A history of paretian welfare economics

Since its introduction by Walras at the end of the 19th century, the question of the
epistemological status of the general equilibrium theory has been the object of recurrent
debates. Briefly put, the main question is what is the general equilibrium theory meant to
designate ? Does it represent solely a description of the running of a set of interdependent
markets, or does it contain (explicitly or not), some normative aspects inducing an evaluation
more or less favourably of this running (or of the result of this running). Walras himself
considered his analytical construction as a theoretical elaboration of an ideal of social justice.
As far as Pareto is concerned, it is well known that he rejected what was considered to be
metaphysical discussions and kept from the work of his predecessor at Lausanne only the
strictly descriptive aspects.

The main part of the neoclassical tradition adopted Pareto’s attitude, considering general
equilibrium theory as a set of equations describing the interdependence of markets. The main
issues to be dealt within this context were the existence and the stability of at least one
equilibrium. Therefore, if one considers this way of understanding the epistemological status,
the theory does not a priori provide any argument that may allow for the elaboration of a
normative evaluation of a general equilibrium.

At this point however, more precision is needed. Pareto explains largely (particularly in his
Traité de Sociologie Générale, where he devotes several pages to these epistemological
explanations) that his “pure” economic analysis, as he names it, is part of a scientific
contribution, that aims only at describing, without making any value judgment or providing
any political device. Therefore, there is no reason why one may judge the general equilibrium
as a “good” social state. However, Pareto himself explains that “Pure economics […] chose a
unique norm, which is the individual’s satisfaction, and established that the individual is the
sole judge of his own satisfaction” (Traité de Sociologie Générale, p.1330-1331, our
emphasis). In addition to this norm, he establishes that a competitive general equilibrium
leads to a “P-point”, concept that was later to be called a “Pareto optimum”. Under a set of
assumptions, it is shown that a competitive equilibrium is a situation such that it is impossible
to increase the satisfaction of one individual without decreasing that of another one. We can
see here that Pareto initiates, perhaps partly unwittingly, what was going to become welfare
economics.

On the basis of the paretian norm presented above, welfare economics aims at providing an
evaluation of the general equilibrium. In this theoretical construction, a “Pareto optimum”,
such as defined above, would soon be considered as a “maximum of social welfare”. This
shift is not, in our opinion, merely semantic. The norm established by Pareto, as he expressly
emphasised it, cannot, under any circumstances, be interpreted as a collective norm. “Social
welfare” is a nonsensical concept in the framework of Pareto’s pure economics, where the
analysis considers only individual “ophelimities”, that is, individual incommensurate and
purely subjective desires. In short, we can say that in Pareto’s pure economics framework,
there is no such thing as social welfare because there is nothing concept such as “society”.
This misunderstanding seems to have attained its most obvious level at the end of the 1930’s.
It is the period when Bergson, followed by Samuelson, elaborated a “social welfare function”,
presented as an analytical tool upholding the paretian representation of individual preferences
(ordinal and inter-individually non comparable) as well as the paretian norm of satisfaction of
these preferences.
It seems to us, and that is what we want to show in this paper, that this kind of
misunderstanding, between Pareto and his “successors”, constitutes a comprehensive reading
key of the history of welfare economics. First, it offers an explanation of the emergence of
several rather harsh criticisms against the social welfare function of Bergson and Samuelson
during the 1950’s and the 1960’s. These criticisms were elaborated by philosophically
“individualist” economists such as Buchanan. These economists support, even though it might
seem paradoxical, one way to understand the quite enigmatic conclusion drawn by Arrow
with his impossibility theorem of a consistent and democratic collective choice (1950).
Second, our key offers some elements that enable us to fully grasp some more recent
developments of welfare economics, namely, analysis focused on the notion of equity defined
as envy-freeness. These analysis, elaborated in the 1970’s by authors such as Varian, Baumol
or Kolm, are a part of the neoclassical tentative to build normative criteria based solely on
individual preferences, that could permit to draw an evaluation of general equilibriums.

In a few words, this story may be told as follows. In Buchanan’s opinion, analysis based on
the concept of a social welfare function faces the following dilemma. On one hand, social
welfare may be assimilated to the welfare of an autonomous and conscious entity, called
“society”. However, this representation may appear absurd to an individualist. On the other
hand, social welfare is defined as the ethical point of view of one individual only. However, in
this case, the designated individual becomes a despot, and that does not really sound better for
an individualist. It seems to us that what Buchanan does in fact is to recall the message
initially set forth by Pareto: social welfare does not exist because society does not exist – a
message also sent, although in a different form, by Arrow’s impossibility theorem.
Buchanan’s objections, probably because they came from an author well known as an
advocate of an extreme form of liberalism, did not really receive the attention of welfare
economists (this attention was, it should be added, fully attracted by Arrow’s affirmation of
the impossibility to construct any social welfare function: welfare economists were looking
for a way to show that they were not concerned by this result). Nevertheless, this distant and,
perhaps, excessive echo of what might be called Pareto’s political philosophy, has probably
not been entirely left aside. Indeed, some more recent developments in welfare economics
such as the analysis of equity defined as envy-freeness, may be seen as attempts to provide
normative evaluations of general equilibriums that avoid the use of any social welfare
function – a concept that decidedly seems hard to grasp correctly. Hence, our analysis also
enables one to consider the debate on Arrow’s theorem impact on welfare economics from a
different perspective. Indeed, when one attempts to evaluate this impact, he concentrates most
of the time on the question of whether or not it is definitely proved that no reasonable social
welfare function exists. However, that is not the only pertinent question. It is sometimes
admitted, contrary to Arrow’s conclusion, that there exists some reasonable social welfare
functions, grounded in a very large extent on individual preferences, so upholding the paretian
norm (cf. Fleurbaey et Mongin [2005], for instance). But our analysis permits to understand
why several authors, particularly those dealing with envy-freeness, who also aimed at
upholding the paretian perspective, have nevertheless tried to avoid the use of any function of
this kind in their elaboration of a normative evaluation of social states.