The Pareto criterion

The only uncontroversial normative criterion at the collective level for the new welfare economics relies on individual utilities, as far as comparing utilities among individuals is not required nor even allowed.

[T]he members of a collectivity enjoy maximum ophelimity in a certain position when it is impossible to find a way of moving from that position very slightly in such a manner that the ophelimity enjoyed by each of the individuals of that collectivity increases or decreases. That is to say, any small displacement in departing from that position necessarily has the effect of increasing the ophelimity which certain individuals enjoy, and decreasing that which others enjoy, of being agreeable to some, and disagreeable to others.

A social state is hence said to be Pareto optimal if it is not possible to improve the situ­ation of certain individuals without making the situation of at least one other individual worse off.

Let us consider how to use this criterion. Compare different social states for a given population, where everyone has monotonous preferences over the commodities x and y. In state S1, the allocation of resources among individuals is fully equal for each com­modity. Now, if individuals’ tastes are heterogeneous - some prefer to have more x while others want relatively more y - they will find opportunities for exchange between x and y. In the social state S2, the situation of individuals who saw an interest in the exchange has improved while the situation of others did not deteriorate from S1 to S2. S2 is better than S1 according to the Pareto criterion as the situation of some has improved without damaging the situations of others. Nobody has a vested interest to go back from S2 to S1 and, at most, some are indifferent. The fundamental theorems of welfare economics characterize this optimum, and specify the conditions of its existence (see below). The choice among different Pareto-optimal equilibria, notably on the basis of explicit value judgements, is the task devoted to the Bergson-Samuelson version of welfare economics.

Imagine now that, in state S3, resources entirely belong to a single rich individual, while the others are totally deprived. The Pareto criterion does not help to compare S1 and S3. May the unequal distribution of S3 be repellent, the rich individual’s satisfac­tion would drop from S3 to S1, which implies that at least one person would suffer a downturn. As the Pareto criterion does not apply, no ranking between S1 and S3, or S3 and S2 may be derived. Hence a strict Paretian welfare economics is mute as to whether or not public policies should go towards state S1 or S2 while in S3. More generally, it cannot disentangle situations in which trade-offs among the satisfactions of different individuals are required. However, most policies are likely to hurt some individuals or groups of individuals in order to improve the situation of another significant group of people. They imply trade-offs at the end, hence they rely on some kinds of interpersonal comparisons of utility. That is why, after Robbins’s attack against the normative aspects of economics and especially against the use of interpersonal comparisons, welfare eco­nomics was likely to become silent for any policy recommendations and could have lost its raison d’etre.

The British version of the Paretian welfare economics provides some tricks to gener­ate recommendations without, so they claim, involving any value judgements. The new approaches to welfare economics such as the capability approach and the equity theory succeed in considering these situations and formulate explicit normative criteria to justify the trade-offs.