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Human Well-Being and Economic Goals

Utility and Welfare II: Modern Economic Alternatives
Overview Essay Page 1

Frank Ackerman

The inequality between the rich and the poor is not primarily a matter of utility, or who feels what, but one of who owns what. There is no obvious reason why abstaining from interpersonal comparisons of utility must have the effect of making it impossible to consider economic inequality in social welfare judgments.
-- Amartya Sen[1]

At the beginning of the twentieth century, economic theory as expounded by Alfred Marshall offered definite, if at times arbitrary or merely pragmatic, judgments on numerous immediate issues affecting social welfare. At the end of the century, the mainstream of economic theory has become rigorous and elegant in its logic, but indecisive as to the welfare implications of most actual policies. Several interesting alternative interpretations have been proposed, but remain controversial; as Sen suggests, there are many possible bases for welfare judgments, beyond the narrow focus on individual utility that is enshrined in neoclassical economics.

This overview offers a necessarily selective treatment of twentieth-century developments in the economics of welfare and wellbeing. It begins with an exploration of the "ordinalist revolution" of the 1930s, followed by a look at Keynes' philosophy. Sub sequent sections address the early development of welfare economics and its contradictions, and the theory of social choice that emerged in the wake of Arrow's "impossibility theorem." The final section examines two contemporary alternatives that are somewhat independent of the discussion of social choice. Further applications of welfare economics to problems of externalities, valuation, and cost-benefit analysis are the subject of Part 4 of this volume.

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