“Welfare Economics”

“The Economics of Welfare”: the symbol of the emergence of welfare economics

• Author: Arthur Cecil Pigou (1877-1959): the father of welfare economics and the founder of welfare economics.
• First published: 1920 by Macmillan & Company, London
• Full book title: “The Economics of Welfare”, adapted from the book “Wealth and Welfare” published in 1912
• Known as:
  • The signs of welfare economics

Pigou is the founder of welfare economics and is known as the “Father of Welfare Economics”. His “Welfare Economics” was published in his 1912 book “Wealth and Welfare”. “”, the first edition was published by Macmillan Company of London in 1920. It has been reprinted many times and translated into many languages.

At the end of the 19th century and the beginning of the 20th century, with the sudden economic rise of the United States and Germany, Britain’s hegemony was in danger. In order to compete with the United States and Germany, Britain had to innovate and launch a technological revolution. However, although the technological revolution created prosperity for Britain, it also caused the majority of workers to suffer the pain of unemployment. As a result, workers’ movements emerged one after another, and social conflicts were on the verge of breaking out. Pigou, an economics professor at Cambridge University, was very worried about this. He hopes to be like Prometheus, bringing fire to Britain, which is beleaguered internally and externally, and drive away the terrible darkness. And his “tinder” was the famous book “Welfare Economics” published in 1920.

The ideological basis of welfare economics is Bentham’s utilitarian philosophy. As the founder of the bourgeois welfare economics system, Pigou did not discuss welfare issues incidentally in “Welfare Economics”, but systematically discussed the concept of welfare and its policy application, and established a theoretical system of welfare economics. He defined the object of welfare economics as the study of improving the economic welfare of the world or a country, and advocated that the country should be concerned about poverty issues and should take appropriate measures to increase welfare. This book is the foundation work of welfare economics and a classic work of old welfare economics. It occupies a very important position in the entire welfare economics and even Western economics.

“Welfare Economics” is to “study the important factors that affect economic welfare in the actual life of modern society.” This book includes two main parts: First, based on Marginal utility value theory proposes a set of concepts related to welfare, especially economic welfare. Second, starting from the increase in national income and distribution of national income, some important factors for increasing social welfare are deduced.​

(1) Volume l discusses the relevant concepts of economic welfare and the relationship between economic welfare and national income.

Pigou’s welfare economics is based on the marginal utility value theory. Pigou put forward two propositions about the concept of welfare: “First, the elements of welfare are some consciousness, or the relationship between consciousness, and second, welfare can be placed under larger or smaller categories.” . That is to say, welfare represents people’s psychological state and is contained in people’s satisfaction, and the size of welfare can be measured. However, Pigou emphasized that welfare covers a wide range. In economics, we do not discuss general welfare, but only welfare related to economic life, that is, economic welfare that can be directly or indirectly measured by monetary standards. This kind of economic welfare is related to general welfare and has a decisive impact on general welfare. Pigou regards welfare as satisfaction and utility as expression of satisfaction. Utility can be measured by the amount of money a person is willing to pay to avoid losing a certain satisfaction, that is, it can be measured by the price of a unit of goods. In order to measure and measure utility, Pigou assumed that the marginal utility of money is constant.
Based on this concept of economic welfare, Pigou discussed the relationship between economic welfare and national income. He pointed out, “It is precisely because economic welfare is that part of total welfare that can be directly or indirectly linked to the amount of money, and national income is that part of society’s current income that can be measured in money… Therefore, these two concepts, economic Welfare and national income are equivalent, and any expression of one of them means a corresponding expression of the other content. “In this way, the study of economic welfare becomes the study of national income.

Pigou used Marshall’s definition of national income, which is: “When a country’s labor and capital act on its natural resources, it produces a certain total amount of pure commodities every year, some of which are material. Some are non-material, and various services are also included.” This refers to the net national product after deducting depreciation and consumption of intermediate products. This net worth is roughly equal to a country’s monetary income.

Pigou shifted from economic welfare to the issue of national income, and then discussed two issues: first, the change in the amount of national income, and the measurement of this change. and its relationship to economic well-being. He explained that when consumer preferences and purchasing power distribution remain unchanged, an increase in national income increases economic welfare, but because changes in national income will cause changes in product structure, the relationship between changes in national income and economic welfare Also quite complex. This increase truly represents an increase in economic welfare only when members of society are willing to pay more money for newly added products than for products that disappear. Second, national income distribution and its impact on economic welfare. He explained that if the national income does not decrease, the national income shifts from the rich to the poor, that is, the equality of national income distribution is conducive to increasing economic welfare. This is because marginal utility is diminishing, and the utility brought by an increase in the income of the poor is greater than the utility reduced by an equivalent decrease in the income of the rich.

(2) Volume 2 focuses on the optimal allocation of social resources.

Because the increase in total national income is the main source of economic welfare, how to increase national income is one of the central issues of welfare economics. Pigou emphasized that in order to increase national income, the allocation of production resources in various production sectors must reach an optimal state. How to achieve this optimal allocation is the center of this volume.

Pigou used the relationship between marginal private net product value and marginal social net product value to illustrate the standard for the optimal allocation of social resources. Marginal private net product value refers to the value of the increase in investor income after private investment increases by one unit, which is equal to the marginal private net product multiplied by price, or it is the marginal private production cost of producer expenditures and the marginal value of increased investment. The difference in private income, the marginal social net product value refers to the value added to society’s income after adding one unit of investment, which is equal to the marginal social net product multiplied by the price, or it is the marginal social production cost of social expenditure and the increase in investment. The difference in marginal social income, if personal investment is regarded as a share of social investment, the marginal social net product value is the marginal private net product value plus the benefits or losses caused to other people in society due to this production. In other words, the beneficial impact that individual production activities bring to society is the marginal social benefit, and the negative impact that personal production activities bring to society is the marginal social cost. The difference between the two is the marginal social net output value. If society has benefited in addition to the marginal private net product value, the marginal social net product value is greater than the marginal private net product value; conversely, if society has suffered losses in addition to the marginal private net product value, the marginal social net product value is less than the marginal private net product value. Pure production value. If the marginal private net product value is equal to the marginal social net product value, then the social resource allocation has reached the optimal state.

Pigou believed that competition and free flow of resources under conditions of perfect competition would eventually make the marginal private net product value equal to the social net product value. However, in reality, due to various reasons, the marginal private net product value and the marginal social net product value are often not equal. These reasons are mainly: first, incomplete market information leads to errors in estimating investment returns and affects the flow of resources. Second, the ownership and use of certain durable production factors (such as land, equipment) are extremely inconsistent, causing these production factors to not be properly maintained and harming social benefits. Third, the existence of external economies or external diseconomies. For example, if a factory fails to control the outflow of sewage, the cost will be borne by society. It is an external economy for the factory, but a loss for society. Fourth, deviations caused by changes in benefits or costs. This means that due to the different economies of scale in various industries, in industries with decreasing costs, scale expansion makes the marginal social net product value greater than the marginal private net product value; while in industries with increasing costs, the opposite is true when the scale expands. Fifth, the existence of monopoly expands the difference between marginal social net product value and marginal private net product value.

Based on the above reasons, Pigou advocated government intervention in resource allocation. Its intervention methods include: nationalizing industries that are related to the overall situation, such as railways, electricity, tap water, etc., and operating them by the government; implementing special encouragement and special restriction policies for industries that are not suitable for nationalization, such as levying taxes on industries that cause pollution. Use heavy taxes and subsidize industries with high profits like agriculture. Limit monopoly, protect competition, etc.

(3) Volume 3 discusses the relationship between national income and labor.

The main thing that determines the size of national income is labor. Therefore, Volume 3 covers a wide range of issues, such as general labor disputes, working hours, wage payment methods, and the impact of labor in different regions. And the factors of distribution between occupations, the possibility of raising wages, methods to reduce unemployment, and issues such as fair wages and minimum wages. The discussion of these issues includes both theoretical analysis and policy suggestions.

Pigou discussed the allocation of labor among various regions and occupations. He believes that even if the demand prices and wages of various types of labor can be equal among different regions and occupations, the allocation of labor among different regions and occupations cannot reach the ideal state. This is mainly due to the ignorance of workers, the costs of mobility (including transportation costs and the psychological cost of leaving home), and the artificial restrictions on mobility imposed by tradition and custom. Errors in labor allocation will cause unemployment and reduce national income and economic welfare. The solution to this unemployment is for the government to use intervention methods, such as the government providing necessary expenses, or making workers employed for life, etc.

In terms of wages, Pigou focused on the issue of fair wages. Fair wages are wages paid to workers in all regions and occupations that are equal to the marginal net product value of their labor, and make all kinds of workers in different regions and The allocation among occupations maximizes national income. Based on this standard, unfair wages can be divided into two categories. One is that although it is unfair, it is equal to the marginal net product value of labor in the region and occupation where the worker works; the other is that there is exploitation and the wages are low. to the net marginal product of labor. The former kind of inequality needs to be solved by promoting the flow of labor between regions and occupations, while the latter kind needs to be solved by government intervention. Furthermore, even if the wages are fair, if they are below the living wage, minimum wage laws should be enacted to increase them.

In short, Pigou increased national income and economic welfare.

(4) Volume 4 discusses in detail the relationship between national income distribution and economic welfare, and puts forward policy recommendations for income equalization.

Pigou’s discussion of the impact of income distribution on economic welfare is based on this basic point of view: “Any of the following situations can increase national income without reducing the income of the poor. The absolute share occupied by the poor, or increasing the absolute share occupied by the poor without reducing national income, will definitely increase economic welfare.” What is studied here is mainly the latter case. When analyzing this problem, Pigou assumed that the marginal utility of money is also diminishing, that is, the greater a person’s monetary income, the smaller his marginal utility; and the less monetary income, the greater his marginal utility. Therefore, the marginal utility of the poor’s monetary income is greater than that of the rich. Transferring monetary income from the rich to the poor can increase the total utility of society, that is, increase economic welfare.

Pigou believed that when “economic depression, strong trade union power, and insistent demands of public opinion exist,” it is necessary to transfer the income of the rich to the poor to increase economic welfare. In order to achieve this, the country is required to adopt an income equalization policy.

Pigou pointed out that the transfer of income can include voluntary transfer and forced transfer. Voluntary transfer means that wealthy people actively contribute money to develop education, entertainment, health care, science, culture and other undertakings. But he also feels voluntary transfers alone are not enough. This requires the state to implement forced transfer. Forced transfer is to impose progressive income tax and inheritance tax and transfer this income to the poor. Transfer methods are divided into direct and indirect. Direct transfer is to provide social insurance and social services, such as pensions, unemployment benefits, free education, medical insurance, etc. Indirect transfer is to subsidize the production of products that the poor need most, such as agricultural production, transportation, and housing construction, so that the products of these industries can be sold to the poor at low prices, thus indirectly benefiting the poor.

The book is divided into two volumes, four parts and 72 chapters: (1) Welfare and the national dividend. (2) The size of the national dividend and the distribution of resources among different users. (3) The national dividend and labor. (4) The distribution of the national dividend.

(1) Welfare and economic welfare. The nature of welfare is an ideology. The broad sense of welfare (freedom, security, family harmony, friendship, spiritual happiness, etc.) and the narrow sense (economic welfare). Two basic points: the amount of national income represents the economic welfare of a society, and an increase in national income means an increase in social and economic welfare. When the amount of national income is given, the more equal the distribution of national income, the greater the social welfare.

(2) Welfare and net national product. Net national product, Pigou quoted Marshall’s approach, following the British tax commissioner’s pragmatic approach, defined net national product as everything people buy with their money income. Its total value should be roughly equal to a country’s monetary income. An increase or decrease in the net national product does not necessarily reflect an increase or decrease in the level of social welfare. This depends on the distribution of social welfare. He used the method of cardinal utility theory and believed that when the national income is given, transferring part of the monetary income of the rich to the poor will increase the total utility and thereby increase the economic aggregate of a country. Resource allocation is an efficiency criterion, and income distribution is a fairness criterion. He advocated that the income of the poor in society should not be reduced as a criterion for testing welfare. Then, if the utilization efficiency of social resources is increased without reducing the income of the poor, social welfare can be considered to have improved. If the level of national income remains unchanged, that is, the efficiency of social resource utilization remains unchanged, and if the utilization efficiency of social resources increases, social welfare can also be considered to be improved.

(3) Resource allocation and national net product. Marginal social net product is the increase in total product from a social perspective caused by adding a certain marginal increment when a given amount of resources is used rationally in a year. (Although the railway company does not need to compensate the trees along the railway line that are burned due to smoke from the train, they should be included as losses when calculating the marginal social net product of railway transportation.)

Assuming that there is only one kind of resource, and the cost of resource transfer is not taken into account, when the allocation of the resource and various uses reaches the point where the marginal social net product value of each use is equal, it must be a kind of use. Net national product is achieved at the maximum configuration. Because transferring resources from any use with a smaller marginal social net product value to a use with a larger marginal social net product value will increase the net national product. This conclusion should also be theoretically valid when applied to the cultivation of multiple resources for multiple uses. Of course, transfer costs must also be considered.

The reality is that various spontaneously formed economic mechanisms cannot bring the national net product to a maximum value. Incomplete information results in misplaced resource transfers and increased transfer costs. The infinite divisibility of resource allocation allows it to be separated from other elements, resulting in irrational allocation. The serious problem is that the existence of economic externalities makes entrepreneurs interested not in the social net product, but in the private net product. The maximization tendency driven by private interests will only make the marginal social net product equal in various uses but not the marginal social net product value in various uses, which will hinder the maximization of the national net product.

(4) State intervention and net national product. Buyer associations to correct the defects of imperfect competition and monopoly. However, as long as there is a discrepancy between investment allocation and the requirement of maximum national net product due to the temptation of private interests by enterprises, there will be a legitimate reason for government intervention. The means are taxes and subsidies. (Pigou-style taxation) In order to maximize social output under given resource conditions, the marginal social net product value of any production resource for various uses should be equal. This is the condition for the optimal allocation of production resources. The national income under this condition is called “ideal output.”

Control of monopoly: protection of competition law and protection of potential competition law. Price control: reverse control, forward control
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　(1) Positive significance:

1) Created welfare economics.

2) The economic and non-economic significance of welfare.

3) It will help improve the economic conditions of the poor.

4) The relationship between equality and efficiency.

5) The raising of the issues of marginal social cost and marginal private cost, the theoretical basis of externality issues, and the role of Pigou-style taxation.

6) Pay attention to state intervention.

(2) Defects:

1) Limitations of utility theory and cardinal utility theory.

2) Pigou-style taxation is not as conducive to solving externality problems as the definition of property rights.

　3) The non-objectivity of welfare, utility and other categories. Pigou said that economic welfare can be measured in currency, but he also said that welfare is a state of consciousness, which is contradictory in actual operation.

4) The blurring of social production relations and economic interest relations.