Made in India: Amartya Sen's good economics

politics | Mar 04, 2011 | By Angus Sibley

Amartya Sen

Economics is supposed to be concerned with real people. It is hard to believe that real people could...stick exclusively to the rudimentary hard-headedness attributed to them by modern economics. Amartya Sen, On Ethics and Economics (Blackwell, Oxford, 1988), chap. 1, p. 1.In search of civilised economics

In my previous articles, I have had much to say about what is wrong with modern economic thought and practice. My readers may well be a trifle weary of my persistent criticism of Ludwig von Mises, Milton Friedman, Friedrich von Hayek and others like them. But I have a good reason for that. Over recent decades these libertarian (free-market) economists have, I believe, had far too much harmful influence on government policy, business management and prevalent social attitudes. Indeed, I think it is fair to say that their economic theories are largely to blame for the appalling financial, economic and social mess in which we find ourselves. That is why I feel a certain duty to do my best to denounce them.

However, endless carping and negative criticism become tiresome. And, after all, not everything in the garden of economics is unlovely. There are still good and enlightened economists who do not think that capitalist society has to be a world of narrowly self-seeking individuals, striving against each other in permanent ferocious competition; who spurn the implausible theory that markets are automatically self-regulating; who are not obsessed by the notion that we must endlessly produce more and more with the help in of fewer and fewer workers, despite the prevalence of overconsumption and unemployment.

So I propose now to write about a number of economists who have defied the prevailing attitudes of their profession, and have thus given us ideas with the potential to make our economic life more civilised, more just, more satisfying, more compatible with longer-term human needs.

A distinguished Indian economist points the way forward

I begin with the Indian economist Amartya Sen, born in 1933 and still extremely active; he currently holds two professorships at Harvard. In his student days he gained a doctorate in economics at Trinity College, Cambridge and then went on to study philosophy, a discipline which has given him a wider view of the world than that of many economists. He was sole winner of the Nobel economics prize in 1998. He holds honorary doctorates from more than 80 universities all over the world and was Master of Trinity College between 1998 and 2003.

In 2008, French president Nicolas Sarkozy invited Sen together with two other economists, Joseph Stiglitz and Jean-Paul Fitoussi, to set up a commission to consider better measures of economic performance than the conventional GDP (gross domestic product). The commission''s report was published in 2009. The British medical journal The Lancet, in its editorial What is Progress? of 14 November 2009, offers a terse and lucid comment:

The central message of the Stiglitz-Sen-Fitoussi report is that human wellbeing is far more than the sum of our economic resources. Wellbeing also depends upon health, education, environment, housing, access to information, the ability to communicate, and the overall quality of our life experience. Reducing ideas of human progress to a single number misses aspects of what human beings consider most important in their lives...Rather than absolute levels of wealth, the distribution of income and the extent of inequality should also command our concern - as should the conditions in which we live and the capabilities we need in order to achieve what we see as critical to our happiness.

A reaction against amoral economics

Sen''s view of economics is often described as ''heterodox''. How does it differ from the attitudes prevailing among economists in recent times? For a good indication of Sen''s distinctive outlook, we need only glance at the title of one of his more recent books (which is in French, though most of his publications are in English): L''économie est une science morale.1 In an earlier work, On Ethics and Economics, Sen complains that the typical modern economist in his economic models...keeps the motivations of human beings pure, simple and hard-headed, and not messed up by such things as goodwill or moral sentiments.2

My readers may recall that a year ago I quoted two present-day English writers, according to whom most economists deny that justice has any bearing on economic transactions.3 More than a century ago, the French historians Gide and Rist blamed three of the founding fathers of ''classical'' economics: Adam Smith, Jean-Baptiste Say and David Ricardo consider that man is motivated only by his own interests. They imagine him totally absorbed in the pursuit of gain.4 That is less than fair to Smith, who was in fact far more concerned with the morality and humanity of economic behaviour than is generally acknowledged. But posterity has neglected this aspect of Smith''s thought, preferring to focus its attention on the ''invisible hand'', whose infallibility was never claimed by Smith himself. As Sen observes, while some men are born small and some achieve smallness, it is clear that Adam Smith has had much smallness thrust upon him.5

Thus, even from its early days, economics has all too often been blind to the moral implications of its theories and policies. It has based itself largely on three assumptions:

(a) that human beings are primarily concerned with rational action designed to maximise their personal economic gains; that other motivations, leading to altruistic or non-rational actions, are of minor importance and can be ignored;

(b) that individual self-interested actions, carried out in the freest possible markets, are normally (not merely ''frequently'', as Smith put it,6) conducive to the general good;

(c) that the sole purpose of economic activity is to maximise the output of consumer goods and services with minimum input of human labour.

Sen, by contrast, is one of the rather few modern economists who have striven to involve economics with morality and justice, not merely with how to maximise capitalist wealth and consumer-pampering efficiency. In his view, there are two contrasting approaches to economics. There is the ''ethical'' approach which considers how to manage the economy so as to deliver ''economic justice'', an acceptable distribution of available resources. And there is the ''engineering'' approach, which considers how to generate goods and services as efficiently and profitably as possible. Sen accepts that both are necessary, but he deplores the inordinate dominance of economic ''engineers'' in the Western world ever since the eighteenth century.

Economics as a guide to good government

Sen harks back7 to Aristotle for a loftier view of the fundamental purpose of economics. He points out that, for Aristotle, it is politics which appears to be the most authoritative art and that which is most truly the master art...we see even the most highly esteemed of capacities to fall under this, e.g. strategy, economics, rhetoric...politics uses the rest of the sciences...the end of this [political] science must include the ends of the others, so that this end must be the good for man.8 Furthermore, wealth is evidently not the good we are seeking, for it is merely useful for the sake of something else.9

Thus, the study of economics should assist the political process in promoting the good, virtuous and happy society. Unfortunately, economics has in recent times come to be something very different. Instead of helping to guide politics in the right paths, it has too often encouraged markets to usurp the role of the state. Many economists have adopted this stance because, at heart, they do not believe that a virtuous, beneficent state is possible. They regard all government as bad; therefore they want the market, rather than the state, to be master. But this means replacing the civilised reign of democracy with the brutal strife of the capitalist jungle. Today, as peoples and their governments live in terror of shadowy, speculative market forces, motivated only by amoral personal greed, we are seeing what this means in practice. And, quite rightly, we do not like it.

Instead of striving for the ''common good'' in the fullest sense, economic policy has become a matter of enabling rapacious entrepreneurs and investors to make as much money as possible by pandering to the whims and fancies of consumers; as if true well-being and happiness were assured simply by having as much spending power and as much choice in the marketplace as possible.

A wider view of the meaning of freedom

Sen challenges another basic proposition of the free-marketeers. They generally assume that the one true freedom is negative freedom, which means one thing only, namely non-interference by other people. The free individual must not be prevented by the wishes or dictates of others from acting according to his own choices. But there is a big problem with this narrow definition of freedom. If the individual is prevented from doing what he would like to do by impersonal causes, this (say the economists) in no way interferes with his negative freedom. Thus, as Hayek explained, the mountaineer who finds himself accidentally trapped in a crevasse, from which he cannot escape by his own efforts, is ''not unfree''.10

This curious notion allows free-marketeers to brush aside the troubles that markets may inflict upon people, such as inadequate pay or unemployment. The free market, they say, is an impersonal force, so it cannot interfere with our freedom. Therefore, we need not worry about the collateral damage caused by market forces. These may cause people to be underpaid, unemployed, or even starving; and yet the victims, like Hayek''s trapped climber, may still be ''free'' in the negative sense of the word; and that is all that really matters. In the vocabulary of free-market fundamentalists, ''freedom from hunger'' does not count as freedom.

Famine without shortage

Sen, born and brought up in Bengal, remembers vividly the trauma of the Bengal famine of 1943, in which two million or more people died. This was a ''boom famine'', occurring in a period of massive expansion of economic activity,11 despite the fact that food supplies were scarcely below normal. It happened because the boom brought the people of Calcutta and other cities increased purchasing power, so that they drove food prices up to levels beyond the reach of rural labourers, who did not benefit from the boom. A fearsome example of what can happen when markets are left to their own devices!

Sen reminds us also of another paradoxical famine, in Ireland in 1822, when potato crops failed (long before the notorious potato famine of the 1840s). In 1822, there was a superabundance of corn [wheat] in Ireland; but many small farmers, who grew mostly potatoes, could not afford it. So there was a glut of corn and a starving people.12

Accordingly, Sen holds a view of freedom very different from that of the free-marketeers. He argues that people who, because of severe hunger, are unable to do what they normally would wish to do and should do, cannot be said to be free. That accords, does it not, with common sense; though not with Viennese theory, which is a very different matter. Hungry people are just as unfree if their hunger is due to impersonal market forces, as they would be if someone were deliberately starving them.

In other words, freedom does not simply mean negative freedom, the absence of malevolent interference by others. It also means positive freedom, the ability to realise one''s potential. To be truly free, one needs both kinds of freedom. To claim, as libertarians do, that negative freedom is the only kind that matters is one of the major intellectual perversions that underlie free-market theory.

The positive liberty of capability

Sen''s wider conception of freedom leads to a concern, conspicuously lacking among libertarians, with excessive financial inequalities and the poverty they imply. The fact of increasing human ''capabilities'' must play an essential role in the promotion of individual liberty.13 Since severe poverty clearly restricts people''s capabilities, it follows that gross inequality, which implies that those at the bottom of the economic pyramid are extremely poor, seriously limits those people''s freedom.

Another diminution of personal freedom is caused by ill health. Here the USA in particular comes into Sen''s line of fire: the social arrangements for the promotion of public health in the USA are more inadequate than those found in many much poorer countries...in the Black quarter of Harlem in New York, men have less chance of reaching the age of forty than in hungry Bangladesh...if one admits that individual freedom (including the positive freedom to live without dying too soon) is a social responsibility, then it follows that the USA needs to pay much more attention to the provision of healthcare and education.14 World demographic statistics show that the USA ranks 41st among the world''s nations in terms of life expectancy.15

All this follows from Sen''s conception of individual freedom as a social responsibility, the title of the first essay in L''économie est une science morale. This means that, if we desire freedom for ourselves as individuals, we as a society have to work towards this goal by way of social institutions and public policies designed not only to protect individuals from unwelcome interference by other people, or from oppression by the state, but also to ensure that everyone has access to adequate resources and public services. Our institutions and policies must aim at positive freedom (opportunity) as well as at negative freedom (absence of harmful interference).

Free markets, inequality and sickness

We know from practical experience, both recent and historical, that laisser-faire economic policies lead to exorbitant inequalities. This became obvious in the nineteenth century, the original heyday of laisser-faire, leading to the socialist and communist reactions that libertarians so deeply abhor. But if we abhor communism, it cannot make sense for us to seek to go back to the kind of society that gave it birth in the first place. The recent revival of laisser-faire thinking and practice reflects an inexcusable failure to learn from history. It is a fact of life that, simply because of the diversity of human personalities, in a free-market jungle some people become very rich and others very poor. Unless we take action to restrain this process, we are stuck with the unsavoury situation of plutocrats tossing coins into beggars'' hats.

Likewise, there are obvious practical reasons for ''socialising'' medical costs, that is to say, spreading the costs by means of universal health insurance. And this needs to be compulsory. For otherwise, some people will not pay; yet we can hardly deny treatment to the seriously ill on the ground that they have opted out of paying their premiums, but lack the means to pay for their treatment. Why not? Firstly, because this would be inhumane; secondly, because many diseases are contagious, and non-treatment would assist their spread; thirdly, because chronically sick people, being unable to work, would become a continuing charge on the state.

Thus Sen sums up his argument concerning public health: the market can, indeed, in many areas, be a powerful ally of individual freedom; but the freedom to have a long life free from avoidable sickness and mortality rates requires recourse to a broader category of social policies.16 By contrast, the Austrian libertarian Ludwig Baron von Mises, looking haughtily down upon the ''working class'' as a race of shiftless scroungers, damned compulsory sickness insurance as an institution which tends to encourage disease by weakening or completely destroying the will to be well and able to work.17

Fiscal soundness without extremism

Sen''s comments on budget deficits and inflation, though they date from the 1990s, are once again highly topical. He recognises that stability of prices is very important and it can be seriously damaged by indulgent public spending and a lack of fiscal responsibility.18 Inflation can be self-feeding, leading to ''dynamic instability''. Yet Sen warns against the blinkered pursuit of anti-inflationary extremism...which takes no account of the sacrifices it entails.19

In the same way, he denounces ''anti-deficit extremism''. Sound financial conservatism, he says, does not require elimination of budget deficits in a few years regardless of the social costs.20 In America, he continues, a sudden break with the past (including the tradition of assistance to persons in need...) can scarcely be called conservatism of any kind.21 Many American and European so-called ''conservatives'' badly need a dose of Sen''s wisdom, but seem unlikely to take it.

Public participation in social and economic decisions

A fundamental element of social responsibility...is public participation in decision-making ...fundamental [economic] questions lend themselves perfectly to general public discussion.22 That remark of Sen''s may seem obvious. It amounts nonetheless to a radical rejection of the philosophy of those free-market fundamentalists who have become so influential in recent times. They do not want economic policies to be thrashed out in parliaments, city council chambers, or public meetings. They would like, ideally, the disappearance of economic policymaking, since this is a process that involves the public authorities.

Free-market zealots hold that those authorities should limit themselves to matters of defence, public order and the strict observance of private contracts. The evolution of the economy, they say, is not a matter on which decisions should be taken by government ministers, by town councillors, or indeed by the general public in referenda. It should simply emerge from our uncoordinated activities in the markets.

In the economy, there are natural, inevitable conflicts of interest. As workers and producers, we want to sell our time and our products (or services) dearly; as consumers, we want to buy everything cheaply. We want to be free to drive our cars wherever we like, whenever we like; we also want uncongested streets. We want low interest rates on our borrowings and high returns on our investments. In theory, we can leave it to the markets to resolve all these conflicts; but in practice, the results may well be unacceptable.

Market failures

Keynes demonstrated, against the classical theorists, that a market economy does not necessarily tend towards an equilibrium in which everyone who wants to work is employed. He gave us a vivid description of the state of economic stagnation, published in 1936 but only too recognisable in many places today:

The economic system in which we live...seems to be capable of remaining in a chronic condition of sub-normal activity for a considerable period, without any marked tendency either towards recovery or towards complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence. Fluctuations may start briskly but seem to wear themselves out before they have proceeded to great extremes, and an intermediate situation which is neither desperate nor satisfactory is our normal lot. 23

What, on the other hand, if unplanned, uncoordinated economic growth leads to a world in which the human race consumes resources unsustainably, and dangerously deranges the global climate? That is not an academic question; it is what is actually happening.

Discussion rather than self-assertion

One of the big problems with individualistic free-market doctrine, in its stronger forms, is that it regards individual desires, ambitions and choices as basic facts that are not negotiable and must be accepted without question as they stand. In Mises'' words, our science...takes the value judgments of acting man as ultimate data not open to any further critical examination.24 That doctrine rejects the idea that people may be persuaded to modify their views, their behaviour and their demands in the course of democratic discussion.

For example, the urban motorist who thinks it beneath him to take the métro may, through such discussion, come to realise that his habits are contrary to the public interest. For, if everyone followed his example, traffic would be totally, not just partially, snarled up; town driving (including his own) would become virtually impossible. Not to mention the consequent pollution!

If one accepts the libertarian doctrine that individual choices are sacrosanct, and not subject to modification through consensus among citizens, then one has to conclude that the economy is a war zone in which free-wheeling individuals battle it out, insisting upon their own demands and giving no quarter. The result, of course, is that the strongest and most aggressive individuals win and the rest of us have to put up with the consequences.

Sen memorably describes this situation, easily recognisable in the current phase of American politics, and perversely approved by the free-market theorists, who see no role for justice in economic matters:

If it is true that individuals promote solely their own narrow personal interests, without respite or compromise, then the pursuit of justice will be obstructed at every step by the opposition of those who have something to lose in every proposed change. And he comments: This ''model'' of humanity is indeed depressing and frightening; however, there are very few data that prove to us that it is a good representation of reality. Individuals are not influenced solely by what they see as their own interests...in fact, among the things that influence people, be they in Prague, in Paris, in Warsaw, in Peking, in Little Rock or in Johannesburg, are care for others and respect for ideas.25

So there is a better way. In Sen''s words, we need no technically sophisticated solution to escape from this nasty situation, but effective consensual remedies, whose effectiveness is explained partky by the fact that they are consensual. Discussion and argument contribute to the formation and revision of priorities and, as Frank Knight observes, "values are established or validated and recognised through discussion, an activity which is at once social, intellectual and creative".26

Et in terra pax hominibus bonae voluntatis (and on earth, peace to men of goodwill): so runs the ancient hymn. As we noted at the beginning of this essay, Amartya Sen laments the belief of all too many economists, that goodwill must be excluded from economic discussion, since it ''messes things up''. But without goodwill, we cannot have peace and justice, in our economy or anywhere else. There must be space for compromise, moderation in personal ambitions, willingness to accept restraints and to share resources.

Angus Sibley is a an actuary, analyst, and former member of the London Stock Exchange. He resides in Paris. See his website:  http://www.equilibrium-economicum.net/

References

1 La Découverte, Paris, 1999. This book contains two essays, dating from 1990 and 1996.

2 Amartya Sen, On Ethics and Economics (Blackwell, Oxford, 1987), chap. 1 (p. 2)

3 See my essay Is Economics about Justice? in this series, January 2010

4 Charles Gide and Charles Rist, Histoire de la Doctrine Economique (1900; new edition, Dalloz, Paris, 2000), book IV, chap. 1 (p. 426)

5 Sen, The Idea of Justice (London, Penguin, 2010), chap. 8 (p. 186)

6 Adam Smith, The Wealth of Nations (1776), book IV, chap. 3

7 Sen, On Ethics and Economics, chap. 1 (p. 3)

8 Aristotle, Nichomachean Ethics, trans. W D Ross (1912), 1094a - 1094b

9 Ibid., 1096a

10 Friedrich von Hayek, The Constitution of Liberty (Routledge & Kegan Paul, London, 1960), chap. 1, pp. 12 - 13

11 Sen, Food, Economics and Entitlements in The Political Economy of Hunger (ed. Jean Drèze and Amartya Sen) (Clarendon Press, Oxford, 1990), chap. 2 (p. 38)

12 Ibid., p. 48

13 Sen, L''économie est une science morale (La Découverte, Paris, 1999), part I (p. 65)

14 Ibid., pp. 66 - 67

15 World Population Datasheet 2010 (Population Reference Bureau, Washington DC), see www.prb.org

16 Sen, L''économie est une science morale, part I (p. 69)

17 Ludwig von Mises, Socialism [Die Gemeinwirtschaft, 1922], trans. J Kahane (Yale University Press, New Haven, 1951), part V, chap. 2, sect. 3

18 Sen, L''économie est une science morale, part II (p. 98)

19 Ibid., p. 101

20 Ibid., p. 102

21 Ibid., pp. 103 - 104

22 Ibid., pp. 110 - 111

23 John Maynard Keynes, The General Theory of Employment, Interest and Money (Macmillan, London, 1936), chap. 18, part 3 (pp. 249 - 250)

24 Mises, Human Action (Yale University Press, 1949), chap. 1, sect. 4 (p. 21)

25 Sen, L''économie est une science morale, part I (pp. 74 - 75)

26 Ibid., part II (p. 110). Sen quotes from the American economist Frank Knight, Freedom and Reform (Harper, New York, 1947), p. 280

 



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