4.3 Direct Measures of Welfare.
As we have argued earlier, modern economic theory implicitly assumes that human welfare roughly corresponds with preference satisfaction. Hausman and Macpherson (2006) have explained in detail why this is highly implausible, and suggested several alternatives. Below we discuss some alternative views on welfare which have the effect of displacing scarcity as the fundamental economic problem.
Suppose a society (like the Amish) considers simple lifestyles more conducive to welfare than consumerism. Scarcity or excess of material goods is not of concern except as a means to sustain life. Economists in such a society might formulate the following alternative to the Pareto principle:
Pareto-Style Longevity Principle: A re-allocation of resources is improves social welfare if life expectancy of some member is increased, while no ones life expectancy is adversely affected by the change.
This is an objective, apparently value free, criteria with radically different implications for economic policies compared to the standard Pareto criterion. It would re-define the role of scarcity in the economic system.
Basic Needs, the capabilities approach of Sen and Nussbaum, and the Human Development approach of Mahbubul Haq, are the intellectual heirs of the material welfare approach of classical economists. Adopting this idea of welfare, as opposed to preference satisfaction, would give ‘scarcity’ a different meaning. Conventional views hold scarcity to be a result of unlimited wants in pursuit of limited goods. In material aspects, these new approaches to welfare would focus on health, food and water, education, shelter etc. Scarcity would refer to inadequate food supplies, insufficient numbers of doctors, schools, homes, etc. Many studies suggest that material resources are sufficient to meet basic needs for everyone. The fundamental economic problem would then be one of distribution rather than scarcity.
Communitarians offer the polar opposite of the individualistic view of welfare espoused by economists. To see how placing community welfare above individual concerns affects scarcity, consider the case of precautionary savings. Suppose every individual has a small risk of a catastrophic event. Suppose also that due to adverse selection, moral hazard, unquantifiable probabilities, or ambiguities in specifying the event, insurance markets fail to exist. In an individualistic society, everyone must save for his potential rainy day, leading to a potentially huge demand for resources. If one can count on community support in case of disaster, far fewer resources would be required, averting scarcity.
In this section, we have demonstrated that replacing any one of the three pillars leads to substantial changes in the role of scarcity within an economic system. This shows how these normative commitments lead to the emergence of scarcity as the fundamental economic problem.