The Moral Standing of the Market: A Capability-Based General Equilibrium Analysis

According to Sen (see, e.g. Sen, 1989), the moral standing of the market has to be related to market outcomes and inequality rather than to the exercise of people's "prior" rights and efficiency. Although developed within a consequentialist framework, general equilibrium theory has usually neglected the problem of inequality in favour of efficiency. Lately, however, considerable effort has been spent by neoclassical economists to prove that the market mechanism satisfies specific fairness requirements. In contrast with this literature, which follows the "welfarist" method of evaluation of states of affairs, Sen proposes to replace the concept of utility with the concept of capability in assessing inequality. The main aim of this paper is to provide sufficient conditions ensuring the existence of an initial allocation with an associated Walrasian equilibrium ensuring the equality of the "size" of the capability set for every agent in the economy, and to analyse the efficiency properties of such allocations.