Many of the things that are most valuable in life are not things that can be traded on the market. Love, friendship, the respect of your peers, and a sense of belonging are all incredibly important parts of life, and they’re also impossible to incorporate into economic analysis. Now, since they’re not economic goods, it normally wouldn’t be a problem that they aren’t subject to economic analysis. Unfortunately, economists have not been content to restrict themselves to economic goods, but instead attempt to provide analysis of public policy choices using economic methods.
Whenever I start criticizing markets people often read the criticism as being of all markets, all the time. That couldn’t be further from my position. I’m confident that markets are the way to go when it comes to commodity exchanges. The price of a new phone or a haircut absolutely should be set by the market (1). But not everything is a commodity. We’re currently debating the role of markets in education and health care. Neither of those are entirely reducible to commodity exchange. For the sake of space, I’ll just do a brief analysis of education and leave health care for another time.
The value of education can be thought of in multiple parts:
- The credential (e.g. diploma or certificate).
- The skill set
- The network
- The individual education
Credential and skill sets clearly have a market value. You can decide if it’s worthwhile to learn the skills and get the credentials that will allow you to be a certified electrician based on the current market value of electrical services. The market value of having a network you meet in school is a little harder to evaluate, but it can be done. The part I’ve labeled ‘individual education,’ for lack of a better term, does not have a market value. The study of art, music, literature, and philosophy is not done for its marketable value. Nor is it, as some economists have suggested, done as a consumption good, the way you might buy some clothing or a vacation. Instead, this is education in the pure liberal arts sense of the term it is designed to change you in ways that have nothing to do with market value. The goal is to make you a better citizen, a better neighbor, parent, and more generally, a better person. It’s the part of education that’s worthwhile even if you decide that what you really want to do with your life is stay at home and never work in the paid market again.
I should note that even those parts of education that can be thought of in market terms often don’t work well in practical terms without society putting in a lot of effort to make those markets work. The education market is plagued by uncertainty, asymmetric information, and inter-generational transfers. Markets do not just exist in some pure form, but are instead created by society, and making an education market work would be difficult even for purely technical skills, and is impossible for the non-market value that is also produced by education.
One of the problems with doing analysis solely based on market values is that over time, this can actually change the value structure of society. Market norms can actually crowd out and replace social norms. People primed to think about economics as individual self-interest act more selfishly and show less concern for others. As behavioral economist Daniel Kahnemahn puts it, “living in a culture that surrounds us with reminders of money may shape our behavior and our attitudes in ways that we do not know about and of which we may not be proud.”
Market norms often win out for three reasons. First, they are convenient and agreed upon. Second, it serves the interest of people with high market values to base policy analysis on market values. Finally, there is a lack of agreement on how to incorporate non-market values into analysis.
One of the most promising approaches to integrating market and non-market values into a single framework is the capabilities approach of Amartya Sen and Martha Nussbaum. Sen argues that theories of justice can be evaluated in terms of the information they deem relevant. The problem with most methods of evaluating well-being is that they artificially restrict the information considered. Sen then lays out his capabilities approach,
…for many evaluative purposes, the appropriate ‘space’ is neither that of utilities nor that of primary goods but that of substantive freedoms – the capabilities – to choose a life one has reason to value…
The concept of ‘functionings,’ which has distinctly Aristotelian roots, reflects the various things a person may value doing or being…
A person’s ‘capability’ refers to the alternative combinations of functionings that are feasible for her to achieve. Capability is thus a kind of freedom: the substantive freedom to achieve alternative functioning combinations (or, less formally put, the freedom to achieve various lifestyles.”
By substantive freedom Sen is distinguishing himself from the formal freedom emphasized by libertarian thinkers. Formal freedom refers only to an absence of legal barriers and not the actual (substantive) ability to do something. For example, the freedom to eat does very little good without the substantive ability to produce or purchase food. The appeal of capabilities has a collection of potential functionings is that it does not restrict us to only part of human life, but includes all of the functionings (market and non-market) that we have reason to value.
Weighting the importance of various capabilities or even simply developing a list of relevant capabilities is a process for democratic discourse. As Sen argues, “To insist on the mechanical comfort of having just one homogenous “good thing” would be to deny our humanity as reasoning creatures.”
It’s important to be up-front about the fact that ignoring the capabilities methodology because it doesn’t have a clear weighting procedure is inconsistent, as most other methods for evaluating human well-being rely on implicit weighting. Surely it is better to be explicit about what we are valuing – even if we are reliant on democratic discourse to work out the details – than to simply issue an implicit judgment about what matters. Sen writes,
Since the preference for market-price-based evaluation is quite strong among economists, it is also important to point out that all variables other than commodity holdings (important matters such as mortality, morbidity, education, liberties, and recognized rights get – implicitly – a zero direct weight in evaluations based exclusively on the real-income approach. They can get some indirect weight if – and only to the extent that – they enlarge real incomes and commodity holdings. The confounding of welfare comparison with real-income comparison exacts a heavy price.
There is also arguably a great deal of merit in such an explicitly non-technocratic approach. Sen has given us a way to include non-market values in analysis, and his approach has been very influential in Europe beginning to experiment with new indexes of social well-being (and, of course, the U.N. human development index). There remains more work to be done on evaluating capabilities and applying this as an aid to decision making instead of macro-level evaluation after policies have been put in place. I’d love to hear your ideas on how that can be done!
(1) I need to qualify this, because some might read it as the libertarian take on markets in which markets spring up from nowhere and somehow still function. Markets are implemented by human society (usually but not always through government) and therefore subject to certain rules of exchange like health and safety laws. So a more detailed reading would suggest that the price of a haircut should be set on a market, but the rules of that market are, and should be, a subject of public debate.