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Re: Error somewhere in this
Dear Sanjeev,
While I may agree with most of what you said, I think the argument
Sastry/Sen if I may quote verbatim below, makes, is with regards to
"initial conditions", a society needs to possess to reap the benefits of
free market. These "initial conditions" in addition to having a basic
understanding of what people should do to better their lives, functional
literacy, basic living conditions also have a lot to do with past
cultural values. This is what I believe is meant by "competitive
equilibrium" in the Sastry/Sen mail.
It is unfair to expect indigenous people, people who have been living
their life the same way they do now for the past several centuries, that
here we have a new and improved market system, adapt to it quickly or
you will lose.
Huzefa
> 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.
>
> 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.
>
> 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.
Sanjeev Sabhlok wrote:
>
> From: K.S.Sastry
>
> "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 comment (this was too big a faux pas to allow to pass):
>
> Dear Mr. Sastry,
>
> This statement is a completely false representation of the market
> economy. There must be some serious mistake somewhere on the panel of
> economists on which you participated.
>
> Barun has already pointed this out. Thought I must add a wee mite.
>
> The existence of perfect information is NOT a part of a competitive
> equilibrium. All that is necessary is that the price vector be allowed
> to determined by millions of households and businesses interacting with
> each other, despite all possibilities of combination. While
> mathematical gymnastics might fail to prove this assertion easily,
> except under certain rigid conditions, Hayek has explained why this is
> actually so. I have some time eearlier described at length earlier the
> Hayek paper on the role of knowledge in society to Charu and others.
>
> Essentially, NO BUREAUCRAT and NO PLANNING COMMISSION can do better than
> the market, consistently, or even for a very short time. Similarly, NO
> Nobel prize winners in economics can beat the market consistently. The
> fact that they flunked out in a big way was a foregone conclusion and
> not something against the market system. The gaps in knowledge with
> which we operate are too vast to be ever filled in by any one, and that
> includes both you and me.
>
> That is why, capitalism (free market economy) runs on incomplete and
> local information, and bounded rationality. On the other hand, socialism
> runs on the assumption of perfect information; hence is fallacious. Not
> the other way round. I don't know how it can ever be asserted that there
> will be a time in India when all resource owners, all producing firms,
> and all consuming households will possess ALL the relevant knowledge and
> information necessary to maximize utility. Please show ANY society where
> such levels of information are available. Alternatively, you can say
> that the relevant information is being consistently distorted by
> bureaucrats who refuse to let the true prices of things be reflected in
> the social price vector. I illustrated with the case of coal which is
> roughly at half its actual price and thus causes negative externalities
> like heavy pollution, while at the same time pulling away resources from
> R & D into fuel alternatives.
>
> If this is the interpretation of the Panel you sat on, please request
> them to submit their assertions to IPI officially, and we can easily
> "relieve" them of their ignorance of basic economic concepts (I guess
> there has been a misinterpretation here; no economist is so ignorant as
> this). Sorry, I am not being rude. Just vastly surprised.
>
> PS: If I have made any error of interpretation, I will be happy to be
> corrected.
>
> SS
>
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Huzefa Mehta
Equator Technologies Inc.,
off: (408) 369-5436
fax: (408) 371-9106
email: hmehta@equator.com
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