A Quiet Revolution In Welfare Economics

By Michael Albert and Robin Hahnel

Web design, scanning, and preparation by Jens Nielsen


A Quiet Revolution In Welfare Economics is an in-depth and comprehensive technical study of existing approaches to understanding the effects of economies on workers and consumers, plus an alternative framework the authors advocate, plus discussion of associated value structures, concepts, and theories, and presentation of new theorems and results.

Detailed Table of Contents


Chapter Descriptions

Chapter 1 A review of traditional welfare theory. We trace its evolution from classical utilitarianism to modern neoclassical welfare theory and discuss recent contractarian interpretations. But while we distinguish between utilitarian, neoclassical, and contractarian formulations and compare their advantages and disadvantages, our major purpose is to understand the essential features of traditional welfare theory as a whole and identify the paradigm it seeks to represent.

Chapter 2 How the traditional concept of the production function has obfuscated important effects of private enterprise on the labor process. We review challenges from the "conflict school" and "segmented labor market" traditions to standard conclusions that profit maximization in competitive environments promotes social efficiency and ameliorates economic discrimination. We conclude that despite much confusion and inconsistency the thrust of these challenges is sound.

Chapter 3 Review criticism of the traditional treatment of externalities and public goods and the exciting literature on "incentive compatible mechanisms" for solving the "free rider problem." We conclude that the unwarranted presumption of "external effect exceptionality" that is buried in the traditional paradigm must bear part of the blame for retarding theoretical progress in the field of public finance as well as for inducing fundamental misconceptions regarding the efficiency of markets.

Chapter 4 An evaluation of the work of those few economists who dared to ignore the traditional taboo against inquiring into the origins of preferences and evaluate the decision of traditional theorists to ignore the effect of economic institutions on preference development. We reveal considerable disagreement among previous analysts about the ultimate significance of treating preferences as endogenous and discover that institutionalist economists have had virtually no influence on welfare theorists regarding the impact of institutions on preferences. In this chapter we complete our case that progress in pursuing important tasks facing welfare theory today has been hampered rather than aided by the traditional paradigm and lay the groundwork for our own major innovation: clarification of the welfare significance of the relation between economic institutions and preference development.

Chapter 5 Replacing the traditional paradigm with a new one that emphasizes human development, human sociality, and the structuring of individual choice by economic institutions.

Chapter 6 Present a new welfare theory based on the alternative paradigm. Using an original model of human development and endogenous preferences, we present a set of theorems that reveal an important mechanism whereby individual rationality proves counterproductive to social rationality. But while these striking new results do not hinge on any specific assumptions about preferences other than their endogeneity, we also elaborate a qualitative welfare theory that addresses fundamental philosophical issues.

Chapter 7 we use the new welfare theory to reevaluate markets. Adam Smith's vision of markets as cybemetic/incentive miracles is not sustained by our new welfare paradigm and theory. Instead new analysis suggests that "market failure" is likely to be far more pervasive than usually admitted and the cybernetic and incentive properties of markets compound the problem. Moreover, the argument in this chapter proves that once it is recognized that preferences are endogenous, the extent of the damage from "market failures" is greater than traditional theory leads one to suspect.

Chapter 8 Reanalysis of the institution of private enterprise. The new theory sustains a careful reformulation of the "conflict theory of the firm" yielding the conclusion that individual employers have an incentive to engage in discriminatory practices, regardless of how competitive labor markets may be. We argue that conflict theory need not reduce to an implicit "conspiracy theory" whose conclusions obtain only under highly restrictive, unrealistic assumptions. Rather it is the traditional conclusion that profit maximization under competitive conditions acts to ameliorate economic discrimination that hinges on unrealistic assumptions. In this chapter we defend the charge that private enterprise generates inefficiency, even when "disciplined" by competitive market structures, from well reasoned objections to previous formulations. And again we show how the discrepancy between employer rationality and social rationality will yield an increasingly inefficient use of productive capabilities in private enterprise economies to the extent preferences are endogenous. The result in chapters 7 and 8 imply two independent sources of increasing inefficiency in private enterprise, market economies, no matter how competitive their market structures or how fully informed their participants.

Chapter 9 Reexamine the principal alternative to market allocations - central planning. We demonstrate that traditional claims that central planning cannot calculate a socially efficient plan, even in theory, are overstated. While information and incentive problems certainly exist, these "practical" problems of central planning are not unlike "practical" problems in market economies that traditional theorists are willing to "abstract from." But while we argue that an evenhanded application of traditional welfare theory should grant public enterprise, centrally planned economies as much claim to efficiency as private and public enterprise market economies, our new welfare theory reveals an intrinsic flaw in central planning that no generous assumptions can disguise. We show that regardless of how democratic a process it adopts for determining society's social welfare function, central planning is inherently biased against selfmanaged labor. Consequently, no centrally planned economy can provide a socially optimal menu of job roles. When preferences are recognized as endogenous, we prove this deficiency leads centrally planned economics to increasingly inefficient allocations of society's laboring capabilities as well as to growing apathy among workers. This concludes our reexamination of the welfare properties of the major economic institutions and systems of our time.

Conclusion we point out that traditional theory is increasingly unable to distinguish between the welfare properties of different economic systems except on "practical" grounds. Under equally generous assumptions, all the major economic systems appear equally efficient and flexible according to traditional theory. But our new results demonstrate that this conclusion is misleading because different economic systems will develop along very different trajectories. We offer new insights about why different kinds of economies will predictably have different distributional trajectories, despite theoretical flexibility. But more surprisingly, we show that the human development and resource allocation trajectories of different kinds of economies will differ precisely to the extent inhabitants make individually rational choices. Moreover, we show why the allocative trajectories of each traditional economic system will be increasingly inefficient.

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This book is a part of the Participatory Economics Project