Collective Choice and Social Welfare

by George Hatjoullis

The title of this blog is taken from Amartya Sen’s book. It was first published in 1970, the year before I became an economics undergraduate, and has recently been expanded. It addresses how societies an make social choices and how social welfare connects to the welfare of the individuals that make up society. It is a difficult area of economics and some argue it is not a legitimate part of economics. The relevance to current affairs is very evident. The HS2 rail link, the expansion of Heathrow, and, of course, Brexit are all collective choices that impact the welfare of individuals and thus of our society. Do these projects improve social welfare?

All three above decisions have been made through the democratic process. The UK has a specific example of representative democracy known as parliamentary democracy. Representatives are elected by constituency on a winner-takes-all basis. It is a pluralist system so each member of parliament has a duty to represent all constituents even if they did not vote for her/him. Campaigns are based on political parties which offer a particular political ideology and often make specific promises prior to election. The parliament elects a government based on the support in the House of Commons and the government can continue as long as it has the support of a majority on key legislation. There is a huge distance between the voter and what the government ultimately chooses. It is the government that makes the social choices that impact social and hence individual welfare.

The UK system allows for a government which may have only directly received a minority of votes. Moreover even those that voted for the party that formed the government may disapprove of specific social choices. It is possible in the UK system for substantial social choices to be made based on the preferences of a small minority of the population. The government of the day should take into account the impact on the whole population but is not obliged to do so. If it commands a simple majority in the House of Commons it can more or less do what it wishes. It can be harassed and delayed by the House of Lords but ultimately it can make the social choices it wishes to make. The population’s only legal defence is to vote for parties that promise to amend or reverse the unwelcome choices of the present government. Occasionally the public can resort to public disorder in order to assert the majority preference (Poll Tax Riots).

The Brexit outcome is a particularly interesting example of this process. The government of the day decided to take direct advice from the population on whether to leave the EU. The result was a (very) small majority of the votes cast in favour of leaving but a minority of those eligible to vote. The government of the day was happy to proceed to leave on this basis but was forced by private citizens to ask parliament through a vote. Parliament approved the government’s action even though there was a substantial majority of MPs that had openly supported remaining in the EU. This odd outcome validated the decision to leave. The government of the day decided to have another election and was allowed to do so by parliament even though the fixed parliaments act was designed to stop opportunistic general elections. The result was the two largest parties in parliament both being committed to leaving the EU even though there is strong evidence that most MPs did not, and the majority of the population no longer, support this commitment. The UK parliamentary system can throw up some social choices that are self-evidently suboptimal. Moreover, the cost of Brexit is high and reversing it is very difficult.

Social choice through voting systems does not make interpersonal comparisons. In all choice situations there are winners and losers. There is no attempt to compare winners and losers and say, for example, the winners gain more in individual welfare than the losers give up so it is a choice that increases social welfare. One of the purposes of Sen’s book is to explore the conditions under which such comparisons are possible. Economists have typically shied away from such comparisons. At best, they have applied the compensation principle. If the winners could compensate the losers and still be better off then social welfare is improved by the choice. This ignores the significance of wealth distribution in social welfare. Moreover, it reduces welfare to money values.

Interpersonal comparisons are not impossible. If a social choice will make a few rich people richer, and a great many poor people poorer, it could be argued that social welfare is being reduced even if compensation is possible. The welfare increase to the rich from getting rich is relatively small compared to the welfare loss of the poor from getting poorer. It might work if the poor are actually compensated but then the rich might not want the change. The point is, who is winning and who is losing is not unimportant in collective choice and social welfare but the electoral system alone may not take this into account. Indeed the system is inevitably biased towards those that have the most political power and know how to exercise it. They tend to be wealthy.

The purpose of this blog is to remind you that democracy is not a panacea. It can lead to outcomes that reduce social welfare. In particular all voting systems ignore interpersonal comparisons. It is possible to consider who the winners and losers are in all collective choices and this will influence the welfare judgements on such choices. It is important to look at each case carefully and not hide behind process and vague words. In particular, ” I’m alright Jack”  and ” Not in my back yard” need to be exposed and held up to scrutiny every time.