Pareto efficiency in individualistic vs. altruistic society

Purpose – This paper aims to compare Pareto optimality for altruistic and individualistic societies to show whether it is possible to have Pareto improvement through altruistic acts even after free market equilibrium. Design/methodology/approach – The paper follows conceptual, axiomatic and theoretical approaches to show Pareto efficiency in altruistic versus individualistic societies. The paper first outlines the welfare axioms of Islamic economics compared to those of capitalism. Second, it defines Pareto efficiency within capitalist and Islamic economic systems. Third, it compares and contrasts the concept in the two systems based on their epistemological and anthropological worldviews. Fourth, it shows how – even under the efficient allocation of material goods – room for Pareto improvement still exists through the redistribution of resources. Finally, it demonstrates optimum income transfer for social welfare maximization. Findings – The paper shows that Islamic economics relying on certain welfare axioms aim for an altruistic society. It then theoretically proves that social well-being would be greater in such an altruistic society in comparison to an individualistic society promoted by capitalism, holding everything else constant. The paper clearly shows that free market equilibrium does not maximize social utility. It theoretically demonstrates that even under efficient allocation of material goods, there is still room for Pareto improvement through redistribution of resources. It reveals that optimum income transfer might not be possible through voluntary altruistic behaviors unless people transcend self-interest and begin to value social interest as important as their own interest. Therefore, the paper suggests a role for the government to reach optimum-level income transfer for social welfare maximization. Research limitations/implications – The paper is purely theoretical. Its main limitation is not to be empirically tested. Future studies might shed light on the issue through empirical evidence Practical implications – Pareto improvement provides important guidance or at least moral justification for welfare programs. The paper might directly affect welfare policy of Muslim countries. Social implications – The paper suggests income transfer through altruistic acts would provide higher social welfare. Therefore, it is in the best interest of nations to promote altruistic behaviors and support voluntary welfare programs for higher social utility. Originality/value – The paper contributes to the Islamic moral economy doctrine by proving that altruistic behaviors encouraged by Islamic teaching could provide higher social welfare.