What (If Anything) Can Economics Say About Equity?
41 Pages Posted: 26 Sep 2002
This paper is a critique of Kaplow and Shavell's recent book, Fairness versus Welfare (2002). Kaplow and Shavell argue that the Pareto principle implies welfarism - that is, that all social decisions be based on maximizing a social welfare function which combines individual utilities. Their welfarist program has three fundamental flaws. First, except when it merely enforces the Pareto principle, welfarism as such is generally indeterminate. For any Pareto-compatible ordering of a finite set of outcomes, it is possible to construct a corresponding social welfare function. Thus, the choice of the social welfare function is critical, but this choice must be made on non-welfarist grounds such as the fairness of the resulting outcomes. Second, society needs some procedure for selecting a social welfare function. These procedural rules, which amount to a constitutional framework, must themselves be chosen on non-welfarist grounds. Hence, much of constitutional law is necessarily non-welfarist. Third, defining and measuring utility presents severe difficulties. Unless individual welfare can be defined in a way that carries a high degree of moral authority, the idea that the Pareto principle should trump all other moral values is implausible. But Kaplow and Shavell's definition of welfare, which amounts only to individual desire gratification, lacks such moral authority. Moreover, the social welfare function itself must be defined in a way that respects the individualism on which Kaplow and Shavell ground the Pareto principle. But this also presents great difficulties. (To some extent, these first two problems can be avoided if we assume that the only permissible social welfare function is utilitarian, an assumption that Kaplow and Shavell explicitly reject but sometimes seem to implicitly adopt. But this solution would only exacerbate the third problem.) In short, welfarism is not really a viable alternative to fairness.
The failure of the welfarist effort to reduce morality to economics does not mean, however, that economics has nothing to say about issues of equity. The final section of the paper discusses some ways in which economics can contribute to our understanding of equity through concepts such as the Nash bargaining solution.
JEL Classification: D6
Suggested Citation: Suggested Citation