Transcript rh351_transparencies8_std - Rose

RH351
Rhetoric of Economic Thought
Transparencies
Set 8
Welfare economics and
public policy
Welfare economics, social choice theory, and public policy
1700
1800
1900
2000
Borda (1733 – 1799)
Condorcet (1743 – 1794)
Bentham (1772 – 1823)
Dupuit(1804 – 1866)
Aristotle
384 – 322 B.C.
Mill (1806 – 1873)
Bentham
Edgeworth (1845 – 1926)
Pareto (1848 – 1923)
Pigou (1877 – 1959)
Pigou
Kautilya
350 – 293 B.C.
Buchanan (1919 – )
Arrow (1921 – )
Sen (1933 – )
Sen
On Ethics and Economics
Concerning questions about distribution:
“… all these are questions of great interest and difficulty,
but no more form part of the Science of Political
Economy, in the sense in which we use that term, than
Navigation forms part of the Science of Astronomy.”
Nassau Senior, 1790 – 1864
“It will be my most cherished ambition, my highest
endeavor, to do what with my poor ability and my limited
strength I may, to increase the numbers of those, whom
Cambridge, the great mother of strong men, sends out
into the world with cool heads but warm hearts …”
Alfred Marshall, 1842 -- 1924
“…Economics is essentially a moral science.”
John Maynard Keynes, 1883 – 1946
On Ethics and Economics
“… it does not seem logically possible to associate the
two studies in any form but mere juxtaposition.
Economics deals with ascertainable facts; ethics with
valuations and obligations. The two fields of enquiry
are not on the same plane of discourse.”
Lionel Robbins, 1932
“We are strongly imbued today with the view that science
should be wertfrei and we believe that science has achieved
its triumph precisely because it has escaped the swaddling
clothes of moral judgment and has only been able to take
off into the vast universe of the ‘is’ by escaping from the
treacherous launching pad of the ‘ought.’”
Kenneth Boulding, 1969
Welfare economics and social choice theory
“In the general case … the demand function are functions of m - 1 variables
which are too numerous to be represented in space. It seems, therefore, that the
problem when generalized can only be formulated and solved algebraically …”
Leon Walras, Elements of Pure Economics (1874)
“Political Economy does not have to take morality into account. But one who
extols some practical measure ought to take into account not only the economic
consequences, but also the moral, religious, political, etc., consequences”
Vilfredo Pareto, Manual of Political Economy (1906)
Leon Walras
1834 – 1910
Vilfredo Pareto
1843 -- 1923
Francis Edgeworth
1845 -- 1926
Welfare economics and social choice theory
“How do we evaluate alternative social organizations?
There are many
possible arrangements for meeting the needs of society and they satisfy
many different needs … we use the notion of efficiency or optimality
that is associated with the name of Vilfredo Pareto … Now, within this
context, and under certain very special assumptions … efficiency can be
achieved through a particular kind of social system, the price system.”
Kenneth Arrow, The Limits of Organization (1974)
Arthur Pigou
1877 -- 1959
Paul Samuelson
1915 –
Kenneth Arrow
1921 –
Gerard Debreu
1921 –
First and second “fundamental” theorems of welfare economics
1. All market equilibria are Pareto efficient.
“With such a definition it is almost self-evident that this so-called
maximum [Pareto-optimality] obtains under free competition …
But this is not to say that the result of production and exchange
will be satisfactory from a social point of view or will, even
approximately, produce the greatest possible social advantage.”
Knut Wicksell, “On the Problem of Distribution” (1902)
2. Every Pareto efficient allocation can be achieved
as a competitive equilibrium (given an appropriate
initial endowment and convexity of preferences).
“[Pareto optimality] does not define, uniquely, a best situation in
any sense of the word … Other criteria – roughly speaking,
those we associate with the term ‘distributive justice’ – have to
be called into play.”
Kenneth Arrow, The Limits of Organization (1974)
Welfare economics and social choice theory
“…economic theory owes its present development to
the fact that some men, in thinking of economic
phenomena, forcefully suspended all judgments of
theology, morality, and justice, [and] were willing to consider the
economy as nothing more than an intricate mechanism, refraining for
the while from asking whether the mechanism worked for good or evil.”
William Letwin, The Origins of Scientific Economics (1963)
The concept of consumer surplus
Jules Dupuit, "On the Measurement of the Utility of Public Works", 1844
Arthur Cecil Pigou, “Producers’ and Consumers’ Surplus", The
Economic Journal, 1910.
Wealth and Welfare (1912).
The Economics of Welfare (1920).
The concept of surplus
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Economists to the right of them, Economists to left of them,
Economists in front of them,Volley'd and thunder'd
The “Left-Leaning” Economist…
The Right Leaning Economist…
 Sees externalities as a pervasive feature of
modern economies.
 Sees externalities as an occasional market failure
that calls for government intervention, but sees this
as relatively rare exception to the general rule that
markets lead to efficient allocations.
 Sees large corporations with substantial degrees
of monopoly power that need to be checked by
active antitrust policy.
 Sees competition as a pervasive feature of the
economy and market power as typically limited
both in magnitude and duration.
 Sees small elasticities of supply and demand (and
therefore low rates of responsiveness to changes)
and so is not too worried about distortionary
effect of taxes.
 Sees large deadweight losses associated with
taxation and, therefore, is worried about the
growth of government as a share in the economy.
 Sees people making systematic errors and
believes that it is the government’s role to protect
people from their own mistakes.
 Sees people as largely rational, doing the best the
can given the constraints they face.
 Sees government as the main institution that can
counterbalance the effects of the all-toopowerful marketplace.
 Sees government as a terribly inefficient
mechanism for allocating resources, subject to
special-interest politics at best and rampant
corruption at worst.
Adapted from Greg Mankiw