|
History
of Economic Doctrines Lecture 14 Vilfredo Pareto and Welfare Economics Commonly-Advocated
Normative Goals of Economics: 1. Efficiency 2. Equity/fairness 3. Freedom Welfare Economics Welfare economics is a subdiscipline of microeconomics that focuses on how alternative economic arrangements and policies affect: (a) allocative, productive, and distributive efficiency, and (b) the distributions of income and wealth. Vilfredo Pareto and
Efficiency Vilfredo Pareto (1848-1923), who extended the welfare implication of Walrasian economics (the general equilibrium model), is widely acknowledged as one of the founders of modern welfare economics. Pareto Efficiency Pareto used Francis Ysidro Edgeworth’s consumer indifference curves to show that, in the case of a fixed supply of goods, a welfare optimum in exchange would occur when no individual could benefit from trade without injuring someone else. Conditions that lead to Pareto efficiency [elaborated by Oskar Lange [1904-1965] and Abba P. Lerner [1903-1982]]. 1. The marginal rates of substitution in consumption must be identical for all consumers and equal to the relative prices of all goods. 2. The marginal social resource costs must be proportional to the resource payments and the values of the marginal products [VMP =PxMPP] for all resources in all production processes. [This means that the negative value of the marginal rate of technical substitution in all productive process must be equal, and equal to the relative costs of resources.] 3. The marginal rates of substitution in consumption must equal the marginal rates of transformation in production. [MRT = slope of production possibilities frontier] Pareto’s Law Pareto found that a large percentage of wealth was concentrated in a small proportion of the entire population. Roughly twenty percent of the people in a society will control roughly 80 percent of the society’s wealth. Individual drive and willpower impact income and the accumulation of wealth so that a government cannot successfully redistribute in the long run. Attempts to redistribute are an exercise in futility, because regardless of social organization (ex: feudalism, capitalism, or socialism), strategic adjustments by acquisitive individuals will restore the distribution of income or wealth to a state similar to that which existed prior to the redistribution.
It was determined that competitive markets will lead to a Pareto
optimal position, and this theoretical support of the market was used in the
formal aspect of the socialist-capitalist
debate. Economic Systems Economic systems can be differentiated in part: 1. by
the locus of resource ownership. 2. by
the locus of decisionmaking within the system.
Capitalism and Market Failure Capitalism Capitalism relies on market determinations of outputs, relative prices, and the distribution of income – private ownership and decentralized decision making (laissez faire). Advocates of Capitalism Classical liberals Including Richard Cantillon, Adam Smith, David Ricardo, and John Stuart Mill. The modern counterparts of classical liberalism are now often viewed as economic “conservatives,” and include such members of the Chicago school of economics as Milton Friedman and Gary Becker. Libertarians The modern champions of
laissez-faire capitalism, prize freedom as the most important social value and
advocate replacing government with the market system wherever possible. Here is a very incomplete list of policies
most libertarians advocate: a. free international trade, with no tariffs or quota systems. b. legalization of gambling, prostitution, homosexuality, psychoactive drugs, and other “victimless” activities. c. privatization of almost all governmental productive activities that could arguably be done privately. [Ex: education, the post office, … .] d. elimination of welfare payments and such governmentally mandated retirement systems as Social security. e. elimination of consumer protection laws [Caveat emptor!] f. elimination of regulations governing working conditions [ex: minimum wage laws, affirmative action, and the Occupational Health and Safety Administration]. g. elimination of most other restrictions on contractual relationships, such as zoning laws. h. elimination of most restrictions on the right to bear arms [or is it the right to arm bears?] Social Darwinists Social Darwinists include Simon Newcomb [1835-1909],
William Graham Sumner [1840-1910], Herbert Spencer [1820-1903] , and Ayn Rand
[1905-1982 ] whose followers, known as modern Randian objectivists, believe
no one is owed anything by anyone else.
Critics of Capitalism Anarchists See giant corporations and big government as threats to freedom and exploiters of labor. Philosophical anarchism counts on cooperation among people to ensure social harmony in the absence of government of law. Syndicalists Syndicalism is the brainchild of the French philosopher Georges Sorel (1847-1922). Syndicalists are convinced that elite groups always control government; and they seek collective worker ownership of nonhuman resources and decentralized decisionmaking. “Buddhist” Economics: Buddhist economics is the label that E.F. Schumacher applied to the
notion that Small is Beautiful [the title of his bestselling book],
which Schumacher based heavily on the views of the Indian philosopher and
social activist, Mohandas Gandhi [1869-1948], who was instrumental in the
successful movement [1948] for Indian independence from Great Britain. Gandhi
emphasized nonviolent resistance to injustice, and inspired Dr. Martin Luther
King. Buddhist economics advocates simplification and the minimization of
wants as crucial to resolving the problem of scarcity, and following Gandhi,
favors self-sufficiency and small local industries with a minimal footprint
on the Earth. Socialism Socialism is characterized by
collective ownership of property. Government would act as a trustee of most
land and non-human capital, and would significantly allocate resources and
determine the distribution of income. Socialism
evolved mainly as a reaction against the unequal income distribution under
capitalism. A Brief Survey of Socialism Utopian Socialism Utopian
socialism is the idea that collective ownership eliminates greed and promotes
personal growth, cultural enrichment, and democracy. The emphasis is on
cooperation to replace competition. The
idea originated from Sir Thomas More’s (1478-1535) famous book Utopia borrowed a Greek word meaning
“no place.” Aside:
More was beheaded by Henry VIII for not acknowledging the king as head of the
church) Sir Thomas More Utopia
is an idealistic society, where people would work for the common good through
corporation and that there would be as much joy from giving as from
receiving. Charles Fourier
[1772-1837] A
French philosopher who was a prominent Utopian. Robert Owen
[1771-1858] Wealthy
Scottish cotton-mill owner, who financed several self-contained, communally
owned villages in Scotland and the U.S. All of
Owen’s experimental utopian communities were poorly managed and
uniformly failed after his death. Ironically,
many modern public policies can be traced back to utopian goals – free
public education, socialized medicine, and welfare system Fabian Socialism Fabian
socialism’s agenda echoed many reforms proposed by utopians except,
instead of the utopian ideal of small communities, they urged nationalization
of heavy industry and municipal ownership of public utilities. The
early Fabians included H.G. Wells, George Bernard Shaw, and Sidney and
Beatrice Webb. Members
favored labor unions and evolved into the present Labour Party, which
dominated the British government from WWI until 1980. Beatrice Webb Working
people needed to unite to prevent discrimination from factory owners, but
unions should not negotiate higher wages for the workers. Aside: By 1980, per
capita income in England was below that for Italy even though its savings
rate was around 15-18%. Labour governments had channeled saving into
investments in failing industries, accounting for the technological
obsolescence and the lagging growth of the English economy. Just as the Roman
Empire became Italy, so to the empire of Great Britain had become England. Christian
Socialism Christian
socialism advocates charity and peaceful social reform. Evolved
from the “social gospel” movement, Christian socialists stress
the dignity of work and favor labor unions (Fabian socialism with Christian
background). It was
supported by Pope Leo XIII, Pope Pius XI, Paul Tillich, and Reinhold Niebuhr,
and remains a powerful force within the World Council of Churches. Liberation Theology Philosophy
blends Christianity with elements of Marxism. Especially popular among revolutionaries
in parts of South America. Scandinavian
Socialism (Democratic Socialism) A
capitalist system with a high tax rate aimed to transfer income from the rich
to the poor. Aside: John Stuart Mill
shared some of the views of democratic socialism. He believed in high taxation and private
ownership. However, he favored
inheritance taxes instead of income taxes, and f “free” public
education and other “modern” liberal policies. |
|||||||||||||||||||||
|
These web pages are significantly edited and elaborated versions
of student notes based on lectures by Ralph Byrns, 2002-2005.
|
|||||||||||||||||||||
