The Welfaristic Framework of Political and Economic Decision-Making
Arrow's contributions were primarily welfarist in the 1950s, using the framework of welfarism in his analyses of political and economic decision-making. According to the first fundamental theorem of welfare economics, a competitive equilibrium achieved by rational agents can satisfy Pareto optimality.
The theorem regards Pareto optimality as one criterion of social welfare, which is only assessed by the consideration of individual preferences, excluding any other observations. The general impossibility theorem considers that consumer or economic choice and political choice can be generalized as a single category within a more general rational choice.[127] In other words, Arrow discusses the general, collective decision-making process, not specifically economic or political decisions (Arrow 1963, p. 5). While collective decision-making does not exist in the market, economic and political decisions have two characteristics in common.First, Arrow considered that economic and political decision-making have rationality as their common informational basis (Arrow 1963, pp. 11-13), in that individuals are rational as long as their economic or political preferences are consistently represented by their preference orderings.
While the conception of welfare in a political decision-making is different from its conception in economic decision-making, in the consumer choice theory, individual preferences are not just represented as transitive ordering; rather, they also comply with the property of monotonicity,[128]which is not required in collective decision-making contexts. Arrow, however, accepts any individual ordering[129] and excludes the assumption of the individual utility function to make individual ordering more general. He also includes non-economic matters, such as an ethical judgment on the distributive sharing of goods in society (Arrow 1963, pp.
17-18). As a result, individual ordering can be regarded as the informational basis for the general, collective decision-making process (Arrow 1963, pp. 11 -17).Second, the consequences of both economic and political decisionmaking are considered to improve social welfare. The reason for this is as follows. First, Arrow regarded an individual’s ordering as the informational basis for both types of decision-making. He mentioned that economists can know someone’s ordering by observing his or her actual choice. According to the Austrian school, in particular, one’s actual choice is related to estimation and judgment. This assumes that what someone chooses must be what he or she prefers, and what is preferred must be better than what is not (Arrow 1985, p. 141).[130] Not only in economic decision-making, but also in social decision-making, Arrow’s choice of the Pareto principle as one condition of collective decision-making leads to the optimization of society’s welfare. Thus, Arrow considers that both types of decision-making can contribute to social welfare.
Arrow focused on common characteristics and did not account for the difference between economic and political decision-making in his analyses during the 1950s and 1960s. He regarded the type of social ordering that values social states according to their consequences as a criterion of social welfare. When regarding one’s welfare judgment as the informational basis, Arrow considered it to be ordinal and regards one person’s welfare as non-comparable with that of another. Because of these ideas, he was considered as an advocate of a type of welfarism.
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