Message-ID: <8525669D.004E2839.00@WBLN0014.worldbank.org> Date: Wed, 14 Oct 1998 10:14:30 -0400 From: mailto:Mmani@WORLDBANK.ORG Subject: Amartya Sen gets Nobel Prize in Economics To: mailto:DEVEL-L@AMERICAN.EDU
Royal Swedish Academy of Sciences has decided to award the
1998 Bank of Sweden Prize in Economic Sciences in Memory of Alfred
Nobel to
Professor Amartya Sen, Trinity College, Cambridge, U.K. (citizen of
India)
for his contributions to welfare economics.
Social Choice, Welfare Distributions, and Poverty
Amartya Sen has made several key contributions to the research on
fundamental problems in welfare economics.
His contributions range from axiomatic theory of social choice, over
definitions of welfare and poverty indexes, to
empirical studies of famine. They are tied closely together by a
general interest in distributional issues and a
particular interest in the most impoverished members of society. Sen
has clarified the conditions which permit
aggregation of individual values into collective decisions, and the
conditions which permit rules for collective
decision making that are consistent with a sphere of rights for the
individual. By analyzing the available information
about different individuals' welfare when collective decisions are
made, he has improved the theoretical foundation
for comparing different distributions of society's welfare and defined
new, and more satisfactory, indexes of
poverty. In empirical studies, Sen's applications of his theoretical
approach have enhanced our understanding of the
economic mechanisms underlying famines.
******
Can the values which individual members of society attach to different
alternatives be aggregated into values for
society as a whole, in a way that is both fair and theoretically
sound? Is the majority principle a workable decision
rule? How should income inequality be measured? When and how can we
compare the distribution of welfare in
different societies? How should we best determine whether poverty is
on the decline? What are the factors that
trigger famines? By answering questions such as these, Amartya Sen has
made a number of noteworthy
contributions to central fields of economic science and opened up new
fields of study for subsequent generations of
researchers. By combining tools from economics and philosophy, he has
restored an ethical dimension to the
discussion of vital economic problems.
Individual Values and Collective Decisions
When there is general agreement, the choices made by society are
uncontroversial. When opinions differ, the
problem is to find methods for bringing together different opinions in
decisions which concern everyone. The theory
of social choice is preoccupied precisely with this link between
individual values and collective choice. Fundamental
questions are whether - and, if so, in what way - preferences for
society as a whole can be consistently derived
from the preferences of its members. The answers are crucial for the
feasibility of ranking, or otherwise evaluating,
different social states and thereby constructing meaningful measures
of social welfare.
Majority rule
Majority voting is perhaps the most common rule for making collective
decisions. A long time ago, this rule was
found to have serious deficiencies, in addition to the fact that it
may allow a majority to suppress a minority. In
some situations it may pay off to vote strategically (i.e. by not
voting for the preferred alternative), or to manipulate
the order in which different alternatives are voted upon. Voting
between pairs of alternatives sometimes fails to
produce a clear result in a group. A majority may thus prefer
alternative a to alternative b whereas a (second)
majority prefers b to c ; meanwhile, a (third) majority prefers c to
a. In the wake of this kind of "intransitivity", the
decision rule cannot select an alternative that is unambiguously best
for any majority. In collaboration with Prasanta
Pattanaik, Amartya Sen has specified the general conditions that
eliminate intransitivities of majority rule.
In the early 1950s, such problems associated with rules for collective
choice motivated economics laureate
Kenneth Arrow (1972) to examine possible rules for aggregating
individual preferences (values, votes), where
majority rule was only one of many alternatives. His surprising but
fundamental result was that no aggregation
(decision) rule exists that fulfills five conditions (axioms), each of
which appears very reasonable on its own.
This so-called impossibility theorem seemed to be an insurmountable
obstacle to progress in the normative branch
of economics for a long time. How could individual preferences be
aggregated and different social states evaluated
in a theoretically satisfactory way? Sen's contributions from the
mid-1960s onwards were instrumental in alleviating
this pessimism. His work not only enriched the principles of social
choice theory; they also opened up new and
important fields of study. Sen's monograph Collective Choice and
Social Welfare from 1970 was particularly
influential and inspired many researchers to renew their interest in
basic welfare issues. Its style, interspersing
formally and philosophically oriented chapters, gave the economic
analysis of normative problems a new dimension.
In the book as well as many separate articles, Sen treated problems
such as: majority rule, individual rights, and the
availability of information about individual welfare.
Individual rights
A self-evident prerequisite for a collective decision-making rule is
that it should be "non-dictatorial"; that is, it
should not reflect the values of any single individual. A minimal
requirement for protecting individual rights is that the
rule should respect the individual preferences of at least some people
in at least some dimension, for instance
regarding their personal sphere. Sen pointed to a fundamental dilemma
by showing that no collective decision rule
can fulfill such a minimal requirement on individual rights and the
other axioms in Arrow's impossibility theorem.
This finding initiated an extensive scientific discussion about the
extent to which a collective decision rule can be
made consistent with a sphere of individual rights.
Information about the welfare of individuals
Traditionally, the theory of social choice had only assumed that every
individual can rank different alternatives,
without assuming anything about interpersonal comparability. This
assumption certainly avoided the difficult
question of whether the utility individuals attach to different
alternatives can really be compared. Unfortunately, it
also precluded saying anything worthwhile about inequality. Sen
initiated an entirely new field in the theory of social
choice, by showing how different assumptions regarding interpersonal
comparability affect the possibility of finding
a consistent, non-dictatorial rule for collective decisions. He also
demonstrated the implicit assumptions made when
applying principles proposed by moral philosophy to evaluate different
alternatives for society. The utilitarian
principle, for instance, appeals to the sum of all individuals'
utility when evaluating a specific social state; this
assumes that differences in the utility of alternative social states
can be compared across individuals. The principle
formulated by the American philosopher John Rawls - that the social
state should be evaluated only with reference
to the individual who is worst off - assumes that the utility level of
each individual can be compared to the utility of
every other individual. Later developments in social choice rely, to a
large extent, on Sen's analysis of the
information about, and interpersonal comparability of, individual
utilities.
Indexes of Welfare and Poverty
In order to compare distributions of welfare in different countries,
or to study changes in the distribution within a
given country, some kind of index is required that measures
differences in welfare or income. The construction of
such indexes is an important application of the theory of social
choice, in the sense that inequality indexes are
closely linked to welfare functions representing the values of
society. Serge Kolm, Anthony Atkinson and -
somewhat later - Amartya Sen were the first to derive substantial
results in this area. Around 1970, they clarified
the relation between the so-called Lorentz curve (that describes the
income distribution), the so-called Gini
coefficient (that measures the degree of income inequality), and
society's ordering of different income distributions.
Sen has later made valuable contributions by defining poverty indexes
and other welfare indicators.
Poverty indexes
A common measure of poverty in a society is the share of the
population, H , with incomes below a certain,
predetermined, poverty line. But the theoretical foundation for this
kind of measure was unclear. It also ignored the
degree of poverty among the poor; even a significant boost in the
income of the poorest groups in society does not
affect H as long as their incomes do not cross the poverty line. To
remedy these deficiencies, Sen postulated five
reasonable axioms from which he derived a poverty index: P = H · [I +
(1 - I) · G]. Here, G is the Gini coefficient,
and I is a measure (between 0 and 1) of the distribution of income,
both computed only for the individuals below
the poverty line. Relying on his earlier analysis of information about
the welfare of single individuals, Sen clarified
when the index can and should be applied; comparisons can, for
example, be made even when data are
problematic, which is often the case in poor countries where poverty
indexes have their most intrinsic application.
Sen's poverty index has subsequently been applied extensively by
others. Three of the axioms he postulated have
been used by those researchers, who have proposed alternative indexes.
Welfare indicators
A problem when comparing the welfare of different societies is that
many commonly used indicators, such as
income per capita, only take average conditions into account. Sen has
developed alternatives, which also
encompass the income distribution. A specific alternative - which,
like the poverty index, he derived from a number
of axioms - is to use the measure y · (1 - G), where y is income per
capita and G is the Gini coefficient.
Sen has emphasized that what creates welfare is not goods as such, but
the activity for which they are acquired.
According to this view, income is significant because of the
opportunities it creates. But the actual opportunities - or
capabilities, as Sen calls them - also depend on a number of other
factors, such as health; these factors should also
be considered when measuring welfare. Alternative welfare indicators,
such as the UN's Human Development
Index, are constructed precisely in this spirit.
Amartya Sen has pointed out that all well-founded ethical principles
presuppose equality among individuals in some
respect. But as the ability to exploit equal opportunity varies across
individuals, the distribution problem can never
be fully solved; equality in some dimension necessarily implies
inequality in others. In which dimension we advocate
equality and in which dimensions we have to accept inequality
obviously depends on how we evaluate the different
dimensions of welfare. In analogy with his approach to welfare
measurement, Sen maintains that capabilities of
individuals constitute the principal dimension in which we should
strive for equality. At the same time, he observes a
problem with this ethical principle, namely that individuals make
decisions which determine their capabilities at a
later stage.
Welfare of the Poorest
In his very first articles Sen analyzed the choice of production
technology in developing countries. Indeed, almost all
of Sen's works deal with development economics, as they are often
devoted to the welfare of the poorest people in
society. He has also studied actual famines, in a way quite in line
with his theoretical approach to welfare
measurement.
Analysis of famine
Sen's best-known work in this area is his book from 1981: Poverty and
Famines: An Essay on Entitlement and
Deprivation. Here, he challenges the common view that a shortage of
food is the most important (sometimes the
only) explanation for famine. On the basis of a careful study of a
number of such catastrophes in India, Bangladesh,
and Saharan countries, from the 1940s onwards, he found other
explanatory factors. He argues that several
observed phenomena cannot in fact be explained by a shortage of food
alone, e.g. that famines have occurred even
when the supply of food was not significantly lower than during
previous years (without famines), or that
faminestricken areas have sometimes exported food.
Sen shows that a profound understanding of famine requires a thorough
analysis of how various social and
economic factors influence different groups in society and determine
their actual opportunities. For example, part of
his explanation for the Bangladesh famine of 1974 is that flooding
throughout the country that year significantly
raised food prices, while work opportunities for agricultural workers
declined drastically as one of the crops could
not be harvested. Due to these factors, the real incomes of
agricultural workers declined so much that this group
was disproportionately stricken by starvation.
Later works by Sen (summarized in a book from 1989 with Jean Drèze)
discuss - in a similar spirit - how to
prevent famine, or how to limit the effects of famine once it has
occurred. Even though a few critics have
questioned the validity of some empirical results in Poverty and
Famines, the book is undoubtedly a key
contribution to development economics. With its emphasis on
distributional issues and poverty, the book rhymes
well with the common theme in Amartya Sen's research.
******
Further Reading
Additional background material can be found below and in
Sen, A.K., 1970, Collective Choice and Social Welfare, San Fransisco:
Holden Day , also London: Oliver and
Boyd (reprinted Amsterdam: North-Holland).
Sen, A.K, 1973, On Economic Inequality, Oxford: Clarendon Press.
Sen, A.K, 1981, Poverty and Famines: An Essay on Entitlement and
Deprivation, Oxford: Clarendon Press.
******
Amartya Sen was born in Bengal in 1933 (citizen of India). He received
his doctorate from the University of
Cambridge, U.K. in 1959 and has been professor in India, the U.K. and
the U.S. In 1998 he left his
professorships in economics and philosophy at Harvard University to
become Master of Trinity College,
Cambridge U.K.
Muthukumara Mani
Environmental and Resource Economist
Economic Development Institute
Environment and Natural Resources Division
The World Bank
Phone: 202-458-7139
Fax: 202-676-0977/8
E-mail: mailto:mmani@worldbank.org