The Economics of Social Problems, by Julian Le Grand, Carol Propper and Sarah Smith,

Palgrave Macmillan, 4th edition 2008, viii + 208 pp, pbk, 0 230 55300 1, £24.99

This is the fourth edition of an important textbook which for over thirty years has helped students of social policy to understand economic theory and the ways in which economic analysis contributes to social policy. Equally, it has helped students of economics to experience their discipline as a practical one which can inform social problems just as much as it can inform such economic problems as inflation and economic growth.
This edition contains new chapters on pensions and on climate change, and all of the other chapters have been rewritten, but the basic approach of the book is as before: to understand social policy’s aims as efficiency and equity; to ask whether in each social policy field the private market can achieve these aims; and to evaluate the effects on efficiency and equity of government intervention. ‘Government failure’ is now as much a part of the agenda as ‘market failure’.

Of particular interest to readers of this Newsletter will be the new chapter on pensions. Here, efficiency is understood in terms of income smoothing, and concepts such as the diminishing marginal utility of consumption discounting and expected benefit are explored. Equity as an aim generates a discussion of relative poverty and of different ways of measuring poverty. Equity requires government to intervene in order to provide sufficient income for those who cannot save enough during their working lives; and because a lack of information about investment options and their outcomes makes individual planning difficult, government also has to intervene in the cause of efficiency. The chapter compares different countries’ systems and also the different instruments available to governments: means-testing, pay-as-you-go state pensions, funded ‘social insurance’, and the subsidy and regulation of private provision. The chapter might have benefited from discussion of the Pensions Policy Institute’s work on a Citizen’s Pension and in particular of the New Zealand example.

Of equal interest will be the chapter on poverty and welfare. A discussion of poverty and of the measurement of inequality is followed by one on objectives: minimum standards, social justice, and equality. The market’s unwillingness to insure where the insured possesses more information about risk than the insurer does means that government taxation, provision and regulation are essential, and the chapter closes with a discussion of tax credits as a response to the poverty trap induced by means-tested benefits.

By relating economic theory to real-world social policy problems this textbook aids learning in ways in which a book simply about social policy or a book simply about economic theory could not hope to achieve.

If a fifth edition is contemplated then it would be interesting to see each chapter extended by the use of economic theory to suggest reforms in the field under review; and it would be particularly interesting to see a treatment of unversalism in each field. Universal provision works in health care and education, and there are reasons why it works; Child Benefit works; and new expressions of universalism in practical policy could work too. It would be pleasure to find ‘universalism’, ‘Child Benefit’ and ‘Citizen’s Income’ in the fifth edition’s index.