DEFINITIONS OF WELFARE

(This handout is largely based on the ideas of Amartya Sen)

UTILITARIAN OR UTILITY DEFINITION OF WELFARE

Utilitarianism defines welfare in terms of utility. Utility means pleasure or

Happiness. The welfare of a person A is said to be higher than the welfare

of a person B if the utility of A is greater than the utility of B

Ua > Ub = Wa > Wb

Where Ua is the utility of person A

Ub is the utility of person B

Wa is welfare of person A

Wb is welfare of person B

Bentham is considered as the founder of utilitarianism. According to

Bentham the goal of economic policy is “the greatest happiness of the

greatest number”. This means that economic policy should maximize the

sum of the utilities of all the people in the society. Policy should maximize

( U1 + U2 + U3 --- + Un), where U1 --- Un are the utilities of the people

in the society. Suppose P1 and P2 are two economic policies. The policies

produce the following total utility:

P1 : ( U1 + U2 + U3 --- + Un) = 1000

P2: ( U1 + U2 + U3 --- + Un) = 2000

P2 results in higher total utility than P1. Therefore policy P2 is preferred to

P1.

PROPERTIES OF UTILITARIAN DEFINITION OF WELFARE:

Sen classifies the properties of the utility definition of welfare as follows :

1) Cardinal utility

2) Comparable utilities

3) Consequentialism

4) Neutrality

5) Anonymity

1) Cardinal utility: it is assumed that utility can be cardinally

measured. That is, it is assumed that we can either measure the

difference between utilities or the actual utility values.

2) Comparable utilities : It is assumed that interpersonal

comparisons of utility( can )

can be made. This means that the utility of one person can be

compared with the utility of another person.

3) Consequentialism : A policy or action should be judged by its

consequences or results. (

).

) A good policy/action is one which results in higher utility. A

policy/action is bad if it results in lower utility. For example, an

 action which causes pollution is bad only if it results in lesser utility.

No policy or action is good or bad by itself

4) Neutrality : only utility information ( )

is taken into account. That is, the welfare of a person or a social

state is defined only with reference to the utility levels.

5) Anonymity : The identity of individuals is not taken into

consideration. Only the total utility level is assumed important.

Social welfare ( ) is assumed to remain same

if the utility values are interchanged between people, since the

individual identity is not important. For example assume policies

P1 and P2 have the following results for two people A and B :

P1 : Ua = 100, Ub = 200. Ua + Ub = 100 +

200 = 300

P2: Ua = 200, Ub = 100. Ua + Ub = 200 +

100 = 300

Utility values are interchanged (

) but the total utility is same and therefore P1 and P2 are assumed to

result in same welfare levels. Whether A gets more utility or B gets

more utility is not important.

CRITICAL EVALUATION OF UTILITY DEFINITION

 MERITS OF UTILITY DEFINITION

The following are the merits of the utility definition of welfare:

1) Sen says that a good definition of welfare should define welfare in

terms of an object which is the goal or an end in itself. It should not

be the means to some other goal (

).

For most people happiness is a goal in itself. Since the utility definition

defines welfare in terms of an object ( happiness) which is a goal in

itself, it is a good definition of welfare.

2) Utility definition uses more information than the preference

definition of welfare ( the most widely accepted definition):

a) The preference definition uses only ordinal measure i.e., only

ranking information. Utility definition uses cardinal measure

which provides more information than ordinal measure.

b) The utility definition allows for interpersonal comparisons of

utility. This information is required for evaluation of

economic policies. Preference definition does not use this

information.

c) The preference definition uses only the information obtained

from observed behaviour of a consumer. It neglects the

mental state of a consumer which cannot be observed. (

 ). Utility definition uses the information about the mental state of

a consumer also.

3) Some economists say that the utility definition supports equal

distribution of income. The marginal utility from money for a rich

person is lower than marginal utility from money for a poor person.

Therefore a policy which increases the income of the poor

maximizes total utility. The redistribution of income from the rich

to the poor also maximizes total utility.

LIMITATIONS OF THE UTILITY DEFINITION

1) The utility definition ignores non-utility information (

). Any information about a social state other than the utility levels is not

taken into account. For example the definition ignores information

about freedom or the literacy levels, because this is non-utility

information. The non-utility information is often very important

component of welfare. A society may have high total utility but very

less freedom. It is not correct to say that the welfare is high in this

society.

2) Sen says that since non-utility information is ignored, the utility

definition leads to “physical condition neglect”(

). For example, a person with high utility can be handicapped (

) and not able to work. But the physical handicap is ignored by utility
definition. Due to physical condition neglect, a handicapped person

with high utility is assumed to have higher welfare than a healthy

person with low utility.

3) According to Sen, the level of utility can depend on the culture of

people. So in a culture where women are taught to accept physical

condition neglect, their utility will be high even when they have poor

health and less freedom than men. Therefore the utility definition

ignores the harmful effects of cultural traditions, especially on the

welfare of women.

4) Since utilitarianism is concerned with total utility, the distribution

of utility is neglected. For example consider the following policies:

P1 : Ua + Ub = 100 + 100 = 200

P2: Ua + Ub = 0 + 200 = 200

Both policies are considered to result in same welfare levels although in

P2 person A gets zero utility. The unequal distribution in P2 is ignored

by utility definition.

4) Since distribution is neglected, utilitarianism can be used to

support unequal distribution of income. A policy P1 is considered

better than P2 even if P1 makes the rich richer and the poor poorer.

Example: A is rich person and B is poor person.

P1 : Ua + Ub = 400 + 100 = 500

P2 : Ua + Ub = 900 + 50 = 950
In P2 the rich person A is made richer and poor person B is made

poorer. But P2 is considered best policy. Therefore utilitarianism

supports unequal income distribution.

PREFERENCE DEFINITION OF WELFARE

The preference definition of welfare is the most widely accepted

definition. According to the preference definition, the preferences of

an individual indicate her welfare. If a consumer A prefers good x to

good y, we can say that her welfare is higher in consuming x.

According to the preference definition:

xPy = Wx > Wy

yPx = Wy > Wx

xIy = Wx = Wy

Where xPy means x is preferred to y

yPx means y is preferred to x

xIy means the consumer is “indifferent” ( ) between

x and y

Wx is welfare from consuming x

Wy is welfare from consuming y

The preference of an individual can be indicated either by the money

she is “willing to pay” for a good or by her vote in the case of elections.

PEROPERTIES OF PREFERENCE DEFINITION

 Sen classifies the properties of the preference definition of welfare as

follows:

1) Ordinal utility

2) Non-Comparable utilities

3) Behaviourism

4) Neutrality

5) Anonymity

6) Self-interest motivation.

1) Ordinal utility: The preference definition of welfare assumes that

utility can be measured ordinally and not cardinally. That is, it is

assumed that we can rank welfare levels of individuals but no other

information can be obtained. For example, we can determine that

Wx > Wy but we cannot measure the difference between Wx and

Wy or the actual welfare levels.

2 ) Non-comparable utilities ( ) : It is assumed that

interpersonal comparisons of utility cannot be made. For example assume

that consumer A prefers x to y and consumer B prefers y to x. We can say

that A gets more welfare from x and B gets more welfare from y. But we

cannot compare the welfare of A and B.

3) Behaviourism ( ) : The preference definition

assumes that the only information available about consumers is the

behaviour that can be observed in the market. The mental state of a

consumer cannot be observed and therefore is not taken into consideration.

4) Neutrality : only utility information or information about

preferences( ) is taken into account. ( The word

“utility” means “preference” in the preference definition) That is, the

welfare of a person or a social state is defined only with reference to the

preferences of individuals.

5) Anonymity ( ) : The identity of individuals is not

taken into consideration. Only the preferences are taken into account.

Social welfare is assumed to remain same if the preferences are

interchanged between people, since the individual identity is not

important. Whether A prefers x or B prefers x is not given any

importance. For example let consumers A, B and C have the following

preference orderings in two social states:

Social State 1 :

A: xPy

B: xPy

C: yPx

Social state 2:
 A: yPx

B: xPy

C: xPy

In both social states majority preference is for x , so x is the social

preference ( ). The preferences of A and C are

interchanged ( ). But the social preference

remains the same. This is because the individuals are not important.

6) Self - interest motivation ( ) : It is assumed

that individuals are always motivated by self-interest. Each person is

concerned only about her own welfare and not the welfare of others. Is

a person prefers x to y it is because it promotes her self-interest.

CRITICAL EVALUATION OF PREFERENCE DEFINITION

MERITS OF PREFERENCE DEFINITION:

The following are the merits of the preference definition of welfare:

1) The preference definition requires minimum information. The

only information required is the observed preferences of a consumer.

It is easy to obtain this information. Samuelson says that the

preference definition and the utilitarian definition provide the same

knowledge about consumer behaviour but the preference definition

is easier to use.
2) The preference definition is the basis of the pareto criterion

which is the most widely used approach to define efficient allocation

of resources.

3) Much of environmental economics is based on the preference

approach to welfare. The preference definition is very useful in

studying the cause of environmental problems as well as for valuing

environmental resources.

4) The most important tool of decision making namely Cost – Benefit

Analysis is based on the preference definition of welfare.

LIMITATIONS OF THE PREFERENCE DEFINITION

Preferences may not always indicate welfare for the following

reasons:

1) Preference for a good may be based on wrong information. For

example due to wrong information a consumer may choose a good

which damages her health.

2) Preferences can be strongly influenced by advertisements.

Advertisements can make a consumer prefer goods which are

harmful.

3) Preference can be influenced by habit ( ) and custom (

). So a consumer may prefer x to y not because x improves her

welfare but because it is her habit to use x or because in her society

x is consumed by people traditionally.

4) Adaptive preferences are a serious problem for preference

definition. Adaptive preferences refers to preferences which indicate

that a person is adjusting to her circumstances (

). For example a woman may prefer not to go for a job because in her

society women are discouraged from working out side the house. This

women’s preference does not indicate her welfare but her

circumstances.

5) Sen says that people are motivated not only by self-interest but also

by the desire to help others. This is called altruism (

). So a person may prefer x to y because x will help others.

When there is altruism preference will not indicate welfare.

5) Sen says that a good definition of welfare should define welfare in

terms of an object which is the goal in itself. It should not be the

means to some other goal. Preference is not a goal by itself.

Preferences are a means for other goals. For example we prefer to

read a book for information. Information is the goal of our

preference for reading. The preference itself is not the final goal.

Therefore preference is not a good definition of welfare.

6) Sen’s “paretian liberal theorem” demonstrates that the pareto rule

can be in conflict with personal liberty. Sen argues that the way to
 avoid this problem is to go beyond individual preferences in

conceptualizing welfare, ( ).

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UTILITY FUNCTION

A “utility function” indicates the preference ordering of an individual.

The term utility here does not mean happiness but preference (

).

For example, if for a consumer xPy and yPz, these preference

orderings are her utility function.

Properties of a utility function

The basic preference relationship between alternatives is the

relationship “at least as good as”

( ) denoted by “R” .

xRy means ‘x is at least as good as y’ ( ). That

is, either x is preferred to y or the consumer is indifferent between x

and y.

A utility function will exist for an individual if the following properties

are satisfied:

1) Reflexivity : If x is an alternative then xRx

2) Transitivity: If xRy and yRz, then xRz

3) Completeness : Either xRy, or yRx, or both.

If the above properties are satisfied, a consumer will have a utility

function.

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________________

PRIMARY GOODS DEFINITION OF WELFARE

The primary goods definition of welfare was given by John Rawls, an

American philosopher.

According to Rawls, the welfare of a person is indicated by “primary

goods”. Primary goods are defined as those goods which will be

demanded by all individuals. Music will not be preferred by all

people, books will not be preferred by all people, but every person will

demand the “primary goods”.

According to Rawls the following are the primary goods which will be

demanded by every individual:

1) Income and wealth

2) Social bases of self-respect ( )

3) Freedom

Rawls says that freedom is the most important primary good

because if they it is lost it cannot be easily recovered.

Using the primary goods definition of welfare, person A is said to be

better-off than person B if A has more quantity of primary goods

than B.
 Pa > Pb = Wa > Wb

Where: Pa is the quantity of primary goods with person A

Pb is the quantity of primary goods with person B

Wa is the welfare level of A

Wb is the welfare level of B

PROPERTIES OF PRIMARY GOODS DEFINITION

The following are the properties of the primary goods definition of

welfare:

1) Social contract formed behind “veil of ignorance”.

2) Ordinalism

3) Interpersonal comparisons of welfare levels

1) Social contract formed behind “veil of ignorance”: Rawls says

that a just society ( ) is a society the rules of

which will be decided through a social contract ( ).

It is assumed that the social contract is entered into by individuals when

they are behind the “Veil of ignorance” ( ). The

veil of ignorance refers to an imaginary situation where there is no legal

system and no economic system. The laws formulated in this imaginary

situation will be just laws because the people are not aware about their

own situation after a social and economic system is established.

 2) Ordinalism : the ordinal measure of welfare is used in Rawls’s

theory.

3) Interpersonal comparisons of welfare levels: Rawls’s theory of

welfare requires the use of interpersonal comparisons of welfare

because these comparisons are needed to identify the people with

lowest welfare. The interpersonal comparisons in this theory are made

by comparing the primary goods of different individuals. “Level

comparability” is used. That is, in making interpersonal comparisons

we can say that A is better-off than B because A has higher welfare

level.

THE RULES OF A JUST SOCIETY:

Rawls says that the following rules will be formulated by people

behind the veil of ignorance :

1) Every individual will enjoy maximum personal freedom without

affecting the freedom of other people.

2) Inequality in society can be accepted only if:

a) The inequality is due to positions which are occupied through

open competition. All people should have equal opportunity

to occupy these positions.

b) Inequality should benefit all people. Inequality is good only if

it gives incentive to people to work hard and increase

production.
3) The society should use the “difference principle”: The “difference

principle” requires that economic policies should maximize the

welfare of the person who has the lowest level of welfare, that is

the person with the lowest amount of primary goods.

CRITICAL EVALUATION OF PRIMARY GOODS

DEFINITION:

MERITS OF PRIMARY GOODS DEFINITION:

1) Sen says that a good definition of welfare should describe the life

people are living. The primary goods are a better description

of the life of people compared to preferences or utility. For

example a primary good like income is a better indicator of the

life we can live compared to the level of happiness or the type of

preferences. Poverty is the major concern in poor countries.

Economists measure poverty by using either income or the

quantity of food intake. These two indicators are related to the

primary goods definition. Therefore to study poverty the primary

goods approach to welfare is more useful.

2) The primary goods definition uses interpersonal comparisons

and therefore the least well-off people in the society can be

identified.

3) The measurement of primary goods levels is easy compared to

measurement of utility.
4) Rawls’s theory of welfare recognizes the importance of

freedom. Freedom is neglected in the utility and preference

definitions. The importance of freedom is now recognized in

welfare economics.

LIMITATIONS OF PRIMARY GOODS DEFINITION:

1) Sen says that although primary goods are a better indicator of

the life of people than utility and preferences, goods do not

describe the life of people fully. Sen illustrates this point with

two examples. (1) Rice is a good, but the quantity of rice with a

person may not be sufficient to meet her food requirements. (2)

A bicycle is a good but the person owning one may be physically

challenged and cannot use it. Therefore the availability of

goods rice and a bicycle alone is not a good indicator about the

welfare of a person.

2) Primary goods provide welfare. Goods are a means to obtain

welfare but not the final goal (

). For example food can be used for obtaining good

health. But food itself is not a welfare object or the final goal of

people. Since goods are not themselves the goal, primary goods is

not a satisfactory definition of welfare according to Sen.

3) Interpersonally comparing primary goods can be misleading. A

person with lower amount of primary goods may have a

 better life than a person with higher quantity of goods. For

example: A person A may have more rice than B. But the

quantity of rice with A may not be sufficient to meet A’s

nutritional needs, while the lower amount of rice with B may be

sufficient for her needs.

THE CAPABILITY DEFINITION OF WELFARE

The capability definition of welfare was formulated by Amartya

Sen.

The capability approach to welfare defines welfare in terms of

the life people are living. Sen distinguishes two components of

welfare:

1) “Functionings”

2) “Capabilities”

1) Functionings: Functionings refer to the activities people are

able to perform (

). The ability to read and write is a

functioning. The ability to avoid disease like cholera is a

functioning. Functionings show the life people are leading.

The capabilities definition can be understood if it is compared with the

other definitions of welfare. This can be shown as follows:

 GOODS -------------- FUNCTIONINGS --------------

UTILITY

Rice --------------- Good health

Bicycle --------------- Movement

Rice is a good. It provides good health which is a functioning. Health

results in utility.

A bicycle is a good. It provides the ability to move around. This is a

functioning. The ability to move around provides utility.

Rawls is interested in the quantity of goods like rice and bicycles.

Utilitarians concentrate on the utility obtained.

Sen gives importance to the functionings resulting from these goods.

Having rice and a bicycle is not enough unless they can be used for various

functionings.

We can say that functionings provide Sen’s “narrow definition” of

welfare( ).

The “broad definition is provided by “capabilities”.

2) Capabilities: Capabilities refer to the freedom people have to choose

the kind of life they want to live (

).
 The difference between capabilities and functionings can be

explained by this example given by Sen: Two people, A and B,

did not have food last 24 hours. A has not eaten food because

she is fasting ( ). B has not eaten because she is

poor and cannot afford to purchase food. So A is going without

food voluntarily. It is her choice to go without food If she

chooses, she can eat food (

). B is going without food involuntarily. B does

not have a choice.

The functionings of A and B is their life without food for 24

hours. The functionings are the same for A and B.

The capabilities of A and B are the freedom or choice they have

to eat food. A has the choice but B does not. So the capabilities

are different. A has more capabilities than B.

The welfare of a person can be defined as her capabilities to perform

various functionings.

This is the broad definition of welfare.

FREEDOM AND WELFARE:

Freedom is an important element in Sen’s theory of welfare. Freedom

can be divided into two types:

1) Negative freedom.

2) Positive freedom
Negative freedom refers to freedom from intervention by others (

). For example, if a person has the money required to go to college,

negative freedom means no one should prevent her from going to a

college.

Positive freedom refers to the freedom to perform some activity (

), for example the freedom to get education. There is positive freedom if

those who want to go to college are able to go to college even if they do

not have the money.

Negative freedom assumes that a person has the ability to perform

some activity (like getting education). No one should prevent the person

from using her ability. If the ability is not there, the person need not be

helped.

Positive freedom means that if the ability is not there the person should be

helped to obtain the ability.

The capability definition of welfare is based on the idea of positive

freedom. Sen says that all people should have the freedom to perform the

basic functionings such as going to school or getting medical treatment.

Sen identifies the following as the basic capabilities:

1) The capability to be literate.

2) The capability to lead a long and healthy life.

3) The capability to earn income to have access to important resources.

 The above are the basic choices because unless a person has the

freedom to choose to be literate, lead a long and healthy life, and

have access to important resources she cannot make any other

choices.

Sen says that every person has the right to these basic capabilities. If the

free-market cannot provide them, the state should provide them.

PROPERTIES OF CAPABILITY DEFINITION:

1) Human beings are treated as ends in themselves and not as means

to an end (

). Capabilities should be increased

because they are required for a good life and not for increasing labour

productivity or GNP.

2) Non-utility information is used in the capability definition. Non-

utility information refers to information about freedom, health of

individuals, distribution of income etc. The assumption of

“neutrality” is rejected ( Neutrality means that only preferences or

satisfaction levels should be taken into account).

3) The identity of individuals is taken into account (

). For example assume that a policy affects two people A and B. The

policy makes A better-off ( ) and B worse-off (

). It is important to find out whether A is rich or poor, man or

 woman etc. “Anonymity” is rejected ( Anonymity means that

individual identity is not important).

4) Interpersonal comparisons of welfare are used. Sen says that

without interpersonal comparisons it is not possible to study

important things like inequality and poverty.

EVALUATION OF CAPABILITY DEFINITION:

MERITS OF CAPABILITY DEFINITION:

1) The capability definition satisfies the two criteria of a good

definition of welfare:

a) It is concerned with the life people are living.

b) It defines welfare in terms of objects which are important

goals in themselves. Capability is a goal in itself (

).

2) It uses all the required information for studying welfare:

a) It uses cardinal utility as well as interpersonal comparisons of

utility.

b) It makes use of non-utility information.

c) It takes into account how different categories of people ( rich

and poor; men and women etc) are affected by policies.

3) It is easy to get information on the basic capabilities.

4) The capability definition of welfare has been found useful in several

ways:

a) The capability approach has been used to formulate a

development indicator called the “human development index”

(HDI) as an alternative to the GNP.

b)It has been used to study the welfare status of women. The

capability approach can be used to study how economic and non-economic

factors such as religion affect women’s welfare.

c)It provides a basis for study of poverty and inequality.

LIMITATIONS OF THE CAPABILITY DEFINITION

1) The capability definition is a vague definition (

). It is not as precise as the preference or utility definitions. But Sen

says that “it is better to be vaguely right than to be precisely wrong”

2) It neglects the importance of investment in human capital for

increasing productivity and growth. For example, Sen says that

education is an important goal itself. He ignores the contribution of

education to labour productivity. According to Partha Dasgupta if the

returns from this is not taken into account, poor countries may not

invest enough in education.

3) The definition concentrates on the need to expand human

capabilities ignoring the importance of economic growth. Without

economic growth the resources for providing basic capabilities will

not be available.