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Nobel Prize in Economics Goes to Professor Amartya Sen, India



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Administrative Note:
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Week's Agenda: Economy
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Sending in: news release of Prof. Sen's award + what Prof. Bhagwati has
to say (I've posted that toward the end). Please also re-read Dr.Parth
Shah:

        http://www.business-standard.com/98jan03/opinion2.htm

Nikhil: could you please post these through a link on the IPI's
reference page? Thanks! SS


***********************************Text of News Release ***

The Royal Swedish Academy of Sciences has decided to award the 1998 Bank
of Sweden Prize in Economic Sciences in Memory of Alfred Nobel to
Professor Amartya Sen, Trinity College, Cambridge, U.K. (citizen of India)
for his contributions to welfare economics.

Social Choice, Welfare Distributions, and Poverty: Amartya Sen has made
several key contributions to the research on fundamental problems in
welfare economics. His contributions range from axiomatic theory of social
choice, over definitions of welfare and poverty indexes, to empirical
studies of famine. They are tied closely together by a general interest in
distributional issues and a particular interest in the most impoverished
members of society. Sen has clarified the conditions which permit
aggregation of individual values into collective decisions, and the
conditions which permit rules for collective decision making that are
consistent with a sphere of rights for the individual. By analyzing the
available information about different individuals' welfare when collective
decisions are made, he has improved the theoretical foundation for
comparing different distributions of society's welfare and defined new,
and more satisfactory, indexes of poverty. In empirical studies, Sen's
applications of his theoretical approach have enhanced our understanding
of the economic mechanisms underlying famines.

******

Can the values which individual members of society attach to different
alternatives be aggregated into values for society as a whole, in a way
that is both fair and theoretically sound? Is the majority principle a
workable decision rule? How should income inequality be measured? When and
how can we compare the distribution of welfare in different societies? How
should we best determine whether poverty is on the decline? What are the
factors that trigger famines? By answering questions such as these,
Amartya Sen has made a number of noteworthy contributions to central
fields of economic science and opened up new fields of study for
subsequent generations of researchers. By combining tools from economics
and philosophy, he has restored an ethical dimension to the discussion of
vital economic problems.

Individual Values and Collective Decisions: When there is general
agreement, the choices made by society are uncontroversial. When opinions
differ, the problem is to find methods for bringing together different
opinions in decisions which concern everyone.  The theory of social choice
is preoccupied precisely with this link between individual values and
collective choice. Fundamental questions are whether - and, if so, in what
way - preferences for society as a whole can be consistently derived from
the preferences of its members. The answers are crucial for the
feasibility of ranking, or otherwise evaluating, different social states
and thereby constructing meaningful measures of social welfare.

Majority rule: Majority voting is perhaps the most common rule for making
collective decisions. A long time ago, this rule was found to have serious
deficiencies, in addition to the fact that it may allow a majority to
suppress a minority. In some situations it may pay off to vote
strategically (i.e. by not voting for the preferred alternative), or to
manipulate the order in which different alternatives are voted upon.
Voting between pairs of alternatives sometimes fails to produce a clear
result in a group. A majority may thus prefer alternative a to alternative
b whereas a (second) majority prefers b to c ; meanwhile, a (third)
majority prefers c to a. In the wake of this kind of "intransitivity", the
decision rule cannot select an alternative that is unambiguously best for
any majority. In collaboration with Prasanta Pattanaik, Amartya Sen has
specified the general conditions that eliminate intransitivities of
majority rule.

In the early 1950s, such problems associated with rules for collective
choice motivated economics laureate Kenneth Arrow (1972) to examine
possible rules for aggregating individual preferences (values, votes),
where majority rule was only one of many alternatives. His surprising but
fundamental result was that no aggregation (decision) rule exists that
fulfills five conditions (axioms), each of which appears very reasonable
on its own.

This so-called impossibility theorem seemed to be an insurmountable
obstacle to progress in the normative branch of economics for a long time.
How could individual preferences be aggregated and different social states
evaluated in a theoretically satisfactory way? Sen's contributions from
the mid-1960s onwards were instrumental in alleviating this pessimism. His
work not only enriched the principles of social choice theory; they also
opened up new and important fields of study. Sen's monograph Collective
Choice and Social Welfare from 1970 was particularly influential and
inspired many researchers to renew their interest in basic welfare issues.
Its style, interspersing formally and philosophically oriented chapters,
gave the economic analysis of normative problems a new dimension. In the
book as well as many separate articles, Sen treated problems such as:
majority rule, individual rights, and the availability of information
about individual welfare.

Individual rights
A self-evident prerequisite for a collective decision-making rule is that
it should be "non-dictatorial"; that is, it should not reflect the values
of any single individual. A minimal requirement for protecting individual
rights is that the rule should respect the individual preferences of at
least some people in at least some dimension, for instance regarding their
personal sphere. Sen pointed to a fundamental dilemma by showing that no
collective decision rule can fulfill such a minimal requirement on
individual rights and the other axioms in Arrow's impossibility theorem.
This finding initiated an extensive scientific discussion about the extent
to which a collective decision rule can be made consistent with a sphere
of individual rights.

Information about the welfare of individuals
Traditionally, the theory of social choice had only assumed that every
individual can rank different alternatives, without assuming anything
about interpersonal comparability. This assumption certainly avoided the
difficult question of whether the utility individuals attach to different
alternatives can really be compared. Unfortunately, it also precluded
saying anything worthwhile about inequality. Sen initiated an entirely new
field in the theory of social choice, by showing how different assumptions
regarding interpersonal comparability affect the possibility of finding a
consistent, non-dictatorial rule for collective decisions. He also
demonstrated the implicit assumptions made when applying principles
proposed by moral philosophy to evaluate different alternatives for
society. The utilitarian principle, for instance, appeals to the sum of
all individuals' utility when evaluating a specific social state; this
assumes that differences in the utility of alternative social states can
be compared across individuals. The principle formulated by the American
philosopher John Rawls - that the social state should be evaluated only
with reference to the individual who is worst off - assumes that the
utility level of each individual can be compared to the utility of every
other individual. Later developments in social choice rely, to a large
extent, on Sen's analysis of the information about, and interpersonal
comparability of, individual utilities.

Indexes of Welfare and Poverty
In order to compare distributions of welfare in different countries, or to
study changes in the distribution within a given country, some kind of
index is required that measures differences in welfare or income. The
construction of such indexes is an important application of the theory of
social choice, in the sense that inequality indexes are closely linked to
welfare functions representing the values of society. Serge Kolm, Anthony
Atkinson and - somewhat later - Amartya Sen were the first to derive
substantial results in this area. Around 1970, they clarified the relation
between the so-called Lorentz curve (that describes the income
distribution), the so-called Gini coefficient (that measures the degree of
income inequality), and society's ordering of different income
distributions. Sen has later made valuable contributions by defining
poverty indexes and other welfare indicators.

Poverty indexes
A common measure of poverty in a society is the share of the population, H
, with incomes below a certain, predetermined, poverty line. But the
theoretical foundation for this kind of measure was unclear. It also
ignored the degree of poverty among the poor; even a significant boost in
the income of the poorest groups in society does not affect H as long as
their incomes do not cross the poverty line. To remedy these deficiencies,
Sen postulated five reasonable axioms from which he derived a poverty
index: P = H  [I + (1 - I)  G]. Here, G is the Gini coefficient, and I is
a measure (between 0 and 1) of the distribution of income, both computed
only for the individuals below the poverty line. Relying on his earlier
analysis of information about the welfare of single individuals, Sen
clarified when the index can and should be applied; comparisons can, for
example, be made even when data are problematic, which is often the case
in poor countries where poverty indexes have their most intrinsic
application. Sen's poverty index has subsequently been applied extensively
by others. Three of the axioms he postulated have been used by those
researchers, who have proposed alternative indexes.

Welfare indicators
A problem when comparing the welfare of different societies is that many
commonly used indicators, such as income per capita, only take average
conditions into account. Sen has developed alternatives, which also
encompass the income distribution. A specific alternative - which, like
the poverty index, he derived from a number of axioms - is to use the
measure y  (1 - G), where y is income per capita and G is the Gini
coefficient.

Sen has emphasized that what creates welfare is not goods as such, but the
activity for which they are acquired. According to this view, income is
significant because of the opportunities it creates. But the actual
opportunities - or capabilities, as Sen calls them - also depend on a
number of other factors, such as health; these factors should also be
considered when measuring welfare. Alternative welfare indicators, such as
the UN's Human Development Index, are constructed precisely in this
spirit.

Amartya Sen has pointed out that all well-founded ethical principles
presuppose equality among individuals in some respect. But as the ability
to exploit equal opportunity varies across individuals, the distribution
problem can never be fully solved; equality in some dimension necessarily
implies inequality in others. In which dimension we advocate equality and
in which dimensions we have to accept inequality obviously depends on how
we evaluate the different dimensions of welfare. In analogy with his
approach to welfare measurement, Sen maintains that capabilities of
individuals constitute the principal dimension in which we should strive
for equality. At the same time, he observes a problem with this ethical
principle, namely that individuals make decisions which determine their
capabilities at a later stage.

Welfare of the Poorest
In his very first articles Sen analyzed the choice of production
technology in developing countries. Indeed, almost all of Sen's works deal
with development economics, as they are often devoted to the welfare of
the poorest people in society. He has also studied actual famines, in a
way quite in line with his theoretical approach to welfare measurement.

Analysis of famine
Sen's best-known work in this area is his book from 1981: Poverty and
Famines: An Essay on Entitlement and Deprivation. Here, he challenges the
common view that a shortage of food is the most important (sometimes the
only) explanation for famine. On the basis of a careful study of a number
of such catastrophes in India, Bangladesh, and Saharan countries, from the
1940s onwards, he found other explanatory factors. He argues that several
observed phenomena cannot in fact be explained by a shortage of food
alone, e.g. that famines have occurred even when the supply of food was
not significantly lower than during previous years (without famines), or
that faminestricken areas have sometimes exported food.

Sen shows that a profound understanding of famine requires a thorough
analysis of how various social and economic factors influence different
groups in society and determine their actual opportunities. For example,
part of his explanation for the Bangladesh famine of 1974 is that flooding
throughout the country that year significantly raised food prices, while
work opportunities for agricultural workers declined drastically as one of
the crops could not be harvested. Due to these factors, the real incomes
of agricultural workers declined so much that this group was
disproportionately stricken by starvation.

Later works by Sen (summarized in a book from 1989 with Jean Drze) discuss
- in a similar spirit - how to prevent famine, or how to limit the effects
of famine once it has occurred. Even though a few critics have questioned
the validity of some empirical results in Poverty and Famines, the book is
undoubtedly a key contribution to development economics. With its emphasis
on distributional issues and poverty, the book rhymes well with the common
theme in Amartya Sen's research.

******

Further Reading
Additional background material can be found below and in
Sen, A.K., 1970, Collective Choice and Social Welfare, San Fransisco:
Holden Day , also London: Oliver and Boyd (reprinted Amsterdam:
North-Holland).
Sen, A.K, 1973, On Economic Inequality, Oxford: Clarendon Press.
Sen, A.K, 1981, Poverty and Famines: An Essay on Entitlement and
Deprivation, Oxford: Clarendon Press.

******

Amartya Sen was born in Bengal in 1933 (citizen of India). He received his
doctorate from the University of Cambridge, U.K. in 1959 and has been
professor in India, the U.K. and the U.S. In 1998 he left his
professorships in economics and philosophy at Harvard University to become
Master of Trinity College, Cambridge U.K.

**********************************************End of Special Report ***


Let us not confuse policy with academic brilliance, says Prof Bhagwati
======================================================================
 
Professor Jagdish Bhagwati said he was extremely pleased to hear about 
Amartya Sen winning the Nobel. "It is richly deserved by Sen," said the 
Arthur Lehman professor of economics and politics, Columbia University, 
New York, USA, over the telephone. 

Bhagwati is known to not share Sen's views on matters of economic policy. 
When queried, he clarified, "Sen has won the award for his academic work, 
and on which there should be no doubts. But on matters of policy, I do 
disagree with him." 

In fact, Bhagwati said it was the model of import substitution and 
subsidies, which the government of India chose to follow in the 1950s, 
that has kept India poor for all these decades. "Let us not confuse 
policy with academic brilliance. The two are separate and different, and 
while I agree with one, I may not agree with the other." 

Bhagwati pointed out that he disagreed with the policy measure suggested 
by economist Milton Friedman, but his economic work was excellent. "Bill 
Clinton does not have Nobel laureates to advise him, in fact he runs away 
from them," laughed Bhagwati, "and I too would say the same." 

The Columbia University professor hoped that the Indian government would 
not use the Nobel win as an excuse to go slow on the reforms. 

Asked if the economic crisis had a hand in Sen getting the Nobel, he 
discounted the idea. "The Nobel committee decides as early as March. 
Second, they sort of rotate the economics Nobel among the various streams 
of economics. So this was the time of welfare," he said, adding, "When 
the time of international finance, it will be Robin Mandel, for 
econometrics it will be Edmund Phelp, and when it is the turn of 
international trade, I'll get it!" 

Bhagwati concluded by reiterating, "The award is for Sen's scientific 
analysis, and it should be seen as that. Do not confuse with policy." 




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