General Equilibrium Model L11 Contents Partial vrs General

General Equilibrium Model L-1/1

Contents • • Partial vrs. General equilibrium Walrasian S System GE Paretian system of General Equilibrium

Walrasin General Equilibrium Model 1. It defined as state in which all the markets and decisions making units are in simultaneous equations. • If each market is cleared at a positive price. • Consumer maximising satisfaction. • Firm maximising profits. • Product market and factor market must be determined simultaneously. 2. GEM simultaneous equation model • Millions of unknown with millions of equations. • Behavioural equations: dd and ss functions • Clearing market mechanism.

GEM: Léon Walras, • Léon Walras (French: 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. • He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the development of general equilibrium theory. • Contributions Walras's law , General equilibrium. • In 1874 and 1877 Walras published Éléments d'économie politique pure (1899, 4 th ed. ; 1926, éd. définitive), • Inn English, Elements of Pure Economics (1954), translated by William Jaffé. • That work that led him to be considered the father of the general equilibrium theory. • Walras's law implies that the sum of the values of excess demands across all markets must equal zero, whether or not the economy is in a general equilibrium. • This implies that if positive excess demand exists in one market, negative excess demand must exist in some other market. Thus, if all markets but one are in equilibrium, then that last market must also be in equilibrium.

GEN: Leon Walras 1. All the prices and quantities in all markets determined simultaneously. 2. It is presented by a set equations. 3. Consumers have double role: he buys commodities and sells factors of productions to firms. • Dd for commodities means quantities of commodities it produces. • Ss of factor inputs means dd for factor inputs. • Simultaneity means inter dependency. • Millions of SEM with unknowns. 4. Three characteristics. • Many markets=Many commodities=many factors of productions. • Ss function=dd functions=clearing the market. • Commodity market=dd functions= no. Of conumers. • SS function=no of firms. • No of equation= no. unknowns.

Economic efficiency: Pareto Optimality • Velfredo Pareto (1848 -1923): rejected the classical view of social welfare 1. Cardinal utility and additive nature 2. Interpersonal comparison of utility • Pareto Criterion 1. Improvement 2. Optimality/efficiency • Pareto improvement is a position from which it is possible to make someone better off without making someone worse off by any re-allocation of resources and outputs. • Pareto optimality is a position from which it is impossible to make anyone better off without making someone worse off by any re-allocation of resources and outputs. • Government policy change applies in case of PO.

Assumption of Pareto Optimality • Each individual has his own ordinal utility function and poses a definite amount of each product and factor. • Production function of every firm and state of technology is given and remains constant • Goods are perfectly divisible. • A producer tries to produce a given output with the least combination of factors • Each individual wants to maximize his satisfaction. • Every individual purchase some quantity of all goods. • All factors of production are perfectly mobile.

Pareto Efficiency Conditions • Exchange Efficiency • Production Efficiency • Product Mix Efficiency

Exchange Efficiency • Exchange efficiency means the distribution of a given output of goods between individuals in a society should be such that it should not be possible to make someone better off without making anyone else worse off. • The marginal condition for a Pareto Optimal or Efficient distribution of commodities among consumers requires that the MRS between two goods must be same for every individual who consumes them both. • MRS xy of A = MRS xy of B

Explanation of the diagram • Draw a Contract curve • MRS between the two goods for individuals A and B are equal on the various points of the Contract curve CC’. • Any point outside the CC does not represent the equality of MRS. • At point K, MRS xy of A is not equal to MRS xy of B. • So movement from K to QS segment of any point on CC’ increase the social welfare.

Production Efficiency • Pareto efficiency in production is possible by reallocating the resources is such a way that resources to produce more of some goods without producing less of some other goods. • Use of Resources by a firm for production of a good or goods is efficient when it produces any given output at the minimum possible cost or a given cost outlays. • The marginal condition for a Pareto optimal allocation of factors (inputs) requires that the MRTS between any pair of factors must be equal the same for any two firms producing any two products and using both the factors to produce the products. • MRTS lk of A = MRS lk of B

Explanation of the diagram • Draw a Contract curve • MRTS for ne factors for another is the amount of one factors necessary to compensate the loss of the marginal unit of the anther so that the level of output remains the same. • MRTS between the two goods for firm A and B are equal on the various points of the Contract curve CC’. • Any point outside the CC does not represent the equality of MRTS. • At point K, MRTS xy of A is not equal to MRTS xy of B. • So movement from K to QS segment of any point on CC’ increase the social welfare.

Product Mix efficiency • The product mix efficiency means that allocation of resources among the production of various goods and services is in accordance with the preferences of the people. • The marginal conditions for a Pareto Optimal or efficient composition of output requires that the MRPT (Marginal Rate of product transformation) between any two commodities be equal to the MRS between the same two goods. • MRPTxy = MRSxy of A = MRSxy of B • MRPT says the rate at which a good can be transformed into another. • MRS xy = rate at which consumer are willing to exchange a good for another.

Explanation of the diagram • AB is a community transformation curve. It represents an amount of X can be produced for any amount of Y with a fixed supply of available resources. • MRSxy of A = MRSxy of B= MRPT at point R. • R represents optimum combination of production in which commodities X and Y are being produced and consumed in OM and ON quantities. • At point S, consumer is at lower IC.

Product Mix with Edgeworth Box • TT’ is society product transformation curve. • At L, ox 1 of X and oy 1 of Y is produced. • Thus production at L and consumption at S can not be Pareto Optimum. • In diagram 2, at point Q of TT’, greater of Y and smaller of X is produced.

Critical evaluation of PC and PO 1. It is not completely free from value judgment. 2. PC can not be applied to judge the social desirability of those policies proposals which benefit some and harm others. Whenever, there is conflict of preferences of two individuals with respect to two alternatives, the criteria fails to rank those two alternatives no matter what the preferences of the rest of the individuals in the society might be. P. K. Paitnaik. 3. PC leaves a considerable amount of indeterminacy in the welfare analysis since every point in CC is pareto optimal. 4. PC accepts the prevailing income distribution and no attempt is made to find out an optimum distribution of income.

A. K. Sen Critique of PO 1. A State can be PO with some people in extreme misery and others rolling in luxury, so long as the miserable cannot be made better off without cutting into the luxury of the rich. A. K. Sen 2. He criticized the utility based PO. Utility is interpreted in happiness and desire-fulfillment. Utility does not always reflect well being. 3. Well being is ultimately a matter of valuation and while happiness and fulfillment of desire may well be valuable for the person’s well being, they cannot-on their own way or even together- adequately reflect the value of well being. 4. Welfare or well being is also affected by political and environmental factors. 5. A reorganization that gives everyone more income and leisure might not improve the welfare of the community if at the same time it limits individual freedom or requires the abandonment of cherished culture and traditions.

Economic efficiency: Pareto Optimality • Velfredo Pareto (1848 -1923): rejected the classical view of social welfare 1. Cardinal utility and additive nature 2. Interpersonal comparison of utility • Pareto Criterion 1. Improvement 2. Optimality/efficiency • Pareto improvement is a position from which it is possible to make someone better off without making someone worse off by any re-allocation of resources and outputs. • Pareto optimality is a position from which it is impossible to make anyone better off without making someone worse off by any re-allocation of resources and outputs. • Government policy change applies in case of PO.

Assumption of Pareto Optimality • Each individual has his own ordinal utility function and poses a definite amount of each product and factor. • Production function of every firm and state of technology is given and remains constant • Goods are perfectly divisible. • A producer tries to produce a given output with the least combination of factors • Each individual wants to maximize his satisfaction. • Every individual purchase some quantity of all goods. • All factors of production are perfectly mobile.

Pareto Efficiency Conditions • Exchange Efficiency • Production Efficiency • Product Mix Efficiency

Exchange Efficiency • Exchange efficiency means the distribution of a given output of goods between individuals in a society should be such that it should not be possible to make someone better off without making anyone else worse off. • The marginal condition for a Pareto Optimal or Efficient distribution of commodities among consumers requires that the MRS between two goods must be same for every individual who consumes them both. • MRS xy of A = MRS xy of B

Explanation of the diagram • Draw a Contract curve • MRS between the two goods for individuals A and B are equal on the various points of the Contract curve CC’. • Any point outside the CC does not represent the equality of MRS. • At point K, MRS xy of A is not equal to MRS xy of B. • So movement from K to QS segment of any point on CC’ increase the social welfare.

Production Efficiency • Pareto efficiency in production is possible by reallocating the resources is such a way that resources to produce more of some goods without producing less of some other goods. • Use of Resources by a firm for production of a good or goods is efficient when it produces any given output at the minimum possible cost or a given cost outlays. • The marginal condition for a Pareto optimal allocation of factors (inputs) requires that the MRTS between any pair of factors must be equal the same for any two firms producing any two products and using both the factors to produce the products. • MRTS lk of A = MRS lk of B

Explanation of the diagram • Draw a Contract curve • MRTS for ne factors for another is the amount of one factors necessary to compensate the loss of the marginal unit of the anther so that the level of output remains the same. • MRTS between the two goods for firm A and B are equal on the various points of the Contract curve CC’. • Any point outside the CC does not represent the equality of MRTS. • At point K, MRTS xy of A is not equal to MRTS xy of B. • So movement from K to QS segment of any point on CC’ increase the social welfare.

Product Mix efficiency • The product mix efficiency means that allocation of resources among the production of various goods and services is in accordance with the preferences of the people. • The marginal conditions for a Pareto Optimal or efficient composition of output requires that the MRPT (Marginal Rate of product transformation) between any two commodities be equal to the MRS between the same two goods. • MRPTxy = MRSxy of A = MRSxy of B • MRPT says the rate at which a good can be transformed into another. • MRS xy = rate at which consumer are willing to exchange a good for another.

Explanation of the diagram • AB is a community transformation curve. It represents an amount of X can be produced for any amount of Y with a fixed supply of available resources. • MRSxy of A = MRSxy of B= MRPT at point R. • R represents optimum combination of production in which commodities X and Y are being produced and consumed in OM and ON quantities. • At point S, consumer is at lower IC.

Product Mix with Edgeworth Box • TT’ is society product transformation curve. • At L, ox 1 of X and oy 1 of Y is produced. • Thus production at L and consumption at S can not be Pareto Optimum. • In diagram 2, at point Q of TT’, greater of Y and smaller of X is produced.

Critical evaluation of PC and PO 1. It is not completely free from value judgment. 2. PC can not be applied to judge the social desirability of those policies proposals which benefit some and harm others. Whenever, there is conflict of preferences of two individuals with respect to two alternatives, the criteria fails to rank those two alternatives no matter what the preferences of the rest of the individuals in the society might be. P. K. Paitnaik. 3. PC leaves a considerable amount of indeterminacy in the welfare analysis since every point in CC is pareto optimal. 4. PC accepts the prevailing income distribution and no attempt is made to find out an optimum distribution of income.

A. K. Sen Critique of PO 1. A State can be PO with some people in extreme misery and others rolling in luxury, so long as the miserable cannot be made better off without cutting into the luxury of the rich. A. K. Sen 2. He criticized the utility based PO. Utility is interpreted in happiness and desire-fulfillment. Utility does not always reflect well being. 3. Well being is ultimately a matter of valuation and while happiness and fulfillment of desire may well be valuable for the person’s well being, they cannot-on their own way or even together- adequately reflect the value of well being. 4. Welfare or well being is also affected by political and environmental factors. 5. A reorganization that gives everyone more income and leisure might not improve the welfare of the community if at the same time it limits individual freedom or requires the abandonment of cherished culture and traditions.

First Theorem of Welfare Economics • Pareto optimality and allocation of resources • One can make better off without making any one else worse off, an inefficient point. • From in-efficienct point through improvement process, one can make Pareto efficient. • First fundamental theorem of welfare economics 1. Maximization of social welfare or economic efficiency in general equilibrium frame. 2. It reflect general competitive equilibrium is Pareto optimal

First Theorem • PC and Optimal Distribution of Goods or Exchange Efficiency 1. MRS xy of A = Px/Py 2. MRS xy of B =Px/Py 3. MRS xy of A = MRS xy of B • PC and Optimal Distribution of Factors or Production Efficiency 1. MRTS lk of X =w/r 2. MRTS lk of Y = w/r • MRTS lk of X =MRTS lk of Y

PC and Optimum Directions of Production • General economic Efficiency • This condition states that MRS between any two commodities for any consumer should be same as the MR of transformation (MRT) for the community between these two commodities. • MC x/ MC y = Px/ Py • MRT xy = MC x/ MC y = Px/ Py • MRS xy = Px/Py • Mrs xy =MRT xy

Criticism • This is also called invisible hand theorem. • General competitive equilibrium exists. • Second order condition for equilibrium must fulfill. • Externality in consumption and production do not exist. • Pareto optimality and social justice

Theory of Consumer Surplus • • First formulated by Dupuit in 1884 to social benefits of public goods. It is further refined by and popularized by “Principles of Economics” in 1890. It is basis for welfare economics. Marshall’s concept of CS is cardinal and interpersonal comparison of Utility. CS is simple difference between the price that one is willing to pay minus one actually pay for it for particular product. Greater the amount of money he is willing to pay, the greater the utility he obtained from it. CS = ∑ MU – P X No. of unit of Commodity.

Marshall’s CS • Example: Consumption of Water. • Two aspects are important to measure. 1. Total utility in terms of money 2. Total market value Assumptions: 1. Cardinal Measurement of Utility. 2. Marginal Utility of Money remain constant. 3. Different units of goods give different amount of satisfaction to the consumer.

Example of CS No of Units Marginal Value Price (in Rs) 1 20 12 8 2 18 12 6 3 16 12 4 4 14 12 2 5 12 12 0 6 10 12 -2 Total CS Net Marginal Benefits 20

• CS under various situation (Marshallian Form of CS) 1. CS Under DD Curve 2. CS and Changes in price CS through Indifference curve • Hicks and Allen is a ordinal concept. • MU of money does not remain constant with the rise and fall in real income.

Hicksian Four Concept of CS 1. Price Compensating Variation 2. Price Equivalent Variation 3. Quantity Compensating Variation 4. Quantity Equivalent Variation 1. Price Compensating Variation • PCV is defined by Hicks “Maximum amount of money the consumer will be willing pay for the privilege of buying a commodity at a lower price so that he obtains the initial level of welfare. That is the level of welfare he obtained before the fall in price.

2. Price Equivalent Variation • PEV is defined by Hicks as the minimum sum of money, the consumer will accept to receive forgoing the opportunity of buying at a lower price, so that he obtains the subsequent level of welfare, which he reaches with lower price. 3. Quantity Equivalent Variation • QCV is defined by Hicks “As the maximum amount of money, a consumer will be willing to pay for the priviledge of buying a good at a lower price, if along with this privilege he is constrained to buy the quantity of the good, which he would buy at a lower price, in the absence of any compensating payment”.

4. Quantity Equivalent Variation • QEV is defined by Hicks as “the minimum sum of money that the consumer will accept forgoing the opportunity of buying the commodity at the lower price, provided he is constrained to buy the quantity of X, which he actually buys at the old higher price”. • If he is constrained to buy OA amount of X, he will accept QT amount of money for giving up the opportunity of buying the commodity at the lower price. This is because combination T gives same satisfaction as combination R at which point the consumer reaches with lower price of X.

Criticism of CS 1. • CS is quite hypothetical, imaginary and illustrative. Sum total of money actually spent by him on the goods cannot be greater than his total money income. 2. It is based on invalid assumptions that different units of the goods give different amount of satisfaction to the consumer. 3. It ignores the interdependence between the goods that is the relations of substitute and complementary goods. 4. CS is hypothetical and imaginary: • Prof. Nickolson says that it is difficult to say how much price a consumer would be willing to pay for a good rather than go without it. • J. R. Hicks says the best way to look at the CS is to regard it as a means of expressing it in terms of money income gain which accrues to the consumers as a result of fall in price. 5. It is based on questionable assumption of cardinal measurability of utility and constancy of the marginal utility of money.

Conclusion • Formulation of economic theory and policy • Utility is more than price paid – Adam Smith, Value in Use and Value in Exchange • Example: salt, match box, news paper etc. • Amenities and Recreational Facilities: • Prof. Samuelson says “How lucky the citizen of modern efficient communities really are? ” • Marshallian CS was meant formulating suitable fiscal policy, which maximizes the welfare of the people. • Indirect Tax and Subsidies: • CS and CBA:

Application of CS • Three Major Areas 1. 2. 3. The Water –Diamond Paradox of Value Theory The effects of taxes and subsidies on Peoples’ welfare CBA of public projects • The Water –Diamond Paradox of Value Theory • • Use value vrs market value Marginal valuation of a commodity reflects how much amount of money consumer is prepared to pay for a commodity. Market price of a commodity is determined not by its total use value but by its marginal valuation of marginal benefit which is turns depends upon the actually availability of quantity. Total valuation or satisfaction derived from water consumed is much greater compared with diamond but its marginal valuation is low due to its abundant supply.

The effects of taxes and subsidies • Indirect tax and constant cost Industry • Demand SS of car • Explain the loss of welfare due to tax • Two components 1. Revenue collect by the govt. 2. Loss of welfare or excess of burden of sales taxation or dead weight loss • Gain from subsidy • • 1. 2. Give the example of foodgrains Two components Total expenditure burn by govt. Net gain in welfare

CBA of Public Projects • CBA means not only analysis of costs and benefits but also real costs and benefits in terms of satisfaction and resources. • It also looks social point of view • Give one example of fly over • No. of journey per month and cost per journey • Two components 1. Cost saving component 2. increase in consumer surplus

Arrow theory of Social Choice L-1

K. J Arrow as a Economist • Kenneth Joseph "Ken" Arrow (August 23, 1921 – February 21, 2017) was an American economist, writer, and political theorist. • He was the joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51. • His most significant works are his contributions to social choice theory, notably "Arrow's impossibility theorem", and his work on general equilibrium analysis. • He has also provided foundational work in many other areas of economics, including endogenous growth theory and the economics of information.

Arrow’s Social Choice • Social Choice and Individual Values • Arrow’s main contention that “It is difficulty to set up reasonable democratic procedures for the aggregation of individual preferences into a social preferences for making a social choice”. • BS SWF – f (goods and services consumed him not by others) • SWF based on all individuals preference is impossible.

Arrow SWF • Arrow has pointed out that individuals ordering of social states does not depend exclusively upon the commodities consumed but also on the amount of various types of collectives such as municipal services, parks, sanitation, erection of statues of famous men. • Welfare results of collective activity can not be evaluated by an individual solely on the basis of his consumption. • Individual ordering of social states will depend on his own consumption as well as on the consumption of others in the society.

Arrow conditions of Social Choice • Value Judgments of a super man or dictator about social welfare may not be valid due to various types of biases in human mind. • Arrow was the first welfare economist, who attempted to lay down reasonable necessary condition for achieving the social ordering. • Dictator can make a choice through custom and tradition, spiritual on religious head in traditional society or by individuals comprising a society through voting. • Dictatonial rule on religious and traditional society, social choice is comparutivelu each. • Social choice in a democratic society based on individual ordering is diffcuilti.

Conditions • Transitivity or Consistency – alternatives must be related Consistency – if any pair of alternatives A and B, either A is Preferred to B, B is preferred to A, on Indifferent between A. • Responsiveness to Individual Preference • Social Ranking must respond positively to the individual ranking. • Social choice changes in the same direction of individual preference. • The condition of Non- imposition • Social choices must not be imposed independently on individual preference • No body prefers B to A, • An Some body A to B • Society prefers B to A

Conditions…. . • Condition of Non Dictatorship. • Social Choice must not be dictated by any one individual in the community • Independence of Irrelevant Alternatives. • Social ranking of any two alternatives is determined exclusively by individual ranking of these two alternatives above

Impossibility Theorem • • X Y Z A B 3 1 2 3 1 (least Preference) 2 (next Preference) C 2 1 3 (Most Preference)

Sen Criticism on Arrow’s theorem: • A limited class of Information • The poorest has no cake left to he taken away. • If we execute the possibility of interpersonal comparisons of Utility only method of passing from individual tastes to social preference, which shall be satisfactory and which will be defined for a wide range of sets individual ordering are either. It is not possible to pass from the imposed indication. • Individual preferences to the social preference, so as to construct a social welfare function. • Free voting in a democratic process. • Social choice would be made by majority rule. • Social choices can not violate transitivity on consistency.

Social Welfare Functions B-S Theory L-I Sanatan Nayak

Classical view • Sum of cardinal utilities • Law of diminishing marginal utilities • Equal distribution of income or Marginal Utility of Money is constant • Interpersonal comparison of utilities • Critiques • Cardinal measurement of utilities • Sum of cardinal utilities: This is unethical or equal weight to each person is not correct.

SWF • Classical SWF: Bentham, Pigou and Marshall: Cardinal Utility • Maximisation of social welfare is possible for equal distribution of income • Pareto SWF: Marginal conditions • Rawlsian SWF: John Rowl • Welfare criteria can be chosen, departure from perfect equality • Unequal distribution of utilities. • The worst of individual is actually better off than under equality.

SWF-SB • A. Bergson (1938): A reformulation of certain aspects of Welfare Economics • BS provided a new approach to SW • Ordinal preferences of individuals • Welfare Approach is individualistic • Interpersonal comparison of utility and value judgment • Welfare economics can not be separated from value judgement

B-S SWF • It is an ordinal index of utility • Welfare function: W=w(U 1, U 2, ………Un) • Ordinal utility index depends on goods and services consumed. • Three proposition: • B-S SWE depends solely on the utility of individual welfare in the society. • Value Judgment can be obtained through democratic process through voting by individual. • Agents of value of Judgment- economists need not himself decide about, the desirable distribution of welfare. • Ordinal Utility is function of own condition of goods & services.

B-S SWF cont …. • SWF function is attained by common consensus or it may be forced upon the society by a dictator. • Problem of choosing an agent by authority “who can give biased value judgment superman”. • Democratic government on process of democratization of mixing welfare. • Rule of transitivity

Representation of BS • SWF : A social IC is a locus of various combination of utilities of A & B, which results an equal level of social welfare. • The consideration of fairness and equality are incorporated into the welfare function and are reflected in the sphere of social IC. • BS SWF arrives a solution for maximum social welfare which combines efficiency and equity. • Point of Contrained Bliss: Equity and efficiency.

Summary of B-S • Value Judgement and Inter personal comparison of utility. • Distribution of welfare is possible through value judgement. • There is no unique value judgement process but set of value judgement can construct a SWF. • SWF provides unique optimum solution with efficiency and equity, i. e. , Constrained Bliss.

Critical evaluation of BS • Little, Streeten and Baumol have pointed SWF have limited practical use. • Little- SWF can neither be used in democratic state non in totalitarian state. • Baumol: SWF is have limited practical value, as it does not tell us how to get the value judgements, which it requires for its construction. • J. K. Mehta: - SWF is possible, when superman or authority initiate representative state, or unbiased or selfless. • It might improve the welfare of the community it at the same time it limits individual freedom or requires the abandonment of cherished cultural traditions.

Reference • A. Bergson (1938), “A Reformulation of Certain aspects of Welfare Economics”, The Quarterly Journal of Economics, Vol. 52, No. 2. , pp. 310334.

Compensation Principles • Due to economic re-organisation, which makes some people better off and others worse off. • Assumption 1. The satisfaction of an individual is independent of the others 2. There is no externality of consumption and production 3. The test of consumer remains constant. 4. The problems of production and consumption can be separated from distribution. 5. Utility can be measured ordinally and interpersonal comparison of utility is not possible.

H-K welfare criterion: Compensation principles • K-H Compensation Criteria says: • If certain change occur due to economic reorganization policy change. Some people better off and others worse off. Then that change will increase social welfare if those who gain from the changes could compensate the losers and still be better off than before. • J. R. Hicks Supported the view of compensation Criteria: -This case is improvement then the re-organisation. • DE is the utility possibility curve. • When we more down ward, utility of A Up es and b Down es. • The movement from Q to T, B better off and A worse of. • Utility. • R is the point, where both A remain same and B better off. • Movement from Q to R, • Q to S, Would increases both. • Due to economic change any movement for lower UPC to higher UPC, would make better off the position.

H-K welfare criterion cont ……. • H. K. Criteria says compensation may not be actually paid to judge whether or not social welfare has increased. It is enough to know whether the gainer could compensate the loser for the loss in his welfare and still be better off. • It says change in output and change in distribution.

UPC move outwards • What happens to social welfare due to economic policy and UPC moves outward. • Any change in the economy that moves the individual from a position on a lower utility possibility curve to a position on a higher utility possibility curve increases social welfare.

Scitovsky Paradox • Important limitation to H-K principles. • If B is an improvement to A by H-K principles, then it is possible, A can be improvement over B on the same criteria. • H-K involve contradictory and inconsistency situation. • JK and GH are two UPC. • C is the original position. Due to policy change, higher UPC and point is at D. • Movement from C to D, satisfy the H-K criteria. • According to Scitovsky, reverse movement from D to C, social welfare also increases.

Scitovsky double criterion • Full fills the requirement of H-K hypothesis & fulfillment of the reversal case. • Change is an improvement if gainers in the changed situation are able to persuade the losers to accept the change and simultaneously losers are not able to persuade the gainers to remain in the original situation. • CD and EF are two UPC parallel. Movement from Q to R increase social welfare. Thus H-K satisfy. • Movement from G to Q does passed by the H-K criteria. • Thus when two UPC not intersecting and change involves movement from a position on a lower UPC to a position on a higher UPC, the changes rises social welafre on basis of HK -S criteria.

Criticism of H-K Criteria • H-K Principle does not require actual compensation to be paid but it is not necessary that the benefits can compensate the losers. • Little H-K focus on efficiency not distribution. • (Prof. Baumol & Little) Compensation criteria is not free from value Judgment that situation it self is a value judgment. • • It is not free from interpersonal comparison of utility. • Potential welfare rather than actual welfare Samuelson’s view.

Theory of Capability Nassubum and A. K. Sen Dr Sanatan Nayak

Brief History of Martha Nussbaum • Martha Craven Nussbaum was born on May 6, 1947 is an American philosopher. • Nussbaum is the author or editor of a number of books, including The Fragility of Goodness (1986), Sex and Social Justice (1998), The Sleep of Reason (2002), Hiding From Humanity: Disgust, Shame, and the Law (2004), and Frontiers of Justice: Disability, Nationality, Species Membership (2006). • She taught philosophy and classics at Harvard in the 1970 s and early 1980 s, where she was denied tenure by the Classics Department in 1982. [3] Nussbaum then moved to Brown University, where she taught until 1994 when she joined the University of Chicago Law School faculty. Her 1986 book The Fragility of Goodness, on ancient Greek ethics and Greek tragedy, made her a well-known figure throughout the humanities. More recent work (Frontiers of Justice) establishes Nussbaum as a theorist of global justice.

Structure and Development of Martha Nussbaum’s Capability Theory • Nussbaum 'Central Capabilities: • Life: Being able to live to the end of a human life of normal length; not dying prematurely, or before one’s life is so reduced as to be not worth living. • Bodily health : Being able to have good health, including reproductive health; to be adequately nourished; to have adequate shelter. • Bodily Integrity: Being able to move freely from place to place; to be secure against violent assault, including sexual assault and domestic violence; having opportunities for sexual satisfaction and for choice in matters of reproduction. • Senses, imagination and thought: Being able to use the senses, to imagine, think, and reason – and to do these things in a ‘‘truly human’’ way, a way informed and cultivated by an adequate education, including, but by no means limited to, literacy and basic mathematical and scientific training.

Structure and Development of Martha Nussbaum’s Capability Theory cont. . . • Emotions: Being able to have attachments to things and people outside ourselves; to love those who love and care for us, to grieve at their absence; in general, to love, to grieve, to experience longing, gratitude, and justified anger. • Practical reason: Being able to form a conception of the good and to engage in critical reflection about the planning of one’s life. • Affiliation: Being able to live with and toward others, to recognize and show concern for other human beings, to engage in various forms of social interaction; to be able to imagine the situation of another. • Other species: Being able to live with concern for and in relation to animals, plants, and the world of nature. • Play: Being able to laugh, to play, to enjoy recreational activities.

Structure and Development of Martha Nussbaum’s Capability Theory cont. . . • Control over one’s environment: • Political: Being able to participate effectively in political choices that govern one’s life; having the right of political participation, protections of free speech and association. • Material: Being able to hold property (both land movable goods), and having property rights on an equal basis with others; having the right to seek employment on an equal basis with others; having the freedom from unwarranted search and seizure.

• • • Brief of AK Sen Amartya Kumar Sen born 3 November 1933) is an Indian economist and philosopher of Bengali ethnicity. Since 1972 has taught and worked in the United Kingdom and the United States. Sen has made contributions to welfare economics, social choice theory, economic and social justice, economic theories of famines, and indexes of the measure of well-being of citizens of developing countries. He was awarded the Nobel Memorial Prize in Economic Sciences in 1998 and Bharat Ratna in 1999 for his work in welfare economics, Charleston-EFG John Maynard Keynes Prize in in February 2015 by the Royal Academy in the UK. He is currently the Thomas W. Lamont University Professor and Professor of Economics and Philosophy at Harvard University. He served as the chancellor of Nalanda University. He is also Fellow of Trinity College, Cambridge, where he served as Master from 1998 to 2004. Thesis, which was on "The Choice of Techniques" in 1959

Major Achievements • Has written many books such as Collective Choice and Social Welfare, On Economic Inequality, Poverty and Famines: An Essay on Entitlement and Deprivation, Choice, Welfare and Measurement, OUP, 1982, Resources, Values and Development, OUP, 1984, Commodities and Capabilities, OUP, 1987, India: Economic Development and Social Opportunity (With Jean Dreze), Development As Freedom, AUP, 2000, India: Development and Participation (With Jean Dreze), OUP, 2002, The Argumentative Indian, 2005, Penguin; The Idea of Justice, 2009, An Uncertain Glory: India and Its Contradictions ((With Jean Dreze), 2013; Development Economics, Social Choice Theory (for which Noble prize in 1998) and Philosophy, Development as Freedom in 1999. • Sen first introduced the concept of capability in his Tanner Lectures on Equality of What? in 1979) and went on to elaborate it in subsequent publications during the 1980 s and 1990 s. • This approach is connected with Aristotle, Adam Smith and Karl Marx.

Definition of Capability Approach • Capability, he means, “that a person has the substantive freedom, he or she enjoys to lead the kind of life, he or she has reasons to value” (Sen, 2000). • Income poverty vrs. Lack of political power to vote. • Old age pension vrs unemployment. • It includes various types freedoms such as political freedom, economic facilities, social opportunities, transparency guarantees and protective security. • Income deprivation vrs capability deprivation. • He proposed public interventions for reduction of inequality or poverty (in wider sense) for establishment of capabilities of persons based on age (old age and young), gender and social roles (custom based family obligations), by location (proneness to flood, drought, or insecurity or violence), epidemiological environment (through dieses in a region).

Capability Deprivation • Hence, conversion of capabilities deprivation is essential in addition to lowness of income. 1. Income and capability gets affected by persons of age, gender social roles, locations. 2. Income deprivation and adversity in converting income into functions. 3. Distribution within family. 4. Relative deprivation in terms of income can yield absolute deprivation in terms of capability 5. Income poverty and capability poverty. • According to Sen, “the notion of poverty as capability of inadequacy from that of poverty as lowness of income, these two perspectives cannot but be related, since income is such an important means to capabilities. And since enhanced capabilities in leading a life would tend, typically, to expand a person’s ability to be more productive and earn a higher income, we would also expect a connection going from capability improvement to greater earning power and not only the other way round”.

Income Poverty and Capability Poverty • Public Action in reducing inequality and poverty • Market reforms and social facilities or opportunities • East Asia and south east asia • investing in education and health care to control income deprivation at the end • entitlements and capability improvement. • America vrs Europe, China and Srilanka. • Gender Inequality, sex ratio, excess mortality, litaracy rate among females etc.

Significant Observations • Income Inequality and Economic Inequality. • Valuation of Diverse capability • Public Discussion and Social Participation

Measurement of Human Capabilities • Output based measures: GNP or GDP • 1. it show country economic prosperity and improve living standards • Lacks to measure of well beings and quality of life • Women and Cultural Universals • Faminism • Greatest goods for all human being • Monetray and Non-Monetary measures of well beings

Critique of output based capability • • • Faminist critiques Distribution of wealth to women Unpaid works Woman's human rights Environmental Critiques Nuclear weapons Defence expenditure Deduction in accountings Technical and misinterpretations critiques Kuznet: quantity and quality of growth, costs and returns, short term and long run

Alternative measures • Human Development index (HDI) • Gender related development Index (GDI): gender related within HDI • Gender Empowerment Measures (GEM): woman employment in high economic ranking jobs, seats in parliments and share of households income. • Gender Inequality Index (GDI): reproductive health, empowerment and labour force participation • Human Poverty Index (HPI): Non-income based income (UNDP) • Gross National Happiness (GNP): see reference

Sustainable Livelihood: Types of Capital • Physical Capital • Natural capital: Renewable vrs non-renewable capital • Human capital • Social capital: Knowledge assets • Financial Capital • These three are complementary capital

References • Commodities and capabilities, A. K. Sen, OUP, 1998. • A work in Progress, the Hindu, Date: 19. 05. 2016, p. 11. develop the work. • Development As Freedom, AUP, 2000.