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economy to sustain the sophisticated network of co-ordination between the first steps taken in producing the good and the final consumption of the good. In contrast, relatively non-complex economies experience great difficulties in developing mature networks for the production and distribution of consumer goods.

Although consumption (and not discovery or complexity) is the ultimate goal of economic activity, the tripartite standard does not necessarily reduce to a consumption-goods standard. The effects of many policies upon consumption opportunities are not always immediately clear, but if they increase discovery and complexity, a long-run favourable impact upon the provision of consumer goods may result. A more fundamental reason why a consumption-opportunities standard is not self-sufficient is that what individuals value (i.e. what is defined as a desirable consumption opportunity) is itself a function of discovery and complexity, among other features (see Elster 1982). Using complexity and innovation as joint standards with consumption goods represents an attempt to come to terms with the problem of doing welfare theory when it is recognized that preferences are endogenous.

SECOND-BEST CONSIDERATIONS

A final issue for non-Paretian approaches I shall discuss is the problem of second best. Well known in Paretian theory, second-best theory suggests that local optimization may move us further away from the global optimum if the optimum conditions are not met in all others markets. An analogous problem exists in the non-Paretian framework discussed in this chapter.

As in Paretian welfare economics, the problem of second best does not arise when no constraints prevent the choice of the best possible policy for all sectors of the economy. In Paretian theory this can be proven a priori— in a nonParetian framework it can be considered an empirical truth. The best outcome should receive the highest ranking from all the standards that we have chosen. If no such dominant outcome exists, this may suggest that we have chosen our standards poorly. It is possible, of course, that no choice of standards will assign dominant rankings to any of the outcomes and that we are always trading one attribute off against the other. This would imply that non-Paretian approaches are incapable of yielding determinant rankings.

If a strictly dominant alternative cannot be found or simply does not exist, a non-Paretian welfare economics will experience its own problem of the second best, which can prevent an unambiguous ranking of the policy alternatives. If the dominant alternative exists but is not available, improvements with respect to one of our standards may make matters worse in other directions. Increasing complexity may stifle innovation, for instance.

Our inability to obtain or find a dominant solution may require us to weigh one of our standards off against another in some fashion. The above discussion, however, implies that this cannot be done without our weighting scheme

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collapsing into some other welfare standard. Like Paretian theory, non-Paretian approaches experience serious problems when confronted with second-best analysis.

A NON-FOUNDATIONALIST APPROACH

Current interpretations of Paretian theory are foundationalist in nature. One starts with certain propositions from consumer theory and the theory of production, and deduces their implications. Policies are evaluated on the basis of how accurately their results correspond to the results stipulated by the theory’s building blocks. The result which comes closest to a competitive general equilibrium receives the highest ranking (second-best problems aside). If we want to adopt a foundationalist approach, Paretian theory is most likely to offer the best foundations available.

An alternative approach to policy evaluation must therefore look to another method. The method we have examined has similarities with the concept of ‘reflective equilibrium’ outlined in John Rawls’s Theory of Justice (1971). Rawls’s concept of ‘reflective equilibrium’ establishes a congruence between the results yielded by our theory, our moral intuitions, and our understanding of the principles of economic and social theory. Both the framework and its results should justify certain intuitions and not violate others, while possessing an overall concordance with our understanding of social reality. Reflective equilibrium is an equilibrium of understanding, not the sort of mechanical equilibrium postulated by classical physics.

The end result of a process of reflective equilibrium will not possess any definite starting point or foundations but will instead consist of a web of interrelated propositions which focus around certain critical issues. For our purposes, comparisons between different frameworks (or ‘webs of propositions’) should be made on the basis of usefulness—to what extent does the approach further our understanding of the world or help us evaluate attempts to change the world?

An excellent summary of this approach can be illustrated by the following extended quotation from the final section of Theory of Justice, ‘Concluding remarks on justification’:

Sometimes they [philosophers] attempt to find self-evident principles from which a sufficient body of standards and precepts can be derived to account for our considered judgments…. I have not adopted [this] conception[s] of justification…. There is no set of conditions of first principles that can be plausibly claimed to be necessary or definitive of morality and thereby especially suited to carry the burden of justification … justification rests upon the entire conception and how it fits in with and organizes our considered judgments in reflective equilibrium… justification is a matter of the mutual support of many considerations, of

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everything fitting together into one coherent view…. The aim throughout was to show that the theory matches the fixed points of our considered convictions better than other familiar doctrines, and that it leads us to revise and extrapolate our judgments in what seem on reflection to be more satisfactory ways. First principles and particular judgments appear on balance to hang together reasonably well, at least in comparison with alternative theories.

(Rawls 1971, p. 579)

As Rawls notes, this concept of justification comes from the works of Willard Quine. Rawls, however, does not emphasize Quine’s argument that all statements contain a significant empirical element, and that we do not have access to any body of purely theoretical propositions which are independent of experience. Quine’s insight is consistent with the emphasis upon economic history offered above. If it can be said that Paretian welfare economics is based upon the theory of general equilibrium, it could be noted in contrast that a nonParetian approach would have to be based upon economic history.

A non-Paretian approach offers a view of welfare economics which is simultaneously more modest and more ambitious than Paretianism. It is more modest because it is not able to generate any large class of abstract propositions comparable to the body of theoretical Paretian welfare economics. Due to the non-formalistic nature of this alternative nonParetian enterprise, the development of such abstract propositions is neither possible nor relevant. The non-Paretian enterprise is more ambitious in the sense that it attempts to bring us closer to useful policy evaluations.

CONCLUDING COMMENTS

One of the most striking features of the non-foundationalist approach outlined above is its resemblance to ‘ordinary language’ conversations concerning the desirability of different economic policies. Arguments are based upon historical examples (either recent or old) and directed at a certain consensual view of what a good result would look like. Whereas Paretian theory attempts to reform our ordinary language practice of policy evaluation, a non-foundationalist alternative studies and reflects it.7

On the plus side, non-Paretian approaches to welfare economics avoid the obsession with rigour at the expense of relevance. Dynamic considerations involving change and discovery often fit poorly into the equilibrium models upon which Paretian theory is based. Furthermore, the type of nonParetian approach examined here provides interesting insights into aggregation problems and might even suggest new approaches to the analysis of endogenous preferences.

On the negative side, non-Paretian approaches experience serious difficulties in dealing with second-best problems. We cannot even be sure that a nonParetian method is capable of producing policy rankings at all. Those rankings

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which might be produced seem heavily dependent upon a large number of empirical propositions whose degree of truth is very difficult to discover. Using economic history as a basis for welfare economics should thus be viewed as an interesting idea, although one which still has serious difficulties.

ACKNOWLEDGEMENTS

The author wishes to thank Peter Boettke, Randy Kroszner, Don Lavoie and Ralph Rector for useful comments.

NOTES

1Nelson and Winter (1982) and Kirzner (1986) offer two examples of non-Paretian approaches.

2Cowen (1990) examines the strengths and weaknesses of preference sovereignty.

3The possibility that no alternative will be unambiguously superior in all three capacities will be discussed below.

4The notion of ‘redundancy’ was first developed by John von Neumann, and characterizes the ability of a system to cope with failure by utilizing alternate methods of communication, co-ordination, etc. After hypothesizing that failure is an essential property of complex systems, von Neumann argued that the critical issue was whether the system in question possessed enough redundancy to minimize the effects of failures of particular parts.

5Some of the discussion of complexity reflects developments in systems analysis. See Checkland (1981) and Sahal (1982) for overviews on this approach.

6This holds true under or near first-best conditions. The problem of the second best which can arise in this framework will be discussed below.

7This mirrors the well-known tension between analytic and ‘ordinary language’ approaches to philosophy. However, it would be worthwhile to develop a nonfoundationalist interpretation of Paretianism. Paretian theory could then be used primarily as a foil that gave us insight into the logical structure of normative propositions, rather than as a means of unambiguously ranking competing alternatives.

REFERENCES

Checkland, P.B. (1981) ‘Science and the systems movement’ in Open Systems Group (ed.) Systems Behavior, London: Harper & Row.

Cowen, Tyler (1990) ‘The scope and limits of preference sovereignty’, unpublished manuscript.

Elster, Jon (1982) ‘Sour grapes—utilitarianism and the genesis of wants’, in A. Sen and B. Williams (eds) Utilitarianism and Beyond, Cambridge: Cambridge University Press.

Kirzner, Israel (1986) ‘Welfare economics: a modern Austrian perspective’, unpublished manuscript.

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McCloskey, Donald (1985) The Rhetoric of Economics, Wisconsin: University of Wisconsin Press.

Nelson, Richard and Winter, Sidney (1982) An Evolutionary Theory of Economic Change, Cambridge, Mass.: Harvard University Press.

Rawls, John (1971) Theory of Justice, Cambridge, Mass.: Harvard University Press. Sahal, Devendra (1982) ‘Structure and self-organization’, Behavioral Science 27, July,

pp. 249–58.

Sen, Amartya (1982) Choice, Welfare and Measurement, Cambridge, Mass.: MIT Press. Spencer, Herbert (1930) First Principles, New York: D.Appleton & Co.

Warsh, David (1984) The Idea of Economic Complexity, New York: Viking Press.