Sen or Sense

We Must Not Ignore the Morality of the Marketplace

Barun Mitra is a founder and the managing trustee of Liberty Institute, an independent think tank in New Delhi, India. He has published widely, including in the Wall Street Journal.

In the battle over economics, the victory of the market seemed decisive. It had not been easy. Since the days of Adam Smith, the world economy had to cross the turbulent waters of colonialism, mercantilism, socialism, fascism, and communism before liberalization, globalization, and privatization became accepted as part of our general vocabulary. But even before the process of consolidation is over, it now seems that free market ideas are faced with insidious threats as never before.

Indeed, the popular appeal of socialist ideas was not primarily based on economic principles but on ethical and political ones—an egalitarian world view. (Discussions rarely focused on the morality of the methods that would be necessary to create such a world order.) On the other hand, many advocates of the free market rarely went beyond economics and utility, and generally ignored the moral basis of the marketplace.

This is best reflected in the criticism of the market that has inevitably followed as the so-called “transition” economies in eastern Europe, Russia, and Latin America have run into rough weather. This criticism has gained considerable credibility after the turmoil in the currency markets in Asia over the past year. Not surprisingly, “liberalism with a human face” has become the new mantra.

No one today epitomizes this sentiment more than Amartya Sen, the Indian-born 1998 Nobel laureate in economics. In a congratulatory message the president of India, K. R. Narayanan, said, “You have brought to bear upon the science of economics a compassion for the ordinary human being and a vision of an egalitarian world society.”

Empowering the Poor

Sen’s recipe for inducing long-term sustained growth involves empowering of the poor through education, health, entitlements, and removal of gender disparity. His method for delivering these services is democracy. And he mainly rests his case on the evidence that independent democratic nations have been more successful in eliminating famines than others.

There is much more than a grain of truth in Sen’s arguments. However, grains are necessary but not sufficient for a balanced diet. Democracy may be a necessary condition for alleviating poverty, but it is not a sufficient condition. Otherwise, India, the largest democracy, would not have remained in the club of poorest nations of the world.

Let us take a closer look at a few of Sen’s propositions in broad context.

Democracies, with periodic elections and a free press, keep elected representatives on their toes and the government more responsive to the population. In times of large-scale tragedies, such as famines or floods, when opposition parties and the media are on the lookout for opportunities to discredit the authorities, representatives work overtime to get as much relief as possible to their constituents.

Indeed, so successful has this process been that, today, whether in the United States or India, politicians continually vie with each other to declare some of their constituents victims of one disaster or another—famine, flood, fire, cyclone, earthquake, crop failure, indebtedness, bankruptcy, job loss, child neglect, old age, to name just a few. Pork-barrel politics is the natural outcome of such an approach. After all, if the benefits can be appropriated to a few and the cost distributed among the whole population, it would be irrational not to try to corner as large a share of the “public pie” as possible.

Apart from the social and economic damage it may cause, this approach legitimizes state intervention through control and expropriation, even if only in the “social sectors.” Once that approach to governance is accepted, it becomes almost impossible to draw a line, since all such intervention is always justified by some alleged social good.

Moreover, this governance becomes extremely short-sighted, moving from one opinion poll to another, from one election to the next. Such a government is hardly ever in a position to concentrate on programs that require a much longer time frame, for example, education or health, two of Sen’s principal concerns. On one hand, he laments the failure of the leftist forces in democratic India to capitalize on their natural constituency among the poor by stressing these two most basic of “entitlements.” On the other hand, he points to the success of the non-democratic, socialist economies in those areas, implying an astonishing lack of regard for the methods that were adopted by these countries to achieve that “success.”

There is no doubt that education and health care are the two basic tools with which an individual can improve himself. So Sen’s concern for those who apparently cannot secure these, and his fear that they may not benefit from a liberalized and globalized economy, need to be addressed.

The Power of Vested Interests

As Sen consistently points out, the performance of the Indian state in primary education and health has been dismal. Indeed, the power of vested interests and pork-barrel politics in the field of education is distinctly visible. For instance, in a country where almost half the population is considered illiterate, higher education is most heavily subsidized! Or at a time when provincial governments can only try to ensure at least a primary school within a reasonable distance of every village, students in Delhi travel almost free to their colleges and universities. Icing on top of their cheap education cake! Another problem is that the content of education has been completely politicized.

Furthermore, there is no real evidence that opposition to liberalization comes from the millions of illiterate, low-skilled workers, an overwhelming majority of whom are engaged in the informal and unorganized sectors of the economy. They provide a range of goods and services—from collecting garbage to manufacturing vehicles—which either the state has failed to deliver despite promises or which the formal sector has been unable to provide. (There is no welfare to speak of.) Clearly, then, the basic problem is not lack of education, but almost total lack of employment opportunity in the formal sector.

According to official estimates, barely 30 million of India’s work force of 400 million are in the organized sector. Not surprisingly, it is this small but entrenched minority, who fear the loss of their unearned privileges, that are at the forefront of the anti-reform group. Their share of the national pie is best indicated by the fact that since the 1970s, while the consumer price index increased by about 750 percent, per capita emoluments rose by a whopping 1,600 percent—a remarkable demonstration of the power of vested interests. The only other explanation is an amazing increase in their productivity. No wonder that the quartet of politicians, bureaucrats, organized labor, and businessmen who have benefited from state patronage and thrived in a protected environment are so keen to defend the status quo.

By adopting the “socialist pattern of development” since the 1950s, the Indian state has been very successful in choking the economy and thereby wasting the most precious of all resources, the spirit and enterprise of her people. As P. T. Bauer, the other development economist deserving of the Nobel Prize, has said, it is policy not poverty that keeps people poor.

The result of Indian socialism has been rampant underemployment, and consequently there seems to be little rational basis for the illiterate to demand better education. Is it any surprise that despite an enrollment of over 90 percent at the primary-school level, the dropout rate after five years ranges between 35 and 40 percent.

Land Reform

Another issue Sen has stressed is land reform. But even the much talked-of land reforms in states like West Bengal have not been able to stimulate growth. Forcible land distribution has led to fragmentation of holding, and productivity has not improved much as a result. This has led to the rise of political brokers in the countryside and forced people to stay on the land. Lower labor mobility has permitted the state government to ignore the virtual collapse of the industrial sector. Bureaucrats are more concerned about preserving the privileges of the existing work force than about increasing employment opportunities. Clearly, land reform in West Bengal has, perhaps unintentionally, helped slow the pace of urbanization, industrialization, and, consequently economic growth. Seen in this light, it should not surprise anyone that West Bengal, which peaked in those respects in 1947, has been sliding over the past decades.

Land reform is necessary. But this cannot be isolated from general economic policy. Today, the state is the largest landlord and is increasingly involved in disputes with indigenous people, whose title to their traditional land is not recognized. Rural communities are being torn apart by contentious litigation and frequent violence. Maintenance of land records by state governments is pathetic and open to rampant manipulation and corruption. Also, land reform cannot be a one-way street to land distribution. There is an urgent need to recognize that productivity, efficiency, and economies of scale are as relevant in agriculture as they are in other sectors of the economy. By obstructing consolidation of landholding in the name of land distribution, India has been spectacularly successful in making agriculture unviable, sealing the fate of the 70 percent of the population that lives in perpetual poverty in our countryside.

To successfully move away from this self-destructive course, a new vision is required. Sen’s concern for the poor, the hungry, and the deprived runs very deep. But there is a need to go beyond good intentions, which, though necessary, cannot be sufficient for the alleviation of India’s ills. Sen deserves credit for highlighting the need to re-establish the relationship between ethics and economics. However, the ethical premise may have to be quite different from the one Sen proposes.

The Morality of Free Exchange

It must be recognized that voluntary exchange in the marketplace is infinitely more moral than expropriation under the sponsorship of the state. It has to be acknowledged that the best way to empower the poor is to allow the market to operate unhindered so that even the poorest have the widest range of options.

The world has taken over two hundred years just to begin to appreciate the power of Adam Smith’s “invisible hand” in economics. Let’s hope we don’t take another two hundred years to appreciate the morality of the marketplace. It will be a tragedy if after winning the battle over economics, the war is lost on ethics.