social welfare’ or ‘social advantage’ or ‘social benefit’. Thus welfare economics and ethics cannot be separated.

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They are inseparable, according to Prof. Little, “because the welfare terminology is a value terminology. Since welfare propositions involve value judgments, the question arises whether economists should make value judgments in economics.”

Economists differ over this issue. The neo-classical were concerned with the measurability of utility and the inevitable interpersonal comparisons of utility. Pigou’s income-distribution policy, based on Marshall’ postulate of equal capacity for satisfaction, implied that interpersonal comparisons of utility were possible.

Robbins, in 1932, led a frontal attack against this view. He maintained that if economics was to be an objective and scientific study, economists should refrain from making interpersonal comparisons, for policy recommendations tend to make some people better off and others worse off.

It is, therefore, not possible to make interpersonal comparisons, i.e. the welfare of one person cannot be compared with that of another.

The majority of economists agreeing with Robbins switched over to the Paretian ordinal method in order to avoid interpersonal comparisons of utility. Kaldor, Hicks and Scitovsky formulated the ‘compensation principle’ free from value judgments.

Accordingly, economists can make policy recommendations on the basis of efficiency considerations. The objective test of economic efficiency is that the gainers from a change can more than compensate the losers. But this test of increased efficiency implies a value judgment because the gainers from a change are able to compensate the losers.

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The very idea of compensation involves value prescriptions. So even the formulators of the ‘New Welfare Economics’ have not been successful in building a value-free welfare economics

Prof. Bergson also agrees with Robbins that interpersonal comparisons involve value judgments. But he along with Samuelson and Arrow holds that no meaningful propositions can be made in welfare economics without introducing value judgments. Welfare economics, thus, becomes a normative study which, however, does not prevent economists from studying it scientifically.

Even the Paretian general optimum theory is not value-free. It states that an optimum position is one from which it is not possible to make every one better off without making at least one person worse off, even by re­allocation of resources. This welfare proposition contains certain value judgments. The Paretian optimum is related to the welfare of individual.

In order to attain the optimum position every individual acts as the best judge of his welfare. If any re-allocation of resources makes at least one person better-off without making others worse-off, then the welfare of the society is said to have increased. These are all value judgments which Pareto could not avoid despite the fact that he used the method of ordinal measurement of utility.

Boulding’s view merits consideration in this controversy:

“Whatever may be the case in the Elysian Fields of pure economics, the social fact is that we make… interpersonal comparisons all the time, and that hardly any social policy is possible without them, for almost every social policy makes some people worse-off and some better-off. The Paretian optimum itself is a special case of a social welfare function, for if we assume this to be a social ideal it implies that nobody should ever be made worse-off, whereas most societies have defined certain groups (e.g., criminals or foreigners) who should be made worse-off…”

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Conclusion:

The obvious conclusion emerges from the above discussion that welfare economics and ethics are inseparable and interpersonal comparisons or value judgments are inseparable from welfare economics. All democratic countries have the ideal of a welfare state and the various legislative measures like free education, heavy excise duty on wine, compulsory national insurance, etc. are all value judgments.

The economist cannot be expected to be an arm-chair academician. He can comment and also make policy recommendations on efficiency, distribution and equity grounds. All such recommendations involve value judgments but they must conform to public opinion.

We fully agree with Scitovsky that “after all, it is the function of social science to make value judgments and recommendations on the distribution of welfare; and not only is the economist a social scientist, he is probably the best qualified among social scientists to deal with this subject.”


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