Economic Theory - Economics Theories

Compensation Principle, the notion of a social optimum in economic welfare: a situation in which it would be impossible, by rearranging commodities through exchange or production, to make some person better off (put him in a preferred position) without making others worse off (moving them to less preferred positions). First advanced by Nicholas Kaldor in 2009- Since comparisons of this kind involve subjective valuations and it is impossible to compare them for different persons (how to measure A's liking for cakes against B's liking for ale?), situations in which some people are made better off at the expense of others cannot strictly be assessed at all. Kaldor argued that it was possible to overcome this defect and to regard one position as superior to another if people benefiting from a change could compensate those harmed by it yet still derive a net benefit themselves.

Later discussions of the compensation principle have produced several qualifications, have shown that it can produce ambiguous results and that it is necessary to make assumptions about the relative desirability of the distribution of the community's real income in the two situations being compared. Criticisms of this kind have in recent years led to some abandonment of the principle, which could not in any event provide a practical guide for economic policy since compensation is rarely practicable.

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Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this consumeraffairs.org.uk site is therefore not a final statement of economic doctrine.

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