Mügge, Daniel
                     Article
                     Amartya Sen's "The idea of justice" and financial
                     regulation
                     economic sociology_the european electronic newsletter
                     Provided in Cooperation with:
                     Max Planck Institute for the Study of Societies (MPIfG), Cologne
                     Suggested Citation: Mügge, Daniel (2010) : Amartya Sen's "The idea of justice" and financial
                     regulation, economic sociology_the european electronic newsletter, ISSN 1871-3351, Max
                     Planck Institute for the Study of Societies (MPIfG), Cologne, Vol. 12, Iss. 1, pp. 10-17
                     This Version is available at:
                     http://hdl.handle.net/10419/155957
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              Amartya Sen’s The Idea of Justice and Financial Regulation                                                                             10 
              Amartya Sen’s The Idea of Justice and Financial 
              Regulation
              BByy  DDaanniieell  MMüüggggee                                         ny than is commonly the case (Mügge, Blom et al. 2010; 
              BByy  DDaanniieell  MMüüggggee  
                                                                                     Mügge forthcoming). 
              University of Amsterdam, Department of Political Science, 
              D.K.Muegge@uva.nl                                                      Noble as such concerns, their advocates rarely offer con-
                                                                                     crete  suggestions  about  the  criteria  financial  regulation 
                                                                                     would have to fulfil  to  deserve  our  support.  This  is  the 
              IInnttrroodduuccttiioonn                                               point  of  departure  for  this  article.  Rather  than  starting 
              IInnttrroodduuccttiioonn  
                                                                                     from scratch, it climbs on the shoulders of a giant of con-
              Much  political  economy  scholarship,  including  research            temporary political theory – Amartya Sen. His The Idea of 
              showcased  in  this  newsletter,  has  an  implicit  normative         Justice (Sen 2009) offers not only an accessible yet exhaus-
              agenda. It sets out to uncover social structures that shape            tive overview of his own ideas; he also situates his argu-
              peoples’ lives without their consent. More often than not,             ments in broader debates in ethics, making comparisons 
              these  social  structures  generate  or  sustain  inequalities,        with alternative formulations easy. An economist by train-
              whether  in  material  welfare,  exposure  to  risk,  access  to       ing, Sen extensively draws on classics in political economy, 
              education or democratic participation, or the ability to lead          including Smith, Marx and Mill, augmenting his relevance 
              lives in line with ones own norms and preferences.                     for debates over financial regulation. 
              Financialization  is  a  hallmark  of  contemporary  capitalism        Sen dismisses utopian approaches to justice, which try to 
              (e.g.  Epstein  2005;  Krippner  2005).  Observers  disagree           sketch the just society. Instead, he favours enhancing jus-
              about origins and consequences of the phenomenon and                   tice  incrementally.  ‘Enhancing  justice’  means  identifying 
              even its proper definition. For now, we simply take it to              aspects of our social environment which can (and should) 
              mean the growing relevance of processes in financial mar-              be  changed  if  thereby  people  were  empowered  to  live 
              kets  for  structuring  other  economic  or  social  domains.          their  lives  in  line  with  their  own  wishes.  Sen  recognizes 
              Financialization then highlights the reordering of produc-             that given diverging norms and preference orderings, it is 
              tion under ostensible pressure from unleashed capital mar-             impossible to reason through to the just society. Rather, 
              kets  (Froud,  Haslam  et  al.  2000;  Lazonick  and  O'Sullivan       deliberation  is  indispensible  to  understand  how  contrary 
              2000; Duménil and Lévy 2004; Glyn 2006) as well as the                 demands on society can be reconciled in practice. Sen does 
              changes these markets have wrought on peoples’ everyday                not start from an objective vision of the good life, which 
              lives (Leyshon and Thrift 2007; Langley 2009; Warren 2010).            people should (be entitled to) live. Instead, the key lies with 
                                                                                     people themselves. That said, he concedes that people are 
              This prominence of finance has made it a common target of              often  deprived  of  meaningful  control  over  their  lives  to 
              normative criticism. Analyses of how finance is regulated –            such a degree that we can still identify their living situa-
              even in  fairly  technical  domains  such  as  accounting  stan-       tions as instances of grave injustices.  
              dards  (Perry  and  Nölke  2006)  or  capital  adequacy  rules 
              (Claessens,  Underhill  et  al.  2006)  –  have  tried  to  uncover    Convincing as the arguments are in their own right, it is 
              unfair or unjust(ified) consequences of the rules in question.         not  self-evident  that  they  generate  practical  guidance 
                                                                                     when  applied  to  financial  regulation.  While  this  article 
              This work is often convincing in the analysis of regulation’s          seeks to strengthen the foundations of normative debates 
              consequences. But equally often it is sorely lacking clearly           about  finance,  it  also  explores  the  helpfulness  of  Sen’s 
              spelt  out  normative  standards.  At  times,  plain  material         arguments for debates in finance in the first place. 
              inequality, tied to financial market functioning, is sufficient 
              to elicit disapproval. Alternatively, rules that affect various        Much of Sen’s work has concentrated on developing coun-
              stakeholders differently trigger claims that surely, financial         tries (notably Sen 1999), and his approach that sees capa-
              regulation should be subjected to more democratic scruti-              bilities  as  freedom  has  relatively  straightforward  implica-
              economic sociology_the european electronic newsletter                                             Volume 12, Number 1 (November 2010) 
              Amartya Sen’s The Idea of Justice and Financial Regulation                                                                             11 
              tions there. For example, scholarship drawing on Muham-                EEtthhiiccss  aanndd  ffiinnaanncciiaall  ggoovveerrnnaannccee  
                                                                                     EEtthhiiccss  aanndd  ffiinnaanncciiaall  ggoovveerrnnaannccee  
              mad Yunnus has spelled out how micro-finance might aid 
              farmers and small entrepreneurs and insulate them against              Given  the  centrality  of  finance  in  people’s  lives  there  is 
              economic  shocks  (e.g.  Young  2010).  Normative  impera-             surprisingly  little  debate  about  desirable  financial  system 
              tives here are relatively clear as credit is scarce and gross,         design  that  takes  ethics  serious.  When  Adair  Turner, 
              and therefore easily identifiable, injustices abound.                  chairman of the British Financial Services Authority, sug-
                                                                                     gested that we distinguish financial services that are ‘so-
              In contrast, this paper concentrates on the OECD world. It             cially  useful’  from  those  that  are  not,  his  statement  was 
              explores to what degree well-established normative argu-               seen as ground-breaking.1 From afar, of course, it is un-
              ments are able to provide guidance in contemporary de-                 clear  what  other  than  social  utility  we  should  consider 
              bates  about  financial  reform.  Three  conclusions  emerge           when  debating  financial  market  policy.  The  furore  sur-
              from its analysis: first, publicly guided provision of credit          rounding  Turner’s  statement  was  far  more  noteworthy 
              has significant potential to advance societal justice. Fram-           than his ‘insight’ itself. 
              ing debates around for example student loans or mortgag-
              es in terms of justice and empowerment (rather than for                That  said,  four  divergent  perspectives  reject  an  explicit 
              example  economic  investments)  provides  ammunition  to              consideration of ethics in financial regulation. First, think-
              those arguing in favour of heavy state intervention in this            ers of various hues deny that financial markets should be 
              domain.                                                                engineered with an eye to fairness standards of whichever 
                                                                                     kind.  Libertarians  see  such  tampering  with  markets  as 
              Second, the financial system could be made more just by                undue interference with individuals’ inalienable right to use 
              curtailing the insecurity it inserts into people’s lives. Finan-       property as they see fit. This exclusive focus on individuals 
              cial innovation has often been hailed as an instrument to              precludes an engagement with justice and fairness, both of 
              redistribute risk towards those actors willing and able to             which are relational concepts. Common as this position is, 
              handle it. Arguably, the opposite effect has been at least             it  completely ignores that – rather obvious for readers of 
              as strong: by enticing corporations to plan short-term and             this publication – finance is necessarily social. It is difficult 
              pushing  governments  to  deregulate  labour  markets,  un-            to imagine a complex financial system that could function 
              leashed  finance  has  increased  many  people’s  insecurity.          without some collectively binding rules. Hence, the notion 
              This  effect  of  liberalized  finance  offers  much  scope  for       that there existed something such as pre-social property or 
              corrective measures and the promotion of justice.                      finance is absurd. 
              Finally,  however, Sen’s Idea of Justice is unable to guide            The  second  position  trusts  ‘markets’  to  produce  socially 
              reform  of  the  plumbing  of  global  finance  –  regulation          optimal  outcomes.  All  that  is  necessary  is  to  engineer 
              covering  wholesale  finance  including  accounting  stan-             proper market functioning – defined in narrow neoclassical 
              dards, derivatives regulation, rules for credit rating agen-           terms – through regulation where necessary. All attempts 
              cies,  etc.  The  effects  of  such  rules  are  too  complex  and     to improve social welfare beyond this point are ultimately 
              intertwined to allow an assessment of how their reform                 self-defeating.2 Underlying this vision are several ideas: (1) 
              might boost people’s capabilities. Instead, Sen’s arguments            market efficiency is possible, (2) it generates the highest 
              suggest serious benefits from downscaling finance such as              aggregate material welfare, and (3) the latter is the ideal 
              to  allow  meaningful  political  control.  Given  people’s  di-       yardstick  for  measuring  social  utility.  All  three  ideas  are 
              verse preferences and values, the enhancement of justice               dubious, at best: the crisis has dampened what remained 
              as empowerment requires economic frameworks in which                   of the optimism about potential market efficiency, certainly 
              people can shape their financial environment through the               in domains as complex as global finance. Once efficiency 
              democratic institutions that they (hopefully) have at their            becomes elusive, arguments about its effects on aggregate 
              disposal.  A  return  to  some  form  of  Bretton  Woods-like          growth ring hollow. As the crisis has hit the poor segments 
              order seems desirable – an order that combined openness                of societies disproportionately and exposed their vulnera-
              to trade and regulated capital flows with at least the ambi-           bility, it is unclear why the growth or decline of lower in-
              tion  to  install  democratic  control  over  national  financial      comes should be treated similar to that of higher incomes, 
              systems. While the mergence such an order may not be                   invalidating plain aggregation of material welfare. Finally, 
              likely in the near future, the apparent difficulty to erect it is      much  theoretical  and  empirical  work  has  demonstrated 
              a crucial obstacle to the realization of justice.                      that material wealth narrowly-conceived is a poor guide to 
              economic sociology_the european electronic newsletter                                             Volume 12, Number 1 (November 2010) 
              Amartya Sen’s The Idea of Justice and Financial Regulation                                                                             12 
              people’s happiness and the capacity to live the lives they             Once these four arguments against taking ethical consid-
              want, certainly in the higher echelons of the income distri-           erations serious in financial market design are discarded, 
              bution. In short, a hands-off approach to financial markets            an explicit definition of what financial market policy is to 
              in the name of market efficiency is indefensible.                      achieve  becomes  necessary.  Even  the  quest  for  financial 
                                                                                     stability  is  less  straightforward  than  might  be  apparent 
              Third, stability as a key goal of financial regulation has at          right away. Clearly, stability advocates are not in favour of 
              times been elevated to the one overall objective to which              building a financial system so rigid that it would deprive 
              financial regulation should contribute. Since the crisis, rules        most people of access to credit, just in the name of pre-
              were re-evaluated mainly with an eye to their potentially              venting  crises  and  instability.  Just  where  the  proper  mix 
              destabilizing effects. As will be argued below, ceteris pari-          between  dynamism,  entailing  risks  and  potential  disrup-
              bus such stability is also desirable from a justice as empo-           tion, and stability lies is a question for normative theorists 
              werment-perspective.  But  making  stability  the  centre  of          to answer. His prominence in this field makes Sen a prom-
              reform efforts has setting policymakers setting their sights           ising starting point for a search for answers. 
              both too high and too low. On the one hand, financial 
              stability,  however  difficult  to  achieve,  leaves  regulatory 
              regimes underdetermined. Stable finance could take many                SSeenn’’ss  IIddeeaa  ooff  JJuussttiiccee  iinn  aa  nnuuttsshheellll  
                                                                                     SSeenn’’ss  IIddeeaa  ooff  JJuussttiiccee  iinn  aa  nnuuttsshheellll  
              shapes and colours, with widely divergent distributive ef-
              fects. Facets of financial systems that have clear bearing on          Sen’s idea of justice can most easily be sketched by con-
              questions of justice would remain ignored. On the other                trasting it with those conceptions he rejects. His most fun-
              hand, it is unclear whether financial stability can in fact be         damental  distinction  is  between  utopian  ideas  of  justice 
              engineered. As Minsky (2008 [1986]) convincingly argued,               and those that take the status quo as their point of depar-
              stability  inevitably  creates  complacency  that  sees  policy        ture.  The  former  start  by  outlining  the  perfect  society  – 
              makers and economic actors condone and indeed desire                   whether  in  terms  of  material  equality,  opportunities  for 
              credit  expansion  lest  economic  growth  is  stifled.  Booms         societal participation, or intellectual, personal and spiritual 
              and busts are the inevitable result. Investing all regulatory          fulfilment. 
              energy in ostracizing financial instability may thus be set-
              ting  the  aims  too  high  and  detract  from  other  ways  to        Such utopias abound, but their champions rarely specify 
              enhance justice in the meantime.                                       how they could be approached (indeed, whether that is 
                                                                                     possible at all) and how individual steps leading towards 
              The final argument in favour of ring-fencing markets against           them should be evaluated  on  their  own,  given  that  we 
              attempts to engineer specific outcomes is that market com-             might  ‘get  stuck’  half  way.3  Conceptions  of  justice  – 
              plexity dooms any such endeavours. This claim boils down to            whether inspired by religious fundamentalism, radical libe-
              a distinction between markets, which can function well only            ralism or socialist or communitarian thought – often paint 
              when left to their own devices (with potential props to pre-           societal choices in stark terms: any society that is not just 
              vent  market  failure),  and  their  non-market  environment,          or  ‘right’  is  necessarily  wrong.  It  is  a  question  of  all  or 
              including politics. Also this idea has been undermined from            nothing. In political economy, this problem emerges when 
              a  variety  of  angles  (Chavagneux  2001;  Mitchell  2002;            we  try  to  reconcile  the  realization  that  power  relations 
              MacKenzie  2006).  And  the  recent  crisis  has  reinforced           penetrate  capitalism  to  its  core  with  the  aim  of  human 
              doubts that a self-contained financial system, which could             emancipation from domination. Does partial emancipation 
              be optimized according to its own ‘inner’ logic, could be              exist? Or are there just different degrees of subtlety? En-
              distinguished.  This  is  not  to  say  that  markets  are  ‘trivial   grossing as those questions may be, they inspire little guid-
              machines’ in Herbert Simon’s sense, which can simply be                ance for policy-choices here and now. 
              instructed  to  produce one or the other outcome (Simon 
              1962). Caution is clearly required, and our capabilities to            Compared  to  the  utopians,  Sen  takes  a  reformist  and 
              bend financial markets to our own liking are seriously li-             pragmatic position, going much further than his teacher 
              mited. This point holds for optimizing efficiency as much as           John  Rawls  in  A  Theory  of  Justice  (Rawls  2005  [1971]). 
              for other political projects, however, so that it is no argu-          Rawls  had  avoided  a  detailed  sketch  of  the  just  society 
              ment against at least the ambition to tailor financial mar-            itself. But he did specify the rather demanding conditions 
              ket functioning to socially agreeable outcomes.                        under which humans might be able to agree on its con-
                                                                                     tours. Absent these conditions, justice was necessarily out 
              economic sociology_the european electronic newsletter                                             Volume 12, Number 1 (November 2010)