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Home , Tony Atkinson, Welfare economics

The Restoration of

By ANTHONY B ATKINSON*

This paper argues that should devote more time and attention. As should be restored to a prominent place on the Keynes said, “economics is essentially a moral agenda of , and should occupy a science” (in a letter to Sir Roy Harrod, see central role in the teaching of economics. Richard Wright, 1989, page 473). Economists should provide justification for the ethical criteria underlying welfare statements, When Samuelson wrote, welfare economics and these criteria require constant re-evaluation was a central concern of the discipline. The in the light of developments in economic survey of “Welfare Economics, 1939-59” by analysis and in moral philosophy. Economists Edward Mishan (1960) referenced more than need to be more explicit about the relation 60 articles on the theory of welfare criteria, between welfare criteria and the objectives of with titles such as “Welfare propositions in governments, policy-makers and individual economics” and “The foundations of welfare citizens. Moreover, such a restoration of economics”. As it was put by Kenneth J Arrow welfare economics should be accompanied by and Tibor Scitovsky in their Introduction to consideration of the appropriateness of Readings in Welfare Economics, “welfare adopting ethical guidelines for the economics economics has greatly increased in importance. profession. ... Economists want to know exactly what they are after, what is the meaning, the limitations, I. Welfare Economics and Welfare and the importance of and Statements in Economics economic progress.” (1969, page 1).

In his Foundations of Economic Analysis, Today, in contrast, there are relatively few Paul A Samuelson explained how he disagreed journal articles on welfare criteria. For with the celebrated critique of welfare example, the 2009 volume of the American economics by Lionel Robbins (1932): Economic Review contained, in the regular “Robbins is undoubtedly correct … ethical issues, some 65 articles, totalling more than conclusions cannot be derived in the same 1750 pages, but not one dealt with welfare way that scientific hypotheses are inferred or criteria or the foundations of welfare verified. But it is not valid to conclude from judgments. There are few textbooks written this that there is no room [for welfare specifically on “welfare economics” and few economics]. It is a legitimate exercise of economic analysis to examine the departments offer courses on the subject. In consequences of various judgments." many places, welfare economics has been (Samuelson, 1947, page 220). incorporated into micro-economics courses or courses on general equilibrium. While welfare The main thrust of this paper is that welfare economics, as such, was a subject of economics is not only a legitimate exercise, but importance half a century ago, now it has that it is an exercise to which economists largely disappeared from the mainstream * Nuffield College, Oxford OX1 1NF, United (Atkinson 2001 and 2009). Kingdom. ([email protected]). This paper was written while I was Frank W. Taussig Research This does not mean that economists have Professor at Harvard University. I am grateful to the stopped making welfare propositions. Of the 65 Department of Economics for their support. The research received no other funding. I have benefited from several articles in the 2009 volume, no fewer than 20 valuable conversations about the subject matter, and contained welfare analyses. The titles are would particularly like to thank Glen Weyl for his instructive: 2 included the word “optimal”, 4 suggestions. I alone however am responsible for the included “efficiency”, and 1 referred to views expressed.

“welfare costs”. One asked in its title an according to whether the representative explicitly normative question. is better or worse off. But this requires justification. Even if everyone were Articles reaching normative conclusions identical, there might be reasons why social typically spend little time justifying the ethical judgments go beyond what enters individual basis for such judgments. A typical procedure . As is remarked by Samuelson, “one is to state the form of the social welfare does not have to be a John Donne … to find function, such as the expected sum of lifetime fault with the above assumption” (1947, page , and then move on to a much more 224). For example, we may believe, as a detailed description of the . society, that there are merits in a higher level of Little or no justification is given for the choice overall education than that chosen. An educated of the particular . In only society may be able to operate more effectively a few cases are any alternatives considered, and as a democracy. there is little consideration of the ethical considerations that may not be captured by the But, even if we stay within the framework of posited social welfare function. There is little strictly individualistic welfare, it is certainly consideration as to how advances in economic constraining to assume that everyone has the analysis may have raised new issues in same . In most real-world policy evaluation. decisions, there are conflicting interests. The assumption of a single representative agent There are of course notable exceptions. may suffice for modeling macro-economic Among the 20 articles cited above, that by Raj behavior, but it rules out most interesting Chetty, Adam Looney and Kory Kroft (2009) welfare economic problems. For example, in recognizes the potential problem for welfare debates about labour reform, there are economics of the finding that people may base differing interests for workers in established their decisions on mis-perceptions of the jobs and those who are outsiders. It would not they face. They draw on the important recent be possible to discuss the desirability of such work of B Douglas Bernheim (2009) and reforms without recognizing these different Bernheim and Antonio Rangel (2009) interests. In the debate about pensions, there are examining the implications for welfare conflicting interests of different generations. economics of non-standard models of choice developed in recent literature on behavioural This last example brings us indeed to the economics (and earlier by , 1977). unavoidable fact that people are born at It is precisely this kind of discussion that I different dates. All members of a birth cohort would like to see more central to our teaching may be identical, but their and research. inevitably occurs, at least in part, at a different date from that of their parents. The typical But how have economists in general avoided answer to this question is that intertemporal welfare economics? differences are subsumed in a dynastic utility function, which takes account of all future II. Avoidance Strategies consumption. It is assumed that those present today take into account the interests of There are several ways in which the neglect of succeeding generations. This answer is not welfare economics can be rationalized. easily explained to non-economists. Since there is often more than one adult generation of a The first avoidance strategy is to assume dynasty, they may reasonably ask – whose away differences in all relevant economic dynastic welfare function? Are we saying to 50 interests. Many macro-economic models are year-olds that their welfare is judged by their populated by identical , described as 75 year-old parents? “representative agents”. It is then assumed that changes in social welfare can be judged simply The second strategy does not seek to assume we have to apply multiple criteria and consider away differences between people. It is assumed how conflicts may be resolved. instead that there is agreement on the welfare criterion to be applied. Judging by the 20 In particular, welfare economics needs to take articles cited above, economists today still account of the alternatives to that largely follow Robbins, who in 1938 said that have been advanced in the past half century, “my own attitude to problems of political such as the theory of justice of action has always been one of what I may call (1971) and the concept of capabilities provisional utilitarianism” (1938, page 635). introduced by Sen (see, for example, 1985). The Presidential Address to this Association of These theories are complex and, in their Robert Lucas, given 65 years later, stated that application to problems, have been grossly simplified by economists, myself “To evaluate the effects of policy included. When the work of Rawls was first change on many different consumers, discussed by public finance economists in the we can calculate welfare gains early 1970s, we tended to pay more attention to (perhaps losses, for some) for all of his difference principle than to his first, and them, one at a time, and add the lexically prior, principle of basic liberties. The needed compensations to obtain the difference principle required that inequalities in welfare gain for the group” (Lucas, a society should work to the greatest benefit of 2003, pages 1-2). the least advantaged. This appealed to economists, since they could see the Rawlsian Lucas appears to regard this statement as self- principle as a limiting case of giving more evident: he describes it as “the general logic of weight to those less well-off in a Bergson- quantitative welfare analysis” (page 1). Samuelson social welfare function. But this However, this statement disregards the many ignored the fact that Rawls was concerned with objections that have been raised to the the of what he called primary utilitarian approach. To begin with, we may not , rather than with the distribution of be content to add the welfare gains: the sum individual welfare. In the same way, Sen was takes no account of how the utilities are concerned to change the evaluative space – in distributed. As it was put by Sen, “maximizing his case to the consideration of individual the sum of individual utilities is supremely capabilities, which we may define broadly as unconcerned with the interpersonal distribution the freedom that people have to function in key of that sum” (1973, page 16). dimensions.

The more fundamental difficulty with this Whatever one thinks of the merits of the approach is that it fails to recognise that there alternatives to utilitarianism, one has to ask – are plurality and diversity in the welfare criteria when making statements about public policy – that could be applied. Plurality refers to the how adoption of a different view from fact that a single person may bring to bear more utilitarianism would affect the conclusions than one set of welfare criteria. A person may reached. Where people disagree about the for example be concerned with the greatest desirability of a particular policy reform, is it happiness, but also with personal liberty. Both possible that they do so because they are are legitimate concerns. They may point in the motivated by a different view of the objectives same direction, but they may also conflict. of society? Diversity refers to the fact that different people hold different sets of values. One may be The third avoidance strategy takes the form of concerned with personal liberty and another an assumed division of labor, with economists person with . Where there are taking responsibility for the identification of multiple welfare criteria, it makes no sense to the possibility frontier, and leaving to others talk about the welfare consequences; instead the criteria for choosing from that menu. But we have then to ask – who are the “others”, and

can we really separate the two stages? III. Ethical Guidelines for the Answers to the first question are at best implicit Profession in most welfare analyses. Insofar as much of the economics literature appears to be based on Supporters of the restoration of a political classical utilitarianism, the natural reference regime – such as democracy or a monarchy – point may be moral philosophy. The division of are not typically simply aiming for the labour is then between the economics restoration of the status quo ex ante. In this department and the philosophy department. case, too, I am hoping that the return of welfare However, many economists are clearly economics will open up new avenues. It is not addressing policy-makers, governments and simply an argument for the ancien regime. In international organizations. If that is the case, the previous sections, I have pointed to some of then the criteria should presumably reflect the new questions that are being, or should be, those of these decision-makers. Yet it is far discussed: the implications of behavioral from clear that the typical decision-maker economics, capabilities, plurality of criteria, would even recognize the social welfare and the role of individual ethical codes. functions employed, still less accept them as embodying all their concerns. This becomes In this final section, I want however to raise even more the case where the objectives are a further field where economists need to engage supposed to be those espoused by individual with moral considerations. This concerns the citizens. To give just one example, behavior of economists themselves, an aspect considerations of “fairness” are commonly about which they are uncharacteristically shy. raised in popular debates about taxation, which Some academic disciplines might be criticized may suggest that economists should pay more for spending too much time on contemplating attention to horizontal as a criterion. their professional navels, but economists can, in my view, be criticized for being Nor is it easy to separate objectives and the insufficiently reflective about their professional constraint set. I give just one example. role. Suppose that individuals recognize their own interests (consumption) but are also guided by a There can be little doubt that economists personal set of moral principles that leads them have become important actors in the . to have concern for the less fortunate. If they But their activities are not typically modeled. make transfers (for example giving to Oxfam), studies the actions of then this affects their consumption (and politicians, government officials, voters, possibly labor supply) decisions and pressure groups, but usually allows no role for revenue. The existence of such “principled” economists, either as advisers, or as officials, or behavior has to be taken into account by the as public commentators. Yet in their teaching, in estimating the possibility frontier. research, and public pronouncements, whether But we have also to ask how the individual about financial markets or about , principles and individual redistribution should economists influence economic behavior and enter the social evaluation. It has been argued the decisions of governments. Just as with that it would be double-counting to count the other actors, one has to ask what governs the “warm glow” to the donor as well as the benefit economist acting in a professional capacity. to the recipients, but it does not seem What form does self- take in this defensible to ignore totally the altruistic context? How far is their behavior governed by objectives of individuals. a set of principles?

The reference to personal moral principles In their influence, economists are no different brings me to the last point of the paper. from several other professions. These other professions tend however to have established guidelines for good practice. They engage in self-regulation. The American Statistical Economics.” Quarterly Journal of Economics, Association, for example, has set out Ethical 124(1): 51-104. Guidelines for Statistical Practice covering responsibilities in publications and testimony, Chetty, Raj, Adam Looney and Kory Kroft. and towards funders, research colleagues, the 2009. “Salience and Taxation: Theory and profession, and to the wider public. It Evidence.” American Economic Review, 99(4): summarizes the purposes as follows: 1145-1177.

“to encourage ethical and effective Lucas, Robert E. 2003. “Macroeconomic statistical work in morally conducive priorities.” American Economic Review, 93(1): working environments. … It is 1-14. important that all statistical practitioners recognize their potential Mishan, Edward J. 1960. “A Survey of impact on the broader society and the Welfare Economics, 1939-1959.” Economic attendant ethical obligations to Journal, 70(278): 197-265. perform their work responsibly” (website of American Statistical Rawls, John. 1971. A Theory of Justice. Association). Cambridge: Harvard University Press.

In my view, economists should consider Robbins, Lionel. 1932. An Essay on the adopting such an approach, and adding the Nature and Significance of Economic Science, study of professional ethics to the training of London: Allen and Unwin. economists. Guidelines may only systematize Robbins, Lionel. 1938. “Interpersonal what is already regarded tacitly in the Comparisons of Utility.” Economic Journal, profession as good practice, but they would 48(192): 635-641. serve to reassure students, and the general public, as to what could be expected of a Samuelson, Paul A. 1947. Foundations of “moral science”. Economic Analysis. Cambridge: Harvard University Press.

REFERENCES Sen, Amaryta. 1977. “Rational Fools: A Critique of the Behavioral Foundations of Arrow, Kenneth J. and Tibor Scitovsky. Economic Theory.” Philosophy and Public 1969. Readings in Welfare Economics. London: Affairs, 6(4): 317-344. Allen and Unwin. Sen, Amartya. 1985. On . Atkinson, Anthony B. 2001. “The strange Oxford: Clarendon Press. disappearance of welfare economics.” Kyklos, 54(2/3): 193-206. Sen, Amartya. 1985. Commodities and Capabilities. Amsterdam: North-Holland. Atkinson, Anthony B. 2009. “Economics as a Moral Science.” Economica, 76(s1): 791-804. Wright, Richard. 1989. “Robbins as a Political Economist: A Response to O’Brien.” Bernheim, B Douglas. 2009. “Behavioral Economic Journal, 99(396): 471-478. welfare economics.” Journal of the European Economic Association, 7(2-3): 267-319.

Bernheim, B Douglas and Antonio Rangel. 2009. “Beyond Revealed : Choice- Theoretic Foundation for Behavioral Welfare