We need to rethink our economic assumptions

By Isabel V. Sawhill – To defeat Trump in the upcoming election, Democrats are advancing a set of proposals engineered to excite their base: a single payer health system, college for all, a guaranteed jobs program.

All are worthy of debate but perhaps the problems go deeper. Perhaps they go to the core of our beliefs about how the world works, what makes the economy tick, and how this relates to human welfare.

The dominant paradigm right now is what is sometimes called Neoliberalism which I define as a belief in the efficiency of markets. Those on the left believe that a market economy needs more than a little help from government. There are social costs and benefits that markets ignore; economic downturns are not self-correcting; and a lack of competition or transparency can harm consumers.

By addressing these and other shortcomings, government can free the market to do what it does best. Still, the central belief is that markets are the most efficient way to organize a society and by extension optimize individual freedom.

Critics of this paradigm note that it is fundamentally flawed. Human beings are not just consumers, they don’t always behave rationally, and they don’t always maximize their own well-being. They need a sense of community, they care about the welfare of others, and their sense of what matters goes well beyond a larger GDP. They respond not just to economic incentives but to the desire for respect from their peers, to social norms, and to moral or religious principles.

There is an efficient allocation of resources to go with every possible allocation of dollar votes and the distribution of dollar votes should be a communal decision arrived at by democratic means.

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At the core of the neoliberal theory – arguably its most influential precept — is the idea that people are paid what they are worth.

If incomes are unequal it’s because skills and talents are unequal. The rich deserve their riches because, for the most part, they earned them. The poor lack income because they have too little education or the other skills needed to get ahead.

There is a lot that’s ignored in the wages equal marginal productivity equation: the asymmetry of bargaining power, the difficulty of discerning who contributes what, the stickiness of established wage norms and employment relationships, and the lack of competition. more>

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