A Utilitarian Welfare Analysis of Trade Liberalization

Abstract

This paper provides a welfare analysis of trade liberalization based upon the moral principles of utilitarianism. The history of the moral philosophy of utilitarianism is described including its introduction into what became known as Cambridge welfare economics. The differences between this school of thought and what would later develop as modern welfare analysis are discussed. Essentially, the Cambridge economists were not particularly disturbed by the assumptions of cardinal utility and interpersonal comparisons and argued that these assumptions added more than they took away. Next the mathematical form of a utilitarian utility and social welfare function are described and the values of the parameters are assigned based upon the writings of moral philosophers. Next the distributional consequences of trade liberalization are developed and the social welfare implications are derived. Basically it is concluded that trade policy changes produce large distributional changes relative to efficiency gains, and the gains go to individuals with significantly higher income than the lossers (in the developed economies). With a realistic concave utility function underlying the social welfare function, the benefits of trade liberalization are quite small if not negative. The policy implication is that trade liberalization without sizable redistribution is unlikely to actually (as opposed to potentially) increase social welfare. It is argued that this approach to trade policy analysis is much more useful in formulating trade policy than the current use of modern welfare-trade policy analysis commonly used and taught in most universities.

Keywords: Trade Policy, Utilitarian, Utilitarianism, Compensation principle, Welfare, interpersonal utility comparisons, utility function, income distribution, social welfare function

JEL Classification: B20, D60, D63, F13