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The 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.
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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 Dr�ze) 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.
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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.
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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.
Professor Amartya Sen
Trinity College
Cambridge, CB2 1TQ, U.K. |
