Introduction

Hitherto we have considered the actions and interactions of agents (persons, firms) each of which seeks to maximize its own utility. This may lead to situations which (by fairly general consent) are not optimal for society as a whole. Any attempt to formalize such goals as “the greatest happiness of the greatest number” leads to comparisons of the utilities of different persons. More generally, some economists have introduced a social utility function which measures the welfare of society as a whole (or of a specified sub-society, e.g. a family). This may depend only on the utilities of individuals (e.g. their sum) or may be more complicated in structure.

The notion of social utility is distinctly more rarified than that of an individual's utility. It is perhaps not too grossly unrealistic to suppose that an individual, confronted with a number of alternatives, can put them in order of preference. It is much more questionable to think of an order decided by a society as a whole. Indeed, “Arrow's impossibility theorem” shows, subject to some very innocuous-seeming axioms, that it is impossible to construct a social ordering from the preference orderings of the individuals in the society.

Nevertheless, one may suppose that, by some sort of consensus or otherwise, a social utility function is given. An individual agent acts, however, to increase its own utility and this may well decrease social utility. It may be regarded as a duty of Government to maximize social utility either by direct action or by manipulating market forces.