Choice, Welfare and Measurement
Resources, Values and Development
Amartya Sen occupies a unique position among modern economists. He is an outstanding economic theorist, a world authority on social choice and welfare economics. He is a leading figure in development economics, carrying out path-breaking work on appraising the effectiveness of investment in poor countries and, more recently, on famine. At the same time, he takes a broad view of the subject and has done much to widen the perspective of economists. He has made major contributions to moral philosophy, being as much at home writing for the Journal of Philosophy as for the Economic Journal. He enjoys controversy, in TV debate as well as the academic seminar, and is an incisive and entertaining lecturer.
The economist seeking to take economics beyond its conventional boundaries might well find himself out of favor with his own colleagues. Not so Sen, who is a prophet with honor in his own discipline. He is Drummond Professor of Political Economy at Oxford, and was recently appointed a professor of economics and philosophy at Harvard. He has been president of the Econometric Society and of the Development Studies Association. He has recently been elected president of the International Economic Association, the previous holder of this office being Kenneth Arrow, who, together with Maurice Dobb and John Rawls, has had a major influence on Sen’s work.
On what is this formidable reputation based? The two volumes of Sen’s collected papers under review provide an opportunity to answer this question. Many people associate Sen with social choice theory and welfare economics, and these are the main topics covered in the first volume, Choice, Welfare and Measurement. Social choice theory is concerned with the relation between social judgments and the preferences of individuals. In societies such as the Western democracies in which individual preferences are the basis for social judgments, how can the different preferences be combined into a collective judgment? Kenneth Arrow’s Social Choice and Individual Values, published in 1951, contained a powerful mathematical analysis of this problem. His “impossibility theorem” showed that if one requires the procedure of reaching a collective judgment to satisfy four apparently quite reasonable conditions (such as that there are no restrictions on the way in which people rank different alternatives), then there can be no consistent social judgment.
That problems of this kind arise with majority voting had long been known, and most people will have come across the “paradox of voting,” by which in a majority vote for, say, the choice of the nation’s capital, Washington would be beaten by Boston, Boston would be beaten by Chicago, but, in a vote between Washington and Chicago, Washington would win. Arrow’s theorem shows that problems arise not just with majority voting but also with any conceivable method of aggregating individual preferences that satisfies the four conditions.
Sen has said that as an undergraduate at Cambridge University he was “besotted” with Arrow’s book. Recalling my own excitement on first reading Arrow’s work, at Cambridge some ten years after Sen, I can understand how it came like a shaft of sunlight into a climate that was inhospitable both literally (Sen has written with feeling of his first winter in an “astonishingly damp country”) and intellectually. Cambridge economics at that time was sympathetic neither to welfare economics nor to the use of mathematics in social science. However, Maurice Dobb, Sen’s supervisor, was more open-minded and encouraged Sen in his explorations.
In examining how Sen has taken social choice theory further, we should begin with the questions that Sen has posed about the nature of choice at the level of the individual rather than society. The opening essays are concerned with choice and preference, including his inaugural lecture at the London School of Economics in 1973 in which he attacked the “revealed preference approach” to consumer behavior that has dominated the economic theory of choice since the 1940s. To quote from Paul Samuelson’s celebrated paper on the subject, the basic idea of this approach is that “the individual guinea pig, by his market behavior, reveals his preference pattern.” For the consumer, the process runs from preferences to consumption decisions; the economist puts the process in reverse: we observe what a person buys in the supermarket and deduce preferences from these choices.
Sen argues that this revealed preference approach takes an overly narrow view, underestimating the influences on choice other than the person’s own preferences. He stresses the ways in which group norms and the culture of a class or community can affect choices. For example, in choosing an insurance plan or making wage demands, people working in a particular job may be influenced as much by the attitudes of their fellow workers as by their personal preferences. For Sen, “economic man,” concerned only with his own desires, is “close to being a social moron.”
Sen warns against equating human beings with guinea pigs, stressing how ethical considerations can figure in human motives and are relevant even to the purely descriptive goal of explaining economic decisions. Notions of “fairness,” for instance, may enter into the explanation of the rate of output of a group of workers. A person’s statement that he does not buy South African goods may well be relevant in determining what can be deduced from the contents of his supermarket basket.
In attacking the model of economic man as a “rational fool,” Sen is not alone. Others unhappy about the foundations of microeconomic behavior include such well-known economists as Harvey Leibenstein, Janos Kornai, and Tibor Scitovsky. Sen’s particular contribution is his dissection of the different meanings that can be attached to the notion that a person “prefers” a particular thing or action that we can call A. To give some examples:
—the person gets more satisfaction from A
—the person prefers that A is chosen
—the person believes that it would be right to choose A
—the person chooses A
None of these entails any of the others. Professor X may get more satisfaction from choosing South African grapes on the grounds that he likes their taste better, but believe that it would be wrong to buy them on political grounds. He may therefore not buy them in the supermarket. The same person may, however, prefer that his faculty club choose South African grapes (particularly if he can complain about the choice while eating the grapes).
This may appear quite obvious, yet individual choice continues to be treated in economics texts as presenting no such problems. Hal Varian’s Microeconomic Analysis, possibly the most widely used graduate text, is based on the assumption that the first statement listed above implies the fourth, and that the second and third are not relevant. For the economics student, beset with difficulties on every side, this simple portrayal may come as a welcome relief, but it impoverishes the subject. What Sen wants us to do is to take more account of the complexity of human behavior.
Individual preferences enter economics both as determinants of behavior and as the basis for judgments about the welfare of societies or groups. Here we come back to the issue of social choice, but now with the insight that there may be more than one interpretation of the way preferences are aggregated. Sen notes in his masterly 1975 survey the difficulties that arise in the theory of social choice from “a desire to fit essentially different classes of group aggregation problems into one uniform framework.” He distinguishes between the aggregation of individual interests (for example, in sharing the burden of taxation) and that of individual judgments (for example, whether apartheid should be ended). He argues that Arrow’s approach is inappropriate for combining different interests. Majority voting is particularly unattractive as a procedure for arriving at decisions: “Making the poor much poorer and passing on half the plunder [the remainder being lost in the process] to the rest would seem to be both wasteful and inequitous, but [the method of majority decisions] strongly supports such a change.”
What is needed according to Sen is to widen the range of information that we bring to bear in making social choices. This additional information may be concerned with individual welfare, conveying, for instance, the value a person attaches to his situation before and after a proposed tax reform. The use of such information poses a number of problems, particularly when it comes to making comparisons between the welfares of different people. One of Sen’s major contributions has been to clarify the different types of information that can be used in making social choices and their relationship with different principles of justice. If, for example, we can compare the value of an extra dollar to one person with that of an extra dollar to anyone else, without necessarily being able to say that one person is overall better or worse off than another for having the extra dollar, then it is legitimate to apply the utilitarian principle, associated with Jeremy Bentham. This means that we calculate the total of everyone’s gains and losses from, say, a tax reform, much as a government calculates the costs and benefits of a spending project. Judging different choices in this way provides a consistent method of social decision.
On the other hand, the more recent “difference principle” of the Harvard philosopher John Rawls requires that we be able to say that one person is better or worse off overall than another. In particular, we can identify the least advantaged in society, who are the group to whom Rawls’s principle would give priority. This too is a permissible criterion for social welfare. We can judge different choices by their effect on the welfare of the least advantaged, asking simply whether they gain or lose from a tax reform and not seeking to compare the size of this gain or loss with that of other groups. As it was put by Robert Lampman, one of the economists instrumental in founding the Institute for Research on Poverty at Wisconsin, the test of policy according to this principle is “what does it do for the poor?”
These approaches are described by Sen as “welfarist,” in that they assume we can use only information about personal welfares. Such a limitation is in the tradition of welfare economics, but Sen has emphasized the need to take a broader view, considering concepts of justice that depart from this assumption. Indeed, Rawls’s difference principle is concerned with the position of the least advantaged defined not by personal welfare, but by “primary goods,” or “things that every rational man is presumed to want.” This takes us outside the traditional scope of welfare economics. The rejection of the welfarist approach is similarly to be found in Marxist theories of exploitation, relating social judgments to the historical information that capital represents the product of past labor. Robert Nozick’s theory of justice is quite different but equally appeals to historical information. For him, it is not the distribution of income that matters but the process by which it is brought about, people being “entitled” to resources that were justly acquired or that were transferred to them according to a just process, even if this means they will be immensely rich and that their riches may be of no benefit to the poor.