I share the universal respect for Professor Sen, but must respectfully disagree on some of his take on capitalism in crisis:
He points out that even Mr. Free Market Invisible Hand, Adam Smith, was aware that you need more than self-interest to make capitalism work. You also need moral values like trust, honesty, and prudence (none of which has been too obvious in the financial sector lately), so business people can do transactions without cheating each other. His story is that free market proponents forgot all that in the run-up to the current crisis. If this is true, free market proponents are amazingly lazy, not bothering to read the zillion articles by economists on precisely these values in the last 15 years. The interesting question is where do these values come from? As this recent research shows, they COULD still arise even in a world of pure self-interest, since self-interested individuals could rationally find ways to bind themselves to norms of good behavior so that they can do repeated transactions with each other (probably helped along by pre-existing norms based on culture or human evolution — see previous post on values). A norm of trust can sustain a free market driven by the profit motive (usually supplemented by formal institutions). And why do the values sometimes break down? Unfortunately, a norm of distrust is also another possible equilibrium, in which you expect everyone else to be untrustworthy and so you are untrustworthy too. A bunch of cheaters could catch everyone by surprise, destroy trust, and we jump to the bad equilibrium. I don’t know if this has anything to do with the current crisis, but I suspect this type of analysis, as practiced by tons of recent research on values and norms, is more useful than moral sermonizing to those (probably nonexistent) economists who didn’t know you need trust as well as the profit motive.
One last footnote: Professor Sen shows some rather surprising nostalgia for Maoism (in the NYRB but not the FT) over the current Chinese system. He is upset the gains in life expectancy slowed down after China moved from Maoism towards (at least partial) free markets. I would have thought you might also want to count the greatest escape from poverty in human history with the change from Maoism to partial capitalism. I also wouldn’t have thought that you would want to bring up Maoist China in an article on moral values. (Great Leap Forward/Famine/Cultural Revolution/50 million killed by Mao, am I missing something?)
Originally published at Aid Watch and reproduced here with the author’s permission.