W is for welfare

August 6th, 2014 at 3:00 pm by David Farrar

The latest from the NZ Initiative series:

The biographies of top economists indicate that they were often motivated to study in order to be better able to contribute to the common good.  

But what is meant by the common good and what policies contribute to it?  After all, in general elections, voters are commonly confronted with at least one party advocating higher taxes in order to make New Zealand a better place for New Zealanders – and at least one other party advocating lower taxes in the same cause.

economics is a branch of economics that explores what might be meant by the common good, and seeks to evaluate economic policies on the basis of their effects on the well-being of members of a community.

As explained previously in the economic ABCs, an insight that has endured since Adam Smith (1776) is that competition, in conjunction with security in person and property, induces even solely self-interested butchers, bakers and the candlestick makers to serve their customers’ interests. Otherwise we freely take our business elsewhere.

During the 20th century, welfare economics formalised this insight into the proposition that stylised competitive processes will produce a zero waste welfare outcome.  It is optimal in the sense that no one person’s (self-perceived) welfare can be increased with reducing that of at least one other person (whether such a change is worth doing regardless remains a moot point).

Welfare economics has clarified the many situations in which the same competitive processes will potentially fail to maximise welfare in this sense. These include problems of monopoly, public goods (such as national security and communicable diseases), environmental pollution, income distribution, poverty, malleable preferences and distorting taxes. Economists have formally shown in many of these cases how a well-motivated government might ideally use taxes or regulations to improve general well-being.

Nevertheless, related branches of economics have also illuminated many difficulties that confront government action, including problems of voting behaviour, inadequate information and political and bureaucratic incentives.  The UK TV series, Yes, Minister, brilliantly depicts these difficulties. “Doing good” in government is subject to the Law of Unintended Consequences.

What about the welfare state? One of the earliest uses of this term was in the1942 Beveridge Report that ideologically proposed that the state was responsible for individual welfare “from the cradle to the grave”. What followed was a dramatic increase in taxes and social service spending in member countries of the OECD, albeit with significant national variations. Its effects on well-being will long be debated.

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9 Responses to “W is for welfare”

  1. mjw (396 comments) says:

    I think Pareto optimality is a curse. It is based on faulty logic – it is true to say “nobody can object to a change in which no one is made worse off” but it is a fallacy to go on to say “therefore we should only consider changes in which no one is made worse off.”

    To me, this is one of the great failures of modern economics.

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  2. thor42 (971 comments) says:

    I think Thomas Sowell says it best –

    “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?”

    **Well said**, Mr Sowell!

    If New Zealanders are so “hard up” then why do orchardists and farmers have to bring in people from Fiji and the Philippines to work on the orchards and farms? Why are there *thousands* of people on the dole in Napier and Hastings even in fruit-picking season?
    ( Answer – because WINZ are too soft to MAKE people take fruit-picking jobs or lose their dole. )

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  3. hj (6,991 comments) says:

    I wonder what BRT does when it’s interests are threatened?

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  4. Judith (8,534 comments) says:

    Many economics students take Psychology papers as an elective and even communications, social policy, human geography, anthropology and sociology. It is quite amazing, so many of them are taking economics because they do want to achieve better standards for lower socio-economic groups. Sort of a modern day ‘social work’ – they know its the economy that affects people most, and therefore its where they can make the biggest difference. They actually do some really good work by putting an economic stance into the area of social science.

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  5. Yoza (1,872 comments) says:

    thor42 (926 comments) says:
    August 6th, 2014 at 3:10 pm

    I think Thomas Sowell says it best –

    “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?”

    Is this a question workers put to their bosses?

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  6. SPC (5,619 comments) says:

    Corporate Welfare – allowing farmers to sell their farm at a world market price to foreigners and then avoid any CGT on their profit?

    For more of the same vote back in National, the Epsom candidate for ACT and the only man left standing for United in Ohariu.

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  7. dog_eat_dog (780 comments) says:

    SPC – let me guess, the English and Australians buying them are OK, but not the yellow peril?

    For tedious new-wave racism, vote for anyone who agrees with SPC. Slap a poll tax on the slit-eyes too while you’re at it son!

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  8. Slipster (168 comments) says:

    In other words SPC – it’s to allow the owners to sell their properties at the best possible price and keep the proceeds.

    Gee, thanks SPC. If anyone still had doubts, you’d have convinced them to vote FOR the National and ACT now.

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  9. Slipster (168 comments) says:

    @Yoza: Why would they ask that? What they worked for is their wages/salaries/fees – what they agreed their work is worth. “Bosses”, as you call them, don’t get a cut in that. Union bosses on the other hand do… Oh, that’s the bosses you mean, right?

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