Development as Freedom (43 page)

Is there great sagacity in recognizing all this? I would argue, perhaps not a great deal. Indeed, it is hard to think that there can be much profundity in the general conclusion that many consequences are entirely unintended.
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Despite my admiration for Friedrich Hayek and his ideas (he has contributed more than perhaps anyone else to our understanding of constitutionality, the relevance of rights, the importance of social processes, and many other central social and economic concepts), I have to say that this modest recognition can scarcely be seen as a momentous thought. If it is, as Hayek puts it, a “profound insight,” then there is something wrong with profundity.

But there is another way of seeing the same issue, and maybe that is what Hayek intended to emphasize. It is not so much that some consequences are unintended, but that causal analysis can make the unintended effects reasonably
predictable
. Indeed, the butcher may predict that exchanging meat for money not only benefits him, but also the consumer (the buyer of meat), so that the relationship can be expected to work on both sides and is thus sustainable. And the brewer, the baker and the consumer may, similarly, also expect these economic relations to be sustainable. An
unintended
consequence need not be
unpredictable
, and much depends on this fact. Indeed, the confidence of each party in the continuation of such market relations rests specifically on such predictions being made or being implicitly presumed.

If this is the way the idea of unintended consequences is understood (in terms of
anticipation
of important but unintended consequences), it is in no way hostile to the possibility of rationalist reform. In fact, quite the contrary. Economic and social reasoning can take note of consequences that may not be intended, but which nevertheless result from institutional arrangements, and the case for particular institutional arrangements can be better evaluated by noting the likelihood of various unintended consequences.

Sometimes the consequences that occur were not only not intended but were not anticipated either. Such examples are important not only to underline the fact that human expectations are fallible, but also to provide inputs for learning for future policy making. Perhaps a couple of examples from recent Chinese history will help to illustrate these issues.

There has been much discussion since the 1979 economic reforms of the apparently negative impact of economic reform on a number of important social goals, including the way the rural health care arrangements work. The reformers did not intend these negative social effects, but these effects seem to have occurred. For example, the introduction of the “responsibility system” in Chinese agriculture in the late 1970s, which did away with the earlier cooperative systems (and ushered in a period of unprecedented agricultural expansion), also made the financing of public health care that much more difficult in rural areas. The health care system used to be, to a great extent, financed through the cooperative system on a nonvoluntary basis. It proved, in fact, very difficult to replace that arrangement by a voluntary system of medical insurance to be taken out by the rural population. This possibly did make it harder to maintain the improvements in public health care in the period immediately following the reforms. The effects apparently came as something of a surprise to the reformers, and if that was the case, it can be argued that the results might have been better predicted on the basis of a fuller study of health care financing in China and elsewhere.

To consider a different type of example, coercive family planning measures (including the “one-child family” policy) introduced in China in 1979, to reduce the birthrate, seem to have contributed adversely to the reduction of infant mortality, especially of female babies (as was discussed in
chapter 9
). To some extent, there has, in fact, been even some accentuation of the neglect and mortality of female infants (if not infanticide), and certainly many more sex-specific abortions, as the families have tried to conform to the governmental norms on the total number of children without giving up
their male-child preference. The architects of social reform and obligatory family planning did not intend to produce adverse effects on infant mortality in general and on female infant mortality in particular; nor did they want to encourage sex-specific abortion. They had only intended to reduce fertility. But these adverse consequences did actually follow and deserve attention and remedy.

The central issue, then, is whether these adverse effects were predictable and should have been
anticipated
, even though not intended. The nature of economic and social reforms in China could have benefited from more predictive analysis of causes and effects, including unintended effects. The fact that the adverse effects were
not intended
did not imply that they could not be at all predicted. A clearer understanding of these consequences could have led to a better conception of what was involved in the proposed changes, and possibly could even have led to preventive or corrective policies.

These examples from recent Chinese experience deal with unintended consequences that were unfavorable from a social point of view. The direction of these unintended effects is not similar to the main class of unintended consequences considered by Adam Smith, Carl Menger and Friedrich Hayek, where the consequences considered are typically
favorable
. There is, however, a basic comparability between the working of the two types of cases, even though the nature of the unintended consequences is attractive in one case and unattractive in the other.

In fact, the occurrence of
favorable
unintended consequences (the Smith-Menger-Hayek case) also has some parallels in the field of economic planning in China, though for that we have to look at other parts of recent Chinese history. As the fast economic progress of East Asian and Southeast Asian economies gets more fully analyzed, it is becoming increasingly clear that it is not only the openness of the economies—and greater reliance on domestic and international trade—that led to such rapid economic transition in these economies. The groundwork was laid also by positive social changes, such as land reforms, the spread of education and literacy and better health care. What we are looking at here is not so much the social consequences of economic reforms, but the economic consequences of social reforms. The market economy flourishes on the foundations of such social development. As India has been lately recognizing, lack of
social development can quite severely hold up the reach of economic development.
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When and how did these social changes occur in China? The main thrust of these social changes was in the pre-reform period, before 1979—indeed a lot of it during the active days of Maoist policy. Was Mao
intending
to build the social foundations of a market economy and capitalist expansion (as he certainly did succeed in doing)? That hypothesis would be hard to entertain. And yet the Maoist policies of land reform, expansion of literacy, enlargement of public health care and so on had a very favorable effect on economic growth in post-reform China. The extent to which
post-reform
China draws on the results achieved in
pre-reform
China needs greater recognition.
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The positive unintended consequences are important here.

Since Mao did not consider seriously the likelihood that a flourishing market economy would emerge in China, it is not surprising that he did not consider this particular entailment of the social changes that were being brought in under his leadership. And yet there is a general connection here that is quite close to the focus on capability in this work. The social changes under consideration (expansion of literacy, basic health care, and land reform) do enhance human capability to lead worthwhile and less vulnerable lives. But these capabilities are also associated with improving the productivity and employability of the people involved (expanding what is called their “human capital”). The interdependence between human capability in general and human capital in particular could be seen as being reasonably predictable. While it may not have been any part of Mao’s intention to make things easier for market-based economic expansion in China, a social analyst should have been well placed—even then—to predict just such a relationship. Anticipation of such social relations and causal connections helps us to reason sensibly about social organization and about possible lines of social change and progress.

Thus, the anticipation of unintended consequences is part of—rather than contrary to—a rationalist approach to organizational reform and social change. The insights developed by Smith, Menger and Hayek draw our attention to the importance of studying unintended effects (as they themselves respectively proceeded to do), and it would be a complete mistake to think that the importance of
unintended effects undermines the need for rational assessment of all effects—unintended as well as intended. There is nothing here to undermine the importance of trying to anticipate
all
the likely consequences of alternative policies, nor anything to subvert the need for basing policy decisions on rational assessment of alternative scenarios.

I turn now to the third argument. What about the claim that human beings are uncompromisingly self-interested? How do we respond to the deep skepticism regarding the possibility of broader social values? Would every freedom that people enjoy be invariably exercised in such a self-centered way that the expectation of reasoned social progress and public action has to be entirely illusory?

I would argue that such skepticism would be quite unjustified. Self-interest is, of course, an extremely important motive, and many works on economic and social organization have suffered from not paying adequate attention to this basic motivation. And yet we also see actions—day in and day out—that reflect values which have clear social components that take us well beyond the narrow confines of purely selfish behavior. The emergence of social norms can be facilitated both by communicative reasoning and by evolutionary selection of behavioral modes. There is, by now, quite a vast literature on this subject, and I shall not dwell on this at great length.
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The use of socially responsible reasoning and of ideas of justice relates closely to the centrality of individual freedom. This is not to claim that people invariably invoke their ideas of justice, or utilize their powers of socially sensitive reasoning, in deciding on how to exercise their freedom. But a sense of justice is among the concerns that
can
move people and often
do
. Social values can play—and have played—an important part in the success of various forms of social organization, including the market mechanism, democratic politics, elementary civil and political rights, provision of basic public goods, and institutions for public action and protest.

Different persons may have very different ways of interpreting ethical ideas including those of social justice, and they may even be far from certain about how to organize their thoughts about it. But
the basic ideas of justice are not alien to social beings, who worry about their own interests but are also able to think about family members, neighbors, fellow citizens and about other people in the world. The thought experiment involving the “impartial spectator” that Adam Smith beautifully analyzed (beginning with the powerful question: What would an “impartial spectator” make of it?) is a formalization of an informal—and pervasive—idea that occurs to most of us. Space does not have to be artificially created in the human mind for the idea of justice or fairness—through moral bombardment or ethical haranguing. That space already exists, and it is a question of making systematic, cogent and effective use of the general concerns that people do have.

While capitalism is often seen as an arrangement that works only on the basis of the greed of everyone, the efficient working of the capitalist economy is, in fact, dependent on powerful systems of values and norms. Indeed, to see capitalism as nothing other than a system based on a conglomeration of greedy behavior is to underestimate vastly the ethics of capitalism, which has richly contributed to its redoubtable achievements.

The use of formal economic models to understand the operation of market mechanisms, as is the standard practice in economic theory, is to some extent a double-edged sword. The models can give insight into the way the real world operates.
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On the other hand, the structure of the model can conceal some implicit assumptions that produce the regular relations that the models build on. Successful markets operate the way they do not just on the basis of exchanges being “allowed,” but also on the solid foundation of institutions (such as effective legal structures that support the rights ensuing from contracts) and behavioral ethics (which makes the negotiated contracts viable without the need for constant litigation to achieve compliance). The development and use of trust in one another’s words and promises can be a very important ingredient of market success.

That something other than the unleashing of greed is involved in the emergence and development of the capitalist system was, of course, clear to the early defenders of capitalism. The Manchester
liberals did not fight just for the victory of greed and self-love. Their concept of humanity incorporated a broader domain of values. While they may have been overly optimistic about what human beings (when left to themselves) can—and will—do, they were right to see some spontaneity in the feelings that people have for one another, and to entertain the possibility of an enlightened understanding of the need for mutually beneficial behavior (without constant prodding by the state).

The same applies to Adam Smith, who considered a variety of values involved in economic, social and political relations. Even those early commentators (such as Montesquieu and James Stuart) who saw capitalism as a kind of replacement of “passions” by “interest” tended to draw attention to the fact that the pursuit of interest in an intelligent and rational way can be a great moral improvement over being driven by fervor, craving and tyrannical propensities. “Interest,” James Stuart thought, was the “most effective bridle” against “the folly of despotism.” As Albert Hirschman has beautifully analyzed, the early champions of capitalism saw a great motivational improvement in the emergence of capitalist ethics: “it would activate some benign human proclivities at the expense of some malignant ones.”
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