Social Welfare: Shall We Aim at Economic Growth?

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Green Growth and New Models of Prosperity

Conceptions of social welfare: Shall we aim at economic growth?

Ottmar Edenhofer Martin Kowarsch, Jan Steckel, Linus Mattauch, Michael Jakob

Summer semester 2013, May 17 What this lecture will be about

 Economic growth is feasible despite climate mitigation

 Yet also desirable (as usually assumed in economics)?  How much priority should policy-makers give to economic growth – compared to other objectives?  The search for the “common good”, or “social welfare” (in the broadest possible sense)  Compare insights on the normative dimension of cost-benefit analysis (previous lecture): the social planner, problem of discounting, etc.

2 Structure of today’s lecture

1) The “standard“ welfare function in economics: pro growth  Welfare economics, and application in predominant IA models  Is a social welfare function feasible at all? The Arrow Paradox 2) Amendments: Distribution, and sustainability of growth  Criticism of standard welfare economics within “welfarism“ paradigm  Distribution of wealth, and the importance of natural capital 3) Widening the horizon beyond welfarism  Many variants of “multiple objectives“  Alternatives to pro-growth social welfare functions 4) Outlook: In-depth assessment of social welfare functions  How to assess the value of growth? A complex normative problem  Indicators, or multi-functional means: correlations? Trade-offs?

3 Structure of today’s lecture

4 A short reminder: Welfare in Ramsey Model From Lecture 2 • Future utility is discounted by rate 

• Objective function is given by intertemporal utility W:

t t W U( Ct )e dt t0

• The optimization problem can be expressed as:

state variable control variable

 t max U (Ct ) e dt C  t 0  constraint + initial condition subject to Kt  Y(Kt )  Ct Kt

K(t  0)  K0 5

Mainstream economics on social welfare

• Economic welfare conception predominant in public policy – Major objective: wealth in terms of economic goods • Economic growth as most decisive means – Consumption and efficiency as core concepts

• Some core underlying assumptions – Consequences in terms of (narrowly understood) utility, based on consumption of economic goods – Normative individualism, individual preferences • Diminishing marginal utility of C: sometimes neglected in Cost-Benefit Analysis (see previous lecture) • Additively separable aggregation (independence of individuals) – Importance of free (competitive) markets as an instrument

Mainstream economics on social welfare

• Positive vs normative economics • Economics as engineering? As purely positive science? Or also normative?  Most economists fear value judgments (deemded subjective), e.g. Menger and Walras.  Collapse of the fact/value dichotomy and of logical positivism underlying mainstream economic methodology (Putnam 2002) • Welfare economics • At least axiomatic reference to ethical values • Ex-post evaluation of public policies (also: comparison) and support of decision-making • Brief overview of history:

7 Early Welfare Economics

• The early economists were utilitarians: Bentham, Mill and Edgeworth thought about utility not in terms of preferences, but in terms of subjective well-being. Utility for them was directly measurable and comparable.

• 100 years of debate in economics: Is utility cardinal? Is utility comparable between persons?

Jeremy Bentham (1748-1832) 8 Utilitarianism

• Hume, Bentham, Mill (18th/19th century)  Jeremy Bentham: “greatest happiness for the greatest number” • Three core elements of utilitarianism – Consequences for individuals (which might differ) determine distribution/allocation, exclusively – Utility (in a rather narrow sense) as the only decisive consequence – Utility as a good to satisfy a want of whatever kind – Welfare is the aggregation of individual utilities (additively separable) • Further aspects • Major means: Economic incentives, private property and reliability in planning (Hume). • Redistribution (“eminent domain”) ok, if aggregated utility is increased then. • An action might be considered morally justified even if it is undertaken for unworthy reasons

9 What is utility? The (interim) resolution

• Utility in the 20th century (pioneered by A. Bergson and P. Samuelson, ca. 1940): – The decisions individuals make, reveal their preferences. Social welfare only makes sense as aggregation of individual preference orderings. Utility which different individuals derive from one situation is not comparable (heavy influence of behaviorism).

• The utilitarians currently strike back: – Recent social psychologists (e.g. D. Kahneman) find that subjective well- being is measurable and comparable, leading to “economics of happiness“ (TOPIC OF NEXT LECTURE).

Daniel Kahneman Paul Samuelson (1934- ), Nobel (1915-2009), Prize 2002 Nobel Prize 1970 10 Paretian welfare economics

• Pareto efficiency – Attempt to be less normative – Yet often several welfare optimal situations, several points on Pareto- possibility frontier: which one to choose? – Bias towards status quo?

• Broadening the range of options: Kaldor/Hicks – Comparing social states via possible compensation payments between winners and losers, beyond Pareto

• Difficult to operationlize, therefore development of “social welfare functions” (SWFs)

11 Social choice and SWFs

• Social choice theory: moral mathematics – Purpose of social choice theory: understand the possibilities of social aggregation and their informational requirements (Sen, 1999). – Major problems addressed: formal representations of certain social values and their logical coherence • Social welfare functions (SWFs) – Real-valued function, ranking social states for public policy! – Bergson/Samuelson, ordinal SWFs – A social welfare function is an aggregate measure of the wellbeing of members of a society – “Paternalist” and non-paternalist SWFs • Do we know what “utility” means for different people? Or better refer to their actual preferences (regarding commodity bundles)?

12 SWFs for climate policy

• Integrated Assessment Models (IAMs) & other economic applications – Social planner (sometimes!) and “paternalism“ – Market equilibrium: 1st fundamental theorem of welfare economics – Implications regarding welfare far beyond climate policy etc. – Distribution as hot topic: “Negishi weights“ to avoid redistribution by the social planner due to diminishing marginal utility • Social welfare functions in current IAMs: the “standard approach” – D/RICE, ReMIND, PAGE, etc – Bergson/Samuelson type • Intertemporal maximization of utility (as a function of consumption) • E.g., MIND

• SWFs have impact on public policy: IAMs are used for policy advice!

13 Feasibility of standard (pro growth) SWF

• Is such a social welfare function (SWF) feasible at all ?!

– The Arrow Paradox (1950, 1951) • One of the greatest achievements of social science in the last century. • Founding result of the `homeless‘ discipline of social choice theory (which is on the borderline of mathematics, philosophy, economics and political science) • Nobel Prizes for K. Arrow (1972) and A. Sen (1998) for developments of social choice theory (among other achievements)

14 Arrow‘s Theorem: Introduction

• Assume here a specific representation of social welfare: Social welfare is the aggregation of individual preferences.

• Arrow‘s Theorem states that under some desirable properties of aggregation, no `reasonable‘ social welfare function exists. – Arrow does not say that a SWF is impossible in general, but only if there is a specific, limited body of information available

• Arrow‘s Theorem thus provides the benchmark for how much you can demand concerning the aggregation procedure. The interesting discussion is which desirable properties to leave out.

15 The essence of Arrow‘s Theorem is…

…the Condorcet Paradox: Suppose there are three people A, B, C and three alternative options x,y,z. Suppose the people have the following preferences:

A B C

First choice x y z Second choice y z x Third choice z x y

The people cannot decide by pairwise majority voting which option to choose! This is a very strong form of Arrow‘s Theorem, who proved that this paradox can happen under much weaker assumptions.

Marie Jean Antoine Nicolas Caritat, Marquis de Condorcet (1743-1794), mathematician, philosopher, politican and revolutionist 16 Arrow‘s Theorem: the conditions

Arrow‘s conditions for a SWF: • (O) The welfare function must be ordinal (only rankings matter, intensities do not matter) • (P) Weak Pareto: If everybody prefers A to B, then A is better than B. • (I) Independence of irrelevant alternatives: Whether A is better than B should depend on how individuals rank A and B and on nothing else. • (D) Non-dictatorship: Whether A is better than B should not depend on the preferences of a single individual regardless of what everybody else prefers.

Additionally, one requires: • Unrestricted domain (U): All possible individual preferences are permissible. • The social ordering must be rational, i.e. transitive and complete: collective rationality (CR)

17 Arrow‘s Theorem

Arrow‘s Impossibility Theorem:

There exists no ordinal social welfare function that obeys the Pareto principle (P) , the independence of irrelevant alternatives (I) and the no-dictatorship condition (D).

Proof: Omitted, as it takes 90 minutes to explain -- but it essentially exploits the structure of the Condorcet paradox (Geanakoplos 2005).

18 Ways out of impossibility: Which condition to be violated?

• Violating the Weak Pareto Principle (P) and Non-Dictatorship (D) seems nonsensical to many. • The ways out of the impossibility seem to be – Admitting cardinal welfare functions (taking intensities of preferences seriously), see also IAMs, and next lecture on happiness – Or allowing for dependent irrelevant alternatives, against assumption (I) • Despite it‘s attractiveness, (I) is a very strong assumption!  Most voting procedures fail this requirement.  Also typical cost-benefit analysis fails it: To apply (Kaldor-Hicks) compensation tests, one must compare two alternatives to a third (hypothetical) one.  In actual political systems the choice between A and B typically depends on many other factors, such as precedent, constitutional provision, rights and how they are respected

Conclusion of part 1: SWF required and feasible

• Factual need for a SWF to support public policy-making • SWF feasible, despite challenges – Some sceptics (Hayek, etc. ) argue that SWFs are infeasible due to (1) information problem (what is good for individuals? See also next lecture) or (2) aggregation/ comparison problem. Yet, limited validity of Arrow Paradox, independency criterion can be withdrawn – Why not utilitarianism (cardinal utility measurement)? Against (O) • Interpersonal utility comparison possible: everyday experience and empathy. • But how to find out what people want / what makes them happy? Problems of accounting & operationalization remain  Welfare economics after Arrow mostly: • Money-metric mesurements, ‚new‘ welfare economics, CBA with Kaldor- Hicks compensation • Thus, should we follow a pro-growth SWF ?

20 Structure of today’s lecture

21 Why critically reflect on the growth paradigm?

• Major prospects of economic growth – Increasing wealth and prosperity for (almost) all • Yet, many people feel uneasy with the prevalent paradigm in economic policy – Problems on social, environmental and psychological level (indicating further societal objectives) – Due to status consumption and positional goods (envy), no real improvement of quality of life

Demand for re-thinking the dominant role of economic growth regarding social welfare

22 Criticism of standard welfare economics

• Assuming that a SWF is possible at all, some scholars made modifications / amendments to standard SWF due to critique

• Especially: equality (here: of C/U(C)/GDP) and natural capital – Utility also dependent on relational issues in terms of distribution of wealth – Allocation and distribution not fully separable – Economic growth also dependent on natural capital (inter alia) – For some people, environmental quality and natural capital also important as such

23 Welfarism as predominant paradigm in economics

• These criticisms still follow the welfarism paradigm – Welfarism is “the evaluation of outcomes, institutions, actions, and policies in terms of their effect on individual welfare” • (Hausman, McPherson 2006, p. 97) – “Welfare“ in a rather narrow, economic sense: consumption-based, related to commodity bundles

24 Equality of wealth

• Distributional aspects and equality – Does inequality (here: of consumption/utility/wealth) matter for social welfare? It does.

• Rawlsian SWF: social welfare is determined by the welfare of the least well-off person in society (maximin utility)  Rawls’ theory goes beyond welfarism (!), but economists usually refer to Maximin only (within welfarism!) when constructing a Rawlsian SWF

• There are also SWF with strong egalitarianism concerning wealth distribution – Measurement: Gini index, for instance

Rawls (1971): A Theory of Justice

• Social contract is established between ‘reasonable persons’ in the ‘original position’ (behind a ‘veil of ignorance’)

• Each person is to have an equal right to the most extensive scheme of equal basic liberties compatible with a similar scheme of liberties for others

• Social and economic inequalities are to be arranged so that they are to be of the greatest benefit to the least-advantaged members of society (‘maximin’ principle).

• Offices and positions must be open to everyone under conditions of fair equality of opportunity

Equality of wealth

• Criticism of equality – After Rawls, political philosophers mainly discussed about liberal equality – Yet, in recent years much criticism on equality (egalitarianism), at least as an end in itself • Rather: threshold approaches, communitarianism, etc.

• Some prevalent criticisms of too much focus on equality – Incentive for economic production? – Promoting envy and social conflicts ? – Other social aspects as well as environmental aspects possibly neglected

27 Sustainability

• Higher appreciation of natural capital (here: from an anthropocentric perspective) – Importance of natural capital for economic growth and human well-being

• Major debates – Discount rate and specific monetarization disputed for different approaches – Uncertainty/risk regarding the future: precautionary principle here?

28 Sustainability

• Different approaches – Weak sustainability • neoclassical economics • Substitutability of natural capital • Solow-Hartwick sustainability • keep total net investment/ savings above zero (extension of Hartwick rule) – see also adjusted net savings of World Bank, criticized by some as to better say “investment” – Strong sustainability • Daly et al. • No (full) substitutability, also within natural capital • Manifold more precise definitions – Also intermediate standpoints: substitutability only in certain areas

(This will be extensively discussed in later lectures: “Accounting“; “Wealth of Nations“; “Over-/Underinvestment“)

29 Sustainability

• How implemented in models? – CEA (IAMs, Rockström and planetary boundaries, etc.) – Standard CBA (Nordhaus, continuous economic growth) – Additional argument in utility function (environmental quality) • Neumayer: U(C,Z,P): P is pollution, negative capital… Z is renewable resources needed for society • Sterner: U(C,E): more weight for ecological goods due to proper discounting (“An Even Sterner Review” (Sterner and Persson 2008) • Weak sustainability: difficult to measure • Also with strong sustainability measuring is difficult – Huerton as pioneer – ecological footprint etc. – GREENSTAMP or SNI (or Rockström’s planetary boundaries) – But much criticism of such approaches!

30 Conclusion of part 2: Amendments to standard SWF

• Standard economic SWF has been modified in many ways, some amendments and lots of discussions – Particularly taking into account distributional issues (“equity”) – …and natural capital / environmental quality (especially in long-term perspective)

• Yet: keeping to the paradigm of “welfarism” (thus far)

31 Structure of today’s lecture

32 Diversity of welfare conceptions

• Sources/ data (this lecture: only tentative hypotheses; strawman!) – Different bodies of literature: Political philosophy, welfare economics, sociology, psychology, etc – Even more interesting (because more policy-relevant): public debate and opinions there • Individual and social welfare conceptions: aggregation of social welfare conceptions for our purposes here • Analytical framework – Usually complex multi-objective conceptions of “welfare” !! – Not all individual objectives on the same level; dependent from respective standpoint (e.g., natural capital important as such, or only for GDP growth) • Notes on the welfare conceptions analyzed here – Vietnam; or Germany after WW 2: increase of consumption much more important due to many people below a certain threshold of well-being contexts decisive, sometimes inconsistencies in public debate

The search for the “common good”: Your favorite group?

Different groups: all of them have multiple objectives (values)!

In addition: Time/space dimensions for each standpoint! 34 Scope

• Scope as additional dimension of the different conceptions – Alternative relevant entities: selfish/own family; nation/region; world; non-human creatures • Economics: anthropocentric measure of value to individual human beings • Alternatively: Biocentrism • some kind of “liberty”, “material well-being”, “natural capital”, etc. also conceivable as claims for animals and plants – Alternative treatment of time: welfare at present only; welfare in lifetime; inter-generational welfare (discounting, etc.)

35 Categories of welfare conceptions

• Standard social welfare conception in economics, a pro-growth social welfare function (SWF) (see part 1 above) • Three circles of criticism 1) Internal, logical criticism (consistency, feasibility) (see part 1) • Cardinal vs. ordinal; “paternalist” vs. stated/revealed preferences • Arrow paradox and feasibility of a SWF 2) Modifications of SWFs within (consumption-based) “welfarism” (part 2) • More equality of wealth • Green growth and sustainability 3) Criteria beyond “welfarism” and “consumerism” (part 3) • Social order (social coherence, security, power, recognition, etc.) • More individualist non-materialistic approaches (mental-spiritual self- realization, arts, education, etc.) • Libertarian liberty • Balanced approaches: liberal equality of capabilities, opportunities, etc. • Fair procedures, rights

Growth proponents, or “consumerists” (utilitarians?)

37 Effects of economic growth

Growth proponents / consumerists often regard growth as means to achieve wealth – GDP as most important measurement, to be discussed in other lectures

Growth is also desired by politicians who assume that… • …it is a possibility to avoid conflicts about distribution • …it allows for a reduction of debt, through higher tax revenues • …it is an effective instrument to reduce unemployment

Yet there are many unwanted side-effects of “consumerism” as well (compare the alternative approaches)

38 Categories of welfare conceptions

• Standard social welfare conception in economics, a pro-growth social welfare function (SWF) (see part 1 above) • Three circles of criticism See also next lecture: irrationalities, etc. 1) Internal, logical criticism (consistency, feasibility) (see part 1) • Cardinal vs. ordinal; “paternalist” vs. stated/revealed preferences • Arrow paradox and feasibility of a SWF 2) Modifications of SWFs within (consumption-based) “welfarism” (part 2) • More equality of wealth • Green growth and sustainability 3) Criteria beyond “welfarism” and “consumerism” (part 3) • Social order (social coherence, security, power, recognition, etc.) • More individualist non-materialistic approaches (mental-spiritual self- realization, arts, education, etc.) • Libertarian liberty • Balanced approaches: liberal equality of capabilities, opportunities, etc. • Fair procedures, rights

Example of a radical left-wing: still welfarism !?

…of wealth!

40 “Greens” here: radical environmentalists, strong sustainability

"Greens" here: biocentric welfarists ? Or beyond welfarism ? Material welfare 100 Growth proponents 80 Left-wing 60 Liberty Equality 40 Greens 20 0 Cons, Republicans, Pirates et al Wisdom & Natural Libertarians perfection capital Education & self- realization Social order Balance, opportunities

41 Categories of welfare conceptions

Social order and social capital

43 Social order, social capital

• Tim Jackson et al criticize “consumerism” (and welfarism in general): – Too much focus on material consequences (consequentialism) – Sufficiency even desirable per se?

Very different aspects belong to “social capital”: • The conservative “no change” approach; security, moral stability (conservatives, Republicans) • Also: power over others, or recognition – Very important values for many people! – Mostly on narrow scope (selfish, or national, not intergenerational) • Example of Pirates, etc.: “commoning”, and social coherence – Social networks, R. Putnam; but how to monetarize?

44 Education & self-perfection: Karl-Heinz Paqué et al

45 US libertarians

46 Libertarianism (Locke, Nozick, Buchanan, etc.)

• Basic libertarian intuition – Freedom and liberty, anti paternalism – Fear of government/state – Often connected with “desert theory” – Not outcome decisive, but rights • Privat property rights most decisive – Property rights are not a mere instrument for realizing another goal, but rather the “operationlization,” or realization, of what we actually mean by claiming “liberty” (as an ethical goal and value-in-itself) – They virtually equate property rights with (some kind of) liberty – They stem from property of own body and its parts (Locke, Nozick) – Protection of individual interests against collective power – Natural resources: Ensure self-sufficiency! My garden (land), my livestock, etc. No welfare state (undesirable depedency!) needed. • Fits neoclassical theory of free markets http://www.againstcronycapitalism.org/tag/property-rights/ 47 Fair procedures

• …could be an additional value on spider’s web  Then all other values would be subordinated • Fair procedures (Habermas, etc.): rightness of procedures > goodness of outcome – because unclear what criteria for welfare: rational discourse instead!

• Excursus: Two major reasons to be sceptical regarding a SWF /strong welfare state: – (1) problems of information and aggregation regarding individual preferences (or utilities). Better fair procedures than being paternalistic (possibly making wrong decisions when estimating society’s preferences) – (2) Normative emphasis on either (i) deliberative disourse, or (ii), libertarian liberty (individual responsibility for one’s own life)

48 Balanced conceptions

49 Balanced conceptions

• Multiple goals constitute “welfare” (beyond utility) – Behavioral economics and happiness research criticizing the underlying assumptions of standard welfare economics (and of micro-economics in general) – Ecological, cultural, non-materialistic social, and other aspects

• Examples for relatively balanced approaches – Equality of opportunities or capabilites or resources • These are specific conceptions of liberalism / liberal equality • At least partly transcending the welfarism paradigm

50 Equality of what ? Different approaches and their “balance”

• Capability Approach: A. Sen, M. Nußbaum etc. – Diverse “substantive freedoms” of choice decisive, multidimensional nature of human development – Not Prussian rights and duties, but flourishing (Aristotelian virtue) Can be interpreted as balanced approach

• Dworkin: sufficient resource endowment for everyone – Like Rawls: endowment-insensitive, ambition-sensitive – Basic idea: Auctionining resources, everyone starting with same amount of money – Insurance scheme for compensating natural disadvantages Also a balanced approach?!? At least: mat. welfare; equality; liberty

51 Dworkin: economic description

The agents’ insurance problem:

Source: Hal R. Varian (1985). Dworkin on Equality of Resources. Economics and Philosophy, 1, pp 110-125

52 Dworkin: economic description

Source: http://www.nek.uu.se/StaffPages/Publ/P729.pdf

53 Conclusion of part 3: Summary of major standpoints

In addition: Time/space dimensions for each standpoint! 54 The flute example (as summary of some standpoints)

• Different conceptions of “welfare” or “justice” • A. Sen’s (2009, pp. 13f) flute example:

Anne Bob

“I am the only one “I am the only one who can play the flute” ? who is poor; I do not Have any other toys”

Clara “I made the flute with my own labour, working to finish It for months and just now the others come in and bring up their claims” The flute example

Anne Bob

“I am the only one “I am the only one who is poor; I do not who can play the flute” Have any other toys” Utilitarian Egalitarian

Clara “I made the flute with my own labour, working to finish It for months and just now the others come in and bring up their claims” Libertarian Structure of today’s lecture

57 Concepts and connotations

• “Welfare“ and similar value-laden concepts – “Welfare“ in the economic sense as lowest common denominator after World War II ? Equated with social welfare in general; economists dominate even ethical discourses • Fukuyama: “End of History“ because of this paradigm

Be aware of socio-historical connotation of such concepts!

58 Societal objectives: Where to place growth?

Multiple objectives for public policy, constituting “social welfare”, or Common good, welfare, well-being, living standard, quality of life, good life, justice, development, happiness or utility, prosperity/ affluence/ wealth, values, decent life, dignity, societal goals/objectives, etc: Ends Similar issues, but not identical; soc. welfare used here in a broader sense (denying the misleading separation of values/welfare & justice/equity)

Means: More specific policy goals (and their means again), Means e.g., climate mitigation, energy security, protection of private property rights, etc.

Where to put economic growth?! An appropriate end (among others)? Only a good means? Weighing with other values/ means?

59 How to find out? Four alternative approaches

Even revealed/ stated preferences approach implies normative individualism

and “consumerism“ (U(C) is crucial) Due to normativity: Is a social welfare conception purely subjective and to be dismissed since there is no consensus?

60 How to find out? Four alternative approaches

(1) Empirical approach: surveys or theoretical models – Either identify least common denominator, overlaps, etc in surveys – …or develop (descriptive) model of human rationality (as in economics) However: diversity & conflicting standpoints; normative implications. NORMATIVE QUESTION! (2) Dogmatic normative approach: determining welfare a priori – Philosophical, religious, economic social planner (utilitarianism), or “decisionist” (political power plays)  However: no universally accepted arguments (3) Skepticism regarding objective determination of “welfare” – “We can never answer question how “appropriate” economic growth is” – Possibly fair procedures lead to acceptable normative decision  However: We cannot avoid making decisions (=the ethical dilemma of freedom)! Acting or not acting in public policy implies a standpoint. (4) Pragmatism: complex ends-means interdependency

61 How to find out? Four alternative approaches

(1) Empirical approach: surveys or theoretical models – Either identify least common denominator, overlaps, etc in surveys – …or develop (descriptive) model of human rationality (as in economics) However: diversity & conflicting standpoints; normative implications. NORMATIVE QUESTION! (2) Dogmatic normative approach: determining welfare a priori – Philosophical, religious, economic social planner (utilitarianism), or “decisionist” (political power plays)  However: no universally accepted arguments (3) Welfare sceptics – We can never answer question how “appropriate” economic growth is – Possibly fair procedures lead to acceptable normative decision  We cannot avoid making decisions (=the ethical dilemma of freedom)! Either way we act or do not act in public policy implies a standpoint (4) Pragmatism: complex ends-means interdependency

62 Example: The football player 1) Change team (as means to become a super star) ? 2) Change goal of becoming a super star ? Direct effects

Alternative Unwanted side-effects means 1

Synergies Uninteresting Policy end(s) 1 Identify best means consequences (here: “means 2”)

Direct effects Alternative Unwanted side-effects means 2 Synergies

Revise end(s) if side-effects of 2 Uninteresting best means are too severe consequences

John Dewey (1859-1952)  Then compare different ends Further example: 2C goal in climate policy

Low-cost 2C goal as policy end would require (inter alia) high share of bioenergy as means. Lots of negative side-effects.

Revise 2C as policy end ?

The same methodology for assessing social welfare conceptions (as ends): Evaluate their means/ practical consequences Growth: (i) either identified as an end in this spectrum, (ii) or a good means to achieve the appropriate ends, (iii) or worthless 64

65 Deeper assessment of welfare conceptions

• Requirements for full-fledged assessment of welfare conceptions – Identify alternative ends and suitable indicators – Identify means to achieve these ends, and their possible practical consequences

• Problems of accounting/making it operational – also because many more specific normative questions unresolved (more specific weighing up of particular stocks etc.) – …and partly due to a lack of empirical data or methodology

66 Possible results?

• Arguments for multiple-objective approaches to social welfare – Empirical: results from happiness research / world value survey – Political philosophy & ethics: the many dimensions of a good life – Politics and democracy: agreement on multiple objectives seems easier

• Economic growth is only one means among others to achieve social welfare – Welfare is decisive, not growth. Yet, growth could contribute to welfare (but also side-effects)

67 For now: A less ambitious approach

• Identify overlaps between different means for different ends, or even identify overlaps between indicators for different welfare conceptions – Might enable political consensus

• Furthermore, identify trade-offs on a more specific level (i.e. means, or indicators), in order to make conflicting standpoints regarding welfare clearer – This might support a public discourse on welfare conceptions

68 Means: multi-functional?

Social welfare

Material Natural Social Individual Equality Liberty objectives welfare capital order

Re- Law, prot. Means Free Cap and distributio Military; private market trade n property property structure; investm in commons

69 Correlations between indicators

Social welfare

Material Natural Social Objectives Equality Liberty wealth capital order

Stability, Environ Main GDP Gini Index trust, Rule of law indicators Indicators coherence

70 Empirical attempts to measure welfare

Jones and Klenow (2010): Beyond GDP? Welfare across countries and time. NBER:

Welfare =

Welfare here is a function of four measurable indicators (as compared to US values). Comparing “welfare” to GDP

(Jones and Klenow, 2010) Comparing “welfare” to GDP

Income alone indicates lower welfare

Income alone indicates higher welfare

(Jones and Klenow, 2010)

Comparing “welfare” to GDP

Extract from Jones and Klenow 2010 and Klenow Jones from Extract

Taking life expectancy, leisure and inequality into account, the wealth of nations needs to be valuated differently ! Growth ?!

Source: http://greenormal.blogspot.de/2010/01/post-growth-marketing.html 75 Today’s lecture in a nutshell

• Is growth desirable (given feasibility)? Depends on overall societal goals - and their most appropriate means • What are appropriate societal goals? – Highly disputed, normative-ethical problem – What orientation for public policy, e.g. economic policy? In some way or the other, decisions have to be made! – Solution: Ends-means assessment through their practical consequences; public discourse & fair procedures  Multiple objectives should play a role in SWF • Growth good or bad? – Growth mostly regarded as means only (within and beyond welfarism), and itself dependent on different stocks & values – Growth: some positive correlations with other values! But also trade-offs – Correlations between indicators (or between means): synergies?

76 Literature on welfare and political philosophy

• Arrow, K. J./Sen, M. A. K.: Handbook of Social Choice and Welfare Volume 1. Handbooks in Economics 19. Amsterdam: Elsevier, 2002. • Beckerman, Wilfred: Economics as applied ethics. Value judgements in welfare economics. Houndmills, Basingstoke: Palgrave Macmillan, 2011 • Buchanan, J.M.: The Limits of Liberty. Between Anarchy and Leviathan, Chicago: University of Chicago Press 1975. • Dewey, J.: Logic: The theory of inquiry. In Boydston, J.A., editor: John Dewey. The Later Works, 1925-1953, Volume 12: 1938. Logic: The theory of Inquiry. Carbondale and Edwardsville: Southern Illinois University Press, 1986, 1-527. • Edenhofer et al (2013): On the Sustainability of Renewable Energy Sources, ABER • Fleurbaey, M. Beyond GDP: The Quest for a Measure of Social Welfare, Journal of Economic Literature 2009, 47:4, 1029–1075 • Hausmann, Daniel M. and Michael S. McPherson (2006). Economic Analysis, Moral Philosophy and Public Policy. 2nd edition. Cambridge: Cambridge University Press. • Jones and Klenow (2010): Beyond GDP? Welfare across countries and time. NBER Working Paper Series. • Kleinewefers, Henner: Einführung in die Wohlfahrtsökonomie. Theorie - Anwendung Kritik. Stuttgart: Kohlhammer, 2008 • Kymlicka, Will: Contemporary Political Philosophy: An Introduction (Second Edition). Oxford: Oxford University Press, 2002 • Neumayer: Weak versus strong sustainability, EE 3rd ed Cheltenham 2010 • Putnam, H.: The Collapse of the Fact/Value Dichotomy and Other Essays. Cambridge Mass.: Harvard University Press, 2002. • Rawls, J. : A theory of justice. Cambridge, Mass.: Harvard University Press, 1971 • Roemer, John: Theories of Distributive Justice, Cambridge MA 1996 • Sen, Amartya: The Idea of Justice. London: ALLEN LANE, 2009 • Sterner, T. and U. Martin Persson. An Even Sterner Review: Introducing Relative Prices into the Discounting Debate. Review of Environmental Economics and Policy 2(1): 61-76. • World Value Survey (http://www.worldvaluessurvey.org/)

77 Literature on Arrow and SWF

• Core literature: – Hausmann, Daniel M. and Michael S. McPherson (2006). Economic Analysis, Moral Philosophy and Public Policy. 2nd edition. Cambridge: Cambridge University Press. Ch. 13.1.-13.3. – Mas-Colell, A., M. D. Whinston, and J. R. Green (1995). Microeconomic Theory. New York: Oxford University Press. p. 789-799

• Other literature referenced on the slides: – Arrow, K. J. (1950). A difficulty in the concept of social welfare. Journal of Political Economy 58, 328–346 – Arrow, K. J. (1951). Social choice and individual values. New York: Wiley – Geanakoplos, J. (2005). Three brief proofs of arrow’s impossibility theorem. Economic Theory 26(1), 211–215. – Sen, A. (1999). The possibility of social choice. American Economic Review 89(3), 349–378. [Nobel Lecture]