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Social welfare function
Arrow proved that it is impossible to have a social welfare function that satisifies a set of given 'reasonable' criteria, in his so called impossibility theorem.
The idea of a social welfare function was first introduced by Abram Bergson in 1938. In this form, social welfare is a function of the levels of utility of members in society.
Alternatively, the social welfare function can be expressed as a function of other variables relevant to welfare, such as income or life expectancy.
The form of the social welfare function can be seen as expressing a statement of the objectives of a society. For example, take this example of a social welfare function:
Where W is social welfare and Yx is the income of each of the xth individual in a society. In this case, maximising the social welfare function means maximising the total income of the people in the society, without regard to how incomes are distributed in society. Alternatively, consider the Max-Min utility function (based on the philosophical work of John Rawls):
Here, the social welfare of society is taken to be related to the income of the poorest person in the society, and maximising welfare would mean maximising the income of the poorest person without regard for the incomes of the others.
These two social welfare functions express very different views about how a society would need to be organised in order to maximise welfare, with the first emphasizing total incomes and the second emphasising the needs of the poorest.
Often choice of such a function is considered part of political economy. Choosing between two sucfunctions may be a matter of tolerances versus preferences, or some broader political or ethics issue that cannot be resolved by economics at all. A related issue is the need of individual capital for rest and recreation, which prevents anyone from actually maximimizing their total income. This renders moot many of the balanced growth assumptions of macroeconomics: Unless a uniform social welfare function is chosen across an entire society, growth is not balanced. Due in part to this concern, more direct means of measuring well-being than "total incomes" or GDP are required by modern human development theory.
Amartya Sen makes the point more directly:
- "What is the relation between our wealth, and our ability to live as we would like?"
Without answering this question, income and welfare are only indirectly related.
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