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Solving market failures means addressing government failures.
August 16, 2019
With Responses From
Aug 16, 2019
6 Min read time
Solving market failures means addressing government failures.
A defining feature of Naidu, Rodrik, and Zucman’s essay is its close alignment with the Democratic Party. Indeed, its initial set of policy proposals would fit comfortably within the platforms of many candidates seeking the party’s presidential nomination.
This congruence is not an indictment per se. Perhaps one of the nation’s political parties did stumble upon just the right economic outlook despite a fatally flawed neoliberalism dominating academic and popular economic thinking. But two other explanations seem more plausible. First, that their essay restates economic views widely held during the period they want to transcend. And second, that the changes proposed are less economic than political in nature and the values chosen are ones that reinforce a particular set of political preferences.
The traditional tools of economics do not answer the political question of what goals a society should orient itself toward.
On the first issue, the essay equates “market fundamentalism, market fetishism, etc.” with neoliberalism and rejects it in favor of a model more sensitive to market failure. But market fetishism does not provide the basis for U.S. economics or public policy. In the academic realm, the authors themselves acknowledge that “contemporary economics is hardly a paean to markets and selfishness.” And in the policy realm, it is not as if a bunch of market fundamentalists have actually cut back government provisions. Across Democratic and Republican congresses and presidencies, the United States has undertaken massive expansions of its safety net, entitlement programs, and public education systems; reregulation of the financial sector; and tightening of environmental standards, coupled with investments in clean energy.
Certainly, some economists and policymakers have pushed in other directions. Some policies have sought to let markets run riot—especially across borders. But the idea that markets frequently fail and government must step into the breach is among the most widely held in U.S. political economy and often the one that emerges victorious. Indeed, Naidu, Rodrik, and Zucman are so dedicated to the standard model of describing and correcting market failures that Rodrik’s own proposal is “distinctive” from the others because he “gives an explicitly pro-social justification for restrictions on trade, not trying to clothe the protectionism in terms of ameliorating some other externality or market failure.”
What has tended to separate left and right in responding to market failures is disagreement not over their existence, but rather over government’s capacity to respond effectively. Naidu, Rodrik, and Zucman exhibit little interest in this countervailing possibility of government failure, instead lamenting that “even when some economists recognize market failures, they worry government action will make things worse.” A call to solve market failures without concern for government failures is not economics after anything; it is economics dug into a trench on the frontlines of a thirty-year political war.
The project’s potential power, then, comes not from its reaffirmation of the market’s fallibility, but from its redefinition of the market’s ends. Its call for an “inclusive prosperity” is laudable, as is its demand that we “consider the whole distribution of outcomes, not simply the average (the ‘middle class’), and that we consider human prosperity broadly, including nonpecuniary sources of well-being.” Hear, hear. This statement of public policy’s objective confronts a view that has dominated economics and policymaking across the political spectrum in recent decades—one characterized by an obsession with optimizing consumer welfare through growth and redistribution of the so-called economic pie. How best to grow the pie, and how much to redistribute, were the focus of debate. But massive helpings of pie were the unquestioned goal. Call it “economic piety.”
If that economic piety is the true gravamen of “neoliberalism,” then a consensus does exist that requires moving beyond, and “Economics After Neoliberalism” can stake its claim. With a different notion of prosperity would come different modes of evaluation, different failures, and thus different policies. But here the second issue emerges: the traditional tools of economics do not answer the political question of what goals a society should orient itself toward. When maximizing consumer welfare is the name of the game, economists can find market failures and suggest fixes. But who names the game?
Naidu, Rodrik, and Zucman could have defined and defended a substantive vision toward which they orient their economics. Instead, they present their values as neutral and self-evident, offering, for instance, three examples of “nonpecuniary sources of well-being”: “from health to climate change to political rights.” Those are all important issues, but they evince a very specific outlook. They are the same three issues, in that order, given top billing on Pete Buttigieg’s campaign website in early July. But are the pride and dignity of fulfilling duties, supporting a family, and contributing to a community also sources of nonpecuniary well-being? If so, where would those priorities sit next to Buttigieg’s? What about the close intergenerational bonds of an extended family or the traditions of a tight-knit community?
Of course, any list of values would be incomplete, but a well-crafted one should call to mind the types of concerns included or excluded. The homogeneously progressive mindset implied by Naidu, Rodrik, and Zucman’s initial list is confirmed by the authors’ own construction of “ justice-efficiency,” which defines “ justice” as the value to be balanced with efficiency. Justice is an important value, of course, but its assertion as the primary one is a progressive predilection, not a universal truth. Many people would give priority to liberty, or tradition, or the strength of families and communities. Note also that, after investing in the idea that prosperity requires a nonpecuniary definition, the authors have already returned the term to its role as a synonym for efficiency. Adopting the lens of a justice-efficiency frontier, the project becomes an effort to temper the traditional economic emphasis on efficiency with a progressive vision of justice, presented with the patina of “an empirical orientation, an experimental mind set, and a good dose of humility to recognize the limits of our knowledge.”
One of the project’s accompanying essays on social insurance and childhood investment provides a practical illustration: it claims strong theoretical and empirical support for the argument that public funding of childcare would improve “welfare,” but it never defines the term. No commentary contemplates whether children have higher “welfare” when placed in daycare centers than when raised by a parent at home, whether parents have higher “welfare” when given large government benefits contingent on leaving their kids in daycare and going back to work, or whether communities are better off when households all make that choice. What is raising a child, or being raised by a parent, worth?
The fact that the larger project seems to carefully curate and validate progressive policies is peculiar, because the argument would surely be much richer, its audience broader, and its implications more startling if it could do more than reinforce a partisan agenda. Immigration would be an especially obvious topic to tackle—recall that, on trade, the framework supports an “explicitly pro-social justification for restrictions”—yet the topic gets no mention beyond vague laments about “nativism” and those “stuck at home.” Free college gets multiple nods, but focus could have gone toward the sizable share of the population that would benefit from other bridges between high school and productive work. Balancing environmental protection with the interests of blue-collar workers would also be ripe for exploration.
“Economics After Neoliberalism” may play a useful role in politics during neoliberalism. But economics after neoliberalism will hopefully fall farther from the tree.
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August 16, 2019
6 Min read time
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