Welfare Economics of Prof. Amartya Sen

This paper is on Welfare economics of Prof. Amartya Sen

Introduction:

Amartya Sen came into public conscience when he was bestowed upon the noble prize for economics in 1998 for his contribution towards welfare economics and his study of famine and its causes. Before going into his contribution to welfare economics we will touch upon the main facets of this branch of economics.

Welfare Economics:

A branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it.

There are two mainstream approaches to welfare economics: the early neoclassical approach and the new welfare economics approach. The neoclassical approach takes utility to be cardinal. It is based upon the philosophy of utilitarianism. In utilitarianism people always have to act in ways that benefits all of humanity, which produces the greatest overall amount of goods in the world. This theory propagates that the overall utility of a society should be maximum irrespective of personal preferences. Utilitarism is by origin a philosophical approach. It is a moral idea about how to make the world a better place. In utilitarism people always have to act in ways that benefits all of humanity, which produces the greatest overall amount of goods in the world. The emphasis is clearly on consequences, not intentions. People must not act out of self-interest, but always need to consider what is best for society. (Hinman, 2003)

It can be said that utilitarianism is a theory, which is about achieving the greatest collective utility. Decisions should be made in accordance with people's moral preferences, because the individual could best decide what the consequences of his behavior is. When everybody realizes what is best for society, the common good will eventually emerge.

The new welfare approach differs with its concepts in terms of ordinal utility approach. Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms. Given an initial allocation of goods among a set of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made. The ideal Pareto efficient state criteria are : when no consumer can be made better off without making others worse off; when it is impossible to increase the production of any good without reducing the production of other goods; when marginal physical product of a factor must be the same for all firms producing a good and when production processes must match consumer wants.

Further there can be distributions which can be Pareto efficient, but the optimum solution is to maximize the social indifference curve. The intermediate form of social indifference curve can be interpreted as showing that as inequality increases, a larger improvement in the utility of relatively rich individuals is needed to compensate for the loss in utility of relatively poor individuals. One individual being better off than other individuals and not leaving other individuals worse off is possible in societies, where political power is not related to economic power. But this is individualistic approach and rejects any 'organic' concept of State or sovereign authority.

According to one view, a person's welfare is a matter of his/her material conditions, such as access to food, shelter, health care and, generally speaking, the necessities and perhaps luxuries of life. According to another view, welfare is a matter of the inner or mental state of the person, such as happiness or satisfaction. Some goods are positional (interpersonal dependencies) such as a high class car which marks the superiority of the owner and makes his neighbors lesser off. Some goods have positive dependencies, i.e. if friends have a mobile phone with each of them only they can communicate. In such cases distribution with Pareto efficiency is controversial.

Amartya Sen's Contribution to Welfare Economics

Before Amartya Sen joined the study of Welfare economics and Welfarism, the field was full of people who were followers of Utilitarianism and were coming dangerously close to Nihilism. Amartya Sen tried to move away from traditional studies and entered forays which have more relevance to the real world. He based his critique of Utilitarianism on following three major issues:

Act consequentialism: A decision is evaluated according to the resulting state.

Welfarism: Decisions are evaluated according to a social welfare function defined over the levels of individual utility.

Sum-ranking: Criterion is the sum of individual utilities

Sum-ranking method is widely used in distribution mechanisms around the world, but Sen says that trying to maximize individual utilities is a futile attempt unless an attempt is made to know the individual preference. A person B, who is disabled, derives half as much utility from any level of income as person A, who is in full health. Amartya Sen's theory requires that, in such circumstances, with a given total income, more should be given to B, whereas a utilitarian solution would give more to A to maximize the marginal utility thereby total utility. However he did not reject the Sum-ranking method in its entirety, rather he tried to introduce the utility comparison model inside the Sum-ranking method. To differentiate between the relative utility for two persons for a similar bundle of products Sen propounded a capability approach. The example given is of two people who are starving, one of whom lacks food, the other of who is starving out of choice on account of religious beliefs. Traditional welfare economics being concerned with outcomes does not capture the difference between the two people, which is that the second person could have made a different choice. Amartya Sen's capability approach says that valuing the set according to the value of the best element is not a good approach. He goes on to explore a dominance argument that may allow comparisons to be made between personal preferences which is outside the purview of our study.

Measuring in equality and Poverty

Amartya Sen tried gaze the real income of a country. According to him the real income is mean income multiplied by (1 - G), where G is the Gini