Amartya Sen on the Proper Scope of MarketsIn its March 26 issue, the New York Review of Books published an article by Amartya Sen, winner of the 1998 Nobel Memorial Prize in Economic Sciences, that presents his view of the current economic crisis and what to do about it, both for short-term recovery and for long-term economic growth and distributional equity.
Sen addresses three issues:
First, do we really need some kind of "new capitalism" rather than an economic system that is not monolithic, draws on a variety of institutions chosen pragmatically, and is based on social values that we can defend ethically? ...In addressing the first question, Sen makes clear that he is opposed to the notion that what we need is a "new capitalism" some sort of modification of unfettered capitalism that would, supposedly, ensure greater economic stability than the current system exhibits. Rather Sen argues for
The second question concerns the kind of economics that is needed today, especially in light of the present economic crisis. How do we assess what is taught and championed among academic economists as a guide to economic policy including the revival of Keynesian thought in recent months as the crisis has grown fierce? More particularly, what does the present economic crisis tell us about the institutions and priorities to look for? Third, in addition to working our way toward a better assessment of what long-term changes are needed, we have to think and think fast about how to get out of the present crisis with as little damage as possible. [link added]
a clearheaded perception of how different institutions actually work, and of how a variety of organizations from the market to the institutions of the state can go beyond short-term solutions and contribute to producing a more decent economic world.Sen goes back to the work of Adam Smith, often cited by devotees of laissez-faire economic policies. After reviewing Smith's views concerning what markets are good at, and what they tend to leave undone (e.g., assuring broad availability of education), Sen sums up his own thinking:
If we were to look for a new approach to the organization of economic activity that included a pragmatic choice of a variety of public services and well-considered regulations, we would be following rather than departing from the agenda of reform that Smith outlined as he both defended and criticized capitalism.Sen goes on to argue that financial markets are currently under-regulated, saying that, in a world of complex financial instruments and transactions, "Accountability has been badly undermined, and the need for supervision and regulation has become much stronger."
Sen also wants policymakers to review the thinking of Arthur Cecil Pigou, who "was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now)." Pigou argued that "undue pessimism" plays an important role in perpetuating an economic downturn, a point that Sen considers relevant to our current troubles:
One of the problems that the Obama administration has to deal with is that the real crisis, arising from financial mismanagement and other transgressions, has become many times magnified by a psychological collapse.Sen also endorses Pigou's concern for designing policies that promote not only general economic growth, but also distributional equity. Sen says:
There is a critical need for paying special attention to the underdogs of society in planning a response to the current crisis, and in going beyond measures to produce general economic expansion. Families threatened with unemployment, with lack of medical care, and with social as well as economic deprivation have been hit particularly hard. The limitations of Keynesian economics to address their problems demand much greater recognition.Sen is particularly concerned to make the case for establishing universal health care as part of the set of policy changes adopted in response to the current crisis. He also recommends attention to environmental conservation and improvements in public transportation.
Labels: Critical thinking