Development as Freedom (22 page)
Read Development as Freedom Online
Authors: Amartya Sen
Tags: #Non Fiction, #Economics, #Politics, #Democracy
The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to that of the publick. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the publick; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
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There is no reason why vested interests must win if open arguments are permitted and promoted. Even as Pareto’s famous argument illustrates, there may be a thousand people whose interests are a little hurt by the policy that heavily feeds the interest of one businessman, and once the picture is seized with clarity, there may be no dearth of a majority in opposition to such special pleading. This is an ideal field for more public discussion of the claims and counterclaims on the different sides, and in the test of open democracy, public interest may well have excellent prospects of winning against the spirited advocacy of the small coterie of vested interests. Here too, as in many other areas already examined in this book, the remedy has to lie in more freedom—including that of public discussion and participatory political decisions. Once again, freedom of one kind (in this case, political freedom) can be seen as helping the realization of freedom of other kinds (particularly, that of economic openness).
Indeed, critical public discussion is an inescapably important requirement of good public policy since the appropriate role and reach of markets cannot be predetermined on the basis of some grand, general
formula—or some all-encompassing attitude—either in favor of placing everything under the market, or of denying everything to the market. Even Adam Smith, while firmly advocating the use of markets where it could work well (and denying the merits of any
general
rejection of trade and exchange), did not hesitate to investigate economic circumstances in which particular restrictions may be sensibly proposed, or economic fields in which nonmarket institutions would be badly needed to supplement what the markets can do.
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It must not be presumed that Smith’s critique of the market mechanism was always gentle, or, for that matter, that he got his critical points invariably right. Consider, for example, his advocacy of legal restrictions on usury.
25
Smith was, of course, opposed to any kind of general ban on charging interest on loans (as some anti-market thinkers had advocated).
26
However, he wanted to have legal restrictions imposed by the state on the maximum rates of interest that could be charged:
In countries where interest is permitted, the law, in order to prevent the extortion of usury, generally fixes the highest rate which can be taken without incurring a penalty.…
The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
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In Smith’s interventionist logic the underlying argument is that market signals can be misleading, and the consequences of the free market may be much waste of capital, resulting from private pursuit of misguided or myopic enterprises, or private waste of social
resources. As it happens, Jeremy Bentham took Adam Smith to task in a long letter he wrote to Smith in March 1787, arguing for leaving the market alone.
28
This is a rather remarkable episode in the history of economic thought, with the principal utilitarian interventionist lecturing the pioneering guru of market economics on the virtues of market allocation.
29
The issue of a legally imposed maximum interest rate is not of much current interest in contemporary debates (in this respect Bentham has clearly won over Smith), but it is important to see why Smith took such a negative view of the impact of “prodigals and projectors” on the economy. He was deeply concerned with the problem of social waste and the loss of productive capital. And he discussed in some detail how this could come about (
Wealth of Nations
, book 2, chapter 3). Regarding “prodigals,” Smith saw in them a great potential for social waste, driven as they are “with the passion for present enjoyment.” So it is that “every prodigal appears to be a publick enemy.” Regarding “projectors,” Smith’s worries related again to social waste:
The effects of misconduct are often the same as those of prodigality. Every injudicious and unsuccessful project in agriculture, mines, fisheries, trade, or manufactures, tends in the same manner to diminish the funds destined for the maintenance of productive labour. In every such project, … there must always be some diminution in what would otherwise have been the productive funds of the society.
30
It is not particularly important to assess these specific arguments of Smith, but it is important to see what his general concerns are. What he is considering is the possibility of social loss in the narrowly motivated pursuit of private gains. This is the opposite case to the more famous remark of Smith: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.…”
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If the butcher-brewer-baker example draws our attention to the mutually beneficial role of trade based on self-interest, the prodigal-projector argument points to the possibility that under certain circumstances private profit
motives may indeed run counter to social interests. It is this general concern that remains relevant today (not just the particular example of prodigals and projectors).
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This is very much the central apprehension in considering the social loss involved, for example, in environmentally wasteful or polluting private productions, which fit well with Smith’s description of the possibility of “some diminution in what would otherwise have been the productive funds of the society.”
The lesson to draw from Smith’s analysis of the market mechanism is not any massive strategy of jumping to policy conclusions from some general “pro” or “anti” attitude to markets. After acknowledging the role of trade and exchange in human living, we still have to examine what the other consequences of market transactions actually are. We have to evaluate the actual possibilities critically, with adequate attention being paid to the contingent circumstances that may be relevant in assessing all the results of encouraging markets, or of restraining their operation. If the butcher-brewer-baker example points to a very common circumstance in which our complementary interests are mutually promoted by exchange, the prodigal-projector example illustrates the possibility that this may not work in quite that way in every case. There is no escape from the necessity of critical scrutiny.
The case for taking a broad and many-sided approach to development has become clearer in recent years, partly as a result of the difficulties faced as well as successes achieved by different countries over the recent decades.
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These issues relate closely to the need for balancing the role of the government—and of other political and social institutions—with the functioning of markets.
They also suggest the relevance of a “comprehensive development framework” of the kind discussed by James Wolfensohn, the president of the World Bank.
34
This type of framework involves rejecting a compartmentalized view of the process of development (for example, going just for “liberalization” or some other single, overarching process). The search for a single all-purpose remedy (such as “open the markets” or “get the prices right”) has had much hold on professional thinking in the past, not least in the World Bank itself. Instead,
an integrated and multifaceted approach is needed, with the object of making simultaneous progress on different fronts, including different institutions, which reinforce each other.
35
Broader approaches are often harder to “sell” than narrowly focused reforms that try to achieve “one thing at a time.” This may help to explain why the powerful intellectual leadership of Manmohan Singh in bringing about the needed economic reforms in India in 1991 was so concentrated on “liberalization” only, without a corresponding focus on the much-needed broadening of social opportunities. There is, however, quite a deep complementarity between reducing, on the one hand, the overactivity of the state in running a “license Raj,” and, on the other, removing the underactivity of the state in the continuing neglect of elementary education and other social opportunities (with close to half the adult Indians still illiterate and quite unable to participate in an increasingly globalized economy).
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In the event, Manmohan Singh did initiate some essential reforms, and this is a rightly admired success.
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And yet that success could have been even greater if the reforms were combined with a commitment to expand the development of social opportunities that had been neglected so persistently in India.
Combining extensive use of markets with the development of social opportunities must be seen as a part of a still broader comprehensive approach that also emphasizes freedoms of other kinds (democratic rights, security guarantees, opportunities of cooperation and so on). In this book, the identification of different instrumental freedoms (such as economic entitlements, democratic freedoms, social opportunities, transparency guarantees and protective security) is based on the recognition of their respective roles as well as their complementarities. Depending on the country considered, the focus of a critique may vary, in light of the particular experience in that country. For example, in India the neglect of social opportunities may be a focus of criticism in a way it may not be in China, whereas the absence of democratic liberties may be more appropriately a focus of a critique of China than it could be of India.
Those who have tended to take the market mechanism to be the best solution of every economic problem may want to inquire what the
limits of that mechanism may be. I have already commented on issues of equity and the need to go beyond efficiency considerations, and in that context, I have tried to discuss why this may call for supplementing the market mechanism by other institutional activities. But even in achieving efficiency, the market mechanism may sometimes be less than effective, particularly in the presence of what are called “public goods.”
One of the assumptions standardly made to show the efficiency of the market mechanism is that every commodity—and more generally everything on which our welfares depend—can be bought and sold in the market. It can all be marketed (if we want to place it there), and there is no “nonmarketable” but significant influence on our welfare. In fact, however, some of the most important contributors to human capability may be hard to sell exclusively to one person at a time. This is especially so when we consider the so-called public goods, which people consume
together
rather than separately.
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This applies particularly in such fields as environmental preservation, and also epidemiology and public health care. I may be willing to pay my share in a social program of malaria eradication, but I cannot buy my part of that protection in the form of “private good” (like an apple or a shirt). It is a “public good”—malaria-free surroundings—which we have to consume together. Indeed, if I do manage somehow to organize a malaria-free environment where I live, my neighbor too will have that malaria-free environment, without having to “buy” it from anywhere.
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The rationale of the market mechanism is geared to private goods (like apples and shirts), rather than to public goods (like the malaria-free environment), and it can be shown that there may be a good case for the provisioning of public goods, going beyond what the private markets would foster.
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Exactly similar arguments regarding the limited reach of the market mechanism apply to several other important fields as well, where too the provision involved may take the form of a public good. Defense, policing and environmental protection are some of the fields in which this kind of reasoning applies.
There are also rather mixed cases. For example, given the shared communal benefits of basic education, which may transcend the gains of the person being educated, basic education may have a public-good component as well (and can be seen as a semipublic good). The persons receiving education do, of course, benefit from it,
but in addition a general expansion of education and literacy in a region can facilitate social change (even the reduction of fertility and mortality, as will be discussed more fully in
chapters 8
and
9
) and also help to enhance economic progress from which others too benefit. The effective reach of these services may require cooperative activities and provisioning by the state or the local authorities. Indeed, the state has typically played a major role in the expansion of basic education across the world. The rapid spread of literacy in the past history of the rich countries of today (both in the West and in Japan and the rest of East Asia) has drawn on the low cost of public education combined with its shared public benefits.