Development as Freedom (21 page)

In the absence of such imperfections (including the nonmarketability of some goods and services), classical models of general equilibrium have been used to demonstrate the merits of the market mechanism in achieving economic efficiency. This is standardly defined in terms of what economists call “Pareto optimality”: a situation in which the utility (or welfare) of no one can be raised without reducing the utility (or welfare) of someone else. This efficiency achievement—the so-called Arrow-Debreu theorem (after the original authors of the results, Kenneth Arrow and Gerard Debreu
¹¹
)—is of real importance despite the simplifying assumptions.
¹²

The Arrow-Debreu results show, inter alia, that—given some preconditions—the results of the market mechanism are not improvable in ways that would enhance everyone’s utility (or enhance the utility of some without reducing the utility of anyone else).
¹³

It is possible, however, to question whether the efficiency sought should not be accounted in terms of
individual freedoms
, rather than
utilities
. This is an especially legitimate question here, since the information focus of this work has been on individual freedoms (not utilities). I have, in fact, demonstrated elsewhere that in terms of some plausible characterizations of substantive individual freedoms, an important part of the Arrow-Debreu efficiency result readily translates from the “space” of utilities to that of individual freedoms, both in terms of freedom to choose
commodity baskets
and in terms of
capabilities to function
.
¹⁴
In demonstrating the viability of this extension, similar assumptions are employed as are needed for the original Arrow-Debreu results (such as the absence of nonmarketability). With these presumptions, it turns out that for a cogent characterization of individual freedoms, a competitive market equilibrium guarantees that no one’s freedom can be increased any further while maintaining the freedom of everyone else.

For this connection to be established, the importance of substantive freedom has to be judged not just in terms of the
number
of options one has, but with adequate sensitivity to the
attractiveness
of the available options. Freedom has different aspects; personal liberties as well as the liberty to transact have already been discussed earlier. However, for the
freedom to achieve
in line with what one wants
to achieve, we have to take note of the merits of the available options.
¹⁵
In explaining this freedom-efficiency result (without going into technicalities), it can be pointed out that given canny choice by individuals, efficiency in terms of individual utilities has to be, to a great extent, parasitic on offering the individuals adequate opportunities from which they can choose. These opportunities are not only relevant for what people choose (and the utility they achieve), but also for what useful options they have (and the substantive freedoms they enjoy).

One particular issue may be worth clarifying here, concerning the role of self-interest maximization in achieving the efficiency results of the market mechanism. In the classic (Arrow-Debreu) framework, it is assumed that everyone must be pursuing her self-interest as her exclusive motivation. This behavioral assumption is necessitated by the attempt to establish the result that the market outcome will be “Pareto optimal” (which is defined in terms of individual interests), so that no one’s interest could be further enhanced without damaging the interests of others.
¹⁶

The presumption of ubiquitous selfishness is hard to defend empirically. Also, there are circumstances more complex than those presumed in the Arrow-Debreu model (involving more direct interdependences between the interests of different persons) in which self-interested behavior may be far from effective in generating efficient outcomes. Thus, if it were really necessary to assume universal selfishness to establish the efficiency results in the Arrow-Debreu model, then it could be seen as a serious limitation of that approach. However, this limitation can be substantially avoided by examining the demands of efficiency in terms of individual freedoms, rather than just utilities.

The restriction of having to assume self-interested behavior can be removed if our primary concern is with substantive freedoms that people enjoy (no matter for what purpose they use these freedoms), not the extent to which their self-interests are fulfilled (through their own self-interested behavior). No assumption need be made, in this case, about what motivates the individuals’ choices, since the point at issue is no longer the achievement of interest fulfillment, but the availability of freedom (no matter whether the freedom is aimed at self-interest or at some other objective). The basic analytical results
of the Arrow-Debreu theorem are thus quite independent of the motivations that lie behind the individual preferences, and can be left unaddressed if the object is to show efficiency in preference fulfillment, or efficiency in substantive individual freedoms (irrespective of motivation).
¹⁷

The basic result about market efficiency can, in this sense, be extended to the perspective of substantive freedoms. But these efficiency results do not say anything about the equity of outcomes, or about the equity in the distribution of freedoms. A situation can be efficient in the sense that no one’s utility or substantive freedom can be enhanced without cutting into the utility or freedom of someone else, and yet there could be enormous inequalities in the distribution of utilities and of freedoms.

The problem of inequality, in fact, gets magnified as the attention is shifted from income inequality to the inequality in the
distribution of substantive freedoms and capabilities
. This is mainly because of the possibility of some “coupling” of income inequality, on the one hand, with unequal advantages in converting incomes into capabilities, on the other. The latter tends to intensify the inequality problem already reflected in income inequality. For example, a person who is disabled, or ill, or old, or otherwise handicapped may, on the one hand, have problems in
earning
a decent income, and on the other, also face greater difficulties in
converting
income into capabilities and into living well. The very factors that may make a person unable to find a good job and a good income (such as a disability) may put the person at a disadvantage in achieving a good quality of life even with the same job and with the same income.
¹⁸
This relationship between
income-earning
ability and
income-using
ability is a well-known empirical phenomenon in poverty studies.
¹⁹
The interpersonal income inequality in the market outcomes may tend to be magnified by this “coupling” of low incomes with handicaps in the conversion of incomes into capabilities.

The freedom-efficiency of the market mechanism, on the one hand, and the seriousness of freedom-inequality problems, on the
other hand, are worth considering
simultaneously
. The equity problems have to be addressed, especially in dealing with serious deprivations and poverty, and in that context, social intervention including governmental support may well have an important role. To a great extent, this is exactly what the social security systems in welfare states try to achieve, through a variety of programs including social provision of health care, public support of the unemployed and the indigent and so on. But the need to pay attention
simultaneously
to efficiency and equity aspects of the problem remains, since equity-motivated interference with the working of the market mechanism can weaken efficiency achievements even as it promotes equity. It is important to be clear about the need for simultaneity in considering the different aspects of social evaluation and justice.

The need for synchronous consideration of distinct goals has already been faced in this work in several other contexts. For example, it was considered in
chapter 4
in contrasting the greater social commitment in Europe (more than in the United States) in guaranteeing minimal incomes and health care, with a greater social commitment in the United States (more than in Europe) in maintaining high levels of employment. The two types of commitments may be, to a considerable extent, combinable, but they may also be, at least partly, in conflict with each other. To the extent that there is a conflict, the need for simultaneity in considering the two issues
together
would be important in arriving at
overall
social priorities, paying attention to both efficiency and equity.

The role that markets play must depend not only on what they can do, but also on what they are allowed to do. There are many people whose interests are well served by the smooth functioning of markets, but there are also groups whose established interests may be hurt by such functioning. If the latter groups are politically more powerful and influential, then they can try to see that markets are not given adequate room in the economy. This can be a particularly serious problem when monopolistic production units flourish—despite inefficiency and various types of ineptitude—thanks to insulation from competition, domestic or foreign. The high product-prices
or the low product-qualities that are involved in such artificially propped-up production may impose significant sacrifice on the population at large, but an organized and politically influential group of “industrialists” can make sure that their profits are well protected.

Adam Smith’s complaint about the limited use of markets in eighteenth-century Britain was concerned not only with pointing to the social advantages of well-functioning markets, but also with identifying the influence of vested interests in guaranteeing the insulation of their inflated profits from the threatening effects of competition. Indeed, Adam Smith saw the need to understand the working of markets, to a great extent, as an antidote to the arguments standardly used by vested interests against giving competition an adequate role. Smith’s intellectual arguments were partly aimed at countering the power and effectiveness of advocacy from entrenched interests.

The market restrictions against which Smith was particularly vocal can be seen, in a broad sense, as “precapitalist” constraints. They differ from public intervention for, say, welfare programs or social safety nets, of which only rudimentary expressions could be found, at his time, in arrangements such as the Poor Laws.
²⁰
They also differ from the functioning of the state in providing such services as public education, of which Smith was very supportive (more on this presently).

As it happens, many of the restrictions that bedevil the functioning of economies in developing countries today—or even allegedly socialist countries of yesterday—are also, broadly, of this “precapitalist” type. Whether we consider the prohibition of some types of domestic trade or international exchange, or the preservation of antiquated techniques and production methods in businesses owned and operated by “protected bourgeoisie,” there is a generic similarity between the sweeping advocacy of restricted competition and the flourishing of precapitalist values and habits of thought. The “radicals” of yesterday, such as Adam Smith (whose ideas inspired many of the activists in the French Revolution), or David Ricardo (who resisted Malthus’s defense of the productive contribution of torpid landlords), or Karl Marx (who saw competitive capitalism as a major force for progressive change in the world), had little sympathy for the
generally anti-market arguments of precapitalist leaders of thought.

It is one of the ironies of the history of ideas that some who advocate radical politics today often fall for old economic positions that were so unequivocally rejected by Smith, Ricardo and Marx. Michal Kalecki’s bitter grumble about restriction-ridden Poland (“we have successfully abolished capitalism; all we have to do now is to abolish feudalism”), which I quoted earlier, can be well appreciated in this light. It is not surprising that the protected bourgeoisie often do their best to encourage and support the illusion of radicalism and modernity in dusting up generically anti-market positions from the distant past.

It is important to join these arguments through open-minded criticisms of the claims made in favor of general restriction of competition. This is not to deny that attention must also be paid to the political power of those groups that obtain substantial material benefits from restricting trade and exchange. Many authors have pointed out, with good reason, that the advocacies involved must be judged by identifying the vested interests involved, and by taking note of the influence of “rent-seeking activities” implicit in keeping competition away. As Vilfredo Pareto pointed out, in a famous passage, if “a certain measure A is the case of the loss of one franc to each of a thousand persons, and of a thousand franc gain to one individual, the latter will expend a great deal of energy, whereas the former will resist weakly; and it is likely that, in the end, the person who is attempting to secure the thousand francs via A will be successful.”
²¹
Political influence in search of economic gain is a very real phenomenon in the world in which we live.
²²

Confronting such influences has to occur not merely through resisting—and perhaps even “exposing” (to use an old-fashioned word)—the seekers of profit from captive markets, but also from taking on their intellectual arguments as proper subjects of scrutiny. Economics does have a long tradition in that critical direction, going back at least to Adam Smith himself, who simultaneously pointed his accusing finger at the perpetrators, and went on to debunk their claims in favor of the thesis of social benefits from disallowing competition. Smith argued that the vested interests tend to win because of their “better knowledge of their own interest”
(not
“their knowledge of publick interest”). He wrote: