Welfare economics : an interpretive history

241 Pages·2019·4.026 MB·English

by  McCain, Roger A.

Welfare Economics
Although it was an important specialization in economics in the mid-twentieth
century,welfareeconomicshasreceivedlessattentioninthetwenty-firstcentury.
Thisbookexploresthehistoryofwelfareeconomics,withaviewtoexplainingits
riseandsubsequentdecline.
Drawing on both philosophy and economics, the book offers a new and
original perspective on the history of welfare economics, starting with Pigou
and charting the trajectory of applied and theoretical welfare economics
throughout the twentieth century.
This book will be of interest to students and researchers of philosophy,
economics and history of economic thought.
Roger A. McCain is Professorof Economics at Drexel University, USA.
Routledge Advances in Social Economics
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Roberto Marchionatti and Mario Cedrini
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26. Welfare Economics
An Interpretive History
Roger McCain
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Welfare Economics
An Interpretive History
Roger A. McCain
Firstpublished2019
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Names:McCain,RogerA.,author.
Title:Welfareeconomics:aninterpretivehistory/RogerA.McCain.
Description:Abingdon,Oxon;NewYork,NY:Routledge,2019.|
Series:Routledgeadvancesinsocialeconomics;26|Includes
bibliographicalreferencesandindex.
Subjects:LCSH:Welfareeconomics--History.
Classification:LCCHB99.3.M392019|DDC330.15/5609--dc23
LCrecordavailableathttps://lccn.loc.gov/2019007130
ISBN:978-1-138-68564-2(hbk)
ISBN:978-1-315-54311-6(ebk)
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Contents
1 Objective and scope of the work 1
2 Utilitarianism for Pigou’s welfare economics 6
3 Pigou and the founding of welfare economics 30
4 Preference theory and the emergence of the New Welfare
Economics 57
5 Social preference 77
6 Utility andwelfare: further development 101
7 Loss of coherence 121
8 The veil of ignorance 149
9 Diverging paths 183
10 Happiness and behavioral welfare economics 205
11 Whither? 226
Index 233
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1 Objective and scope of the work
Welfare economics is a systematic studyof normative policy recommendations
in economics. Applied welfare economics is an attempt to say “what ought to
be”withrespecttogovernmentpolicy,and theoreticalwelfareeconomicsisthe
attempttolearnhowtocreateareliableappliedwelfareeconomics.Thehistory
ofwelfareeconomicsisastrandofthehistoryofthetwentiethcentury.During
the twentieth century, welfare economics emerged from neoclassical economic
theory as a specialized field of study, only to strangely disappear from the
mainstream of economics by the end of the century, as Sir Anthony Atkinson
observedin2001.Followingmid-century,welfareeconomicswaswidelytaught.
(IwashiredinmyfirstfacultypositioninpartbecauseIwasconsideredqualified
to teach welfare economics.) Today it is far less commonly taught, and while
someresearchcontinues,itislargelyignored.InAtkinson’swords(p.193),“The
‘strangeness’ is that, despite the prevalence of welfare statements in modern
economics,wearenolongersubjectingthemtocriticalanalysis.”Thisbookwill
attempttotraceand,perhaps,explainthatriseanddissolution.
Now,economistsinearliercenturies,likethoseofthetwenty-firstcentury,did
not hesitate to make policy recommendations. Adam Smith could advocate for
freetradeandlaissez-faireonthegroundthatitwouldincreasetherevenueofthe
nation;Ricardocouldopposethecornlawsbecausetheywouldraisethepriceof
corn and shift income to the landlords. However, the emergence of neoclassical
economics,particularlyintheworkofMarshall,madepossibleanarrowerfocus
and more preciseanswers. Any excisetax will discourageproduction, no doubt,
but there is no civilized society without some taxation. How much will a
particular tax discourage production, and could it be that some taxes are less
burdensome in this way than others? The apparatus of elasticity of supply and
demand, consumerand producersurplusesshowedtheway to answerquestions
atthatlevelofdetail,questionsthatclassicaleconomicscouldnothaveanswered.
This is the opportunity that arose, for economists, with the maturation of neo-
classical economics in the workof Marshall and Pigou. In Wealth and Welfare
(1912)andEconomicsofWelfare(1920),A.C.Pigoupresentedahighlycoherent
account of the relation of economic activity to welfare as he conceived it, an
account that was to influence both the construction of economic statistics that
remainsstandard,andgenerationsofresearchbyeconomists.
2 Objective and scope of the work
There was, of course, some hesitation to adopt the Marshallian kit of tools.
ManyeconomistshadfollowedSmithandRicardoinarguingforfreemarkets,
forlaissez-faire;othershadarguedthecontrary.Theselargeissuesseemedtobe
the ones that mattered. To ask which taxes are less burdensome must have
seemed a distraction from the more important question whether markets, on
the whole, could better promote the prosperity of the many than could direct
action by the state. There was probably less doubt about the value judgments
thatunderlaytheneoclassicaltools.Advocatesoffreemarketsandadvocatesof
stateactioncould alike claim that the policies theyadvocatedwould encourage
the prosperity of the many. The two sides in this great controversy shared the
same, rather vague, value judgments. Their differences had to do with the
nature of the economic system.
A further source of hesitation was the very precision of the Marshallian
approach itself. To say that we can determine which taxes are less burden-
some, and how much less burdensome, is to imply that the government ought
to consider the taxes case by case, and choose those that are least burden-
some.Moregenerally,thegovernmentwouldbeabletoconsiderthemeritsof
market processes as against regulation case by case. But, to the believers in
laissez-faire, thiswould require the state to be thevery meddlesome busybody
they opposed. The precision of Marshallian analysis, if it could really be
applied, was itself a defeat for their program. And the opponents of the free-
market position were no more comfortable with the case-by-case approach.
They wereconvinced thatmarketsystemswerejust chaoticand unreasonable,
so that a simple set of bureaucratic rules could easily bring about a vast
improvement of prosperity. Neoclassical economics, with a predictable logic
of market equilibria and a focus on marginal improvements, must simply be
wholly false, a fraud rather than a theory.
Further, the neoclassical apparatus was complex and tricky. This was a
third major reason to hesitate: may we really be surethat these arcane graphs
and computations could be a guide to the policies that would bring about
greaterprosperityofthemany?Whatdoesconsumersurplusreallymean,and
how should we really measure it? These questions would occupy many of the
pages of the newly founded research journals in economics in the early years
of the twentieth century, and several of Pigou’s early papers were important
contributions.
The questions that remained largely unasked, even by those who hesitated
to adopt the Marshallian approach, were those of value: just what constitutes
the prosperityof the many, andwhy should it be agoal of public policyorof
right action? Why should we favor policies that increase the revenue of the
nation? Why shouldwe not favor policies that shift income from the working
class to the landlords? What, to use Pigou’s phrase, is the national dividend
and why should we favor public policies that increase it? But these questions
had to be addressed. The very precision of the neoclassical theoretical appa-
ratus demanded that the value questions be addressed with similar precision.
Pigou addressed them, and in the process reinforced a dilemma for many
Objective and scope of the work 3
economists. Pigou’s welfare economics was firmly based in utilitarian ethical
theory as Pigou understood it. This theory provided the most transparent
support for the argument that free markets could result in increased prosper-
ity in a morally significant sense. On the other hand, it had been known since
the workof John Stuart Mill that utilitarianism could imply an argument for
redistribution of income toward equality. Mill had also called for a separate
consideration of efficiencyand distribution. Thiswas the dilemma economists
had inherited from Mill, and to accept Pigou’s analysis of the efficiency of
competition seemed to make a distinction between efficiency and distributive
norms impossible.
Pigou also developed Marshall’s discussion of externalities, creating the
modern concept of externalities. In the retrospect of a century, this may
seem more important than the utilitarian case for (a limited amount of)
redistribution. However, it was the Millian dichotomy of efficiency and dis-
tribution that motivated the attempt by the New Welfare Economics to
reconstruct welfare economics on a different, though closely related, value
theory. It will be argued that the creativity and success, and ultimate failure,
of the New Welfare Economics led both to the rise and the disappearance of
welfare economics in the twentieth century.
Pigou’s welfare economics is described as “highly coherent” in somewhat
the sense of C. I. Lewis (1946), or Laurence BonJour (1985): a body of dis-
course is coherent only if it is logically consistent; and is relatively more
coherent to the extent that it comprises propositions that entail or enhance
the conditional probability of one another; and is less coherent to the extent
that it can be divided into unconnected subsets of propositions and to the
extent that it contains unexplained anomalies. This is not to assert a coher-
ence theory of truth or justification, to assert, that is, that coherence is either
necessaryor sufficient to evaluate truth or to justify beliefin all or part of the
discourse. However, coherence is useful. In particular, it is useful to have
coherence between the concept of economic welfare and the theory of the
motivations,decisions and actions of people in the marketplace.If wewere to
adopt a concept of welfare and a theory of economic action that contradict
one another or are without logical or probabilistic connections, we would
raisethequestionswhy(ontheonehand)peopleareunmotivatedbywhatwe
suppose to be their welfare or (on the other hand) whether a concept of wel-
fare can be meaningful if it is unrelated to, or indeed contradicts, the motives
that people reveal by their actions. Pigou’s welfare economics was highly
coherent in that sense. A large part of the story to follow is of the attempt to
retain that coherence without the specific utilitarian basis that Pigou gives it,
and the failure of that attempt.
Pigou’sworkdidnotofcoursetakeplaceinavacuum,butquitethecontrary,
could reasonably be considered the maturity of the neoclassical tradition that
had been growing in the last third of the nineteenth century. Much of this pre-
historyiswellknownandwillnotrequirearesumehere.Someotherparts–the
utilitarianargumentforredistribution,consumerandproducersurplusesandthe