How valuable is the market mechanism for practical morality? What is its moral standing? We can scarcely doubt that as individuals we do value tremendously the opportunity of using markets. Indeed, without access to markets most of us would perish, since we don't typically produce the things that we need to survive. If we could somehow survive without using markets at all, our quality of life would be rather abysmal. It is natural to feel that an institution that is so crucial to our well-being must be valuable. And since moral evaluation can hardly be indifferent to our interests and their fulfillment, it might appear that there is nothing much to discuss here. The market's moral standing “has to be” high.
1 The last phrase comes from Adam Smith, The Wealth of Nations (1776). Aside from indicating wherein the virtue of the market mechanism lies, it points to the fact that no individual participant in the process aims at all the results the market achieves. Friedrich von Hayek has seen in this a great new insight – indeed a great theory of “the result of human action but not of human design” – initiated allegedly by Adam Smith, “revived” by Carl Menger, and now enshrined by Hayek; see his Studies in Philosophy, Politics, and Economics (Chicago: University of Chicago Press, 1967), pp. 96–105. One has to be careful about what is being asserted here. It would be wrong to say that no one aims at any of the results achieved. In this model, each person is assumed to pursue, as far as is feasible, his own interest, and this pursuit is fulfilled by the market transaction. “The butcher, the brewer, or the baker” did not aim at “our dinner,” but me presumably did. The fact that not all the results, nor the pattern of the results, was anyone's “design” seems to be an unremarkable fact. Surely, Adam Smith's main contribution, in this area of analysis, was to show how the results of different people's “designs” are coordinated and achieved by the market. I have discussed this question, among other issues, in “The Profit Motive,” Lloyds Bank Review, vol. 147 (1983).
2 Milton, and Friedman, Rose, Free to Choose (London: Secker and Warburg, 1980), p. 222.
3 ibid., p. 223.
4 See Hare, R. M., Moral Thinking: Its Levels, Methods and Point (Oxford: Clarendon Press, 1981), on “levels” of moral thinking, and on the distinction between the “intuitive” and the “critical.” See also Gray, John, Mill on Liberty: A Defence (London: Routledge, 1983).
5 Nozick, Robert, Anarchy, State and Utopia (Oxford: Blackwell, 1974), p. 1.
6 Robert Nozick does point to (what he calls) “invisible-hand explanations” of the emergence of social institutions (such as markets), quoting Adam Smith (ibid., p. 18). But, consistently with his own approach, he does not proceed to assess such institutions in terms of the goodness of interest-fulfilling outcomes.
7 See, for example, the different analyses of this issue by Husami, Z., “Marx on Distributive Justice,” Philosophy and Public Affairs, vol. 7 (1978); Steiner, H., “Individual Liberty,” Proceedings of the Aristotelian Society, vol. 74 (1974); Cohen, G. A., “Capitalism, Freedom and the Proletariat,” Ryan, A., ed., The Idea of Freedom: Essays in Honour of Isaiah Berlin (Oxford: Clarendon Press, 1979); Cohen, G. A., “Illusions about Private Property and Freedom,” Mepham, J. and Rubens, D., eds., Issues in Marxist Philosophy (Hassocks: Harvester Press, 1981); O'Neill, O., “The Most Extensive Liberty,” Proceedings of the Aristotelian Society, vol. 79 (1979–1980); and others. See also Dworkin, Gerald, et al., Markets and Morals (Washington: Hemisphere Publishing, 1977).
8 Gibbard, Allan, “Natural Property Rights,” Nous, vol. 10 (1976). Gibbard examines the possible claim of “property rights” to be “grounded in principles of natural liberty,” with or without John Locke's, [John Locke, The Second Trealise of Government (1764)] qualification regarding the libertarian position, and shows why the claim is hard to justify.
9 Sen, Amartya, Poverty and Famines: An Essay on Entitlement and Deprivation (Oxford: Clarendon Press, and New York: Oxford University Press, 1981).
10 Contrast the model of “alienable rights” in Gibbard, A., “A Pareto-Consistent Libertarian Claim,” Journal of Economic Theory, vol. 7 (1974), in which rights have extreme sensitivity to the nature of the outcome. It is arguable that such a system of outcome sensitivity may not do full justice to the procedural nature of rights, but on the other hand it is very hard to see why rights should continue to be not alienable at all even when the results of the exercise of rights are plainly terrible. Some connections between outcomes and rights are discussed in my “Rights and Agency,” Philosophy and Public Affairs, vol. 11 (1982). See also Regan, D. H., “Against Evaluator Relativity: A Response to Sen,” Philosophy and Public Affairs, vol. 12 (1983); and Sen, Amartya, “Liberty and Social Choice,” Journal of Philosophy, vol. 80 (1983).
11 Amartya Sen, “Rights and Agency”.
12 See my “Evaluator Relativity and Consequential Evaluation,” Philosophy and Public Affairs, vol. 12 (1983), and “Well-being, Agency and Freedom: The Dewey Lectures 1984,” Journal of Philosophy, vol. 82, (1985).
13 One way of seeing the problem of personal morality in this type of context is in terms of a system of action evaluation that is consequence-sensitive, but not fully “consequentialist.” Another way of dealing with it is to make the evaluation of states of affairs position-relative to the person doing the evaluation (including his or her own agency). There is, in fact, a case for such position-relativity on grounds of ethical cogency; or at least so I have tried to argue in “Rights and Agency”; see also the exchange between Donald Regan, “Against Evaluator Relativity,” and Sen, A. K., “Evaluator Relativity and Consequential Evaluation,” Philosophy and Public Affairs, vol. 12 (1983).
14 Discussed in Sen, Amartya, “Utilitarianism and Welfarism,” Journal of Philosophy, vol. 76 (1979).
15 On questions as to how these moral values may be interpreted, assessed and integrated, there are – not surprisingly – enormous differences; see for example Arrow, K. J., Social Choice and Individual Values (New York: Wiley, 1951); Harsanyi, J. C., “Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility,” Journal of Political Economy, vol. 63 (1955); and Essays on Ethics, Social Behaviour and Scientific Explanation (Dordrecht: Reidel, 1976); Little, I. M. D., A Critique of Welfare Economics (Oxford: Clarendon Press, 2nd edition, 1957); Buchanan, J. M. and Tullock, G., The Calculus of Consent (Ann Arbor, MI: University of Michigan Press, 1962); Rawls, J., A Theory of Justice (Cambridge, MA: Harvard University Press, 1971); and “Kantian Constructivism in Moral Theory: The Dewey Lectures 1980,” Journal of Philosophy, vol. 77 (1980); Dworkin, R., Taking Rights Seriously (London: Duckworth, 1977); and “What is Equality,” Philosophy and Public Affairs, vol. 10 (1981). On related matters, see also Varian, H., “Distributive Justice, Welfare Economics and The Theory of Fairness,” Philosophy and Public Affairs, vol. 4 (1975); G. Dworkin, et al, Markets and Morals; Calabresi, G. and Bobbitt, P., Tragic Choices (New York: Norton, 1978); Usher, D., The Economic Prerequisites to Democracy (New York: Columbia University Press, 1981); Roemer, J., A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); and “Equality of Talent,” Working Paper 239, Economics Department, University of California, Davis, (1984); Frey, B. C., Democratic Economic Policy (Oxford: Martin Robertson, 1983); McLeod, A. M., “Justice and the Market,” Canadian Journal of Philosophy, vol. 13 (1983); Pattanaik, P. K. and Salles, M., Social Choice and Welfare (Amsterdam: North-Holland, 1983). I have tried to discuss some of these issues in Sen, Amartya, Collective Choice and Social Welfare (San Francisco: Holden-Day, 1970; republished, Amsterdam: North-Holland, 1979); “Equality of What?” in McMurrin, S., ed., Tanner Lectures on Human Values, vol. 1 (Cambridge: Cambridge University Press, 1980, reprinted in my Choice, Welfare and Measurement (Oxford: Blackwell; and Cambridge, MA: M.I.T. Press, 1982); “Rights and Agency,” Philosophy and Public Affairs; “Well-being, Agency and Freedom: The Dewey Lectures 1984.”
16 Arrow, K. J., “An Extension of the Basic Theorems of Classical Welfare Economics,” in Neyman, J., ed., Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability (Berkeley, CA: University of California Press, 1951); Debreu, G., Theory of Value (New York: Wiley, 1959); Arrow, K. J. and Hahn, F. H., General Competitive Analysis (San Francisco: Holden-Day, 1971; republished, Amsterdam: North-Holland, 1979).
17 As Dorfman, Samuelson and Solow put it: “More recently it has become common to sum up all these in one brief and easily understood theorem which comprises everything of significance and provides the backbone of welfare economics. This fundamental theorem states ‘every competitive equilbrium is a Pareto optimum; and every Pareto optimum is a competitive equilibrium.’;” Dorfman, R., Samuelson, P., and Solow, R., Linear Programming and Economic Analysis (New York: McGraw-Hill, 1958), pp. 409–410.
18 This assumption is not in fact fully needed for each of the results; see Winter, S., “A Simple Remark on the Second Optimality Theorem of Welfare Economics,” Journal of Economic Theory, vol. 1 (1969); and Archibald, G. C. and Donaldson, D., “Non-paternalism and the Basic Theorems of Welfare Economics,” Canadian Journal of Economics, vol. 9 (1976). These further results indicate the presence of an asymmetry, in the required assumptions regarding “externalities,” between the direct theorem and the converse theorem. Some other properties (e.g., convexity) have very disparate relevance, indeed, to the two theorems (the direct theorem does not require any convexity assumption, whereas the convex theorem certainly required it in some form or other).
19 Sen, Amartya, On Economic Inequality (Oxford: Clarendon Press; and New York: Norton, 1973).
20 G. Debreu, Theory of Value; Koopmans, T. C., Three Essays on the State of Economic Science (New York: McGraw-Hill, 1957), p. 27.
21 Uniqueness and global stability, incidentally, are additional assumptions and no mean demands either. See Arrow and Hahn, General Competitive Analysis.
22 This problem of the incentive to reveal information has to be distinguished from the problem of informational economy, to which the precedures for “decentralized resource allocation” are addressed (see, for example, Malinvaud, E., “Decentralized Procedures for Planning,” in Malinvaud, E. and Bacharach, M. O. L., eds., Activity Analysis in the Theory of Growth and Planning (London: Macmillan, 1967); Heal, G. M., The Theory Of Economic Planning (Amsterdam: Horth-Holland, 1973); Weitzman, M., “Prices versus Quantities,” Review of Economic Studies, vol. 41 (1974); Dagsputa, P., The Control of Resources (Oxford: Blackwell, 1982). In such “decentralized” procedures, each agent acts as a member of a “team,” and it is typically assumed that they have shared objectives, though disparate access to information. The problem of decentralized resource allocation, when the agents have their own respective goals, which may conflict, has not been much studied in the literature, and will certainly not lead to simple and comforting results.
23 There are various “incentive compatible” mechanisms (see for examples, Groves, T. and Ledyard, J., “Optimal Allocation of Public Goods: A Solution to the ‘Free Rider’ Problem,” Econometrica, vol. 45 (1977); Green, J. and Laffont, J. J., “Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods,” Econometrica, vol. 45 (1977); Dagsputa, P., Hammond, P., and Maskin, E., “The Implementation of Social Choice Rules: Some General Results in Incentive Compatibility,” Review of Economic Studies, vol. 46 (1979); which deal effectively with the problem of “the free rider” in terms of the incentive to do the right thing, given the initial distribution of resources, despite the presence of such problems as “public goods.” These “solutions” are not, however, addressed to the problem of how to deal with the incentive to reveal information of a kind that would permit the policy makers to make judgments about the right initial distribution of resources (in line with the distributional objectives of policy making). Nor do they address the problem of revelation of individual judgments to be combined in an “aggregate” judgment (e.g., to decide on equity). On the last, see Gibbard, A., “Manipulation of Voting Schemes: A General Result,” Econometrica, vol. 41 (1973); Satterthwaite, M. A., “Strategy-Proofness and Arrow's Conditions: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions,” Journal of Economic Theory, vol. 10 (1975); Pattanaik, P. K., Strategy and Group Choice (Amsterdam: North-Holland, 1978); Laffont, J. J., ed., Aggregation and Revelation of Preferences (Amsterdam: North-Holland, 1979); Moulin, H., The Strategy of Social Choice (Amsterdam: North-Holland, 1983); Peleg, B., Game Theoretic Analysis of Voting in Committees (Cambridge: Cambridge University Press, 1984).
24 In fact, insofar as we value the market achievement not in terms of Pareto-optimality (i.e., reaching an “undominated” vector of utilities), but in terms of the corresponding notion of being “free to choose” (i.e., having an “undominated” n-tuple of individual freedoms to pursue whatever they decide to seek), the assumption of self-interested behavior can be also significantly relaxed.
25 See R. Dworkin, “What is Equality,” See also J. Roemer, “Equality of Talent”; and Varian, H., “Dworkin on Equality of Resources,” mimeographed, University of Michigan, Ann Arbor (1984).
26 There can, however, be useful partial criteria of judging achievements, e.g., whether the mechanism satisfies specific requirements of “horizontal equity” or “symmetry preservation.” The market mechanism can be partially defended from these particular perspectives. See for example, Schmeidler, D. and Vind, K., “Fair Net Trade,” Econometrica, vol. 40 (1972); Varian, H., “Equity, Envy and Efficiency,” Journal of Economic Theory, vol. 9 (1974).
27 Coase, R. H., “The Problem of Social Cost,” Journal of Law and Economics, vol. 3 (1960).
28 For different interpretations of what Coase's line of reasoning achieves, see Buchanan, J. M., Freedom in Constitutional Contract (College Station: Texas A & M University, 1977); and “Rights, Efficiency and Exchange: The Irrelevance of Transactions Cost,” mimeographed, Center for Study of Public Choice, George Mason University (1983); G. Calabresi and P. Bobbit, Tragic Choices; Cooter, R., “The Cost Of Coase,” Journal of Legal Studies, vol. 11 (1982); Green, E. J., “Equilibrium and Efficiency under Pure Entitlement Systems,” in Meltzer, A. H. and Romer, T., eds., Proceedings of the Conference on Political Economy, vol. 2, Supplement to Public Choice (1982).
29 Bauer, P. T., Equality, The Third World and Economic Delusion (Cambridge, MA: Harvard University Press, 1981).
30 See Sen, Amartya, “Just Desert,” New York Review of Books, vol. 19 (March 4, 1982). See also P. T. Bauer's rejoinder in the same journal, June 10, 1982; also Bauer, P. T., Reality and Rhetoric: Studies in the Economics of Development (London: Weidenfeld, 1984).
31 There are, of course, a great many difficulties in this way of seeing the Marxian system, as many contributions by Marxian economists have brought out. There is, in fact, a strong case for seeing the relevance of Marxian exploitation theory from a perspective different from that of production entitlement. On these issues, see Morishima, M., Marx's Economics (Cambridge: Cambridge University Press, 1973); Steedman, I., Marx after Sraffa (London: NLB, 1977); Cohen, G. A., Karl Marx's Theory of History (Oxford: Clarendon Press, 1978); Elster, J., “Exploitation and the Theory of Justice,” mimeographed, Historisk Institute, University of Oslo (1980); J. Roemer, A General Theory of Exploitation and Class.
32 I have discussed this question in “Ethical Issues in Income Distribution: National and International,” in Grassman, S. and Lunberg, E., eds., The World Economic Order: Past and Prospects (London: Macmillan, 1981); reprinted in Sen, Amartya, Resources, Values and Development (Oxford: Blackwell, and Cambridge, MA: Harvard University Press, 1984).
33 It is not surprising, in view of this, that the early contributions to the efficiency of the market mechanism came from socialist writers like Lange, O., “The Foundations of Welfare Economics,” Econometrica, vol. 10 (1938); and Lerner, A. P., The Economics of Control (London: Macmillan, 1944).
34 Amartya Sen, Collective Choice and Social Welfare; “Utilitarianism and Welfarism”; “Rights and Agency.”
35 On the last, see Sen, Amartya, “Equality of What?”; Well-being, Agency and Freedom: The Dewey Lectures 1984. ”
36 Brittan, S., The Role and Limits of Government: Essays in Political Economy (London: Temple Smith, 1983); p. 37. See also Little, I. M. D., Economic Development: Theory, Policy and International Relations (New York: Basic Books, 1982).
37 The question is discussed in Sen, Amartya, “Public Action and the Quality of Life in Developing Countries,” Oxford Bulletin of Economics and Statistics, vol. 43 (1981); and “Development: Which Way Now?”, Economic Journal, vol. 93 (1973).
* I am most grateful to Allan Gibbard for his discussion of the paper following my presentation at Bowling Green on 21 September 1984. I have also benefited from the general discussion, including comments by Jules Coleman, Donald Regan, Alexander Rosenberg, and Hal Varian, and from later correspondence with Varian.
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