Justice and Welfare Economics

By Worland, Stephen | Review of Social Economy, September 2005 | Go to article overview

Justice and Welfare Economics


Worland, Stephen, Review of Social Economy


The attempt to specify precisely the criteria to be used by the economist to evaluate economic policy and institutions has led to the development of that specialized branch of analysis known as "welfare economics." Bypassing the problem of interpersonal comparisons of utility by invoking the "compensation principle," welfare economics proceeds to demonstrate that Pareto optimality--P = MC in all product markets; P = VMP in all factor markets--contributes to maximal efficiency in the use of resources, to maximal real social income. Implicit in this line of reasoning is a fundamental assumption consistent with the conception of economic activity carried along in scholastic social philosophy--i.e, the principle that the key defining function of an economic system is to provide the flow of commodities needed to satisfy human need. Such a conclusion shows how welfare economics can illuminate and clarify Thomistic teaching on (e.g.) the just price; on the principle that privately owned resources must be deployed so as to serve the common good; on the living wage. To deal with the problem of multiple Pareto optima, welfare economics invokes the concept of the Social Welfare Function. With this notion, welfare economics has rediscovered another key principle of scholastic teaching on economic justice--property ownership and income are to be distributed in a pattern that matches share received to the relative status of society's member.

Keywords: commutative justice, Pareto optimality, Scholasticism, distributive justice

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It is remarkable that, although economists have rarely shown themselves reluctant to hand down pronouncements on economic policy--e.g. to condemn monopoly or the tariff--it is mainly within the last quarter-century that specialists in economic science have made a serious attempt to delineate precisely the criteria in terms of which their discipline evaluates economic policy. This attempt has led to the development of that rather specialized body of analysis known as "welfare economics." (1) Given the interpretation most common among contemporary economists, welfare economics, however useful it may be as an exercise in economic analysis, is of little practical significance. At most, it merely illustrates how policy analysis which attempts a rigorous exclusion of explicit ethical principles manages surreptitiously to reintroduce and obscure implicit ones. However--and this is one of the issues to be considered in this paper--welfare economics is perhaps susceptible of an alternative interpretation. Given this alternative interpretation, welfare economics seems to be at least consistent with--and at most a carefully-deduced corollary of--Scholastic moral philosophy. (2) Furthermore, if welfare economics can be made to bear such an interpretation, its arguments seem but to re-emphasize, and perhaps clarify, conclusions with which Scholastic economists--i.e. those who consider the practical science of economics as an adjunct of the Thomistic ethical system would heartily agree. For welfare economics, after using the most elegant tools of economic analysis to elucidate precisely the criteria which govern economic policy decisions, establishes normative generalizations. Though the typical present day economist probably does not realize it, these generalizations do in fact imply that the primary concern of public economic policy is, after all, the achievement of justice. Careful consideration of these and related matters requires brief discussion of the origin of the so-called "New Welfare Economics."

To retell an old story briefly, it was preoccupation with the problem of "interpersonal comparisons" which, in the latter 1930's, gave rise to the modern, post-Pigovian version of welfare economics. In his searching examination of the methodological problems of economic science, Lionel Robbins had revived the interpersonal comparisons problem. Insisting that there was really no scientific way to compare the amount of one person's satisfaction with that of another, he had concluded that there was no scientific justification for income re-distribution (Robbins 1932). …

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