ETHICS, ECONOMICS AND POLITICS This page intentionally left blank Ethics, Economics and Politics Principles of Public Policy I. M. D. LITTLE GreatClarendonStreet,OxfordOX26DP OxfordUniversityPressisadepartmentoftheUniversityofOxford. ItfurtherstheUniversity'sobjectiveofexcellenceinresearch,scholarship, andeducationbypublishingworldwidein OxfordNewYork AucklandBangkokBuenosAiresCapeTownChennai DaresSalaamDelhiHongKongIstanbulKarachiKolkata KualaLumpurMadridMelbourneMexicoCityMumbaiNairobi SãoPauloShanghaiTaipeiTokyoToronto Oxfordisaregisteredtrademark ofOxfordUniversityPress intheUK andincertainothercountries PublishedintheUnitedStates byOxfordUniversityPressInc., NewYork ©L.Segrave,2002 Themoralrightsoftheauthorhavebeenasserted DatabaserightOxfordUniversityPress(maker) Firstpublished2004 Allrightsreserved.Nopartofthispublicationmaybereproduced, storedinaretrievalsystem,or transmitted,inanyform orbyanymeans, withoutthepriorpermissioninwriting ofOxfordUniversityPress, oras expresslypermittedbylaw, or under termsagreedwiththeappropriate reprographicsrightsorganization.Enquiriesconcerningreproduction outsidethescopeoftheaboveshouldbesenttotheRightsDepartment, OxfordUniversityPress,attheaddressabove Youmustnotcirculatethisbookinanyotherbindingorcover andyoumustimposethissameconditiononanyacquirer BritishLibraryCataloguinginPublicationData Dataavailable LibraryofCongressCataloginginPublicationData Little,IanMalcolmDavid. Ethics,economics,andpolitics:principlesofpublicpolicy/ I.M.D.Little. p.cm. Includesbibliographicalreferences 1.Economics–Philosophy.2.Economics– Moralandethicalaspects. 3.Politicalscience—Philosophy.I.Title. HB72.L5752002320′.6′01–dc212002072440 ISBN0-19-925704-3 13579108642 Contents Preface and Acknowledgements vii Introduction ix PART I. ECONOMICS AND PHILOSOPHY 1. Personal Utility and Welfare 3 Expected Utility and Risk 4 Risk and Fluctuations 5 Risk and Equality 6 Utility and Positive Economics 7 Utility and Normative Economics 8 2. Collective Utility and Welfare 11 3. Welfare Economics 19 Theoretical Welfare Economics 19 Applied Welfare Economics and Cost-Benefit Analysis 22 PART II. POLITICS AND PHILOSOPHY 4. The Role of the State 27 Limitations of State Authority 28 Individual Rights 29 Social Contract and Property 32 Property and Property Rights 35 5. Utilitarianism: Theory and Applications 39 Utility and the Value of Life 42 The State and Population Policy 45 What Constituency Now?—On Citizens and Foreigners 49 The State and Saving for the Future 50 6. Utilitarianism, Justice, and Equality 53 Utilitarianism and Equality 54 Rawls's Theory of Justice 55 The Meaning of Justice 59 Distributive Justice 61 Interstate Distributive Justice 64 vi CONTENTS Dworkin and Equalizing Resources 65 The Measurement of Equality 69 Summary 72 7. Contractarianism 74 8. Communitarianism 84 PART III. ECONOMICS AND POLITICS Introduction 88 9. Games, Conventions, and Public Goods 89 Games 89 Conventions 94 Public Goods and the State 95 10. Positive Political Economy 101 Endogenizing Government 101 Democratic and Authoritarian Government 103 Collective Choice and Voting 104 Economic Policy under Relatively Autonomous Government 109 Economic Policy under Democracy 110 Modelling Political Economy Explanations of Policies and Trends 111 The Political Economy of Protection in Industrialized Countries 112 The Growth of Government in Industrialized Countries 113 Protection and Import Substitution in Developing Countries 116 Policy Reform in Developing Countries 117 An Interim Jejune Report on Endogenizing Government 121 11. Normative Political Economy 123 Further Consideration of Government and Distribution 123 Rent-seeking and Corruption 126 PART IV. ETHICS, ECONOMICS, AND POLITICS 12. The Principles of Public Policy 131 A Résumé of Parts I, II, and III 131 The Philosophical Framework 139 The Scale of Government Expenditure 143 The Boundaries of Public Policy 149 References 153 Index of Names 159 Index of Subjects 161 Preface and Acknowledgements Ibegantoplanthisbookon18thDecember,1998,my80thbirthday.However,becauseofillnessnotmuchwasdone until the new millenium began. It was submitted to Oxford University Press on 9th August 2001. As the reader will discover, the book is more about moral and political philosophy than anything else. With very few exceptions, as an active economist, I had not read any philosophy for 50 years. The exceptions included books by John Rawls, 1971, Robert Nozick, 1974, and Anthony de Jasay, 1985. During this time there has been a lot written of relevance to the presentbook. I have notread more thana smallfractionofit:but enough, I hope, topointsome studentsintheright direction for further study. The more recent philosophers who have most influenced me have been John Broome, Anthony de Jasay, and Robert Sugden, as the references to their work will testify. It is interesting that all three began as economists (and Robert Sugden is still a professor of economics). The followinghaveread and commented on thewholebook: Wilfred Beckerman, VijayJoshi, AnthonyQuinton,and Robert Skidelsky. Others who have read part of it include: Ken Binmore, John Broome, Anthony de Jasay, Robert Sugden, and Peter Oppenheimer. Tim Besley also gave some advice on politicaleconomy. They have saved me from someerrors and infelicities, butIhavenotalwaysacceptedtheirsuggestions. Iam gratefultoallofthesebuttheusual disclaimersapply.IamespeciallygratefultoPeterOppenheimerwithoutwhoselateinterventionthisbookmightnever have appeared. Finally, Iam mostdeeplyindebtedtomywife,Lydia,whohastyped andretypedthewholebook, takingtimeofffrom her more artistic work as a sculptor. Her computer skills have occasionally been supported by those of my stepson, Joseph Lenthall. Introduction This book studies the three interfaces of ethics, economics, and politics. Any well-considered view of the most desirable role for the State in various aspects of our lives implies some serious thinking about these subjects, and the way in which they interact. This can be done without academic training in any of them. Therefore, this book is intended to inform not only students but also any person with an interest in public affairs. Ibelievethatmanyuniversitiesnowhavejointschools includingatleasttwoofthethreesubjects. Afewhavea school comprising all three, including Yale and Oxford. Oxford has long had a school known as PPE (philosophy, politics, and economics), but the teaching and exams have not been planned to emphasize the relationship of the subjects to each other. A more integrated school would always have been possible, but I believe that recent thinking in these subjects, in the past 25 years, has made this interdisciplinary possibility more exciting. Each of our subjects can be divided into branches. Some of these branches of any one subject are closely related to other subjects, others less so or hardly at all. Let us glance at our subjects with this in mind. The branches of philosophy that will almost exclusively concern us are moral and political philosophy. We shall be discussing their relationshiptopoliticsand economicsat length. However, ifwe confineourselvestothese branches whathaveweleft out, and can we justify this neglect? The other most important branches of philosophyare epistemology and logic. These are concerned with knowledge, truth, and meaning. In some sense every branch of knowledge, every science, presupposes that knowledge can be acquired, that propositions can be true or false, and sentences understood. But there is no special relation to economics or politics. We shall not be concerned with epistemology or logic because they are too profound. These apart, almost every field of enquiry generates books and articles entitled The Philosophy of ——, where the blank may stand for history, law, mathematics, religion, the physical, and social sciences, and indeed economics. These philosophies are concerned with the concepts, methodology, and the explicit or implicit assumptions of INTRODUCTION ix the designated subject. Economics apart, they are mainly peripheral to our central interests, and we shall not need to explorethem.Thismayseempuzzlinginthecaseofthesciences,especiallythesocialsciences,sinceeconomicsisafter all a social science. Before resolving the puzzle it is useful to try to define economics itself, and then to make a distinction between positive and normative economics. Economics is part of sociology if the latter is defined as the study of individual persons, and groups of persons, interacting in society. This study includes what benefits and harms such persons or groups. In other words, it is concerned with their welfare. How do we separate economics from other branches of sociology? A.C. Pigou had an answer in The Economics of Welfarethathas beenwidelyaccepted. Hewrote‘Theoneobvious instrumentofmeasurementavailableinsociallifeis money.Hence,therangeofourenquirybecomesrestrictedtothatpartofsocialwelfarethatcanbebroughtdirectlyor indirectly into relation with the measuring rod of money’. This definition is imperfect. First, economists study 1 relationshipswheretherewards or incentives need notbe expressed in monetary terms. Second, and more important, what can legitimately be brought intolinewiththe measuring rod of moneyis debatable.The value of lifeis the most awesome example.Butwhile thereare these problems withthedefinitionitis, I think, goodenough tobegoing along with. Positiveeconomics is concerned to measure economic facts and relationships, and to produce causal explanations of economic events and trends. Normative economics is concerned with whether one economic state of affairs is better or worse than another, and hence with the question whether one action or measure, one policy or institutional framework, is better than another in the light of its probable consequences. It is, thus, essentially teleological. Normative economic problems range from whether or not to widen some road, through whether to fix the foreign exchange rate, to the design of economic decision-making institutions and procedures. Closely related to the positive/normative distinction is that between descriptive statements on the one hand, and prescriptive statements or value judgements on the other. This latter is a much-discussed distinction that we shall consider at length later in the book. A preliminary view follows. 1 A.C.PigouTheEconomicsofWelfare, fourthedition1946,p.11.