5.1 Poverty measurement

In this chapter I explain the lower part of Table 4.1, which refers to principles and good practices of P measurement.

PPM1 and PPM2: principles of diminishing marginal WB and the existence of a maximum WB

In his major work on the collapse of the facts/values dichotomy, philosopher of science Hilary Putnam (2002) makes a radical criticism of neoclassical economic theory and its normative expression, so-called ‘welfare economics’. He recalls that in the late nineteenth century, neoclassical economists (such as Jevons and Marshall) adopted the concept of utility, assumed that it could be quantified, and drew utility curves whose shape was determined by the Law of Diminishing Marginal Utility (LDMU), which holds that the utility derived from the consumption of the last unit of a given good diminishes as consumption increases. In Welfare Economics (1920), Putnam adds, Pigou argued that money and income (Y) are also subject to the LDMU. Based on this, Pigou formulated the thesis that the reduction of Y inequality increases social welfare, since total social utility (or happiness) would increase if one withdrew a thousand dollars from a millionaire and gave them to a destitute person.

Such a subversive thesis, however, could not last in academia (which tends towards an apology of the status quo). Putnam relates that, in 1938, Lionel Robbins convinced all mainstream economists that interpersonal comparisons of utility lack any significance. He maintained that rational discussion in the domain of ethics is impossible and that, therefore, ethical issues should be kept completely outside economic theory. Thus, in a single stroke, the idea that economists could and should be concerned with social WB in an evaluative sense was rejected. The dichotomy between facts and values was taken to the limit in Robbins’ statement: ‘It does not seem logically possible to associate the two studies [ethics and economics] in any form but mere juxtaposition. Economics deals with ascertainable facts; ethics with valuation and obligations’ (Robbins, 1932, p 134, quoted by Putnam, 2002, p 54). Putnam goes on to say that economists, convinced by Robbins’s ideas, instead of abandoning the discipline of welfare economics, sought – however strange this may seem – a criterion of optimal economic functioning that was value-neutral and found it in the notion of the Pareto optimal.