APPROACHES TO WELFARE ECONOMICS
There are basically there are three approaches to the problem of welfare economics.
The Neo-classical or Pigouvian Welfare Economics,
The New Welfare Economics or the Paretian Welfare Economics
The Social Welfare Function of K. Arrow
2.1.1 The Neo-classical or Pigouvian Welfare Economics.
The classical Economists did not bother much about the welfare aspects of Wealth for the
simple reason that Adam Smith’s invisible hand took an automatic care of accumulation of
wealth and output on which social welfare depended. Both wealth and output increased or
decreased together. As all individuals (being rational) were individually capable of looking after
their respective individual interests and maximizing their satisfactions, and as the society was
just a collection of individuals, the total welfare was automatically taken care of and would be
automatically maximized.
Some such argument was given by John Stuart Mill in support of utilitarianism. He said
no reason can be given why the general happiness is desirable except that each person, so far as
he believes it to be attainable, desires his own happiness. This, however, being a fact, we have
only all the proof which the case admits of; but all which it is possible to require, that happiness
is a good: that each person’s happiness is good to that person, and that general happiness,
therefore, a good to the aggregate of all persons.
There were, however, many developments later on the field of classical welfare
economics, which were brought up-to-date by A. C. Pigou in Wealth and Welfare (1912) and the
Economics of Welfare (1920), and is known as the Pigouvian or Neo- Classical Welfare
Economics. A.C Pigou wanted to limit the subject matter of welfare to more manageable sizes
and measurable categories. “The one obvious instrument of measurement available in social life
is money.” Hence, the range of our enquiry becomes restricted to that part of social welfare that
can be brought directly or indirectly into relation with the measuring rod of money. This part of
welfare may be called economic welfare.”
Pigou agrees that a precise boundary between economic and noneconomic welfare does
not exist, nevertheless “The test of accessibility to a money measure serves well enough to set up
a rough distinction. Economic welfare, as loosely defined by this test, is the subject matter of
economic science.” Pigou also agrees that economic welfare may not serve as a barometer or
1
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, index of total welfare. The changes in economic and non-economic welfare act and react upon
each other instances can be multiplied in which economic causes, that affect economic welfare in
one way, affect total welfare in a different way.
Nevertheless, there is a presumption that qualitative conclusions about effects upon
economic welfare will hold good also of effects upon total welfare. Though the technique of
index numbers, the total production of goods and services is converted into national income, and
changes therein are said to represent changes in economic welfare as well.
On the basis of certain classical assumptions like, cardinal measurability of utility, inter-
personal comparisons of utility, universal applicability of diminishing marginal utility from
money, independence of utility functions, treating all individuals alike from the point of view of
derivation of utility from money, prevalence of perfect competition and full employment, e.t.c.
A.C Pigou draws some important propositions of welfare economics:
Firstly, “Provided that the dividend accruing to the poor is not diminished, increases in
the aggregate national dividend/national output of the community, unless they result from
coercing people to work more than they wish to do, carry with them increases in
economic welfare.”
Secondly, “Changes in the distribution of the national dividend in favor of the poor may
be brought about in several ways, the most important of which is by a transference of
purchasing power to them from rich persons. Except in very special circumstances such
transference must increase economic welfare.
This, however, is not quite the same thing as saying that a diminution in the inequality of
distribution must increase economic welfare.
Transfers of money incomes from the better-to do to the worse-to do sections of the
community in practice must be accomplished insofar as they do not have any adverse
effect on productive effort, enterprise, and the development of capital equipment’s, i.e.,
After “maintaining capital intact”.
Under the impact of trenchant criticism of Lionel Robbins, J. R. Hicks and others, the
Pigouvian welfare economics lost its scientific purity. Its assumptions were challenged
and so also its operational consequences as guide to welfare policy. But is still persists,
particularly in the fields of taxation, minimum wage policy and social legislation.
2
This study source was downloaded by 100000856941565 from CourseHero.com on 11-26-2022 14:39:29 GMT -06:00
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There are basically there are three approaches to the problem of welfare economics.
The Neo-classical or Pigouvian Welfare Economics,
The New Welfare Economics or the Paretian Welfare Economics
The Social Welfare Function of K. Arrow
2.1.1 The Neo-classical or Pigouvian Welfare Economics.
The classical Economists did not bother much about the welfare aspects of Wealth for the
simple reason that Adam Smith’s invisible hand took an automatic care of accumulation of
wealth and output on which social welfare depended. Both wealth and output increased or
decreased together. As all individuals (being rational) were individually capable of looking after
their respective individual interests and maximizing their satisfactions, and as the society was
just a collection of individuals, the total welfare was automatically taken care of and would be
automatically maximized.
Some such argument was given by John Stuart Mill in support of utilitarianism. He said
no reason can be given why the general happiness is desirable except that each person, so far as
he believes it to be attainable, desires his own happiness. This, however, being a fact, we have
only all the proof which the case admits of; but all which it is possible to require, that happiness
is a good: that each person’s happiness is good to that person, and that general happiness,
therefore, a good to the aggregate of all persons.
There were, however, many developments later on the field of classical welfare
economics, which were brought up-to-date by A. C. Pigou in Wealth and Welfare (1912) and the
Economics of Welfare (1920), and is known as the Pigouvian or Neo- Classical Welfare
Economics. A.C Pigou wanted to limit the subject matter of welfare to more manageable sizes
and measurable categories. “The one obvious instrument of measurement available in social life
is money.” Hence, the range of our enquiry becomes restricted to that part of social welfare that
can be brought directly or indirectly into relation with the measuring rod of money. This part of
welfare may be called economic welfare.”
Pigou agrees that a precise boundary between economic and noneconomic welfare does
not exist, nevertheless “The test of accessibility to a money measure serves well enough to set up
a rough distinction. Economic welfare, as loosely defined by this test, is the subject matter of
economic science.” Pigou also agrees that economic welfare may not serve as a barometer or
1
This study source was downloaded by 100000856941565 from CourseHero.com on 11-26-2022 14:39:29 GMT -06:00
https://www.coursehero.com/file/160432021/TOPIC-TWO-APPROACHES-TO-WELFARE-ECONOMICS-NOTESpdf/
, index of total welfare. The changes in economic and non-economic welfare act and react upon
each other instances can be multiplied in which economic causes, that affect economic welfare in
one way, affect total welfare in a different way.
Nevertheless, there is a presumption that qualitative conclusions about effects upon
economic welfare will hold good also of effects upon total welfare. Though the technique of
index numbers, the total production of goods and services is converted into national income, and
changes therein are said to represent changes in economic welfare as well.
On the basis of certain classical assumptions like, cardinal measurability of utility, inter-
personal comparisons of utility, universal applicability of diminishing marginal utility from
money, independence of utility functions, treating all individuals alike from the point of view of
derivation of utility from money, prevalence of perfect competition and full employment, e.t.c.
A.C Pigou draws some important propositions of welfare economics:
Firstly, “Provided that the dividend accruing to the poor is not diminished, increases in
the aggregate national dividend/national output of the community, unless they result from
coercing people to work more than they wish to do, carry with them increases in
economic welfare.”
Secondly, “Changes in the distribution of the national dividend in favor of the poor may
be brought about in several ways, the most important of which is by a transference of
purchasing power to them from rich persons. Except in very special circumstances such
transference must increase economic welfare.
This, however, is not quite the same thing as saying that a diminution in the inequality of
distribution must increase economic welfare.
Transfers of money incomes from the better-to do to the worse-to do sections of the
community in practice must be accomplished insofar as they do not have any adverse
effect on productive effort, enterprise, and the development of capital equipment’s, i.e.,
After “maintaining capital intact”.
Under the impact of trenchant criticism of Lionel Robbins, J. R. Hicks and others, the
Pigouvian welfare economics lost its scientific purity. Its assumptions were challenged
and so also its operational consequences as guide to welfare policy. But is still persists,
particularly in the fields of taxation, minimum wage policy and social legislation.
2
This study source was downloaded by 100000856941565 from CourseHero.com on 11-26-2022 14:39:29 GMT -06:00
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