Dr Adrian Pabst, Senior Lecturer in Politics, School of Politics and IR, University of Kent; Visiting Professor, Institut d'Etudes Politiques de Lille (Sciences Po), specially for wpfdc.org
As the world’s political and business elites gather in Davos this week, discussions have focused on how to secure the fledgling economic recovery and promote ‘resilient dynamism’ – the theme of this year’s edition of the World Economic Forum. The trouble is that the mainstream debate continues to privilege short-term profit over the long-term well-being of people and the planet and also reduces the financial crisis to the failure of laws and regulations.
But in reality, the current crisis is both economic and ethical. Reckless lending and irresponsible spending led to the credit-fuelled, debt-financed bubbles that burst in 2008-9, leaving the real economy with a substantial output gap (in excess of 5% in some economies) and causing the widespread loss of human and social capital as a result of higher unemployment, poverty, and inequality. According to a recently released report by the NGO Oxfam, the US for example has seen “the share of national income going to the top 1%... doubled since 1980 from 10 to 20%. For the top 0.01% it has quadrupled to levels never seen before”. Across the world, the evolution is much the same: “Globally the incomes of the top 1% have increased 60% in twenty years. The growth in income for the 0.01% has been even greater”. Far from reversing this trend, the worldwide financial storm has accelerated and amplified the concentration of wealth in the hands of the top 1 per cent.
Popular protest around the globe has been triggered not only by deprivation linked to the recession and austerity but also by moral outrage against all those who have betrayed traditional social norms and obligations of justice, fairness, and the common good – bankers, politicians, regulators, journalists and civil servants. Nearly five years after the financial crash, the world economy remains caught in a spiral of debt and demoralisation.
Across the world there is a growing albeit inchoate sense that ‘big business’ and ‘big government’ have colluded at the expense of the people. Both central government and the global economy have become increasingly disembedded from society. At the same time, society has been re-embedded in the ‘market-state’ that subordinates civic and social purpose to the pursuit of power and wealth. For example, the Corporation of London represents the interests of finance to the detriment of all vocational trades, strengthening the City’s capture of the Treasury (Ministry of Finance) and the Treasury’s domination of all government policy. Likewise, Wall St. has escaped prosecution for systematic fraud and continues to shape policy-making in Washington DC. In this manner, bankers and financiers have turned largely self-governing, democratic cities into the capital of global finance.
And just as global finance is disconnected from ethical goals, so too the state has extended the rule of the political and the economic over the social. For half a century, governments of the left and the right have either replaced mutualist arrangements among workers with centralised, bureaucratic welfare or outsourced the delivery of public services to private providers – or indeed both at once. More recently, taxpayers have bailed out both banks and governments who hold each other’s increasingly unreliable bonds, saddling several generations with a debt burden that depresses the kind of sustained strong growth which alone can reverse long-term stagnation and decline. That is why protesters have denounced not just bankers but also regulators and politicians who have all been complicit in the bubble cycle of boom and bust that has imploded with such devastating social consequences.
In short, the collusion of ‘big government’ and ‘big business’ has brought about a system that privatises profit, nationalises losses, and socialises risk. In turn, this has exacerbated already existing income and asset inequality and also exacerbated pockets of persistent poverty across the country. Linked to this is a centralisation of power and a concentration of wealth that are more reminiscent of the late nineteenth century and the 1920s than any point during the post-1945 era. From the outset, the economic turmoil of 2008-9 was part of a much deeper moral and cultural crisis.
Part of the reason why the economics profession neither saw the crisis coming nor could explain it beyond too much lending and too little regulation has to do with the split of political economy from moral philosophy – notably Platonist-Aristotelian virtue ethics and substantive notions of the common good.
In fact, modern economics (including monetarism and Keynesianism) rests on two foundational premises that are ethically and philosophically questionable. First of all, human beings are considered to be fundamentally selfish and greedy, which is why they cooperate with others merely for the sake of their own self-interest. Second, the economy is thought to function according to natural regularities that are mechanistic, such as the iron law of supply and demand or the tendency towards equilibrium – a system whose working is best secured by combining the visible hand of the state with the invisible hand of the market.
Both presuppositions view human beings as economic, not political, ‘animals’ that require a measure of coercion in order to turn egoistic conflict into mutually beneficial cooperation and harmony. Connected with this is the idea that only the human artifice of the social contract can regulate the violent ‘state of nature’ and police the anarchy of individual freedoms. In short, modern economics tends to abstract human beings and the market from the relational constraints as well as opportunities of social bonds, civic ties, and mutual moral obligations.
Bound up with this abstraction is a series of other assumptions that are completely at odds with reality and human nature. Instrumental rationality, perfect information, and efficient markets are little more than mental constructs that modern economists simply project onto the world. But given that reason is bounded, information partial, and market allocation of resources often wasteful, it is little wonder that modern political economy has struggled to understand or account for the real world.
Another key claim by modern economists is that mankind must accept resource scarcity, especially in conditions of population growth. However, resources are only ever scarce in the short term. Over time, it is arguably the case that human labour, ingenuity, and creative production can generate an almost infinite flow of finite resources which help mankind meet its real, objective needs and provide universal basic goods – food, shelter, health, education, friendship…
Scarcity is nearly always something artificially engineered by both monopolisation and the fabrication of fake desires. Indeed, cartels and monopolies generate rents that accrue to the few while restricting genuinely free and fair competition that can help generate prosperity for the many. Moreover, laissez-faire liberalism has replaced substantive notions of the common good with a focus on individual rights, negative liberty, and the satisfaction of our supposedly unlimited human wants.
But this wrongly assumes that all desires are equally valid and that insatiable wants can legitimately override genuine needs. ‘Free-market’ capitalism has reinforced the ‘acquisitive society’ that feeds on “the creation of organised dissatisfaction” (as mass advertising has been aptly described) in order to fuel a culture of continuously accumulating worthless commodities.
The myth of scarce resources ultimately rests on a perverse moral philosophy that Western political economy owes to the Reverend Thomas Robert Malthus. Surveying the deprivation and struggle of the poor from the comfort of his vicarage in late 18th-century England, he denounced what he saw as the greed of “reckless rabble”. That is why he attributed human vice to “the constant pressure on man from the difficulty of subsistence”, which is exacerbated by growing populations – hence the modern, neo-Malthusian tendency to control reproduction through intrusive state intervention and perverse market incentives.
Crucially, Malthus linked private vice to public virtue by presenting a vision of “man as he really is, inert, sluggish and averse from labour unless compelled by necessity”. In other words, humans are naturally prone to vice, and only the necessity of scarce resources can induce virtuous action. This is reminiscent of Bernard Mandeville’s claim in his influential book The Fable of the Bees (1714) that base passions and vile behaviour can be channelled politically towards positive economic outcomes: “Private Vices by the dextrous Management of a skilful Politician may be turned into Publick Benefits”.
The logic is that the selfish greed of the wealthy stimulates consumption, which has a ‘multiplier effect’ and trickles down to the poor masses – a precursor to the neo-liberal economics of Reagan, Thatcher and their political heirs worldwide.
So like Mandeville before him, Malthus claimed that humans are naturally immoral and that paradoxically “moral evil is absolutely necessary to the production of moral excellence”. In light of this Mandevillian-Malthusian dystopia, the English 19th-century thinker Thomas Carlyle was surely right to brand modern economics the ‘dismal science’.
So what is at stake is human nature. Modern economics assumes that mankind is fundamentally selfish, greedy, competitive, and indifferent to mutual recognition or the public good. Adam Smith’s political economy marks an improvement, as he believed in virtuous self-interest that results in cooperation thanks to the invisible hand of the market.
However, his vision of an economy inscribed in networks of social sympathy is limited by a double distrust: first, a distrust in the human ability to extend virtue beyond the ‘thick ties’ of family relations and friendship; secondly, a distrust in human association, which Smith claims nearly always leads to the vice of corruption.
For Smith, both markets and states ought to be amoral and neutral because only the pursuit of individual self-interest – without regard to the well-being of our butcher, brewer, and baker – can produce social benefit.
No surprise then that post-Smithian economics no longer associates the market with the realm of civil society or the moral virtues of civic life. This essay contends that morally embedded markets are also economically more profitable and socially more sustainable. A ‘civil economy’ model is the only genuine alternative to the pessimism in modern economics about either individuals or society (or indeed both at once).
By contrast with the idea of homo oeconomicus in pursuit of self-interest (central to Mandeville, Malthus, and Smith), my argument is that humans are more relational, ‘gift-exchanging animals’ who are naturally disposed to cooperate for the common good in which all can share. Such an alternative anthropology can translate into a ‘civil economy’ and transformative policy ideas, rebuilding our economy and embedding welfare in communities (about which more in a later essay).
For now, several points need to be made about the principles underpinning the ‘civil economy’ model. First of all, the tradition of ‘civil economy’ builds on older notions of human beings as ‘political animals’ who are in search for mutual social recognition through the exercise of virtues that are embodied in practices and the exchange of gifts, as Karl Polanyi suggested in his seminal book The Great Transformation. Marcel Mauss’ anthropology of the gift is equally important in order to rethink economics. What Polanyi and Mauss teach us in different ways is that humans are naturally ‘social animals’ with dispositions to cooperate in the quest for the common good and the good life.
Second, human beings are not ‘bare individuals’ but rather complex persons who are entangled in relationships such as family, community, and associations. The social bonds and civic ties that bind people together are more primary than either individual rights or formal contracts. Moreover, virtuous habits such as cooperative trust or mutual sympathy precede both the exercise of mere instrumental reason and the interplay of sheer sentimental emotions. As such, the ‘civil economy’ model breaks with Enlightenment rationalism and positivism and recovers the notion that people are embedded in relationships and traditions.
Third, some of the most innovative research in contemporary economics repudiates the modern, liberal separation of private from public goods in favour of ‘relational goods’ that are shared by people such as participation in joint activities that depend on continuous interaction, not one-off transactions. Connected with this is a renewed emphasis on notions of the common good, not utility or happiness: the latter merely denotes the felicity of people one by one, whereas the former captures the real relationships and the good of each and everyone in terms of their specific embeddedness in the complex webs of trust and reciprocity. The common good exceeds the sum total of all individual goods and services precisely because it encompasses the mutually augmenting relationships whose reality is greater than the sum of its individual parts.
Fourth, an embedded model means that elected governments create the civic space in which workers, businesses and communities can regulate economic activity and direct the free flow of globally mobile capital to productive activities that benefit the many, not the few. There is growing evidence to show that politics and business serve the needs of society better when they allow worker representation in firms and public sector cooperatives or mutuals. All this involves free, democratically self-governing groups and associations in the governance of the polity and the economy. Contrary to the centralisation of power and the concentration of wealth in the late 19th century and again since the advent of neo-liberalism in the late 1970s, a more plural and participatory model corresponds much better to the spirit of Britain’s mixed constitution because at all levels it re-balances power away from the executive and the administrative towards the legislature and the judiciary.
Fifth, associative democracy strengthens the role of national parliaments, regional assemblies or city/town halls. This model also promotes a renewed participation of professional associations (both nationally and globally) as part of the long-standing tradition of guilds that blend local government and administrative functions with civic, socio-economic, and cultural activities. Instead of free-market fundamentalism or bureaucratic statism, it is individual and corporate members of civil society who collectively determine the norms and institutions governing production and exchange, as my colleague Raffaele Marchetti has suggested in his essay.
Sixth, by contrast with the ordo-liberalism that underpins the German social market economy (and attempts to reform the eurozone), the ‘civil economy’ approach views the market not merely as compatible with the primacy of society over the economy and the polity or the priority of cooperation over conflict. Rather, markets are part of a wider moral economy that promotes the practice of civic and moral virtue in the shared pursuit of the common good – the good of each and everyone in their concrete place and specific relationships.
Seventh, this vision translates into the fusion of gift with contract and a commitment to substantive (not just procedural) justice – just prices, just wages and just rates of interest that restrict usury. Linked to this is a vocational economy that fosters ethos not just based on apprenticeships and professional associations or guilds but also on the sharing of risk and profit through mutualised banking, finance and cooperative arrangements that are constitutionally recognised.
Finally, whereas the social market economy tends to restrict the role of the state to providing a legal framework for competition, the ‘civil economy’ alternative views the state as encouraging and rewarding virtuous behaviour: first, by rewriting company law in such a way as to foster the internal ethos of firms and professional associations and, second, by putting in place rewards for businesses that deliver both social benefit and a reasonable profit. This approach departs from the liberal myth of value neutrality and the ordo-liberal myth of impartiality that are wrongly ascribed to modern government. As such, models of ‘civil economy’ have a much more positive vision of the state as upholding the common good and popular participation in the polity in ways that involve democratic co-determination of the economy.
In short, the genuine alternative to both capitalist commodification and statist collectivisation (or its contemporary monetarist and Keynesian variants) is a ‘civil economy’ model that re-embeds transactions in relationships and directs them to the common good in which all can participate.