A very short note on alternative conceptions of welfare

Based on class notes (for a Public Policy course)

There are two views of welfare that are fundamentally associated to alternative ways to interpreting what markets do, which in turn are based on alternative theories of value. In the more conventional view, adopted in most welfare textbooks, it is presumed that markets allocate resources - in particular the so-called factors of production, land, labor, and capital - efficiently. In that view, often referred in economics as neoclassical (or marginalist), welfare is related to the individual, subjective notion of pleasure. One is better if one is somehow happier. In the alternative view, associated to an older tradition, of the so-called classical political economy authors, markets were central for promoting economic accumulation and higher levels of consumption. If a society was more opulent, with more material goods, then they would be better off.

The neoclassical view suggests that social welfare is based essentially on some kind of aggregation of individual well-being. The ideas go back to the work of Jeremy Bentham, in the 18^th century, the founder of Utilitarianism that suggested that individuals want to maximize pleasure and minimize pain. This view, together with a notion that supply and demand determined the allocation of resources, as developed by marginalist authors, implied that welfare should be analyzed in the process of market exchange, in which individuals interact independently in order to satisfy their wants or desires. That, in turn, led to the notion of Pareto efficiency, according to which total welfare increases if one can improve the condition of one individual and does not hurt others. One individual is better off, and nobody is worse off, adding to the sum of individual pleasures.

If a millionaire is less happy because, for example, they are taxed a bit more, even if materially nothing much changes in their life and one could improve the lives of more than a few hungry kids, that would not be welfare enhancing according to the conventional notion of welfare. It might not be fair, but someone is worse off, and, hence, the incomparable measures of individual pleasure would not allow one to be sure if the change improved the overall situation. Policy intervention cannot improve on the position achieved by means of impersonal market exchanges. In this view, there is an inherent conflict between efficiency and equality.

This should be seen as contrasting with the views of classical authors, who were not methodological individualists, to use the term coined by Schumpeter. Adam Smith is perhaps the most well-known supporter of this alternative to marginalist economics. In his view, society evolved historically from hunter-gathering to farming and eventually to commercial societies, which is how he referred to what we now would call capitalism. Societies were trying to reproduce the material conditions for survival, and the availability of a surplus, and excess of production beyond what was needed for subsistence, was what allowed for accumulation and opulence. By opulence he just meant people could consume more. More and better houses, more food, more things that made life easier and more comfortable.

Welfare in the classical or surplus approach tradition was based on the objective, material well-being – rather than the subjective utility - of the great majority in society. When they referred to utility, classical authors meant the social utility or the general well-being of society as a whole, and not the individual pleasure of a particular member of the community.

Smith was concerned with the improvement of the material welfare of the working class, because they were the vast majority of the members of the community. He argued:

“The common complaint that luxury extends itself even to the lowest ranks of the people, and that the labouring poor will not now be contented with the same food, cloathing and lodging which satisfied them in former times, may convince us that it is not the money price of labour only, but its real recompence, which has augumented.

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged” (Wealth of Nations, vol. I, ch. VIII: 96).

In Smith’s approach, one can certainly tax the rich to improve the conditions of those at the bottom and consider that a general improvement of well-being, if that allows workers to consume more of the things necessary for their lives in real terms. Not just more money, but more food, and clothes, and better houses. This does not mean that redistributive policies that increase equality would necessarily lead to more efficient outcome, in the sense of more opulence. But there is no reason to see efficiency and equality as inevitably at odds with each other.

Also, it does not mean that government intervention is always good. Smith was, it should be noted, for a minimal government, and, essentially, for free markets. Certain interventions would be good. Smith was for taxing the moderately well to do to pay for the education of the children of everybody, something that was not the norm, and even a bit radical, in the 18^th century. But he was very critical of policy interventions to promote domestic merchant interests, the mercantile policies of his time. He was essentially against the monopolies granted by the state to merchants. He was for a limited government. But the real enemy was not the government per se, but the excessive power of capitalists, particularly the monopolists, as noted by Heilbroner in his classic book on the worldly philosophy.

On this, it is worth remembering that for Smith distribution was conflictive and he was very clear that on that conflict he sided with workers. He said:

“…the common wages of labour depends every where upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour. It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer” (Wealth of Nations, vol. I, ch. VIII: 83-84).

Smith also had a very dim view of capitalists. He suggested, famously, that:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices” (Wealth of Nations, vol. I, ch. X: 145).

Clearly, the interests of the public did not necessarily align with the interests of the dominant class. The liberalism of Smith and the classical authors was based on the notion that the rising bourgeoisie had a revolutionary role, something noted, more explicitly, by Marx and Engels in the Communist Manifesto, and was a reaction against Mercantilism and the remnants of the Ancien Régime.

Marx noted in The Poverty of Philosophy that:

“The Classics, like Adam Smith and Ricardo, represent a bourgeoisie which, while still struggling with the relics of feudal society, works only to purge economic relations of feudal taints, to increase the productive forces and to give an new upsurge to industry and commerce” (1847: 118).

To some extent one can see how the laissez-faire principles come, not from a notion that markets produce optimal outcomes, nor from the conventional and often misinterpreted notion of the invisible hand, but from a need to eliminate the regulatory remnants of the feudal society. One could be for a minimal state, without implying that markets are fundamentally about efficiency. The implication is that a particular view regarding what constitutes welfare does not directly imply a particular position on the policies necessary to improve it. But objective measures of welfare do not need to consider that interventions to increase the public good will always interfere with the efficiency of markets.