Chapter Five of Development as Freedom begins with a phenomenal quote by Huxley from Science and Culture. “It is the customary fate of new truths to begin as heresies and to end as superstitions.” Several years ago (2008, The Center Will Not Hold) I wrote an essay suggesting that radical ideas, like agile, begin at the fringes and then assimilate into the center. I wish I had run across this quote that highlights the life cycle of ideas back then. In Chapter Five, Sen reviews the impact of capitalist markets on freedom and development.
On top of the great quote, several concepts struck me in this chapter. The next set of concepts that struck me was the Arrow-Debreu theorem and Pareto Optimality. The Arrow-Debreu theorem defines the conditions (and assumptions) of an efficient market in equilibrium. Something we have all been taught to seek and revere as the best way to generate growth. Coupe Arrow-Debreu with Pareto Optimality which Sen defines the concept as “a situation in which the utility (or welfare) of no one can be raised without reducing the utility (or welfare) of someone else.” A market meeting the Arrow-Debreu assumptions would be by definition Pareto Optimal leads to the conclusion that the expansion of someone’s slice of the market comes at the expense of someone else’s. While we can argue that there is no such thing as a market that meets the criteria of Arrow-Debreu, it is easy to see why many view the idea of a win-win solution as a myth in the marketplace.
One of the critical assumptions of the Arrow-Debreu theorem is the idea of self-interested behavior. It posits that individuals act in their best interests, seeking to maximize their utility or profit. Viewed from the point of view of outputs or outcomes. Individuals seek to maximize the outcomes important to them which in a market in equilibrium means taking outcomes from others. While not a perfect analogy, the initial adoption of agile cannibalized other software development techniques until a new equilibrium was established.
Sen suggests that all is not doom and gloom; the problems of Pareto and Arrow-Debreu can be avoided if we define efficiency as a combination of freedoms and utilities. By focusing on freedoms Sen shifts the focus from outcomes generated by self-interested behaviors to freedoms people enjoy. Freedoms are far less bound than market outcomes. Efficient markets require freedoms. Examples include frictionless movement of information, transparency, free labor markets, education, and a healthy workforce. Many of these freedoms are aligned with public goods which require non-market institutions to manage and deliver in a complementary manner with markets. This symbiotic relationship means most markets are on the continuum between totally controlled and perfectly free.
Another area of the Chapter that I found interesting focused on means testing before allowing access to public goods. Education and Medicaid are examples of public goods. Means testing is typically adopted to allocate public goods so they are not overused (see the Tragedy of the Commons). The idea of means testing to distribute public provisions (welfare, WIC payments, and Medicaid are examples) has several pluses and minuses. What caught my attention was the concept of public distortions. Targeting and means testing can cause negative behavior whether cooking the books to get access to the public good or to avoid being seen to need it. This type of behavior is not limited to countries or geo-political units, the same problems exist in organizations. For example, during transformations I have seen teams “engineer” data so they did not have to adopt a new methodology. I have also seen the opposite when the approach is considered “cool.” Information is distorted to manage perceptions. Means testing and targeting require policing, the five categories Sen describes provide a framework for considering the problem.
Previous installments of Development as Freedom by Amartya Sen:
Week 1: Context and Logistics
Week 2: Introduction and Preface
Week 3: The Perspective of Freedom
Week 4: The Ends and the Means of Development
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