A liberal theory of social welfare: fairness, utility, and the Pareto principle.

• Author: Chang, Howard F.

The economic analysis of law evaluates legal regimes by the criterion of social welfare, which economists usually take to be a function of the utility that individuals enjoy under the laws in question. Economists generally define the utility enjoyed by each individual as the satisfaction of that individual's preferences over various states of the world. Economists normally assume that any reasonable notion of social welfare would conform to the Pareto principle, which holds that if each individual prefers one state of affairs over another, then social welfare must be higher in the first state than in the other state.

Amartya Sen, in his influential article entitled The Impossibility of a Paretian Liberal, shows how liberal rights, such as the right to read a book of which others disapprove, can produce outcomes that everyone would prefer to avoid, thereby violating the Pareto principle.(1) Sen infers that one cannot uphold both liberal values and the Pareto principle. Disturbed by the implication that "individual liberty may have to be revoked" under the Pareto principle, Sen concludes that the conflict that he exposes indicates "the unacceptability of the Pareto principle as a universal rule."(2)

In a similar vein, Louis Kaplow and Steven Shavell identify potential conflicts between the Pareto principle and notions of "fairness," which give weight to considerations other than the overall utility level of each individual.(3) Indeed, Kaplow and Shavell claim that "any conceivable notion of social welfare that does not depend solely on individuals' utilities" implies a "social welfare function" that violates the Pareto principle.(4) They infer that "as a matter of logical consistency, a person who embraces a notion of fairness must on some occasions favor adopting legal rules that would make every person worse off," a conclusion that they view as "a serious challenge to proponents of notions of fairness who also care about the well-being of members of society."(5) We might call their claim "The Impossibility of a Fair Paretian." Unlike Sen, however, Kaplow and Shavell view their impossibility claim as a critique of all fairness notions (including liberal rights) rather than of the Pareto principle as a universal rule.

That is, Kaplow and Shavell use their claim to advocate "welfarism," which makes moral judgments a function only of the utility of individuals.(6) Welfarism includes a broader class of moral theories than utilitarianism, which takes social welfare in a given population to be equal to the sum of individual utilities. A welfarist theory need not assume that social welfare for a given population is equal to the sum of individuals' utilities. Kaplow and Shavell, for example, assume a more general social welfare function that permits the distribution of a given amount of utility among individuals to affect social welfare.(7) Any form of welfarism, however, including utilitarianism, ranks states of affairs entirely on the basis of utility, regardless of other information about those states. Thus, the claims of Sen and of Kaplow and Shavell both have important implications for the fundamental normative question of what criteria we should ideally use to evaluate laws or public policies.

Both Sen's claim and Kaplow and Shavell's claim refer to the "weak" version of the Pareto principle, which holds that if every individual prefers any alternative x to another alternative y, then x is socially preferable to y.(8) The "strong" Pareto principle holds that if at least one individual prefers x to y, and no one prefers y to x, then x is socially preferable to y.(9) Thus, under the strong Pareto principle, x may be socially preferable to y even if all but one individual is indifferent between x and y. The strong Pareto principle is the stronger condition insofar as it implies the weak Pareto principle. That is, if the strong Pareto principle holds, then the weak Pareto principle must also hold. If the weak Pareto principle holds, however, the strong Pareto principle does not necessarily hold.

The weak Pareto principle is a relatively weak constraint on a social welfare function. It is a "weak form of welfarism," in the sense that while welfarism "asserts that non-utility information is in general unnecessary for social welfare judgements," the weak Pareto principle "makes non-utility information unnecessary in the special case in which everyone's utility rankings coincide."(10) Thus, if we believe in any welfarism in which social welfare is an increasing function of each individual's utility, including utilitarianism, then this belief will imply that the weak Pareto principle must hold. Kaplow and Shavell, however, make the surprising claim that the converse implication is also true: If we believe in the weak Pareto principle, then we must also believe in welfarism.

The weak Pareto principle is also an appealing criterion. Even Sen, who argues that the Pareto principle is unacceptable "as a universal rule," concedes that "there is something very central in the idea that preferences unanimously held by members of a community cannot be rejected by that community."(11) Kaplow and Shavell infer that because "most analysts who accord importance to notions of fairness would not want to contravene the unanimous preferences of the population," they should find the conflict between fairness and the Pareto principle "troubling."(12) After all, why would one ever want to violate the Pareto principle? When we do so, "everyone is worse off, including any person of possible concern under a notion of fairness."(13) Anyone who urges us to follow a rule that requires us to violate the Pareto principle is vulnerable to the charge of "superstitious `rule worship,'" that is, "the charge of heartlessness, in his apparently preferring abstract conformity to a rule to the prevention of avoidable human suffering."(14) Why should we follow a fairness rule that requires us to comply even when it serves no one's interests? Kaplow and Shavell conclude that "fairness-based analysis stands in opposition to human welfare at the most basic level"(15) and that we should therefore reject all fairness theories and base social choices on individual utility alone.(16)

I argue in this Article that both Sen's critique of the Pareto principle and Kaplow and Shavell's critique of fairness notions are based on questionable assumptions. This Article proposes a middle course, which I argue resolves the supposed conflicts while remaining faithful to both liberal fairness principles and the Pareto principle. Thus, Kaplow and Shavell cannot reject all fairness concerns by relying on the Pareto principle alone, nor can Sen reject the Pareto principle by relying on liberal rights alone. Both positions require stronger and more controversial assumptions to prove their claims.

This Article outlines a moral theory that takes social welfare to be a function of more than just individual utility. In this Article, however, I do not defend a particular theory of fairness against all possible objections. Specifying completely the precise content of a liberal theory of fairness is an ambition well beyond the scope of this Article. This Article does not, for example, present a defense of the Pareto principle as a universal rule. Instead, I assume for the sake of argument that we believe in the Pareto principle, because I am interested in exploring the logical implications of that belief. In particular, I analyze whether this belief must invariably produce a conflict with liberal notions of fairness.(17) My goal is simply to demonstrate that plausible theories of fairness, especially a liberal theory, need not violate the Pareto principle. Thus, although Kaplow and Shavell may present an effective critique of some theories of fairness, their critique cannot reasonably be viewed as effective against all theories of fairness.

Part I of this Article presents a critique of welfarism from a liberal perspective and proposes a liberal alternative to the utilitarian theory of social welfare. I first discuss the conflict between classical utilitarianism and liberal values and then describe how various economists and philosophers, including Ronald Dworkin, have proposed modifying the utilitarian notion of social welfare to incorporate liberal notions of fairness. Drawing upon this literature, I outline the basis for a liberal notion of social welfare. In particular, I take issue with welfarism's indiscriminate inclusion of all forms of satisfaction, including the satisfaction of racist or malicious preferences, in the calculation of social welfare. I argue that a liberal theory would exclude the satisfaction of such objectionable preferences from our notion of social welfare.

Part II describes how these liberal fairness notions raise the possibility of conflicts with the Pareto principle and sets forth the claims of Sen and of Kaplow and Shavell in more detail. Section III.A defends a resolution of the conflict between the principle of liberal rights and the Pareto principle that, I argue, is faithful to both principles, contrary to the claims of Sen. Indeed, I argue that a solution based on alienable rights flows naturally from familiar liberal principles.

Section III.B then extends this solution to notions of fairness generally, arguing that a plausible theory of fairness can conform to the Pareto principle, contrary to the claims of Kaplow and Shavell. I argue that any plausible fairness theory includes multiple principles and that any such pluralistic theory must specify rules for when some principles take priority over others. There is nothing to prevent a pluralistic fairness theory from including the Pareto principle among its principles and giving the Pareto principle priority over other principles. Such a theory would never violate the Pareto principle but would still apply fairness principles when doing so would not create a conflict with the Pareto...