Modern economists don’t understand how societies and economies function. The time has come for a new economics that will bring humanity back into capitalism.
For economists, the solution to all complex problems is the same: leave it to the market. They mean freedom for capitalist markets, where money is the measure of value and the owner of capital has the right to use it as he wishes, including the right to use it only for accumulating even more capital rather than investing it in society
Noble Laureate economist Angus Deaton is critical of his fellow economists in his March 2024 paper, “Rethinking My Economics”. He writes, “The profession knows and understands many things. Yet today we are in some disarray. We did not collectively predict the financial crisis and, worse still, we may have contributed to it through an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought…Economics has powerful tools that can provide clear-cut answers, but that require assumptions that are not valid under all circumstances..”
The global financial crisis in 2008 revealed structural weaknesses in economies. Irrational exuberance in de-regulated financial markets in the US and UK, global centres of finance, had disrupted economies around the world. A high-level, international commission chaired by Noble Laureate economist Michael Spence brought together 22 policymakers, academics, and business leaders to examine various aspects of economic growth and development. The group published The Growth Report in 2009.
Elaborating on the report, Spence said that liberal market theories explain how to make economic growth faster. They don’t explain how to make growth inclusive at the same time. The models assume that macro growth lifts all boats, and wealth will trickle down as it accumulates. However, trickle-down does not happen automatically. As Thomas Piketty revealed in his 2013 book translated into English as Capital in the Twenty-First Century, wealth had been flowing upwards since the 1990s with the ideology of “leave it to the market and get governments out of the way” pervading economic policies from the 1980s.
Market is an ancient idea. People traded many things in markets centuries before the advent of modern stock markets and financial trading. They traded their produce, and their work, and many things that money cannot buy. But in capitalist circles, the answer to the question, “How is the market doing?” is to report how the Dow Jones, Nasdaq, and Sensex did overnight.
21st century economics does not have a theory of how to improve inclusion along with growth. In capitalist economies, everything can be bought for money and converted into the buyer’s property to use as he wants. Land, mineral resources and forests become commodities in financial markets. Their owners can use them to extract the maximum economic value and sell their assets to others whenever they will.
The concept of a labour market is an abomination. Human beings are not commodities. They get dignity from the dignity given to the work they do. Human beings can be bought and sold for money in slave markets. Labour is a commodity in contract labour markets. Its price is negotiated between workers and employers who need them to work to make profits and who can withhold payments when they will.
Every citizen is a potential customer in markets. Marketers compete for a larger share of customer’s wallets. However, every consumer is a human who needs enough in his wallet to buy all the stuff that becomes available when markets are opened to imports. If citizens don’t have decent jobs to earn enough, internal markets will not grow.
India’ Finance Minister pleads with investors to invest and make India’s GDP the third largest in the world. Even if GDP increases, what about the incomes of Indians? Even in PPP terms, GDP per capita was $7,096 in India in 2017, compared to $13, 470 in South Africa, $18,188 in China, and $64,703 in the US.
Many citizens are self-employed because they cannot get regular wage paying jobs. Studies also reveal that the actual earnings of self-employed workers have declined by 0.76% between 2019 and 2023. Worse, the real earnings of regular wage workers declined by 2.05%.
Modern economists do not acknowledge how societies and real economies function. By the last century’s end, free market fundamentalism had become an ideology. With the shame attached to socialism by the Washington Consensus, free market capitalism and unfettered trade became economics.
Behind the invisible hand is the power of capital. Rights of capital and its freedom to roam the world across national boundaries and make more profits trump the rights of human beings moving across borders searching for safer lives. The time has come for a new economics to put humanity back into capitalism.
(Published in The Economic Times, April 17 2024)