The Broader Market

By Jordan Eizenga

Given the current ideological narratives dominating the political universe, I thought it might be relevant to turn to a thought experiment referred to as the liberal paradox, devised by Amartya Sen, an economist and Nobel Laureate.  Sen’s thought experiment was designed to show that liberalism and pareto optimality (i.e., an outcome when everyone improves) cannot coexist.   It is important to note that in this instance, the term ‘liberal’ takes a different meaning; the term liberal herein is used to describe a free market, libertarian ideology (i.e., one that is unconstrained by government interference). 

Sen’s liberal paradox can be based understood with the following scenario, which has been modified slightly for the current audience:

Suppose Jack and Jill each have to decide whether or not to see a film at the theater this evening and each is free to choose to go or to not go to the theater.  Both Jack and Jill have their own preferences as to how they will spend the evening.  Jill’s highest priority is to be with Jack and her second priority is to see the film.  Jack’s highest priority, on the other hand, is for Jill to be able to see the film, followed by not seeing the film by himself.  This means that the order of personal preferences can be listed as follows for each:

Jill wants: both to go to the film > neither to go to the film (because this scenario still allows Jill to be together with Jack, a top priority for Jill) > Jill to go to the film on her own >Jack to go to the film on his own.  

Jack wants: Jill to go to the film > both to go to the film (because this scenario still allows Jill see the film, a top priority for Jack) > neither to go to the film on his own > Jack to go to the film on his own.

From these sets of individual preferences, we can identify the joint preferences of Jack and Jill.  At a minimum, we know that Jack would not go to the movie by himself.   However, if he did, Jill would choose to join him.  This means that the joint preference must be that both attend the film > (is preferable to) Jack attending the film on his own.  However, if Jack does not attend the film, Jill, who is free to make her own decisions, would also choose to not attend the film.  Thus, the joint preference must also be neither go to the film > Jill goes to the film.  However, Jack is also free to make decisions, which means that the joint preference must be that Jill goes to the film on her own > both go to the film > neither go to the film > Bob goes to the film on his own. If we combine these two sets of joint preferences, we arrive at a rather paradoxical outcome:

Joint preference: neither go to the film > Jill to go to the film on her own> both go to the film > Jack to go the film on his own

And to simplify:

            Joint preference: neither go to the film > both go to the film

The reason this is a paradox is that both individually have preferences in which both go to the film > neither go to the film, but, together, their joint preference is the exact opposite.  This is what is referred to, in the language of economics, as a pareto inefficient outcome, which means that the actions of both of them have made each individual worse off.  In fact, doing the exact opposite would be an improvement for both Jack and Jill.

Sen’s liberal paradox is meant to demonstrate that when autonomous agents act with complete freedom, it is impossible for the agents to produce an outcome that is a net improvement to everyone.  While this is not to argue for government intervention, it is to say that a pareto optimal improvement and libertarianism cannot coexist.  In other words, the paradox shows us that the invisible hand of the marketplace is incapable of producing net improvements in welfare for a given society.