The progressive capitalism
Isiah Berlin: “Freedom for the wolves has often meant death to the sheep.”[1]
How are we to balance political and economic freedom?
There are four essential economic freedoms: freedom to work, freedom to enjoy the fruits of one’s labour, freedom to own one’s property and the freedom to participate in a free market.
Taxation without representation is tyranny.
People also need freedom from want and freedom from fear. A person facing extremes of want and fear is not free.
Reagan and Clinton had given freedom to the wolves (the bankers) at the expense of the sheep (workers, ordinary investors, and homeowners).
The mild coercion – forcing someone to do something that he of his own volition would not do – can, in some instances, enhance everyone’s freedom, even the freedom of those being coerced.
Often. Collective action is not possible without a modicum of coercion because of what are called free-rider problems.
A world without any restraints would be a jungle in which only power mattered, determining who got what and who did what. It wouldn’t be a market at all.
What kind of system is most likely to deliver meaningful freedom and well-being to the largest number of people. The answer is something along the lines of a rejuvenated European social democracy or a new American Progressive Capitalism, a twenty-first-century version of social democracy or of the Scandinavian welfare state.
Among the critical failures of neoliberalism is that it curtails the freedom of the many while it expands the freedom of the few.
Freedom in Danger
A refrain throughout the book is that one person’s freedom can often amount to another’s unfreedom; or, put in another way, the enhancement of one person’s freedom often comes at the expense of another’s.
Freedom to live up to one’s potential. People who are living on the edge have, in some sense, no freedom. They do what they must to survive.
American grow up on an elixir of freedom. It is hard to see how a society seemingly so deeply committed, allowed slavery to continue.
An economist’s notion of economic freedom begins with a simple idea: A person’s freedom is about what she can do and what she can choose. It is close to Milton Friedman’s perspective in his book Free to Choose.
Progressive taxation, with the proceeds redistributed to the less-well off through social programs or education, expands the opportunity set of the poor, their freedom, even while it may simultaneously constrain the opportunity set of the rich.
Standard competitive analyses in academic economics assume that no one has less power, and everyone has perfect information, and all are perfectly rational.
Coercion can enhance everyone’s freedom. Stoplights are a simple regulation.
Property rights are a restraint on others; but it is a restraint that, overall, is freeing that expands what people can do and consume.
People, of course, impose constraints on themselves in their dealing with others. That’s what contracts are. Voluntarily entered contracts make both parties better off. One of the few roles for government accepted by the Right is the enforcement of contracts.
A social contract that defines citizens’ relationship with each other and the government. Or with sovereign, as Thomas Hobbes and John Locke, wrote.
Preferences and beliefs can be shaped. They are not fixed as neoliberal economics is claiming.
Economists have traditionally viewed education simply as enhancing skills – creating human capital. But education does more than that; is shapes individuals.
The liberty to think as one pleases and act in ways that one pleases – so long as the action do not affect others – is central to the concept of freedom.
What kind of global architecture is most likely to deliver on, what authors believe is the good society. One thing that is required is a better balance between the market, the state, and civil society, and richer ecology of institutions, including cooperatives and non-for-profits.
One of the hallmarks of neoliberalism and neoliberal policies was the claim that there is no alternative. Progressive capitalism entails an important role for collective actions. A central role of collective action is to expand the freedom of all (by well-designed regulation and public investments, financed by taxes), but another key component is to balance expansions of the freedoms of some against the reductions in the freedom of others.
How Economists Think About Freedom
The Mont Pelerin Society sought to advance an anti-state vision, one that was far more radical than even the Republican Party at that time.
Neoliberal economists constructed a theory to support their views, not surprisingly called neoclassical economics.
We’ve now had forty years of this neoliberal experiment that began under Reagan and Thatcher.
Friedman and Hayek were the intellectual handmaidens of the capitalists. They wanted a smaller role for government and less collective action.
Under neoclassical economics, individuals were rewarded based on their contributions to society – a theory called just deserts.
Even within their own framework, Friedman and Hayek would have questioned the moral legitimacy of inequalities arising from market power and other forms of exploitation. If only everybody works hard, is creative, and pursues their own interests, all will be well. But that claim is, regrettably, false.
John Maynard Keynes and FDR saw an alternative way forward from classical economics. The Keynes and FDR approach was a tempered capitalism with government playing a key but limited role, ensuring stability, efficiency and equity. They laid the groundwork for a twenty-first-century progressive capitalism that supports meaningful human freedom.
Liberty and Freedom – Basic Principles
One Person’s Freedom is Another Person’s Unfreedom
Isaiah Berlin’s quote: “Freedom for the gun owners has often meant death to schoolchildren and adults killed in mass shooting.”[2] This is an example of an externality, an action taken by some people that negatively affects others.
Externalities are pervasive in our economy and society.
Author showed, together with Bruce Greenwald that whenever there is incomplete and asymmetric information and imperfect risk markets there are externalities that affect the efficiency of markets.
The economy would function far better if everyone could trust each other.
Historians of economic thought looking at the totality of Adam Smith’s writing, including his Theory of Moral Sentiments, suggested that when Smith referred to the individual pursuit of self-interest leading to societal well-being, he wasn’t referring to a totally selfish pursuit, as modern economists think. Rather, he was focused on people’s well-being, broadly construed, including their instinct toward the well-being of others.
A person may realize that she might be worse off in the narrow self-interested sense where she (and others) not to have acted in the seemingly other-regarding way.
Coercion is necessary. We reduce the freedom of some because it is necessary if we want a civilized society to function well, for others to have some of the freedom they want, and for any society that thinks of itself as a free society.
Once we recognize the interdependence of freedoms, one must begin to evaluate trade-offs. An absolutist position that says “any infringement on my liberty is unacceptable” would lead to chaos. Many of the most politically contentious issues arise when groups within society differ in their judgments about balancing trade-offs. Assessments of trade-offs are obviously affected by beliefs.
While aware of the possibility of externalities, those on the Right make four mistakes:
- They relegate externalities to being exceptions.
- They fail to recognize the really important externalities.
- They believe that, in most of the rare instances in which externalities occur, voluntary actions would suffice and there is no need for government intervention.
- They believe if government has to take action, it should do so by using a simple instrument.
Externalities are ubiquitous and pervasive, and they matter.
We can’t look at debt in isolation. We have to look at what we got with that debt. If we spend the money on infrastructure, education, or technology, then we have a more productive economy; there are assets that offset the debt liability. Not to make essential public investments is to leave a country impoverished. Debt is a financial liability, not a real liability. By contrast environmental degradation is a real liability.
The freedom of today’s bankers has come at the expense of more frequent financial crises.
The tragedy of commons and the free-rider problem are big problems of collective agreements. Ronald Coase is saying that externalities would be solved if government would assign and enforce property rights. That is privatization solution. Elinor Ostrom is talking about regulation solution. Both of them privatization and regulation are coercive.
Another solution is subsidies for good behavior.
Subsidies, taxes, and regulations.
It is wrong to say that the regulatory system is more coercive than the price or subsidy system. We must evaluate the full consequences for both winners and losers.
Freedom through Coercion: Public Goods and the Free-Rider Problem
The collective actions of the group decides on a set of rules that enhances the well-being of the society as a whole, even if particular individuals or groups of individuals are worse off.
Coercion, in many cases, takes the form of taxes to make it possible to provide the public good.
Free-rider problem. Each person has a strong incentive to become a free-rider on others’ contributions.
Not recognizing that one person’s freedom is another’s unfreedom was a grave intellectual failure of the Right. Another one is to not recognize the enormous value of public expenditure, which can only be funded through taxes. And not recognizing the value of coercive coordination is a third.
The right-wing perspective – and the standard economics perspective – on human nature is just wrong.
The basic political unit in the world today is the nation-state, able to regulate only what occur within its borders. There is no effective global body to regulate what occurs across borders. The most important example of a global public good is protecting the world from climate change.
Contracts, the Social Contract, and Freedom
When individuals sign a contract, they agree to do something; this contract constraints their freedom to act in the future in return for something from the other party.
The fact that a contract is voluntarily entered into does not mean it is not exploitive.
Philosophers have long viewed the relationship between individuals and society as governed by a similar social contract, which constrains citizens in ways that enhance their overall freedom and well-being.
Fundamental difference between an ordinary contract and a social contract is that behind any ordinary contract there is government to enforce it, social contracts are based on trust.
We need to figure out a system for weighing the expansion of some people’s freedoms with the curtailing of other people’s beyond the law of the jungle, where the strongest expands her freedom at the expense of all others.
John Rawls’s Theory of Justice provides this kind of framework. How individuals would want to make these trade-offs if we imagine them behind what Rawls calls the “veil of ignorance,” where they don’t know where in society they will find themselves when the veil is lifted.
In pragmatic way, Rawls’s framework is akin to Smith’s “impartial spectator”. Rawls uses this framework to present a persuasive case for progressive redistribution as a desirable part of the social contract.
One aspect of a good social contract incorporated into virtually all modern societies and representing one of the foremost social innovations of the past 150 years is social protection.
We know that without adequate education and health care, no one can live up to their full potential. Insecurity can have a devastating effect on people.
Germany’s chancellor Otto von Bismarck was the first to introduce an old-age social security program in 1889.
Much of the opposition to publicly provided social protection is driven by a simple ideology which claims that collective action impinges on our individual freedom and government is always inefficient.
Even Adam Smiths warned that the interest of businessmen is always in some respect different from, and even opposite to, that of the public.
Freedom, a Competitive Economy, and Social Justice
The fact that resources are limited – what economists call scarcity – constrains what we can do as individuals and as a society.
Morally illegitimate wealth gives rise to wages and prices that themselves lack moral legitimacy. Historically, economists who attack direct redistribution claimed that incomes are the “just deserts” of people’s efforts. When illegitimately begotten wealth is passed down the generations, it remains morally illegitimate even hundred of years later.
Historically, property rights have been defined by the powerful to preserve their own power. They are social construction, they are what they are because we as society define them to be.
When it came time to end slavery in most countries, it was the enslavers who were compensated for their loss of property rights, not the formerly enslaved.
A key characteristic of owning something, it is often said is the right to sell or give that property right to others.
Even in the most progressive societies, there is a high level of intergenerational transmission of advantages and disadvantages. There are many mechanisms by which this occur, including education (human capital) and connections.
Discussion of property rights and how they are defined highlights the way rules determine both how the economy functions and the income distribution that emerges.
We cannot divorce the current distribution of income and wealth from the current and historical distribution of power. Change is constant but initial conditions matter.
The moral legitimacy of the income earned can be questioned on two grounds. Income depends on assets – how much wealth (also inherited) I have and how much human capital (that typically depends on how the state allocates educational resources).
In a competitive markets, wages and relative prices reflect the preferences of people with income and wealth.
We owe our income and the wealth that derives from it as much to that environment as to our won skills and effort. There is full justification for imposing high taxes on high incomes even in a perfectly competitive economy in which wealth is garnered in ways that have full moral legitimacy.
Assessing the magnitude and nature of the trade-offs is hard.
To the extent that effort is directed at rent-seeking, we want to discourage it because it decreases GDP and increases inequality.
There are multiple ways in which inequality has adverse economic, social and political consequences. The children of the rich may grow up feeling entitled. People with low or no income feel a sense of despair, a conviction that the system is rigged. Both entitlement and despair hurt overall economic performance.
Redistribution, financing high-return public investments through progressive taxation, and tilting the rules of the economic game toward ordinary workers through pre-distribution – that is, changing the market distribution of income to make it more equitable – are all desirable policies. They would emerge naturally as part of a social contract written behind the veil of ignorance.
The Freedom to Exploit
The fact that the incomes of so many wealthy people are the result, at least in part, of exploitation reinforces the earlier conclusions that we shouldn’t give primacy to the distribution of incomes generated by the market economy.
The high price leads to a transfer of income from ordinary people to the monopolist, creating more inequality.
Markets don’t exist in a vacuum, they must be structured by rules and regulations. An important area of those regulations relates to competitions.
In his 1952 book, American Capitalism, John Kenneth Galbraith describes a system of countervailing powers, what might be though of as a system of checks and balances within our economic systems. Perhaps the most important force countervailing corporations is unions. Fewer that 6 percent of private-sector workers were unionized in 2022, in contrast to almost 25 percent in 1973 and a peak of over 35 percent in the 1950s.
One important source of monopoly power is patents, which give an individual or corporation exclusive rights to the use of a discovery for a temporary period (globally, twenty years).
The most important input into the production of knowledge is knowledge itself. There is a growing body of evidence that shows that intellectual property, as currently constituted, leads to a slower pace of innovation and higher prices.
Freedom, Beliefs, and Preferences, and the Creation of the Good Society
Freedom through the economists standard toolkit – trade-offs, externalities, public goods, and coordination problems.
We are concerned both about negative freedoms – freedom from want and freedom from fear – and positive freedoms – the freedom to live up to one’s potential and the freedom to flourish. We are concerned about economics as well as political freedom.
The research into the departures from infinitely rational individuals was called behavioral economics.
Social Coercion and Social Cohesion
We are all social animals, sensitive to what others think of us. What we view as acceptable is shaped by our society.
Twenty-first-century behavioral economics emphasizes that preferences are endogenous – they can change with our experience – and that they are largely socially determined.
Socialization plays an important role in preference shaping. Education plays another role. It creates social commons, or common ways of looking at the world, including a common language with which to discuss it. Peer pressure and social norms play an important role in shaping behavior.
Sometimes norms can help address an externality.
To the extent that there is social cohesion, a requirement to act for the good society is not coercion. If individuals fully adopt norms as their own values, there is no constraint imposed by a regulation requiring these behaviors.
In some contexts, it may be easier to induce cooperation through a social norm than through regulations or market incentives.
Social capital includes the trust people have in each other; it can also include social norms and the social commons that enable them to function well together.
Under capitalism, we tend to admire people who have made a lot of money without paying much attention to how they made it.
Modern behavioral economics has detailed how our economic environment shapes us.
Capitalism encourages selfishness and materialism; ruthless selfishness often leads to dishonesty; dishonesty undermines trust; and a failure of trust undermines the functioning of the economic system.
The Concerted Shaping of Individuals and Their Beliefs
Freedom of speech is also not absolute. The advent of social media created a new issue not contemplated by the Founding Fathers – the question of virality.
There is a popular idea that in a free marketplace of ideas, only the best win out. The marketplace of ideas is one in which, a priori, there cannot be perfect information. If everyone knew everything there would be nothing to put out into the marketplace of ideas.
The first principle of a competitive, free market is transparency.
Pollution of our information environment, like other forms of information, imposes costs on society that the polluter does not take into account.
A functioning society must have socially agreed-on ways to assess the truth. People can’t have different views of the truth in certain key areas, for instance, having to do with contract, property, criminal behavior, and public health.
There is a least one more ingredient necessary to make markets work well, no use of force and intimidation.
Corporations use their money to shape what citizens see and hear – and what they see and hear shapes society.
The platforms have devised a winning strategy – winning for them, but disastrous for the rest of society – based on polarization, or engagement through enragement. The greatest danger the platforms have is the power to create society’s metanarratives, the stories and understanding that shape how large portions of our population see the world. How people see the world is central to every issue – including freedom. Differences in worldviews are also associated with major differences in what decisions to take collectively.
Concentrated economic power leads to concentrated political power.
In past decades, public policy recognized how price discrimination undermines efficiency (and equity). The Robinson-Patman Act of 1936 outlawed it, saying that firms couldn’t discriminate in the prices they charged. Instead, price differences had to be justified by cost differences. Because of the influence of free-market economists, US courts have not enforced these provisions in decades.
Certain private-sector firms have now an almost Orwellian power to shape us, including the power to convince others to allow them to continue unchecked.
Tolerance, Social Solidarity, and Freedom
About tolerance, two critical distinctions are useful. The first is between ideas that can be verified and those that are metaphysical and cannot be verified; and the second is between thought and action.
The deficit is simply the difference between the expenditure and the taxes. Passing a law that the deficit should be not greater than xx trillion can’t change that arithmetic; it only poses the question: Which of the three numbers (expenditures, taxes, deficit) should be ignored.
Tolerance about beliefs is one thing; tolerance about beliefs that lead to action that impose harms on others is something else.
Speech intended to influence other is clearly an “action”.
Greater solidarity – less polarization – will enable us to see the world more similarly, and this will allow us to reach greater consensus on the difficult issues facing society, including what kinds of statements and actions are untruthful and socially harmful, and in what ways can the dissemination of those statements be restricted consistent with other values.
What kind of Economy promotes a Good, Just, and Free Society?
What kind of economic system is most conducive to a good society?
Neoliberal Capitalism: Why It Failed
The great irony of history is that neoliberalism became a global ideology just as economic theory was helping us to understand the limitations of markets.
Some of the critical market failures:
- Competition and exploitation.
- Macroeconomics.
- Externalities.
- Public goods and coordination failures.
- Imperfect information.
- Imperfect risk markets.
- Imperfect capital markets.
- Macroeconomic fluctuations.
- Macro-inflation.
- Lack of competition.
- Excessive inequality.
There are several reasons for pessimism about self-correcting forces. Societies often respond slowly.
A hallmark of neoliberalism was the claim that there is no alternative. As the world faces the existential crisis of climate change, there is no alternative but government action. The fact that there is no alternative but radical change is one source of optimism. Our young people are another.
Freedom, Sovereignty, and Coercion Among States
Coercion can take many forms. Depriving a person of an opportunity he might otherwise have had may induce him to do something he otherwise would not have done. While he is not forced to take the action he feels coerced into, it is the best remaining option.
Nothing could better illustrate the imbalances in the international rules and regulations than intellectual property (IP) regulation.
Multinationals became experts in exploring globalization. They produced goods where labor was cheap but used global rules to avoid paying taxes anywhere.
The investor agreements restrain the ability of a country to increase taxes on foreign companies whose headquarters are located in one of the countries that’s a signatory to the agreement. foreign companies are treated more favorably; with more protections than domestic companies.
An effective democracy requires limiting corporate power and curbing wealth inequalities.
Three general principles underlay this alternative framework:
- The first principle is that international rules should allow countries to do as they please so long as it does not harm other countries.
- The second principle is one of fairness and justice. It is often useful to think about the matter through the lens provided by John Rawls.
- The third principle is one woven throughout this book: Economic arrangements have societal costs that must be considered. Economics does not stand outside society.
Progressive Capitalism, Social Democracy, and a Learning Society
An alternative framework, progressive capitalism (or a rejuvenated social democracy), which puts the well-being of all citizens at its center and goes beyond material goods to incorporate a sense of security and freedom.
The economy is supposed to serve society, not the other way around.
I center my discussion of progressive capitalism around six themes:
- Concerning power.
- Inequality.
- The importance of collective actions.
- The role of the economic system in shaping individuals.
- Creating a learning society.
- A rich ecology of institutions.
Learning is important. Underregulated financial markets are dangerous. We are crashing headlong into our planetary boundaries. We must adapt. Our economic system has to be decentralized. We need different institutions like public, private for-profit, cooperatives, private non-for-profit.
The term governance refers to the rules that determine who makes what decisions and what objectives are.
Rebalancing power relationships in every aspect of our society is essential for shared prosperity and creating a good and decent society.
To achieve a better balance – to replace neoliberal capitalism with progressive – we have to reconstruct our economic and legal system, rule by rule, regulation by regulation, institution by institution.
We need check and balances within society.
We must fight inequality, access to health institutions must be universal human rights, we must improve collective action and make sure that some coercive actions take care of free-rider problems.
We should think about all sorts of capital: physical, financial, human, intellectual, organizational, social, natural. They are all foundations of our economy.
Democracy, Freedom, Social Justice, and the Good Society
We need regulations. Environmental, traffic, zoning, financial.
Politics is about navigating a world in which there might be large differences in opinion on what should be done collectively.
There are many ways in which economic power gets translated into political power and undermines the fundamental democratic value of one person having one vote. The reality is that some people’s voices are much, much louder than others. Fear is a key instrument the powerful wield to persuade others to go along with their agenda.
[1] In the book on page ix
[2] In the book on page 46
