What is the free market?

There are a couple of important books out in September that I’ve had to restrain myself from writing about too far ahead of publication. Brad Delong’s Slouching Towards Utopia: An Economic History of the 20th Century will be published mid-month. A week or so later – and it can also be pre-ordered now – is Jacob Soll’s Free Market: The History of an Idea. So I’ll write about the latter first.

The premise of the book is that, “We are in an essentially abusive relationship with free market thought,” which has had adverse consequences that finance and big business have stacked the economic system in their favour while the little people take on high debt burdens and pay taxes, in the pretence that ‘the market’ must prevail. To recover from this dysfunctional relationship requires a task of intellectual history. What is this ‘free market’ idea and how has it come to veil a state and regulatory structure favouring the rich over the rest?

The book takes this task seriously: “To understand the origins of free market thought, it is first necessary to understand Cicero’s philosophy.” So, not Adam Smith then. Successive chapters go on to the conceptualisation of markets and what we would now call ‘the economy’ in the late Roman period, the Middle Ages, Renaissance Italy, early modern Britain, Colbertist France, the Dutch Republic, and on through the Enlightenment, French Revolution, Adam Smith, Industrial Revolution and age of Empire.

The book identifies a sort of historical pendulum: “When there is political stability and a developed economic system, it can seem as if markets just emerge on their own and sustain themselves. The fall of Rome, however, showed that when society collapses, strong and sustained state intervention may be necessary to build back the market.” The Mediaeval period was one of these. Another was the Netherlands after the Dutch War of Independence: “Windmills were the product of Dutch traditions of communcal investment dating from privately-funded medieval public works…. Citizen investors worked together to create public infrastructure. This long tradition of private-public partnership laid many of the commercial foundations of the Republic.”

The post-Adam Smith version of free market thinking is traced here to paradoxical roots in Colbert, usually thought of as the architecht of mercantilist state management. The seeming endless violence and suffering experienced by the mass of 17th century French people led Colbert’s sucessors – children and nephews – to turn back to Cicero’s vision of voluntaty exchange among Rome’s aristocracy. Add in Christian ethics and here are the foundations of rational self-interest and ordered exchange. As is now better appreciated, Adam Smith’s free market vision was founded on the ethical system he had written about in his Moral Sentiments before The Wealth of Nations. The free market was built not on greed but on social responsibility.

The book then canters toward the post-1980 bowdlerisation of this free market ideal, via ever faster swings of the pendulum for and against state activity. Soll concludes that much free market thinking is simply utopian, markets as magic. “This model, however, no longer seems realistic or relevant. After decades of deregulation and expanding free trade, the world has experienced regular cycles of economic crashes and government bailouts, along with burgeoning wealth inequality, wars, and climate and health disasters. Equilibrium eludes us.” And indeed the state remains a major economic actor, in the US as well as China, albeit in different guises.

So the dilemma remains: the ‘free market’ is a fiction and we get closest to it in historical periods of stability. But governments can be at best inefficient and at worst corrupt and authoritarian. “But the historical record shows that, as economies grow in complexity, so governments grow in response, for better or worse.” The free market? It would be a good idea. But more important than how the economy is organised is the social and moral context in which we carry out our investments and exchanges. The final word: “Faith in the market alone will not save us but hewing to those old virtues might.”

So, a very interesting read – I really learned a lot from the long historical perspective on the origins of what became the modern version of free market thought. Some of it was a bit surprising & perhaps historians of thought will contest it. I’d have liked more on the post-world war two aspects but that’s probably a different book (and indeed Delong covers that period).  I fundamentally agree with the conclusion, though: economies exist in and as part of societies, so the social and moral relations are fundamental. And – for economists – ideas about the right way to behave really matter, not just as innovation or endogenous growth, but (as Deirdre McCloskey has pointed out in her major trilogy) as the enabling or limiting environment for both markets and state to function.

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Fitting economics into a theory of justice?

I spent a relaxing week at the Welsh coast doing only light reading, but have a few posts to catch up on about books I read before the holidays – including a couple out in September, Brad Delong’s Slouching Towards Utopia and Jacob Soll’s Free Market: The History of an Idea. First up, though, some thoughts prompted by A Political Economy of Justice, a collection of essays edited by Danielle Allen, Yochai Benkler, Leah Downey, Rebecca Henderson and Josh Simons. That’s a wonderful line-up of editors, and the chapters emerged from a seminar series at Harvard. As with all essay collections, they are variable in quality and cover a wide range of subjects – from ‘Beyond GDP’ to theories of change in a democracy to the US ‘prison industrial complex’. Nevertheless, the book is well worth it for the introduction alone.

The intro makes the case for considering capitalism as a multi-level system whose economy is institutionally embedded, reflects power relations, depends on social norms and instantiates certain values. It thus argues that neoliberalism as an economic ideology ignores these contextual aspects, claiming an impossible universalism (although the book isn’t particularly interested in the varieties of capitalism literature). The editors also argue strongly for the discussion of social justice and the values of the capitalist economy to focus on the organization of production as well as – or rather than – the distribution of income and consumption. They want economic analysis to rediscover politics and to make explicit issues of justice such as race and gender, or corporate purpose and sustainability.

Individual chapters focus on specific issues and proposals – there’s a clear progressive slant to all, however. Interestingly, the editors note that one area on which they could not reach consensus was the question of effective freedom and property rights in a market economy: does ownership inevitably imply unequal power relations?

There’s also some discussion – interesting to me! – of the implications of economic measurement, the definitions and metrics particularly GDP, for social justice: “Contemporary theories of justice have given these questions little sustained attention.” The introduction takes it as a given that the specific aim of growth in GDP should not guide a fair society. The chapter on this issue (by Julie Rose) takes the perspective of a history of thought about idea of the stationary state, invoking Mill, Keynes and Rawls. It argues for an alternative aim: “To fairly and reliably expand people’s opportunities,” and paints GDP growth as a subsidiary aim. Fine as far as it goes, but not actionable – although I must say I’d expected a traditional ‘degrowth’ argument and was relieved to find Rose doesn’t fall in to that trap. Although an analysis of the argument from a social justice perspective would be telling. Throughout, the book assumes the inadequacy of GDP growth but is vague about alternative metrics, while clearly sympathetic to the capabilities approach.

This and much more. While the focus on institutional specifics is welcome, it means the book is almost wholly US-focused. There’s also an inevitable tension between acknowledging the specificities of time and place and articulating a reasonably universal theoretical framework. The book goes heavily for “historically grounded explanations” involving “socialized or embedded individuals”, and with power and conflict central to economic relations. “There is no Archimedean point on which to perch microfoundational agents….” I tend to agree that economic analysis needs far more history, social relations and politics – but take it too far and ‘political economy’ loses the economics part.

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All the Cs but how many Gs?

The title of Fred Bergsten’s latest book is somewhat misleading: it’s The US vs China: the quest for global economic leadership. But the argument of the book goes against the polarisation presumed in the title. Bergsten’s argument is that while the US and China are bound to compete in some economic domains, they should, and will find they must, co-operate in others. Tackling climate change and ensuring global financial stability are two of the examples of the latter. Indeed, he calls for ‘conditional competitive co-operation’, with the formation of a G2 on issues of global public goods, pandemics and other crises.

This all seems super-sensible. But it also has the flavour of a book from a distant era. Although the pandemic had happened, the Russian invasion of Ukraine had not. Nor at the beginning of 2022 might we have expected both China and the US to seem as unstable internally as they do at this moment, with astonishingly bad covid-exit policies on the one hand and the resurgence of Trumpism in public life on the other, alongside what is going to prove the most serious crisis of capitalism for at least a generation. The (geo)political pack has been not just shuffled but thrown up in the air. (And who had a monkey-pox epidemic on their 2022 bingo card??) At least Bergsten does warn about the dangers of a leadership vacuum, a G0 world, with the 1930s as a spectre of what could be.

The author’s knowledge of the international monetary system is legendary, and this is a terrific book to read for the economic insider’s perspective. Alongside Adam Tooze’s books, particularly Crashed, I now feel as informed as I’m going to be about international monetary matters. But the future now looks even more frightening than the most frightening prospect described here. Screenshot 2022-05-20 at 15.53.40

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Grasping the intangible nettles

Second albums after a huge first hit are always tricky, but the famous econ duo of Jonathan Haskel and Stian Westlake pull it off with Restarting the Future: how to Fix the Intangible Economy, a sequel to their best-selling Capitalism Without Capital.

That title was missing a ‘Physical’ in parenthesis before ‘Capital’, because the point was to underline the relative importance of intangible capital in the economy now – everything from patentable drug formulae to reputation to social trust to the tacit know-how that makes complex organisations function. While intangibles have always been important in the economy, they now predominate in the creation of economic value. Indeed this has been the case for decades now (my book The Weightless World is 25 years old this year). Jonathan and Stian (who are friends of mine) set out the special characteristics of intangibles – fours Ss, scalability, sunkenness, spillovers, and synergies – and explored the implications.

The new book starts with the observation that all is not well in the economy, with a litany that has become all too familiar: stagnant productivity, excessive inequality, a lack of resilience, ‘dysfunctional’ competition and what they term inauthenticity. They note, too, that investment in intangibles has slowed down markedly. Their diagnosis is that while existing institutions (in the broad sense in which that term is used in economics) were able to support intangible growth up to a point, progress now will depend on institutional reform: “institutions are out of sync with the intangible economy”. In their sights for reform are institutions and policies to support better (and fund) research and development, a redesigned competition policy, improvements to the financial architecture and monetary policy, and fixing cities.

The first half of the book is diagnosis, including rejecting some alternative diagnoses. In particular, they reject the idea that markets have become too concentrated, arguing that firms’ mark-ups have not risen when their intangibles are measured properly. I must say I don’t find this persuasive, given for example the steady consolidation of service sectors (pharmacies, vets, private healthcare, accountancy firms, financial advisers….) or simply observing the steady degrading of big tech service offers (eg Amazon searches being dominated by paid-for items). Still, competition policy certainly needs (and is getting) a refresh. Nor does this mean the intangibles explanation is invalid – on the contrary, it seems to be an integral part of the way production has been restructured.

The second half of the book then goes on to recommendations for reforms of policies and institutions, all rather sensible albeit not tangling with the politics of how these changes might come about except to observe that winners from the old regime will use their power to lobby against change.

I have some other quibbles. Jonathan and Stian put James Scott (Seeing Like A State) and Ernst Schumacher (Small is Beautiful) in the same ideas basket, which seems a bit odd to me although it’s decades since I read Schumacher. I don’t really understand their argument about inauthenticity, which draws on Graeber’s ‘bullshit jobs‘ and on Baudrillard, as an economic phenomenon – I decided it was about (lack of) trust or social capital but am not sure. The chapter on competition seems to claim that the debate about big tech etc only has one proposition, namely break-up, whereas in fact there is a rich debate about reshaping competition policy and enforcement in these large scale, spillover-laden markets. It also shoehorns in positional arms races in the jobs market into the ‘dysfunctional competition’ basket, when this is ja distinct labour market phenomenon.

But these really are quibbles about an excellent book. Their fundamental point about institutions lagging the structure of the economy is spot on, as is the implication that different kinds of collective approaches are needed to the economy. In the world of the four Ss, individualism and market-knows-best policies make for stagnation and discord. A final note: the book is published as the Russian invasion of Ukraine reminds us that tangibles from tanks to wheat really matter too. Simon Schama writes in the Financial Times that Ukraine’s ‘software’ has so far held out better than anybody might have feared against Russia’s hardware. But the world of the post-1989 era is changing.

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Taking ideas seriously

In preparation for delivering the 2021 John Urry lecture at Lancaster University on Thursday, I’ve been re-reading the book that introduced me to his work, Economies of Signs and Space, co-authored with Scott Lash. It was published in 1994, but being an economist, and therefore more ignorant of the other social sciences than I ought to be, I had only just found it when I wrote my 1997 The Weightless World. The commonalities in our ideas were striking – more so to me now than I recall them being 25 years ago, although I cite the book.

These included the intuition about the increasing salience of time and space – both books have a ‘cities’ chapter – fragmenting production systems, the importance of the cultural industries, the deficit of institutions lagging behind economic and cultural change. But above all the increasing share of value assigned to the intangible or weightless. They write: “What is increasingly produced are not material objects but signs,” and note the “increasing component of sign-value or image embedded in material objects.”

The lecture this week will pick up on these insights – I think I and they were pretty prescient – to talk about what it means to have an economy of ideas, but will also talk about the need to re-focus on the material foundation of this economy: giant warehouses and energy-guzzling AIs. Oh, and human brains.

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