Chicago economics gave us all a healthy respect for markets; however, it also gave us too little consideration for what the markets cannot do, do badly, or should not be called upon to do at all
Many people seem to be losing faith in capitalism, and with it, any faith they had in economists, who are seen as its apologists. The New York Times reporter Binyamin Appelbaum's new book, The Economists' Hour, raises many uncomfortable questions. Did economics take a wrong turn? Did those of us who do not subscribe to its Chicago School neoclassical variant nonetheless allow ourselves to be pushed too far in that direction? Would the world have been a better place if Cambridge economists had achieved more influence, and Chicago economists less? And, by Cambridge, I, of course, mean Cambridge, England.
When I became an economist in Cambridge 50 years ago, economists and philosophers talked to one another, and welfare economics was taught and taken seriously. John Rawls's landmark 1971 work A Theory of Justice was much discussed, and Amartya Sen, Anthony Atkinson, and James Mirrlees, all then in Cambridge, thought about justice and its relationship with income inequality.
Sen, inspired by Kenneth Arrow's Social Choice and Individual Values, which he read as an undergraduate in Calcutta, wrote about social choice theory, relative and absolute poverty, and utilitarianism and its alternatives. Mirrlees solved a version of the question of how to reconcile a preference for equality with the need to respect incentives, and Atkinson showed how to integrate views about inequality with their measurement.
Meanwhile, in the US, the Chicago School was following a different line. No one should doubt the intellectual contributions of Milton Friedman, George Stigler, James Buchanan, and Robert Lucas to economics and political economy, as well as those of Ronald Coase and Richard Posner to law and economics. Yet it is hard to imagine a body of work more antithetical to broad thinking about inequality and justice. Indeed, in the most extreme versions, money becomes the measure of well-being, and justice is nothing more than efficiency. When I came to the US in 1983 and was called out as "unprofessional" for thinking about inequality, I thought of my own reaction years earlier to reading Stigler's 1959 argument that "the professional study of economics makes one politically conservative." I had thought it was a typo; I had never met a conservative economist.
The influence of Chicago economics and of Friedman's own arguments remain extraordinarily wide. Friedman dismissed much of inequality as natural, reflecting the choices of people with heterogeneous tastes.
He believed in equality of opportunity but stridently opposed the estate tax as "a bad tax" that "taxes virtue" and "encourages wasteful spending." More than 700 economists recently endorsed these claims, and today we hear the same arguments against a wealth tax.
For Friedman, who also favoured tax competition between countries, efforts to limit inequality of outcomes would not only stifle freedom but would also result in more inequality. Free markets would produce both freedom and equality.
It doesn't seem to have worked out that way.
Instead, we got a world in which the Sackler family paid themselves more than $12 billion for igniting and promoting an opioid epidemic that has killed hundreds of thousands of Americans. Johnson and Johnson, the makers of Band-Aids and baby powder, grew opium poppies in Tasmania to fuel the epidemic while the US military was targeting the Taliban's opium supply in Afghanistan's Helmand Province.
In 1839, the British sent gunboats to make China safe for British (and Indian) opium smugglers. We have private equity firms buying up ambulance services and staffing hospital emergency rooms with their own physicians so that they can charge "surprise" fees even to patients whose insurance covers that particular hospital.
This is exactly how we would expect unregulated markets to work: establish a local monopoly and charge a high price in the face of inelastic demand by unconscious (sometimes literally so) consumers.
At least in retrospect, it is not surprising that free markets, or at least free markets where government allows rent seeking by the rich, produce not equality but an extractive elite. After all, this is not the first time that utopian rhetoric about freedom has produced an unjust social dystopia.
Appelbaum's best example is the achievement of which Friedman was most proud: the introduction of an all-volunteer military, which I suspect most economists still favour. But is it really a good idea to draw our military from those with less education and fewer opportunities? In 2014, only 7% of enlisted troops had a bachelor's degree, compared with 84% of officers.
Anne Case of Princeton University and I have been exploring widening inequalities between the less and well educated in the US. We have found a growing divergence in wages, labour-force participation, marriage, social isolation, pain, alcoholism, drug deaths, and suicides.
And now the less educated are being asked to risk their lives for an educated elite, who choose where, when, and whom to fight.
We have lost the social connectedness that came from all kinds of people serving together. Listen, for example, to the Nobel laureate economist Robert Solow describe his experience in the army as one of the best and most important periods in his life. If US President Donald Trump were to reject the 2020 election results, or refuse to leave the White House after being impeached and convicted, we may come to regret the social divisions that have given us an enlisted military selected from the places and people who most fervently support him.
Chicago economics gave us all a healthy respect for markets, but it also gave us too little regard for what markets cannot do, do badly, or should not be called upon to do at all. Philosophers have never accepted that money is the sole measure of good, and economists spend too little time reading and listening to them.
But change may be on the horizon. The Nobel laureate economist Peter Diamond was a long-time collaborator of Mirrlees, and his work with Emmanuel Saez is helping to shape plans by US Senator Elizabeth Warren, a leading candidate to challenge Trump in 2020, to re-institute high marginal tax rates on the rich. Whatever the outcome of the 2020 election, more attention to Cambridge economics might help restore faith, not only in capitalism, but also in economics itself.
Angus Deaton is the 2015 Nobel laureate in economics and is professor emeritus of economics and international affairs at Princeton's Woodrow Wilson School of Public and International Affairs. He is the author of The Great Escape: Health, Wealth, and the Origins of Inequality.
Disclaimer: The article first appeared in project-syndicate.org. Live Mint published it from Project Syndicate.