In 2008, we learned that unfettered markets on their own are neither efficient nor stable. In 2017, we learned that the international rules of the game could be unilaterally altered by a single person – the president of the United States – at whim, with little consequence: power evidently mattered. In 2020, we were hit by a global pandemic. Were it not for public investment in research and development, we would not have developed the effective vaccines that have enabled a modicum of normalcy to return. And yet, large numbers of people in the US and elsewhere defy the public interest and ignore the costs they impose on others by refusing to get vaccinated, wear masks or practise social distancing. They claim it is an infringement on their freedom, while their actions cause an even greater infringement on the freedom of others – what could be a greater infringement on other people’s freedom than an action contributing to their deaths? In 2021, China ended even the façade of democracy in Hong Kong, while it continued to oppress the Uighurs. In 2022, the international rule of law was broken again as Russia invaded Ukraine, a breach of the kind that the United Nations was founded to stop. The resulting interruption in energy supplies, combined with broader pandemic-related supply side shortages and large demand shifts, has resulted in inflation rising at a rate not seen for nearly half a century.
This is a lot for any society to digest in a short period of time. Our understanding of world economics and politics has naturally been shaken to the core. In his essay “Capitalism after the crises”, Jim Chalmers rightly argues that this succession of events should have called for a revision of our mental models – the lenses through which we see the world. That some of the old premises were wrong is clear. Francis Fukuyama’s “end of history” hypothesis – the idea that we were all converging to liberal democracies and free-market economies – is now seen as simply wishful thinking. The notion that economic integration would bring peace and convergence, too, has been trashed – the presence of more McDonald’s restaurants doesn’t bring more democracy or a better-functioning economy.
But other ideas die more slowly. Neoliberalism – the idea that free and unfettered markets are efficient, stable and maximise societal welfare and individual freedom – should have been thrown into the dustbin of history, but it struggles on, 40 years after its ascendancy. This is not because of any intellectual coherency, theoretical foundation or empirical evidence. Rather, it is a set of doctrines that serves powerful interests while simultaneously appealing superficially to broadly held ideals. A little thought makes clear that the freedom of some comes at the expense of others. The freedom not to wear a mask or be vaccinated, for instance, comes at the expense of the much more important freedom of others to live healthy lives, or even to live, period.
Almost a half century ago, I showed that whenever there was imperfect information or imperfect risk markets – that is, always – even competitive markets are not efficient. As I put it, the reason that the “invisible hand” was so invisible was that it wasn’t there. But then we traced the growing inequality to an increase in market power and other forms of exploitation. Many businesses had found it more profitable to invent better and more insidious ways to take advantage of others’ lack of information or vulnerabilities than to produce goods that enhanced the wellbeing of individuals and society. The worst manifestations of this occurred in the United States. While GDP grew (though much more slowly than during the period prior to the onset of the era of neoliberalism), all the benefits went to the people at the top. Wages at the bottom today, adjusted for inflation, are the same as they were 65 years ago. There has been an evisceration of the middle class. Capitalism American style has not delivered for the vast majority of Americans. As president, Donald Trump took advantage of the understandable disgruntlement by claiming that the system was rigged against the ordinary American – but then he went on to rig it even more, passing a tax law that would lower taxes on billionaires and rich corporations while increasing taxes (when fully implemented) on a majority of Americans.
As clear as the evidence was, and as dramatic as the events of 2008 were, the old mental model was hardly shaken. The system ground on, with a small dose of more banking regulation (in the US, the regulation that occurred in the aftermath of the 2008 crisis was partially undone with Trump’s appointment of Jerome Powell to the Federal Reserve). Changing mental models is not easy, and there were strong interests in keeping the system as it was.
In 2012, in my book The Price of Inequality, I predicted that the country’s growing inequality made it prey to a demagogue, though I didn’t think it would happen as fast as it did, and I couldn’t imagine one so intent on destroying societal norms as Trump. I also couldn’t imagine one of the two major parties marching so far down the road to fascism that it interpreted the January 6, 2021, insurrection – an attempt to prevent a peaceful transition of power and change the outcome of the election itself – as just an ordinary protest.
At the same time, the pandemic showed that the economy was far less resilient than many would have hoped. To me, again, this was not a surprise. I saw a shortsightedness and a misunderstanding of risk demonstrated in the lead-up to the 2008 financial crisis revealed again: we built cars without spare tires. Germany had made itself dependent on Russian gas. In my 2006 book, Making Globalization Work, I warned about how foolish this was. George W. Bush may have looked into Vladimir Putin’s eyes and seen someone he could trust, but anyone looking more closely at the matter should have been deeply worried. Markets don’t handle risk well; they don’t think forward well. And now Germany and the world are paying a high price for this shortsightedness.
By now, it should be clear that solving the central problems of the 21st century will require more, not less, government. At the core of two existential issues facing us – climate change and pandemics – are externalities, the sort of things that markets just can’t handle on their own. We turn to government in the face of these and other disasters. We can only imagine where we would be but for governments getting us those COVID-19 vaccines, and in responding to the bushfires and floods and hurricanes. Left to its own devices, the private sector would have accelerated the pace of climate change, and the disasters that are in the offing would be already upon us.
As an American, I think of all the other problems foisted on our society by an insufficiently tempered private sector: the opioid crisis, with life expectancy in the United States declining even before the pandemic and “deaths of despair” marking our deindustrialised communities; the childhood diabetes crisis, as food companies push their sugar-rich products knowing full well the consequences; and the student-debt crisis, with students owing well over $1.5 trillion. Before this, we had our tobacco, Teflon and asbestos problems.
One might wonder where the values, the ethics, of those who run these companies were. And there’s the rub: capitalism, at least in the neoliberal version, creates people who put values and ethics on the back burner. Recent research in behavioral economics had documented this. At least in the context of lab experiments, bankers are less honest and more selfish than ordinary human beings. And economists are at least more selfish.
Capitalism devours itself. While successful capitalism requires trust and honesty, it creates people who are the opposite. Trump is emblematic. Perhaps that is part of the reason that American capitalism has been evolving the way it has, with more market power, more exploitation and more rent seeking.
My visit to Australia last summer brought a moment of optimism and hope. Maybe some countries, with good governments and good economic policies, could show that there was another way forward. Perhaps they could shift our mental models, helping us to absorb the insights of modern economics so resisted by the market fundamentalists.
As discredited as neoliberalism might be, it won’t fade until we create an alternative model for how the economy might work. I call it progressive capitalism. The name’s not as important as what it entails: a rich ecology of institutions, private firms, non-profits, cooperatives and governmental entities. A balance between individual and collective action. A recognition of the need for regulation and public investments. A recognition of the fact that one person’s freedom is another’s unfreedom – and that a well-functioning society needs a reasoned discourse about how these freedoms are to be balanced. A recognition that among the important freedoms are the freedom to live up to one’s potential, freedom from fear (requiring a modicum of security) and freedom from hunger. Well-functioning societies require checks and balances, but these can’t work effectively if there are disproportionate inequalities; so again, a modicum of equality is necessary not just as a matter of social justice, but for a well-functioning economy and a well-functioning democracy.
As we look around the world, we see enormous successes for countries and programs that have departed from the strictures of neoliberalism. Indeed, as I’ve long argued, the United States, even as it advocated neoliberalism, never took it fully on board. It had an active industrial policy that formed the basis of two of its strongest sectors, tech and pharmaceuticals. But one of those was buried in the Department of Defense, the other in the innocent-sounding National Institutes of Health, and large grants from them and the National Science Foundation were made to another set of America’s premier institutions, its universities, none of which were profit-making institutions, and all of which were either state enterprises or not-for-profits.
Chalmers emphasises a values-driven capitalism, but I would go further: we need a market economy that not only reflects values but encourages and develops these values from the outset. GDP, markets and market prices do not reflect and incorporate much that is important. As Robert Kennedy said, GDP measures everything “except that which makes life worthwhile”. That’s why I think Australia’s efforts to create a wellbeing budget are so important. Budgets allocate resources, and a wellbeing budget allocates resources in ways that enhance societal wellbeing. Around the world, there are a few countries trying to embrace these ideas.
There are many instruments by which democratic governments wedded to progressive capitalism can achieve these goals, adapted to the circumstances and history of the particular country. These include macroeconomic and financial policies with a focus on the real economy, and on how the real economy delivers wellbeing to all citizens. This means not simply cutting costs if it entails worsening working conditions. A wellbeing focus goes against the Federal Reserve’s almost gleeful calling for a weaker job market to bring down wage growth – even though workers’ share of GDP has been declining, and even though inflation has already been tempered and there is no evidence of a wage-price spiral. Other policies include commitments to social protection and opportunity. And opportunity means that markets can’t be dominated by mega-firms, those 21st century giants that are even more powerful than the firms of the late 19th and early 20th century. We need strong competition laws, and in some areas, Australia has led the way.
So, too, neoliberalism simply assumed that people could costlessly move to new jobs when they lost their old jobs; they could move from the deindustrialised communities to where new jobs were being created, ignoring the value of community and what social scientists refer to as social capital. A wellbeing focus, then, entails place-based policies and active labour market policies.
One can’t separate a successful economy from a successful democracy and a cohesive, well-functioning society. Neoliberalism pretended it was just an economic agenda, but it also provided a lens through which the entire society was viewed. It encouraged a narrow materialism, tunnel vision and short-sighted selfishness. We need a new mental model, a new set of lenses, like that provided by progressive capitalism with its focus on wellbeing. Australia is setting out on the path to achieve it. It won’t be easy, and it won’t be a short journey. But Chalmers’ essay provides a vision of both the road and the destiny.
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