The Origins of The New Welfare Economics
The Origins of The New Welfare Economics
The Origins of The New Welfare Economics
Roger E. Backhouse
August 2016
I. Introduction
It is well known that the New Welfare economics emerged at the end of the 1930s, as
a way forward from the “old” welfare economics of Alfred Marshall and A. C. Pigou,
with its assumption that different individuals’ utilities could be compared, and the
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sterility of a welfare economics based on no more than the Pareto criterion. But how
did the new welfare economics emerge and come to dominate the way economists
thought about the problem of welfare? Put differently, what were the intellectual
resources on which the main proponents of the new welfare economics drew and
how did those resources shape the way they created shaped the new field? The New
Welfare Economics covers a broad range of work: Boulding (Boulding, 1952, pp. 1-2)
defined it as covering the work of Abba Lerner, John Hicks, Nicholas Kaldor, Harold
Hotelling, Melvin Reder and Paul Samuelson, its defining characteristic, aside from
its newness, being that it did not stem from Pigou. He picked out three features:
‘economically’ desirable;”
judgments,” but which can be used to narrow the range of policies between
added) noted that the New Welfare economics could have “two entirely different
meanings.” One was the claim that welfare economics could be “solidly based on
objective economic criteria;” the other was a systematic way of introducing ethical
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criteria from outside economics. Baujard Baujard, 2011, drawing on the contrast
between on the one hand Hicks and Kaldor, and on the other Bergson and
Samuelson, has called these the British and American approaches to the New
Welfare Economics. These labels are problematic. For example, Reder’s Studies in the
Theory of Welfare Economics Reder, 1947 is closer to Hicks than to Samuelson, despite
1952, that he knew no one who still defended the first position. However, despite
this, I suggest that if we are to understand the origins of the New Welfare
2. John Hicks
In a lecture delivered in May 1939 in Stockholm, Hicks outlined “the new welfare
economics” (Hicks, 1939a, p. 698). All economists agreed that economists should
explain economic phenomena and, so far as this was possible, should make
predictions about the future. There was, however disagreement over whether the
economist should lay down principles about what was good for social welfare. One
group, including Pigou, believed that economists could and should do this but
economics, valid for everyone, denied that this was something the economist should
do. According to this group, “the economics of welfare, the economics of economic
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696). Hicks confessed to having taken the second view but the problem with it was
that it meant that “economic positivism” became “an excuse for the shirking of live
Hotelling had recently found a way round the problem—a way to say something
useful about policy without violating the canons of positivism. Formulating the
constraints imposed by limited production and the wants of other people, Hicks
argued that the economist was “obliged” to consider how far economic activities
were effective in achieving the ends for which they are designed: to explain how
efficiently the economic system adjusts means to ends (Hicks, 1939a, p. 699). The
to focus on eliminating situations were someone could be made better off without
making anyone else worse off, if necessary achieving the latter by compensating
anyone who lost out from a change. He thus concluded that “A ‘permitted
compensation being paid, and which will yet show a net advantage” (Hicks, 1939a,
p. 706). Hicks concluded that this procedure allowed Welfare economics (the
of the same logical precision … as its twin brother, Positive Economics, the
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It is useful to note that the first stage in Hicks’s argument was to adopt a
“welfarist” approach, presuming that welfare was related, in some way that he had
to work out, to the utilities achieved by individuals. In making this judgment he did
particular way of conceiving the economic system. This was, of course, the
Significance of Economic Science (1932). In that book Robbins had defined economics as
the science that studied the allocation of scarce resources between competing ends.
Hicks was therefore claiming that welfare economics could be fitted into Robbins’s
English, sources can be debated, but two such sources are cited at significant points
in the argument. He cited Max Weber at the outset as his source for the idea that the
1932, p. 2, citing Weber, 1904, p. 166). This unification of the problems and
explanatory principles was central to his argument. Later on he also cited Weber on
the argument that propositions about “ought” are different in kind from
propositions involving “is”, making the strong claim that “On all of this it seems to
me that the elucidations of Max Weber are quite definitive. Indeed, I confess that I
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am quite unable to understand how it can be conceived to be possible to call this part
With two exceptions, Hicks confined his citations to recent works by Anglo-
even to name the book to which he was referring. The two exceptions, possibly
connected to the fact that his article was first delivered as a lecture in Sweden, were
to a technical point by Erik Lindahl (of whose work he was making use in Value and
is significant because, though it was a brief reference and it is not clear whether he
numbered Myrdal among the positivists or cited him as having explained their
views, it was his only source for the philosophical position he was taking.
Like Robbins, Myrdal presents his work as supported by the ideas of Weber and
his disciples, but his emphasis is very different. In contrast with Robbins optimistic
that can be met adopting his approach to economic theory, Myrdal emphasises the
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Robbins also cited Weber in support of his criticisms of “Historismus” and
Institutionalism; and on the impossiblity of measuring marginal utility.
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being scientific, economists had, throughout the history of the subject, often
Robbins’s assumption that the whole of economics can be deduced from the
sentence is warning against. Myrdal advised that it was important to eradicate from
economics “all valuations tacitly implied by the basic concepts,” because, “being
concealed, they are more insidious and more elusive, and hence more likely to breed
confusion.”
Myrdal also challenged the common assumption that it there was a harmony of
interests. This was something for which factual evidence needed to be found.
Whereas economists tended to gloss over conflicts of interest, it was important that
they analysed them. Even Marx fell prey to the idea that there were common
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ideals that have greater emotive force. It was problematic trying to infer attitudes
from observed behaviour or to change attitudes; even where attitudes were based on
incorrect information, changing them was a matter of social psychology not of logic.
His conclusion was very un-Robbinsian. “Only if economists are modest in their
claims and renounce all pretensions to postulate universal laws and norms can they
rational, that is to say, to base them on as complete and as correct a knowledge of the
facts as possible” (Myrdal, 1953, p. 206, emphasis added). Even the assumption that
value judgment, comparable with the ones Weber associated with the scientist in
“Science as a vocation.”
Bergson and Samuelson came to the idea of a social welfare function whilst
They both wrote articles on consumer theory in which they noted, Bergson
implicitly and Samuelson explicitly, that there was a gap between that field and
real money utility” (Burk (Bergson), 1936, p. 42, n. 1). If it did not measure real
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money utility then a fortiori it could not have welfare implications. Samuelson went
any connection between utility as discussed here and any welfare concept
could have any influence upon ethical judgments of policy is one which
nothing said here in the field of consumer’s behaviour affects in any way
The most significant remark here, because of the way they were to develop their own
Their starting point was Pareto. At some point in 1937, during the second year of
Samuelson’s coursework, Bergson kept asking Samuelson, “What can Pareto mean
by this 1898 use of the French singular when he speaks of ‘the social
optimum’?” (Samuelson, 1981, p. 224). Their conclusion was that Pareto’s writings
were ambiguous and that he meant different things. Samuelson explained this to
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I had to read Pareto in the Italian original, and my command of Italian
was very poor. Nevertheless, I had a feeling when I read the 1913 article—
I say this with diffidence—that he may momentarily have had the notion
any society. Each one of these elites has different power, like the powers of
father and mother, oldest son, younger sons in a family. If you try to get a
demand function for the family, you must combine these different
integrable function. To me, that was what Pareto was talking about in the
1913 article.
Samuelson makes two points here. The first is that he thought Pareto glimpsed the
doubt expressed diffidently as he could have been reading Arrow’s social welfare
function into his memory of Pareto. The second, is the idea that he and Bergson
Bergson (Bergson, 1938) was the first to publish on the subject. He wrote down a
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• the amount of labour each individual devoted to producing each good;
good;
As it stood, such a social welfare function said almost nothing, for it had no content
beyond saying that welfare depended on all types of economic activity taking place
of “Economic welfare.”
One of the main propositions in Bergson’s article, which was echoes the
conclusions drawn by Samuelson in his two articles on consumer theory, was that
judgements: it was a way in which value judgements were brought in. Bergson did
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consist only in a decision to accept the evaluations of the individual
Like Hicks, he was rejecting utilitarianism, but he was reaching that conclusion by
different reasoning.
not publish on welfare economics until his friend George Stigler attacked the “new
welfare economists” for claiming that “many policies can be shown … to be good or
355). They failed to recognise that societies were concerned with more than
preferences, making it impossible to use them as the basis for welfare analysis. What
societies required, Stigler contended, was consensus on the ends that society is to
seek.
Samuelson agreed with much of what Stigler was saying—economic welfare was
not necessarily the main goal in society and tastes would change—but he believed
that Stigler had got the new welfare economics completely wrong. The new welfare
economics was not intended to displace the old but to derive necessary conditions
for social welfare, basing them on the very mild assumptions that it is better to have
more than to have less, and that “individual tastes are to ‘count’ in the sense that it is
‘better’ if all individuals are ‘better’ off” (Samuelson, 1943, ibid., p. 605). He was not
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Note that this was published during a crucial year in the Second World War.
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denying that ethical judgments are needed for welfare conclusions but he was
arguing that the ones made in the new welfare economics were very weak and
generally acceptable.
Analysis, the book he was then revising for publication. In that he took up Bergson’s
idea of a social welfare function but, instead of using it to tackle debates over welfare
Without inquiring into its origins, we take as a starting point for our
human frailty where one’s own beliefs are involved, to omit the latter.
All he assumed about such ethical beliefs was that they provided an ordering of
possible states of the world and that they were transitive (that if A was better than B,
down the range of possible social welfare functions, the crucial one being that
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individuals’s preferences “count”. This was a politically charged ethical judgment,
consumption, envy and related phenomena. But if it were accepted, it meant that the
could derive the now-familiar Pareto efficiency conditions relating to production and
symmetric with respect to the consumption of all individuals (that everyone counts
for approximately the same) and that welfare was the sum of individuals’ cardinally
same conclusion as Hicks and Kaldor, but rather than imply that he was avoiding
“welfarist” conclusions but did so only at the end of his argument and only as the
Like Hicks, one of Samuelson’s sources was Robbins, cited as the source for the
idea that value judgments had no place in scientific analysis. However, where Hicks
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Contrary to Robbins and many proponents of the new welfare economics,
comparisons have “real content and interest for the scientific analyst” even though
the economist may not wish to deduce or verify the ethical judgments on which they
There is no direct evidence that Bergson and Samuelson engaged directly with
either Weber or Myrdal, though they could well have done. Das Politisches Element in
economic theory (Akerman, 1936), two sources that Bergson and Samuelson will
both have read. Myrdal visited Harvard in 1939 and they undoubtedly knew of his
work, two of their friends translating his Monetary Equilibrium (1939) into English.
However, even if they had not read Myrdal, they were to be exposed to Weberian
ideas through a different source, Frank Knight one of Samuelson’s most important
undergraduate teachers and Samuelson claimed that, when he left Chicago, he had
4. Frank Knight
When Stigler claimed that societies were concerned with more than maximising
national income, he was making a point that echoed the views of one of his teachers
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students had assembled and and arranged for the publication of a collection of
Knight’s essays, titled The Ethics of Competition (Knight, 1997), the dominant theme
in which was the relationship between ethics and economics. Samuelson was not
involved in this project but, as a final-year undergraduate who was friendly with
Stigler and who claimed to have been besotted with Knight, reading everything he
had ever written, he will have been familiar with these essays. He loved Knight’s
iconoclasm and these essays represent that clearly. After he moved to Harvard, he
moved away from Knight but he continued to engage with Knight, and his stress on
the centrality of ethics to welfare economics was entirely consistent with the position
Knight took.
A repeated theme in Knight’s writings was that wants were not to be taken as
given. They were in large part determined by the economic system. Thus while be he
found much to admire in Pigou’s work, he was critical of the idea that welfare
accepted the argument that individualism and the free market would place resources
in the hands of those who valued them most, and maximise the social dividend, he
denied that this constituted “a sound ethical social ideal” (Knight, 1923, p. 588; 1997,
p. 40). Social ideals had to come from ethics, not from arguments about the efficiency
We contend not merely that such ideals are real to individuals, but that
they are part of our culture and are sufficiently uniform and objective to
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form a useful standard of comparison for a given country at a given time.
Like Myrdal, he attached great significance to conflicts over values and the difficulty
of resolving them; social changes bring about institutional changes and involve ideas
about the kind of people we want to be, for tastes and values are continually
evolving (see Emmett, 2009, p. 99). Knight made no attempt “to ‘settle’ moral
questions or set up standards” but merely to “bring out the standards involved in
making some familiar moral judgments in regard to the economic system, and to
examine them critically (Knight, 1923, pp. 583-4; 1997, pp. 36-7). Knight summarised
his methodological position as being “any judgment passed upon a social order is a
value judgment and presupposes a common measure and standard of values, which
Economic efficiency is a value category and social efficiency an ethical one” ((Knight,
Knight thus took into account the need for physical goods and the implications of
the process of competition. His conclusion was that, irrespective of whether or not it
was possible to find a better form of social organisation, the competitive system had
the livelihood of the masses of the people made a pawn in such sport [i.e. “business
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considered purely as a game”], however fascinating the sport may be to its leaders”,
perfection and the Christian ideal of spirituality” (Knight, 1923, p. 624; 1997, p. 67).
Like Myrdal
Though Knight did not cite him in his writings on ethics and economics, Knight
probably engaged much more deeply with Weber’s work than any other economist
discussed here. He became familiar with Weber’s work before 1920 and produced a
Weber for having gone more deeply into the causes of capitalism than any other
historian (Knight, 1928, p. 143). In the 1930s he was close to Talcott Parsons and
Edward Shils, involved in translating key texts, including the two cited by Robbins
on objectivity and value neutrality (Weber, 1904, Weber, 1917, chapter 9). Knight
found Weber’s ideas useful in addressing the question of how social science could
make progress. Samuelson left Chicago two years before Weberian texts were made
part of the general courses in social science, but he was there when Knight and
sociologist Louis Wirth, who taught social science, were fully engaged with Weber’s
work (see Scaff, 2011, chapter 11). After the First World War and the collapse of
form social science should take. In trying to define a way forward, Knight drew on
two Weberian ideas: comparative economic history and his notion of theory as
dealing with ideal types. The result was that although Knight was not an
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institutionalist, he did not dismiss institutionalism and historicism out of hand in the
5. Conclusions
It is no surprise to find that Weber’s ideas about value neutrality were one of the
sources on which the creators of the new welfare economics drew. What is more
significant is the very different routes by which Weberian ideas reached Hicks on the
one hand and Bergson and Samuelson on the other. Value-neutrality, as presented in
assumptions about the world that were indisputably true. It is likely that, through
his exposure to Myrdal, Hicks had encountered Weber’s argument that value
had, it left no trace on his version of the new welfare economics. In complete
contrast, Samuelson had been exposed to Weberian ideas through Knight, whose
position on the role of values possibly went even further from Robbins’s position
than Myrdal. He could not possibly have read all of Knight’s work without having
encountered, repeatedly and forcefully, the argument that people held conflicting
values that could not easily be resolved and that such conflicts were an inescapable
result of who we are. He would have picked up very clearly the idea that values
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Though it would be going too far to say that this explains why they formulated
the idea of a social welfare function, it could would certainly explain why the
Hicksian formulation of the new welfare economics had no appeal for Bergson and
Samuelson. Ideas learned from Knight explain the way Samuelson conceived the
social welfare function. It was a way of expressing values that prevailed within
society, but because values had to come from outside the economic system, they
could come from anywhere. The idea that a social welfare function could represent
expressing a position that could have been taken straight from Knight.
Both Hicks and Samuelson ended up with a welfare economics that focused on
Pareto efficiency and related social welfare to individuals’ own perceptions of their
own welfare. They were both welfarist according to Sen’s (1979) definition of the
term, in that welfare was assumed to depend on individual utilities. This provides
much of the justification for including Bergson and Samuelson as part of the new
they reached that conclusion. For Hicks, it was a corollary of the Robbins definition
of economics and was embedded in the new welfare economics from the start.
Perhaps this is one reason why he showed no sign of being responsive to Myrdal’s
arguments. For Samuelson, on the other hand, it came right at the end of his analysis
which, in its most general form allowed for non-welfarist elements in the social
welfare function. It was only when he narrowed down the social welfare function by
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adding possible value judgments that he derived Pareto efficiency conditions and his
judgments, he was saying that a certain value judgment was implicit in any welfare
of welfare economics, though one inspired by Knight rather than Myrdal. Though he
there was no reason in principle why he could not have introduced widely accepted
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