Posted by Alex M Thomas on 18th December 2010
The study of commodities has been central to economic theory. Mercantilists considered gold, a commodity to be wealth. Later economists argued that an increase in commodities, both agricultural and manufactured, implied an increase in wealth. The increase in the production of commodities is still the most widely used indicator of economic growth/progress. This indicator is none other than the real GDP. In 1985, Amartya Sen published a book titled Commodities and Capabilities. In this work, Sen challenges the dominant view in economics regarding the role of commodities, i.e. he maintained that an increase in commodities cannot be taken as the sole factor in assessing economic development. Sen emphasised the importance of examining capabilities, which subsequently led to the creating of the Human Development Index (HDI). This post discusses the rationale behind economists’ obsession with commodities. It also examines Sen’s critique of commodities and how his (Aristotelian) concept of capabilities differs from it. This post concludes by arguing for a strengthening of classical economics, which studies the production, distribution, exchange and consumption of commodities, for the considerations of ethics can be easily integrated into this approach.
Economics as a distinct form of inquiry begins with the works of Sir William Petty in the 17th century. Petty was interested in assessing the comparative wealth of England and Ireland. Some of the indicators he chose were the number of houses and population. The idea behind this being that a surplus of food results in more population and therefore more houses. Having a large population was considered to be beneficial to the state. His successor, Richard Cantillon, an economist par excellence, pointed out that wealth of a state is reflected in the quantity and nature of commodities it produces – necessities, comforts and luxuries. This brief historical excursus is to point out the nature of economic inquiry, which is essentially an analysis of quantities and prices. Examples of quantities are employment, income, exports, investment, money supply, etc. Examples of prices are WPI, interest rates, foreign exchange rate, commodity prices, share prices, etc. That is, an analysis of commodities is an examination of quantity and price at the same time. Therefore, an analysis of commodities subsumes an examination of their production, distribution, exchange and consumption. Production includes the structure and relations of production; distribution pertains to the process and mechanism through which the incomes/surplus from production is divided among its participants; exchange refers to the mode and institution through which commodities are sold; finally, consumption illuminates the channels through which consumption of commodities aid production in the next period and how production in the current period aids current consumption. Thus, classical economists such as Petty, Cantillon, Quesnay, Smith and Ricardo were interested in the theory of production, distribution and exchange of commodities. Their interest was motivated by the need to find out ways of improving the general well-being of their respective societies.
According to Sen, the kind of analysis posited above looks at opulence as the sole indicator of economic development. A shift in economic analysis came about in the 1870s with the emergence of marginal analysis, independently developed by Jevons, Walras and Menger. Terms such as utility, choice, scarcity, margins, etc made inroads into economics. In fact, standard microeconomics texts are nothing but a combination of Walrasian and Marshallian economics. In any case, the maximization of utility began to be seen as the objective of individuals, for attaining economic progress. The internal justice of free markets was imbued to this form of economic analysis. Based on utilitarian principles, the maximization of utility by individuals was seen as a way to improve human well-being and welfare. This conception of development, according to Sen, emphasised the role of utility.
Both the above mentioned analyses, according to Sen, deal with “the relation between commodities and people” (p. 1). The former approach argues for more commodities which leads to more production, which raises the incomes of the people and hence their consumption. The latter analysis points out that “more is better” and hence availability of more commodities imply more utility. The idea of “more is better” is intricately connected with their idea of economics, as a science of choice. Economics, for marginal/neoclassical economists, refers to the allocation of scarce resources amongst alternative uses, as Lionel Robbins points out. For Sen, both these analyses are limited, since they do not address the heterogeneity in the capabilities of different people, which leads to “a confounding of the state of a person with the extent of his or her possessions” (p. 16). It is precisely this argument of Sen developed in his 1985 book which widened the scope of mainstream economics. I write mainstream economics because for classical economists, economics or political economy formed only one way of looking at growth/progress/development. For classical economists, as pointed out earlier, an analysis of production included the state or condition of the producer. The best example of this form of theorising can be found in Marx, the last of the early classical economists. However, with the advent of marginal analysis, the analyses of the structure of production took a backseat. The sphere of exchange came to the forefront and along with it the explanation of the formation of all kinds of prices and quantities through the apparatus of demand & supply.
It is interesting to note that the idea of capabilities has been intrinsic to classical economics. As mentioned earlier, an increase in the production of commodities translates into an increase in income generated. In contrast with neoclassical economics, the economic processes is visualised in a circular way as opposed to a one-way street. One needs to look into the structure of production to find out to whom (which class) this increase in income accrues (theory of distribution). However, the manner in which Sen develops his capabilities approach is rooted in mainstream/neoclassical economics – via the sub-domain of welfare economics (See Benicourt 2002 and Omkarnath 2007). Although, Sen deserves credit for bringing back humanitarian concerns into the discourse of neoclassical economics. Omkarnath further points out that the capabilities approach rooted in the Walrasian tradition is static in nature, for it mainly concentrates on the formation of capabilities. Whereas, classical economics has numerous insights on the relation between capabilities and commodities. This sort of analysis calls for a careful examination of the structure of production, distribution and exchange present in various economies in the classical political economy tradition, which has more scope for including social, cultural and political factors as well as ethical concerns.
Benicourt, E (2002), “Is Amartya Sen a Post-Autistic Economist?”, post-autistic economics review, issue no. 15, September 4, 2002, article 4. http://www.paecon.net/PAEReview/issue15/Benicourt15.htm
Omkarnath, G (2007), “The Formation of Capabilities”, Indian Journal of Human Development, Vol. 1, No. 2, pp. 389-399.
Sen, Amartya (1985) , Commodities and Capabilities, Oxford University Press: New Delhi.
Tags: Amartya Sen, Classical Economics, Commodities and Capabilities, Commodity studies, Economics, Neoclassical Economics
Posted in Adam Smith, Classical Political Economy, David Ricardo, Development Economics, Economic Philosophy, Economics, Francois Quesnay, GDP, Karl Marx, Neoclassical Economics, Political Economy, Prices, Richard Cantillon, Utility | 5 Comments »