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«Edited by ANNE MASON Research Fellow, Centre for Health Economics University of York and ADRIAN TOWSE Director, Office of Health Economics Radcliffe ...»

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I shall ask some questions and try to clarify what seem to me to be some critical issues, without suggesting definitive answers. The questions are not new. I hope that my structured approach to them provides new insights. The quotation from Jack Wiseman is intended to highlight the point that answers always depend on the perspective of the questioner and the context in which the question is asked. Getting the question right is therefore a vital preliminary. Alan was, of course, very clear on his (extra-welfarist) perspective. I want to clarify what we know (believe?) and don’t know about the benefits of approaching questions of resource allocation in health from a welfarist or extra-welfarist perspective. In particular, what is the difference between them?


I shall set aside the related question of how resources ought to be allocated to health care and focus on the ‘within health care’ question. There have been two broad ways in which economists have thought about this question.


These determine, though by no means completely, the inferences that may be drawn about the effectiveness of markets as means of allocating resources to provide services; the services made available to the clients of the system; and the way in which one interprets the results of cost-effectiveness and related evaluative studies or stipulates how such studies ought to be conducted. The two approaches were first outlined by Sugden and Williams (1978) and can be characterised as ‘Pareto versus the decision maker’.


In the standard welfare economics (‘welfarist’) approach to cost-effectiveness analysis (CEA), the general objective of expected utility maximisation is usually asserted, the value content of policy is taken to be preference based (and only preference based), the criterion for a social improvement is the Pareto (or potential Pareto) improvement, and the role of the economist is essentially that of advising those responsible for policy as to how best to improve existing resource allocations in the face of a variety of market and governmental failures. This approach to CEA ties the practice of health economics firmly into the mainstream of welfare economics, and thereby gives us handles for discriminating between ‘good’ and ‘bad’ examples of the art as practised in the literature. It also provides some intellectual underpinnings for a fairly rarefied form of libertarian politics, and it seems to be the approach adopted by at least half of the world’s academic health economists.

It was not, however, the approach favoured by Alan Williams. He was more pragmatic, although as adept as any at generating elegant analyses and proofs, and at posing and solving brainteasers. He was also, incidentally, an unusually adept virtuoso – in the Harry Johnson class – at three-dimensional geometry (witness Williams, 1963).


The other approach is pragmatic (‘extra-welfarist’) as per Alan Williams, and somewhat ad hoc. It too begins with primitive axioms, but these are not of the formal kind that constitute the elementary propositions upon which the edifice of welfare economics is built. The most basic of these is an assumption that it is someone other than the economist who possesses ethical authority (usually through a political process, such as popular democracy, recognised by the analyst to be a legitimate process) to stipulate the objective of any system, of which the healthcare system in a jurisdiction is but one. This is the person designated in Sugden and Williams (1978) as ‘the decision maker’. This is by far the most signal difference between the two approaches in analytical terms, since beyond this point the analysis – about maximisation of a function subject to resource constraints – is at the broadest level the same. Thus, to take again a common pursuit of health economists and again one for which Alan Williams


was famous (e.g. Williams, 1981, 1983, 1985, 1986, 1988a, 1988b, 1991a, 1991b, 1992, 1993a, 1993b, 1994, 1998a, 1998b) if ‘health’ or ‘health gain’ maximisation is delivered to the economist qua analyst as ‘the’ objective of a healthcare system, then the analyst seeks the first-order maximising conditions for this under a resource constraint and sets about advising those responsible for policy as to how best to improve existing resource allocations in the face of a variety of market and governmental failures.

This approach is inherently less stable. Its foundation rests upon an external source like ‘a minister’ which is itself inherently unstable. It raises different brainteasers, for example, from those that arise from the probability that different ‘ministers’ will have different and mutually conflicting objectives measured, moreover, by quite different metrics. These objectives may make quite different claims upon our consciences. This approach raises its own interesting puzzles, such as the construct validity of ‘health’ and the adequacy of empirical approximations to it, the extent to which preferences (whose?) count at all in practical analyses, or how opportunity cost is assessed (are healthcare costs to be evaluated with respect to resources it uses outside the healthcare sector?) This in turn raises questions about how the efficiency of other sectors, with which health care competes for resources, should be appraised, their outcomes compared and valued, and their budgets determined.

The extra-welfarist approach is much more likely to be attuned to the issues as seen by the ultimate clients of economic analyses. Even the language of analysis is likely to be more easily communicable to non-economists – including ministers, their agents and research collaborators from other disciplines. It also has the characteristic of modesty. One might imagine it gaining Keynes’ approval, for

–  –  –


Several ideas provide the seeds from which extra-welfarism has grown. One was sown by Tobin (1970). He argued that the desire for equality is specific rather than general (coining the term ‘specific egalitarianism’). Some basic goods and services (like health care) are, as a matter of empirical fact, commonly thought to be more properly allocated in egalitarian ways. Similar ideas are met in other disciplines. The philosopher Rawls (1971) used the notion of ‘basic goods’, although he explicitly excluded both health and health care from his list of ‘primary goods’. The early development of health economics involved much discussion about the extent to which health care was ‘different’ from other goods and services: the consensus seemed to be that ‘health’ and


health care are subject to so many of the standard cautions against reliance on free market methods of production and distribution that they are, indeed, different – partly because each specific feature looms large (severe information asymmetry, imperfect agency, inherent monopoly, absence of prices for all entities, incompleteness of markets, moral hazard, adverse selection, externality, equity), and partly because few other goods and services, if any, provide so comprehensive a challenge to efficiency and equity in resource allocation.

A second seed was sown in the shape of ‘merit goods’ (Musgrave, 1959):

goods that need not be public goods but that are deemed so ‘meritorious’ that they ought to be publicly subsidised – though what qualified such goods as ‘meritorious’ was never quite clear, in particular it was never clear how these goods differed from goods whose consumption generated externalities (Culyer, 1971).

A third, especially influential, seed was sown by Sen (1979, 1980, 1985) in arguing that a welfarist focus on utility was too narrow. It ought to be replaced by a broader perspective that took account of the quality of utility and focused on people’s capabilities rather than sensations, that is the emotional reaction (i.e. utility) of individuals to the possession of goods.

A fourth seed is the apparently explicit rejection of strict welfarist values by governments. In the UK, for example, we have on ministerial authority that health maximisation, not welfare maximisation, is the objective of the health services: ‘The purpose of the NHS is to secure through the resources available the greatest possible improvement in the physical and mental health of

the people of England [and]... aims to judge its results under three headings:

equity, efficiency, and responsiveness’ (Department of Health, 1996). Nothing explicit about utility or willingness to pay there!

A fifth significant seed was the ‘decision-making’ approach to cost–benefit analysis suggested by Sugden and Williams (1978). They contrasted the Paretian welfarist approach with its embodiment of ‘individual sovereignty’ with one in which ‘decision makers’ were the source of values (and weights) in public decision making.

Underlying these extra-welfarist views are two disturbing questions for economists. One is this: granted that people have knowable preferences, what is the link between the satisfaction of these preferences and welfare? Is there, indeed, any link? If there is, how many ways are there of describing the various psychological states that might constitute welfare? Moreover, does not the quality of a preference matter – like whether it is a preference for something good or something evil, cheap or superficial, noble or profound?

The other disturbing question comes from challenging the convention that public decision makers, as agents for the public, ought to act as they think the public (their principals) would act. Suppose instead, however, that they were to act rather as they think the principals ought to act? Ought decision makers to act as ‘moral’ agents?




The standard sorts of intellectual journey that economists make here have a common root but, beyond a certain stage, diverge. I think they can best be described as a sequence that moves in steps. These are summarised in Figure 6.1 and then I discuss each step individually.

–  –  –

a. Primitive proposition ‘normative economics is done to serve the social good’ Step (a) contains a primitive proposition of the kind of statement that does indeed underlie most of what has usually been called ‘welfare economics’. It establishes a normative context for the analysis and implies the existence of an entity called ‘society’. Like any such point of departure, it is taken largely uncritically. Most of the debates that take place are downstream from it.

b. The social good depends (only?) on characteristics of (all?) individuals, the distribution of these characteristics and (possibly) the nature of the interrelationships between individuals Step (b) says what it is that the social good depends on. It is an assertion that is not necessarily entailed by step (a). The emphasis that economists typically put on the individual characteristics, their distribution across individuals, and the nature of the interrelationships between individuals (are they loving, respectful and trusting, or hate filled, inconsiderate and suspicious) varies a good deal.

But what is overwhelmingly the case is that the focus is on individuals. Needless to say, the main ‘characteristic’ used in welfare economics is ‘preference’, but in step (b) the question of what the characteristics comprise is left open.


c. The social good can be conceived as quantifiable, in the sense of being measurable up to a linear transformation, and as being some kind of (weighted?) sum of the things on which the social good depends (only on this?) Step (c) provides the means by which most economists do their work: it permits marginal analysis; it addresses the ‘adding-up’ problem, both of the characteristics that are asserted in step (b) for one individual and of the resultant sums across many individuals. The question ‘which individuals?’ is usually left unaddressed. The presumption seems to be one of inclusivity, though sometimes explicit exclusions are encountered – such as children, the crazed, the unconscious or the irrational. The latter may not necessarily correspond to those who do not obey the axioms of expected utility theory, presumably on the grounds that such an exclusion would be altogether too comprehensive for comfort, since so few people seem actually to obey those axioms (for extensive reviews of this literature, see Hogarth and Reder, 1987; Kahneman et al., 1999; Kahneman and Tversky, 2000).

d. Realising the social good equates to maximising welfare (satisfaction?

well-being? happiness? ophelimity?) or / versus Realising the social good equates to optimising over an eclectic set of characteristics of individuals or groups of individuals (‘welfare’ can be one of them, ‘health’ another) At step (d) there is a decided branching. It relates to the character of the entities to be maximised or equitably distributed. In the left-hand column is what I understand to be the conventional route of welfare economics. This is welfarism with the social good being more precisely located in terms of the satisfaction of preferences. Welfare, well-being, satisfaction, happiness, ophelimity and so on, while not being synonyms or even plesionyms, are conceptual bed-fellows. The bed they occupy is the procrustean one of a state of mind called ‘preference’. The fellows are quite diverse, united by their common respect for individual preferences (although not much else).

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