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:
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
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.
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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.
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