BOX 4-3 Welfare Economics, Utilitarianism, and Contractarianism

Welfare economics is the economics discipline's attempt to define the good life and to measure progress toward it. Individual good is defined as the satisfaction of individual preferences. The value measures are found through a process that identifies the minimal expenditure that will maintain the individual's baseline utility level. The procedure accurately reflects individual preferences, as intended, but also has the more controversial property that the preferences of the well-off count for more.

Welfare economics speaks with a clear voice about individual good, but there are distinct utilitarian and contractarian variants for addressing social good. The utilitarian approach is manifested in the benefit-cost criterion and in indexes of standard of living and cost of living. Money metrics of individual utility (for example, willingness to pay and willingness to accept) are summed across individuals to calculate social-welfare levels and changes. This interpersonal rule by aggregation has the property that it could identify a welfare improvement in a change that visited great harm on a few in the service of small gains for many.

The contractarian alternative finds it intolerable that individuals might be obliged to bear uncompensated harm in service of the public good. It emphasizes Pareto safety and consensual change: voluntary exchange of private goods and voluntary taxation for provision of public goods. Accordingly, contractarian welfare economics places great importance on property rights and compensation for individuals who would otherwise be made worse-off as the result of actions undertaken for the public good.

"veil of ignorance" process is more nearly a thought experiment than a practical prescription. Without the constitutional stage, libertarian and contractarian proposals remain seriously flawed: libertarians remain unable to deal consistently with public goods and community values, and contractarians find themselves defending a legal and economic status quo that has not itself been justified.

Kantian Ethics

A tradition of ethical theory dating at least to the 18th-century writings of Immanuel Kant takes seriously the distinctions between instrumental needs, desires, tutored aesthetic taste, and matters of moral principle. Kant distinguished among three kinds of value: instrumental, subjective, and categorical. An object has instrumental value insofar as it is a means to a valued end. If you want your car to go, for example, you must fuel it. This kind of "if-then" statement, which Kant called the "hypothetical imperative", is testable and so universal and rational. Insofar as the statement "If you want your car to go, you must fuel it" is true,



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