When economists talk about
maximizing social welfare, they are referring to a concept that appears to have
something to do with the well-being of people. However, the concept is best
viewed as a signaling device to suggest that the social planner claims to have
obtained insights about society from studying an abstract mathematical model. Such
signaling is not helpful to consideration of the merits of policy proposals.
Maximizing social welfare can
encompass policies that would enlarge the economic pie (national product) so
that there is potential for everyone to be given a larger slice. In that case,
it might be reasonable to argue that the policy would receive widespread
support among citizens. A good society - one that is good for the people who
live in it – could be expected to adopt such policies. However, claims about
pursuing social welfare objectives make such policies no more attractive than
if they are advocated to simply expand opportunities for individual
flourishing.
Maximizing social welfare can also
encompass policies to redistribute the economic pie in a manner that advocates
believe will somehow enhance the collective well-being of citizens. When maximizing social welfare is said to
require redistribution of the cake, some citizens will be advantaged at the
expense of others. It is possible for some policies of this nature to receive
widespread support (e.g. provision of a basic social safety net) but that is
less likely when extensive redistribution is proposed to equalize the utility
that different individuals obtain at the margin from additional income.
Whose welfare function should we
maximize?
The idea of social welfare maximization
implies the existence of a social welfare function reflecting insights about determinants
of collective well-being and expressing the “general will’ of the people. It
was over 50 years ago that I began to realize that this idea is highly
problematic. My libertarian friends might find this hard to believe, but it
happened while I was studying welfare economics.
An article by Francis M Bator
influenced me greatly, although perhaps not in the way the author intended. As
I was reading Bator’s article
- ‘The Simple Analytics of Welfare Maximization, The American Economic
Review, 17(1) March 1957 - I remember feeling that this was an object of great
beauty. I suppose the article seemed beautiful for the same reasons that
abstract art can seem beautiful. Bator provides a geometric presentation of the
derivation of a production possibilities curve, then proceeds to derivation of
the utility possibility frontier, which he then crowns with a social welfare
function, as shown in the diagram above.
Bator’s description of that diagram
left a lasting impression on me. He tells us that BB represents the grand
utility possibilities frontier, showing at each point the maximum utility for
person X given any feasible level of utility for person Y, and vice versa. He
then proceeds to explain the “bliss point”, Ω, in the following words:
“To designate a single best configuration
we must be given a Bergson-Samuelson social welfare function that denotes the
ethic that is to “count” or whose implications we wish to study. Such a
function – it could be yours, or mine, or Mossadegh’s, though his is likely to
be non-transitive – is intrinsically ascientific.”
What Bator meant by ascientific is that
the function involves ethical valuations. However, the point that has stuck in
my mind is that despite the heroic assumptions Bator was making in constructing
his beautiful geometric edifice, he did not try to pretend that it could be
crowned with a social welfare function aggregating the preferences of all
citizens. The function depicted “could be yours, or mine, of Mossadegh’s”. (Mohammad
Mosaddegh was an Iranian prime minister who held office from 1951
until 1953, when his government was overthrown - apparently in a coup orchestrated
by M16 and the CIA.)
Is it possible to make sense of
the diagram?
As I look at the diagram now, the idea
of choosing between the utility levels of different people seems problematic. It
would also be problematic to some modern utilitarians whose social welfare
function is defined simply in terms of maximizing average life satisfaction
(making the implicit ethical judgement that everyone deserves to have the same
life satisfaction). In that case, if the axes measure the life satisfaction of X
and Y, the bliss point would be defined by the intersection of the possibility
frontier and a 450 line drawn from the
origin. The 450 line would represent all points where X and Y have
equal life satisfaction – X and Y would each have maximum life satisfaction at the
bliss point.
However, I reject that modern
utilitarian view. It seems to me to reflect an inadequate understanding of the
determinants of individual flourishing. As argued in Freedom,
Progress, and Human Flourishing, even though average life satisfaction
may be a reasonable indicator of the average psychological well-being of large
groups of people, psychological well-being is just one of the basic goods of a
flourishing human. In my experience, when people are encouraged to offer more
than perfunctory responses to questions about how they are faring, they tend to
talk about a combination of different things such as their aspirations and the
choices they have made, their health, and their personal relationships. Satisfaction
is relevant, but does not encompass all relevant aspects of human flourishing.
To make sense of the choices represented
in the social welfare function depicted, I would need to replace “utility” with
“opportunity to flourish”. Even then, I would need good reasons to make an
ethical judgement about whether X and Y deserve to have their opportunity
to flourish enhanced or restricted.
What are the implications for
social choice?
While Bator’s description of the
social welfare function let the cat out of the bag for me, I remember reading
about Kenneth Arrow’s impossibility theorem at about the same time. I think the
main lesson I took away was that the processes of government must inevitably be
somewhat dictatorial. That makes it important to have constitutions that protect
liberty and electoral processes that are capable of kicking tyrants out of
office.
While studying welfare economics, I
also took a course in public choice in which I had my first exposure to The Calculus of
Consent, by James M Buchanan and Gordon Tulloch. That book and other
writings by Buchanan have had a profound impact on my views about the good
society and the role of economists.
Buchanan and Tulloch noted that
when individuals are considering constitutional rules that they expect to be in
place for a long time, they are uncertain as to what their own
interests will be in any of the whole chain of later collective choices made
according to those rules. Such uncertainty may enable people to set aside their
current economic interests in making constitutional choices. One implication is
that individuals will tend to choose somewhat more restrictive rules for social
choice-making for areas of potential political activity that could involve
violation of liberty.
Buchanan and Tulloch link liberty
directly to the concept of a good society:
“The acceptance of the right of the
individual to do as he desires so long as his action does not infringe on the
freedom of other individuals to do likewise must be a characteristic trait in
any “good” society. The precept “Love thy neighbor, but also let him alone when
he desires to be let alone” may, in one sense, be said to be the overriding
ethical principle for Western liberal society.” (p 217).
Buchanan later warned that the norms that
underlie democratic institutions are under threat when politics is allowed to
become little more than a ‘commons’ through which competing coalitions seek
mutual exploitation. (For further
discussion of this please see Chapter 6 of Freedom, Progress, and HumanFlourishing).
What should economists
do?
Economists who advise on public
policy often view themselves as social planners who are advising benevolent despots.
They are frequently disappointed to find that those whom they advise give
higher priority to political and personal goals than to publicly stated
economic objectives, or lack the political power to implement recommendations.
James Buchanan suggested that
economists should adopt a contractarian approach, with a focus on the
consequences of rules and, in particular, on the question of what rules of the
game individuals might accept voluntarily as participants in an authentic
constitutional convention. In providing an example of this approach, Buchanan
suggested that such a convention would be unlikely to endorse rules of the game
which allow majorities in a single generation to impose public debt burdens on
subsequent generations of taxpayers. (Nobel
prize lecture).
My career
The focus of my career in public
policy advice was partly contractarian. For most of my public service career I
had the good fortune to work in agencies of the Australian government (predecessors
of the Productivity Commission) which undertook
research and published reports on the economic implications of changing the
rules of the game for economic development. The focus of much of this work was
assessing effects of barriers to international trade and other forms of
industry assistance.
I note that my career was only partially
contractarian because the agencies were required to make recommendations to the
government according to specific terms of reference for individual inquiries and
more general guidelines. The specific terms of reference were sometimes
designed to ensure that governments received politically palatable
recommendations, but the research and policy analysis published in inquiry
reports, and in annual reports, informed policy-making processes in ways that
led eventually to adoption of rules of the game more favourable to free trade.
The advisory agencies were given
general guidelines including having “to have regard to the desire of the
Australian Government … to improve and
promote the well-being of the people” and to “improve the efficiency with which
the community’s productive resources are used”. I do not believe that the
collectivism reflected in the reference to people and privately owned capital
as “the community’s productive resources” had one iota of influence on the
research and policy analyses conducted by the agencies.
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