Welfare Interpretation in Classical and Modern Approaches; A Comparison
Theoretical Frameworks of Modern Welfare Economics
Are Modern Welfare Methodologies Strong Enough?
Role of Classical Notions in Welfare Interpretation in a Better Way
Welfare economics as a multidisciplinary body of knowledge, it aims at the best way of interpretation of human wellbeing and human endeavor. From the early welfare economics to the present modern welfare economics, a jubilant battle can be see among different profounder in the welfare interpretation. The methodological difference provides us an opportunity to compare different welfare economic theories and also to improve the understanding of welfare economics. Classical economists were used dynamic and normative methodologies while later developments in welfare economics became narrow-minded by following static and positive economics by putting assumptions, mathematical and other models. Classical theories were influenced in the idea of ‘invisible hand’ and argue that, the social welfare can be enlarged at the point where the highest level of happiness scan be enjoyed by maximum number. On the other side, the later developments especially by later neoclassical theories began to weaken the role of ‘invisible hand’. Moreover the analysis was based on predicting social welfare by simply assuming two individual model frameworks. Here, vividly, the scope of modern interpretation became too extreme by neglecting the role of multiple factors of a plural society in the welfare determination process. Very recently, few interesting welfare interpretations are also coming with multidisciplinary approach like Samuelson’s social welfare functions, Sen’s capability approach etc. In fact, the methodological battle in handling both qualitative and quantitative variables, classical economists follows general equilibrium analysis while later developments focus on ‘Paretian Condition’ analysis. So the prediction of social welfare from the Pareto analysis of modern welfare economics has very limited scope than the classical economics.
Economics is at a crucial juncture. The research program that has guided economic theory for some six decades is at an impasse, and a new and different research program is emerging. The new program grows out of a different vision of the economic process. This vision suggests a very different type of economic theory offering a different explanation of how the economy works and different policy advice (Kohn). Economics as one of the leading branches of social science is experiencing lot of changes than its affiliated areas. Over the last few decades, social scientists are altering or exploring their methodologies and interpretations to make their case for showing the social equilibrium. They kept on adding different methodologies and models, which works only based on certain assumptions. Unfortunately, most of the theories in economics especially those who came out after the Keynesian revolution has failed to become successful even for a short generation of time. Why is this happening? The basic purpose and endeavor of an economy including all institutions is to improve the welfare, so that each unit in the society can optimize their utility, desires, opportunities and wellbeing. Apparently, the notions and the methodology of most of the modern welfare interpretation has been falls down since it excludes some qualitative or normative variables.
Welfare economics can be regarded as one of the most dynamic branches in the field of human life, animal life, and environment sustainability studies. Basically, the methodology of welfare economics is deeply influenced in micro economics and aims at explaining welfare of a society. There are several interpretations in welfare economics which has a tradition of many decades. The earlier ideas especially of classical economists were actually a mixture of both qualitative and quantitative aspects, which are quite difficult to measure. But based on certain assumptions, there are theories connected to welfare economics contributed by classical pronouncers. The later development in welfare theories since neo-classical economics began to put some models which are measurable in ratio-scale terms. Following neo classical economic thought, the concern towards welfare economics became more or less extreme by including lot of mathematical and quantitative aspects. Unfortunately, the assumptions of the later interpretation of welfare economics can be criticized based on several philosophical and qualitative aspects suggested by early classical economic thinkers. Here some exception can be seen like the ‘Capability Approach’ of Prof: Amartya K. Sen, who highly influenced in classical pillars and philosophies. In fact the evolution of welfare commentaries are tend towards more easier to explain by the logic of mathematics. But unknowingly, such theory neglects the significance of pluralism of human behavior which is highly relevant in actual practice.
To distinguish the notion of early classical welfare interpretations with the later interpretations, the methodology of both can be thoroughly revisited. That is by using the methodology of positive economics and normative economics.
Positive economics only gives answers to basic question blindly. Here the focus will be on few questions like what is, what will be and how etc. On the other side, normative economics is deeper than positive economics and which requires the capacity of understanding the society. Then only the process of value judgment of an economic activity can be justified. Generally most of the economic theories are in nature of positive economics, especially modern welfare explanations. The reason why the methodology of normative economics excluded is that, many variables which are difficult to quantify are locked under assumptions of theories. So when theoretical knowledge brings to the application, it will not show complete success. In earlier classical economics, they were paid attention for such variables while many modern economists neglected them.
The utility is one of the principal sources of beauty has been observed by everybody, who has considered with any attention what constitutes the nature of beauty (Smith). The classical economists argued for a welfare system where the optimization occurs at a point in which the greatest happiness can be enjoyed for a greatest number. It was based on utility, but not in the form of ordinal utility measurement. Instead they tried to apply several qualitative variables in many fields. In the area of taxation, the balancing of sacrifice (disutility) and revenue collection was suggested by early classical thinkers. Similarly, the balancing of pain and pleasure also played a crucial role in the welfare interpretations of forerunners of economic thought. Coming to the later developments in the filed several changes can be met.
Welfare Interpretation in Classical and Modern Approaches; A Comparison
The conflict between those who regard earlier economic doctrine as simply the wrong opinions of dead men and those who view it as the repository of a series of prescient insights does deeper than economics (Blaug). Interpretation of welfare can be done by anyone. But the power of interpretation will be a function of the intellectual capacity which makes the way of interpretation.
In classical thought, the idea of utilitarianism of Jeremy Bentham constitutes the cumulative concepts of classicism on welfare. Each individual in the society is benefiting absolute freedom so they can decide their destiny of wellbeing. It also says the cardinal measurement of utility and the social welfare can be derived by summing up all the individual welfare. So each private person is regarded as a king who can determine his destiny. One of the important concerns of this approach is that, it gives same weight to each and every individual in the society. The idea of cardinal measurement of utility has transferred to later developments, but it became more extreme especially since neoclassical economics school. The capability of classical thought was the ability of their interpretation in a way which comprises of philosophy, psychology, sociology and rationality. In fact, classical economic thought was a mixture of multiple aspects of human life. Unfortunately, greedy of human beings as an impact of industrial revolution created many social evils from dividing society in to classes like capitalists and proletariats. Actually, these were not due to the mistakes in the welfare interpretation, but the society did not ensured the qualitative things that a person should get to improve his welfare. The whole benefits were bagged by capitalists at the cost of the welfare of mass. Here, approaches of classicism never weakened but showed its relevance in ensuring a peaceful society with better wellbeing only when their notions are entrusted to each individual in the society.
The later developments, we often say as the modern welfare theories were actually began from the idea of ‘Paretian Optimality’ coined by Vilfredo Pareto. These theories are concentrated on welfare distribution based on a market situation. There were also theories like Edge worth model to explain welfare idea. Even then, Pareto’s optimality condition has highly influenced later developments in welfare interpretations. According to Pareto, welfare of a society can be improved in a condition when at least one individual in the society get well off without reducing the welfare of others. It uses the ordinary way of method to measure utility and also claims the possibility of comparing utility among individuals. Its main criticism is that, it may make a case of improved welfare even in a condition of extreme inequality. To recover this criticism, later developments such as Kaldor-Hicks compensation criteria, Scitovsky criteria and social welfare function of Bergson and Samuelsson came, but they used the ordinary measurement of utility. There arose some distinguished theories like Arrow’s impossibility theorem, Rawl’s theory of justice and the critical views of Amartya Sen. These are vividly emphasizing on many ideas of classical economists, such as justice, freedom, wellbeing etc. So to make a conclusion, modern welfare theories are evaluating welfare by using ordinary measurement technique or indifference curve technique. On the other side, the early theories of classical economics was actually a culmination of both qualitative and quantitative things which represented in a general way since its complexity in the measurement process of many variables using the technique of ordinary method as done by modern welfare economists.
Theoretical Frameworks of Modern Welfare Economics
Any linear extrapolation of an ordinary least squires’ regression is a regression is a prediction of sorts, and yet the regression itself may be based on no theory whatsoever of the relationship between the relevant variables, much less a notion of which are comes and which are affects (Blaug). Adam Smith’s idea of ‘Invisible Hand’ played a very crucial role in early welfare ideologies and most of them were free from mathematical models. But the later developments especially from Pareto’s introduction of optimality condition (1906) onwards, there is a profound dependency on ordinal measurement (indifference curve technique) approach, mathematical equation and other models can be seen to make the case of social welfare. There are several common mistakes can also be pointed in modern welfare theories.
Firstly, it can be analyzed based on the assumption of perfect competitive market. Both classical and modern economists believed in the idea of perfect competitive market condition. But coming to the context of theory, classical ideas focuses on a welfare condition where the greatest level of happiness will be enjoyed by the greatest number. On the other side, modern interpretations tells us about a welfare condition which is derived based on certain assumptions. For the sake of simplicity, the geometrical mode of interpretation assumes that, there are two individuals in the market. So based on this limited representation of society in the model, they are argues that, welfare can be improved and it also allows the possibility of comparison, transitivity and redistribution of benefits in the society.
- Quote paper
- Irshad C. V. (Author), 2016, Role of Classical Notions in the Interpretation of Modern Welfare Economics, Munich, GRIN Verlag, https://www.grin.com/document/349975