Subjectivism and the Austrian School of Economics
Chapter 9: Welfare Economics: Workable Definitions
___________________________________________________ … a business deal is always advantageous for both parties. If both the buyer and the seller were not to consider the transaction as their most advantageous action they could choose under the prevailing conditions, they would not enter into the deal (Mises, The Ultimate Foundations of Economic Science, 1962a, p. 90). Myrdal (The Political Element in the Development of Economic Theory, 1953) was right to claim, ‘The Austrians were preoccupied with value theory and never elaborated a detailed theory of welfare economics’ (1953, p. 128). This was rapidly corrected, however, as if in reply by Rothbard (‘Toward a Reconstruction of Utility and Welfare Economics’, 1956), which was the start of an abundance of Austrian literature on the question of welfare. This writing should not be confused with traditional welfare economics, various versions of which are riddled with theoretical weaknesses that the Austrians have continually condemned. The subjectivist paradigm obviously prevents interpersonal comparisons of utility between agents and so excludes any use of utilitarist criteria as valueless. 1 Pareto’s version, which avoids this kind of comparison, is faced with the impossibility of a priori knowledge of agents’ indifference curves and therefore of considering it as data for the theorist. More contemporary approaches, notably Coase’s (‘Social Cost’, 1960) are based on a criterion of welfare centred on reducing transaction costs. But the mistake of believing in a fictitious ‘Nirvana’ (Kirzner, Competition and Entrepreneurship, 1973) where transaction costs would be eliminated, is obvious. Moreover, this situation would in any case not be the...
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