Livia: Development as Freedom, Trade and Innovation

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Within Development as Freedom, Amartya Sen discusses the role the market plays within different societies and how it impacts different interest groups. Although there are many groups of people who are beneficiaries of the smooth functioning of the market, there are groups of people who are harmed by its functioning (Sen 120). Sen suggests that a prominent issue occurs when these latter groups obtain political power and influence, as they can create policies which inhibit the market’s purpose in a society’s economy. On way to limit the influence of markets is through imposing strict trade barriers, therefore insulating companies from external competition. In doing so, monopolistic product units flourish. The legitimization of these types of trade policies could potentially increase product prices, dilute quality, and inhibit innovation (121). Though I agree with Sen, and his promotion for the market (and subsequently more liberalized trade), I am curious how Sen would consider the notion of competition and liberalized trade policies between developed and developing countries firms.

In a world in which strict trade barriers exist, firms are in positions to earn monopoly rents. Intuitively, as those trade barriers are dropped, more firms enter the market. This in turn forces firms to either innovate—in order to stay within their business due to the increased levels of competition—or to leave the market. Interestingly, many developed companies have been protected by high trade barriers. When trade barriers are more liberalized, developed countries firms may struggle. They face higher barriers to innovation than firms in developed countries as they do not have access to the capital, or the technical know-how needed to innovate. If a substantial fraction of firms in developing economies are unable to innovate when trade barriers are removed, then the negative effects of employment in these economies might be greater than the positive effects of cheaper prices for imported goods under free trade. Additionally, a further effect of increased competition is that profit margins are not likely to be unaffected. In a dynamic where one country lags behind another country in technological knowledge, the Schumpeterian effect—where competition can reduce rents and reduce incentives to innovate—dominates.

I’m curious how Sen might respond to presentation of this argument less because of matters regarding economic growth, but rather because of matters of freedom. While the freedom to participate within market is overall important, what happens when developed countries are in positions in which they are unable participate within the market due to a lack of capital? Should we create policies that help to offset this imbalance? Or should we allow the market to decide? 

  

Comments

  1. Paul HurleyMarch 30, 2023 at 10:21 AM

    This is a really interesting issue to introduce into the conversation. Economist such as Joseph Stiglitz and Sen himself have argued elsewhere that certain barriers to certain kinds of trade are absolutely necessary for a group of people to develop their capabilities and exercise their political freedom, for example, to secure their traditions. A barrier to trade will be justified, for Sen, if it is part of an overall framework that enhances human freedom/capabilities. Might not many such barriers be justified?

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