The prescience of Will Baumol

The sad news about Will Baumol’s death sent me looking at his publications, and I’ve been reading the (1950) book of his PhD thesis, Welfare Economics and the Theory of the State.

The book begins by noting that laissez faire is certainly not no-government anarchism, but the list of things the government ‘ought’ to do (defence, justice, street lights, roads….) can vary between laissez faire writers and is rather arbitrary. Can there be a set of criteria based on first principles? What about asking, “Which, if any, are the circumstances in which the people composing an economy will find that a particular extension of the authority of the government is requisite for the most efficient pursuit of their own economic interests.” The thesis seeks to answer this question by an extension of the notion of external economies in consumption and production, and concluded that this approach can yield a consistent list of government activities (and moreover one that has governments do more than is often the case, rather than less).

The book then essentially destroys some of the standard convenient assumptions of welfare economics, in amazingly prescient ways. Baumol for example argues that individual preferences are not fixed, but rather influenced by other people, that monopoly and monopolistic competition are the norm, and that there is imperfect knowledge, prefiguring behavioural economics and information economics by some decades. The book ends with an Epilogue: “The Wreck of Welfare Economics.” He writes: “The simplifying premise that these types of interdependence [ie of production costs or preferences] are negligible or non-existent is misleading. Such an assumption is not neutral; it leads inexorably to the acceptance of laissez faire.” He concludes that until economics can say more about external economies and diseconomies, in terms of empirical investigation, there is no point in applying welfare theory.

 

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