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Collection: IHS Studies in Economic Theory
Subject Area: Economics

From Wealth to Welfare - Israel M. Kirzner, The Economic Point of View [1960]

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The Economic Point of View: An Essay in the History of Economic Thought, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed Andrews McMeel, 1976).

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From Wealth to Welfare

The period in which economic affairs were chiefly considered as being concerned with a class of objects known as wealth coincided roughly with the nineteenth century. Only since the turn of the century have economists been increasingly inclined to consider the scope of their subject in less objective terms. Yet most of the newer views on the question of definition had already found some expression in the writings of the more thoughtful students of economic methodology well before the present century. These murmurings of dissatisfaction with the traditional wealth–bound conception of economics may most illuminatingly be interpreted as the reflection of the more general revolt against the classical system that came to a head in the last quarter of the century.

This general revolt found expression in various ways. In the domain of formal reasoning, the development of the theory of marginal utility in the seventies by Jevons, Menger, and Walras marked the shift of attention from objective cost to subjective utility. In discussions concerning the nature and scope of economics, the change showed itself in the increasing awareness that this subject has as much to do with man as it has with wealth. Well before 1870 there were already many signs in England of the recognition of the humanistic character of economics.60 Schaffle in Germany and Droz in France had insisted on placing the role of man in economics higher than that of goods.61 Ely described the development of economics as occurring in three steps:

Writers of the first class regard political economy as a science which has to do with external valuable things or economic goods—that is, with wealth...; writers of the second class, as the science which has to do with economic goods in their relation to man; writers of the third class, as the science which has to do with man in his relations to economic goods.62

All this made necessary a search for some new criterion for determining the scope of economics. If economics has to do with goods, then its scope is as clear as is permitted by the definition of the word “goods.” But if it is urged that economics is primarily concerned with man, then there is an obvious need to make clear precisely which aspect of the study of man economic theory is concerned with. The subsequent chapters of this book deal with some of the different approaches that have been made toward the solution of this problem. At this point in the chapter describing the conception of economics as a science of wealth, attention must be drawn to one of the most popular of these approaches, viz., the view that sees economics as dealing with the phenomena connected with economic welfare.

This view of economics had, in fact, the most persuasive claim to qualify as the natural successor to the earlier definition of it as a science of wealth. Wealth promotes the economic welfare of man. If exclusive attention to the objects of wealth was to be declared scientifically inexpedient, then the problem could be avoided by shifting attention from the goods themselves to the welfare to which they minister. Instead of studying the effects of various measures on the wealth of a nation, economic analysis may be viewed as going a step further and studying the welfare of the nation as affected by these measures.

Such a conception of economics provided a framework into which the received body of doctrine could be fitted without excessive strain, while at the same time it reflected the new recognition of the subjective basis of market phenomena. The shift to this fresh conception seemed merely a broadening of the scope of the subject from one narrowly concerned with goods to one concerned with happiness.63 Cannan, writing at the beginning of this century on developments since the appearance of Mill’s Principles, saw this broadening as the work of the theory of marginal utility:

Whatever definition of economics may be adopted, it is clear that the conception of its subject has become wider than it was...The economist of today recognizes that he has to do with man in relation to one particular kind of human welfare...Ever since Jevons...it would be impossible for any economist of the present day to repeat Malthus’ remark that Adam Smith mixes the nature and causes of the wealth of nations with the causes which affect the happiness and comfort of the lower orders of society.64

From the point of view of the long–run developments in the definition of economic phenomena, this broadening of the economics of wealth into the economics of welfare does not mark so radical a change as that marked by the appearance of any of a number of later conceptions to be taken up in subsequent chapters. In fact, as against the other definitions of economics, both the wealth and the welfare formulations contain much in common; many of the features found to be objectionable in the wealth criterion appear unchanged in its welfare counterpart. Both formulations are “classificatory” and “departmental” rather than “analytical.”65 Both see economics as studying something that is produced, whether goods or happiness, rather than a certain type of activity.66 Especially where economic welfare is understood as meaning material welfare, the concept of welfare evinced a strong bond of continuity with that of material wealth.

Nevertheless, as the neoclassical expression of the classical wealth–oriented definition of economics, the welfare and utility criterion did call for a conscious alteration of focus in the contemplation of economic phenomena. This point of view, while it became popular only after the introduction of marginal utility economics, had its forerunners as far back as the classical economists. One of Adam Smith’s successors, Dugald Stewart, considered political economy as dealing with “the happiness and improvement of political society.”67 The position of Henri Storch has already been noticed in this chapter. He broadened economics so as to deal, not with the wealth of nations, but with the “prosperity” of nations—a concept that included “civilization” as well as wealth. John Stuart Mill, when he came to consider the question of defining economics, criticized Say for having a similarly wide conception of political economy. Sismondi’s emphasis on happiness and consumption in economics68 and Lauderdale’s all–embracing definitions of wealth place their conception of economics in the same group.

The more general movement towards the idea of economics as a science of welfare rather than of wealth that accompanied the reaction against the classical school is evidenced in the literature in a number of directions. Cliffe Leslie, who was to become the vigorous proponent of historical consciousness in British economics, had a hand in this development. Writing as early as 1862 in a frequently cited essay, The Love of Money, Leslie attacked the notion that the pursuit of wealth represented a self–contained human motive. The love of money means completely different things to different people. To the scholar it may mean the love of books; to the toper it may mean love of liquor. There is nothing unique in the motives that lead men to seek monetary gain; they are as heterogeneous as are human tastes themselves. Later arguments like these were to lead Leslie and others to denounce the classical economists for their postulation of the possibility of valid laws of wealth apart from the “laws of society.” Yet the impact of these ideas undermining the concept of a unique category of wealth through reference to the heterogeneity of the demand side of economics undoubtedly contributed toward a better grasp of the nature of economic theory. For example, it was the increased attention to the demand factor that made it possible for Jevons to “take utility...as the subject matter of economics,” or for an American writer to declare that all definitions of economics reduce to “the science of enjoyment or ...the science of the means of enjoyment.”69

In France a long tradition of stress on utility lent force to the growing dissatisfaction with the definitions of economics formulated in terms of wealth.70 Welfare, utility, ophelimity—these were the terms around which expositions of economic doctrines revolved. The “ethical neutrality” with which these terms were explicitly invested even further removed the newer views from the wealth–bound conception of the subject, while it at the same time provided the bridge across which economics could, if desired, pass in order to become a science of conduct or a logic of pure choice.

By the early years of the present century, the idea that economics is essentially concerned with welfare, or at least with material well–being, was probably the view most generally accepted among the English economists. Both Marshall and Cannan introduced widely used textbooks, running to many editions, with definitions formulated in terms of material welfare.71 Marshall, it is true, had made it clear that it is only an accident that economics is concerned with material wealth and that its “true philosophic raison d’etre must be sought elsewhere.72 Cannan, however, held the criterion of material welfare to be the real distinguishing feature of economics. When Robbins, in attacking this proposition, took Cannan’s enunciations of it as his principal target, Cannan gladly took up the cudgels in its defense.73 In America economists representing such different outlooks as Fetter and Mitchell both called for a shift in interest away from wealth itself towards the human welfare with which it is related; both saw a need for such a shift in the very conception of the nature of economic science.74

Of course, the identification of economics with the study of economic welfare raised fundamental questions about the justifiability and validity of propositions concerning changes in social welfare. It is under the shadow of this thorny problem, involving the admissibility of interpersonal comparisons of welfare and the legitimacy of possible ethical assumptions, that welfare economists in recent decades have been consciously working.75 Sir Dennis Robertson cites the contention that the implications of envy make it uncertain that welfare would be increased even if everyone had more of every commodity. Robertson’s characteristic reply to this possibility would certainly have won Cannan’s concurrence:

How much better, surely, to assert as a plain matter of fact that economic welfare undoubtedly will be increased in this event; and then to call in the Archbishop of Canterbury to smack people over the head if they are stupid enough to allow the increased happiness which might be derived from this plain fact to be eroded by the gnawings of the green–eyed monster; and I cannot at present persuade myself that such a common–sense distinction between the economic and the not is fatally undermined by the fact that the Archbishop draws a salary and that his gaiters embody scarce resources which might have been devoted to an alternative use.76

Robertson’s words gives added salience to the difficulty that the advance from wealth to welfare brought in its train. If economics is concerned with a part of welfare, how is this part to be identified? The “material wealth” criterion embraced by Cannan provided an answer to this question by retaining a direct bond to the discarded conception of economics as a science of wealth. The objections which might be raised against such a criterion, and which Robertson here brushes aside, are clearly in large measure those that can be levelled at the type of definition treated generally in the present chapter.

[[60]]On the existence of a line of subjective development in economics after the death of Ricardo, see M. Bowley, Nassau Senior and Classical Political Economy, ch. II.

[[61]]See A. Schäffle, “Mensch und Gut in der Volkswirtschaft” (1861) in his Gesammelte Aufsätze, pp. 158 ff.; Droz's very strongly held position is cited by an American economist, Stephen Colwell, in a preliminary essay to an edition of F. List's National System of Political Economy (Philadelphia, 1856), p. xxxvii; see also P. Cauwés, Précis du coursd'économie politique (Paris, 1881), p. 6.

[[62]]R. T. Ely, An Introduction to Political Economy (New York, 1889), p. 105.

[[63]]This continuity between the classical conception of economics as a science of wealth and the later emphasis on welfare gains in significance if classical economics is interpreted as “welfare analysis at the physical level” on the grounds that the classical economists implicitly assumed “that quantities of satisfaction of given wants are roughly proportional to quantities of physical products.” H. Myint, Theories of Welfare Economics, p. xii.

[[64]]E. Cannan, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848 (3rd ed.; London, 1917), p. 312. The quoted passage first appeared in the second edition (1903).

[[65]]On the distinction between “classificatory” and “analytical” definitions of economics, see L. Robbins, Nature and Significance of Economic Science (2nd ed.), pp. 16 f.; A. L. Macfie, An Essay on Economy and Value, p. 2; L. Fraser, Economic Thought and Language, pp. 26 f.

[[66]]“Welfare was like a fluid or a gas which, although perhaps difficult to measure, was in principle measurable ... ” I. Little, A Critique of Welfare Economics (Oxford, 1950), p. 9.

[[67]]Dugald Stewart, Political Economy, ed. Hamilton (1855), I, 9. The passage was written about 1810. Cf. Bonar, Philosophy and Political Economy (London, 1922), p. 152.

[[68]]J. C. L. Simonde de Sismondi, Nouveaux principesd'économie politique (3rd ed.; Geneva, 1951), p. 66.

[[69]]See W. S. Jevons, The Principles of Economics (London: Macmillan & Co., 1905), p. 49; H. H. Powers, “Wealth and Welfare,” Publications of the American Academy of Political and Social Science (April 4, 1899), p. 16.

[[70]]Among French writers of the period who expressly condemned the objectivism of the definitions formulated in terms of richesses were: H. Dameth, Introduction à l'étude de l'économie politique (Paris, 1878), p. 89; A. Girault, “Les grandes divisions de la science économique,” Revued'économie politique, 1900, p. 796; E. Villey, Principesd'économie politique (Paris, 1894), p. 5; C. Gide, Principles of Political Economy (2nd American ed.; Boston, 1905), p. 3 n.; G. Tarde, Psychologie économique (Paris, 1902), I, 127.

[[71]]See L. Robbins, Nature and Significance, p. 4 and footnotes.

[[72]]For a more detailed discussion of Marshall's conception of the economic point of view, see below, chap. V. See also T. Parsons, “Wants and Activities in Marshall,” Quarterly Journal of Economics, November, 1931, pp. 106 ff. For a discussion of the limitations circumscribing Marshall's adoption of the welfare formulation, see also F. Fetter, “Price Economics Versus Welfare Economics,” American Economic Review, 1920, p. 721.

[[73]]E. Cannan, review of L. Robbins' Nature and Significance in Economic Journal, September, 1932, pp. 424–427.

[[74]]F. Fetter, “Price Economics Versus Welfare Economics,” American Economic Review, 1920; W. C. Mitchell, The Backward Art of Spending Money and Other Essays, p. 381.

[[75]]For an informative survey of these problems, see Streeten's Appendix to his translation of Myrdal's The Political Element in the Development of Economic Theory (1954).

[[76]]D. H. Robertson, “Utility and All What?” Economic Journal, December, 1954, reprinted in his Economic Commentaries (London: Staples Press), pp. 57–58. Robertson has coined the term “ecfare” to denote the specific area of human welfare which is of concern to the economist.