by Sen, Amartya
53. On this see my “The Welfare Basis of Real Income Comparisons,” Journal of Economic Literature 17 (1979), reprinted in Resources, Values and Development (1984).
Chapter 5: Markets, State and Social Opportunity
1. I have tried to present some attempts at scrutiny in my On Ethics and Economics (Oxford: Blackwell, 1987), and further in “Markets and Freedoms,” Oxford Economic Papers 45 (1993); “Markets and the Freedom to Choose,” in The Ethical Foundations of the Market Economy, edited by Horst Siebert (Tübingen: J.C.B. Mohr, 1994); and “Social Justice and Economic Efficiency,” presented at a seminar on “Philosophy and Politics” in Berlin, November 1997.
2. On the distinction between “culmination outcomes” and “comprehensive outcomes,” see my “Maximization and the Act of Choice,” Econometrica 65 (July 1997). The comprehensive outcome takes note not merely of the end-states, but also of the process of choice itself.
3. There is a separate but important issue as to what kinds of relations can be appropriately seen as fit for marketing and commodification, on which see Margaret Jane Radin, Contested Commodities (Cambridge, Mass: Harvard University Press, 1996).
4. See Robert W. Fogel and Stanley L. Engerman, Time on the Cross: The Economics of American Negro Slavery (Boston: Little, Brown, 1974). See also chapter 1 above.
5. See G. A. Cornia with R. Paniccià, The Demographic Impact of Sudden Impoverishment: Eastern Europe during the 1986–1996 Transition (Florence: International Child Development Centre, UNICEF, 1995). See also Michael Ellman, “The Increase in Death and Disease under ‘Katastroika,’ ” Cambridge Journal of Economics 18 (1994).
6. Friedrich Hayek, The Road to Serfdom (London: Routledge, 1944). See also Janos Kornai, The Road to a Free Economy: Shifting from a Socialist System (New York: Norton, 1990), and Visions and Reality, Market and State: Contradictions and Dilemmas Revisited (New York: Harvester Press, 1990).
7. On this see my “Gender and Cooperative Conflict,” in Persistent Inequalities: Women and World Development, edited by Irene Tinker (New York: Oxford University Press, 1990).; see also the extensive references, cited there, to the empirical and theoretical literatures on this subject.
8. On this see Ester Boserup, Women’s Role in Economic Development (London: Allen & Unwin, 1970); Martha Loutfi, Rural Women: Unequal Partners in Development (Geneva: ILO, 1980); Luisella Goldschmidt-Clermont, Unpaid Work in the Household (Geneva: ILO, 1982); Amartya Sen, “Economics and the Family,” Asian Development Review 1 (1983), Resources, Values and Development (Cambridge, Mass.: Harvard University Press, 1984), and Commodities and Capabilities (Amsterdam: North-Holland, 1985); Irene Tinker, ed., Persistent Inequalities (1990); Nancy Folbre, “The Unproductive Housewife: Her Evolution in Nineteenth Century Economic Thought,” Signs: Journal of Women in Culture and Society 16 (1991); Naila Kabeer, “Gender, Production and Well-Being,” Discussion Paper 288, Institute of Development Studies, University of Sussex, 1991; Lourdes Urdaneta-Ferrán, “Measuring Women’s and Men’s Economic Contributions,” Proceedings of the ISI 49th Session (Florence: International Statistical Institute, 1993); Naila Kabeer, Reversed Realities: Gender Hierarchies in Development Thought (London: Verso, 1994); United Nations Development Programme, Human Development Report 1995 (New York: Oxford University Press, 1995); among other contributions.
9. The need to see the working of the market mechanism in combination with the roles of other economic, social and political institutions has been stressed by Douglass North, Structure and Change in Economic History (New York: Norton, 1981), and also—with a different emphasis—by Judith R. Blau, Social Contracts and Economic Markets (New York: Plenum, 1993). See also the recent study by David S. Landes, The Wealth and Poverty of Nations (New York: Norton, 1998).
10. There is by now quite a substantial literature on these and related issues; see Joseph Stiglitz and F. Mathewson, eds., New Developments in the Analysis of Market Structure (London: Macmillan, 1986), and Nicholas Stern, “The Economics of Development: A Survey,” Economic Journal 99 (1989).
11. See Kenneth J. Arrow, “An Extension of the Basic Theorems of Classical Welfare Economics,” in Proceedings of the Second Berkeley Symposium of Mathematical Statistics, edited by J. Neyman (Berkeley, Calif.: University of California Press, 1951), and Gerard Debreu, A Theory of Value (New York: Wiley, 1959).
12. The modeling of the market economy in the recent development literature has substantially broadened the rather limited assumptions made in the Arrow-Debreu formulation. It has particularly explored the importance of economies of large scale, the role of knowledge, learning from experience, prevalence of monopolistic competition, the difficulties of coordination between different economic agents and the demands of long-run growth as opposed to static efficiency. On different aspects of these changes, see Avinash Dixit and Joseph E. Stiglitz, “Monopolistic Competition and Optimum Product Diversity,” American Economic Review 67 (1977); Paul R. Krugman, “Increasing Returns, Monopolistic Competition and International Trade,” Journal of International Economics 9 (1979); Paul R. Krugman, “Scale Economies, Product Differentiation and the Pattern of Trade,” American Economic Review 70 (1981); Paul R. Krugman, Strategic Trade Policy and New International Economics (Cambridge, Mass.: MIT Press, 1986); Paul M. Romer, “Increasing Returns and Long-Run Growth,” Journal of Political Economy 94 (1986); Paul M. Romer, “Growth Based on Increasing Returns Due to Specialization,” American Economic Review 77 (1987); Robert E. Lucas, “On the Mechanics of Economic Development,” Journal of Monetary Economics 22 (1988); Kevin Murphy, A. Schleifer and R. Vishny, “Industrialization and the Big Push,” Quarterly Journal of Economics 104 (1989); Elhanan Helpman and Paul R. Krugman, Market Structure and Foreign Trade (Cambridge, Mass.: MIT Press, 1990); Gene M. Grossman and Elhanan Helpman, Innovation and Growth in the Global Economy (Cambridge, Mass.: MIT Press, 1991); Elhanan Helpman and Assad Razin, eds., International Trade and Trade Policy (Cambridge, Mass.: MIT Press, 1991); Paul R. Krugman, “History versus Expectations,” Quarterly Journal of Economics 106 (1991); K. Matsuyama, “Increasing Returns, Industrialization and the Indeterminacy of Equilibrium,” Quarterly Journal of Economics 106 (1991); Robert E. Lucas, “Making a Miracle,” Econometrica 61 (1993); among other writings.
These developments have very substantially enriched the understanding of the process of development, and in particular of the role and functioning of the market economy in that process. They have also clarified the insights of earlier economists on development, including Adam Smith (especially on economies of scale, division of labor and learning from experience), but also Allyn Young, “Increasing Returns and Economic Progress,” Economic Journal 38 (1928); Paul Rosenstein-Rodan, “Problems of Industrialization of Eastern and South-eastern Europe,” Economic Journal 53. (1943); Albert O. Hirschman, The Strategy of Economic Development (New Haven, Conn.: Yale University Press, 1958); Robert Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70 (1956); Nicholas Kaldor, “A Model of Economic Growth,” Economic Journal 67 (1957); Kenneth J. Arrow, “Economic Implications of Learning by Doing,” Review of Economic Studies 29 (1962); and Nicholas Kaldor and James A. Mirrlees, “A New Model of Economic Growth,” Review of Economic Studies 29 (1962). Fine accounts of the major issues and results can be found in Robert J. Barro and X. Sala-i-Martin, Economic Growth (New York: McGraw-Hill, 1995); Kaushik Basu, Analytical Development Economics: The Less Developed Economy Revisited (Cambridge, Mass.: MIT Press, 1997); Debraj Ray, Development Economics (Princeton: Princeton University Press, 1998). See also Luigi Pasinetti and Robert Solow, eds., Economic Growth and the Structure of Long-run Development (London: Macmillan, 1994).
13. For an elementary, expository discussion of the results and their ethical implications, see my On Ethics and Economics (1985), chapter 2. The results also include the “inverse theorem” that guarantees the possibility of reaching, through the market mechanism, any one of the possible Pareto optima, from a suitable initia
l distribution of resources (and a corresponding set of generated prices). The need to establish the identified initial distribution of resources (for realizing the desired result) does, however, call for enormous political power and sustained administrative radicalism in bringing about the needed redistribution of assets, which can be quite drastic (if equity figures prominently in the choice between different Pareto optima). In this sense, the use of the “inverse theorem” as a justification of the market mechanism belongs to the “revolutionary’s handbook” (on this see my On Ethics and Economics, pp. 37–8). The direct theorem, however, does not make any such demand; any competitive equilibrium is shown to be a Pareto optimum, given the required conditions (such as the absence of particular types of externalities), for any initial distribution of resources.
14. See my “Markets and Freedoms,” Oxford Economic Papers 45 (1993).
15. There are also other ways of seeing effective freedom, which are discussed and scrutinized in my Freedom, Rationality and Social Choice: Arrow Lectures and Other Essays (Oxford: Clarendon Press, forthcoming); see also the literature cited there.
16. On this see also Kenneth Arrow and Frank Hahn, General Competitive Analysis (San Francisco: Holden-Day, 1971; republished, Amsterdam: North-Holland, 1979).
17. While the form of the preferences does impose restriction on what the individuals are assumed to be seeking, there is no further restriction on why they are seeking what they are seeking. For a scrutiny of the exact requirements and their relevance, see my “Markets and Freedoms” (1993). The basic point here is that the efficiency result—as extended to apply to substantive freedoms—relates directly to preferences, irrespective of the reasons for those preferences.
18. On this see my “Poverty, Relatively Speaking,” Oxford Economic Papers 35 (1983), reprinted in my Resources, Values and Development (1984), and “Markets and Freedoms” (1993).
19. See, for example, A. B. Atkinson, Poverty in Britain and the Reform of Social Security (Cambridge: Cambridge University Press, 1970). See also Dorothy Wedderburn, The Aged in the Welfare State (London: Bell, 1961); Peter Townsend, Poverty in the United Kingdom: A Survey of Household Resources and Standards of Living (Harmondsworth: Penguin, 1979).
20. See Emma Rothschild, “Social Security and Laissez Faire in Eighteenth-Century Political Economy,” Population and Development Review 21 (December 1995). Regarding the Poor Laws, Smith saw the need for social safety nets, but criticized the restrictions imposed by these laws on the movements and other freedoms of the poor thus supported; see Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776; republished, edited by R. H. Campbell and A. S. Skinner, Oxford: Clarendon Press, 1976), pp. 152–4. Contrast Thomas Robert Malthus’s severe attack on the Poor Laws in general.
21. Vilfredo Pareto, Manual of Political Economy (New York: Kelley, 1927), p. 379. See also Jagdish N. Bhagwati, Protectionism (Cambridge, Mass.: MIT Press, 1990), who quotes and cogently develops this argument. On related issues, see also Anne O. Krueger, “The Political Economy of the Rent-Seeking Society,” American Economic Review 64 (1974); Jagdish N. Bhagwati, “Lobbying and Welfare,” Journal of Public Economics 14 (1980); Ronald Findlay and Stan Wellisz, “Protection and Rent-Seeking in Developing Countries,” in David C. Colander, Neoclassical Political Economy: The Analysis of Rent-Seeking and DUP Activities (New York: Harper and Row, 1984); Gene Grossman and Elhanan Helpman, Innovation and Growth in the Global Economy (Cambridge, Mass.: MIT Press, 1991); Debraj Ray, Development Economics (1998), chapter 18.
22. Dani Rodrik has pointed to an important asymmetry that may to some extent help the advocates of tariff, to wit, that this brings in money for the government to expend (“Political Economy of Trade Policy,” in Handbook of International Economics, volume 3, edited by G. M. Grossman and K. Rogoff [Amsterdam: Elsevier, 1995]). Rodrik points out that in the United States, in the period 1870–1914, tariffs contributed to more than half of all revenues that the U.S. government earned (the proportion was even higher—more than 90 percent—before the Civil War). To the extent that this feeds a restrictionist bias, it has to be reckoned with, but to recognize a source of a bias is itself a contribution in the direction of countering it. See also R. Fernandez and D. Rodrik, “Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty,” American Economic Review 81 (1991).
23. Smith, Wealth of Nations, Campbell and Skinner edition (1976), volume 1, book 11, pp. 266–7. In modern interpretations of Adam Smith’s opposition to the state’s regulatory intervention, there may be an inadequate recognition of the fact that his hostility to such regulations related closely to his reading that these regulations were most often aimed at catering to the interests of the rich. Indeed, Smith expressed himself quite unequivocally on this subject (in Smith, Wealth of Nations [1976 Campbell and Skinner edition], pp., 157–8):
Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.
24. On this see Emma Rothschild, “Adam Smith and Conservative Economics,” The Economic History Review 45 (February 1992).
25. On this see my “Money and Value: On the Ethics and Economics of Finance,” the first Paolo Baffi Lecture of the Bank of Italy (Rome: Bank of Italy, 1991); republished in Economics and Philosophy 9 (1993).
26. Adam Smith not only saw the banning of interest as mistaken policy, but also pointed out that such a prohibition would increase the cost of borrowing for the needy borrower.
In some countries the interest of money has been prohibited by law. But as something can every where be made by the use of money, something ought every where to be paid for the use of it. This regulation, instead of preventing, has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of money, but for the risk which the creditor runs by accepting a compensation for that use. (Smith, Wealth of Nations [1976 Campbell and Skinner edition], volume 1, book 2, chapter 4, p. 356.)
27. Smith, Wealth of Nations (1976 Campbell and Skinner edition), volume 1, book 2, chapter 4, pp. 356–7. The term “projector” is used by Smith not in the neutral sense of “one who forms a project,” but in the old pejorative sense.
28. Letter, 1787, of Jeremy Bentham, “To Dr. Smith,” published in Jeremy Bentham, Defence of Usury (London: Payne, 1790).
29. Smith does not give any evidence of having been convinced by Jeremy Bentham’s argument, even though Bentham felt convinced that he had indirect evidence that he had persuaded Smith to abandon his own earlier position (Smith’s “sentiments,” Bentham felt convinced, “with respect to the points of difference are at present the same as mine”). In fact, though, the subsequent editions of The Wealth of Nations did not include any revision whatsoever of the passage of which Bentham had been critical. On this odd debate, see Smith, Wealth of Nations (1976 Campbell and Skinner edition), pp. 357–8, footnote 19. See also H. W. Spiegel, “Usury,” in The New Palgrave: A Dictionary of Economics, edited by J. Eatwell, M. Milgate and P. Newman, volume 4 (London: Macmillan, 1987).
30. Smith, Wealth of Nations (1976 Campbell and Skinner edition), volume 1, book 2, chapter 3, pp. 340–1.
31. In Smith, Wealth of Nations (1976 Campbell and Skinner edition), pp. 26–7.
32. There are various distinct concerns about the limitations of the market economy. For illuminating analyses of different types of worries, see Robert E. Lane, The Market Experience (Cambridge: Cambridge University Press, 1991); Joseph Stiglitz, Whither Socialism? (Cambridge, Mass.: MIT Press, 1994); Robert Heilbroner, Visions of the Future: The Distant Past, Yesterday, Today and Tomorrow (New York: Oxford University Press, 1995); Will Hutton, The State We Are In (London: Jonathan Cape, 1995); Robert Kuttner, Global Competitiveness and Human Development: Allies or Adversaries? (New York: UNDO
, 1996), and Everything for Sale: The Visions and the Limits of the Market (New York: Knopf, 1998); Cass Sunstein, Free Markets and Social Justice (New York: Oxford University Press, 1997).
33. See particularly Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization (New York: Oxford University Press, 1989); Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990); Lance Taylor, ed., The Rocky Road to Reform: Adjustment, Income Distribution and Growth in the Developing World (Cambridge, Mass.: MIT Press, 1993); Jong-Il You and Ha-Joon Chang, “The Myth of Free Labor Market in Korea,” Contributions to Political Economy 12 (1993); Gerry K. Helleiner, ed., Manufacturing for Export in the Developing World: Problems and Possibilities (London: Routledge, 1995); Kotaro Suzumura, Competition, Commitment and Welfare (Oxford: Clarendon Press, 1995); Dani Rodrik, “Understanding Economic Policy Reform,” Journal of Economic Literature 24 (March 1996); Jomo K.S., with Chen Yun Chung, Brian C. Folk, Irfan ul-Haque, Pasuk Phongpaichit, Batara Simatupang and Mayuri Tateishi, Southeast Asia’s Misunderstood Miracle: Industrial Policy and Economic Development in Thailand, Malaysia and Indonesia (Boulder, Colo.: Westview Press, 1997); Vinay Bharat-Ram, The Theory of the Global Firm (Delhi: Oxford University Press, 1997); Jeffrey Sachs and Andrew Warner, “Sources of Slow Growth in African Economies,” Harvard Institute for International Development, March 1997; Jong-Il You, “Globalization, Labor Market Flexibility and the Korean Labor Reform,” Seoul Journal of Economics 10 (1997); Jomo K.S., ed., Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia (London: Zed Books, 1998); among other writings. Dani Rodrik has provided a helpful overall account of the need for an appropriate combination of public intervention, markets and global exchange; the chosen combinations may vary from country to country; see his The New Global Economy and Developing Countries (1999). See also Edmond Malinvaud, Jean-Claude Milleron, Mustaphak Nabli, Amartya Sen, Arjun Sengupta, Nicholas Stern, Joseph E. Stiglitz, and Kotaro Suzumura, Development Strategy and the Management of the Market Economy (Oxford: Clarendon Press, 1997).