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What a non-Paretian welfare economics would have to look like

Tyler Cowen

INTRODUCTION

Although non-Paretian approaches to welfare economics receive considerable attention outside of mainstream economics, they have not received much critical scrutiny. Non-Paretian welfare frameworks, while not necessarily wrong in their present form, are seriously incomplete. I will discuss whether a non-Paretian welfare economics can avoid collapsing into Paretianism, and still serve as a promising model for policy analysis. I warn the reader in advance that no definitive conclusions will be offered.

HOW DO NON-PARETIAN APPROACHES DIFFER?

The search for an alternative welfare standard is motivated by the deficiencies of Paretianism. On a theoretical level, Paretian welfare theory simply stipulates that we should prefer all moves which make some individuals better off and none the worse off. The absence of unanimity over most policy changes, however, implies that purely theoretical Paretianism must be supplemented with some empirical procedure for aggregating values across individuals with conflicting desires (e.g. applied cost-benefit analysis).

The difficulties with applied cost-benefit analysis are well known. Outside of general equilibrium, prices will not accurately reflect the value of resources. Preferences can be aggregated across different consumers only under fairly restrictive conditions (i.e. quasi-homotheticity). Furthermore, the rankings generated by cost-benefit analysis depend upon whether we use ex ante or ex post levels of wealth, and may not be transitive. In short, attempts to apply Paretian theory to actual policy evaluation often leave a significant gap between the rough-and-ready policy analysis and the precisely refined theoretical underpinnings.

Non-Paretian frameworks replace Pareto optimality with some other standard, or set of standards, for evaluating an economic system or economic policies.1 Typical suggestions for standards include co-ordination, responsiveness to change, innovation, discovery, and complexity. Under such standards, a desirable

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policy is associated with an increase in the relevant standard. A co-ordination standard, for instance, would give the highest ranking to the policy that did the most to further the mutual coordination of individual plans.

The particular choice of non-Paretian standard, however, is difficult. Welfare theory is concerned with the ranking of outcomes and must therefore focus upon the maximization of some attribute or set of attributes. These attributes should correspond to what our ultimate, most philosophic judgements consider a ‘good result’. But our notion of a ‘good result’ is complex and may not correspond to the maximization of any particular quality or set of qualities. The welfare theorist must then find a set of attributes or qualities that serve as a proxy for our idea of a good result.

Non-Paretian approaches may thus differ from Paretian theory in two different respects: either they contain a different notion of what a ‘good result’ is, or they attempt to find a better proxy for good results than the Paretian notion of maximizing gains from trade. For the purposes of this essay, I will accept the vaue judgement underlying Paretianism that ‘preference sovereignty’, however defined, is our ultimate basis for judging a good result.2 Whether preference sovereignty can be more accurately captured by some standard other than costbenefit analysis is thus an important issue.

A central problem

A non-Paretian approach to welfare economics must outline a satisfactory notion of consumer welfare which does not collapse into the Paretian standard. This task has not yet been accomplished. Any attempt to invoke the concepts of coordination, complexity, discovery, etc. as normative standards, encounters the issue of whether these qualities are considered good per se or not; answering this question can lead to untenable results.

Regarding any of these qualities (or any mix) as good per se leads to the following problem: an economy may be comparatively rich in the attribute(s) we have selected, but still not fulfil our intuitive criteria for a good result. With respect to co-ordination, for instance, we can imagine a perfectly or highly coordinated economy existing on a low level of subsistence or with a low level of progress. (Ancient China may be an example here.) Similarly, one can imagine economies with enormous amounts of discovery or complexity in limited spheres of activity which have no significant impact upon the general standard of living. Maintaining a strict per se advocacy of the chosen standard might result in unwanted endorsements of such situations.

Escaping this problem is not easy. If our chosen standard is not considered desirable per se, its presence must be evaluated with respect to some other criterion or criteria. Such evaluations tend to undercut the newlyerected welfare standard. If complexity is good only when it increases wealth, for example, then we really have a wealth standard, not a complexity standard.

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Our initial standard may even tend to slip away into applied Paretianism. There is a strong and understandable tendency to evaluate our non-Paretian standard in accord with its ability to satisfy consumer preferences. This judgement may in turn be represented by ‘willingness to pay/be paid’ criteria, which returns us to applied Paretianism and cost-benefit analysis. The central task of any non-Paretian welfare economics is to incorporate non-Paretian standards into welfare analysis while avoiding the dilemma discussed above.

SIDESTEPPING THE DILEMMA WITH ECONOMIC

HISTORY

Alternative welfare approaches might choose to ground their standards in economic history. The chosen standard would not be considered good per se, but the probability of encountering outlying cases where satisfaction of the standard generates a ‘bad result’ may be small. I will first discuss the nature of value judgements in this approach, and then consider applying these value judgements to actual policy analysis.

A history-based approach to welfare theory contains no theoretical ‘first step’, and is instead empirical in nature. One starts with a number of historical examples which are generally considered instances of ‘economic success’. Such examples may involve nations, cities, firms, specific policies and other economic entities. Possible examples might include Japanese post-war economic growth, the history of IBM, or the economic development of Europe. The relevant qualities which characterize these examples of success become our welfare standards.

It is unclear whether non-Paretian approaches involve more questionbegging than Paretianism. The initial claim that success is defined relative to a consensual view of examples is controversial. This step, however, may be a necessary part of any policy-analysis process. If economics is viewed as an important rhetorical device in an ongoing dialogue of persuasion (McCloskey 1985), it must ultimately make reference to instances and examples which are consensually considered examples of success. Furthermore, the process of persuasion must attempt to relate the policy choices at hand to the prior notions of good shared by the policy audience.

The process of consensus-building around examples of ‘success’ is not necessarily more arbitrary than other approaches to welfare economics. For instance, starting with Paretian optimality as a welfare standard presumably reflects the intuition that exhausting all possible benefits from trade corresponds to a desirable economic system. This may sound uncontroversial, but in fact the presuppositions of Paretian theory have come under heavy fire from many welfare economists and philosophers (Sen 1982 is perhaps the best known critic).

A more important point remains, however. Even if the initial premises of Paretianism are less controversial than a history-based approach, the movement

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from initial premises to policy conclusions may be more controversial. Uncontroversial premises may not get us far in evaluating a controversial world. For instance, the simple premise of exhausting all possible gains from trade may not much help us evaluate policies in a complex world. Further ethical judgements need to be introduced at each step, through measurement techniques and aggregation rules for costs and benefits.

The value judgements behind non-Paretian standards directly reflect the complexity of economic phenomena by making a greater set of intial value judgements than Paretian theory does. The non-Paretian approach makes economic history—rather than measurement techniques and aggregation rules— the relevant field for normative presuppositions. While the initial normative presuppositions may be greater in non-Paretian theory, these presuppositions bring us closer to our final goal of policy evaluation. There may be less need for further normative presuppositions when we apply nonParetian standards.

Developing a standard

The chosen examples of economic success are not used directly as normative benchmarks but instead for uncovering a number of underlying principles behind economic success. Through the use of contrast and comparison, the welfare theorist can attempt to discover common features behind each of the historical examples which were vital to the desirability of the outcome. These common features would be used as our ‘standards’ for judging economic policies or systems. We might decide, for instance, that coordination and innovation are critical features behind the economic success of nations.

The chosen features can be regarded as the result of the study of economic history and current economic institutions. This leaves three different levels at which disputes over welfare economics can be conducted. Such disputes may involve the choice of examples of success, their important common underlying characteristics, and the extent to which these characteristics will result from current economic policy choices. At no point is there a purely theoretical level of discourse which generates abstract propositions—each of these levels of argumentation is strongly empirical in nature. This method, however, need not be anti-theoretical—economic theory is necessary to discover the common underlying characteristics of success and to estimate the effects of current policy options upon these characteristics.

It might be argued that this method of policy evaluation is open to the dilemma discussed earlier. What is to prevent such a standard from approving of a policy that maximized the presence of the chosen characteristics at the expense of generating an intuitively undesirable outcome?

Adherence to, or rejection of, non-Paretian welfare criteria is based on empirical criteria. For the purposes of the following discussion, let us assume that one of the standards yielded is innovation, or discovery. One of the empirical presuppositions behind our use of discovery for welfare economics might be the