Welfare Economics

1. Welfare Economics 金文云 金雪超 Theo Karim

2. Welfare Economics • Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution. • 维弗雷多·帕累托Vilfredo Pareto • 阿瑟·塞西尔·庇古Arthur Cecil Pigou • 路德维希•冯•米塞斯Ludwig von Mises • 奥斯卡·理沙德·兰格Oskar Ryszard Lange • 肯尼思·约瑟夫·阿罗Kenneth Joseph Arrow • 詹姆斯·布坎南James M. Buchanan

3. Vilfredo Pareto(15 July 1848 – 19 August 1923) An Italian engineer, sociologist, economist, political scientist and philosopher. He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices. Vilfredo Pareto

4. Pareto efficiency • Pareto Optimality • In a Pareto efficient economic allocation, no one can be made better off without making at least one individual worse off. • Pareto improvement • Given an initial allocation of goods among a set of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off is called a Pareto improvement.

5. Requirements of Pareto Efficiency • Pareto optimality in consumption: • MRSaxy=MRSbxy • Pareto optimality in production: • MRTSAlk=MRTSBlk • Pareto optimality in both: • MRTxy=MRSxy

6. Welfare economics' first law: • Perfect competition of market economy in general equilibrium is Pareto optimal. • competitive market mechanism can ensure that Pareto efficient allocation realized.

7. Welfare economics' second law: If a certain social resource allocation situation while meet the Pareto optimality, but this kind of distribution is not very fair, the government could begin to intervene for income transfer then back to the competitive market mechanism, can also achieve the Pareto optimality.

8. Arthur Cecil Pigou (18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the school of economics at the University of Cambridge. His work covered various fields of economics, particularly welfare economics. Arthur Cecil Pigou

9. Main Publications： • 《工业和平原理和方法》（1905）； • 《财富与福利（即福利经济学） 》（1912） ； • 《论失业问题》（1914） ； • 《工业波动》（1927） ； • 《公共财政研究》（1925，1956） ； • 《失业理论》（1933） ； • 《社会主义与资本主义的比较》（1937） ； • 《静态经济学》（1935） ； • 《就业与均衡》（1945） ； • 《收入理论》（1946） ； • 《凯恩斯“通论”的回顾》（1956);

10. Pigou’s economic welfare • Ideological basis: • Bentham the utilitarianism of philosophy • Personal welfare is the sum of the meet • And the social welfare is the sum of personal welfare • Theoretical basis: • Radix number of marginal utility value theory

11. Pigou’s economic welfare • Pigou divided the welfare into two classes • The social welfare • The economic welfare • And Pigou focus on the economic welfare

12. Pigou’s economic welfare • PART 1：Welfare and national income • PART 2：The distribution in different uses of the quantity and resources of national income • PART 3：National income and labor • PART 4：The distribution of national income

13. Pigou’s economic welfare • Pigou, justify equal distribution of income mainly on the ground of diminishing marginal utility, assuming equal capacity to enjoy income. Abstracting away such questions as incentive effects, that equal distribution maximises total utility

14. Pigou’s economic welfare • Pigou has two propositions in welfare economic • For a person's actual income of any increase, can make the meet increase • Transfer the rich man's money income to the poor can gratify them.

15. Pigou’s economic welfare • Transfer income policy Suggestions: • From rich: • voluntary(charity) • Compulsory(tax) • To poor: • Direct: social insurance and services • Indirect: subsidies to necessary production department

16. Pigou’s economic welfare • Method: Marginal output value analysis • Premise: Perfect competitive market • Put forward two concepts: • Marginal private net output • Marginal social net ouput

17. Pigou’s economic welfare • Optimal distribution condition: • pure Marginal private output = pure Marginal social output • The marginal social net output are identical in each production department

18. Pigou’s economic welfare • The necessity of state intervention: • It is objective that the marginal private net output and marginal social net output would deviate from the equilibrium level • The method of state intervention: • Subsidies • Tax

19. Ludwig Von Mises 路德维希·冯·米塞斯 29 September 1881 – 10 October 1973 He was a prominent figure in the Austrian School of economic and is best known for his work on praxeology.

20. 1881 born in a wealthy Jewish family 1900 attended the University of Vienna 1906 awarded his doctorate from the school of law. 1913~1934 privatdozent at the Vienna University in the years 1909~1934 secretary at the Vienna Chamber of Commerce 1934 moved to Switzerland 1934~1940 a professor of the Graduate Institute of International Studies 1940 moved to New York City 1945~1969 visiting professor at New York University. 1973 died in New York City at age of 92

21. Major work Human Action 《人类行为》 Socialism 《社会主义》 Liberalism 《自由与繁荣的国度》 The Theory of Money and Credit 《货币与信贷理论》 Bureaucracy 《官僚体制》 The Anti-Capitalistic 《反资本主义的心态》

22. Many of his works, including Human Action, were on two related economic themes: First，monetary economics and inflation （Business cycle theory） Second，the differences between government controlled economies and free markets.

23. "Economic Calculation in the Socialist Commonwealth" (1920) • The socialist government interference can not be pricing rationally. • With the development of free market, private capital investment is the only way to prosperity and growth of economic. • The functions of government are limited to the protection of private property and legal sanctions

24. Liberalism “自由主义一贯注重全社会的福利，从未为某一特殊阶层谋取利益。” “从历史学的角度看，自由主义是第一个为了大多数人的幸福，而不是为了特殊阶层服务的一种政治倾向。与宣传追求同样目标的社会主义截然不同的是：自由主义不是通过其追求的目的，而是通过它选择的方法去达到这一最终目的。” “自由主义认为：它所提出的方法是唯一适合并能达到这一目标的方法。如果谁认为他还能提出一个更好的或能达到这一目标的另外的道路，那么他就必须去证实它的可行性。” “自由主义绝不是代表某一特殊阶层的政策，而是为全体人们利益服务的政策。”

25. “我们习惯将一个实行了自由原则的社会称为资本主义社会，将这一社会形态打上资本主义的标记。”“我们习惯将一个实行了自由原则的社会称为资本主义社会，将这一社会形态打上资本主义的标记。” “资本主义之所以有活力，是因为它从自由主义思想中汲取了丰富的营养。” “事实上，自由主义所主张的资本主义社会秩序是：资本家若要发财致富，唯一的途径是像满足他们自身需求一样来改善同胞的物质供应条件。” “我们认为：只要贯彻了自由主义的原则，这种现象绝不会发生。这是因为：在自由主义思想占统治地位的国家里，既无海关也无哄抬糖价的卡特尔。”

26. “当自由主义在十八世纪和十九世纪上半叶开始在欧洲和海外大陆的黑人奴隶中呼吁废除农奴制和奴隶制……自由劳动可以创造远远高于奴隶劳动的生产率。在奴隶制条件下，劳动者没有兴趣发挥他们的最大劳动能力，他们的工作热情和劳动量仅限于能够避免遭到惩罚的程度，而这种惩罚只有在没有完成最低限度的工作量时才会发生。自由的劳动者懂得，若要得到更多的报酬，就必须付出更多的劳动。”（一、自由主义政策的基础 2.自由） 

27. “自由主义是一种真正研究人类行为的学说，其着眼点和最终目的是促进人们外在的物质福利，而不是直接满足人们内在的、精神上的以及形而上学的需求。它并不向人们许诺幸福和满足，而是尽一切可能将外部世界所能提供的物质用来满足人们的诸多需求。”“自由主义是一种真正研究人类行为的学说，其着眼点和最终目的是促进人们外在的物质福利，而不是直接满足人们内在的、精神上的以及形而上学的需求。它并不向人们许诺幸福和满足，而是尽一切可能将外部世界所能提供的物质用来满足人们的诸多需求。” “自由主义仅仅是试图为人们创造一个外在的富裕条件。” “自由主义除了为人们的内心生活发展创造一个外部的前提条件之外，别无它求。”

28. Friedrich August Hayek 弗里德里克·A·哈耶克 • 1899~1992 • student and follower of Mises, and he was the representative of the neo-liberalism

29. Oskar Ryszard Lange 奥斯卡·R·兰格 1.July 27, 1904  – October 2, 1965 2.a Polish economist and diplomat. 3.He was most known for advocating the use of market pricing tools in socialist systems and providing a model of market socialism.

30. 1904 born in Tomaszów Mazowiecki. (波兰托马舒夫) 1926 studied law and economics at University of Krakow, where he received a B.A. 1928 got a Masters of Law . 1926~1927 worked at the Ministry of Labor in Warsaw. This was followed by a research assistantship at the University of Krakow. 1934 a Rockefeller fellowship brought him to England. 1937 emigrated to the United States in. He then became a professor at the University of Chicago in 1938. 1945 returned to Poland. 1961~1965 was deputy chairman of the Polish Council of State. 1965 died

31. Lange Model The Lange model suggests three levels of decision-making. Firms and households represent the lowest level, with industrial ministries as the intermediate level, and the highest level of decision-making is made up of the central planning board.

32. trial-and-error method. If a surplus in the supply of a particular good arises, the central planning board lowers the price of that good. Likewise, if there is a shortage of a particular good, the price is raised by the central planning board. This process of price adjustments takes place until equilibrium between supply and demand is met.

33. Advantages • Governments can control the input factors and decide social dividends. These will make the distribution of income better than capitalism. • Governments can control the investment ratio, so that the country can control the speed of economic growth.

34. 3.Governments can control the prices of resources, which can prevent undesirable environmental impact. 4.Governments can control the savings and investment. And this is beneficial to reduce of cyclical instability.

35. Criticisms • This model was developed in response to Ludwig von Mises and Friedrich Hayek’s criticisms of socialism, stating that the state does not have the knowledge to calculate general equilibrium prices, and that market prices were essential for the state to allocate resources.

36. 2.The primary criticism against socialism is that it could not direct investment efficiently without speculation in financial markets . socialist officials can’t simulate the pricing of future capital goods in financial markets. 3.Incentive mechanism has a serious problem. They can’t make everyone in this model take their duties and make the right decision.

37. Conclusion Planned economy can not solve the allocation problem of resources

38. Public choice theory : Intrisinc connection with welfare economics

39. James Buchanan • Ph.D. from the University of Chicago in 1948, influenced by Frank H. Knight. Found enlightening the work of Knut Wicksell.  • Founder of a new Virginia school of political economy. • He taught at • the University of Virginia, where he founded the Thomas Jefferson Center for the Protection of Free Expression;  • UCLA;  • Florida State University; • the University of Tennessee; • Virginia Polytechnic Institute ("Virginia Tech"), where he was affiliated with the Center for the Study of Public Choice (CSPC). • In 1983, he followed CSPC to its new home at George Mason University. In 2001 Buchanan was honoured with an honorary doctoral degree at Universidad Francisco Marroquín due his contribution to economic theory. • Buchanan's work includes extensive writings on public finance, the public debt, voting, rigorous analysis of the theory of logrolling, macroeconomics, constitutional economics and libertarian theory. • Nobel Prize in 1986 for his work on public choice

40. Bibliography Public Principles of Public Debt: A Defense and Restatement, by James M. Buchanan, at the Library of Economics and Liberty The Calculus of Consent: Logical Foundations of Constitutional Democracy, by James M. Buchanan and Gordon Tullock, at the Library of Economics and Liberty Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, by James M. Buchanan, at the Library of Economics and Liberty The Demand and Supply of Public Goods, by James M. Buchanan, at the Library of Economics and Liberty Cost and Choice: An Inquiry in Economic Theory, by James M. Buchanan, at the Library of Economics and Liberty The Limits of Liberty: Between Anarchy and Leviathan, by James M. Buchanan, at the Library of Economics and Liberty Democracy in Deficit: The Political Legacy of Lord Keynes, by James M. Buchanan and Richard E. Wagner, at the Library of Economics and Liberty The Power to Tax: Analytical Foundations of a Fiscal Constitution, by Geoffrey Brennan and James M. Buchanan, at the Library of Economics and Liberty The Reason of Rules: Constitutional Political Economy,

41. Background • Consideration of the state as an agent outside the scope of economic theory, whose actions depend on different considerations than those driving economic agents • Context of democracy

42. Public Choice Theory • Buchanan : “Public Choice is nothing more than common sense, as opposed to romance. To some extent, people then and now think about politics romantically. Our systematic way of looking at politics is nothing more than common sense.”

43. Hardin’s "back of the Invisible Hand " • "One may sense, however, that all too often we are less helped by the benevolent invisible hand than we are injured by the malevolent back of that hand; that is, in seeking private interests, we fail to secure greater collective interests. The narrow rationality of self-interest that can benefit us all in market exchange can also prevent us from succeeding in collective endeavors."

44. Assumption • Politicians and bureaucrats are individuals who act based on a budget-maximizing model in a self-interested way for the purpose of growing their own power and influence. • Buchanan rejects "any organic conception of the state as superior in wisdom, to the individuals who are its members."

45. Budget Maximization Model • Rational bureaucrats will always and everywhere seek to increase their budgets in order to increase their own power, thereby contributing strongly to state growth and potentially reducing social efficiency. • Example : bureaucrat who heads a public administration department, and who will try to maximize the department's budget, thus increasing its salary and prestige.

46. Public choice theory • Public choice theory is the use of modern economic tools to study problems that traditionally are in the province of political science. From the perspective of political science, it is the subset of positive political theory that models voters, politicians, and bureaucrats as mainly self-interested

47. Public choice theory • Goal : How to ensure that the most effective policies earn better chance of being implemented (how to choose the politicians and bureaucrats, what sanction system and provide rewards, etc.)..

48. Government’s Failure • Democracies produce less "good" than optimum decisions due to ignorance and indifference rational voters. • Weak power of individuals to influence the outcome, the effort required to learn to vote with full knowledge himself is considerable. • rational choice of the voter is to remain in ignorance, or to abstain.

49. Government’s Failure • Special interests that could gain an advantage by forcing the government to adopt decisions generally harmful, but profitable for them. • Invisible prejudice because very small. Profits are shared among a small minority, whose concern becomes to perpetuate this type of decision. • For example, protectionist measure in the textile industry

50. Government’s Failure • Theory of fiscal illusion • The essential violence of redistribution policy, which distorts the perception of its nature and its effects, both for policy makers and for their victims.