Forgot to paste this in last post..cheers, Ken Hanly I also wanted to ask if the same welfare critierion is used in trade theory?
In sum, disregarding the problems inherent in the Kaldor, Hicks and Scitovsky criteria, the question must be raised again: are these objective criteria in any sense? Ethically, of course, the Kaldor criteria is easily disputed as it is only a "could" and not a "would" or even a "should". As Ian M.D. Little writes, in his famous critique: "It seems improbable that so many people would, in England now, be prepared to say that a change, which, for instance, made the rich so much richer that they could (but would not) overcompensate the poor, who were made poorer, would necessarily increase the wealth of the community." (Little, 1950: p.90). A point reiterated by many contemporaries (e.g. Baumol, 1946; Reder, 1947; Samuelson, 1947). There were three lines of defense followed by the L.S.E. economists. The first was to agree and make the "could" into a "would", i.e. have the winners actually compensate the losers. This, of course, leads to an improvements of sorts, the practical objection that arises is that once we are at a new allocation, winners are unlikely to surrender any of their gains. The second defense, pursued by Hicks (1941), was that even if the losers do not get compensated in the move, they might still benefit in the "long-run" if the criteria were followed consistently by society. This argument is similar to that of "trickle-down" theory and in arguments for free trade: some people may be worse off in the short-run, but in the long run, everyone will be better off. The underlying assumption, of course, is that at some point, those who lost utility initially will come across a possible move in which they benefit and a society which follows the Kaldorian rule will move to it and thus they will gain in the end. Of course, as Little (1950) notes, this is completely hypothetical. There is nothing to guarantee that there will eventually be a move in which the initial losers will be the ultimate winners. The third (and perhaps best) line of defense is that the Kaldor-Hicks criteria merely lay out what is economically possible and that it is up to policy-makers, on the basis of their own value judgements, to choose which move to make and whether compensation of the losers should be forced (cf. Kaldor, 1939; Scitovsky, 1951). Thus, they argue, they are merely underlining that certain options may be more economically possible than others, but they are still only options. The final decision will require more philosophical, ethical and political considerations to be brought into the story.
