journal of Economic Literature Vol. XXII (June 1984), pp. 507-530

Were the Ordinalists Wrong About Welfare ?

By ROBERT COOTER University of California, Berkeley and PETER RAPPOPORT New York University

Useful comments on earlier drafts were provided by Sean Flaherty, Marcia Marley, Tim Scanlon, Andrew Schotter, Mark Schankerman, Lloyd Ulman and two anonymous referees. We are grateful to the National Science Foundation and the C. V. Starr Center at New York University for financial support. Responsibility for accuracy rests with the authors. pE DEVELOPMENT of theory has economics.1 The intuitive idea of scientific experienced two definitive episodes: progress is that new theories are discov­ the "marginalist revolution" of the 1870s ered that explain more than old theories. and the "Hicksian" or "ordinalist revolu­ We shall contend that the ordinalist revo­ tion" of the 1930s. While the first event lution was not scientific progress in this established a central place for utility the­ sense. For example, the older school was ory in economics, the second restricted concerned with economic policies to the concept of utility acceptable to eco­ bring about income redistribution and al­ nomics. The term "ordinalist revolution" leviate poverty, and the ordinalists did not refers to the rejection of cardinal notions offer a more general theory for solving of utility and to the general acceptance these . Instead, the trick that car­ of the position that utility was not compa­ ried the day for the ordinalists was to ar­ rable across individuals. The purpose gue that the questions asked by the older of this paper is to analyze the events school, and the answers which they gave, comprising the ordinalist revolution with 1 For example, Kenneth Arrow, referring to the a view to determining whether they earlier school, wrote: achieved the advances in economic sci­ . . . the proponents of measurable utility have been ence usually claimed for them. unable to produce any proposition of economic behav­ ior which could be explained by their hypothesis and The developments of the 1930s are of­ not by those of the indifference-scarcity definition gentiaJ to the question of interpersonaJ of economics, and employed a positivist comparisons. Instead, we concentrate on methodology. The salient feature of utility the special assumptions concerning utility was held to be its ordinal nature. that justified the interpersonal compari­ The elements of the newer frame­ sons made by these economists. work-the scarcity definition, positivist The different roles of assumptions about methodology, and ordinal utility-are fa­ measurability and comparability of utility miliar to contemporary economists. In can be elucidated by borrowing from the contrast, the elements of the older frame­ modern approach to social welfare theory work-the material welfare definition, em­ (for example, Amartya Sen 1977). Let each piricist methodology, and interpersonal individual i = I, 2 be represented by a utility-are now viewed through the dis­ set, L;,,, of utility functions. Each utility torting lens of the ordinalist framework. function is defined over the set of social states, and, for the present purpose, is best

2 The following is a partial list of questions that regarded simply as a list of numbers, one material welfare economists claimed to answer and for each state. Measurability assumptions ordinalists claimed were unanswerable by econom­ restrict L;, to particular classes of functions ics: Is a dollar more valuable to the average poor person than to the average rich person? Should econ­ or, equivalently, particular lists of num­ omists give different weight to additional income bers. For example, if utility is cardinally for the rich and poor when doing cost-benefit analy­ (ordinally) measurable, then each L;, will sis? Does a hungry person need food more than a bored person needs theater tickets? If income is re­ contain functions or sets of numbers that distributed to the poor, with no change in total in­ are related to each other by positive linear come, does national welfare go up or down? Is there (monotone) transformations. an economic justification for progressive income tax schemes? In this framework, we may view the 3 In his Essays on the Nature and Significance of problem of making interpersonal compar­ &anomic Science Lionel Robbins stated that this isons of utility as that of selecting a utility was "(t)he definition of Economics which would probably command most adherents, at any rate in function from each L;,. This determines Anglo-Saxon countries" (1937 [1932), p. 4). the magnitude of the number that will Cooter and Rappaport: Were the Ordinalists Wrong? 509

represent each person's utility in compari­ them. Essentially, goods were seen as hav­ sons. For reasons explained below, we will ing utility if they contributed to a person's call such a choice a "comparability con­ physical well-being, which was conceived vention." In general, there will be com­ as nearly equivalent to productive capac­ parability conventions from which it will ity. Physical well-being is objective, like follow that person 1 derives more utility the condition of a person's health, not sub­ than 2 in a particular state, and conven­ jective, like a person's enjoyment of a tions that entail the reverse. 4 In particular, good meal. Furthermore, productive ca­ even if individual utility is cardinally mea­ pacity of people is closely related to eco­ surable, it can be seen that the L;, have nomic efficiency, which is also objective. not been restricted sufficiently to make When ordinalist writers criticized this the outcome of a comparison independent comparability convention, they attributed of the comparability convention adopted. to the material welfare school their own For example, one can find a pair of utility conception of utility rankings, derived functions for which the state that yields from individuals' orderings. If 1 lowest utility has a higher number at­ utility is related tdpreference in this way, tached to it than 2's highest utility state, then interpersonal comparisons inevitably and a pair for which the reverse occurs. seem arbitrary, as if the writer were im­ A fortiori, we are not prevented from em­ posing his or her preferences on society. ploying conventions that yield these re­ However, the material welfare school did sults when utility is ordinally measurable. not equate utility with preference. It is apparent from the above that the The body of this paper examines the "arbitrariness" involved in making inter­ conceptual frameworks of the two schools. personal comparisons arises from the diffi­ The substantial difference between them culty of discriminating among compara­ is offered as evidence against the view that bility conventions. Restricting the L;, by the ordinalist revolution may be explained appeal to the standard measurability con­ as part of the progress of economic sci­ ditions does not materially limit the num­ ence. The fl.rst section summarizes general ber of possible comparability conventions. developments in utility theory up to the As we shall see, the material welfare early twentieth century. The next section school did opt for a particular comparabil­ describes the conceptual framework of ity convention, and evaluated social wel­ the material welfare school. Following fare on the basis of it. This choice could this, a comparison is made with the ordi­ be defended in the context of the inter­ nalist school, which reveals that the two pretation of utility employed by the mate­ schools were using the common elements rial welfare school. Utility rankings were in their vocabularies to refer to different not seen as coextensive with preference things. The fl.nal sections of the paper sum­ orderings, nor were they derived from marize the argument, and suggest lines along which to explain the success of the • This is so, even though, to be accurate, a compar­ ordinalist view. ability convention defines an equivalence class in L, the Cartesian product of L 1 L 2, in the sense that The aim of this paper is to demonstrate elements of this class will return the same results that the arguments developed some fl.fty for interpersonal comparisons of utility. The class years ago to criticize the material welfare will contain elements of L that are related by posi­ tive monotone transformations. By this it is meant school do not in fact address the claims that the same positive monotone transformation is of that school, whose scientific integrity applied to every individual's utility function in the remains intact. This suggests that it may element selected by the comparability convention. This invariance condition is called "ordinal level be fruitful to draw on the material welfare comparability" by Sen (1977, p. 1542). perspective in the analysis of present-day 510 journal of Economic Literature, Vol. XXII (June 1984)

welfare problems, and perhaps warrants In England this situation persisted until a comparison of the older view with the W. Stanley Jevons (1871) demonstrated achievements of modern welfare econom­ that the of value could be re­ ics. However, we stress that these issues solved by ~ssociating with the "final are not pursued in the current research, degree of utility," or , which limits itself to recounting the devel­ rather than total utility. Using techniques opment of doctrine. Consequently, we of calculus, J evons showed that equilib­ have concentrated only on the welfare rium in exchange requires everyone to problems stressed by the material welfare consume commodities in quantities such school, and contrast its work only with that the ratio of marginal equals early ordinalist . the price ratio for each pair of commodi­ ties. I. Utility Before the l 920s: Thumbnail This demonstration that mathematics History could be used to fuse the theory of mar­ Contemporary economics offers a sepa­ kets and the theory of utility convinced rate account of consumer and producer Jevons that it was wrong to separate them. theory, then combines them together in He spoke out boldly on this matter: "Util­ an analysis of markets. The classical eco­ ity is plainly the subject-matter of eco­ nomic theories of , David Ri­ nomics from beginning to end" because cardo, and lacked a sys­ "the object of Economics is to maximize tematic account of consumer theory. Mill happiness by purchasing pleasure, as it wrote: were, at the lowest cost of pain" (1905, p. 6 and 1911 [1871], p. 23). Jevons' con­ . . . has nothing to do with temporaries did not share his opinion of the consumption of , further than as the consideration of it is inseparable from that of the significance of his discoveries, and al­ production, or from that of distribution. We though he did not die in obscurity, he did do not know of any laws of the consumption not receive the recognition that later gen­ of wealth as the subject of a distinct science: erations have accorded him.6 Neverthe­ they can be no other than the laws of human less, research did continue in the same enjoyment [1844, p. 318]. vein as Jevons', and by the turn of the Mill did not develop "laws of human en­ century much progress had been made joyment" to explain how consumers allo­ in the theory of price by economists of a cate expenditures among different com­ mathematical bent, although few of them modities. He was a utilitarian who did not were in England. 7 make utility maximization by consumers Vilfredo Pareto (1896, 1906) articulated into an important element of economic a theory of markets based upon con­ theory. strained optimization, and successfully in­ One reason why utility theory was not tegrated production into the marginal of great significance to economics in the framework. This approach gave consumer first three-quarters of the nineteenth cen­ demand equal standing relative to pro­ tury is explained by the "paradox of ducer costs in detetmining , which value." Since water had a high use-value conflicted with the older tradition of eco­ but a low price, and the reverse held for nomic thinking. For example, the margin- diamonds, utility apparently was not the cause of price. With this dismissal, English 6 Jevons' disappointment at his lack of acclaim is economists concentrated on cost of pro­ displayed in a paper entitled "The Noxious Influence duction as the explanation of price.5 of Authority" (1871), and in Hutchison (1953, Ch. 2). 5 Standard references are Mark Blaug (1978) and 7 Some details of the works of continental writers Joseph Schumpeter (1954). are given in Emil Kauder (1965). Cooter and Rappaport: Were the Ordinalists Wrong? 511

alist theory denies that prices are propor­ ticeable differences" in pleasure experi­ tional to the labor time needed for pro­ enced by an individual confronted with duction, except in very restrictive circum­ a series of choices (1961 [1881], p. 7-9, stances. The cost-of-production theory of 60). By equating the just-noticeable differ­ value was replaced by a theory of simulta­ ence in utility across people, Edgeworth neous determination of prices by consum­ proposed to carry out the utilitarian ers and producers. calculus.9 In contrast, Jevons wondered The marginalists accomplished more wl,iether it was possible to observe and than injecting consumer theory into the compare individual utilities: core of economics. From the standpoint The reader will find, again, that there is never of the history of ideas, they brought New­ in any single instance, an attempt made to com­ ton's mathematics and Bentham's util­ pare the amount of feeling in one mind with itarianism into intimate association with that in another. I see no means by which such economic theory. The assimilation of comparison can be accomplished. The suscepti­ Newtonian , which began in the bility of one mind may, for what we know, be a thousand times greater than that of another. 1870s and was completed in the 1940s, But, provided that the susceptibility was differ­ was decisive in establishing the mathe­ ent in a like ratio in all directions, we should matical character of economics. The as­ never be able to discover the difference. Every similation of utilitarianism was decisive in mind is thus inscrutable to every other mind, policy science, because utilitarianism sug­ and no common denominator of feelings seem to be possible [1911 (1871) p. 14).10 gests ways to evaluate economic policies according to how efficiently they satisfy When Jevons derived the conditions for the wants and needs of individuals. equilibrium in exchange, he recognized that it was not necessary to add together Measurability and Comparability of the utilities of different people. Pareto and Utility Fisher (1892) developed Jevons' observa­ A question faced by the marginalists was tion mathematically by analyzing how whether their conception of utility was re­ much must be known about utility func­ ally the same as the concept that Jeremy tions in order to compute a equi­ Bentham (1948 [1776]) had made promi­ librium. Fisher summed up this informa­ nent in political philosophy and ethics. Ac­ tion: cording to Bentham, under ideal condi­ Thus if we seek only the causation of the objec­ tions, utility can be treated as an tive facts of prices and commodity distribution observable quantity of pleasure with the four attributes of utility as a quantity are en­ same measurable properties as weight.8 tirely unessential, (1) that one man's utility can The utility of one person could be ob­ be compared to another's, (2) that for the same individual the marginal utilities at one con­ served and added to another's if it were sumption-combination can be compared with necessary to arrive at the total utility for society.

Among nineteenth century economists, 9 For a discussion of Edgeworth's work, see Mena­ opinion varied on the measurability of hem Yaari (1981). utility. Francis Y. Edgeworth proposed to 10 Elsewhere, Jevons appears to have expressed a different opinion, indicating that records of transac­ measure utility in terms of the "just-no- tions kept by commercial enterprises would afford the necessary data for measuring "pleasures and pains" (1911 [1871), pp. 10-11). Irving Fisher (1927, 8 When Bentham takes up the issue of measure­ p. 158) offers this passage as evidence in favor of ment (1948 [1776), Ch. IV) he describes the addition the view that Jevons considered utility to be measur­ of the utilities of different people, which assumes able. It has also been pointed out by George J. Stigler that the utilities have the same properties as weight. (1950, p. 320) that Jevons implicitly employed inter­ However, he stresses that this exact process can be personal comparisons of utility in his reference to followed in ideal cases, but not in every case. "trading bodies." 512 journal of Economic Literature, Vol. XXII (June 1984)

those at another, or at one time with another, purposes, it was desirable to have a con­ (3) even if they could, total utility and gain ception of utility that was comparable might not be integratable, (4) even if they were there would be no need of determining the among people. constants of integration [1965 (1892), p. 89]. II. The Material Welfare School By 1900, therefore, there was no reason for anybody who was numerate to suppose There were several schools of thought that anything more than ordinal utility among economists, but by the 1920s the material welfare approach was followed was required for price theory.11 Insights such as Fisher's are cited as rea­ by prominent academics constituting the sons why concepts such as marginal utility mainstream of English economics.14 This were expelled from scientific economics. section will document this claim and at However, the ordinalist revolution oc­ the same time extract from the classic curred some forty years after publication texts the characteristics which define the of Fisher's book in 1892. Fisher and other material welfare school. pioneers of utility theory persisted in us­ The conceptual framework offered by ing utility concepts that went beyond or­ the material welfare school can be con­ dinality in their published work. In the trasted with contemporary ordinalism in late 1920s Fisher was still trying to mea­ terms of three central elements: the defi­ nition of economics, the conception of sure marginal utility.12 Why was the ordinalist revolution de­ economic method, and substantive empir­ layed so long after all the necessary discov­ ical claims about utility. The older defini­ eries were made? The answer lies in rec­ tion of the subject focused upon material ognizing that price theory was not so welfare, whereas the contemporary ap­ central to economics until after the ordi­ proach emphasizes scarcity. The older nalist revolution. Although concepts such conception of method was called empiri­ as measurability and comparability of indi­ cism, whereas the contemporary method viduals' utility functions were known to is positivism. Finally, the two approaches be superfluous to price theory, they were differ on the nature of the utility concept 13 not at the time superfluous to economics. 14 The term "material welfare school" is our own, Economists retained a keen interest in the although, as we have mentioned above, Robbins problems of producing and distributing (1937 [19321) stated that material welfare was the subject matter of economics at the time. He ascribed necessities to alleviate want, which was the material welfare view to Edwin Cannan, Mar­ principally the condition of physical defi­ shall, Pigou and John Bates Clark (1937 [1932], p. ciency that arose from poverty. For these 11). Other writers use different . Schum­ peter, for example, talks of a Marshallian school of thought, "the membership of which thought in terms 11 A reading of the appendices of Arthur C. Pigou of a well-defined scientific ," but fails to elu­ (1920) and (1920 [1890]) will con­ cidate its defining characteristics (1954, p. 833). Ti­ vince the reader that these economists' use of cardi­ bor Scitovsky (1951) talks of the "Cambridge nal concepts did not result from limited mathemati­ School," and characterizes this as a group of practical cal vision. men, with little patience for the gathering storm 12 Cf. Fisher (1927). Ragnar Frisch's New Methods of theoretical problems attending their inferences, of Measuring Marginal Utility (1932) is dedicated: which finally swept them away with the publication "To Irving Fisher, the pioneer of utility measure­ of Robbins', Essay in 1932. Hla'Myint identifies the ments." "neoclassical school" of which Marshall, Cannan and 13 In his inaugural lecture at Cambridge, Marshall Pigou are members (1948, p. 124). He also includes noted that a "task [that] most properly belongs to Joseph S. Nicholson, Henry Sidgwick, Frank W. Taus­ the economic organon" was the computation of ben­ sig and Allyn Young. This school is seen as straddling efits of industrial or social change, "taking account the classical "man against nature" and modern "sub­ of the fact that the same sum of money measures jective" views of economics. Myint is unclear as to a greater pleasure for the poor than for the rich" the relationship of his neoclassical school with the (1885, p. 31). scarcity school, as well as to the origins of the latter. Cooter and Rappoport: Were the Ordinalists Wrong? 513

relevant for the analysis of economic be­ material welfare economics were food, havior. We shall analyze each of these ele­ "clothing, house-room and firing," fol­ ments in turn. lowed by rest. These were dubbed "neces­ saries" by Marshall. As one proceeded fur­ Material Welfare Definition ofEconomics ther along the hierarchy, one came to The exposition of the conceptual frame­ "comforts" and "luxuries," whose material work of the material welfare school will content was less certain (Marshall, 1920 refer mainly to Marshall, Cannan, and Pi­ [1890], p. 6). gou. In the 1920s Pigou's Economics of According to Pigou, a reason for confin­ Welfare was used in teaching at Cam­ ing attention to the material or economic bridge and Cannan's Wealth was the prin­ end of the scale was that it permitted ex­ cipal text for the "Elements of Econom­ ploitation of the form of measurement ics" course taught at the London School that was available to economists, the of Economics (cf. London School of Eco­ "measuring rod of money." Given the in­ nomics, 1920-1940). Marshall's Principles formation that a person's income was a ofEconomics had entered the intellectual certain money value, under certain condi­ culture as a classic and was still widely tions, it could be inferred that they would read. enjoy material welfare of a level that could As represented in these texts, econom­ be purchased by that income.16 However, ics confined itself to a part of the well­ it was far more difficult to establish a con­ being of the community, to which Cannan nection between increases in income and referred as "material welfare" (1928 the other parts of welfare. Pigou cited sev­ [1914], Ch. I), and Pigou as "economic eral authors who testified to the deleteri­ welfare" (1932 [1920], Ch. I). The material ous spiritual effects of advances that had welfare school made a distinction among brought greater productivity and material the types of satisfactions that could be de­ wealth (1932 [1920], pp. 12-14). After con­ rived from goods. Indeed, goods, the mo­ sidering these arguments, Pigou con­ tives for acquiring them and the satisfac­ cluded it was likely that material and total tions yielded by their consumption were welfare would be positively related (p. 20). arranged in a hierarchy that proceeded To make statements about the effects from the "purely economic" or "material" of policies on material welfare, at the ag­ at one end to the purely noneconomic or gregate level, a measure was required. Pi­ nonmaterial at the other. It was stressed gou proposed a partial ordering based that there was no hard-and-fast line sepa­ upon the size and distribution of the "na­ rating the economic part of the scale from tional dividend" or national product.17 On the noneconomic, although the extremes the assumption that the rich spend so as were clearly distinguishable.15 The mate­ to satisfy all their material wants, a redis­ rial end of the hierarchy was concerned tribution in favor of the poor would per­ with survival and health. The goods that mit more material wants to be satisfied. fell most securely within the purview of Thus, material welfare was said to increase if the distribution of the dividend shifted 15 Thus, Cannan maintained that, "Although ev­ in favor of the poor, without decreasing eryone is agreed that the satisfaction of hunger is economic and the satisfaction that a Tibetan fanatic feels when he has himself immured for life in the 16 These conditions relate to the concept of ration­ dark is non-economic," it is possible to "proceed ality in the work of the material welfare school. See from the undoubtedly economic at one end of the below, p. 516. scale to the undoubtedly non-economic at the other 17 This was the way in which Pigou planned to end without finding anywhere a fence to climb or employ the "measuring rod of money" in the analysis a ditch to cross" (1928 [1914], p. 4). of welfare (1932 [1920], p. 31). 514 Journal of Economic Literature, Vol. XXII (June 1984) its total (1932 [1920], p. 89). In addition, ciency. A more tentative approach was re­ an increase in the dividend increased ma­ quired when policies involved an equity­ terial welfare if the absolute share accru­ efficiency tradeoff. Pigou rejected ration­ ing to the poor did not fall. This measure ing and wage subsidies as impairing incen­ is only partial because nothing can be in­ tives to work. Payments in kind showed ferred from an increase in the dividend much more promise, as they were consid­ accompanied by a decrease in the poor's ered less likely to have an adverse effect share, or from a decrease in the dividend on effort than money transfers. As far as accompanied by an increase in the poor's revenue is concerned, death duties were share. favored by Pigou over income taxes, in Evidently, increases in material welfare order to avoid adverse effects upon sav­ brought about by redistribution would oc­ ings (Pt. IV, Ch. IX). cur at the expense of the nonmaterial wel­ While the proximate reason for reliev­ fare or of less urgent elements of the mate­ ing poverty was its detrimental effect on rial welfare of the expropriated. However, industrial efficiency, the recommenda­ consideration of long-term effects some­ tions of the material welfare school were what mitigated this difficulty; it was held reinforced by a more grandiose master that many types of redistribution would plan. The goal was to liberate the race actually increase the dividend in the long from the wants of "the brute and the sav­ run. This result followed from the direct age, "18 in order to permit people to de­ relationship between the extent to which velop their "higher faculties."19 These an individual's material needs had been were of a more spiritual nature than satisfied, and his or her productive effi­ material wants. Marshall argued firmly ciency. Thus, in modern terminology, against religious views that insisted these there were redistribution measures for virtues could be cultivated even in the which there was no "equity-efficiency presence of material privation (1920 trade-off;" instead, the two were viewed [1890], p. 2). as complementary. Pigou argued that the In summary, this school of thought was poverty of a significant proportion of the concerned with deriving economic condi­ population, especially children, ingicated tions that would bring about improve- an untapped resource, investment in which would pay more in terms of in­ 18 Pigou gave careful consideration to the findings creases in the dividend than further in­ of eugenicists. In a chapter entitled "The National vestment in machines. The investments Dividend and the Quality of the People" (Part I, Ch. X) he faced the argument that economic policies expected to yield the highest return were would be devoid of long-run effect, since the prob­ those in school meals, health care, and in­ lem they were designed to cure was hereditary. He dustrial training (1932 [1920], Pt. IV, Ch. proposed that improvements in the quality of educa­ tion and sanitation would cause improvements in XII). Substantive predictions of this kind environment, particularly in the area of child-rear­ constituted the central policy conclusions ing, that would be transmitted to future generations. of the material welfare school. 19 Marshall was quite explicit in his discussion of the role of economics in the development of the Discussion of policies was carried out human race. Thus, while the proximate reason for by considering the effects on incentives, the development of policies to alleviate poverty as it was possible that, if the work effort came from its deleterious effects on industrial effi­ ciency, a more profound reason was that it stultified of rich or poor were impaired, the even­ the development of man's "higher nature." This as­ tual effect on the dividend would be nega­ pect of Marshall's thought is discussed in detail by tive. Material welfare economists were Talcott Parsons (1931), who lists the facets of higher nature envisaged by Marshall as: energy, initiative, thus most confident when defending enterprise, rationality, frugality, industry and honor­ egalitarian policies on grounds of effi- able dealing (1931, p. 107). Cooter and Rappoport: Were the Ordinalists Wrong? 515

ments in material welfare. Economists neers, and was explicitly treated by could discuss necessaries with assurance Pareto.20 but encountered increasing difficulties in In his Cours d'Economie Politique the consideration of comforts and luxuries. (1896), Pareto noted that economists had The difficulties did not arise in the expla­ traditionally understood "utility" in the nation of prices-for the material welfare everyday sense of "usefulness." Thus, to school, the price of bread had the same economists, something had utility if it was explanation as the price of opera tickets. "conducive to the development and pros­ The problems arose in the attempt to es­ perity of an individual, a people, or the tablish firm conclusions about the practi­ human race" (Pareto, 1896, p. 3). In his cal effects of policy. It was more defensible discussion of equilibrium, Jevons had em­ to argue that free school lunches and in­ ployed the term in a different sense, which dustrial training would increase the divi­ Pareto understood as the capacity to sat­ dend significantly than to argue that subsi­ isfy the desires of an individual, "whether dized opera would have that effect. legitimate or not," (1896, p. 3). Pareto coined the term "ophelimity" to refer to The Material Welfare Conception of this type of utility, which he regarded as Utility "subjective" (1896; 1971 [1906], passim). The difference between utility and ophe­ (a) Utility and Ophelimity limity is thus the difference between "so­ cially useful" and "desired. " At the level Economists of the material welfare of the individual "socially useful" is con­ school tended to use the concept of mate­ strued as being conducive to physical rial welfare for analysis at the aggregate health. To illustrate the contrast, Pareto or "national" level. The term "utility" was suggested that bad-tasting medicine has reserved for discussion at the level of the utility for sick children, but not ophe­ individual. If one substitutes "utility" for limity. 21 "welfare" in the above discussion, it ap­ In Pareto's view, the science of ophelim­ pears that an interpersonal comparison is ity had proceeded to an advanced state. present in one of Pigou's criteria for the In contrast, the study of utility was proble­ establishment of increases in material wel­ matic. The usefulness of things was a fare. This is the condition that material sticky issue: Pareto listed air, water, light welfare can increase if there is a shift in and wheat as among the things that were the distribution of the national dividend, undoubtedly useful, but he was ambiva- but no decrease in its size. The grounds for this comparison seem arbitrary, and 20 The distinction to be discussed is merely to be this would lead one to believe that the regarded as a useful terminological device. It is not intended to suggest that Pareto is to be counted work of the material welfare school was among the ranks of material welfare economists, or normative. Indeed, it is in this manner to imply that material welfare views were prominent that they have been represented by mod­ on the continent. (A hierarchy of wants is discussed in , 1976 [1871), Ch. 3, however.) ern historians of thought and ordinalist 21 The idea that interpersonal comparisons might writers. However, this view comes from have an objective rather than a subjective basis is thinking in terms of the subjective notion a theme of current philosophical inquiry. For exam­ ple, in the Theory of Justice, John Rawls compares of utility that is current today. In fact, at the material well-being of different people by an the turn of the century the definition of index of "primary social goods," rather than subjec­ utility was not so clear-cut, and there coex­ tive satisfactions. Rawls' approach can be viewed as extending the idea of material well-being into a set­ isted two distinct ideas. This was recog­ ting of moderate scarcity, where everyone's basic nized implicitly by many ordinalist pio- needs are satisfied. 516 journal of Economic Literature, Vol. XXII (June 1984)

lent about potatoes, as excessive reliance ciency") are physical in nature, and hence on them had caused great problems in Ire­ observable. One can thus dispute mean­ land. Difficult as these questions were, ingfully with someone as to whether they Pareto believed that the progress of the or others have a need: Departures from social sciences depended on their resolu­ industrial efficiency may be documented tion. Furthermore, unequivocal answers by pointing to inadequacy of diets, fre­ to questions of usefulness could be given quency of illness, high mortality rates and if a criterion for "economic utility" were so on.24 Thus, an important implication of adopted, and Pareto proposed to take this confining utility to the material end of the as "material well-being. "22 hierarchy of goods or satisfactions, is that When economists of the material school it made the production of utility observa• thought about interpersonal comparisons ble and verifiable. On the other hand, the of utility, they thought in terms of com­ generation of ophelimity for a particular paring the material well-being of people. individual is not answerable to any stan­ Physical objects were considered useful in dard of verification external to that indi­ so far as they could satisfy material needs, vidual because each person is the best and the power of commodities to satisfy judge of his or her own preferences. material needs was called utility. They be­ lieved that the needs of individuals, and, (b) Maximization of utility vs. therefore, the power of given quantities maximization of ophelimity of useful objects to satisfy them, could be For the material welfare school, the compared. The comparison of needs, not coincidence or divergence of the pursuits the comparison of subjective desires, was of ophelimity and utility assumed great what they usually meant by comparing importance for policymaking. 25 The issue utilities of different people. Thus their arose in the debate about whether money conception of utility was similar to the old transfers would yield the same results as idea of use-value and dissimilar to ophe­ payments in kind. If the poor desire what limity. 2a is useful, then they will spend extra money It is worthwhile to dwell on the differ­ to increase utility, i.e., transfers will be ence between focusing on needs and fo­ spent on food, clothing, industrial training cusing on desires, since this underlines the and the like. If the poor do not desire what crucial differences, for our purposes, be­ is useful, then instead of being spent so tween utility and ophelimity. The noun as to maximize utility, money transfers "need" is synonymous with "deficiency," would be squandered, i.e., spent to maxi­ as measured against a norm of "complete­ mize ophelimity. ness." For the material welfare school, this norm was the condition of the physically 24 There are some difficulties with this approach, fit individual. The significance of such a in particular that the norm may not be easy to estab­ norm is that the important deviations lish, and may vary considerably among tasks, cultures from it (those relating to "industrial effi- and even individuals of different physical size or con­ struction. However, these do not vitiate the claim that deviations from the norm are measureable in 22 "Le bien-etre materiel." He did not attempt to principle. For a discussion of these matters, see Sen justify this choice explicitly, but seems to have had (1981, pp. 11-14). in mind some Spencerian ideas of evolutionary fit­ 25 The greatest divergence between calculations ness. Evolution is seen here as improvement rather of ophelimity and utility was believed to be present than adaptation. where the planning of expenditures for the future 23 Pareto asserted that a rational person would was involved. This was held to have a deleterious view the two as identical. Thus, in contemporary effect on material welfare, as a result of the lower usage, rationality was viewed as "doing what is good rate of capital formation it engendered (Pigou 1932 for you." [1920], pp. 24-30). Cooter and Rappoport: Were the Ordinalists Wrong? 517

This problem caused some consterna­ cause the desire to spend on necessities tion for the material welfare school. On is prompted by the want of them: the one hand, Pigou maintained that "to For we may fairly expect that most material charge the whole body of the poorer commodities, and especially those of wide con­ classes with ignorance and lack of capacity sumption, that are required, as articles of food for management would, indeed, be to ut­ and clothing are, for direct personal use, will ter a gross libel" (1932 [1920], p. 754). On be wanted as means to pleasure, and will conse­ quently be desired with varying intensity in the other hand, he bemoaned the limita­ proportion to the pleasure they are expected tions of the wisdom of the typical house­ to yield [Pigou 1903, p. 68). hold in its purchases and use of goods, lik­ It could therefore be assumed, in discus­ ening it to technologically primitive sions of the disparities of material welfare, cottage production of textiles (1932 that the effect of transfers of money would [1920], p. 754).26 Considerable care had be quite similar to the effect of transfers to be exercised in the practice of doling in kind. out subsidies to people who had been at If people typically desire what they or below the margin of subsistence: need, and if needs are more urgent when For, if anybody accustomed to a given standard people are poor, it follows that additional of living suddenly finds his income enlarged, income is more useful to the poor than he is apt to dissipate the extra income in forms the rich. The marginal utility of income of exciting pleasure, which, when their indi­ rect, as well as their direct, effects are taken declines because additional income is de­ into account, may even lead to a positive loss voted to needs whose urgency diminishes of satisfaction [1932 (1920), p. 91). as a person's income increases. For exam­ In view of this, Pigou advocated that any ple, Pigou wrote: redistribution of income be carried out It is evident that any transference of income gradually and imperceptibly. from a relatively rich man to a relatively poor man of similar temperament, since it enables Despite such caveats, Pigou and Mar­ more intense wants to be satisfied at the ex­ shall believed that the poor would tend pense of less intense wants, must increase the to use additional money in the most useful aggregate sum of satisfaction. The old "law of ways. This outcome could be expected be- diminishing utility" thus leads securely to the proposition: Any cause which increases the ab­ solute share of real income in the hands of the 26 It was the argument of John A. Hobson and the poor, provided that it does not lead to a con­ "humanist school" that even if someone desired pos­ traction in the size of the national dividend session of an object that was capable of satisfying from any point of view, will in general, increase their wants it did not follow at all that these wants economic welfare [1932 (1920), p. 89).27 would be satisfied by endowing the person with the good in question: "the amount of utility or welfare Given the material welfare conception to be got out of any goods depends upon the charac­ of utility, it is possible to understand Pi­ ter, the natural or acquired capacity of the particular gou's welfare criterion in terms of the con­ consumers or classes of consumers into whose hands they fall" (Hobson 1914, p. 37). Extracting utility dition that money be allocated so that its from goods was a skill which had to be learned in marginal utility is equal between people. the same way as one learned productive skills. Wil­ liam Robson (1925, Ch. 2) presented a more detailed This scheme will produce the greatest ma- study in this vein, in which he demonstrated that variations in family income around a low level were 27 This quote is characteristic of the language of uncorrelated with occurrence of rickets in the chil­ the material welfare school. The term "want" is often dren concerned. He took these and other findings used to mean the objective ful6.llment of a need and on the lack of relationship between health and in­ the corresponding subjective pleasure. In retrospect come as evidence that the principal needs of the the material welfare school could have avoided con­ time were for education in the best use of income fusion by observing Pareto's distinction more rigor­ to satisfy wants and that increases in income or pay­ ously; however, their mode of expression is not in­ ments in kind alone would not help. consistent with ordinary speech. 518 Journal of Economic Literature, Vol. XXII (June 1984)

terial welfare (and the greatest improve­ Comparisons between two named indi­ ment in productive efficiency), given the viduals were declared impossible or in­ available resources. It will lead to an equal feasible. However, this was not considered distribution of wealth only if the relation­ to be of particular importance for policy. ship between individual wealth and the Thus, Marshall argued: production of utility is the same for each It would therefore not be safe to say that any individual. The fact that utility was con­ two men with the same income derive equal fined to the material end of the hierarchy benefit from its use; or that they would suffer of wants thus suggests the possibility of equal pain from the same diminution of it . . . Nevertheless, if we take averages sufficiently an egalitarian bias.28 However, this was broad to cause the personal peculiarities of indi­ tempered in Pigou's writing by consider­ viduals to counterbalance one another, the ation of the deleterious effects on incen­ money which people of equal incomes will give tive and thus ultimately on the dividend, to obtain a benefit or avoid an injury is a good that an egalitarian policy might create measure of the benefit or injury. If there are a thousand persons living in Sheffield, and an­ (1932 [1920], Pt. IV, Chs. VIII-X, XII).29 other thousand in Leeds, each with about £100 (c) The Use of Interpersonal Averages a-year, and a tax of £1 is levied on all of them, we may be sure that the loss of pleasure or Material welfare economists were most other injury which the tax will cause in Shef­ comfortable in making comparisons of field is of about equal importance with that which it will cause in L~eds [1920 (1890), pp. utility, not between specific persons, but 18-19). between broad classes of people who dif­ fer widely in their unmet needs--e.g., the Indeed, it was scarcely to be expected that rich and the poor. The terms "the rich" one would be able to make any sense of and "the poor" were used to describe av­ individual comparisons. In his attempts to erages, not individuals, much as modern measure the marginal utility of money, economists talk about "the consumer." Fisher resorted to the device of the aver­ age family. His justification in modern us­ 28 Sen (1973, p. 16) observes that utilitarianism is, age, was that individual data contains "too in general, "supremely unconcerned with the inter­ much noise" (1927, p. 181). The claim that personal distribution" of total utility, and points out poor people have more urgent needs than that maximizing the sum of total utility will lead to an egalitarian outcome only in the special case rich people was thus made with similar in which everybody has the same utility function. caveats as the claim that the consumer The assumption of identical utility functions was at­ allocates a smaller share of his or her bud­ tacked by Robbins and others, which "gave utilitar­ ianism a reputation for being equality-conscious." get to housing as income rises. Both propo­ From the above, it is clear that the "special case" sitions smooth out the statistical outliers. arises from the particular conception of utility held That material welfare economists, as we by the material welfare school, and, indeed, any as­ signment of utility indices that varied dramatically have described them above, had no diffi­ among persons would be considered inadmissible. culty with this use of averaging is scarcely Only when "utility" is interpreted in terms of ophel­ surprising.30 Their view that utility sprang imity does the egalitarian version of utilitarianism become a special case, placed on an equal footing from conditions associated with physical with all other possible assignments of utility func­ survival and development led them natu- tions to individuals. 29 This particular solution to the allocation problem so What is remarkable is that the process of averag­ is reminiscent of Edgeworth's formulation of the ing was advocated by economists who have gained problem of the "Utilitarian Calculus" (1961 [1881], a reputation for being the forerunners of the more p. 56). The difference between two approaches is modern sort of economics, in which "interpersonal that Edgeworth believed that the pleasures derived comparisons" are vigorously eschewed:- Phillip H. by all people from all commodities may be com­ Wicksteed, whom Blaug (1978 [1962), p. 514) cites pared, whereas the material welfare school confined as a precursor of Robbins' conception of the scope itself to a more modest list of commodities. Edge­ of economics, argued that there could be no doubt worth's approach is discussed in Yaari (1981). that the pain experienced by torturing one hundred Cooter and Rappoport: Were the Ordinalists Wrong? 519

rally to believe that people were funda­ studying economics.31 However, they mentally alike except for an insignificant were particularly conscious of the distinc­ personal component, rather than that the tion between positive and normative eco­ personal component swamped the shared nomics, and of the necessity of abstaining one. from prescription based on normative The ability to make interpersonal com­ judgments. Thus, Pigou contended that parisons of utility is already implicit in the economics "will not ... be an art, or di­ hierarchical conception of human needs. rectly enunciate precepts of government. The significance of the hierarchy is that It is a positive science of what is and what it arranges needs in the order in which tends to be, not a normative science of they unfold as income increases. This or­ what ought to be" (1932 [1920], p. 5). Ac­ der is the same for different people, in cording to Schumpeter and Denis H. Rob­ particular it is shared by the average rich ertson, the methodological bible of the person and the average poor person. In time was John Neville Keynes' Scope q,nd order to compare the welfare of two dif­ Method of Political Economy. 32 Here, ferent people it is necessary to locate their three aspects of political economy were positions on the hierarchy. The person distinguished: The studies of "economic higher on the hierarchy enjoys a greater uniformities, economic ideals and eco­ level of welfare. For example, a person nomic precepts." The first were seen as deprived of food has a more urgent need the subject of positive inquiry, the second than a person deprived of entertainment. as the concern of a "normative science" Giving food to the hungry increases mate­ and the last as the province of an "art," rial welfare more than giving theater tick­ "a system of rules for the attainment of ets to the bored. However, material wel­ a given end" (p. 35). Keynes insisted that fare economists did not claim any it was both possible and desirable to re­ jurisdiction over the "higher faculties," as strict economics to the positive study of Marshall called them. They did not pre­ economic uniformities (1917 [1890], Ch. tend to know whether one person was 2, p. iii). Similar views are advanced in more capable of enjoying the theater than Marshall's Inaugural Lecture at Cam­ another. All they said about these com­ bridge (1885, p. 38). The pronouncements modities was that, in comparison to food, of the material welfare school on the scope their contribution to material welfare was of economics are thus in keeping with less significant.

The "Scope and Method" of Material 31 Pigou saw this motivation as emanating not from Welfare Economics the desire for "knowledge for its own sake," but from "the social enthusiasm which results from the sordid­ Material welfare economists held that ness of mean streets and the joylessness of withered social reform is an important motive for lives" (1932 [1920], p. 5). Marshall believed that the possibility of banishing poverty depended on the out­ come of economic investigations, and imparted to them "their chief and their highest interest" (1920 men was greater than that experienced by another [1890], p. 4). hundred men each subject to a gnat bite. "There 32 From what one can judge, this book was, for might in one odd case be extraordinary sensitivity, many years, the main source of information on meth­ and in another extraordinary anaesthesia, but they odology, to the extent that such information was would not be typical" (1932, p. 149). Similarly, Par­ sought. Schumpeter refers to the "excellent perfor­ eto, whom John R. Hicks and Roy G.D. Allen (1934, mance of J. N. Keynes that settled most ... metho­ pp. 52-54) name as the father of ordinal utility the­ dological issues . . . to the satisfaction of the profes­ ory, argued that comparison of utilities (as opposed sion. For two decades this book held a well-deserved to ophelimities) of two people was legitimate as long position of authority" (1954, p. 824). D. H. Robertson as they did not depart too much from the average affirms its importance, but is more reserved about (Pareto 1896, Vol. II, pp. 48-49). the interest it excited (1952, p. 14). 520 Journal of Economic Literature, Vol. XXII (June 1984)

those at the base of modern economics. tum crucis, e.g., the Bank of England will The material welfare economists saw not alter its policies merely to test eco­ themselves in a long tradition of empiri­ nomic theories. The absence of experi­ cism. British empiricism was character­ mental data can be overcome in part by ized in theory by the claim that knowl­ statistical methods, but in the end Mill edge comes from experience, rather than thought it was necessary to draw upon or­ reason and, in practice, by meticulous at­ dinary experience and common sense. Ac­ tention to detail and the collection of facts. cording to Mill, abstract economic theory The material welfare economists, like proceeded by deduction from common other empiricists, took pride in being sense generalizations. sober scientists whose theories were From our argument in Part II it is clear grounded in facts: They took pains to col­ that the elements of the conceptual lect and analyze data on wealth and wel­ framework of the material welfare school fare,33 and they were pioneers in mathe­ were closely bound together. The mate­ matical economics and statistics. They rial welfare definition of economics com­ aspired to the same high standards of mitted the subject to the analysis of eco­ proof as present-day economists, but had nomic needs. The arrangement of needs a different idea of what to do when that in a hierarchy was motivated by common standard was hard to reach. sense, as well as by scientific evidence. If quantitative evidence was.insufficient The methodology of empiricism admitted to decide an issue then the material wel­ common sense into social science. These fare school accepted common sense and foundations supported the conception of introspection as legitimate evidence. Thus, utility as an objective, public phenome­ Marshall observed that "as human nature non, comparable across individuals. Crit­ is constituted, man rapidly degenerates ics of this conceptual framework were unless he has some hard work to do" (1920 more likely to succeed if they could offer [1890], p. 136). Similarly, Frank Taussig, a complete alternative, which is exactly in his discussion of the law of diminishing what Lionel Robbins did. marginal utility, appealed to the fact that "all human enjoyments tend to pall rap­ idly when repeated" (1946 [1911], Ch. 9). Ill. The Critique of the Material Welfare Such passages are relics of the prose style School of 19th century British classics, which modern economists can find embarrass­ The tradition exemplified by Cannan, ing, like a photograph from adolescence. Pigou, and Marshall was attacked by Rob­ In fact the appeal to common sense was bins in his Essay on the Nature and Signif­ part of a carefully considered method for­ icance of Economic Science, first pub­ mulated by J. S. Mill (1844). According to lished in 1932. The parts of this critique Mill, all knowledge is obtained inductively that generated the most controversy were from experience, and the scientific ideal the first and last chapters, which dealt involves performing an exact experiment with "The Subject Matter of Economics" whose outcome is decisive among rival and "The Significance of Economic Sci­ theories. However, in economics it is ence," respectively. Our development of rarely possible to perform the experimen- the arguments of these chapters will cor­ respond to the discussion above of the ma­ terial welfare school, dealing with Rob­ 33 The findings of the Royal Commission on the Poor Law are cited frequently by Pigou and Mar­ bins' definition of economics, and his shall. conceptions of method and utility. Cooter and Rappoport: Were the Ordinalists Wrong? 521

Scarcity Definition whereas they occupy different positions in the hierarchy of needs. In the first chapter Robbins criticized Robbins stated that "what is -rejected the material welfare definition of econom­ is but a definition," and not "the body of ics on the grounds that it did not compre­ knowledge which it was intended to de­ hend the full range of that econo­ scribe" (p. 22). However, it is important mists study. For example, wheat is more to realize that change of definition was material than opera, but the demand for instrumental in uprooting the existing opera tickets is as fit for study by econo­ body of knowledge. For, if the "unity of mists as the demand for wheat. He pro­ the subject of Economic Science" were posed an alternative definiton: to come from "the forms assumed by hu­ Economics is the science which studies human man behavior in disposing of scarce behavior as a relationship between ends and means" (1937 [1932], p. 15), then the scarce means which have alternative uses [1937 natural primitive concept for studying (1932), p. 16]. economic welfare would be ophelimity Only this definition possessed the "capac­ rather than utility. Robbins did not make ity to describe exactly the ultimate sub­ this distinction, and continued to use the ject-matter of the main generalizations of term "utility" in his analysis of the work the science," (pp. 4-5) according to Rob­ of the material welfare school. bins. He called this definition "analytical," As we have noted, ophelimity cannot rather than merely "classificatory," be­ be observed, and there is no way to know cause it "focuses attention on a particular that it will be the same for two "average" aspect of behavior, the form imposed by individuals confronted with the same ob­ the influence of scarcity" (p. 17).34 jective circumstances. Therefore, Robbins The crucial feature of Robbins' defini­ would find that his conception of utility tion is that it expands the list of goods that offered no scientific support for state­ are equally legitimate concerns of the ments about the effects on welfare of re­ economist. Under the material welfare distributive measures. This argument was definition, economics was particularly but couched in terms of Robbins' conception not exclusively concerned with go9ds that of science, as we shall now explain. people need for the sake of physical and mental well-being. Under Robbins' defini­ Positivism tion, one good is as appropriate for study During the 1930s, economists at the by economists as another so long as some­ London School of Economics, where Rob­ one does not have as much of it as he bins taught, were exposed to the philoso­ or she desires. Bread and opera are on phy of logical positivism,35 which was an equal footing in scarcity economics, imported into England from Vienna (William H. Beveridge 1960, Ch. 4). Posi­

3• Much of Robbins' argument was anticipated by tivism had a dramatic impact upon Anglo­ Frederic Benham (1930), who condemned "eco­ American philosophy and social science. nomic welfare" as a loose concept, vulnerable to misinterpretation, and the "law of diminishing mar­ Positivism shared many of the predilec­ ginal utility" as the result of "an amateur incursion tions of empiricism, e.g., both held that into the domain of psychology" (p. 184). However, knowledge comes from experience rather Benham was more skeptical about the scarcity con­ ception of economics that Robbins was to introduce. than reason, both advocated testing theo- The scarcity definition was not unknown to the ear­ lier generation of economists. J. N. Keynes explicitly 35 There were two positivisms in the history of phi­ rejected the notion that political economy is con­ losophy, logical positivism being the twentieth cen­ cerned with scarcity or the "specially reasonable ad­ tury version (Paul Edwards 1967: "Positivism" and aptation of means to ends" (1917 [1890], p. 35). "Logical Positivism"). 522 journal of Economic Literature, Vol. XXII (June 1984) ries by quantitative methods, and both interpersonal comparisons of utility are held that prescriptions and policy judg­ outside science. In order to understand ments are outside of science. However, this claim we must appreciate Robbins' these traditional tenets of empiricism conception of utility. were given a much narrower interpreta­ tion by the positivists. This change in tone Ordinal Utility had a large effect upon the practice of social science. The claim that interpersonal compari­ At this stage, we can focus upon one sons of utility are outside of science may aspect of positivism, namely its strictures seem bizarre in light of the careful re­ against mental and moral concepts. A ba­ search by the material welfare school into sic claim of positivism is that science can the consequences of material deprivation. be demarcated from nonscience accord­ Hunger is plainly observable, open sewers ing to whether or not the propositions in assault the senses, the relationship be­ question predict observable events.36 Posi­ tween infant mortality and prenatal care tivists tended to interpret "observable is documented, etc. For the material wel­ events" in a very restrictive sense. Con­ fare school, "utility" referred to the extent cepts with an ethical tinge (duties, obliga­ to which material needs were satisfied, tions, values, norms, etc.) were deemed which is observable. What did Robbins "unobservable." For example, it is said mean by claiming that utility is unobserva­ that the existence of a duty to tell the truth ble? cannot be confirmed by observation and We noted that the material welfare is therefore regarded as metaphysical, and school adopted an objective definition of outside the pale of science. Those con­ utility (socially useful), whereas the ordi­ cepts with a subjective tinge (intentions, nalists adopted a subjective definition (sat­ wishes, purposes, pleasures, happiness, isfaction of desire). As noted, Jevons used etc.) were suspect. For example, another the subjective definition and remarked person's pleasure cannot be observed so that there is no compelling way to com­ directly as chairs or horses. Some positiv­ pare the pleasures of different people. ists went so far as declaring all subjective Robbins merely embedded this familiar and mentalistic concepts to be unobserva­ claim in positivist philosophy. Specifically, ble, and became behaviorists in their ap­ he regarded utility as relating to prefer­ proach to science. ences (i.e., ophelimity) and he stressed Robbins went a long way in the positiv­ that alleged comparisons of utility among ist direction of excluding ethical and men­ persons cannot meet the criterion of tal concepts from science. The material observability which demarcates science welfare school had long recognized that from nonscience (Robbins 1937 [1932], neither , nor interpersonal pp. 136-42). comparability of utility is necessary to ex­ Robbins' commitment to the positivist plain market behavior. Robbins claimed line is exemplified by his treatment of the that no observable behavior could be ex­ law of diminishing marginal utility in the plained by placing such structure on util­ last chapter of his Essay. Here he offered ity. Since observability is the demarcation a discussion of the assumptions underlying criterion for science, he concluded that the "theory of public finance," especially progressive income taxation. The defense of progressive taxation by Robbins' oppo­ 36 This claim talces a somewhat different form in different writing: Karl Popper (1972 [1934]); the col­ nents proceeds from the assumption that lection of writings in Alfred Ayer (1959). the marginal utility of income declines to Cooter and Rappaport: Were the Ordinalists Wrong? 523

the conclusion that total utility will be in­ thought that propositions about needs and creased by the transfer of a pound of in­ their satisfaction concern observable facts, come from the rich to the poor. not ethical judgments. Of course, "needs" Robbins condemned this argument as has an ethical tinge and "satisfaction" "merely specious," representing "an ex­ sounds mental, which arouses the suspi­ tension of the conception of diminishing cion of positivists. Robbins proposed to marginal utility into a field in which it is purge utility of its ethical tinge, but he entirely illegitimate." The unextended, le­ did not propose to eliminate its subjective gitimate law refers only to the income and tinge. In his day there was a tendency to utility of one individual; to extend it "begs describe utility as a psychological impulse the great metaphysical question of the sci­ or mental spring to action. He did not ob­ entific comparability of different individ­ ject to such descriptions, but he insisted ual experiences" (1937 [1932], p. 137; also, that subjective impulses were not measur­ Benham 1930). able or comparable among persons. The Two sources of evidence are recognized possibility of a strictly behaviorist inter­ in Robbins' Essay: introspection and ob­ pretation of utility was not part of the vi­ servation. He reported that he could find sion of his Essay. no introspective evidence in favor of the In 1934, and R. G.D. Allen extended law of diminishing marginal util­ offered "A Reconsideration of the Theory ity of income. He also asserted that obser­ of Value," which supplied the technical vation had no bearing on this extension, basis for a behaviorist account of con­ because no one can observe the satisfac­ sumer theory. Their article reconstructed tion enjoyed by other people. We may, consumer theory by isolating and develop­ by chance, agree on which satisfaction is ing those parts that did not rely on cardi­ greater, but if we disagree, then there nality. Two notable casualties were the would be)1:0 way to resolve the dispute. concepts of the marginal utility of a good, He concluded that the extended law of and complementarity between two goods, diminishing marginal utility which were replaced respectively with the concepts of the marginal rate of substi­ . . . cannot be justified by appeal to any kind tution between two goods, and a revised of positive science. It involves an element of conventional valuation. Hence it is essentially conception of complementarity that re­ normative [1937 (1932), p. 139]. quired the presence of three goods. These changes did not alter any of the standard Economists were thus presented with results about consumer equilibrium, but a dilemma: either they adopted a conven­ the implications for the meaning of utility tion that made interpersonal comparisons were substantial: A concept that described possible, or they abandoned comparisons mental impulses (marginal utility) was re­ altogether. If they took the former course, placed by a behaviorist concept (marginal then, according to Robbins, they would rate of substitution). have to eschew the pursuit of positive sci­ In conclusion, we note that Robbins as­ ence. On the other hand, were they to sembled the elements of a new conceptual dedicate themselves to positive science, framework by joining together the scar­ there would need to be a "substantial cur­ city definition of economics, the positivist tailment of much of what [now] assumes conception of method, and the ordinalist the status of scientific generalization in view of utility. The only piece missing [current] discussions of applied econom­ from the modern view was a behaviorist ics" (1937 [1932], p. 141). interpretation of ordinal utility, and that As noted, the material welfare school was supplied by others. 524 Journal of Economic Literature, Vol. XXII (June J 984)

IV. Debate Between the Schools ments of the population, yet Robbins de­ fined this practice out of economics. Rob­ We have described two internally con­ bins had proceeded by laying down a defi­ sistent but mutually incompatible con­ nition of economics and deducing the ceptual frameworks. The ordinalist frame­ activities which economists could legiti­ work eventually came to dominate the mately pursue. e~osition of economic theory, but tracing Later (1937), Fraser characterized two this movement is difficult.37 The ordinal­ methods of definition as themselves either ists did not convert the members of the "positive" or "normative." He reasoned material welfare school, but students were that the material welfare definition is posi­ won over. The material welfare school tive because it describes the actual prac­ died out gradually as it failed to reproduce tice of economics, whereas the scarcity itself. In this section of the paper we re­ de~nition is normative because it pre­ count these developments as reflected in scnbes the appropriate practice for eco­ the leading journals and books. nomics. Robbins was portrayed by Fraser Replies to Robbins as defining economics normatively while advocating the exclusion of norms from The initial responses to Robbins' Essay economics. were unfavorable, although muted. In the Fraser also criticized Robbins' applica­ same year as it was published, the Eco­ tion of scientific method.38 He claimed nomic Journal offered two critical re­ that it was not the rigor of scientific views. The first, by Cannan, was directed method that Robbins had imposed on the primarily at Robbins' definition, the ap­ practice of making interpersonal compari­ parent virtues of which failed to attract sons of utility, but rather a variant of the him. It appeared to Cannan that Robbins skeptical method. According to Fraser, had broadened the definition of econom­ people agreed that there was "no ground ics to the point where it encompassed for supposing that poor men are in general most of life. For example, Robbins saw the less capable of enjoying a given amount tradeoff between pursuit of pleasure and of wealth than rich men" (p. 562). From fulfillment of duty as an economic deci­ this, it followed that egalitarian policies sion, whereas Cannan viewed it as "one were likely to increase welfare, even of the problems of life" (cf., George M. though "the metaphysical doubt re­ Janes 1933). mains." Thus, while one could never rule In a second review, entitled "How Do out the possibility that redistributive poli­ We Want Economists to Behave?," Lind­ cies would decrease welfare there was no ley Fraser (1932) pointed out that the scar­ reason for acting on the basis of this un­ city definition had not been distilled from likely state of affairs, instead of the one the actual practice of economists. Econo­ that people considered more likely. mists had long concerned themselves with comparing the well-being of different seg- 38 Fraser's identificabon of ordinal utility theory with the skeptical method, rather than the scientific method, anticipated seminal criticisms made years 37 Fraser (1938), in a review of Barbara Wootton's later by C. West Churchman (1966). A full account Lament for Economics (1938), indicated that the of Fraser's concept of economic method is found views of "Robbins and his colleagues are utterly un­ in ~anomic Thought and Language (1937). This representative of economists as a whole" (p. 196). adrmrable and much-neglected work discussed eco­ By contrast, Roy Harrod (1938, p. 388), in the article nomic theory from the viewpoint of the philosophy refen:ed to below, remarked that in recent years of lan~ge. The philosophy of language has had pro­ the history of thought had been discussed far more found influence on the other social sciences· Fraser from the standpoint of the theory of exchange than is unique in trying to work out some of its implica­ from the standpoint of improving material welfare. tions for economics. Cooter and Rappaport: Were the Ordinalists Wrong? 525

Little more was written about these is­ ciate that the other is using the same sues until Harrod raised them again in his words to mean different things. Consider essay entitled "Scope and Method of Eco­ for example the fate of the term "utility." nomics" (1938). He, too, was critical of the We mentioned that Pareto distinguished practice of writers who stipulated meth­ utility (usefulness) from ophelimity (satis­ ods and definitions instead of discussing faction of desire). Robbins used one name, those actually employed by economists. utility, to refer to both concepts. Pareto The suggestion that economists limit had shown that ophelimity was not com­ themselves to developing causal laws, and parable, but Robbins discussed the incom­ leave it up to policymakers to decide parability of utility. In Robbins' Essay the which course of action would be pursued, meaning of "utility" to the material wel­ was illegitimate as it was "in manifest con­ fare school is ignored. tradiction with the actual practice of econ­ Another source of confusion arose from omists" (p. 388). Robbins' proscriptions the examples used to illuminate the de­ were seen to entail the principle that bate about the interpersonal comparisons. economists offer no advice whatsoever, as The material welfare school compared the a result of which the interest in their rich to the poor, speaking in terms of ab­ causal laws would diminish markedly. stract individuals widely separated on the The advisory role assumed by econo­ scale of material well-being. Robbins mists also formed the basis for Harrod's made comparisons in terms of named indi­ dissent on the matter of interpersonal viduals who were not so far apart in terms comparisons of utility. Economists could of income. This shift in examples affects not afford to reject the common sense the plausibility of the assertions that levels view of such comparisons. The objection of welfare can be compared. that they were unscientific Ordinalist Welfare Economics . . . would be very weighty if economics itself were a mature and exact science. Yet in fact It appears unlikely that the work of Rob­ its achievements outside a limited field are so bins and Hicks and Allen could, in isola­ beset on every side by matters which only ad­ tion, precipitate the dramatic changes in mit of conjecture that it is possibly rather ridic­ the practices of economists that occurred. ulous for an economist to take such a high However, the development of the litera­ line . . . [p. 396]. ture on compensation criteria may offer While it was necessary to assume equality a clue to the victory of Robbins' frame­ of ability for satisfaction in order to make work. comparisons, this assumption, when used Harrod had noted that Robbins' scien­ with care, need not lead to problems. tific ideal would not have allowed econo­ Robbins' response to Harrod, which ap­ mists to endorse repeal of the Com Laws peared in the Economic journal a few which almost all British economists had months later, merely reiterated his earlier endorsed (1938, p. 388). Nicholas Kaldor positions (1938b). In this and another arti­ (1939) suggested that the repeal of the tar­ cle written at the same time, he insisted iff was justifiable because the increase in that the question of the scope of econom­ wealth brought about by this reform, if ics was dead (1938a, p. 344). redistributed appropriately, was more One cannot but come away from this than sufficient to put everybody at the discussion between Robbins and his critics same level of utility as previously. Thus, with a sense of dissatisfaction. They argue repeal of the Com Laws made a Pareto past each other, instead of defining the improvement possible by appropriate issue clearly. Neither side seems to appre- wealth redistribution. This procedure 526 journal of Economic Literature, Vol. XXII (June 1984)

promised to rank a state of the world by most subsequent discussion of compensa­ comparing the hypothetical redistribu­ tion criteria did not consider this point. 39 tions it permitted to other actual states This suggests that a generation of econo­ of the world, using the Pareto criterion. mists was trained to believe that science According to Kaldor, using hypothetical treats a dollar as equally valuable to every­ rather than actual redistributions permit­ one, whereas a nonscientific approach ted economists to make policy recommen­ treats a dollar as more valuable to the poor dations without making value judgments than to the rich. (Kaldor 1939, p. 550). Use of the Pareto Nevertheless, compensation criteria did criterion made interpersonal comparisons offer some degree of rapproachement be­ of utility unnecessary. Thus, it appeared tween the two schools. In the Introduction that some of the conclusions of the mate­ to his textbook on the new welfare eco­ rial welfare school might remain intact, nomics, Melvin Reder precedes his devel­ even when Robbins' strictures were opment of compensation criteria with this obeyed. statement: The recommendations that flow from . . . if our welfare criterions were applicable Kaldor's principle are sometimes different only to the few policies that harm none, welfare from the recommendations of the mate­ economics would be quite sterile. Fortunately, rial welfare school. Suppose we are consid­ this is not the case [1947, p. 18]. ering the desirability of a redistribution Subsequently, the technical difficulties policy that raises marginal tax rates at low with compensation criteria were ex­ incomes and lowers marginal tax rates at posed by Paul Samuelson (1950) and Wil­ high incomes. This policy is expected to liam M. Gorman (1955). One may won­ raise the national income, the increase ac­ der whether the new welfare economics cruing to the rich. Suppose further that would have been so readily adopted in their eventual gain in income exceeds the the late 1930s had its "sterility" been evi­ loss in the income of the poor. Using Kal­ dent at that time. dor's criterion, we would say that the pol­ icy results in an economic gain, even if V. Evaluating and Explaining the the rich do not compensate the poor. Ordinalist Revolution However Pigou's criterion yields no.defi­ nite result in this case. (Although it would The body of this paper has recon­ agree with Kaldor's criterion if compensa­ structed the conceptual frameworks of the tion were paid.) Alternatively, if the even­ two schools of thought involved in the de­ tual money gain to the rich were exactly bate on the possibility and relevance to equal to the loss of the poor, Kaldor's crite­ economics of interpersonal comparisons rion would evaluate the two situations of utility. A comparison of these frame­ equally, whereas the original situation works leads to the conclusion that phrases would dominate under Pigou's rules. The such as "the comparability of utility across difference in conclusions occurs because persons" meant different things to each Kaldor's approach requires the economist school. The observation that the earlier to proceed as if a dollar were equally valu­ conceptual framework was not general­ able to everyone, whereas Pigou's re­ ized by the later motivates a reconsidera­ quires the economist to proceed as if a tion of the question of whether scientific dollar were more valuable to the poor progress occurred. To this we now turn. than to the rich. Thus, Kaldor made a dif­ ferent conventional judgment from Pi­ 39 An exception is William Baumol (1965 [1952], gou, rather than no judgment. However pp. 161-70). Cooter and Rappoport: Were the Ordinalists Wrong? 527

Received history of economic thought utility theory.40 Instead, the explanation accounts for the difference between the resides in the fact tuat, cumbersome as two schools in terms of rival views of the their conception of utility was for price scope and method of economics. Thus, theory, it was well adapted to the exami­ material welfare economics is seen as nor­ nation of propositions about material wel­ mative and the banishment of interper­ fare, which were the major preoccupation sonal comparisons of utility as the conse­ of the school.41 Moreover, their concep­ quence of the attempt to make economics tion of admissible scientific evidence was a positive science (Blaug 1978 [1962], pp. congruent with their view of utility. The 636-37). This view is in keeping with Rob­ belief that a utility structure was common bins' recollections: to people made introspection an appropri­ ate empirical tool. The fact that the pro­ All that I had done was to assert, in regard to duction of utility was linked to the mate­ discussion of economic affairs, the distinction rial end of the hierarchy of needs made between propositions involving existence and obligation, well recognized elsewhere since the incidence of utility readily observable, Hume pointed out the distinction between and so offered a place for observations "ought" and "is" [1971, p. 148]. based on everyday experience. The theses that economics developed Yet, as we have argued above, in our dis­ as it did in the early decades of this cen­ cussions of scope and method, material tury because it confused normative and welfare economists were well aware of positive concepts, or because of inade­ this distinction. They did not consider nor­ quate scientific method, must be rejected. mative statements to be part of the eco­ They attribute to apparent differences in nomics they practiced. Further, they af­ scope and method the effects of differ­ firmed "Hume's guillotine" in much the ences in research agenda. An account of same breath as they made statements that the doctrinal changes of the 1930s must were later criticized for ignoring it. concentrate on differences in research In his discussion of the development of agenda which influenced the two rival utility theory from 1790 to 1915, Stigler schools' definitions of "economics," and pointed to the method of empirical i.JJ_ves­ the denotation they gave to the term "util­ tigation by appeal to "casual knowledge" ity." used by economists practicing during this Each school was guided by a separate period. He went on to suggest: definition of economics, which mandated that they focus their attention on different Had specific tests been made of the implica­ tions of theories, the unfruitfulness of the ruling phenomena. Considerations of scarcity di­ utility theory as a source of hypotheses in de­ rected economists to study the production mand would soon have become apparent . . . and exchange of all commodities, for That such able economists were delayed and which the appropriate concept of human distracted by the lack of a criterion of refutable behavior is preference, or ordinal utility. implications of theories should be a finding as useful to us as any of the fine theoretical ad­ Considerations of material welfare man- vances they made [1950, p. 396]. 40 Stigler referred to the aspects of this theory that It is true that the material welfare econ­ were later generalized, as a result of the replacement of the additive utility function by the generalized omists appealed to everyday experience utility function, and of the measurable utility func­ for evidence, which resulted from their tion by the nonmeasurable one. use of an empiricist rather than a positivist • 1 It should be noted, in this paper we have not dealt with the question of whether Stigler's judg­ methodology. However, this does not ex­ ment is appropriate for economists of generations plain why they retained their version of earlier than the material welfare school. 528 Journal of Economic Literature, Vol. XXII (June 1984) dated concentration on an aspect of the pened because all economists, sharing the significance of commodities for which the goal of advancing their science, perceived canonical concept of human behavior is the merits of the ordinalist approach. In the satisfaction of needs or "wants." While contrast, our account makes it necessary intensity of preference among people to dissociate the explanation from the could not be ranked in any way that would evaluation of the change. As far as the ex­ not be considered arbitrary, interpersonal planation is concerned, we have shown intensity of needs could be ordered in a that the two schools had different frame­ way that would only be considered arbi­ works, the older framework consisting of trary by a sceptic. However, in the pres­ a material welfare definition of economics, ence of confusion as to the concept of util­ an empiricist conception of method, and ity being appealed to, it was possible for an interpersonal conception of utility, the scarcity school to characterize mate­ whereas the newer framework consisted rial welfare economics as guilty of sub­ of a scarcity definition of economics, a scribing to arbitrary conventions or "value positivist conception of method, and an or­ judgments," and to explain the persis­ dinalist conception of utility. The essential tence of these practices by the neglect of unity of each framework explains some positivist scientific method. Similarly, it features of the change, such as the diffi­ was possible for the material welfare culty each side had in comprehending the school to interpret the strictures of ordi­ other's arguments.42 In order to provide nalists on interpersonal comparisons of a more complete explanation of the utility as mere scepticism on the part of change in doctrine, an examination of the economists who were prepared to ham­ relationship of the two schools to the string the science by giving disproportion­ wider intellectual and political climate of ate weight to possible but unlikely configu­ the time now seems indispensable. For the rations of utility among people. moment, we can do no better than to echo The received view is that ordinalism Lindley Fraser (1937, p. 36) who, having represents scientific progress relative to discussed the scarcity and material wel­ the material welfare school, but one can fare definitions of economics, despaired talk unequivocally about the progress of of objective criteria for adjudicating a science only when it continues to ad­ among them. He concluded that the dress the same questions. The period choice "would have to rest largely on the offers two yardsticks with which the individual temperaments of the persons achievements of economics are to be mea­ concerned." sured because the questions asked by eco­ nomics changed. The evaluation of the REFERENCES schools is thus confounded by the fact that ARROW, KENNETH J. Social choice and individual the work of neither encompassed that of values. 1st ed. Yale U. Press, 1963. the other. It is necessary to balance the AYER, ALFRED J., ed. Logical positivism. Glencoe, IL: Free Press, 1959. gains in understanding markets which the BAUMOL, WILLIAM}. Welfare economics and the the­ ordinalist framework facilitated against ory of the state. 2nd ed. London School of Eco­ the losses in understanding human wel­ nomics, [1952] 1965. fare, suffered by abandoning the material • 2 Our account suggests that the ordinalist revolu­ welfare framework. tion was not unanimously accepted by economists. An important feature of the received Indeed, Pigou (1951) maintained his belief in the view of the ordinalist revolution is that material welfare program into the 1950s, and there do not appear to have been any notable conversions the explanation of why it occurred is a of faith among other members of the material wel­ simple corollary of its evaluation: it hap- fare school. Cooter and Rappaport: Were the Ordinalists Wrong? 529

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