Discuss the basic difference in approach adopted by Pigou and Pareto to deal with problems of welfare economics.

Pigou will succeed Marshall as professor at Cambridge in 1910, and this succession is also a filiation. The welfare economy, says Pigou, consists of “that category of satisfactions and clissatisfactions that could be related to a monetary measure”. Pigou insisted on considering “the demand expressed in money as the measure of the satisfaction reported by the acquired good” (The Economics of Welfare, 1920, p.19). It is not possible to say in a clearer way that utility is cardinal, that prices give their measure and that we can add the individual levels of utility. Evidently with Pigou we are in a Marshallian universe.

Pigou’s theories about welfare economics were developed for the first time in Wealth and Welfare (1912) and taken up in a more elaborate version in The Economics of Welfare (1920). To summarize such ideas, we will rely on these two works.

The source of economic welfare is in the real income (or “national dividend”) that must be maximized. The general rule that presides over this maximization is in the usual neoclassical principle: the marginal social productivity of all resources must be the same in all possible jobs. Obviously, in effect, in this case the transfer of resources from one use to another will not be profitable. Of course, observes Pigou, any increase in production to the extent that it requires additional work, is accompanied by an increase in the disutility that must be taken into account. Here, too, we can apply the usual principles: production must be brought to the point where the utility born from marginal production equals the marginal disutility of supplementary labor. The originality of Pigou consists in not being satisfied with these propositions of static order and in situating the maximization of the product in a perspective of growth. But, considering that the forecasting capacity of most economic agents is both insufficient and biased, limited but current satisfactions will often be preferred over the most important but future satisfactions. This myopia can be the source of suboptimal growth and therefore of a significant loss of well-being in the long term. There is in it a first reason for the intervention of the state. The latter, as the best judge of the future, must rectify the biases of individual forecasts and, in particular, encourage individuals to save.