There are those who state their opinions as fact. And then there are those who base their opinions on facts. I like to think that I am one of the latter. I have for quite some time been sitting on a series of views around neo-liberalism, free markets, and Christianity. Recent events on the political campaign trail have finally prompted me to go back to the notes I drafted some two months ago, and put fingers to keyboard.
This entire discussion of course has to be framed with the clear understanding that we all carry cognitive and emotional biases. Being aware of these may not reduce the degree to which we exercise them, and I am no different. Confirmation bias is perhaps the 'biggie' that we all need to confront, and all too often too few of us do.
That said, let's start with a look at the impact of neo-liberal freee market ideologies. The ideology bases itself largely on the work of Adam Smith that many derive from his book 'An inquiry into the nature and causes of the wealth of nations' (1776) in which he stated:
…THE INVISIBLE HAND…
[The rich] consume little more than the poor, and in spite of their natural selfishness and rapacity…they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, (my 'bolding') which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society (again, my 'bolding'), and afford means to the multiplication of the species.
The Wealth Of Nations, Book IV, Chapter V, Digression on the Corn Trade, p. 540, para. b 43.
This is has been. taken as an underlying truth by many, a justification for action that is fundamentally selfish in nature. I would restate it this way: 'if we act in our own best interests we generate the best outcomes for everyone else too'.
Underlying theories of economics have been developed within what is termed the neo-classical school of economics. The 'trickle down' theory is one in particular that is often cited by the political right. It goes like this: if wealth is generated amongst higher income earners, or those with more wealth (these two things are different) then as a result of their spending of that additional wealth or income, this income is spread across the economy. Or put another way, if we provide economic largesse for the ealthy, then they will spend it (there seems to be an implication, what's more, that they will know the best way to spend) in a way that it spreads out across everyone else in the economy. It 'trickles down' from higher income earners t lower income earners. It is the subject of a concept called the 'income multiplier', a statistical calculation by which we can even calculate the extent of the increase in GDP that will result form that initial stimulus. The logic is impeccable. Love it. It's a shame it doesn't work. There's a further comment below on this.
The OECD, in a report date back in 2011, agreed that 'trickle down' is flawed, it doesn't actually work. Here it was, as reported in The Washington Post in December 2011. So it seems reasonable to suggest that in fact when you increase the incomes of high income earners, or the wealth of those with greater material wealth what you actually do is... increase the incomes of high income earners, or the wealth of those with greater material wealth. Those less well off receive little of no benefit from that. Interpretation: tax breaks for the wealthy do not actually benefit those less well off.
Keynesian economics even contains an interesting piece of theory about this, called the 'marginal propensity to consume'. That concept goes like this. If each of us is given an additional dollar (the 'marginal' or last dollar) then we will spend a set proportion of it. Those on low incomes will spend a high proportion of that dollar because they are currently struggling to make ends meet, to put food on the table etc, whereas those on high incomes will be motivated to spend less of t because they are already meeting a large proportion of their material needs. The MPC for lo income earners is greater than that for high income earns. So statistically speaking if Government gives an extra dollar to some one below the average wage more of that dollar will be spent back into the economy, so the economy will receive more stimulus than if that same dollar were given to someone on a higher income. Remember that this is likely to be both 'chunky' and messy' in its nature, and operates at the macro economic level. So there may well be individuals in the economy who do not behave this way, but statistically speaking this is what we ought to see. Interestingly, the Keynesian view is that that income multiplier I mentioned above will be greater when a financial stimulus is given to those on lower incomes. The multiplier is the reciprocal of that mpc.
Then there is the argument that inequality acts as a great incentive for people to strive, to work harder, to be innovative, and this benefits the economy through increased economic growth. Again, the logic seems flawless. Yup, but .. nope., the data says this is not true. Increased inequality appears to reduce economic growth. So with greater inequality we are all worse off, even the wealthy. Here is the OECD repot on that one.
Finally, the evidence on the impact of the impact of the past 36 years of neo liberal or free market economics in new Zealand is that our distribution of wealth has grown ever greater. We currently have the greatest gap between rich and poor that we have ever had. Here is a study commissioned by NZ Treasury that only spanned the period 1981 to 1996 showing the changes that occurred.
There are in fact more fundamental flaws in the free market model too, flaws that strict advocates seem oblivious of. The market model makes asries of assumptions in order to work. For example it assumes:
- Perfect knowledge
- Consumer sovereignty, and
- Perfect mobility of resources.
We do not all have perfect knowledge on which to base decisions. I think markets magnify the imbalance of knowledge and power, because producers tend to have more knowledge than consumers. This is not a level playing field. This is one of the issues that lies behind the concept of market failure, and hence the need for government intervention. in markets. Perhaps one of the simplest examples of this is the need for consumer laws (our Consumer Guarantees Act, and our Fair Trading Act, to name just two). These exist because there is a power imbalance.
Another example of market failure: with goods that we term Merit goods, and Public goods (capitalised because those are proper nouns, names for the goods in economic theory), if left to the market the market will under provide. That is, you'll get less of these goods than is in the economy's best interests. Education is just one such Merit Good'. his isa classic argument for NOT using market provision for schools, and for not using a voucher system, I have written elsewhere about the impact of market provision on education outcomes in a professional blog post titled 'Why school competition isn't optimal'. These approaches further embed institutional racism at its worst.
So all in all, the free market economy has not served New Zealanders as well as we might like to think. My own interpretations based on this data are:
- Economic growth has been less than it might have been, because of the growing disparity between rich and poor
- We have continued to assume that discredited theories of trickle down and incentive are true when they are demonstrably not so
- We have created a growing underclass of poor, with what I would interpret to be a less economically just society. My suspicion is that this underclass is overly represented with Māori and Pasifika peoples.
- Look after those less well off than ourselves
- Protect the weak
- Use our actions rather than our words to support those less well off than ourselves.
- Treat others with aroha/love, and respect .. basically, whakawhanaungataga, manaakitanga
