Theorem Of Welfare Economics

Welfare Economics, Theorem Of Welfare Economics

A tendency to modify the Classical doctrines on the score of individualism and competition has been noted. It is quite apparent in the thought of Marshall and Pigou. England's "social problem" — expanding wealth in the face of poverty-ridden masses — has been great, and was made acute by World War I. Thus the tendency of some minds to set up an ideal concept of "social welfare" as a goal, and to make economics deal with social policies directed toward such a goal, has been accentuated. This tendency we may call "welfare economics."

One of the earliest attempts to reconstruct economics on this basis was that of John A. Hobson (d. 1940). Trained in the late seventies at Oxford (not Cambridge), he was influenced by Ruskin and by Toynbee. He became a social reformer, actuated by a desire to relieve "economic oppression," and seeking to make economics a sort of ethical policy.

In this connection, Hobson's treatment of surplus will not be forgotten. In his Economics of Distribution (1900), he reasons that distribution is carried on through the fixing of market prices, accompanied by a process of bargains in which, by the superior economic strength or cunning and varying differential estimates of buyers and sellers, a "forced gain" is obtained, leaving the weaker bargainers a bare minimum inducement. "Thus emerges the true surplus value, derived not from some vague, unintelligible idea of tyranny, but from the various hindrances to perfect equality of bargaining-power in the owners of the various factors of production, and the consequent establishment of different forms and pressures of economic force."1 According to this theory, surpluses may be found anywhere, and are not confined to rent or profits only. A conclusion is that taxes upon commodities are not necessarily borne by consumers, but may merely absorb some one of the numerous "forced gains." It may be objected that many of these so-called surpluses may be better explained as rewards for superior skill in bargaining — as differential wages, for example; and in other cases, they appear to resemble Marshall's consumers' surpluses in their origin.

Hobson's thought, which, despite numerous inconsistencies, has had much influence in America, is based upon extreme idealism. He assumes an organismic concept of society ("collective personality"), and denies the existence of "laws" based upon inter-individual exchanges. He argues that prices determine margins, — not vice versa. He reduces factors of production to units of productivity, either begging the question of the value of the product or ignoring the physical limitations of supply. He attributes crises to oversaving, — and, therefore, presumably underconsumption — a sure sign of question-begging economic thought.

Other earlier "welfare economists" to be mentioned are H. Clay (Economics, 1916) and R. G. Hawtrey (The Economic Problem, 1926). They oppose individualism, consider ethics to be a necessary part of economics, and make social "welfare"
the goal.


Following this early phase, the idea of "welfare economics" has come up again in the discussion of "imperfect competition" and of "general equilibrium," both of which lead to the idea of an optimum condition. Indeed, a "new welfare economics" is sometimes referred to. Here may be mentioned J. R. Hicks, L. Robbins, R. G. D. Allen, J. E. Meade, R. F. Kahn, N. Kaldor, and A. L. Bowley.