The Market and Freedom to Choose

The Market and Freedom To Choose

Sen has pioneered the revival of ethical considerations as part of the mainstream of economics discussion. He has developed his views in a series of brilliant papers and books. He has also combined philosophical speculation with intense concern with the problem of world poverty, which has led him on several occasions to question the value of free markets as policy instruments. Let me say at the outset that I agree with his general stance on the subject-matter of economics, which leads me, like him, to question the value of the 'welfarist' approach to policy questions. However, I do not share his value judgments and have a rather different view of the nature and function of the market. What follows is largely based on a comment on Sen (1994).

First of all, Sen considers how we are to judge the market. I agree entirely with his approach by which the market is not some 'mortal God' which needs to be worshipped with the fervour one associates with extreme 'liberals'/conservatives; but it is a mechanism. Whether and in what form one should employ that mechanism depends on normative judgments. I am also at home with his proposal to consider the role of the market in relation to the promotion of individual freedom.

I want first of all to explore his important point that 'the perspective of freedom is motivationally quite different from that of "welfarist" approaches underlying standard assessments of the market mechanism'. Charles Rowley and I (Rowley and Peacock, 1975) explored this difference in detail some years ago at a time when non-acceptance of Paretian welfare economics was regarded as a cardinal sin. I am glad that Sen has accepted our primary contention of the separate natures of liberalist philosophy and Paretianism. His emphasis, however, is different from ours. Agreeing with John Hicks, he rightly stresses that pursuit of economic efficiency is not the first item in the ordering of liberal priorities. In contrast, we emphasize that the achievement of Pareto preferred or optimality positions, in the presence of externalities, is based on a 'Nirvana' view of the use of government intervention.

To elaborate, government intervention to take account of externalities by regulation or public provision of goods and services removes the discipline of market forces and can result in the achievement of neither allocative nor 'X' efficiency. Even if one accepts the narrow Paretian criteria, any supposed inherent deficiencies in a free market solution should not be compared with some idealised alternative. More important still, implementing the consumer sovereignty element in Paretian welfare economics by devising political institutions which reflect citizens' choices does not guarantee 'liberal' results which would exercise firm control over the growth of the public sector (see Peacock, 1992). This was why the Classical economists held that the franchise should only be extended as property became more widely distributed. A modern liberalist view regards equality of voting rights as an essential principle, which means that only persuasion may be used to reduce voters' support for ever-increasing public expenditure.

Sen makes a distinction between 'freedom to act' and 'freedom to achieve'. There is a sophisticated exploration of this distinction, but it really comes down to identifying the circumstances where one is free to allocate what resources one has and to transact and bargain in such a way as to alter that allocation as one thinks fit in contrast to the circumstances where the ability to choose is restricted because of lack of physical or human capital.

Sen accepts that the market mechanism is a necessary condition for freedom of choice, but this view must be qualified by two circumstances. The first is obviously the hollow ring of 'freedom of choice' to those whose domain of choice is severely restricted by poverty or misfortune. The second is where freedom of choice leads to conflicts of interest, as demonstrated in negative externalities. I shall follow Sen in ignoring the latter circumstance, interesting though it would be to discuss 'liberal' solutions to internalizing externalities (see particularly de Jasay, 1991).

Sen argues that the defence of the market rests primarily on the freedom to transact and exchange, restrictions which are 'ethically very limiting indeed'.

I find this contention unhelpful. (If the opportunities to transact and exchange are limited because of inequalities of ownership, the market can hardly be to blame. This is like blaming the gun for murder. It is another thing altogether to pass judgment on those who create or tolerate a situation where ability to choose may be limited to the relatively few. Furthermore, as I have argued above, the efficient working of markets characterised by a myriad of transactions in time and space, involving millions of persons who may never meet, presupposes a high degree of mutual trust and honesty.
Sen reserves most of his doubts about the market's performance for an examination of 'freedom to achieve'. His analysis has two parts.

In the first, major differences in resource endowment between persons are ignored. Then the process of achievement might be depicted very much along the lines of traditional welfare economics with the market facilitating the maximization of personal welfare by re-allocation of one's resources to provide the most preferred combination. I do not dispute the legitimacy of this approach. Nor do I dispute that persons with similar material endowments may differ in their opportunities for 'freedom achievement' if they differ in their personal and environmental characteristics. Sen considers the situation of a disabled person with more command over resources than a fit person, the former having 'less freedom to achieve' though being conventionally better off.

In the second part, Sen emphasizes that the market can do little to help those who are poor as well as disabled in some way. They may suffer from the double disadvantage of low resource endowment and lack of the capability of using what resources they have to the best advantage.

It is important to note that Sen's position relies on his particular description of the market. He implicitly accepts the welfarist view that the sole function of the market is to enable individuals to maximize utility, subject to resource constraints. I offer a very different view of the market's functions which includes the opportunities it gives to individuals to lessen these constraints so as to 'better their condition', as Adam Smith maintained. This entrepreneurial function is only made possible because the real world is characterised by market imperfections which stimulate the discovery of ways of removing them. The relevance of this view of the market here is that, in contrast with dirigiste systems, it offers the poor and uneducated the chance to exploit entrepreneur­ial skills, and in so doing to pull themselves out of the poverty trap. Sen knows better than I do that this argument forms the basis of a powerful counter-attack on the conventional wisdom of development planning by those who claim that 'poor' countries fostering the market economy will have a better chance of removing the resource constraints governing the economic dimensions to freedom of choice than those relying on government intervention.
Sen's analysis is designed to support the proposition that if 'freedom to achieve' is an important dimension of freedom, then control of market forces will be necessary in order to rectify the imbalance in access to that freedom brought about by inequality. Sen is not diverted into an argument about conflicts between freedom and economic equality but concentrates on the special though not unusual case of severe hardship caused by famines. Most of us will probably accept that the market by itself can neither prevent the onset of famine caused by some natural disaster nor operate so quickly that destitution and starvation are prevented. What system can cope with such conditions in an adequate fashion? This is not to deny that preventive as distinct from remedial measures of the kind associated with rural development in poorer countries may crucially depend on government participation in educational programmes and in extensive support for irrigation and technological improvement in agriculture. A good argument could be made for the view that these are preconditions for the efficient operation of a market system which is not to be riddled with imperfections, such as local monopolies of means of subsistence.

Towards the end of Sen's contribution he recognises what he describes as the 'commissioning' role of the market. Private markets are the conduit which offers an efficient response to consumer demands for the necessities of life. However, the sin of omission of the market is that it does not generate income and purchasing power which enables potential victims of famines to exercise this freedom to choose. A 'discriminatingly activist' government is necessary to create income opportunities for the 'disentitled' population, and to offset manipulation of the market by monopolistic traders by some form of counter-speculation devices. Alongside his own well-known investigations of the appropriateness of this complementary arrangement between the public and private sector, he reminds those who claim to be lineal successors of the Classical economists that such an approach is endorsed by Turgot, Smith and Condorcet. He bases his case on an important study of these economists by Rothschild (1992). I would emphasize a different aspect of the Classical analysis. As Rothschild shows, the need for public intervention was perceived as being necessary, not simply because the initial endowments of the poor were such that destitution would follow from scarcity resulting from famine, but also because opportunities for entrepreneurial activity within competitive markets were severely restricted by government regulation of commerce. Clearly, their view of the market was very different from those who would judge its performance by the achievement of Pareto optimality. The market was an essential condition for the promotion of thrift and enterprise on which the relief of poverty must ultimately depend, though reasonable men might differ about the extent to which government intervention might be necessary to remove imperfections. I suppose that Sen would argue that the market might remove poverty but that would not satisfy his ethical stance which would favour a much more radical attack on economic inequality. Furthermore, this process would take a much longer period of time than would be tolerable to the poor in poor countries. However, even if one agrees with Sen that at least some state intervention will be necessary to create compatibility between ethical norms and removing poverty - a position that liberals will accept to a greater or lesser degree - it is a separate question whether such intervention necessarily entails the use of methods of support which set aside the market and restrict freedom of choice of individuals.