Neoclassical Welfare Economics Research Articles

Reconciling the liberal tradition in normative economics with the findings of behavioural economics: on J.S. Mill, libertarian paternalism and Robert Sugden’s The Community of Advantage

ABSTRACT In The Community of Advantage, Robert Sugden reconstructs and defends an account of the liberal tradition (LT) in normative economics in the light of the findings of Behavioural Economics (BE). In this paper, the LT in neo-classical welfare economics which has roots in J.S. Mill’s thought is contrasted with Sugden’s account. Cass Sunstein and Richard Thaler’s Libertarian Paternalism (LP) arguably attempts to reconcile the LT in neo-classical welfare economics with the findings of BE and to provide it with a Millian pedigree. To the extent that it attempts this, LP is unsuccessful. While Sugden abandons core elements of traditional normative economics – notably the ‘view from nowhere’, welfarism and the preference satisfaction view of welfare – which have a Millian pedigree and advances a contractarian alternative, he successfully reconciles his reconstruction of the LT with the findings of BE and also provides it with a sound Millian pedigree.

Democracy as an evolutionary process

In this chapter we argue that contemporary Democracies undergo intense political processes of competitive transformation, in such a way that they can be analyzed as evolving complex systems. We draw upon Schumpeterian evolutionary economics, to explore how local and global interactions between heterogeneous boundedly-rational citizens and platforms, innovative processes of competition to reach power and gradually transform society, and the co-evolution between the political and the economic realms, all lead to institutional transformations underlying political and economic change. The evolutionary approach to Democracy highlights new political paradoxes and dilemmas that must be explored, monitored and faced in a dynamic way. We claim that there exists a fruitful evolutionary approach to political economy that can add surprising findings to those provided by Public Choice theory and Neoclassical Welfare Economics.

Ethical aspects of multi-stakeholder recommendation systems

In this article we analyze the ethical aspects of multistakeholder recommendation systems (RSs). Following the most common approach in the literature, we assume a consequentialist framework to introduce the main concepts of multistakeholder recommendation. We then consider three research questions: Who are the stakeholders in a RS? How are their interests taken into account when formulating a recommendation? And, what is the scientific paradigm underlying RSs? Our main finding is that multistakeholder RSs (MRSs) are designed and theorized, methodologically, according to neoclassical welfare economics. We consider and reply to some methodological objections to MRSs on this basis, concluding that the multistakeholder approach offers the resources to understand the normative social dimension of RSs.

The Precarious Case of the True Preferences

Empirical demonstrations that people’s behavior often deviates from predictions of models based on the assumption of coherent preferences highlight the possibility that people’s choices systematically misrepresent what they genuinely want. Thus, the concept of welfare as preference satisfaction becomes more questionable than ever. The essay addresses the alternative to neoclassical welfare economics proposed by the libertarian paternalists. It shows the centrality of the idea of ‘true preferences’ for the libertarian paternalist program. However, the existing proposals on how to uncover true preferences are found lacking. This effectively undercuts the idea that the government could intervene in a transparent, non-arbitrary fashion to correct ‘behavioral market failures.’ The essay concludes with a plea to the benevolent policy-makers to retain a humble, skeptical attitude towards the use of tools of psychological manipulation which is legitimized by vague welfare criteria.

Ethical Aspects of Multi-stakeholder Recommendation Systems

This article analyses the ethical aspects of multi-stakeholder recommendation systems (RSs). Following the most common approach in the literature, we assume a consequentialist framework to introduce the main concepts of multi-stakeholder recommendation. We then consider three research questions: who are the stakeholders in a RS? How are their interests taken into account when formulating a recommendation? And, what is the scientific paradigm underlying RSs? Our main finding is that multi-stakeholder RSs (MRSs) are designed and theorised, methodologically, according to neoclassical welfare economics. We consider and reply to some methodological objections to MRSs on this basis, concluding that the multi-stakeholder approach offers the resources to understand the normative social dimension of RSs.

Regulation, public interest, and private interest: an empirical investigation of firms in Japan

By using empirical methodology, this paper investigates to what extent the public interest and the private interest theories, respectively, explain the actual regulatory process. Our estimation findings are as follows: First, on average (whole industry basis), the explanation power of the public interest theory is about 46– 78%, while that of the private interest theory is about 22–54%. Second, the explanatory power of the public interest theory is higher in non-public utility industries, while that of the private interest theory is higher in public utility industries. This suggests that regulations on non-public utility industry are constructed largely with social welfare in mind, as assumed in conventional neoclassical welfare economics, but that those in the public utility industry tend to be captured largely by private groups, as assumed in private interest theory.

Beyond Rationality, Towards Reasonableness: Enriching the Theoretical Foundation of Deliberative Monetary Valuation

Economic valuation is often deemed an important source of information for land-use decisions. Stated preference (SP) methods are a particularly potent class of economic valuation methods, but they are also particularly controversial. In response to accumulating criticism of SP, deliberative monetary valuation (DMV) has been proposed as an alternative approach and has gained considerable attention in recent years. However, being a combination of elements from two theories – neoclassical welfare economics and theory of deliberative democracy – it lacks a convincing, consistent theoretical foundation. In our paper, we propose some clarifying adjustments regarding rationality assumptions and aggregation issues by drawing upon the work of Amartya Sen. We find that many of his ideas lead to a harmonisation of DMV's theoretical foundations, e.g. meta-rankings of preferences, impartial spectator and the plurality of impartial reasons.

Improving the Relationship between Welfare Economics and Ethics

In this essay, the essential aspects of Welfare Economics are summarized in order to analyse the possible links with Ethics, and consequently to provide useful suggestions for Economic Policy. The Introduction contains the principles of neoclassical Welfare Economics, without considering the circumstances in which the so‑called failures of competitive markets occur. The second part of this paper contains a description of two possible solutions to the problem concerning the integration of Welfare Economics and Ethics. The first solution is the determination of the optimal combination of general competitive equilibrium principles and social ethics ones, without removing the theoretical structure of Welfare Economics. This first proposal, while retaining some economic liberalism principles, assigns a central role to the government, which is delegated to superimpose on the Pareto criterion a distributive justice rule. Another solution, which is suggested by Sen, is essentially directed to modify Welfare Economics by ethical criteria aimed at improving every individual deprivation, and it is based on the distinction between the two concepts of ‘utility’ and ‘agency’. We also proposed exploiting the original considerations written by Smith about social aspects as a useful integration and support to Sen’s approach.

A New Institutional Approach to Innovation Policy

Modern research and innovation policy is largely based on neoclassical welfare economics, in which the diagnosis of market failure in the production of new information is translated into a case for innovation policy. Both New Institutional and Public Choice economics criticise this approach because it tends to assume that policy interventions are largely costless and produce only benefits. An alternative policy model is proposed that focuses on minimising the social costs of innovation policy through efficient choice of institutions. We review the recently released National Innovation and Science Agenda through this lens.

Reconciling normative and behavioural economics

The aim of this thesis is to address from a methodological, philosophical and theoretical perspective the problem of how to reconcile normative and behavioural economics — the “reconciliation problem”. The first part develops a methodological assessment of behavioural welfare economics (and more specifically of libertarian paternalism), which currently constitutes the most accepted approach to deal with the reconciliation problem. We argue that behavioural welfare economics is in the direct continuation of neoclassical welfare economics, and that its conception of individual behaviour is tightly connected to Pareto’s reductionist model of the Homo economicus. It is assumed that an individual can be defined by “true” preferences — distinct from her revealed preferences — and that those preferences are consistent and context-independent. The satisfaction of those true preferences is taken as the normative criterion. The existence of true preferences requires accepting that people have access to a latent mode of reasoning able to generate consistent and context-independent preferences, and to treat individual decision-making as if it was the result of an optimisation problem faced by an inner rational agent trapped in an outer psychological shell. We argue on the contrary that we cannot define unambiguously such true preferences. We then argue that the normative challenge raised by behavioural economics is that individuals may lack of autonomy: rather than focusing on the satisfaction of one’s preferences, we argue that what matters is the ability to choose one’s own preferences. Since we suggest that the difficulties of behavioural welfare economics are related to its commitment to an implausible model of individual preferences, we provide in the second part of the thesis a model of preferences compatible with our methodological analysis: we take Bacharach’s variable frame theory as the primitive of our analysis, and build a model of endogenous preferences, in which individuals can choose to some extent their own preferences. The main contributions of this model are that (i) it does not require the existence of latent true preferences, and (ii) the individuals are allowed to team reason. We assume that collective preferences are strategically chosen, and show that team reasoners tend to be aggressive (cooperative) with other teams in submodular (supermodular) games. We finally show that team reasoning can be empirically justified as an ecologically rational heuristic.

Contingent valuation and choice experiment of citizens’ willingness to pay for forest conservation in southern Finland

Environmental quality has a direct effect on citizens’ welfare. To quantify this effect, the four articles of this thesis analyse Finnish citizens’ willingness to pay (WTP) for increased forest conservation using the contingent valuation (CV) and choice experiment (CE) methods. These methods are based on neo-classical welfare economics augmented with the choice process framework originating from psychology and behavioural economics. Using the CV method, we analyse how WTP is affected by respondents’ uncertainty, by the share of nonrespondents and by the considerably high share of “yes” responses at the highest proposed costs to households. The CE data are used to study the effects of different conservation programme characteristics on WTP. The results show that Finnish citizens support increased forest conservation. The median WTP in the contingent valuation was 72 EUR, i.e. 50% of respondents supported increased conservation if the costs per household did not exceed 72 EUR. The mean WTP estimates were sensitive to modelling assumptions and assumptions concerning the nonrespondent preferences. This emphasises the need for careful sensitivity analyses when results are used for welfare measurement and policy planning. Respondents’ choices in the valuation questions were affected by the household costs of conservation and other socioeconomic characteristics. The results suggest that the choices in valuation tasks are affected by economic and psychological factors. The study gives important insights into the choice behaviour and lower and upper bound estimates of WTP. These estimates are somewhat lower than those in comparable earlier Finnish studies. In CV, respondents seemed insensitive to programme size while the extent of the proposed project had a significant effect on the choices in CE.

The economics of social reform across borders: Fukuda's welfare economic studies in international perspective

AbstractThis article examines how, in the course of modernization, Japan learned from Germany and Britain about ideas and institutions concerning social reform, and attempted to implement and develop them at home. It focuses on Fukuda Tokuzo, a pioneering liberal economist and social reformer, who studied under the German historical economist Lujo Brentano, and who was also inspired by the British scholars Alfred Marshall, A. C. Pigou, and J. A. Hobson. By examining how Fukuda's ideas and work were developed and assimilated in Japan, this article shows how Japanese social reformers navigated the two key strands of economic thinking that witnessed a process of globalization during this period: neoclassical welfare economics, on the one hand, and an ethical-historical style of economics, on the other. It shows how the latter was stronger in a latecomer country to modernization such as Japan.

Better Development Decision-making: Applying International Human Rights Law to Neoclassical Economics

This paper aims to demonstrate that a human rights-compliant normative approach offers solutions to some of the specific areas of concern for economic decision-making in the context of development, as well as for meeting the requirements of human rights. The authors, an international lawyer and economist respectively, draw on the doctrines that inform international human rights law in the area of socio-economic rights and by providing a careful construction that meets the didactic demands of a cross-disciplinary inquiry, reveal how the externally-generated ethical criteria of international human rights law provide welfare economics with the justice-centred guidance it lacks, moving it beyond the conventional premises of economic efficiency and aggregate social utility. The merits of this study transcend that of academic pursuit: most international organisations favour mainstream economics with development economists adopting the value judgments and allocation efficiency principles of neoclassical welfare economics. Integrating the normative demands of human rights into mainstream economic thinking and decision-making may thus offer international development and financial institutions insights that help set alternative norms and value judgments that can act as an integral complement to welfare economic analysis.

Observing the observers: uncovering the role of values in research assessments of organic food systems

Assessing the overall effects of organic food systems is important, but also a challenge because organic food systems cannot be fully assessed from one single research perspective. The aim of the article is to uncover the role of values in assessments of organic food systems as a basis for discussing the implications of combining multiple perspectives in overall sustainability assessments of the food system. We explore how values are embedded in five research perspectives assessing organic food systems, 1) Food Science, 2) Discourse Analysis, 3) Phenomenology, 4) Neoclassical Welfare Economics and 5) Actor-Network Theory. The article shows that value has various meanings in different scientific perspectives, and that a strategy for including and balancing different forms of knowledge in overall assessments of the effects of food systems is needed. Based on the analysis, we propose five ecommendations: 1) Elucidate values as a necessary foundation for research assessment across perspectives. 2 The choice of perspective is decisive and should be openly discussed 3) Formulate common goals which can be translated into the different perspectives and 4) Consider assessment of food system sustainability a learning process and design it as such.

Gleichmäßigkeit der Ertragsbesteuerung – ein ökonomisch fundiertes Besteuerungsziel? / Equability of Taxation – an economic based approach of taxation?

Zusammenfassung Gleichmäßigkeit der Besteuerung hat neben einer ethischen eine erfahrungswissenschaftliche Dimension. Im Hinblick auf diese erfahrungswissenschaftliche Dimension stellt sich die Frage, wie Gleichmäßigkeit der Besteuerung durch ökonomische Theorien konkretisiert werden kann und auf welche ökonomischen Theorien rekurriert werden sollte. Das hier vorgelegte Ergebnis lautet, dass sich Gleichmäßigkeit der Besteuerung neoklassisch und evolutorisch fundieren lässt. Neoklassische Gleichmäßigkeit wird in der Betriebswirtschaftlichen Steuerlehre als neoklassische Entscheidungsneutralität konkretisiert. Neoklassische Gleichmäßigkeit hat ihr theoretisches Fundament in der neoklassischen Steuerwirkungstheorie und wird aus der neoklassischen Wohlfahrtsökonomik hergeleitet. Evolutorische Gleichmäßigkeit wird hier als Verringerung von Steuerausweichentscheidungen konkretisiert. Sie basiert auf dem von Viktor Vanberg vertretenen evolutorischen Ansatz. Die Entscheidung für neoklassische oder evolutorische Gleichmäßigkeit hängt davon ab, ob man Realitätsgehalt und Widerspruchsfreiheit oder methodische Stringenz stärker gewichtet. Nach hier vertretener Auffassung ist eine realitätsnähere, widerspruchsfreie, wenn auch weniger stringente evolutorische Gleichmäßigkeit gegenüber einer neoklassischen Gleichmäßigkeit vorzuziehen.

Behavioral Economics and the Conduct of Benefit-Cost Analysis: Towards Principles and Standards

As traditionally conducted, benefit-cost analysis is rooted in neoclassical welfare economics, which, in its most simplified form, assumes that individuals act rationally and are primarily motivated by self-interest, making decisions that maximize their welfare. Its conduct is evolving to reflect recent work in behavioral economics, which explores the psychological aspects of decisionmaking. We consider several implications for analyses of social programs, focusing largely on economic valuation. First, benefit-cost analysis often involves valuing nonmarket outcomes such as reductions in health and environmental risks. Behavioral research emphasizes the need to recognize that these values are affected by psychological as well as physical attributes. Second, benefit-cost analysis traditionally uses exponential discounting to reflect time preferences, while behavioral research suggests that individuals’ discounting may be hyperbolic. While the appropriate rates and functional form are uncertain, market rates best represent the opportunity costs associated with diverting funds to support a particular social policy or program. Such rates reflect the intersection between technological progress and individual preferences, regardless of whether these preferences fit the standard economic model or a behavioral alternative. Third, behavioral research emphasizes the need to consider the influence of other-regarding preferences on valuation. In addition to acting altruistically, individuals may act reciprocally to reward or punish others, or use the status of others as the baseline against which to assess their own well-being. Fourth, behavioral economics identifies factors that can help researchers develop valuation studies that provide well-informed, thoughtful preferences. Finally, while behavioral research has led some to argue for a more paternalistic approach to policy analysis, an alternative is to continue to focus on describing the preferences of those affected by the policy options while working to ensure that these preferences are based on knowledge and careful reflection. Benefit-cost analysis can be best viewed as a pragmatic framework for collecting, organizing, and evaluating relevant information.

Cardinal Scales for Health Evaluation

Policy studies often evaluate health for an individual or for a population by using measurement scales that are ordinal scales or expected-utility scales. This paper develops scales of a different type, commonly called cardinal scales, that measure changes in health. Also, we argue that cardinal scales provide a meaningful and useful means of evaluating health policies. Thus, we develop a means of using the perspective of early neoclassical welfare economics as an alternative to ordinalist and expected-utility perspectives.

An Assessment of Important Issues Concerning the Application of Benefit-Cost Analysis to Social Policy

AbstractBenefit-cost analysis (BCA) provides a framework for systematically assessing the efficiency of public policies. Increasingly, BCA is being applied to social policies, ranging from preschool interventions to prison reentry programs. These applications offer great potential for helping to identify policies that offer the best returns on public investments aimed at helping the disadvantaged or otherwise improving social life. However, applying BCA to social policies pose a number of challenges. The need for a comprehensive approach to assessing social policies generally requires making predictions based on data from multiple sources and using available shadow prices. As these predictions and shadow prices are inherently uncertain, special effort must be made to explicitly address the resulting uncertainty of predictions of net benefits. Prediction and valuation are complicated by behaviors, such as addiction, that do not clearly satisfy the assumptions of neoclassical welfare economics. As distributional goals are often an explicit motivation for social policies, BCA may be an incomplete framework for public policy purposes unless analysts can find ways to incorporate people's willingness to pay for changes in the distribution of consumption across society. If BCA is to reach its potential for contributing to good social policy, analysts must be aware of these challenges and researchers must help address them.

A reformulation of the foundations of welfare economics

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.

The behavioral foundations of Austrian economics

Behavioral and experimental economics present challenges to the neoclassical theory of individual behavior, which is based on individuals making choices within the framework of utility functions that are assumed to have certain well-defined characteristics. Results in behavioral and experimental economics have shown that it is common for individual behavior to systematically deviate from the neoclassical axioms of utility maximization. Austrian economics is also based on axiomatic theories of utility maximization, but the assumptions underlying utility-maximizing behavior are much weaker in the Austrian approach. As a result, they have more solid behavioral foundations and are less subject to challenge by the empirical findings of behavioral and experimental economics. Neoclassical policy conclusions are often overly strong because of its behavioral foundations which are challenged by behavioral and experimental economics and are often misleading because of the comparative static nature of neoclassical welfare economics. For purposes of policy analysis, the Austrian approach provides better insights because of its more realistic behavioral foundations.