New Welfare Economics and Socialism

The New Welfare Economics and Socialism

As the turn of the century drew near, the tendency to criticize and abandon marginal utility and a competitive solution as the basis for organizing economic life brought together three different thought tendencies and focused them on the problem of "social welfare." These three tendencies were the general-equilibrium theory of Barone and Hicks, the full-employment theory of Keynes, and the Marxian theories of central control. The new movement was led by certain Socialistic thinkers such as Lerner and Lange in America and Dickinson in England. Their thought was essentially subjective in that they ignored certain essentials in the problems of producing goods. They assumed that utility as "wants" is important, but only under conditions of equal income. This enables them to substitute for the idea of individ­ual marginal utility operating competitively in a free economy the idea of an aggregate optimum in a controlled economy.

The new welfare idea is based on the assumption that indi­vidual marginal utilities are not measurable. This assumption appears in the general-equilibrium analysis, where the indiffer­ence curve replaces it. An indifference map on which there may be many indifference curves is the result. But this leads to the concept of some total well-being upon which the "optimum" condition must depend. At this point the general-equilibrium approach appears to break down as a scientific procedure. The dictator is called in — the central planning board.

The Keynesian and Marxian approaches are more simple in a way and certainly more objective. The Keynesian thinker sees welfare as synonymous with full employment and employ­ment in terms of the "wage unit" which is essentially labor-time. Similarly, Marxian thinkers, while revising the labor cost theory of value, are forced to accept some non-economic standard of performance per man-hour. The idea seems to be to assume (1) "comparability of utilities" as a basis for norma­tive control over production and use, and (2) to set up a central board to allocate resources without regard to actual differences in ability or disutility as they exist among different individuals. The general criterion of optimum conditions appears to be the requirement that price shall equal marginal cost without any allowances for profits. The question as to what is to be included in cost, however, remains vague and is the source of much discussion and disagreement. The centralist group which stems from Marxian thought appears to favor the use of "fixed coefficients," which is just another way of saying that technical problems only would be considered — no values — for the short run at least! The "competitive" solution group which stems from the general-equilibrium or Keynesian approach breaks down into two groups. One sub-group would endeavor to make some use of the idea of consumer sovereignty and presumably allow firms to make a profit. This, however, appears to suit no one. The other sub-group would have firms run by a salaried manager. After all, while there may be some difference in spirit or attitude, this idea seems to come close to the centralist approach. The whole tendency is to set up a concept of "social value," assuming a "scale of social values" which in the last resort requires an authoritarian origin.

Those who are thinking along these lines in America appear to be such men as Lerner, Lange, Bergson, and Sweezy. Their ideas have been criticized by F. M. Taylor, Mises, Hayek (England), Schumpeter, Wright, Graham, and Knight.