The Advent of Two Schools of the “New” Welfare Economics

Two schools of the “new” welfare economics emerged in response to this call for relief. They were based commonly on the informational basis of interpersonally non-comparable and ordinal utilities, but their similarity ends precisely there.

observed that “ ’Tis in vain to talk of adding quantities which after the addition will continue distinct as they were before, one man’s happiness will never be another man’s happiness: a gain to one man is no gain to another: you might as well pretend to add 20 apples to 20 pears.” We may mention in this context that Walter Bossert and Kotaro Suzumura (2016) attempted to reinterpret the Benthamite dictum within the information­al framework of interpersonally non-comparable and ordinal utilities.

7.3.1 The Bergson-Samuelson School of the “New”

Welfare Economics

The first step toward construction activities of the “new” welfare econom­ics was taken by Abram Bergson (1938), who introduced the fundamental concept of the social welfare function. Samuelson (1947/1983, p. 221), who had been the most powerful disseminator of Bergson's idea, expounded this contrivance as follows:

Without inquiring into its origins, we take as a starting point for our discussion a function of all the economic magnitudes of a system which is supposed to characterize some ethical belief - that of a benevolent despot, or a complete egoist, or “all men of good will,” a misanthrope, the state, race, or group mind, God, etc. Any possible opinion is admissible.... We only require that the belief be such as to admit of an unequivocal answer as to whether one configuration of the economic system is “better” or “worse” than any other or “indifferent,” and that these relationships are transitive.... The function need only be ordinally defined....

Two remarks on the nature of the Bergson-Samuelson contrivance may be in order.

In the first place, the standard scenario of the Bergson-Samuelson “new” welfare economics may be phrased as follows: Design an institutional framework of the economy so as to identify and implement a social alternative x* that maximizes the value of the social welfare function f at the profile (u₁(x), u₂(x),..., u_n(x)) of individual utilities within the set of feasible alternatives.^[52] Observe that the Bergson-Samuelson scenario and that of maximizing the social sum-total of individual utilities have a conspicuous family resemblance. Indeed, the two scenarios capture in common the essence of welfare economics by means of the constrained maximization paradigm. Their crucial difference can be reduced to the difference in their respective objective functions, viz. the ordinal index of social welfare provided by a Bergson-Samuelson social welfare function, on the one hand, and the social sum-total of individual utilities, on the other.

Although the transition from the scenario based on the social sum-total of individual utilities to the alternative scenario based on the Bergson- Samuelson social welfare function was once considered to be a quantum leap in the history of welfare economics, they share the conspicuous feature of focusing on the maximization of some social welfare index subject to resource constraints. It is this common feature of these scenarios that brings them into one and the same subclass of welfare economics. Pigou’s “old” welfare economics is in clear contrast with the “new” welfare economics of the Bergson-Samuelson family in that the former is concerned with the down-to-earth - less than perfect and defective - economy with a view to finding feasible instruments for the bettering of human life.

In the second place, there exists an important difference of opinions between Bergson and Samuelson with respect to the nature and origin of the Bergson-Samuelson social welfare function. Samuelson remained un­compromising in his flat denial of thinking whose value judgments the social welfare function embodies, and how the social welfare function is generated or constructed from individual value judgments.

The practitioner of welfare economics is in principle free to take any values as a point of departure, but the resulting counsel as to economic policy is not apt to be too relevant unless the values in question are held by, or can plausibly be imputed to, one or more officials concerned with the policies in question. Should the practitioner for any reason disapprove of those values, he may, of course, refrain from offering the officials any counsel at all.^[53]

7.3.2 The Kaldor-Hicks School of the “New” Welfare Economics

The second school of the “new” welfare economics is based on the hypothet­ical compensation principles introduced by Nicholas Kaldor (1939) and John Hicks (1940/1981), and elaborated further by Tibor Scitovsky (1941), Paul Samuelson (1950), William Gorman (1955), and many others.^[54] The informa­tional basis of this school is interpersonally non-comparable and ordinal utilities, which is common with the first school, but otherwise the two schools are diametrically contrasting. Unlike the social welfare function of the first school, the second school does not accept any ethical value from outside of economics.

The point of departure of the second school is the well-known concept of Pareto-superiority. According to Jan de V. Graaff (1957, pp. 84-85),

the compensation [principles] all spring from a desire to see what can be said about social welfare... without making interpersonal comparisons of well-being.... They have common origin in Pareto's definition of an increase in social welfare - that at least one man must be better off and no one worse off - but they are extended to situations in which some people are made worse off.

Aconcise articulation of the Kaldor-Hicks compensation principles may be in order.^[55] As an auxiliary concept, a social state a is said to be compensatory equivalent to another social state b if and only if we can move from a to b by means of the hypothetical payments of compensation among individuals. Two hypothetical compensation principles can then be defined as follows. Consider an economic policy that turns a social state x, to be called the status quo ante, into another social state x*, to be called the status quo post. Then (a) the status quo post x* is Kaldor-superior to the status quo ante x if and only if there exists a social state x**, which is compensatory equivalent to x*, such that x** is Pareto-superior to x; (b) the status quo post x* is Hicks-superior to the status quo ante x if and only if there does not exist a social state x**, which is compensatory equivalent to x, such that x** is Pareto-superior to x*.

It is easy to be wise after the event, and the present-day verdicts on the performance of these compensation principles are largely in the negative for ethical and logical reasons. The ethical criticism is based on the arbitrariness of using the status quo ante or the status quo post as the point of reference in judging about welfare distributions among individuals at x vis-a-vis at y, whereas the logical criticism is based on the lack of transitivity, or its weaker variants, of the social preference judgments generated by various compen­sation principles.^[56] These criticisms notwithstanding, it should not be over­looked that the second school of the “new” welfare economics is a successor of Pigou’s research scenario in that this school focuses on the search of “instruments for the bettering of human life” rather than on the search of the first-best social welfare maximization.^[57]

7.4