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Is economics like car building or car repair? Are we working toward a finished product, or are we attempting to answer pertinent questions that arise and change from time to time? These questions are entertained in this chapter in order to explore the nature of the methods economists employ. The subjective nature of data and the relevance of predicting from past trendsis explored. The proof that rational choice analysis predicts better than any alternative process is seen to be less than definitive by typical standards of proof. Welfare economics comes closest to philosophy when it optimizes social welfare with a social welfare function, but the ramifications of that model are rarely explored. Finally, it is suggested that key questions change and economic thinking then adapts to deal with the new challenges. The vignette for this chapter looks at John Maynard Keynes and his rethinking of mainstream macroeconomics.

This chapter begins by introducing the social welfare function (SWF) approach. It then goes on to criticize the competing approaches to policy analysis that are currently dominant. Although SWFs are in fact used by some scholars for purposes of evaluating actual government policies—particularly within the scholarly field of optimal tax policy—other approaches are currently much more widespread, both among scholars and in governmental practice. The dominant frameworks are: cost-benefit analysis; inequality metrics, such as the well-known “Gini coefficient”; other equity metrics, in particular poverty metrics, social-gradient metrics, and tax incidence metrics; and QALY-based cost-effectiveness analysis. The chapter critically examines these various frameworks from the perspective of welfarism. It argues that each framework either fails to furnish an attractive basis for constructing an impartial, Pareto-respecting, quasi-ordering of an outcome set, or achieves this goal only by functioning as a variation on the SWF approach.

Giving for development provides an interesting case study in the application of welfare economics. Giving for development is modest in total amount, but it is one of the few direct ways in which individuals reveal information relevant to the properties of the social welfare function to be applied to global redistribution. Where individuals themselves are willing to make transfers, how should this be taken into account in the social welfare function? The chapter first examines individual motives for giving, turning to the specific purpose of development in the second section. It then considers how far these motives are welfarist. The fourth section examines the implications for the social welfare function of individual altruism towards people in poor countries. If individuals are non-welfarist in their concerns, should the state continue to adopt a welfarist social welfare function? The final section addresses explicitly the geographical dimension, and the fact that the social welfare is a national social welfare function, which has to take into account the limited ‘sphere of control’ of national governments.

This chapter begins by addressing the problem of simplified outcomes. Outcomes are not complete possible worlds, but more limited descriptions of possible realities. This is a feature, not merely of the social welfare function approach, but of all policy frameworks. But the simplified nature of outcomes raises some distinct puzzles for the construction of the set U. What exactly does it mean for an individual to have extended preferences with respect to life-histories that arise from simplified outcomes: life-histories in which some of the subjects' attributes, and some background facts about the world, are missing? The chapter proposes an answer to this crucial problem, and then confronts a second problem: What are the data sources that help us infer individuals' extended preferences? This is followed by a discussion of further issues relating to the construction of U. These include: the extent to which spectators' preferences are sensitive to subjects' preferences; how to model heterogeneity in extended preferences; using an assumption of temporal additivity to facilitate the estimation of extended preferences; the role of happiness surveys; and the use of surveys as opposed to behavioral data to estimate preferences. The chapter closes by discussing the problem of “zeroing out” extended utility functions, so that they assign zero to nonexistence.

This chapter discusses why welfarism is worth elaborating upon. It explains why a person-centered view of morality and consequentialism are both plausible premises, and why even the reader who rejects them might find this book of interest. It suggests that welfarism should be seen as an approximation to a truly plausible moral view, namely responsibility-sensitive welfarism; and that the elaboration of the social welfare function (SWF) framework undertaken in this book should be understood as a large step toward elaborating a decision procedure that would implement responsibility-sensitive welfarism. The chapter seeks to accomplish two other vital preliminary tasks. The first is to distinguish between moral evaluation and other types of normative evaluation. The second task is to review questions of metaethics and epistemology that no work of normative theory can wholly ignore. It argues that the SWF approach is the most “attractive” choice-evaluation framework, that it helps us determine which governmental policies (or other large-scale choices) are “better” or “worse.” The chapter concludes by providing a formal, generic structure for a welfarist choice-evaluation procedure.

This chapter describes a rich number of cases in which Samuelson distinguishes between the individual and the family as the consuming agent. The idea that the family demand function can be consistent with axioms of revealed preference is rendered difficult to achieve. Part of the problem involves giving a spouse rather than the family or household a utility function. Then the problem arises as to how the individual demand function is aggregated for the family. On the theoretical side, the chapter considers a Bergson–Samuelson type of social welfare utility function, with implications for Arrow's impossibility theorem. On the application side, the chapter features Becker's ‘rotten kid’ model problem, holding out the possibility of a solution with a family member as a possible dictator.

This chapter focuses on the measurement of inequality, in particular measuring when one income distribution is more unequal than another for any inequality averse social welfare function. While the Atkinson-Dalton measure illustrates the total cost of inequality (or the percentage of national income which society would be willing to give up in order to eliminate inequality), this chapter develops a marginal measure of inequality (how much society is willing to sacrifice to reduce inequality a given amount). This new measure of the value of marginal reductions in equality also focuses on the consequences of wage inequality with an elastic labor supply. Finally, the chapter relates the optimal tax structure to the new measure of inequality and provides a simple formula for determining the optimal tax rate.

This chapter turns to the question of the functional form of the rule R. It argues that the most attractive such rule is a continuous prioritarian social welfare function (SWF), which says: outcome x is morally at least as good as outcome y iff Σ _i=1 ^N g(u_i (x)) ≤ Σ _i=1 ^N g(u_i (y)) for all u(.) in U, with the g(.) function strictly increasing and strictly concave. Yet more precisely, the most attractive such rule is a particular kind of continuous prioritarian SWF, namely an “Atkinson” SWF, which says: x is morally at least as good as y iff (1−γ)⁻¹ Σ _i=1 ^N u_i (x)^(1−γ) ≤ (1−γ)⁻¹ Σ _i=1 ^N u_i (y)^(1−γ), for all u(.) in U. The γ parameter for the Atkinson SWF is a so-called inequality-aversion parameter that takes some value greater than zero. The universe of SWFs is usefully organized around three axioms: the Pigou–Dalton axiom, an axiom of separability, and a continuity axiom. The chapter is interested in the Pigou–Dalton principle in terms of well-being.

The formal structure of welfarism is oriented around lifetime well-being. The social welfare function (SWF) approach is framed in whole-lifetime terms. The elements of U are lifetime utility functions, tracking the well-being associated with whole life-histories. Each such function maps an outcome onto a vector of individual lifetime utility numbers. And an SWF is a rule for ranking pairs of outcomes as a function of their associated lifetime utility vectors. But why should a SWF necessarily function in this fashion? This chapter focuses on comparing lifetime versus non-lifetime approaches to applying a continuous prioritarian SWF. The chapter demonstrates that the claim-across-outcome view, conjoined with the premise about personal identity, supports lifetime continuous prioritarianism rather than the application of a continuous prioritarian SWF to individual sublifetime utility numbers or to numbers measuring individual attribute levels.

This chapter outlines three large, difficult, and important problems, connected to the social welfare function (SWF) framework. First, what is the appropriate legal role of the SWF framework? Should governmental officials be legally required to use SWFs in evaluating laws and regulations, just as they are currently required (at least to some extent) to use cost-benefit analysis? Second, how should the SWF framework be outfitted to handle non-identity problems, variable populations, and infinite populations? This book has assumed that each of the members of a “population” (the individuals whose well-being is of interest to the decisionmaker) exist in all of the possible outcomes of choice; that the size of the population is the same number in all outcomes; and that this number is finite. What happens when these assumptions are relaxed? Finally, how should considerations of individual responsibility be integrated into the SWF framework? This chapter addresses these final questions.

A large part of health economics concerns the methodology of informing the best way to allocate health‐care resources at the social level, and the actual delivery of such information. One typical analytical approach is called the cost per QALY analysis, where health gains are quantified in terms of QALYs (Quality-Adjusted Life-Years). The QALY is a composite measure of the duration of survival and the health‐related quality of life associated with each period of survival. This chapter examines the nature of the QALY as the desideratum; why should we regard the QALY as the desideratum in health care? Two schools of thought are discussed. The welfarist school holds that the QALY is the desideratum because it is a representation of people's utility associated with their own health state. The non‐welfarist school proposes an alternative view and argues that the QALY is the desideratum because this is what publicly funded health‐care systems are set up for. The second part of the chapter looks at different ways in which individual QALYs can be aggregated across the population, in the form of a health‐related social welfare function, in order to facilitate economic evaluations.

This chapter shows that the cost-benefit analysis can be used only if the actions under scrutiny are marginal, that is, if implementing them has no macroeconomic effects. Otherwise, one needs to go back to the basics of public economics to evaluate these actions. The chapter examines the error that one makes by following the classical discounting approach when evaluating non-marginal projects. The evaluation of non-marginal projects must be done by measuring their impact on the social welfare function. A non-marginal investment project with positive future cash flows will have an impact on welfare that is smaller than when estimated by using the standard discounting method.

The prior four chapters focused on developing tools for constructing and morally ranking an outcome set: tools that include an account of well-being, principles for measuring well-being using a set U of utility functions that operate on life-histories, and a continuous prioritarian SWF. This chapter turns to the topic of moral bridge principles. It argues that a continuous prioritarian SWF should be merged with a (refined version of) expected utility theory so as to generate a ranking of choices—notwithstanding violations of the ex ante Pareto and Pigou–Dalton principles. While the SWF framework defended here satisfies the Pareto and Pigou–Dalton principles in terms of the ranking of outcomes, the ex ante versions of these principles constitute an additional requirement which, on balance, should be rejected. The dilemmas that arise in specifying norms of fair distribution under conditions of uncertainty have been discussed by philosophers and social choice theorists.

This introductory chapter briefly sets out the purpose of the book, which is to provide a comprehensive, philosophically grounded defense of the use of social welfare functions as a framework for evaluating governmental policies and other large-scale choices. The “social welfare function” (SWF) is a concept that originates in theoretical welfare economics. The proper design of the SWF framework raises many questions of normative theory—questions that this book will engage. In doing so, it draws upon welfare economics, social choice theory, and related formal literatures (such as utility theory and decision theory), and upon philosophical scholarship concerning a variety of topics, in particular, well-being, equality, and personal identity. An overview of the subsequent chapters is also presented.

The special cases considered in Chapter 4 yield insights, but within the framework of the assumptions made. How robust are these insights? What happens when we move away from quasi-linearity? On the basis of the first-order conditions it is possible to say relatively little about the general shape of the tax schedule. The optimal marginal tax rates in more general cases become considerably more difficult to interpret because labour supply can vary with skill and because of income effects. This chapter presents optimal tax schedules with alternative assumptions. Therefore, numerical calculations have proved useful in generating useful results. This chapter provides advanced numerical simulations of the extended Mirrlees models. Using numerical simulations, we study the role of different elements of the model in determining the pattern of optimal non-linear tax/transfer.

The social welfare function (SWF) framework is a core methodology of welfare economics. This chapter describes the approach, discusses its application to health priority-setting, and illustrates this application with a concrete example. The SWF framework conceptualizes any given policy as a probability distribution over outcomes, with each outcome in turn a pattern of well-being among the population of concern. The well-being measure can be derived from utility functions representing individual preferences with respect to the attributes that determine well-being (e.g., health, longevity, income). Different rules for ranking well-being patterns are possible, including both “utilitarian” and “prioritarian” rules. Unlike cost-effectiveness analysis, the SWF framework is sensitive to the way in which a given individual’s income, health, and longevity interact to determine her lifetime well-being. Unlike cost-benefit analysis, the utilitarian and prioritarian SWFs take account of the declining marginal utility of income. Health scholars’ traditional concerns about considering income in allocating health care are mitigated by this feature of both SWFs and, even more so, by the extra concern for the well-being of the worse off that is characteristic of prioritarianism.