Essay on Welfare Economics

Welfare economics is a normative branch of economics.

It is con­cerned with the ways in which economic activities ought to be arranged so as to maximise economic welfare.

Welfare economics is based on value judgments about what ought to be produced, how production should be organised, the way income and wealth ought to be distributed, now and in the future.

However, the problem here is that each individual in a society has a unique set of value judgments which are dependent upon his attitudes, religion, philosophy and political affiliation.

This is why the economist finds it difficult to aggregate these value judgments in advising policy makers about decisions which affect the allocation of resources (it is so because such decisions involve making interpersonal comparison of utility).

For quite a long time economists have attempted to develop criteria for judging efficiency to use as a guide in evaluating actual resource deploy­ment. Neo-classical economists, including A. C. Pigou, who wrote the first textbook of welfare economics in 1919, assumed that utility was measurable (in terms of numbers or in terms of money).

On the basis of this assumption they were able to speak in terms of changes in the pattern of economic activity which would either increase or decrease economic welfare. In their view, economic welfare could be measured by utility. However, modern economists have rejected the idea that utility was measurable.

Therefore they have to accept that economic welfare is immeasurable. They all agreed that any statement about welfare is a value judgment influenced by the preferences and priorities of those making the judgment (i.e., the political parties in power).

This led to a search for welfare criteria which avoided making interpersonal comparisons of utility by introducing explicit value judgments as to whether or not welfare has increased.

There has been controversy among economists regarding the exact scope of economic science. One of the major points of controversy is whether economics is to be treated as a positive science or a normative science. As a positive science economics seeks to explain various economic phenomena and problems.

For example, it tries to explain why price of oil is so high while price of jute is so low. Again, as a normative science it seeks to focus on things as they ought to be. For example, it suggests that the government should take certain measures to reduce the unemployment problem.

In fact, positive economics is the study of what ‘is’ in economic theory, rather than what ‘ought to be’. For example, the statement that ‘a cut in direct taxes increases consumption spending in the economy’ is a factual statement that can be confirmed or refuted by examining the available empirical evidence on the effects of taxation on spending.

Positive econom­ics seeks to identify relationships between (among) economic variables, to quantity and measure these relationships and to make predictions of what will happen if a variable changes. As a positive science economics is con­cerned with the best possible utilisation of means or economic resources for achieving certain economic goals or fulfilling certain economic ends.

But, economics has a normative aspect also. And as a normative science it examines, through value judgment, the desirability or otherwise of the ends or goals to be achieved. A positive science is not concerned about the desirability (i.e. goodness or badness) of the economic ends, with which normative science is primarily concerned.

Normative economics is the study of what ‘ought to be’ in economic theory, rather than what is. For example, the statement that ‘people who earn high incomes ought to pay more income tax than people who earn low incomes’ is a normative statement.

Normative statements reflect people’s subjective value judgment of what is good or bad and depend on ethical considerations such as ‘fairness’ rather than strict economic rationale. The actual economic effects of tax system of a country on spending and saving, for example, is in the subject area of positive economics.

The classical economists argued that economics was not at all concerned with the ends. Since approval or disapproval of any economic activity such as production or any economic policy such monetary or fiscal policy or exchange rate policy was outside the sphere of economists, economics, stood neutral as regards ends.

Whether the end of an economic activity is good or bad, noble or ignoble, the economist is not at all concerned with it. This was the belief of the classical economist. For example, consumption of wine or harmful drug is not morally or physically justified. But, such an act no doubt satisfies a human need (desire). So, it is the task of economists to take note this reality but not to pass any judgment on this point.

In 1932, L. Robbins reaffirmed neutrality. He emphasised the point that as a science of scarcity economics is concerned merely with the utilisation of scarce resources (means) to satisfy (fulfil) unlimited (multiple and often conflicting) ends (objectives). Due to unlimited wants and scarcity of means (resources) an individual is constrained to exercise choice between (among) the various wants that he has to satisfy.

It is not the task of the economist to make a choice. Rather the choice is to be exercised either by an individual (which is a micro-unit) or by the government of a country (which is a macro-unit). The task of the economist is relatively simple—he has just to suggest how a given end can be achieved with a fixed (minimum) amount of resources (means). He is not supposed to make any comment or pass any judgment as to the end selected by an individual or the government.

The choice made by an individual may be good or bad, rational or irrational. An economist is not to appreciate or condemn it. So, the basic point that emerges from the views of classical economists is that, economics is to be considered as absolutely neutral as regards ends. As one economist commented long ago that “the function of the economist is to explore and explain and not to advocate and condemn.”

But, this view is not fully correct. It is a parochial view of the social science of economics. As R. G. Hawtry pointed out long ago, economics cannot be divorced from ethics. The economist is only partly concerned an economic problem. He should be also concerned with such non-economic issues as equity and justice, who suffers, who gains; who pays, who benefits.

As K. E. Boulding has rightly commented:

“Economic problems have no sharp edges; they shade off imperceptively into politics, sociology, and ethics. Indeed, it is hardly an exaggeration to say that the ultimate answer to every economic problem lies in some other field.”

There is an economic ‘ought’ which cannot be ignored. Economics is therefore both a positive and a normative science. In fact, a non-psychologi­cal economics must, therefore, be regarded as either superficial figment or positively non-scientific. A complete economist is not merely concerned with economic theory or economic analysis.

He is concerned with economic policy and value judgment, too. This simply means that, to reach perfection an economist should always strive to gain (acquire) a correct and complete knowledge of the ends, too. It is not enough to be concerned with means.

A practical economist can never advocate the pursuit of various ends since, like other sciences; economics has two sides: the theories and the facts. Since economics deals with matters which men consider very close to their lives, all economic activities (such as production, consumption, exchange, distri­bution, specialisation and so on), must be governed by ethical considera­tions.

Conclusion:

So, the main conclusion is that economics is both a positive and a normative science. This simply means that, it is not only concerned with the efficient (optimal) utilisation of society’s scarce resources, but with the achievement of certain desirable goals or objectives — such as employ­ment generation, poverty alleviation and, of course, an equitable distribu­tion of income wealth, economic power and opportunities.

As such the ‘ends’ are to be treated as lying outside the scope of economics. Since economics is all about how people make decisions, it cannot adopt a neutral attitude as regards the different objectives that can be achieved. It is not enough for economists to focus on means. It is equally vital to settle the ends, too.

As Robert L. Heilbroner has rightly commented, “By divorcing itself from the need to struggle with the elements of the political and social world, however recalcitrant they may be, conventional economics has ensured its technical virtuosity and its internal consistency, but at the cost of its social relevance.”

There is a feeling among some economists that economic analysis does not admit of any ethical judgment and it is neutral as between social ends. It is not the task of economists nor of economic principles, to pass judgment on what must happen or what ought to happen or what is likely to happen if a particular course of action is adopted.

This view seeks to establish economics as a pure science, devoid of all practical or ethical considerations. However, a close look reveals that it is a very narrow view of economic science.

The truth is that, economics has both positive and normative aspects. This simply means that, economists cannot refrain from discussing the desirabil­ity or otherwise of a certain action. If economics avoids normative or ethical issues it will largely lose its practical relevance, in which case it will have little, if any, value to policymakers.

But, one must not forget that, like theology and unlike mathematics, economics deals with matters which men consider very close to their lives.

Economics is largely concerned with human welfare and, therefore, it is not possible to avoid the ethical side of economic activities completely. Thus, it is not enough to lay down economic laws. It is equally important for an economist to pass judgment on whether a particular action is desir­able or not, from society’s point of view.