Chapter 6: The Indeterminacy of Social Welfare Theory
6.1 A REPRISE As has been repeatedly emphasized, the ‘new’ social welfare theory deploys two fundamental analytical constructs. Broadly speaking, the efﬁciency or welfare frontier may be regarded as summarizing the system of constraints operative at a cross-section of time, while the utilitarian social welfare function constitutes the objective function. While all points on the efﬁciency frontier satisfy the three marginal equivalences or ‘efﬁciency’ conditions, only one of these ﬁrst-best Paretian optima constitutes the ‘competitive equilibrium’ to which a perfectly competitive system is impelled.1 A competitive equilibrium may or may not be an ‘ethical equilibrium’. The latter is determined at the point of tangency of a social indifference curve and the efﬁciency frontier. Finally, a reconciliation of the competitive and ethical equilibria can, in principle, be accomplished by appeal to a system of lump-sum taxes and bounties. While earlier chapters have raised fundamental questions about the new social welfare theory paradigm, immediate interest centers on the existence of the efﬁciency frontier. 6.2 THE FRICTIONLESS NEOCLASSICAL DECISION ENVIRONMENT As is well known, the logic of the efﬁciency frontier requires that the underlying utility and production functions possess orthodox, neoclassical properties, and that the decision environment be ‘frictionless’ (§ 4.2).2 Let us ﬁrst stipulate that the properties imputed to functional relationships are embodied in sets of statements – generative assumptions – which serve to generate hypotheses, given certain auxiliary assumptions (Melitz 1965). From the positivist or instrumentalist perspective, this distinction is crucial: Whereas generative assumptions need not be...
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