Development As Freedom

When Sen began his career, intellectual orthodoxy concentrated on the flaws of market mechanics to the point of advocating any alternative. However, at the time if his writing this book, the situation is reversed, and orthodoxy scoffs at any limitations on the free market. He says that neither extreme is healthy. Free markets are, however, generally good, both as a matter of principle and considering their practical results. The freedom to engage in transactions is so common in Western countries that people often don’t see it as a freedom, but it is an important freedom. Enslavement and other bonded labor still exist (albeit illegally), and people suffer from that unfreedom. Communism, while often increasing lifespans, similarly deprives people of that freedom to control their economic lives. Child labor and restrictions on women working outside the home pose similar issues of unfreedom. A capabilities-approach must advocate for people’s substantive freedom to control how they sell their work or the fruits of their labor.

Beyond the issue of freedom, economists correctly state that a perfectly functioning free market ought to give the best economic results. The Arrow-Debreu theorem shows that this hypothetical market should achieve the “Pareto optimality,” in which no one’s utility can rise without harming another person’s utility. Sen has argued elsewhere that the mathematics of Arrow-Debreu hold up even when freedom replaces utility as the end goal. However, this Pareto optimality can include problematic inequality, especially since unequal capabilities (such as disability) are coupled with unequal incomes. Efficiency and equity therefore need to be analyzed simultaneously, and free markets do not always meet these double criteria.

One major problem with actual markets is that special interest groups, such as wealthy industrialists, may use their political influence to create monopolies or otherwise rig markets to artificially limit competition to protect their wealth. Adam Smith’s classic defense of markets was aimed precisely at this recurring issue. Transparency and free public discourse serve as the best defense against such selfish market restrictions. Here, once again, different freedoms—economic and political—show their close connection. Since markets sometimes need rational restrictions, and since noneconomic concerns may rationally take precedence, this should be a true dialogue shaped by critical reason and concern for the good of all citizens. Indeed, public goods—like an environment free of malaria—cannot be directly purchased in the market, so a nonmarket mechanism may be the best way to obtain it, even if that means imposing government restrictions. Public policy, especially in developing countries, needs to create social opportunities when markets fail to do so.

Government interventions may distort the incentives in the marketplace or increase the strain on the public budget. Focusing on the deprivation of capabilities makes analyzing the tradeoffs easier. Few people opt to die young, suffer malnourishment, or remain illiterate, if they have the freedom to choose otherwise. Therefore, those enduring these deprivations must lack a realistic market option for healthcare or basic education. That means that free public provision of such services for them would not compete with the market. Many governments have adopted means-testing criteria to limit their expenditure on such goods to only those unable to afford them. However, public bureaucracy often struggles to determine eligibility accurately and efficiently. Associating aid with poverty also creates a social stigma. Means-testing may reduce the recipients to targets, rather than acknowledging them as agents. In addition, people’s fear of losing public aid can distort the economic incentive to improve their situation.

Another factor to consider in structuring public aid, whether targeted or available to all, is deficits. These are a normal part of government operations. Even analysis from conservative economists demonstrates that moderate deficits and low inflation do not harm growth, as long as the state avoids moderate to high inflation (over 15-20% annually). A genuinely financially conservative approach that limits deficits is wise, but it should not be confused with anti-deficit radicalism that rejects any deficit spending. The need to balance all these concerns is one reason why careful public discussion of alternatives is so important.