ON ETHICS & ECONOMIC AMARTYA SEN On Ethics and Economics Copyrighted material The Royer Lectures Series Editor: John M. Letiche University of California, Berkeley On Ethics and Economics Amartya Sen Blackwell Publishing Copyrighted material ©1987, 1988 by Amartya Sen BLACKWELL PUBLISHING 350 Main Street, Malden, MA 02148-5020, USA 108 Cowley Road, Oxford 0X4 1JF, UK 550 Swanston Street, Carlton., Victoria 3053, Australia All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher. First published 1987 First published in paperback 1988 Reprinted 1990, 1991, 1992, 1994, 1995, 1996, 1997, 1998, 1999 (twice), 2002, 2003, 2004 Library of Congress Cataloging- -in-Publication Data Sen, Amartya On ethics and economics. 1. Economics—Moral and ethical aspects L 174'.4 HB72 ISBN 0-631-16401 -4 (pbk) A catalogue record for this title is available from the British Library. Set in 11 on 13 pt Times by Columns of Reading Printed arid bound in the United Kingdom by Athenæum Press Ltd, Gateshead, Tyne & Wear The publisher ' s policy is to use permanent paper from mills that operate a. sustainable forestry policy, and which has been manufactured from pulp processed using acid-free and elementary chlorine-free practices. Furthermore, the publisher ensures that the text paper and cover board used have met acceptable environmental accreditation standards. For further information on Blackwell Publishing, visit our website: http://www.blackwellpublishing.com To Ken Arrow Copyrighted material Contents Foreword by John M. Letiche ix Preface xv 1 Economic Behaviour and Moral Sentiments 1 Two Origins 2 Achievements and Weakness 7 Economic Behaviour and Rationality 10 Rationality as Consistency 12 Self-interest and Rational Behaviour 15 Adam Smith and Self-interest 22 2 Economic Judgements and Moral Philosophy 29 Interpersonal Comparisons of Utility 30 Pareto Optimality and Economic Efficiency 31 Utility, Pareto Optimality and Welfarism 38 Well-being and Agency 40 Valuing and Value 41 Agency and Well-being: Distinction and Interdependence 43 Utility and Well-being 45 Achievements, Freedom and Rights 47 Self-interest and Welfare Economics 51 Rights and Freedom 56 3 Freedom and Consequences 58 Well-being, Agency and Freedom 58 Plurality and Evaluation 61 Incompleteness and Overcompleteness 65 Copyrighted material Contents Conflicts and Impasse 68 Rights and Consequence 70 Consequential Assessment and Deontology 74 Ethics and Economics 78 Welfare, Goals and Choices 80 Conduct, Ethics and Economics 88 References 90 Author index 123 Subject index 129 Foreword This small book is a 'treasure-chest' for economists, philosophers and political scientists interested in the relations between contemporary economics and moral philosophy. Written in a clear. crisp and stimulating style, Professor Amartya Sen provides more than a terse synthesis of the relevant literature on ethics and economics. In the sense of being substantially new, he shows the contributions that general equilibrium economics can make to the study of moral philosophy; the contributions that moral philosophy and welfare economics can make to mainstream economics; and the harm that the misuse of the assumption of self-interested behaviour has done to the quality of economic analysis. Sen demonstrates that there has occurred a serious distancing between economics and ethics which has brought about one of the major deficiencies of contemporary economic theory. As he persuasively argues. since the actual behaviour of human beings is affected by ethical considerations, and influencing human conduct is a central aspect of ethics, welfare -economic considerations must be allowed to have some impact on actual behaviour and, accordingly, must be relevant for modern logistic economics. But while logistic economics has had an . influence on welfare economics, Sen points out that welfare economics has had virtually n.o influence on logistic economics. He shows that both the ethics -related origins and the logistic-based origins of economics have cogency of their Copyrighted material Foreword own. The logistic approach of modern economics, he emphasizes, has often been extremely productive, providing better understanding of the nature of social interdependence and illuminating practical problems precisely because of extensive use of the logistic approach. The development of formal 'general equilibrium theory' is a case in point, and Sen illustrates its application to critical problems of hunger and famine. The foundation of Seri's arguments rests, however, in the view that economics, as it has emerged, can be made more productive by paying greater and more explicit attention to the ethical considerations that shape human behaviour and judgment. With illuminating brevity, he analyses certain departures from standard behavioural assumptions of economic theory that may arise from distinct ethical considerations. They may arise from intrinsic evaluations and from instrumental ones, either individually or from the group. Sen draws attention to the various causes from which they may arise, causes that give credence to the instrumental role of contemporary social behaviour. Such behaviour may go against each person's apparently dominant strategy, but group-rationality conditions of a specified type often influence actual behaviour without involving any defect in people's knowledge. In consequence, Sen discusses the ways in which welfare economics can be enriched by paying more attention to ethics; how des- criptive economics, prognosis, and policy can be improved by making more room for welfare economics in the determination of individual and group behaviour; and how the study of ethics can, in turn, benefit from a closer contact with economics. Understandably, though Sen is critical of economics as it stands, he does not think that the problems raised have been adequately dealt with in the ethical literature. Therefore, it is not a problem of merely incorporating the Foreword xi lessons from the ethical literature into economics. Indeed, he suggests that some of the ethical considerations can be helpfully analysed further by using various approaches and procedures now utilized in economics (p. 71). Illustrating this argument by the modern literature on rights and consequences, he notes that if rights are considered not only as primarily legal entities with instrumental use but rather as having intrinsic value, the literature can be much improved. Furthermore, he sets forth systematic suggestions as to how an adequate formulation of rights and of freedom can make substantial use of consequential reasoning of the type standardly used in general interdependence economics. hi one of his most original discussions, Sen indicates that while the richness of the modern literature of ethics is much greater than has been accommodated in economics, the extremely narrow assumption of self-interested behaviour in economics has impeded the analysis of very significant relationships. Mainstream economic theory, however, identifies rationality of human behaviour with internal consistency of choice and, further, with maximization of self-interest, But, as Sen notes, there is neither evidence for the claim that self-interest maximization provides the best approximation to actual human behaviour nor that it leads necessarily to optimum economic conditions. He refers to free market economies, such as Japan, in which systematic departure from self-interested behaviour in the direction of rule-based behaviour — duty, loyalty and good will — has been extremely important for the achievement of individual and group economic efficiency. An accurate interpretation of Adam Smith, he demonstrates, does not lend support to believers in, and advocates of, a narrow interpretation of self-interested behaviour either in ethics or in economics. Technically, as Sen demonstrates, under a scheme of extremely limited conditions, welfare economics admits of Copyrighted material xii Foreword circumstances in which acting entirely according to self- interest could be ethically justified. But the practical significance of this theorizing is highly questionable Therefore he identifies the limitations of the 'wellfarist' concepts on which, inter alia the analysis is based_ By distinguishing between the 'well-being aspect' which covers a person's achievements and opportunities in the Context of the individual's personal advantage from the 'agency aspect' which examines them in terms of broader objectives, the analysis goes beyond the pursuit of one's own well being, with productive results. Sen distinguishes between elements of distributive justice and more extensive valuations of the individual or group. This leads to a discussion on 'plurality and evaluation'; 'commensurability'; 'completeness and consistency'; 'impossibility theorems', as well as positive possibility results and constructive characterization. In apptying the recent philosophical literature on consequentialism to economics, Sen shows how this reasoning - including interdependence and instrumental accounting - can be combined not only with intrinsic valuation but also with position-relativity and agent-sensitivity of moral assessment, In effect. he shows that under realistic conditions, a broad consequential