Debating Welfare Economics

Though the social welfare function was Bergson's, it was Samuelson who defended the underlying approach to welfare economics during the next decade. Bergson's publications were confined to issues relating more dir­ectly to problems confronting the government agencies for which he was working during the war - price flexibility and the economics of the Soviet Union.

Samuelson's starting point was that welfare economics implied mak­ing ethical judgments.

At the outset, it is understood of course that every discussion of welfare economics implies certain ethical assumptions. I do not propose, however, to discuss the philosophical grounds for holding or rejecting different ethical precepts or assumptions. Rather will the discussion be confined to the impli­cations of different ethical assumptions and the necessary and sufficient pre­suppositions or the truth of various theorems. (Samuelson, 1938b, p. 261)

He simplified the argument, avoiding the issues that arguably made welfare economics so difficult, by considering trade between two individuals, so that no aggregation problems arose within each of the parties engaging in trade. This meant that he could represent each trader's behavior by a set of indifference curves. He made the assumption that if one trader preferred one outcome to another, this was better. This left the problem of measuring welfare when one of the two parties to trade was made better off and the

other worse off, for there was no way to measure or add their utilities.

Samuelson’s discussion of the case where countries are not composed of identical individuals makes it clear that he was thinking in terms of what became Pareto optimality. Indifference curves are taken to denote well­being and the problem of evaluating welfare is simply that of comparing different people’s gains and losses. Perhaps implicitly responding to John Hicks’s attempts to reinstate the concept of consumers’ surplus, Samuelson noted that “constructs such as consumers’ surplus are in general inadmis­sible” and that in the special cases where they could be used, they were “perfectly arbitrary and conventional, adding nothing to the analysis” (Samuelson, 1939, p. 205).

Shortly after Bergson’s article,⁴ Samuelson restated its conclusion in arguing that a line of theory initiated by Oskar Lange, and involving Roy Allen, Hicks’s co-author in their articles on indifference curves, about the determinateness of the utility function was misconceived. “As Mr. Burk [Bergson] has shown,” Samuelson argued, “it is only necessary in order to make welfare judgments that we agree upon the definition of an ordinal function involving as variables the quantities of goods consumed by all individuals; and that even if we permit the individual’s own preferences to ‘count,’ there is still no need for any cardinal measure of utility” (Samuelson, 1938a, p. 65). Assuming cardinal utility added “literally noth­ing” to welfare analysis.

The occasion for a more explicit assessment of what he now called “the new welfare economics,” in which his work was placed alongside those of Hicks, Harold Hotelling, Nicholas Kaldor, Lerner and others, was a critique by his friend from his Chicago student days, George Stigler. Stigler published a paper that claimed that the “new welfare economists”

The evidence for this statement on timing is that Samuelson cites Bergson’s paper and his was published in the same year.

(including Samuelson in the paper on international trade cited above) claimed that “many policies can be shown... to be good or bad without entering a dangerous quagmire of value judgments” (Stigler, 1943, p. 355). Claiming that the new theory, though usually presented using formidable mathematics, was simple enough to be summarized in half a page, he offered what he believed was a strong critique. If the precepts of the new welfare economics were followed, thieves would be rewarded for their crimes and wars should be fought with checkbooks (Stigler, 1943, p. 356).^[79] The problem was, he contended, that societies were concerned with more than maximizing national income. Policy changes would lead to changes in individuals’ indifference curves (to changes in their prefer­ences), making it impossible to use them as the basis for welfare analysis. What societies required, Stigler contended, was consensus on the ends that society is to seek. Without such consensus, and a belief that the system is fair, the social system will disintegrate.

Samuelson (1943) responded to this by saying that he agreed with much of what Stigler was saying - economic welfare was not necessarily the main goal in society and tastes would change - but Stigler had got the new welfare economics completely wrong. The new welfare economics was not intended to displace the old but to derive necessary conditions for social welfare, basing them on the very mild assumptions that it is better to have more than to have less, and that “individual tastes are to ‘count’ in the sense that it is ‘better’ if all individuals are ‘better’ off’ (Samuelson, 1943, p. 605). This is all entirely consistent with the claim that ethical judgments have to be imposed but the emphasis is, as in his work on trade, on what is now called Pareto efficiency. In saying that the new welfare economics is no substitute for the old, he implied that stronger ethical judgments can and should be made, though it is not a point he chose to stress.

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