The Need for Interpersonal Utility in Economics
Alfred Marshall defined the value of an outcome to an individual, positive or negative, as the largest amount he would be willing to pay to get it or prevent it. He defined an economic improvement as a change whose total value was positive, meaning that the value to those who benefited by it was greater than the disvalue to those who lost by it. He offered the concept as an imperfect proxy for a utility increase on the grounds that although a given amount of money might represent more utility for one person than another such differences would usually average out for changes that affected many people. Put in modern terminology, an economic improvement is an increase in economic efficiency and an outcome is efficient if it cannot be improved.
A Pareto improvement, a concept originated by Vilfredo Pareto, is a change that benefits at least one person and harms nobody, avoiding the need for any interpersonal comparison of amount of benefit and harm. An outcome is Pareto efficient if it cannot be improved. The problem with substituting the Pareto versions of improvement and efficient for the ones based on Marshall’s approach is that almost no change affecting a significant number of people is a Pareto improvement, hence almost all outcomes are Pareto efficient.
Hicks and Kaldor tried to solve that problem with the concept of a potential Pareto improvement, a change that would be a Pareto improvement if combined with a suitable set of payments from people who gained to people who lost. If gainers gain more than losers lose, making the change a Marshall improvement, there should be some set of transfers that fully compensates the latter while leaving some gain for the former so, in almost all circumstances, something is a potential Pareto improvement if and only if it is a Marshall improvement.[1] Since the transfers are not actually made, a potential Pareto improvement is not an actual Pareto improvement — some people gain, some lose — so justifying it as a criterion for what changes are good or bad requires the same interpersonal utility comparison as Marshall’s approach.
It just makes the fact less obvious.
In order for economists to conclude that abolishing a tariff or a minimum wage law or practically any other change is (or is not) good for the country, an improvement, they must be willing to bite the bullet, treat utility as interpersonally comparable.
[1] I describe a situation in which something is a Marshall improvement but not a potential Pareto/Hicks-Kaldor improvement in "Does Altruism Produce Efficient Outcomes? Marshall vs Kaldor." Journal of Legal Studies, 1987 Vol. XVII, (January 1988).