Welfare
Welfare in economics means the satisfaction a person gets from his own choices, and the Austrian claim is that it cannot be added up across persons. Welfare economics is the branch that tries to say when a change makes a society better off, and the Austrian contribution to it is mostly a demonstration of how little can be said. The word also names tax-financed transfer payments, which is a different subject; see welfare state.
The problem with adding utility
Utility on the Austrian account is ordinal. A person ranks the alternatives open to him and acts on the ranking, and there is no unit in which the gap between his first and second choice can be measured. Since there is no unit, there is nothing to sum, and a statement that one person's gain outweighs another's loss has no content beyond the speaker's own preference between them.
That is not a complaint about the difficulty of measurement. Standard welfare arguments rest on comparisons of exactly this kind, most familiarly the claim that a dollar is worth more to a poor person than to a rich one. The claim may well be true of any given pair of people, and there is still no procedure by which anyone could establish it, because the only evidence about a person's valuations is what he chooses and choices reveal nothing about anyone else's scale.
Demonstrated preference
Murray N. Rothbard built his reconstruction of the field on the one thing that is observable: what a person actually does.[1] A choice demonstrates that the option taken ranked above the options forgone, at that moment, for that person. Nothing else is demonstrated, and in particular a survey answer, a stated willingness to pay, or an inference from someone's income is not a demonstration.
Two consequences follow, and they are the whole of the theory.
A voluntary exchange benefits both parties ex ante, because each demonstrated by trading that he preferred what he received to what he gave up. It may still disappoint either of them afterwards, since the ranking was over expectations. The free market, as the set of all such exchanges, therefore has a welfare property no other arrangement has: every act in it is one both participants demonstrated they preferred.
An act of aggression benefits one party at the expense of another, and no comparison of the two is available. This applies to every compulsory transfer without exception, which means the economist qua economist cannot pronounce a tax-financed programme an improvement. He can say who was coerced and he can describe the consequences, but the summation that would license the verdict does not exist.
The unanimity rule and its price
The only welfare criterion that survives is unanimity: a change is an improvement if nobody objects. This is close to the Pareto criterion but stricter in an important way, because Pareto's version is usually applied to hypothetical rankings while the Austrian version admits only demonstrated ones.
It is a criterion almost no policy can meet, which is the point rather than a defect. The compensation tests economists use to get round it, in which the gainers could in principle compensate the losers, restore precisely the interpersonal comparison that was ruled out, since determining that the compensation would be adequate requires knowing the loser's valuation without his having demonstrated it.
Jesus Huerta de Soto extended the argument in a dynamic direction, arguing that the standard framework judges an allocation of already-known means to already-known ends and so cannot see the thing that matters most, which is entrepreneurial discovery of ends and means nobody had in view.[2] On that reading efficiency is not a property of a state of affairs at all but of a process, and the question to ask about an institution is whether it lets discovery happen.
Ludwig von Mises reached the practical conclusion by a different route. Economics is value-free and cannot pronounce on ends; what it can do is show that a proposed means defeats the end its advocates hold, and that is the form every sound argument against an intervention takes.[3]
See also
- Utility
- Marginal utility
- Welfare state
- Economic calculation problem
- Consumer sovereignty
- Value
- Utilitarianism
- Poverty
References
- ↑ Murray N. Rothbard. Toward a Reconstruction of Utility and Welfare Economics, 1956.
- ↑ Jesús Huerta de Soto. Toward a Reconstruction of Utility and Welfare Economics.
- ↑ Ludwig von Mises. Human Action, 1949, ch. II and ch. XXXV.
Links
- Toward a Reconstruction of Utility and Welfare Economics by Murray N. Rothbard, 1956
- Toward a Reconstruction of Utility and Welfare Economics by Jesús Huerta de Soto
- Welfare at Wikipedia