Professor Sen has an article on Capitalism beyond the Crisis in the current New York Review of Books. He has a shorter summary in the Financial Times today.
I share the universal respect for Professor Sen, but must respectfully disagree on some of his take on capitalism in crisis:
He points out that even Mr. Free Market Invisible Hand, Adam Smith, was aware that you need more than self-interest to make capitalism work. You also need moral values like trust, honesty, and prudence (none of which has been too obvious in the financial sector lately), so business people can do transactions without cheating each other. His story is that free market proponents forgot all that in the run-up to the current crisis. If this is true, free market proponents are amazingly lazy, not bothering to read the zillion articles by economists on precisely these values in the last 15 years. The interesting question is where do these values come from? As this recent research shows, they COULD still arise even in a world of pure self-interest, since self-interested individuals could rationally find ways to bind themselves to norms of good behavior so that they can do repeated transactions with each other (probably helped along by pre-existing norms based on culture or human evolution — see previous post on values). A norm of trust can sustain a free market driven by the profit motive (usually supplemented by formal institutions). And why do the values sometimes break down? Unfortunately, a norm of distrust is also another possible equilibrium, in which you expect everyone else to be untrustworthy and so you are untrustworthy too. A bunch of cheaters could catch everyone by surprise, destroy trust, and we jump to the bad equilibrium. I don’t know if this has anything to do with the current crisis, but I suspect this type of analysis, as practiced by tons of recent research on values and norms, is more useful than moral sermonizing to those (probably nonexistent) economists who didn’t know you need trust as well as the profit motive.
One last footnote: Professor Sen shows some rather surprising nostalgia for Maoism (in the NYRB but not the FT) over the current Chinese system. He is upset the gains in life expectancy slowed down after China moved from Maoism towards (at least partial) free markets. I would have thought you might also want to count the greatest escape from poverty in human history with the change from Maoism to partial capitalism. I also wouldn’t have thought that you would want to bring up Maoist China in an article on moral values. (Great Leap Forward/Famine/Cultural Revolution/50 million killed by Mao, am I missing something?)
10 Comments
With all due respect, I would like to contribute to three comments concerning your reaction to Amartya Sen’s articles.
First, pursuant to your comment about “sermonizing to those (probably nonexistent) economists who didn’t know you need trust as well as the profit motive”, Sen’s articles are NOT directed at economists with excellent knowledge of how capitalism works best and how it must be supplemented by public goods etc. (you are definitely included in this group). Sen’s articles are ostensibly targeted towards those who have taken on a more myopic, market fundamentalist belief. More specifically, Sen is challenging those who don’t recognize the extent to which all of the five major freedoms identified in Development As Freedom are integral for a functioning welfare state – one which is not only based on the capitalism derived from the butcher-baker-brewer principles of Adam Smith.
Second, although it is difficult to discern from these two articles, I believe your mention of trust does not fully encompass what Sen is trying to allude to. In my view, Sen is trying to underscore the extent to which “transparency guarantees” and one’s ability to participate in the market (see Development As Freedom) were undermined by those who allowed a myopic belief in butcher-baker-brewer-capitalism to flourish. Sen explains this well in the NYRB article by mentioning the failures to regulate the practice of subprime lending and the proliferation of derivatives which fueled the latter.
Third, Sen cogently explains your concerns about the Cultural Revolution and the Great Leap Forward in Development As Freedom. I won’t try to summarize his elegant argument in this forum.
The idea that Sen is showing ‘nostalgia for Maoism’ is as inaccurate as it is insulting. He endorses universal health care, not Maoism. Maybe you don’t understand the difference, but some of us do.
You also misrepresent his article about being all about ‘trust’, which it plainly is not. He is very clear that the current crisis was in large part brought about by a failure to regulate markets, a failure directly linked to the ideological promotion of the self-regulating market as the embodiment of ‘freedom’ and ‘liberty’. I’m not surprised you want to deflect attention away from that part of his argument, though.
RESEARCH WATCH
-sporadically holding development research accountable to reality since the other day
Wouldn’t your proposal that trust COULD arise out of PURE self-interest presuppose that society is a closed system inhabited by immortals? By recent, I don’t suppose you mean the 70’s – Richard Titmuss’ gift relationship or Gary Becker’s exchange theory???
I haven’t read all zillion articles on trust, norms, formal- and informal institutions, social capital *sigh*, etc. but my conclusion so far is more along the lines of ‘trust’ as distributed and maintained in multiple forms and levels, highly entangled in power structures, varying according to the matter of interaction, sensitive to tiny variations in history …… Actually, any talk of (multiple) equilibria seems more confusing than helpful.
M and Jim, rereading Sen’s Development as Freedom makes me more concerned about his take on Maoism, not less. On p. 260, Sen says “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.” Complusory indocrination and seizure of land don’t sound like growth-encouraging policies to me. A more plausible story for China’s rapid growth post-Mao is that it is recovery from the economic destruction of Mao, and a change from a totalitarian society to one with partial economic and political freedom.” Regards, Bill Easterly
Well since you raise it, I’ll do what you didn’t do and give your readers the full quote from Development as Freedom:
“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. The positive unintended consequences are important here.”
Elsewhere in Development as Freedom, Sen writes:
“The Chinese famines of 1958-1961 killed, it is now estimated, close to thirty million people – ten times more than even the gigantic famine in British India. The so-called Great Leap Forward initiated in the late 1950s had been a massive failure, but the Chinese government refused to admit that and continued to pursue dogmatically much the same disastrous policies for three more years”
You’d have to be pretty desperate to call that a ringing endorsement of Maoism. What Sen is saying is that a system that was generally malign can have positive UNINTENDED consequences. I don’t think he’s the first to point this kind of thing out, either. Why that means he deserves furious, red-baiting denunciation of the kind you’re doling out is beyond me.
Prof. Easterly, I appreciate that you took the time to respond to our concerns, and I also commend you for the consistent passion that you have showcased in this blog. Still, I must admit that I too am concerned about your reading of Development as Freedom. Do you have any other issues with the book? Is there truly any room for disagreement, especially regarding the importance of the five freedoms that Sen identifies (the ability to participate in the market, the ability to choose who governs and by what principles, social opportunities such as health care and education, transparency guarantees such as police and independent judicial systems to ensure safe transactions, and protective security such as pensions and unemployment insurance)?
I also mention the five freedoms again because they are essential to understanding Sen’s articles. Sen argues in essence that greater recognition of their importance — and especially of the social opportunities of universal health care — could have mitigated the harmful effects of the current crisis.
It doesn’t seem like Sen’s premise – that market capitalism should be regarded as but one of several pieces of a functioning modern economic system – is actually much of a philosophical innovation at all. This idea has been spoken to both formally and informally for generations, so I walked away from the article feeling pretty unimpressed. The only difference seems to be his timing and packaging.
At the same time, Easterly’s allusion to trust is an interesting one. It’s not incorrect to say that Sen is essentially calling for an economic culture that is founded on elements of trust – as the institutions that are supposed to facilitate that trust have been largely discredited. The problem is that Sen’s solution is to further empower these institutions, essentially suggesting that larger staffs and a broader mandate would somehow reinvigorate confidence and be more adept at catching the next problem.
I’m not convinced. If anything, there are compelling cases to be made that the influence of distorting government policies – the CRA, the ‘ownership society’ phenomena, and the Fed’s inner sanctum come to mind – directly contributed (partially, at least) to the bubbling of the bubble while mitigating the effects of market self-correction. Cavalier interest rates and a persisting weak dollar policy made short-term market correction nearly impossible; in that sense, the current crisis IS the markets self-correcting.
Where is trust?
Debt is there!
And health care?
Nowhere!
Capitalism without moralism is maoism.
Yeah.
Sen macht Sinn (means sense).
M -
Thanks for your comments on my blog. I appreciate your input, and I have read Sen’s book. As you might have noticed, I have also worked in international development a bit myself, so I’m not unfamiliar with many of the issues he raises. I actually like the book, although my comments that I raised above relate to his piece on NYRoB and not necessarily that of Development As Freedom.
I’m not sure what about my comments you find ‘disturbing,’ nor do I understand why you seem to think I’m obligated to subscribe to Sen’s opinions if I’m interested in sustainable development. Sen is a very smart man, but his ideas is hardly the god particle of development economics.
I understand Sen’s emphasis on creating effective institutions, but his seeming reliance on state-led models for ‘development’ (and not growth) is laudable but introduces conditions that will, to channel the late Mancur Olson, calcify political power among the elite and their selected interests, mitigating growth and, indeed, development.
Of course, Sen is a Nobel Laureate and I’m just a country economic developer.
Thanks.
Mao the Capitalist?
If he were alive, he’d have you shot.