By Felipe Flores
Shifting the paradigm of neoclassical economics to boost a more just and fair economy
Economics is a social science which has portrayed itself as a rigorous, mathematical one, but it has fallen short in regard to incorporating ethical or justice considerations into its body of knowledge. This is not a new claim but still an alarming one due to the significant social outcomes driven by the practical applications -calculations- made by governments, corporations and individuals. Society seems to be unhappy about said social outcomes, for instance in issues of poverty, access to healthcare or wealth disparities. Nevertheless, many individuals and society actors have failed to acknowledge that we have been supporting -directly or indirectly- an economic system that has not worked for all, at least in the past decades. The mainstream neoclassical economics model and its assumptions are still being taught and highly utilized despite its limitations to measure performance, nudge individual behavior or guardrail more just outcomes which are far from the optimal, in real life.
Toward a Truly Free Market by John C. Medaille is a thought-provocative book which elaborates on interesting propositions about the shortcomings of the economic system as we know it and how distributism criteria can fill the gaps to allow for a more just distribution of economic outcomes. We notice the inefficient and unequal outcomes of the market economy in real life as we ponder the call to raise the minimum wage or discuss provisions to let minority-owned businesses access to government contracts. Likewise, we have noticed an increasing number of ways in which corporations have tried to remedy some of the deficiencies of the economic system, for instance through Corporate Social Responsibility (CSR) programs. Moreover, we have observed the growing call and advocacy to boosting inclusive capitalism and we even see the Catholic Church taking a lead on these initiatives through the Economy of Francesco. In sum, the “invisible hand” does not seem to work quite well for society. What can we do about it?
The author strongly recommends to revisit and emphasize the political economy consideration of the economic science over the mathematical demonstrations of artificial equilibriums -what he calls, the mathematical bias- when estimating outcomes that are inconsistent with reality. The short-term swings of the economy are nowadays mostly driven by expectations, uncertainties and current events more than they are supported by real, tangible good or services supplied and consumed by society.
The technicalities and his economic rationale are well explicated in his book. It is worth noting his support to progressive taxation and fostering the creation and growth of cooperatives. Another interesting idea is the proposition to normalize the returns from labor (wages) and capital (profits), as the differential might be exacerbating the wealth inequality gaps, for instance.
As pointed by Mr. Medaille, the current economic system in the US brings the worst of capitalism and socialism together because there are so many externalities and legacy government interventions, so that “the rewards are privatized, and the risks are socialized” (p. 83). In this way, the counterintuitive realization is that capitalism is incompatible with free markets. We let corporations and individuals “compete” in highly regulated sectors or sometimes controlled by self-regulating groups which only tend to reduce the number of suppliers and therefore letting the ones who hold these assets maintain more market power. On the other hand, we have other highly subsidized sectors which are less subject to competition as well (think of healthcare), where the price for these services does not match the marginal cost of producing the service. We have quasi-monopolies or monopolistic competition operating in many industries such as airlines, financial services. Indeed, many sectors seek to be bailed out sooner or later despite economic advantages given to them.
The pandemic period has only exacerbated the deficiencies and disparities of the current economic system. It is time to shift the underlying assumptions of the economy, ideally to be informed by justice and freedom too. It is time to provide incentives to nudge a just distribution out of the economic system to ultimately achieve a more inclusive and positive punctuated equilibrium.