Market Failure and Income Distribution: Notes for Economics in Two Lessons

by John Quiggin on January 5, 2017

For quite a while now, I’ve been working through my book-in-progress, Economics in Two Lessons (partial draft here), focusing on applications of Lesson 2

Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

Thinking about the standard market failures (monopoly, externality and so on), I’ve come to the conclusion that I need to say more about the interaction between market failure and income distribution. I’ve already looked at the opportunity costs involved in income redistribution and predistribution, but different kinds of questions are coming up in relation to issues like monopoly, privatisation and for-profit provision of public services.

The discussion here and at my blog has been very helpful in stimulating my thoughts, but I need to do a lot more clarification. Some preliminary thoughts are over the fold: comments and criticism much appreciated

Market failures arise either when market prices don’t reflect social opportunity costs or when markets for some good or service don’t exist at all, so that some other method of allocation must be used (examples include household self-sufficiency, gift exchange and public provision). It might be thought that the problems are more severe in the case of non-existent markets. Indeed some followers of Lesson 1 see the expansion of market transactions as a universal solution to social problems (the blog Marginal Revolution runs a series of posts under the Heading ‘Markets in Everything‘, which now runs to over 1300 entries).

In reality, however, markets with the ‘wrong’ prices (those not equal to social opportunity cost) are often worse than no markets at all. The core problem is that a divergence between prices and opportunity costs creates a potential ‘free lunch’, that is, an opportunity to make profits without any net contribution to the production of useful goods and services.

Free lunches are beneficial for those who get to eat them. Precisely for this reason, strenuous efforts are made to secure free lunches by generating divergences between prices and opportunity costs. Among the ways of doing this, which will be discussed in this section

  • Securing monopoly control of unregulated markets
  • In regulated monopolies, obtaining a rate of return higher than the opportunity cost of the capital invested
  • Avoiding the costs of waste disposal by engaging in unregulated pollution
  • Providing publicly funded services at a price greater than the cost of provision
  • Obtaining ownership of public assets through privatisation, at a price below the value of the asset

All of these free lunches are available only to owners of capital and all (with the exception of unregulated pollution) have become more readily available over the last few decades. Conversely, the forms of redistribution (taxes and transfers) and predistribution (unions and minimum wages) that benefit workers have declined in significance. This is both the cause and the result of the growing inequality of wealth and power that has become glaringly obvious in the last decade.

The costs of market failures aren’t confined to problems with the distribution of income. First, the search for ‘free lunches’ is costly. Firms may incur high costs keeping competitors out of their markets, or lobbying politicians to keep pollution laws lax, or in regulatory litigation aimed at keeping rates of return high. These activities are profitable enough, for the firms concerned, to justify the expenditure of many billions of dollars every year.

Finally, when prices don’t reflect social opportunity costs, productive resources are used in ways that don’t yield a social benefit equal to their costs. Consumer choices are similarly distorted. The resulting allocation of resources is, in the standard terminology of economics, ‘inefficient’. I’ve argued earlier that this term is misleading, but whatever term is used, the presence of market failures means that the resources available to society aren’t being used in the way that would yield the greatest benefits, for any given distribution of income.

It follows that policy adjustments that can reduce allocative inefficiency have the potential to improve the wellbeing of society. Economists have devoted a lot of attention to these potential gains, while often neglecting the bigger issues of income distribution (or ‘equity’). In what follows, I will look at both equity and efficiency.

{ 20 comments }

1

M Caswell 01.05.17 at 3:48 pm

A basic question from an economically unlearned reader: From the fact that market failure can arise “when markets for some good or service don’t exist at all, so that some other method of allocation must be used (examples include household self-sufficiency, gift exchange and public provision)”, am I understanding correctly that “market failure” is not always a bad thing? If so, that point could be rhetorically underlined.

But then I’m not clear on why you write “the presence of market failures means that the resources available to society aren’t being used in the way that would yield the greatest benefits.” Strictly speaking, isn’t this only true if we have a failing, but existing market? Moreover, even in that case, achieving an economically maximal allocation might not require fixing the “market failure.”

Relatedly, when you say that in some market failure conditions, we “must” use “some other method of allocation” could we just as well say that we “get” to use “some other method”- like it’s a good thing?

2

H Horan 01.05.17 at 7:43 pm

1. Your post notes “All of these free lunches are available only to owners of capital.” True now but wasn’t historically. The post concluded by arguing that economists can help society as a whole by focusing on allocative efficiency. This was true in the past, but this capability was systematically destroyed, and one needs to understand how it was killed before talking about what can be done in the future.
I’m focusing here on your second “In regulated monopolies, obtaining a rate of return higher than the opportunity cost of the capital invested” item because prior to the 1990s, that and #3 (externalities) were the only major sources of these free lunch, and because I have been in transport my entire career, where there’s a lot of history directly relevant to this, and to how the world subsequently changed so that all five items became major free lunch sources exclusively available to capital.
Something that has gotten close to zero attention is how “deregulation” (first applied on a major scale in the US to rail, trucking and aviation) morphed from a tool whereby increased competition was justified by its ability to improve consumer welfare to a tool for eliminating competition in order to transfer wealth from labor and consumers to capital. Even the people who led the fight for transport deregulation don’t seem to have noticed that everything they fought for has been totally subverted. Before you try and explain the current problems to people (or suggest solutions) I think you need to explain how these recent changes occurred, and why there’s so much willful ignorance about them. I think the transport history is a lot easier to understand than the subsequent changes in finance and other industries.
Here is my very simple overview of the changes. All of the regulatory regimes started as politically negotiated bargains between government and major industry insiders. Step (1) Laissez-faire markets couldn’t produce an economically sensible level of railroad service, or establish prices that efficiently rationed capacity between markets with different cost/demand characteristics. Congress steps in to facilitate a deal that crudely balances major interest group interests (capital/labor, consumers/producers, agricultural vs mining vs manufacturers) with government attempting to protect parties that have some electoral clout but aren’t insiders (labor, urban consumers, small farmers) but was never defined in “broader public interest” terms. This successfully stabilized the industry and employment and service levels, but the remaining imperfections get reinforced by political/bureaucratic inertia. RR owners get substandard returns but increased protection from competition and volatility. Step (2) markets and technology change over time so the economics that supported the cross-subsidies in the initial bargain collapse; regulatory regimes weren’t structured to deal with structural changes that would require renegotiating the bargain; the interests most threatened by external changes dig in their political heels to prevent needed changes which makes the allocative efficiency (and industry viability) problems worse. Step (3) Academic work in the 60s-80s period attempt to reform 1880s/1930s regulatory regimes; the basic need for regulation is unquestioned but by establishing “allocative efficiency” and “aggregate economic welfare” criteria, they attempt to replace openly political approaches with very technocratic ones. Despite numerous flaws, the transport reforms led to major, measurable improvements in both industry efficiency and consumer welfare. Step (4) “deregulation” morphs into a broader political movement that claims it will produce similar consumer welfare benefits in industries totally dissimilar to the CAB regulated airlines of the 1970s. Efforts focus on finance where the interests of capital are more sharply defined and better organized. Efforts become largely financed by think tanks openly hostile to the idea of a general public interest in objectives such as “allocative efficiency” and “aggregate economic welfare” that would justify market intervention by government. The academic economists who played a powerful role in step 3, and who had long understood market imperfections were marginalized or bought off. And lots of related political changes that you are very familiar with that produced today’s situation.
How did the regulatory free lunch become the exclusive domain of capital? “Regulatory capture” was one of the hammers academic critics of ICC/CAB frequently and justifiably used. The regulatory inefficiencies created by “regulatory capture” pre-1980 (step 2 above) involved wealth transfers from capital and consumers broadly to narrow interest groups. Local politicians gained when regulators required uneconomic airline service to small cities and the retention of uneconomic freight railroad branch lines. Unions gained from excess staffing (firemen on diesel locomotives) and the extra contract bargaining leverage established by industry entry barriers. Plus lots of other examples. But “regulatory capture” is an inevitable consequence in any major industry, since none can exist in a vacuum free of any governmental involvement; some players will always organize to rig the market a bit more in their favor than less organized parties. Historically, the distortions were limited here by political competition between insiders and also market competition (things couldn’t be too obviously rigged in favor of the Southern Pacific or United Airlines because other companies would complain). And the step 3 shift to aggregate economic welfare type criteria helped a lot (for a while). But in step 4 “regulatory capture” morphs from the concept that any powerful, well organized insiders can create distortions to the concept that any involvement by government of any type that might restrict the unfettered freedom of capital will create massive distortions. Absolutely none of these people who were outraged when unions achieved modest levels of “regulatory capture” are totally silent when capital achieves exponentially greater levels of “regulatory capture.” It (alongside many other concepts) gets divorced from any measurable welfare related criteria, and in fact gets divorced from any requirement to use empirical evidence in industry analysis. And massive increases in industry concentration occur, so there are now no meaningful constraints on powerful incumbents seeking to further rig markets in their favor. The real justification for most of these mergers, as you suggest, is that “regulatory capture” can be pursued much more easily with oligopoly than with robust competition.
This is all a very long winded way to raising two concerns. Your post suggests income inequality as a cause of many of these allocative efficiency issues, while I think the historical evidence makes a stronger case that the war capital accumulators have successfully waged against all competing economic interests (regulators, public ownership, labor, consumers, regulators, any concept of aggregate economic welfare) caused the big increase in both inefficiency and inequality. Yes, these gains allowed them to push the war further and further, but it wasn’t a true two-way causal effect. And the post seems to suggest way to fix today’s problems is the same “refocus on allocative efficiency and aggregate economic welfare” (my stage 3) that led to the short-term success of transport deregulation in the 70s and 80s. I think that refocus would be awfully nice, but since this approach was politically annihilated from the 90s onward (my stage 4) it doesn’t seem useful to suggest thisin isolation as the way forward.
2. Not directly relevant to the development of “Economics in Two Lessons” but your post suggests you are still thinking about how these market failure/regulation/privatization/public ownership issues do and don’t fit together, and I can point you to two things I’ve written about transport cases that deal with the history and economics and illustrates in detail how many of these pieces fit together. The current work in progress is about how Uber has managed to make a mockery of any traditional concepts of allocative efficiency by converting a historically fragmented, competitive taxi industry into a private monopoly valued at $68 billion despite the total absence of any competitive efficiency/product advantages and without any ability to generate profits in competitive markets. While also eliminating or nullifying all applicable laws and regulations totally outside the democratic process. So far six parts of this story have been published at Naked Capitalism, part one is at http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html And you can easily track the others from there. As yet unpublished pieces include showing how a major 1990s propaganda campaign for taxi deregulation became the template for all of Uber’s PR efforts. An older piece traces how airline deregulation became an active program that drove the radical consolidation of international aviation. Double Marginalization and the Counter-Revolution Against Liberal Airline Competition, 37 Transportation Law Journal 251-291 (2010) downloadable from SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1743685

3

William Meyer 01.05.17 at 8:47 pm

My criticism here is that the idea of an externality seems fairly simple, and comprehensible, but I wonder if really is up to undercutting the “mythology” of markets as “efficient” devices or if it simply reinforces that notion.

I mean, once you really start to think about externalities, they are less clear cut than you might think. One major question is whose point of view your frame of reference includes or leaves out. To a person running a slaughterhouse, being able to pollute by dumping the offal and blood in a local river might be an nice “externality” that saves him money compared to having to dispose of it more properly, and having to internalize the cost of proper disposal will result in a higher price of meat, and therefore a more “efficient” allocation of resources for “society.” But if looked at from the viewpoint of a sheep or cow, the whole thing, waste disposal and all, is insanely “inefficient.” Does the “market system” here include the animals? Well, similar questions might be asked as to whether or not the “market system” really includes the poor. In fact, once you start factoring in all sorts of “opportunity costs”, especially to people who have been excluded (by design) from the frame of reference, you begin to wonder if “market prices” really contain any information at all except for a sort of condensation of who has power in society and gets to call the shots.

I mean, looked at from 50,000 feet, the vast majority of people enter modern Western societies with virtually no endowments of financial assets, land or valuable commodities, and they are told that to obtain food, clothing, shelter, they must work for people with financial assets or land or mines and obtain the necessary tokens. So our private property-monetized economy is basically a giant forced work scheme, and a solution to the problem of coordinating large numbers of people to obtain various ends that are chosen by the people who have either financial assets, or pull with the local dominant street gang, or both. (Everywhere you look in the vicinity of financial assets and private property one sees that men with guns ultimately underpin them.) Capitalism turns out to be surprisingly similar to the labor taxation of the Pharaohs, to classical slavery, to feudalism, etc. In all of them, the guy with the army and his buddies call the shots. I have often wondered if coercion is truly the only way to solve the coordination problem and permit large-scale cooperation.

It seems to me that using externalities as a way of “completing” markets and making them more efficient is kind of a bandaid on a much bigger problem.

4

Mike Huben 01.05.17 at 9:35 pm

I’ve looked briefly at your partial draft, and compared it to EIOL. We can read the original ‘Economics in One Lesson’ here.>

I think you are missing some basic rhetorical opportunities to exploit Hazlitt’s own words. For example:

“While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case.” (Section 1.)

Does that sound like a Koch strategy or what?

“It is often sadly remarked that the bad economists present their errors to the public better than the good economists present their truths. It is often complained that demagogues can be more plausible in putting forward economic nonsense from the platform than the honest men who try to show what is wrong with it. But the basic reason for this ought not to be mysterious. The reason is that the demagogues and bad economists are presenting half-truths.” (Section 3)

The whole idea of “one lesson” is exactly a half (or much less) truth. This is all classic psychological projection, accusing others of your own problem.

“The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs, the error of a thousand political speeches, the central sophism of the new economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole.” (Section 2)

And yet that is the ENTIRETY of individual self-interest, the basis of markets. Somehow markets can deal with this, but democratic representative politics cannot?

“In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.” (Section 1)

This is exactly what you mean when you are talking about Social Opportunity Costs. And you can easily illustrate that Hazlitt is a bad economist by showing which ones he ignores.

Hazlitt is everywhere aggressively ACCUSING everything but the perfect unregulated market of horrible crimes and mistakes. Even if you don’t want to adopt that tone, you should at least turn his aggressiveness against him and make clear his hypocrisy. It is a rhetorically sound tactic that will excite readers and is justifiable as good defeasible argument.

Personally, I would start each section with one of these judgmental quotations from Hazlitt and an illustration of how it is actually HIS problem, and that your second lesson deals with these ideas correctly. Hazlitt’s style provides no end of useful quotations to turn against him.

You might want to include an appendix of some of the blatant errors of Hazlitt: where his predictions have been obviously wrong.

5

EricKodjo 01.06.17 at 12:27 am

You may be covering this elsewhere, but in a world with significant economies of scale, scope, density etc., that is, in our world, focussing on distortions at the margin seems to miss the point. Setting uniform prices to cover marginal costs cannot support private production, and while free market supply involves probably relatively small Harberger losses in any static equilibrium, it (especially given current IP laws) leads to an extremely skewed distribution of firms’ and individuals’ command of resources, the result of which is the few winners are often and often increasingly granted the ability to control future income distribution, which in turn is very damaging to incentives to cooperate in a market economy or to engage in innovation. So aren’t the real issues competition law and income distribution? And isn’t that true even putting equity concerns, which of course strongly reinforce the point, aside?

6

Peter T 01.06.17 at 4:39 am

Is it worth making the point that in cooperative systems of production (the kind we operate almost universally) no single person’s contribution can be reliably measured. And that therefore the rewards accruing to each person do not reflect their contribution but bargaining power, custom and hierarchy. That, in short, the calculations of the market paradigm do not apply to the largest and most important sphere of all. In this sphere, prices certainly do not reflect opportunity costs, social or individual.

Alongside this, the custom is to treat non-market transactions as if they were in some sense market ones. They are not. And often the choice is not whether to accept some market bargain or not, but whether to participate in the market at all. Modernity is marked by a shift from non-market to market, (or rather from the non monetary to the monetary) a shift which has, over the last several decades, gone into overdrive (Uber, AirBnB, Facebook and similar are monetising previously unmonetised spaces). The reaction may well be not to demand more money, but to move away from the market.

7

Edward Lambert 01.06.17 at 4:53 am

I would add a link to a paper by Bruce Kaufman about the need for the minimum wage to cover the social cost of labor. This idea goes back to Beatrice Webb as the paper shows. There are problems that can emerge in the market for labor that make wages insufficient to cover social costs. Low wages become inefficient as John Quiggin points out.
http://aysps.gsu.edu/files/2016/01/08-16-Kaufman-MinimumWage.pdf

8

acarraro 01.06.17 at 10:19 am

Surely 1, 2 and 4 do not benefit only capital owners. Public employees can push to regulate unregulated monopolies. They can capture the resulting profits by keeping higher wages than non-public employees and they seem to be the best placed in extracting excess profts from the provision of public services (through absenteism, low productivity and excessive benefit packages). I would bet that at least one category of public employees (politicians) is considered to be over-paid pretty widely.

I have never seen estimates of the relative cost, but I think the statement that only capital can benefit from monopolies is not correct. Given the relative size of the public sector in many countries vs the size of corporate profits, it’s not entirely obvious to me that capital is the main beneficary of such rents to be honest…

9

Effem 01.06.17 at 2:27 pm

I struggle with how you define “value to society.” Let’s take Facebook for example – it has massive returns on capital. I consider it a net-negative to society (for mental health reasons) and yet many others consider it a massive positive to society. The market may be “sloppy” in determining value but I’ll take before an “expert” deciding what has value.

To me, much of this problem would be solved if the government viewed its role in capitalism as always and everywhere promoting competition instead of redistributing or punishing “winners.”

10

DCA 01.06.17 at 2:38 pm

Off-topic, but since comments are closed in the education thread: a quite thorough look at the higher-ed situation is available as a free e-book from the University of California press, about the vision that led to UC and what happened to it (with a good discussion of what is going on in East Asian higher ed):

http://www.luminosoa.org/site/books/10.1525/luminos.17/

11

reason 01.06.17 at 3:38 pm

I just want to highlight a handful of words.
“his is both the cause and the result”

This sounds harmless but is in fact a dagger in the guts of traditional economic analysis. It implies POSITIVE FEEDBACK and the whole theoretical structure of economics is based on the assumption of a negative feedback system. And of course positive feedback implies instability unless their are damping controll processes (i.e. it kills laissez faire). Any critique of neo-classical economics needs to give this more prominence.

12

David McConville 01.06.17 at 4:06 pm

Please give me the equation for calculating “social opportunity costs.”
This will be interesting. You realize that if you can’t deliver a credible calculation, all your credibility is lost.

13

John Quiggin 01.06.17 at 6:55 pm

@Mike This is a very helpful suggestion. I’ll see if I can make it work

Thanks to other commenters also. I’ll respond when I get a bit more time.

14

Sebastian H 01.06.17 at 7:28 pm

A lot of this comes down to the lack of good analysis of social capital (which is almost certainly a bad label for it but I can’t come up with a good one).

A good example for your side of the argument is employee/company loyalty.

There was, at least for many firms, the concept that if you worked a long time for a company, it would protect you somewhat from the momentary ups and downs of the business, give you training, and if you did a good job keep you around, maybe even find a different place for you if things changed. This allowed firms to retain workers for a long time, maintain institutional learning, develop long term projects, etc.

At some point a lot of managers decided that they could eek out a little extra money by being less loyal to employees. This worked for a while because it created an asymmetry of expectations–employees functioned under the old system while employers functioned under the new. This essentially spent the social capital of the expected employee-employer relationship.

Eventually however, employees caught on and stopped treating employers like a place they want to invest in. Now that the social capital has been spent, we are all worse off.

A similar story, not as flattering to the government side, could be told of how the EU and ECB has spent social capital of structures built after WWII.

For me, a big part of government bad acting AND capitalist bad acting ends up being spending social capital without understanding what you are doing.

15

Peter T 01.07.17 at 12:06 am

“Please give me the equation for calculating “social opportunity costs.””

Hazlitt’s little book assumes that one can calculate private opportunity costs (Lesson 1). John’s Lesson 2 does not directly contradict this, but “social opportunity costs” are also private costs (they do, after all, fall on real people).

If you can’t calculate the one, you can’t calculate the other. My position would be that for most practical purposes you can’t calculate either.

16

John Quiggin 01.07.17 at 12:19 am

Responding in reverse order. First, thanks to all for commenting

Sebastian @14 This is a very good point, but I’ll need to think about where I can fit it in

DM @12 *sarcasm on* You realize that “social opportunity cost” is a standard term from mainstream economics, I’m sure. Why don’t you write to the American Economic Review and explain that the absence of the equation you seek has destroyed the credibility of the entire discipline *sarcasm off* Seriously, there’s plenty of things wrong with mainstream economics, but the concept of social cost is not of them

Reason @11 I’ll see if I can work on this

DCA @10 Thanks, I’ll chase this

Effem @9 See reply to DM

acarraro @8 Reread final para

More responses to come, I hope

17

Sebastian H 01.07.17 at 1:08 am

Just want to be clearer on my social capital explanation in case it is already called something else in economics.

The employee, in return for the stability of working under the older arrangement wouldn’t jump ship to another firm with all his institutional knowledge over a small increase in salary. This made it safer to invest in the employee. This social capital, or maybe it is institutional trust, or institutional capital made the long term commitments and investments palatable. When companies abandoned it, they got to profit on the sale of this social capital because employees still didn’t jump ship so easily–they thought they were under the old system.

Similar things happen in other areas. For example the recent abandonment of Constitutional amendments in the US in favor of just doing it by getting 5 Supreme Court justices. This allowed for short term advantage at the huge cost of failing to build societal capital over narrow decisions. But it greatly increased the political danger of letting the other side win the presidency–which was already plenty of a prize itself. This spending of social capital without doing the hard work of replenishing it is a recurring theme in all sorts of conservative/liberal squabbles where both sides work hard to spend it without ever acknowledging that doing so eats the long term viability of the system up from the inside.

Brexit is another case. The EU leveraged the social capital of wanting to avoid WWII again into all sorts of other things. They thought that the non-resistance of the general populace meant that they were going along without cost. But the cost was drawing down the trust in the overarching institutions. It is showing up FIRST in the UK, where the social capital for the EU was always lowest. But it is showing up almost everywhere. This went hand in hand with a draw down in the social capital of business experts. For about 30 years a large part of the country went along with the idea that globalism would eventually make all of them better off, instead of just the average GDP being better off. But as year after year went by with a large portion of the profits going to a small portion of the people, an all too significant portion of the population began to think that the trust they gave was foolish.

A huge portion of the profit in the cosmopolitan areas represents a one time cashing in on the social capital of the outlying areas, just like a huge portion of the profit in the 80s and early 90s represented a one time cashing in of the social capital of the employee/employer relationship.

18

derrida derider 01.09.17 at 6:19 am

Isn’t Sebastian’s point just another example of market failure through externality? The managerialist (or worker) who breaches the implicit employment contract for short run gain appropriates all that gain while the cost is borne by the wider society in the form of no incentive for future such implicit contracts.

19

Sebastian H 01.09.17 at 5:57 pm

“Isn’t Sebastian’s point just another example of market failure through externality?”

That is one of the ways that it manifests itself in the market, but couching it that way obscures the applications in other socially important institutions. Treating it that way is reproducing the problem of cramming everything through a market lens. I would say that some market externality failures are sub-species of drawing down on social capital.

I feel like I may be flailing about a bit because I don’t have the idea fully fleshed out even in my head, so I’m not sure what the exact parameters are. I think it is something like:

Trying to leverage the joints of the social fabric (informal or implicit interactions) for immediate advantage without understanding (or perhaps cynically not caring in some instances, but I think usually just not understanding) that doing so can’t represent a long term gain because it undermines the thing you are using.

The non-market analysis in the political world perhaps is a form of social trust? In fact maybe social trust also explains the employee/employer issue as well. I strongly believe that a big part of what is going on across the world represents a backlash against various forms of drawing down social capital without returning it. It underlays much of the discussion around crookedtimber which has gone on about the failures of neo-liberalism. In my view many of the failures we are currently talking about are linked to the SUCCESSES because those successes were based on drawing down social capital without replacing it. I don’t want to get sucked directly back into a neo-liberalism debate because I don’t believe it maps directly on to what I’m talking about. But I do believe what I’m talking about makes a good structure for talking about it.

It is why so many of the Brexit debates seem like people aren’t talking about the same thing. They aren’t talking about the same thing, but we don’t have a good language to talk about what the issues are, so we talk past each other.

From my point of view much of the political dynamic of globalism has been drawing down on long ago earned social/political capital. It consists of the promise that yes there will be transition problems, but they will be managed and overall ‘the nation’ will do better. The transition problems were not managed from a political or social point of view. ‘The nation’ doing better did so only on average, while the median voter got left behind. The draw down on social capital is in the “trust us to manage the transition” and “trust us to share the then-gained wealth” dimensions. After 30-40 years of promises in those zones, the social capital had been spent, and those voters who feel they paid out are beginning to lash out.

This kind of analysis explains why standard anti-brexit arguments didn’t work. “It’s going to hurt the London financial world which is a huge part of our GDP” can’t work in that environment because that social capital has been spent. “Immigrants help our GDP” can’t work not because it isn’t true for “the UK” but because the social capital of “make sacrifices for the UK” has been spent without being repaid by making sure that “our increased GDP” includes the people who were told they had to make sacrifices the last 5-8 election cycles.

That isn’t a market failure in any of the normal senses of the word. That is a political failure and a social failure. Part of that failure rests on the ‘winners’ because we fail to realize that some of the wealth that we think has been created to be enjoyed by the cosmopolitan success is social capital which we have drawn down, and cannot continue drawing on when we have spent it.

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Sebastian H 01.09.17 at 7:04 pm

Similarly, ‘ever-closer union’ drew heavily on anti-war social capital. This has meant that there was a huge reserve of political willingness to invest in various EU institutions without directly worrying about them quickly paying off.

However, if you analyze it that way you can see that the further you drift from the anti-war concerns (both because of time since WWII and because you have continually spent from that reserve of social capital) the more important it becomes to realize that you have been spending social capital that you have not replaced. You might replace it by making sure that large constituencies share in the wealth created by the ever closer union (circling back to John’s original topic in this post) or by creating deeper social ties based on the EU.

Instead, a vast majority of the politicians acted as if they had vast license to continue the project without rebuilding the social capital–BECAUSE they didn’t even realize they were spending it. They thought they were operating in a world where their constituents agreed with their policies on a basic level, instead of a world where their constituents were willing to tolerate their policies on an implied promise of eventually paying back the social capital.

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