Compensation theory of economic welfare.docx (original) (raw)

WELFARE ECONOMICS-the win-win-win papakonstantinidis model

RG, 2016

“..A branch of economics that focuses on the optimal allocation of resources and goods and how this affects social welfare Welfare economics analyzes the total good or welfare that is achieved at a current state as well as how it is distributed. This relates to the study of income distribution and how it affects the common good. Welfare economics is a subjective study that may assign units of welfare or utility in order to create models that measure the improvements to individuals based on their personal scales. Welfare economics uses the perspective and techniques of microeconomics, but they can be aggregated to make macroeconomic conclusions. Because different "optimal" states may exist in an economy in terms of the allocation of resources, welfare economics seeks the state that will create the highest overall level of social welfare. Some people object to the idea of wealth redistribution because it flies in the face of pure capitalist ideals, but economists suggest that greater states of overall social good might be achieved by redistributing incomes in the economy”. The field of welfare economics is associated with two fundamental theorems: Fundamental Theorems There are two fundamental theorems of welfare economics. The first states that any competitive equilibrium or Walrasian equilibrium leads to a Pareto efficient allocation of resources. The second states the converse, that any efficient allocation can be sustainable by a competitive equilibrium. Despite the apparent symmetry of the two theorems, in fact the first theorem is much more general than the second, requiring far weaker assumptions. The first theorem is often taken to be an analytical confirmation of Adam Smith's "invisible hand" hypothesis, namely that competitive markets tend toward the efficient allocation of resources. The theorem supports a case for non-intervention in ideal conditions: let the markets do the work and the outcome will be Pareto efficient. However, Pareto efficiency is not necessarily the same thing as desirability or even more general definitions of "efficiency"; it merely indicates that no one can be made better off without someone being made worse off. There can be many possible Pareto efficient allocations of resources and not all of them may be equally desirable by society. These ideal conditions, however, collectively known as Perfect Competition, do not exist in the real world. The Greenwald-Stiglitz Theorem, for example, states that in the presence of either imperfect information, or incomplete markets, markets are not Pareto efficient. Thus, in most real world economies, the degree of these variations from ideal conditions must factor into policy choices.[1] The second theorem states that out of the infinity of all possible Pareto efficient outcomes one can achieve any particular one by enacting a lump-sum wealth redistribution and then letting the market take over. This appears to make the case that intervention has a legitimate place in policy – redistributions can allow us to select from among all efficient outcomes for one that has other desired features, such as distributional equity. However, it is unclear how any real-world government might enact such redistributions. Lump-sum transfers are difficult to enforce and virtually never used, and proportional taxes may have large distortionary effects on the economy since taxes change the relative remunerations of the factors of production, distorting the structure of production. Additionally, the government would need to have perfect knowledge of consumers' preferences and firms' production functions (which are in fact unknowable[2]) in order to choose the transfers correctly. In addition, this remedy cannot be expected to work if large numbers of people do not understand the economy, and how to make effective use of any transfers they receive.

On the difficulty of combining actual and potential criteria for an increase in social welfare

Economic Theory, 2001

This paper examines two problems associated with the use of potential Pareto criteria in welfare economics. The …rst problem is the wellknown intransitivity of the compensation criteria à la Kaldor-Hicks-Scitovsky. The second problem is the possible incompatibility between the Chipman-Moore-Samuelson criterion and the Pareto principle. The main result of this paper is that, in order to avoid either of these problems, it is necessary and su¢ cient that the domain to which these criteria are used is such that the Chipman-Moore-Samuelson criterion encompasses completely the Pareto criterion. When interpreted in a standard economic environment, this result is shown to be equivalent to Gorman's requirement of non-crossing between utility possibility frontiers.

Economic Inequality and Paretian Welfare Economics: Some Insinuating Questions

This paper examines the academic soundness of the Pareto welfare criterion as a normative rule for evaluating alternative economic inequality scenarios and suggests that the criterion has several weaknesses, which weaken its usefidness. First, the Pareto principle is of limited use in the inequality debate because labor markets hardly satisfy the conditions of perfect competition, the pivotal assumption of the theory. Second, the proposition that competitive equilibrium leads to the "common good" of society is difficult to defend. Third, the Paretian welfare economics barely answers the questions society demands, because perfect competition does not guarantee fairness in the determination of relative prices in the initial situation of income distribution. Fourth, in the distribution theory, the marginal productivity principle determines the rewards to the factors of production. If we assume that rent, wage and interest incomes are determined by this theory, then questions arise about how profits, the potentially huge surpluses generated by the businesses, are distributed. Fifth, income distribution, being a public policy topic, is a political issue. However, Pareto's primary motivation in formulating the principle was to alienate the income distribution debate from political and policy discourses. Finally, by invoking the Pareto principle, economists are in fact avoiding the real issues of the public debate on personal distribution of income. Personal income distribution truly refers to division of income generated by a group of people working together and therefore, ought to be analysed with reference to the sector of employment. Thus, Tommy Franks' earning should be compared with that of a private, while an ordinary worker's salary should be compared with that of the CEO. History testifies that the public earning structure is much more equitable than that of the private sector. This poses a very serious question: Which earning structure reflects improvement in

The Revolution In Welfare Economics and Its Implications for Environmental Valuation and Policy

Land Economics, 2004

and two anonymous reviewers for comments on an earlier draft. The First Fundamental Theorem of Welfare Economics: Assume that all individuals and firms are selfish price takers. Then a competitive equilibrium is Pareto optimal. The Second Fundamental Theorem of Welfare Economics: Assume that all individuals and producers are selfish price takers. Then almost any Pareto optimal equilibrium can be supported via the competitive mechanism, provided appropriate lump-sum taxes and transfers are imposed on individuals and firms. These two theorems have been the backbone of neoclassical theory and policy in the decades since WWII. Lockwood (1987, 811) writes of the Second Theorem: "It is no exaggeration to say that the entire modern microeconomic theory of government policy intervention in the economy (including cost-benefit analysis) is predicated on this idea." Likewise, Fisher (1983) writes: "The central theorems of welfare economics (i.e. the first and second fundamental theorems) may be the single most important set of ideas that economists have to convey to lay people..." The Second Fundamental Theorem implies that if a particular state of the economy is judged to be desirable, it may be achieved through lump sum transfers. The rationale for distinguishing between alternative states of the economy is the Kaldor-Hicks criterion. If the magnitude of the gains from moving from one state of the economy to another is greater than the magnitude of the losses, then social welfare is increased by making the move even if no actual compensation is made. This is a Potential Pareto Improvement (PPI) and as Stavins, Wagner, and Wagner assert (2002, 5): "This is the fundamental foundation-the normative justification-for employing benefit-costs analysis, that is, for searching for policies that maximize the positive differences between benefits and costs." Establishing environmental policies through the identification of PPIs to evaluate costs and benefits is central to the leading environmental economics texts. 3 A PPI is fundamentally different from the notion of Pareto efficiency that simply says that an

Theoretical framework of public policies for welfare maximization

RePEc: Research Papers in Economics, 2004

The welfare state concept, which is related to welfare economics, has taken place in economics literature once again in recent years. The theories and theoretical supports are various. In this study, at first the concept of welfare economics was applied and then addition of Smith were added in the historical period. On the other hand , the welfare economics which is based on Pareto, Pigou and Hicks-Kaldor's theories and also The social welfare function theory were examined. At the end of the last part of study, the reasons of the government's interference on economics is appraised aorund the framework of the pareto optimal deviations.

“win-win-win papakonstantinidis model”- A proposal on welfare economics

ABSTRACT In this research I have tried to collect, classify and compare the theoretical material from various sources on the functioning of Social Welfare Function (SWF), towards building a strong case with logical and coherent arguments, towards the one Triple Pole (A-B-COMMUNITY) Equilibrium (TPE), different from N.E, that leads to the Social Bargaining Solution” (SBS) AND coincide with the "optimal" Community Collective Choice (CCC) Based on this model, in practical level, the ambitious is to create a series of new policies to strengthen social welfare, despite the "impossibility theorem" (K. Arrow 1955) I supported with arguments, that "a simultaneous, reflective, strong effective (Pareto), Flexible, fair (Rawls), collective (Amartya Sen) Social Welfare Function (SWF) in the frame of a General Equilibrium (Walras), incorporating the values of equality, justice, harmony, symmetry, and the hypothesis, of self-organization (Papakonstantinidis) as well as the hypothesis of self-supporting bargaining solution in a community level, should exist and be the only one CONCLUSIONS Capitalism is a strictly coherent system based on rationality, consistency and efficiency (Pareto) at least. People have "consistent priorities" (in a fantastic strictly atomic list of priorities) according to the neoclassical school of thought and make their expectations on these The consequence of preferences (see Nash Equilibrium) and rationality in decision making and the "Common Knowledge Rationality "refer to rigorous rational decisions This assumes "rationality" and "consequence of behavior" (even without morality, justice, equality of opportunity, which further increases the chances of maximizing the profit of certain individuals (or increasing their satisfaction, thus minimizing the satisfaction of other people of the community, (in spite of the Market theory of Adam Smith) For all the "players" "i", for whom, is supposed to be consistent, efficient with "consequence of behavior" as to the decision-making process (an idea on which capitalism is based) the conditions and goals coincide They follow the same form of “suicidal expectation” as the logic with the 'barber's paradox" (paradox Russell 1918) who shaves only those who can not shave themselves- a proposal that is not feasible: Suppose there is a town with just one barber, who is male. In this town, every man keeps himself clean-shaven, and he does so by doing exactly one of two things: (a) shaving himself; or (b) being shaved by the barber. Also, "The barber is a man in town who shaves all those, and only those, men in town who do not shave themselves." From this, asking the question "Who shaves the barber?" results in a paradox because according to the statement above, he can either shave himself, or go to the barber (which happens to be himself). However, neither of these possibilities are valid: they both result in the barber shaving himself, but he cannot do this because he shaves only those men "who do not shave themselves". Now, according to Kurt Gödel , 1. "If the system is consistent, cannot be complete." This is generally known as the theorem incompleteness. 2. The consistency of the axioms can not be proved within the system On the other hand, the basic Neoclassical School of Thought is based on "win-win" outcome (according to game payoffs, , depending on the strategies used by players (pure-mixed) -see "binomial distributions", each for a Nash-Equilibrium) This leads us to the conclusion that the "win-win" Equilibria have characteristics (a) rationality (cause and effect at the same time) (b) consistency and (c) efficiency (Pareto)-but not justice/equity (Rawls) Just because they have these characteristics (particularly, the "consistency") means that NE (based on neoclassical thinking belong to a system that is not complete Capitalism, (especially the nowadays globalization of economies) is indeed a rational, efficient and above all consistent construction but, it is not complete (just because it is consistent - Kurt Gödel) Glaring example, the "Greece’s dept crisis” ((2010-015) (see case study) where the Economic Adjustment Programmes, relied solely on consistency and rationality (in numbers, that is) but the result was the worst in terms of justice, equity and equality If we could find some system expansion tools, so as to include "social welfare and justice and equity" without reducing (theorem Pareto) its efficiency, would we have a better and hopefull new system? The answer may be YES, by the “win-win-win papakonstantinidis model” ▲ The «win-win-win papakonstantinidis model" has been proposed to transfer the system from the Gödel's "incompleteness" in a new situation with less consistency, more justice, more socialization more equity , more effective more cooperation, more self-organization Besides “The degree to which social justice is achieved in a given time and place should be measured by two… notions: 1) the greatest good for the greatest number, and 2), how the least powerful and the smallest minorities in a society are faring.” Ched Myers There are many aspects to justice and the creation of a just world. These include social and economic factors as well as the principles of equity and equal rights. “Social justice” has been defined in a variety of ways. Amongst them, they incorporate concepts of basic rights, the realisation of human potential, social benefit, a healthy planet, an equitable distribution of resources, equal opportunities and obligations, security, and freedom from discrimination. Economic justice really forms a part of social justice. It seeks the equitable distribution of world’s natural and intellectual wealth so that everyone is able to gain a fair share. Social justice means equal rights for all, regardless of gender, race, class, ethnicity, citizenship, religion, age or sexual orientation. It implies equal rights for women and girls in workplaces, homes and public life. It implies economic justice – which means governments must take active steps to alleviate poverty and redress past injustices. In a world where millions starve and minorities are discriminated against, such goals are still a long way off (Sabbath Economics) . Humans are not predictable units, so as to define a single behavior. With this basic thinking, I accepted the Gödel's theorem of "incompleteness" and I have incorporated it in the basic logic of this original work (if a system is consistent, is not complete) Then, I've focused on main globalization function which is the "bargain" with the coincidence of (a) rationality, (b) consistency, (c) efficiency and I've tried to find the deviation points,from what is called "Social Welfare" Then, putting the "Bargaining Solution" (one of the Nash Equilibria) on the microscope I've tried to find an alternative social solution, the "third Way" by allowing the Community to participate as the third independent and more integrated "part of the bargain, between two negotiators (if it is accepted by these) Thus, the problem and its own solution is "transferred" from the two-dimensional space in a three-dimensional space : In this 3D space we are seeking to define the 3-pole bargaining Solution (A, B, and the Community) on the "pin head" as one of the Karatheodory's umbilical points (Chapter 5) [any isolated point on Sphere, is an umbilical Point] Any system, which includes the Community as the third and most complete player in the "play", is expected to win the coveted completeness while maintaining a minimum level of consistency, efficiency and logic The "vehicle" of this transition will be the theorem of justice (Rawls) -under the condition of acceptance of the "veil" or "original position" posed by ¨ "Theory of Justice" So the win-win-win model meets with the need of making "globalization", more interactive with the poverty and inequality and justice all over the world ▲ Special review to local communities: local development The win-win-win papakonstantinidis model is a methodological tool for conflict resolution, especialy in the case of decision making, or in forming "instant reflection winning strategies" an the BARGAIN (which is the frame) It deals with local development, both as a regional and social sciences field. It proves that building social capital at local level mainly depends on social trust links among local people: Social cohesion based on social capital may be measured by the diversification Rate (R *) from strict globalization rules: From this point of view, local people intervention should be useful, so as to diversify these "rules" at local level adjusting them to local identity, including communication code, customs, ethics, culture. The Win-win-win methodology [Papakonstantinidis Model] should facilitate local people to "readjust" bargaining globalization rules locally, through a sensitization process: Community is defined as a discrete spatial / cultural entity at its sensitization process' limit July 17, 2015 papakonstantinidis