It’s ironic that this quote has been attributed to the economist John Maynard Keynes. Ironic, because economists as a breed are not known for changing their minds very often. They are not alone in this, of course. The social sciences, beset by so-called ‘physics envy’, seem at pains to be more scientific than thou.
So it was interesting to read Jo Confino’s challenge to rethinking prosperity, in which he explains that we have been conditioned into regarding the globalised economic system as an impregnable monolithic structure.
He’s right. Economics is often presented not only as monolithic, but as representing a set of ‘natural laws’ that only its High Priests are qualified to apply or amend. The debate is characterized by lots of mansplaining, and the use of obfuscatory jargon to frighten off the amateurs. One illustration of this is the struggle the post-crash economics community is having just trying to persuade their professors to refresh the economics curriculum.
So how best to penetrate the monolith, and what, specifically, do we need to change our minds about? The monolith that is global market capitalism depends on seven big ideas. These served the world well in the past, but over the years they have become cancerous, and are slowly killing the system as a whole.
First, competition, the linchpin of the entire system. In fact, mathematicians would argue in favour of co-operation as a primary strategy, because it yields better outcomes over time. While winning at all costs is necessary for survival in war, in business, companies want longer term customer and supplier relationships. On the other hand, co-operation and the sharing of information increases the size of the pie, instead of restricting the debate to arguments about how best to cut it up. And absolute competition isn’t just mathematically questionable, it’s sexist, too. While male fight-or-flight physiology favours competition, particularly in challenging environments, it ignores the role that female physiology has to play. Research conducted on female subjects suggests quite a different physiological response, one that has been dubbed ‘tend-and-befriend’. So being hooked on competition may actually be compounding a tendency towards sub-optimal outcomes, reinforced through the norms of a traditionally masculine business environment.
Second, the ‘invisible hand’ is just an optimistic myth. It offers a reassuring but inaccurate justification for self-interested behaviour. While order does frequently rise out of chaos, there is no evidence to suggest that this always tends towards the good, and certainly none sufficient to justify society’s reliance on it. The crowd is sometimes wise, but not invariably so. In fact, leaving things to the ‘invisible hand’ skews the market in favour of the strongest. This maximizes their utility, but not that of society or the world at large.
Third, the idea that ‘utility’ is the best way to measure the effectiveness and morality of the market works only if the ‘invisible hand’ really exists. This is because the concept is an empty one – utility for what? If there is no guarantee that individually selfish behaviours produce a good outcome overall, a system based on this thinking cannot be moral without help. And the sort of help this requires – government intervention – is exactly what the economists are trying to avoid, because it interferes with the smooth functioning of the market, and gets political, fast. Even if this idea was a sound one, the idea that ‘Economic Man’ is a rational agent is wildly optimistic. We are all subject to irrational urges, whether through peer pressure, emotions, or our psychological makeup. Assuming we are all robots just leads to confusion about how the market actually works, and about how best to run it.
Fourth, Adam Smith’s original notion about the different interests of owners and managers has had catastrophic consequences. It has used negative psychology to generate HR policies that assume employee recalcitrance, limiting the ability of organizations to unlock human potential. Worse, it’s been used to justify the disastrous ubiquity of executive shareholding. This practice, hand-in-hand with the idea of the supremacy of the shareholder, has made corporate strategy defiantly short-termist and manipulative.
Fifth, the assumption that the price mechanism, left to its own devices, will settle at a scientific equilibrium, is nonsense. It ignores the interplay between supply and demand, and the potential for both of these to be manipulated. As well as airbrushing out the historical debate about ‘just’ prices, market pricing ignores historical questions about cost. This obscures a very important debate about hidden costs (or ‘externalities’), like the environmental cost of pollution. In an age where the limits of the Earth are starting to be felt, it is vital that this debate about the market’s embeddedness is not ignored. There is now no cod left in Newfoundland, and the planet is running out of other commodities all the time.
Sixth, the belief in the shareholder as king owes more to a romanticized ideal about the nature of shareholding than it does to reality. Ignoring the extremely limited sense in which shareholders actually ‘own’ businesses, modern patterns of shareholding make the ‘shareholder’ a rather bizarre – and certainly fleeting – concept. The average time for which a share is now held? About 11 seconds. Blink and you’ll miss it. Sticking to the romance that the shareholder is a nice old bloke who founded the company just drives short-termism. In an attempt to keep him in socks by keeping the share price high, companies neglect wider issues of accountability by ignoring other company stakeholders. This romanticism has fuelled the exponential rise of boardroom pay, and an overly narrow measurement of corporate performance. Many would now argue that shareholder value is the WMD of capitalism.
Seventh, the dominance of the limited liability model is extremely risky. In a global economy, the resilience of the system will always depend on diversity, so no one single model should prevail. But 98% of companies registered in England and Wales enjoy limited liability. In institutionalizing moral hazard, it also plays into an increasingly irresponsible shareholder culture, because there is no downside. More encouragement in law and public policy of alternative models for enterprise would introduce healthy ‘competition’ between business models. And more employee ownership and mutualization would spread risk, as well as creating a wider range of businesses with different risk profiles and models of success.
Is it naive to suggest than a mere change of mind can lead to a change of heart and a change in behaviour? Imagine how you would have felt as a navigator when you first realised there was no longer a risk of you steering the ship over the edge of the earth into the abyss. Imagine how you would have felt waking up the morning after your brother had abdicated as King-Emperor of the British Empire. Imagine how you would have felt crossing the finishing line behind Roger Bannister on 6 May 1954 and hearing this announcement: “Ladies and gentlemen, here is the result of Event 9, the one mile: 1st, Number 41, RG Bannister, Amateur Athletic Association and formerly of Exeter and Merton Colleges, Oxford, with a time which is a new meeting and track record, and which—subject to ratification—will be a new English Native, British National, All-Comers, European, British Empire and World Record. The time was 3 minutes, 59.4 seconds.”
So yes. When the facts change, I change my mind. What will you do, sir?
If you want to read more about this, my book is now out: https://www.amazon.co.uk/Capitalisms-Toxic-Assumptions-Redefining-Generation/dp/1472916794