Thursday, March 12, 2009

Sen on Smith and capitalism

Amartya Sen on Adam Smith, current financial crisis, and capitalism

All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.

The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.

Meanwhile, here is one of the most realistic statements about what economics is all about by Rodrik:

Economics is really a toolkit with multiple models - each a different, stylized representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation. Economics' richness has not been reflected in public debate because economists have taken far too much license. Instead of presenting menus of options and listing the relevant trade-offs - which is what economics is about - economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.

More here

VDIS: Guilty have the upper hand!

I got a lot of angry comments (okay, I got good ones as well) when I wrote this opinion piece defending the government of Nepal’s decision to implement Voluntary Disclosure of Income Scheme (VDIS), which was designed to give an opportunity to tax evaders to reveal sources of their assets and income and pay 10% of it to clear outstanding tax payments before they face the regulatory music. I had hoped that the government would enforce this provision to the fullest. Sadly, the government is bowing down to the illegitimate demands of business executives, who are the principle tax evaders.

It is ironic that the government has yielded to demands of tax evaders, who are in a way guilty of committing a crime, i.e. conceal true worth of assets and income and not pay taxes to the government. The government has spared application of VDIS in investments made in labor-intensive industries like hydropower, physical infrastructure, and “other productive services” (uff, another loophole!).

I can’t understand why the FNCCI, the apex representative body of the business sector, is so ferociously arguing against VDIS. Is this an indication that the business executives have amassed more ‘black money’ than is thought? It is a golden opportunity for them to turn ‘black money’ into ‘white money’. They are ignoring this at their own peril!

The Maoists government should live up to its promises and proposed policies. People have already heard too much (and redundant) rhetoric. Time for action! By this, I mean real action, which might often come at the expense of few crooked business executives going down or behind bars! The VDIS is one of the few policies I have been supportive of the Maoists government.

Why let the guilty have an upper hand?