Pareto Unanimity Rule:
Vilfredo Pareto was the first economist who provided us with a positive criterion for an increase or decrease in social welfare. His formulation was accepted by his followers, especially Enrico Barone. This was, indeed, a landmark in the history of subjective welfare economics. Earlier, economists spoke of ‘welfare’ as the sum of cardinally measurable utilities of the members of society. According to them, an optimum allocation of resources was one that maximized welfare in this sense. But Pareto differed from them on two important points. Firstly, he rejected the cardinal notion of utility. He refused to believe that utility was an extensive magnitude, subject to numerical measurement like the length of a piece of cloth. Utility, according to him, was not miserable at all. Secondly, he ruled out interpersonal comparisons of utility altogether. This was the logical inference from his belief that utility was not subject to numerical measurement. Pareto’s welfare conclusions were independent of any interpersonal comparisons whatsoever.
Pareto started with his concept of social optimum (often referred to as the Paretian optimum or the general optimum). Paretian optimum or social optimum refers to that situation when no one in a society can move into a position that he prefers without causing someone else to move into a position which that person prefers less. It may be defined as that position from which it is not possible, by any reallocation of resources, to make anyone better off without making someone worse off. In other words, a situation is not a Paretain or social optimum if it is possible, by changing the way in which commodities are produced or exchanged, to make one person better off without making another person (or, persons) worse off. In Pareto’s own words, the social optimum is a position “where it is impossible to make a small change of any sort, such that ophelimities of all the individuals, except those that remain constant, are either all increased or all diminished.”
The Paretian concept of social optimum is, in essence, the same as the Cambridge concept of ideal output. Following in the footsteps of Pareto, Cambridge economists, including Pigou, have defined ideal output as that position from which no reallocation of productive factors can add to the social value of the total product. Thus, the Paretian optimum, as well as the Pigovian ideal output, both indicate summit positions yielding the maximum social welfare.
The Paretian optimum, no doubt, represents a summit position (in the sense of maximum social welfare). But there is no single summit in this sense. There may be many such summit positions, each representing a different magnitude of welfare. Pareto himself pointed out that there were, “an infinite number of points at which maxima of individual ophelimities are attained.” The Paretian definition of Social Optimum, thus, sets up an infinite number of non-comparable welfare optima. This, in fact, represents the main weakness of the Paretian Social Optimum. If there is more than one summit position, the question naturally arises: Which of the many summit positions represents the unique social optimum? The answer to this question involves interpersonal comparisons which Pareto had rejected altogether. If interpersonal comparisons are ruled out, there is no possibility of finding a summit position representing a unique social optimum.
The Paretian optimum provide us with a criterion, often referred to as Pareto’s Unanimity Rule, for making welfare judgments. Pareto did not devote much attention to the problem of distribution, because he believed that incomes are distributed among individuals in society “according to the rule which one would like to adopt.” Therefore, the welfare of society, according to him, depended upon production, (including exchange). He, thus, dispensed with the problem of distribution and built up his criterion of social welfare on the optimum organization of production, including exchange. In Pareto’s own words, “Given certain rules of distribution, we can investigate what positions, following these rules, will give the greatest possible well-being to the individuals of the collectivity. Let us consider any particular position, and suppose that a very small move is made compatible with the relation involved. If in doing this, the well-being of all the individuals is increased, it is evident that the new position is more advantageous for each one of them; vice versa, it is less so if the well-being of all individuals is diminished. The well-being of some may remain the same without these conclusions being affected. But if, on the other hand, this small move increases the well-being of certain individuals and diminishes that of others, it can no longer be said that it is advantageous to the community as a whole to make such a move.”
In other words, according to Pareto, within a given framework of distribution, a reorganization of production and exchange will be looked upon as welfare increasing (or, decreasing) if it improves (or, worsens) the position of at least one person without affecting the position of others. But if any reorganization of production and exchange, through a redistribution of incomes, makes some persons better off and others worse off, we cannot say whether the welfare of society as a whole (or, social welfare) has increased or decreased. The reason is obvious. Any such statement would inevitably involve interpersonal utility comparisons about which there can be no unanimity. Therefore, it is not possible to say as to what has happened to the welfare of society as a whole under these circumstances.
The above criterion of Pareto is negative in character. It amounts to saying “Never do harm to anyone”. This criterion involves no interpersonal comparisons of utility. The welfare of society, according to Pareto, increases if the position of at least one person improves without worsening the positions of others. In his later formulations, Pareto seemed to have divested his criterion (of social welfare) of its negativity and preferred to base it on a positive view. It amounted to saying, “Always do good to all.” He distinguished two types of movements as-
- Movements that are good to some and harmful to others.
- Movements that are “to the advantage of all individuals without exception.”
He preferred the second type of movements because they helped to reach the “point of maximum ophelimity for the community.” This clearly indicates that Pareto preferred in his later formulations the positive criterion for making welfare judgments. This positive criterion (known as Pareto’s Unanimity Rule) does not rely on interpersonal comparisons of utility at all. It is based on a fairly broad critical judgment, namely, that it is a good thing to make any person better off without making any person or persons worse off. This social welfare criterion of Pareto is quite consistent with the doctrine that both parties stand to gain from free exchange.
The main weakness of the Paretian criterion is that it enables us to judge only unambiguous welfare changes. In other words, it can tell us whether welfare has increased when some governmental policy makes at least one person better off without making any person (or, persons) worse off. It does not help us to evaluate those governmental policies which benefit some and harm others. The criterion, therefore, fails to evaluate ambiguous welfare changes. To evaluate such welfare changes, it becomes necessary to resort to interpersonal utility comparisons which Pareto wanted to avoid at all costs. Hence Pareto’s criterion evaluates only unambiguous welfare changes. As Prof. Boulding has pointed out, Pareto’s criterion has distinguished between two types of changes in social variables. The first type takes place through trading that benefits all persons or at least benefits one person without harming others. The second type takes place through conflict which benefits some and harms others. The Paretian criterion deals with the former, not with the latter. It deals exclusively with those changes which benefit all persons or at least benefit one person without harming others. In view of the fact that there are few economic policies that do not harm someone, the Paretian criterion for an increase in social welfare does not possess general applicability. To that extent, it makes welfare economics barren. Economists like Kaldor, Hicks, and Scitovosky have tried to remove the drawbacks of the Paretian criterion by introducing the notion of compensating payment, but their efforts have not been crowned with success. They could hardly effect any improvement on the original Paretian criterion.