Firstly I must acknowledge that the title of this article was inspired by the words of the 1994 song ‘Shibboleth’ by Melbourne band, The Killjoys.
In this case, the shibboleth I am referring to is ‘economic rationalism’, an expression that distinguishes the Right from the Left of politics. I also use ‘shibboleth’ with one of its more modern meanings: that it signifies something where meaning has been lost, and now serves merely to identify allegiance. I choose this meaning deliberately because I do believe that economic rationalism is on the wane. Its death may take some time, perhaps ten years or so, but I perceive that changes are coming.
In researching this piece, I was surprised to learn that the term ‘economic rationalism’ is mainly used in Australia: overseas the more common terminology is ‘market liberalism’. Whatever its name its essential premise is the same — markets rule! Economic rationalists believe that market forces will always produce better outcomes than government or bureaucratic decisions, that it is the market that should determine what
to produce and how
to produce it.
Some economic rationalists accept that there is a role for government in providing public goods and in intervening when there is market failure. Others, however, consider market failures as unimportant or self-correcting and that, in any case
, ‘the costs of government intervention [are] greater than the costs of the market imperfections government policies [are] supposed to remedy.’
They assume that a free market system has an inherent tendency towards equilibrium in which demand and supply are in balance
Movement towards equilibrium is brought about by changes in relative prices. (Prices include not just the prices of goods and services but wages and interest rates.) If there is persistent unemployment, then that is believed to be caused primarily by institutions (trade union pressure, minimum wage legislation, and so on) which prevent the price of labour — wages — from moving to a level in which the demand and supply of labour is brought into balance and full employment achieved.
Economic rationalists also consider low inflation is vital for a deregulated financial sector and for business. One cost of maintaining low inflation can be increasing unemployment. In Australia, before economic rationalism, ‘full employment’ was often seen as having an unemployment level of about 2% (which was achieved in the 1960s until the mid-1970s). Since the 1980s, a level of about 5% has become acceptable.
The economic rationalists tend not to be overly concerned about the distribution of income. In 1997 J W Neville explained
While some economic rationalists argue that unequal income distribution is important to create the right incentives, generally in Australia economic rationalists say little explicitly about income distribution … they tend not to comment on the role of social security or the social wage, and hence on the final pattern of income distribution, except perhaps to leave a vague impression that social security will take care of those whom market forces leave living in poverty.
On the distribution of income, Milton Friedman
, one of the founders of economic rationalism, wrote in 1962:
The ethical principle that would directly justify the distribution of income in a free market society is, “to each according to what he and the instruments he owns produces.”
From this, Friedman sees a primary function of the state as maintaining property rights, both physical and intellectual, and leaving the markets to get on with the job of using those property rights.
Another figure in economic rationalism is the late Friederich Hayek, important not only for his economic works, but also for The Road to Serfdom
. In that work his basic argument
was that government control of our economic lives amounts to totalitarianism. ‘Economic control is not merely control of a sector of human life which can be separated from the rest,’ he wrote, ‘it is the control of the means for all our ends.’
The earlier quote from Milton Friedman comes from his Capitalism and Freedom
. It is this emphasis on freedom, as economic rationalists see it, that gives economic rationalism a non-economic dimension. Despite what its proponents may claim, it has profound social, not just economic, implications.
It has developed, and been taken on board politically, not simply as an economic approach but as a whole social philosophy based on old-style libertarianism, opposed to any form of government interference in markets and people’s lives — what it perceives as ‘socialism’.
It has also arisen from a long history in which happiness was removed from economics. A chapter in the World Happiness Report 2013
provides a potted history of this change: from the Greek philosophers and early Christian church’s view that happiness was achieved by being virtuous, to the economic theory of ‘utility’ in which individualism and consumerism prevailed. The early economic theorists brought material goods into the happiness equation, suggesting that people purchased that which brought them pleasure or happiness. In the twentieth century economics came to be dominated by mathematical formulae, and the question of whether market consumption could increase happiness and well-being was no longer a consideration.
Economic rationalism rose to prominence in politics in the 1980s, being adopted by the Thatcher and Reagan governments after the economic problems of the 1970s (as discussed in my earlier posts, ‘Whither the Left
’). It was occurring at a time when socialism as a political and economic system was fading: glasnost
was introduced in the Soviet Union from 1985; Poland had unrest from the early 1980s and voted in its own government in 1990; the Berlin Wall came down in 1989 and German reunification took place in 1990; and the Soviet Union fell and broke up in 1991. The politico-philosophical basis to question economic rationalism was itself in turmoil and economic rationalism rose with little philosophical opposition. By the early 1990s few socialist governments were left and economic rationalism was entrenched.
So entrenched has it become that markets are now often seen as the answer to social and environmental problems. Many, not just economic rationalists, now argue that protecting the environment requires putting a market value on it, no longer accepting that governments have a duty to respond and, if necessary, work towards changes in behaviour — no, that would distort the markets. Need more child care? — privatise it and allow the market to determine demand, supply and price. Need more jobs? — sorry, any government action will distort the markets but support the markets and the jobs will come (at the market’s price!).
Another sign of the entrenchment of economic rationalism is how the idea of ‘capitals’ has also permeated social thinking. Now people talk about ‘human capital’ and ‘social capital’ as though these are merely commodities that can add to economic production. Its lack of reference to values in the market, as opposed to its libertarian social thinking, may be its undoing. As Jeffrey D Sachs wrote in the World Happiness Report
A prosperous market economy depends on moral ballast for several fundamental reasons. There must be enough social cooperation to provide public goods. There must be enough honesty to underpin a stable financial system. There must be enough attention paid to future generations to attend responsibly to the natural resource base. There must be enough regard for the poor to meet basic needs and protect social and political stability. [emphasis added]
In my piece, ‘Bringing Gross National Happiness into play
’ I discussed alternative economic and social progress measurements to GDP, such as the Fordham Index of Social Health (FISH), the Genuine Progress Indicator (GPI) and the Social Progress Index (SPI). What I found fascinating in researching that piece was that those indexes have flat-lined since the late 1970s. I don’t think that is a coincidence.
The FISH and GPI, and even subjective surveys of ‘life satisfaction’ in the UK, appear to have increased throughout the early 1970s but from the late 1970s/early 1980s have barely moved and, in some cases, have fallen slightly. Applying the Gini coefficient to those times provides a similar result in many countries, particularly developed nations. From World War II to the 1970s there were improvements in wealth distribution (lessening inequality) but this began to reverse from the 1980s.
Guess what happened in the 1980s? No prize really for answering: ‘economic rationalism’.
The economic rationalists argue that ‘trickle down’ economics means that increasing wealth and free markets do improve life for those at the lower end of the socio-economic scale: they earn more money; they have more benefits from new consumer products to make life easier. Yes, that is true if you take WWII or 1850 as your starting point, but it takes no account of the relative benefits that are gained by different segments of the population as national wealth increases. The economic rationalists ignore that at their peril.
As discussed at the World Economic Forum in January 2014, increasing inequality can lead to increasing social unrest and then the economic rationalists’ belief in markets will be meaningless. Who will then seek government intervention to quell social upheavals? Perhaps they should be told the markets can take care of it!
The other aspects I discussed in ‘Bringing Gross National Happiness into play’ are also relevant here and are what gives me optimism that economic rationalism will falter in the coming years.
The fact that social well-being and life satisfaction have not improved since the 1970s, despite rising GPD, is leading to greater pressure for new measurements of progress to be adopted. Some of those are still market-based, in the sense that they take account of the real costs of production, including damage to the environment, but some are based on social well-being and life satisfaction or happiness.
Any move away from GDP as a measure of economic progress will impact the influence of economic rationalists. Improving social well-being is not something that can be solely achieved by the markets, particularly using the value-free models of economics or the libertarian approach. If these other indexes assume growing importance, as I think they will, there will be more pressure on governments to intervene and take active measures.
If governments start responding to social well-being indexes and levels of inequality they will be overriding pure market outcomes. The economic rationalists will argue that some of the problems can be addressed by social security payments but not by progressive taxation scales: that will not hold water, however, when the evidence of the new indicators comes into the public arena. When the costs of damage to the environment and the depletion of natural resources are factored into economic growth, more people will understand that our so-called economic success was not as successful as they had been led to believe and that it has come at a cost for future generations. More and more evidence will be available that questions the outcomes from a pure, market-driven approach and the economic rationalists will be seen for what they are: ideologues who may be ‘rationalists’, but who are not necessarily rational.
Despite what economic rationalists like to think, governments do take account of social values in their decision making — otherwise they would never be elected — and that will flow over into decisions affecting their beloved market. Then, the shibboleth of economic rationalism will be just that, an old expression identifying those few who refused to move with the times. What do you think?