Learning Objectives
By the end of this section, you will be able to:
- Define Pareto optimality
- Explain how orthodox determines the conditions for societal well-being to be maximized.
- Analyze the ethical issues surrounding Pareto optimality.
For orthodox economists the ideal outcome for an economy is an outcome in which Pareto optimality is achieved. The concept of Pareto optimality owes its origins to a 19th century Italian mathematician Vilfredo Pareto. Stated simply, the Pareto criterion for determining whether an economy has produced the “best” or “ideal” outcome is fulfilled when economic outcomes are such that there is no way to make any one or many people better off without making any one person or many worse off.
On its own the Pareto criterion for social well-being is an attractive proposition. After all if someone is harmed in order to improve the plight of someone else or many others, then it appears obvious that someone is being granted preferential treatment at the expense of someone else or many others. The granting of preferential treatment hardly seems fair or equitable. In this context, the utilization of the Pareto criterion eliminates the need to make those choices.
Additionally, the granting of preferential treatment opens the door to a long series of ethical questions that can be avoided by applying the Pareto criterion. On what basis is the decision to harm or benefit being made? How or when are interventions that inflict harm or bestow benefits decided? If an intervention does take place, who is making the decision to inflict harm or bestow benefits? What is the degree of harm or benefit triggered by an intervention? What is the ethical basis for intervening? In many ways, whenever a government must make budgetary decisions, it is asking and answering these questions. For example, perhaps government policymakers would like to expand the size of the military. Expanding the size of the military requires that the government finance the expansion of the military. Financing military expansion may require that other government spending programs be reduced. Alternatively, perhaps taxes will be raised to pay for the military expansion. Either way, whomever is responsible for financing the military expansion is directly paying for someone else to benefit. In defense of expanding the military, policymakers may have to justify to the public why the public will, presumably, benefit from the expansion of the military. The Pareto criterion appears to clearly answer these questions. If a society knows when it is in a position of maximum benefit, then, on the basis of the Pareto criterion, no justification can be made to either harm or benefit anyone, causing all of the above questions become moot.
Something important has now been revealed. The Pareto criterion only becomes applicable when there is a measure of what it means for someone, or many, to benefit and for someone, or many, to be harmed. If some kind of metric exists, then, on