Holcombe on the Foundations of Welfare Economics

I haven’t yet read it, but this paper by Randall Holcombe in the latest Review of Austrian Economics, “A reformulation of the foundations of welfare economics looks like a very important contribution. The abstract:

Neoclassical welfare economics takes an outcome-oriented approach that uses Pareto optimality as its benchmark for welfare maximization. When one looks at the remarkable improvements in economic welfare that have characterized market economies, most of those improvements in welfare have been due to economic progress that has introduced new and improved goods and services into the economy, and innovations in production methods that have brought costs down, leading to higher real incomes. Pareto optimality is only peripherally related to actual economic welfare, and no economist would argue that people are materially better off today than a century ago because the economy is closer to Pareto optimality. After analyzing the actual factors that lead to improvements in welfare, this paper suggests a reformulation of the foundations of welfare economics to replace the almost irrelevant outcome-oriented concept of Pareto optimality as the benchmark for evaluating welfare with a process-oriented benchmark based on factors that generate economic progress. The paper then explores some implications of this reformulation.

2 Responses

  1. Yes.

    Now that seems like a good idea. In fact having read it, it seems obvious – although I can’t recall hearing the same idea before. I wonder how original this idea from Holcombe is?

    • The Austrian school in general is big on considering economic performance dynamically, but I’ve never seen anyone make precisely the argument Holcombe does. (I’m still judging by the abstract – will probably read the whole thing tonight or tomorrow.)

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