Money, Banks and Finance in Economic Thought

William J. Baumol And The New Welfare Economics Debate: 1940 – 1970

Noci Anna, University of Insubria

This paper explores the role of William J. Baumol in the New Welfare Economics debate and the legacy of his research on welfare economics on his subsequent works. Baumol was an extremely eclectic scholar. Maybe surprisingly for someone who remembers him for his university textbooks, like Macroeconomics: Principles and Policy, or the Baumol’s cost disease, Baumol began his academic career writing on welfare economics and economic dynamic. After the Second World War, he was admitted as a master student at LSE in 1947, becoming a PhD candidate and a member of the faculty after few weeks. His supervisor was Lionel Robbins and being at LSE put him at the center of the New Welfare Economics debate. This debate was, in the 1940s, a war between institutions and scholars, across the two sides of the Atlantic Ocean. Many great economists were active in this dispute, with a series of back-and-forth papers in the major economics journals. However, after the 1970s and definitively after the 1980s, the welfare economics theoretical debate faded away and also faded Baumol’s production in this field. The aim of this paper is to evaluate from an historical point of view Baumol’s interest and contribution in the welfare economics analysis. We argue that his interest for this branch of economics was rooted in his personal beliefs and convictions and that it left a legacy on his subsequent works. In particular, and coherent with his conception of economics as an applied science, his interest for welfare analysis shifted from the theoretical analysis to the applied one. Baumol thought of economics as something that must enhance the living conditions of people and this belief remained almost unchanged during his whole life. Moreover, the work on welfare economics made him aware of many issues related to the application of welfare theory to concrete cases. Central to this discourse is the problem of externalities, which was faced by Baumol in one of his first books, Welfare Economics and the Theory of the State. In this book and in the first set of papers, we find the attention for a series of topics that later will become his objects of study, for example the rising costs of services, the pollution of cities and the regulation or deregulation of utilities.

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Keywords: William Baumol, welfare economics, new welfare economics

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