Monday, 19 September 2016

We need to move on from existing theories of the economy

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Adam Smith. Image source: Wikimedia Commons
[This was originally published a few days ago as a guest post on Dan Little's excellent blog Understanding Society following his review of my book Profit and Gift in the Digital Economy.]

Let me begin by thanking Dan Little for his very perceptive review. As he rightly says, my book is more ambitious than the title might suggest, proposing that we should see our economy not simply as a capitalist market system but as a collection of “many distinct but interconnected practices”. Neither the traditional economist’s focus on firms in markets nor the Marxist political economist’s focus on exploitation of wage labour by capital is a viable way of understanding the real economy, and the book takes some steps towards an alternative view. 

Both of those perspectives have come to narrow our view of the economy in multiple dimensions. Our very concept of the economy has been derived from the tradition that began as political economy with Ricardo and Smith then divided into the Marxist and neoclassical traditions (of course there are also others, but they are less influential). Although these conflict radically in some respects they also share some problematic assumptions, and in particular the assumption that the contemporary economy is essentially a capitalist market economy, characterised by the production of commodities for sale by businesses employing labour and capital. As Gibson-Graham argued brilliantly in their book The End of Capitalism, ideas seep into the ways in which we frame the world, and when the dominant ideas and the main challengers agree on a particular framing of the world it is particularly difficult for us to think outside of the resulting box. In this case, the consequence is that even critics find it difficult to avoid thinking of the economy in market-saturated terms.

The most striking problem that results from this (and one that Gibson-Graham also identified) is that we come to think that only this form of economy is really viable in our present circumstances. Alternatives are pie in the sky, utopian fantasies, which could never work, and so we must be content with some version of capitalism – until we become so disillusioned that we call for its complete overthrow, and assume that some vague label for a better system can be made real and worthwhile by whoever leads the charge on the Bastille. But we need not go down either of these paths once we recognise that the dominant discourses are wrong about the economy we already have.

To see that, we need to start defining the economy in functional terms: economic practices are those that produce and transfer things that people need, whether or not they are bought and sold. As soon as we do that, it becomes apparent that we are surrounded by non-market economic practices already. The book highlights digital gifts – all those web pages that we load without payment, Wikipedia’s free encyclopaedia pages, and open source software, for example. But in some respects these pale into insignificance next to the household and family economy, in which we constantly produce things for each other and transfer them without payment. Charities, volunteering and in many jurisdictions the donation of blood and organs are other examples.

If we are already surrounded by such practices, and if they are proliferating in the most dynamic new areas of our economy, the idea that they are unworkably utopian becomes rather ridiculous. We can then start to ask questions about what forms of organising are more desirable ethically. Here the dominant traditions are equally warped. Each has a standard argument that is trotted out at every opportunity to answer ethical questions, but in reality both standard arguments operate as means of suppressing ethical discussions about economic questions. And both are derived from an extraordinarily narrow theory of how the economy works.

For the mainstream tradition, there is one central mechanism in the economy: price equilibration in the markets, a process in which prices rise and fall to bring demand and supply into balance. If we add on an enormous list of tenuous assumptions (which economists generally admit are unjustified, and then continue to use anyway), this leads to the theory of Pareto optimality of market outcomes: the argument that if we used some other system for allocating economic benefits some people would necessarily be worse off. This in turn becomes the central justification for leaving allocation to the market (and eliminating ‘interference’ with the market).

There are many reasons why this argument is flawed. Let me mention just one. If even one market is not perfectly competitive, but instead is dominated by a monopolist or partial monopolist, then even by the standards of economists a market system does not deliver Pareto optimality, and an alternative system might be more efficient. And in practice capitalists constantly strive to create monopolies, and frequently succeed! Even the Financial Times recognises this: in today’s issue (Sep 15 2016) Philip Stevens argues, “Once in a while capitalism has to be rescued from the depredations of, well, capitalists. Unconstrained, enterprise curdles into monopoly, innovation into rent-seeking. Today’s swashbuckling “disrupters” set up tomorrow’s cosy cartels. Capitalism works when someone enforces competition; and successful capitalists do not much like competition”.

So the argument for Pareto optimality of real market systems is patently false, but it continues to be trotted out constantly. It is presented as if it provides an ethical justification for the market economy, but its real function is to suppress discussion of economic ethics: if the market is inherently good for everyone then, it seems, we don’t need to worry about the ethics of who gets what any more.

The Marxist tradition likewise sees one central mechanism in the economy: the extraction of surplus from wage labour by capitalists. Their analysis of this mechanism depends on the labour theory of value, which is no more tenable that mainstream theories of Pareto optimality (for reasons I discuss in the book). Marxists consistently argue as if any such extraction is ethically reprehensible. Marx himself never provides an ethical justification for such a view. On the contrary, he claims that this is a scientific argument and disowns any ethical intent. Yet it functions in just the same way as the argument for Pareto optimality: instead of encouraging ethical debate about who should get what in the economy, Marxists reduce economic ethics to the single question of the need to prevent exploitation (narrowly conceived) of productive workers.

We need to sweep away both of these apologetics, and recognise that questions of who gets what are ethical issues that are fundamental to justice, legitimacy, and political progress in contemporary societies. And that they are questions that don’t have easy ‘one argument fits all’ answers. To make progress on them we will have to make arguments about what people need and deserve that recognise the complexity of their social situations. But it doesn’t take a great deal of ethical sophistication to recognise that the 1% have too much when many in the lower deciles are seriously impoverished, and that the forms of impoverishment extend well beyond underpaying for productive labour.

I’m afraid that I have written much more than I intended to, and still said very little about the steps I’ve taken in the book towards a more open and plausible way of theorising how the economy works. I hope that I’ve at least added some more depth to the reasons Dan picked out for attempting that task.

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