A Theory of the Social Market

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The communitarian view of politics and society – whereby our actions and views are inseperable from the communities in which we live – is not incompatible with mainstream economic thinking. Rather, it heightens our understanding of how markets work.

Political Economy After Socialism

For the last century, political debate on economic issues has been determined by socialism. The agenda and the language of socialism have dominated the discourse of those who have opposed it as much as those who espoused it.

Their position is austere. The most important of social institutions is private property. Self interest is the central human emotion. Insecurity is a necessary engine of economic progress. The activities of government are mostly coercive and potentially if not actually corrupt. Fairness and justice lie principally in respect for other people’s property.

I don’t propose to give much attention to these doctrines. I am addressing myself tonight to people who already reject them. To people who think that nursing is more useful than Eurobond trading, even if it pays less. To people who find unattractive a society which glorifies selfish behaviour and relies on greedy executives maximising shareholder value. To people who think that much of what is valuable in life is derived from relationships with other people. My audience is those who are persuaded by the empirical evidence for the effectiveness of markets as a system of economic organisation, but would like to see them associated with a kindlier, gentler view of the nature of social organisation. For them, I want to argue that Eurobond trading, managerial greed, and excessive individualism are not essential features of successful market economies. They undermine them, perhaps fatally.

Models of Political Economy

If there is today a coherent political economy which is alternative to both the New Right and to socialism, it is a doctrine which I shall call redistributive market liberalism. Redistributive market liberalism is often seen as a conjunction of the models of general competitive equilibrium associated with Arrow and Debreu with the political philosophy of John Rawls. There seems to be a natural affinity between those economic models which describe individual maximisation on the basis of predetermined resource endowments and liberal individualist views of the nature of society. This affinity is emphasised by many on the New Right – Nozick tells us that the outcome of free trade and respect for private property is just, the fundamental theorems of welfare economics that those outcomes are efficient.

What Rawls offered was a less conservative conception of justice which seemed to justify redistributive activity by government within a framework of liberal individualism. Such state action escapes the libertarian charge that is in coercive of individual freedom because even if we resent it now we would have chosen such action from behind a veil of ignorance, in which we had no knowledge of our actual social position. Part of the fundamental theorem of welfare economics asserts that any efficient outcome can be achieved by a competitive market equilibrium so long as the initial distribution of endowments is appropriately chosen. This invites the conclusion that state action should be limited to the choice of a suitable distribution of incomes. Production can be left to the market.

Thus redistributive market liberalism based on a dichotomy between distribution on the one hand and production and exchange on the other. This dichotomy has many dimensions. The distribution of incomes is properly the subject of civil obligations, altruism and state involvement: the production and exchange of goods and services is a matter for private profit, selfish behaviour and freedom from government intervention. Self interest is the driving force of commercial activity, social welfare the proper concern of political action. Considerations of fairness and justice should be the basis of our social behaviour, but are inappropriate factors in our business decisions.

The state must have a dominant role in matters of income distribution, but should discharge this responsibility with as little interference as possible in the workings of the free market. Its intervention in production and exchange should be limited to a small, well-defined category of market failures. These market failures include action to curb the exercise of monopoly power: areas where the actions of firms may dramatically affect the welfare of others, as in health and safety or pollution: and markets where individuals are at risk because they face complex products and more knowledgeable sellers, as in financial services. Otherwise, governments should leave well alone.

The most eloquent exponents of redistributive market liberalism are probably James Meade and Samuel Brittan. The titles of two of their books “Efficiency, Equality and the Ownership of Property”, and “Capitalism with a Human Face”, nicely encapsulate the central elements of that philosophy. Largely under their influence, I would a decade ago have described myself and a redistributive market liberal.

Today, however I wish to argue that redistributive market liberalism is not a tenable doctrine. Like the redistributive market liberals, I will link economics and moral philosophy. But the account of modern market economics which I shall offer is quite different. And the moral philosophy which underpins my argument is not drawn from the tradition of liberal individualism, but from what is generally called communitarianism (although several of the leading members of that school dispute that label).

The key communitarian view is well expressed in the title of one of its seminal works: “The Embedded Self”. What we think and feel, like and dislike, approve and disapprove, is inseparable from the communities in which we live. These determine our values, define our interpretation of justice, create our rationality. The veil of ignorance – behind which we take decisions without substantive knowledge of either the society in which we live or our relationship to it, is an absurd metaphor. Hume’s distinction between is and ought is untenable, because what ought is inseparable from what is. Individuals do not maximise anything, in any ordinary sense of the word. Their objective is, and ought to be, the pursuit of a good life, in an Aristotelian sense: that embraces a substantial dose of self interest, to be sure, but it also incorporates concern for others, fulfilment at work, and respect from others earned by doing what they value.

If you find a good deal in that account that is persuasive, as I do, you should note that almost everyone who has written in that vein assumes that what they have to say is directly at odds with neo-classical economics and business values. They believe that the rise of the market is associated with the decline of the community, and that the whirlwind of trade liberalisation destroys traditional values.

But, I want to suggest that not only is there no incompatibility between this view of politics and society and the mainstream of modern economic thinking: I want to go on to claim that the communitarian view of politics and society leads us to a better understanding of how markets work. There is an embedded market as there is an embedded self: markets, like individuals, operate in a social context and their performance depends on that context.

At a broad level, we all know that this is true: the reasons why Switzerland, Japan and the United States are rich and Haiti, Nigeria and China are poor have very little to do with differences in endowments or production functions and everything to do with the social environments within which these markets function. Over the last twenty years, economic theory has begun to describe the reasons for this.

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