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Classical And Marshallian Welfare Economics

 Classical and Marshallian Welfare Economics

The Classical Welfare Economics

            The classical economists did not develop any specific theory of economic welfare. The classical welfare economics relates to the sketchy ideas of Smith, Ricardo and J.S.Mill about increasing the wealth of a nation. According to Prof. Hla Myint, the classical view about welfare is largely confined to the production of material wealth.

            Smith explains real national income of a nation in terms of its physical output which is an index of its economic welfare. The real value of a commodity is its labour price irksome and disagreeable. It is the division of labour which motivates labour to produce more. Smith associates increase in welfare with a reduction in the sacrifice required does produce more commodities.

            A person’s wealth is measured by the value of a commodity produced by his own labour or his purchasing power over other men’s labour. The more the labour, the more the total output or the hike in real income leading to improvement in welfare. Thus welfare is a positive function of population growth. According to Smith, the most positive mark of prosperity in any nation is the increase in the number of inhabitants.

            Smith believes in the working of the ‘invisible land’ i.e. the automatic working of the market. Since every person maximises his own satisfactions due to the automatic working of the economic system, the satisfactions of the whole community are maximised. Thus the motive of self interest embodied in the free market system maximises economic welfare by increasing the physical productivity of labour by adopting new techniques of production.

            To maximise social welfare, Smith favours the increase in outlay on such public works as highways, canals, bridges, harbours, etc. But he wanted that the greater part of outlay on public works should benefit through toll taxes on their users and the remaining out of local revenue and general revenue.

The Marshallian Welfare Economics

            The Marshallian theory of economic welfare is based on his tool of consumer’s surplus. Marshall begins with the individual consumer’s surplus or welfare and then makes the transition to the aggregate consumer’s surplus. To explain the aggregate welfare of the community, he uses his tax-bounty analysis. We are going to discuss individual surplus and then the aggregate economic welfare subsequently.

Marshall’s Individual Consumer’s Welfare

            Marshall explains the individual consumer’s welfare with his equipment of consumer’s surplus. Marshall defines consumer’s surplus as “the excess of the price he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction.” The price which a consumer pays for a commodity like salt, match box, postcard etc. is always les than what he is willing to pay for it so that the satisfaction which he gets from its purchase is more than the price paid for it and thus he derives a surplus satisfaction which increases his welfare.


Consumer’s surplus is represented graphically in the diagram where DD1 is the demand curve for the commodity. If OP is the price, OQ units of the commodity are purchased and the price paid is OP x OQ = area OQRP. But the total amount of money, he is prepared to pay for OQ units is OQRD. Hence consumer’s surplus = OQRD – OQRP = DRP. If the price of the commodity falls to OP1, the consumer’s surplus increases to DR1P1 and conversely a rise in price would diminish it.


            According to Prof. Hicks, this Marshall’s measure of the consumer’s surplus “involves noting more introspective or subjective than the demand curve itself.” The area under the demand curve after deducting consumer’s outlay on the commodity represents consumer’s surplus. This is based on the hypothesis of constant marginal utility of money for the consumer. It is thus free from interpersonal comparisons of utility.

            So far, we have studied the individual consumer’s surplus which is the sum total of the surplus from a number of commodities he buys, with a given money income. By adding up consumer’s surplus from anyone commodity enjoyed by a number of individuals, the market consumer’s surplus for that commodity can be known. The demand schedule so formed will be the market demand curve. But it presupposes the non-existence of interpersonal differences in customs, habits and incomes of the consumers.

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