Nobel Prize committee got its economics wrong

When Amartya Sen won the Nobel Prize in economics a few weeks ago, the committee that chose the Indian-born scholar was praised for picking someone whose work really matters to people. Sen is credited with bringing ethics back to economics, in contrast to much of his profession, which is preoccupied with high-level and irrelevant mathematical models.

The Nobel committee singled out Sen's study of famines in the developing world. His empirical studies have demonstrated that, in our time, famine doesn't mean food shortages. Rather, it means that people can't afford food. When a disaster-a flood or earthquake-strikes, Sen has written, people can't work. Their incomes drop, and although food may be plentiful, they can't buy it. Thus, they starve.

The policy implication of Sen's work is that government doesn't have to worry about the supply side, only the demand side. He advocates the government's stepping in to keep incomes up to avert starvation.

Sen has it half right. Government only needs to refrain from interfering with producers to ensure a good supply of food. That means it should not regulate farmers, processors, wholesalers, and retailers. It should not regulate transportation. It should not regulate foreign trade. If it keeps from doing those things, the supply of food is ensure.

Undercuts Attempts To Have People Fed

But Sen is half wrong too. There is no need for government to look after the demand side either. In fact, if it does so, it will inevitably harm the supply side and undercut its own attempts to have people fed.

To see this, we need only to consider how the government would attempt to keep incomes up when people lose their jobs after a natural disaster. There is only one way to accomplish this: Government, using the force of taxation, would have to move money from those who have it to those who don't.

That may strike most people as the proper thing to do, but actually it isn't. First, it is immoral to steal, which is what government transfers do. Second, the people who will have money taken from them are the very producers and investors who are needed to keep the food stores stocked.

What Sen and so many people miss is that the supply and demand sides are of a whole.

When John Stuart Mill said that the problem of production had been solved and now it was time to solve the problem of distribution, he set in motion years of mischief from which we are still suffering. Government can't fiddle with distribution without stifling production. It can't sensibly say to producers, "Go ahead and keep on producing. We won't bother you. But we are going to tax you so that people can buy your products."

Strictly speaking, in a marketplace there is no distribution. People produce things for exchange with other producers. There's no distribution process analogous to a parent's distributing food to his children. There is only production and exchange. When government ventures into distribution, it necessarily upsets production.

If producers are taxed in the name of "fair distribution," they will of course have less capital with which to expand production. Whom does that harm? The very people the distribution schemes are allegedly designed to help.

It's worth noting that Sen's India is a classic illustration of these principles. India is a democracy, as well as the largest recipient of foreign aid in the post-World War II era. Yet it is mired in poverty at a time when Hong Kong and Taiwan, both extremely poor after the war, have boomed. Why? India is a Socialist country, with myriad programs built according to the Sen program.

Perhaps the Nobel committee overlooked this small detail. It also overlooked the fact that there is a development economist eminently worthy of the Nobel Prize. He is Peter Bauer, the Hungarian-born British economist who nearly single-handedly demolished the dominant Socialist model for undeveloped economies.

His theoretical and empirical work, spanning about half a century, demonstrates irrefutably that the free market is the way to create wealth where it does not yet exist.

Lord Bauer's writing is a treasure-trove of wise and elegant prose. He has summed up his life's work with one knock-down observation: If the development establishment is right that only wealth transfers can make poor countries rich, how did the first country ever get rich?

Mr, Richman is senior fellow at the Future of Freedom Foundation in Fairfax. Va.. and editor of The Freeman magazine.

Copyright Human Events Publishing, Inc. Dec 4, 1998
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