Sunday, October 12, 2008

Economic efficiency and the Good Society

Even if it were not the most economically-efficient, Milton Friedman said of the free-market economy, he would support it anyway because it was a liberty-maximising political economy. But by a happy co-incidence, it just so happened that it was the most efficient too.

We don't know what he would have said about the present situation were he still alive but many people are rather gratified at the thought that he would have had to recant at least part of this statement. It's a feeling I understand and share to an extent but - and I hate to be a wet-blanket here - in addition to the reasons outlined in the post below, I think there are reasons why we should be more circumspect.

Or rather there is really one reason, which I want to discuss and it's this: saying one's version of the Good Society just so happens to be the most economically efficient is just a rather narrow way of saying my version of the Good Society yields a utilitarian outcome. I've been thinking that this is so prevalent that it could almost be considered a human universal. Well, maybe not quite - but I think the majority of us do this probably for most of the time.

For me, the most obvious example of this is the way in which the religious talk about the erosion of society's values as a result of declining religious belief. What strikes me about this is the way in which utilitarian arguments are used in this context. Secularism leads to the destruction of the family, they argue, which in turn is the source of many of our society's ills. This may or may not be true but as far as I'm concerned it simply cannot be considered a valid argument for religion because it says nothing about whether the religion in question is actually true and it is, I'm sure unconsciously, disingenuous because no-one every joined a church to shore up the institution of marriage or to cement society's traditional virtues and customs - they do so for the salvation of their own souls.

This is the template - the pattern from which the narrower economic argument forms itself. It in this context I think we should be careful. The God of economic history is a capricious deity; since the dawn of time She has switched her affections from one form of political economy to another for no apparent reason - or at least none that is apparent at the time - and, crucially, She does this without warning. During the Great Depression, it was Stalin's Russia and Hitler's Germany that weathered Her wrath better than most - yet you don't have to subscribe to the fatuous, ahistorical and frankly grotesque equation some 'bloggertarians' make between state intervention and 'totalitarianism' to accept that economic efficiency - in this case in the form of resisting mass unemployment - cannot be the final standard by which a political economy is judged.

I hope these examples are not too extreme and emotive that they obscure my point. I'll try a milder one. Here north of the border we have had for many years now a rather tedious debate about nationalism that has been framed almost entirely in these terms. The nationalists have argued for independence in these hopelessly narrow terms - we would be better off, like the Scandanavian countries are - like Ireland and Iceland - these two forming part what Alex Salmond likes to call the 'arc of prosperity'. Or should I say liked to call - a week being a long time in politics and all that. It would be tempting to argue that recent events have shown Scotland isn't viable as an independent state - but this would only mirror the narrow lines within which the debate thus far has been conducted. Scotland might be better off as part of a larger economic unit. On the other hand, it's too early to say whether the actions of our larger unit - UK plc - will have any effect on the panic currently afflicting the markets. And there's no reason to assume that an independent Scotland wouldn't be viable if it had rather better regulated banks, or even a nationalised banking system.

Better to argue on a wider basis - on the grounds of civility, of democracy, of what the Good Society might look like. But I'm wondering if an entirely purist position is possible to take here - whether a trade-off between this and economic efficiency isn't inescapable. Surely no rational person's vision of the Good Society is a model that would invite economic disaster and technological retardation; by the same token the sane and the good would not be prepared to embrace the most efficient model regardless of the social cost. I'm wondering if when finding the balance the temptation to insist on Friedman's formulation - here's my vision, it just so happens to be the most efficient - isn't irresistible to us all.

Let me give you a narrow example of what I mean. I'm half a Keynesian so I think the government could help to stimulate the economy by making cuts in regressive taxes such as VAT, along with the duty on alcohol, tobacco and petrol. The Bank of England is independent but we could also do with further cuts in interest rates. Hopefully all this would leave low to middle income households with more dosh to spend, thereby stimulating aggregate demand. I'm also a social democrat so I also think this shift away from regressive taxation would be more socially just. It would be be more equitable and more economically efficient. But I would say that, wouldn't I?

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