Paul Samuelson on Fundamental theorems of welfare economics

“When I was a student at the University of Chicago, where I was a direct student of Jacob Viner in the classroom, and an indirect student of Frank Knight, I could not learn why price should equal marginal cost. Even when I got to Harvard in 1935, I went around asking everybody: “What is the proof that this is so?” Of course, I did not know the 1892–1893 work of Vilfredo Pareto in which he essentially shows that a perfectly competitive equation system gives you the necessary and sufficient condition, not for ethical optimality—he was always a little slippery on that problem—but for what came to be called Pareto optimality so that there is no avoidable deadweight loss. I think I had most to learn from Abba Lerner, although I, of course, worked it out for myself.”

“If I had had perfect teachers, they would have known the Pareto work; they would have known Enrico Barone and what you might call the fundamental theorems of welfare economics that the conditions for Pareto optimality would be exactly realized by competitive arbitrage. Before Bergson, Lerner–Hicks–Hotelling–Kaldor–Scitovsky insufficiently understood that the full set of Pareto optimality conditions constituted an incomplete set of conditions for ethical maximization. You must ask the right questions and make the right distinctions. All of my teachers believed there was something to Adam Smith’s invisible hand—that each person pursuing their self interest would, by some miraculous action of the invisible hand, be led to contrive in some vague sense the best interest of all. However, none of them could explain properly what the truth and falsity was in that position. I would say that if I had been a bright student in 1894 and read Pareto’s Italian journal article, I would have understood what I now understand to be the germ of truth in the invisible hand argument. All it refers to is the avoidance of deadweight loss. Here is where my association with Abram Bergson becomes relevant.”