Redistibutive market liberalism (New Statesman)

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

In the last two decades, that control of the intellectual agenda has been captured by the New Right. What the New Right offers is unappealing. The most important of social institutions is private property. Self-interest is the central human emotion, insecurity the engine of progress. Government is inherently coercive and corrupt. Fairness and justice mean respect for other people’s property. Trust is established by good attorneys and watertight contracts.

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. It is 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 civic obligation, 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 as a redistributive market liberal.

But I no longer think that that redistributive market liberalism is a tenable doctrine. Let Samuel Brittan spell out what it involves. “In matters such as buying and selling, or deciding what and how to produce, we will do others more good if we behave as if we are following our self-interest rather than by pursuing more altruistic purposes”. This statement appears no less than three times (p37, 55, 267) in “Capitalism with a Human Face”. We have, Brittan suggests, a moral obligation to behave selfishly, a positive duty to refrain from altruistic behaviour.

This is the dichotomy in extreme form. But it involves little imagination to recognise that it takes a hopelessly implausible view of human nature. Can one be a selfish beast at work and a concerned citizen at home? Can you have different personalities in the boardroom and the polling booth? Eurobond traders and senior executives easily persuade themselves that it is just as well as efficient that they should be lavishly remunerated.

It is not easy to sustain selfishness as a moral duty, and it is not surprising that this argument is put forward mostly by people who themselves display quite exceptional moral integrity. But these are few in number. Brittan quickly recasts his maxim as “people should be allowed to follow their self-interest in the market and should not feel guilty in doing so”. It is only a short step further to the great arbitrageur Ivan Boesky: “Greed is all right by the way. I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself”.

It is perhaps superfluous to mention that Boesky’s career ended when he was sent to prison: that dealers rarely leave the trading floor early to engage in good works: or that the policy issue of greatest concern to well paid executives is the disincentive effect of high taxation. The dichotomy between business values and civic virtues cannot be maintained, and in practice one rapidly corrodes the other. The scepticism expressed by Mandeville three centuries ago

“Every part was full of vice.

But the whole an earthly paradise”

remains fully justified.

But there is an even more fundamental objection to redistributive market liberalism – an objection which undermines it as much as it undermines the more extreme assertions of the New Right. It is that the model of maximising individuals trading property with each other while adding to its value is a poor description of how market economies actually work.

Commodities are not homogeneous, and we rely on reputations, signals, brands, advertisements and relationships to enable us to make wise purchases. Interactions within small groups frequently have pathological properties. In the real world, production and exchange demand co-operation, co-ordination, differentiation and commitment. Simple game theory tells us that in these situations individual actions frequently lead to outcomes that serve no-one’s best interests. Relationships and conventions are the social mechanisms which are developed.

Individualistic markets rely on insurance to spread individual risks: but few even of the economic risks we face – divorce, redundancy, small business failure – are insurable, for very obvious reasons. If these risks can be spread at all, it is through schemes of social insurance provided by the state and informal insurance within families and communities.

And then – perhaps most fundamentally of all – property rights in modern societies are not natural, or obvious, as the New Right insists and requires. For these conservatives, the characteristic acquisition of property is picking up a sea shell from a shore on which there are plenty left for others: and redistributive market liberals follow conservatives closely in their emphasis on the central economic role of well defined property rights. But the property rights which matter in modern economies are social constructs, created by legislation and social convention, and traded in ways that are governed by legislation and social convention. The property rights which I acquire and trade when I turn on the television, go to work, or buy a subway tickets are fundamentally different in origin and nature from those which are involved when I trade apples from my garden for pears from yours.

The force of all these points is that markets necessarily operate within 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 has almost nothing to do with differences in the resources or the technology available to them and everything to do with the social and political environments within which their markets operate.

This emphasis on the social context of markets leads to a very different kind of political economy. The moral philosophy which is naturally allied with it is not the liberal individualism which appeals to the New Right and to redistributive market liberals. Rather it is the set of ideas generally called communitarianism: the notion that a market must be embedded in a social context aligns naturally with what Sandel describes as “The Embedded Self”. This is what is properly meant by the social market.

In this perspective, 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. Rawls’ veil of ignorance, behind which we take decisions without substantive knowledge of our relationship to the society in which we live, is an absurd metaphor, and Hume’s distinction between is and ought collapses because we have no conception of what we ought to do independent of what is.

The economic consequence is that individuals do not maximise anything in any ordinary sense of the word. Their objective is a good life, an Aristotelian eudiamonia, which embraces a substantial dose of self-interest, but also incorporates concern for others, fulfilment at work, and the respect earned from others by participating in activities, including economic activities, which they value.

The most common criticism of these communitarian positions has been their moral relativism. We do not wish to be required to judge Nazi Germany by its own values: feminists object that the social context of most societies for most of history has restricted women to subservient positions. But the link between the social context of moral values and the social context of market economies offers at least a partial answer to that critique.

The world economy, and historical evolution itself, demonstrates competition between alternative social and political contexts. The collapse of totalitarian Eastern Europe is a striking demonstration of the ultimate effectiveness of this form of competition. Fukuyama’s thesis – the slow but palpable triumph of liberal democracy in the market for political value systems – is directly relevant. And the case for liberalism and plurality in business and in politics, for boundaries that are open to foreign goods and foreign ideas, is not made on a priori grounds but, demonstrated by the success of countries which have adopted these policies and these values.

Let me give two examples of policy areas where there are radical differences between my social market perspective and that of the redistributive market liberal. One is welfare policy. Redistributive market liberals are inclined to couch their discussion of these issues in the language of welfare rights. Both Meade and Brittan, for example, have given considerable attention to schemes for a social dividend; a basic income to which everyone is entitled simply by virtue of citizenship.

The problem with this approach is that it attacks the New Right on its own ground. Since liberals conduct their argument by reference to individual rights, redistributive market liberals describe their claims using the language of rights: claiming for welfare rights the same respect that conservatives attach to property rights. But since there is no persuasive account of the origins of these welfare rights, conservatives are not obliged to show such respect, and mostly do not. And once we understand that property rights themselves have no firm ethical basis, the attempt to attach welfare rights to them weakens, not strengthens, the claim to entitlement.

The social market perspective is radically different. The need for welfare policies is the product of the inclusive nature of our shared values. Welfare is a partnership, not a scheme of entitlements. This takes on board much of the New Right criticism of traditional welfare policies. It shares their fear of a dependency culture among excluded groups, it denies any universal entitlement to benefit. But it differs from that stance in emphasising inclusion rather than glorifying autonomy. That means that what we seek to provide for the unemployed is jobs, not compensation for not having a job: and that caring for the elderly is a social responsibility rather than an opportunity for pension salesmen to encourage individuals to ensure against hardship in old age.

There is an equally stark difference in considering the role and form of economic regulation. The issues here are how we impose on firms responsibilities for health and safety, or industrial training: how we secure proper treatment and security of investment for those who buy retail financial services: how we limit the prices charged by monopoly utilities. The essential difference is between regulation by rules and regulation by values. Under the former approach – common to both New Right and redistributive market liberals – the state defines a framework with which individuals are permitted, indeed encouraged, to pursue their self-interest as vigorously as they think fit.

But what we have here is a right wing version of the same fallacy that undermined socialist planning. Both schemes are based on an attempt by a central authority to lay down rules to influence the behaviour of decentralised agents. Because of the differences in information and incentives between authority and agent, the rules never quite work as intended – as we see today in financial services and regulated utilities. The result is fuller elaboration of the rules, again with unanticipated consequences. The end game is a rule system of great complexity and little effectiveness.

The social market approach relies on value based regulation, in which the social objectives of economic regulation are largely internalised by firms themselves. As with other forms of legislation, economic regulation is effective only when its direction is one in which most people would in any event want to go.

It is an extraordinary paradox that Adam Smith, whose principal philosophical argument was that “sympathy” formed the basis of moral sentiments, has been represented as the father of an economic doctrine based on selfishness and greed. There is no real conflict between sympathy and market economics, and the link between neoclassical economics and political and philosophical individualism is the product of a fundamental misunderstanding of how markets actually work.

The author is Chairman of London Economics

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