Shastry on Amartya Sen

[Liberty Institute <liberty@giasdl01.vsnl.net.in>]

From: K.S.Sastry 
It is wrong to suggest that Amartya Sen's contribution is the antithesis of
the free market philosophy. Rather, it is a synthesis of the concepts of
efficiency and equity in the free market system. There is no absolute
concept of efficiency. It is relative to the given initial distribution of
economic resources. If another pattern of initial distribution is preferred
the locus of efficiency shifts. Thus, the concept of efficiency of the
markets cannot be divorced from a judgement on the initial distribution of
resources.

MY RESPONSE: I agree. Ethic and economics cannot be separated. And it is
from ethics that the evaluation of the initial condition is attempted. 

From: K.S.Sastry 
    Secondly, free markets do not automatically reach a competitive
equilibrium and thereby become Pareto efficient. There are certain
pre-conditions to achieve a competitive equilibrium. One of these is that
all the resource owners, all the producing firms, and all the consuming
households have all the knowledge and information necessary to maximise the
benefit respectively accruing to them.

MY RESPONSE: (1) This description, of market functioning in perfect
competition where participants have perfect knowledge, is completely wrong.
It is this belief that had led to the rise of central planning by the
omniscient officials of the state. If one knows everything that there is to
know, planning will indeed be the most efficient model to adopt.

(2) In reality, market functions efficiently because there is asymmetry in
knowledge. This provides incentive to competitors to try out there
respective models. This also provides the incentive to discover that little
extra bit of knowledge that will give the competitive advantage. And since,
knowledge is open-ended, every incremental improvement helps improve
efficiency, and at the same time continuing the search for further
improvements. Some of the authors who have dwelled at length on this issue
include Hayek, Popper, Sowell.

From: K.S.Sastry 
    Sen's singular contribution lies in emphasising that this condition can
be secured only if all these players are capable of availing the
opportunities presented to them. Citizens with lack of even functional
literacy or healthy living conditions are not so capable. Defining poverty
as capability deprivation, Sen argues that state must intervene to enable
everyone to acquire the necessary capabilities to participate in the
system. Unless a level playing field is ensured free market system cannot
deliver.

MY RESPONSE: There are further problems with this. Who is to determine that
level? How is it to be determined?

From: K.S.Sastry
    We may be tempted to conclude that state intervention must be based on
targeting the poor and the disadvantaged groups. In an illuminating article
in the World Bank's publication Public Spending and the Poor (1995), Sen
cautions against such a mechanistic approach. To see the objects of
targeting as patients rather than as agents can undermine the exercise of
poverty removal in many different ways and can be a major source of
allocational distortion. The people affected by such policies can be very
active agents indeed, rather than languid recipients waiting for their
handouts, says Sen. What is required is building up their capabilities.

MY RESPONSE: (1) People are indeed very active agents. This raises the very
real possibility that if they are not seeking to improve upon their
existing "level" then there may indeed be very real reasons for it. Public
policy induced obstacles or blockages that may make it irrational or
uneconomic for these active agents to build up their capabilities beyond
their particular level.

(2) Secondly, in democracies, there is another critical fall out. We in
India have accepted adult franchise, which is unrestrained by conditions of
education, wealth, caste, gender, social class, etc. This implies that
irrespective of the initial condition, people have the basic political
wisdom / consciousness necessary to participate in the political process.
If that is so, what prevents them from investing to build up their own
capabilities? If on the other hand, we say that we are hardly a democracy,
and our problems stem from the ignorant demos, then we should publicly and
openly say that we think we prefer a different political system. Where
there is an enlightened dictator who strives to improve the level of the
people and decides at which point people are fit for democratic governance.

From: K.S.Sastry
    Sen's synthesis of efficiency and equity provides a beacon light for
public policy. It shows how to intervene and how not to intervene. We can
intervene to enhance both efficiency and equity. Land reforms like those
undertaken by South Korea and China are examples. We can intervene in a
manner detrimental to both efficiency and equity. Fertiliser pricing
adopted by us in India is an example. A comparison of India's progress in
the last fifty years with the progress made by these East Asian countries
would clearly bring out the difference between thoughtless and purposeful
fifty years with the progress made by these East Asian countries would
clearly bring out the difference between thoughtless and purposeful
intervention.

MY RESPONSE: 
While Sen's stress on economics and ethics is laudable. But the ethical
premise have to be quite different from from Sen's. Two thinkers who have
contributed significantly in this field are Hayek and Ayn Rand. Sen's
ethics primarily focuses on distribution. While things have to be produced
before one can think of distribution. Sen seeks to bypass this question by
falling on the rationality of pareto efficiency. This aggravates the
problem, because as has been pointed out above, market is efficient, not
because of perfect knowledge and competion, but precisely because there is
imperfect knowledge which provides the incentive to compete.

Comments will be most appreciated.


----------------------------------------------------------------------------
This is a posting to India_Policy Discussion list:  debate@indiapolicy.org
Rules, Procedures, Archives:            http://www.indiapolicy.org/debate/
---------------------------------------------------------------------------