Human Development and the current economic and social challenges Nuno Ornelas Martins Universidade Católica Portuguesa ISEG Development Studies Programme, March 3, 2016
Welfare Economics and Cambridge Neoclassical School Arthur Cecil Pigou and the Cambridge School (Henry Sidgwick, Alfred Marshall) Influence of Distribution on Well-Being: Redistribution increases total utility since those with lower income have a higher marginal utility Pigou-Dalton Transfers, Hugh Dalton and Gini coefficient Redistribution increases capabilities for activities (subjective wants vs objective and urgent needs) 2
Cambridge Keynesian School John Maynard Keynes criticises Pigou, but maintains idea that distribution is positive: Those with lower income have a higher marginal propensity to consume, which is essential in crises when investment colapses Michal Kalecki develops similar idea and together with Keynes influences the Cambridge Keynesian School (Joan Robinson, Nicholas Kaldor) 3
New Welfare Economics Lionel Robbins: interpersonal comparisons of utility have no scientific basis (facts vs values) Paul Samuelson: Robbins is correct from a scientific point of view New Welfare Economics arises, focusing on Pareto Optimality as a criterion of efficiency Distribution no longer a central topic in economics 4
Cambridge Controversies in Capital Theory Samuelson/Solow Neoclassical Theory: - Distribution determined mathematically through marginal productivity of capital and labour - Piero Sraffa and Joan Robinson: Distribution is a determinant rather than determined (interest rate needed to find aggregate capital) - Robert Solow: one good only, so no aggregation - Robert Lucas: Growth, not distribution 5
Anthony Atkinson and Amartya Sen (Cambridge School) Anthony Atkinson (influenced by James Meade) develops an inequality index for a given level of inequality aversion, which provides a more objective basis for Pigovian considerations on inequality Amartya Sen works on partial comparisons of utility, welfare and social choice (Sen 1970, 1982), while influenced by Atkinson, but develops a different perspective focusing on objective capabilities 6
The Capability Approach Utilitarianism: Subjective metric John Rawls: Primary Goods Amartya Sen: Emphasis on how diverse people convert commodities into (objective) functionings (what a person is or does) Martha Nussbaum: Aristotelian functionings and connections to Rawls overlapping consensus Nuno Ornelas Martins 7
Human Development as Capability Expansion Capabilities are potential functionings. Capabilities are the more adequate space for assessing inequality Human Development is the multidimensio nal expansion of Human Capabilities The expansion of human capabilities is both an end and a means of human development 8
Social and economic policy Social and economic policy should focus on capability expansion at an earlier stage of the development process Education and health are not only final goals but also means to achieve economic performance In developing countries, education and health can be financed more easily, since they are labour intensive, and labour is cheaper in developing countries 9
Sequence of policy goals More adequate sequence is: 1) Social Goals 2) Economic Performance 3) Financial Consolidation Opposite sequence, which is usually advocated, constitutes what Sen (1999) calls anti-deficit radicalism. 10
United Nations Development Programme Mahbub Ul-Haq and Amartya Sen Human Development Index -Health -Education -Income Measuring Poverty Human Poverty Index Multidimensional Poverty Index (OPHI) 11
Measurement of poverty and inequality Atkinson on Multidimensionality: accepts the need of multidimensional approach, but stresses that income is an important dimension. Atkinson on Poverty vs Inequality: Society should be studied as a whole, focusing on inequality. Thomas Piketty (after working with Atkinson): focuses on inequality of income, but suggests social tables rather than synthetic indexes (Gini, Atkinson, Theil) 12
Revival of Classical Political Economy Hilary Putnam and Vivian Walsh -First stage: Piero Sraffa and the classical surplus approach (surplus rather than scarcity as central theoretical concept) -Second stage: Amartya Sen and the capability approach (capabilities rather than subjective utility) 13
Ethical Foundations of Economic Theory After Robbins and Samuelson, scarcity is the key notion of economics, since human beings are always maximizing subject to constraints. In Classical Political Economy, human beings are creatures of habit, who need a certain standard of living defined in terms of basic capabilities Whatever is produced above the required standard of living, is a social surplus (Production Wages). 14
Sustainable Human Development If human beings are always maximizing given nonsatiable preferences, ecological and environmental problems are always an external constraint imposed on the theory If human beings need a certain finite standard of living, ecological and environmental problems can be addressed within the analytical structure of the theory Implications for (strong and weak) sustainability 15
Distribution of the surplus in classical theory For Classical Political Economy, scarcity is a particular case (rare goods, works of art, natural resources that generate a rent) and surplus is the general case. Classical Political Economy studies the production and distribution of the social surplus, and the fate of the economy depends on whether the social surplus is used in a productive way, or in a wasteful way (Quesnay, Smith, Ricardo, Marx) 16
Distribution of the surplus in neoclassical theory Marshall redefines the social surplus in terms of supply and demand curves, as the sum of a consumer s surplus and a producer s surplus Pigou like Marshall and Sidgwick, maintains an emphasis on distribution Robbins critique of interpersonal comparisons and emphasis on scarcity led economic theory away from distribution problems 17
Conclusions Recent interest in inequality points towards a central theme in the human development and capability approach, where inequality is assessed in the space of human capabilities But emphasis is on measurement of inequality, while disregarding underlying economic theory Capability approach requires theoretical development in order to address new challenges 18
Comments and questions Thank you! Please send questions and comments to: nmartins@porto.ucp.pt 19