Markets, state and economics

The Courageous State: Rethinking Economics, Society and the Role of Government by Richard Murphy has three targets, as the subtitle suggests. He scores some good hits on two of them, albeit not entirely systematically, and misses the third.

The first part of the book is a statement of some familiar state versus markets arguments, and it has to be said that markets – specifically financial markets –  have made that a much easier task than would have been the case five years ago. I’m always slightly suspicious of generalisations about ‘neoliberal thinking’ of the kind made here, as it’s a marker of political as much as economic argument. The book also misses what is to me a key point about this debate, which is that market failures and government failures will occur in the same kinds of domain and for the same kinds of reason: information asymmetries and externalities are in practice pretty hard for the state to respond to as well, so government intervention has to be supplemented with other institutional safeguards. A good example is healthcare: navigating between the perverse incentives created by the profit motive and the danger of producer capture in a state system is a difficult balance, and in either case part of the trick is a strong professional ethos of service.

Having said that, Murphy sets out the reasons for market failure with passion, and makes a clear and strong case for the unashamed use of the tax system to achieve redistribution and deliver public services. The chapter on the rationale for taxation and the effectiveness of the system is the best one, as might be expected from a tax researcher. He articulates well the widespread sense of deep dissatisfaction with our economic institutions.

The third part of the book sets out a positive vision for a ‘courageous state’, with plenty of specific tax proposals. Some of these I agree with (tax simplification), some not (a financial transactions tax – too easily avoided by financial institutions but not by you, me and our pensions, so why not instead introduce the equivalent of VAT on financial services?). But proposals are certainly welcome, and I thought this was a useful list.

The second part of the book outlines a ‘new way of economic thinking’, which doesn’t do anything at all for me. I would say that, wouldn’t I, as a conventional economist? However, if you take the question of economics as being the efficient allocation of resources, I could find nothing in this section to help me answer it. There is lots here on emotional and intellectual as well as material needs, and heaven knows nobody would deny that they matter, nor even that economic decisions and policies affect them. But the gritty stuff of opportunity cost and trade-offs is essential for analysis. Murphy seems to think that any economic tools are manifestations of ‘neo-liberalism’, even say the economics of environmental externalities. The book introduces the concept of sufficiency – and assets that there is too much finance in the economy. As it happens, I agree, but would prefer to move beyond assertion because I know there are lots of people who would disagree with me and I’d like to get beyond a battle of competing assertions. Instead, I would turn to Andy Haldane’s economic analysis (pdf) of the excessive size of the finance sector. Economics as actually practised in many places in the 1990s and 2000s may have left a lot to be desired, but Richard Murphy hasn’t convinced me of the need for a new economics.

The Courageous State: Rethinking Economics, Society and the Role of Government