Measuring Economic Welfare

Introduction

In the preceding chapters we have shown that, in general, consumer preferences can be expressed in the form of a money-metric. In addition, provided that these preferences are “well behaved,” the money-metric can be calculated from the parameters of ordinary demand functions. The question then arises: Why haven't economists, particularly those working in the areas of cost-benefit analysis and the theory of index numbers, appreciated these facts before? To properly answer this question, we really require a definitive theory concerning the evolution of scientific thinking. Alas, such an undertaking is not feasible. However, it is possible to offer one hypothesis in this respect, even though it may not be possible to to ascertain its validity. When a particular problem arises for the first time, initial attempts to solve it are inevitably simple, based as they are on a lack of prior experience. As time passes, the defects of any solution technique can be identified and gradually eliminated. However, in the process, paradigms or modes of thinking may develop. Although these may contain valuable insights into the nature of particular problems, their widespread adoption and use may blinker and limit scientific progress in a particular area. Such an explanation, I believe, goes a long way toward explaining the fact that consumer surplus techniques continue to play a central role in much of economic analysis.