Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.
J.M.Keynes, 1936
What kind of scociety is troubled by the existence of inequalities, would want to address the heavy burden that inequalities place on so many people throughout the world? I want to argue here that such a society would need to be free from the hold that orthodox economics has on economic, political and social life.
Students almost everywhere, start their study of the economy through examining the workings of the market, how the demand and supply of any good is equilibrated via changes in price. The price could be for a packet of spaghetti, the wage rate that ensures full employment or the interest rates that ensure that the supply of loans by the financial system is compatible with the demand for borrowing. At first these markets are assumed to be competitive, that is to say there are many producers and suppliers of all the various goods and, therefore, no big players that can “fix” the price. Now students go on to discuss many distortions in actual markets, such as monopoly power, the existence of externalities (such as the pollution created by firms, the cost of which is borne by society and not the firm in question) and so on.
By the end of their first degree, or the beginning of their post graduate studies, students come across the high theory that is behind the theory of competitive markets – the two fundamental theorems of general equilibrium. The first, let us call it the invisible hand theorem, attempts to show that under certain assumptions every competitive equilibrium – that is to say in an economy in which all the demand for all goods equals their supply – is also a Pareto optimum. A Pareto optimum is one where one cannot improve the situation of anyone without harming someone else. It is implied that markets are efficient.
The problem is that such a competitive equilibrium can be be very unequal, including the coexistence of billionaires and a multitude of people in poverty. This is where the second fundamental theorem comes into play which states that any desired Pareto allocation can be reached by a competitive equilibrium. This theorem is sometimes called the separation theorem in that questions of efficiency are separated from those of equity – society can decide the fair distribution it desires, and a competive equilibrium will then ensure that it is efficient as possible. How do we reach this fairer distribution? By the imposition of lump-sum taxes, that is one-off taxes that do not “distort” the decisions of producers consumers. The fact that most other taxes are seen as distortions says a lot about how orthodox economics views redistributional instruments.
Moreover, there is considerable doubt that lump-sum taxes actually exist in practice or at least in sufficient amounts. And this is only one of the many assumptions that the two theories need in order to be proved. Theorist like Kenneth Arrow and Gerard Debreu who worked out the maths behind both theorems were fully aware that their assumptions were very unrealistic in real life – no monopolies or externalities, perfect information and so on. But they thought the theory could sort out when and how markets could lead to efficient outcomes and be used by policymakers to intervene in markets to make them more efficient and fairer. However, the status of the theory remains unclear. Economic students are taught the distinction between positive economics (which is scientific and in which values have no place) and normative economics (where values, in this case the desired level of redistribution, do). But it does seem that the first theorem – on the efficiency of markets – has a clear deontological bent. Why should a perfect competitive market act a benchmark, or a goal, if it is not considered desirable?
The case I want to make here does not rest on the realism of the assumptions of the two theorems. Let us assume that either the assumptions are valid, or that, when they are not, policymakers one can respond with appropriate policy instruments. Would people living in a competitive economy (society is not a word in most economists’ dictionary) be interested in supporting more equitable outcomes? These people are assumed to be self-interested, and their only ties are through the market. Homo economicus, as feminist critics of orthodox economics have argued, appears fully formed like a mushroom, without ties of dependency to family and the community, without even the language of the community affecting how the person acts, how s/he thinks about their preferences. In fact, there is a long line of thinkers from Hobbes to Machiavelli to orthodox economists that consider that people are always the same irrespective of the society they live in. Always, that is, prone to self-interest.
This assumption is nowadays also prevalent in political theory. Consider for a moment Rawls difference principle that suggest that we should strive for ever greater redistribution until the moment that continuing with such a path would actually harm the interests of the least well-off. In arriving at this principle, Rawls asks us to consider a meeting of people behind the “veil of ignorance”, that is to say each person would not know their role in life, for instance whether they would be a poor farmer in sub-Sahara Africa or a rich financier in New York. Such people, Rawls argues, exactly because they would not know their place in society, would support quite a bit of redistribution. However, the people making the contract between themselves may not know their station in life, but they are assumed to be the type of people we know in the advanced capitalist world. Importantly, they are assumed to have all the motivations of economic theory, including that of self-interest[1].
Thus, I would argue that people behind Rawl’s veil of ignorance, and those in a competitive equilibrium of the economists, are unlikely to be motivated by considerations, even by feelings, of community. The problem is not so much the realism or otherwise of the assumptions but the benchmark – what kind of society people in both contexts would support. There is even experimental evidence that suggests that studying economics actually reinforces self-interested behaviour, while studying sociology or anthropology does not (students of politics are somewhere in between). Of course, both politics and economics have subtle modifications to their approach, and often the work of economists and political theorists is used in support of fairer policies or institutions that support more equitable arrangements. But it seems that the actual theory, especially of orthodox economists, is working against the grain of more collectivist and fair solutions.
Up to the financial crisis of 2009, neoliberal policies for decades were motivated by the desire to make economies more like the competitive markets that are taught to students. At least in terms of ideology, for where needed, neoliberal policies were eminently compatible with the existence of monopolies, state intervention, bailing out banks etc. But we cannot ignore the fact that policies of deregulation, privatisation, and “flexible” labour markets were all driven by market economics. Orthodox economists have a lot to answer for the resulting inequalities.
It is unlikely that orthodox economics will have much to offer in any strategy for a progressive exit from the multiple crises we face. And yet a more equal society is a prerequisite for confronting the existential threat we face from climate change. We need an economics that, as Polanyi argued, does not see labour, the environment and finance as just another market good. We need an economics that is open to the insights of sociologists, anthropologists, even theorists of language. Most important of all, we need an economics of collectivism, of how people can deliberate, plan, and implement policies with respect to those facets of human life that are of common concern.
[1] It is certainly true that Rawls’s work has been an inspiration for mostly centre or centre-left political positions. But, given the assumption of homo economics, a neoliberal could argue that little redistribution is called for, since this would lead to inefficiencies which would harm the least well-off. We have here arrived at trickle down economics via Rawls. Our argument is that any social theory that is based on homo economicus may occasionally support redistribution, but on the whole, this will be going against the grain of the theory.