By Donald Low
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” (John Maynard Keynes)
A recent workshop organised by the Institute of Policy Studies (IPS) got me thinking about how governance in Singapore might evolve in the next decade or so, in the context of important shifts in economics thinking globally and changes in the political landscape domestically.
Globally, we are witnessing a backlash against the free market ideology that came to dominate the international discourse on governance in the three decades preceding the global financial crisis. While market triumphalism and hubris in the financial industry sowed the seeds of the crisis, this ideology also made significant headway in many other domains of governance. It is still too early to say that the crisis has precipitated a revolution in economics or in the social sciences more generally. But it is already quite clear that there is now a rising tide of ideas that question, quite profoundly and fundamentally, the supremacy of markets and the dominance of conventional economics in policy thinking.
Beginning in the 1980s, governments around the world came to see markets as a proxy for good governance. According to the prevailing ideology of that era, the wisest thing governments can do in economic governance was to roll back the frontiers of the state (for instance, through privatisation and deregulation), and allow competitive market forces to drive growth and innovation. Even if governments had to intervene in the economy, say to correct for market failures, they should do so by “mimicking” markets. So to deal with externalities (like pollution or traffic congestion), they should put in place market-based mechanisms that would allow the price of these externalities to be discovered. With prices established, whatever outcome produced by the mutually beneficial exchanges of the marketplace would, by definition, be efficient.
Globalisation fuelled this faith in markets: countries would benefit not just from freeing up their domestic markets, but also from opening themselves to global trade. Meanwhile, seemingly unjust market outcomes – such as rising income inequalities, unprecedented riches for bankers, or employment dislocations caused by free trade – could all be justified as the inevitable outcome of impersonal economic forces. To be sure, there were some governments which tried to buck the trend, and which sought to ameliorate the social dislocations and widening inequality caused by open markets with active social protection and labour market policies. But these were the exceptions, not the rule.
In light of the crisis, a potentially far-reaching scrutiny of the free market ideology of the last three decades is now underway. Governments around the world are still preoccupied (and rightly so) with addressing their immediate fiscal and economic problems. But it is worth taking a longer-term look at how the new ideas in economics might reshape our understanding of the role of the state, and of governance more generally. Just as the ideas of the free market ideology had quite a significant influence on many of Singapore’s economic, social and regulatory policies, so too would the economic ideas that are now emerging have a bearing on governance in Singapore, and on how Singaporeans expect to be governed in the future.
A number of thoughtful and provocative books published this year give an indication of the broader critique of markets that I believe will become more important in the next few years. Perhaps the most strident of these has been written by the Harvard moral and political philosopher, Michael Sandel.
In What Money Can’t Buy: The Moral Limits of Markets, Sandel fires a wide-ranging broadside at markets and market thinking. Sandel’s chief argument is that contrary to what economists believe, markets are not values-free or “inert”. Much as economists would like to claim that markets are devoid of normative judgments, they actually embody certain implicit values about how we should view a social good, activity or practice. Whenever markets are introduced into a domain previously governed by non-market or social norms, they alter the character of that activity or practice. Paying a child to read a book (or allowing people to pay to shoot endangered wildlife, or charging late-coming parents at a childcare centre a fee) changes the way society views and values reading (or wildlife and thoughtfulness). These market-mimicking practices (justified by the irrefutable economic logic of incentives) crowd out the intrinsic motivation or social norms that make reading, wildlife conservation and thoughtfulness meaningful. Markets are corrupting, Sandel contends, not in the sense that they involve bribes or illicit payments, but in that commercialising a social activity or practice changes its character. It replaces a higher social norm with a lower market norm.
Besides their corrupting influence, markets also erode commonality. Pointing to the increasing commercialisation of public spaces in America, Sandel argues that “at a time of rising inequality, the marketisation of everything means that people of affluence and people of modest means lead increasingly separate lives. We live and work and shop and play in different places. Our children go to different schools… It’s not good for democracy, nor is it a satisfying way of live.”
A second important book that questions the orthodoxy of efficient markets and the corrosive effects of inequality is Christopher Hayes’ The Twilight of Elites: America after Meritocracy. Hayes identifies meritocracy as the surprising source of America’s manifold social problems. Meritocracy, Hayes argues, does not simply sort the best from the rest. Once they get to the top, elites develop their own class consciousness and use their privilege to entrench themselves and their children. They also parlay their success in one domain – say in business – to another, chiefly the political domain.
Rather than attribute their success to luck or circumstance, elites believe that they have achieved their success through their own merit, and feel that others have done less well due to their lack of talent or effort. Consequently, they have fewer qualms about undermining redistributive institutions. All this creates an elite which lives in a bubble, increasingly detached and disconnected from the way the rest of the society lives – which is of course a much larger problem when it is the elite that governs. The only solution, Hayes argues, is to reduce economic inequality through aggressive government redistribution.
We have also seen, in the last few years, a flood of other notable books (see below for a recommended reading list) on why inequality is a major policy problem, on how markets fail, on the changing state-market balance, on market fundamentalism and how it caused the financial crisis, on the behavioural revolution in economics, on how economics should incorporate measures of happiness or people’s subjective well-being, and on the emergence of complexity science as an alternative way of understanding the world. Together, these books amount to a wide-ranging, multi-disciplinary assault on almost everything the free market economist held dear: the primacy of growth, the efficient markets hypothesis, rational agency, the virtues of small government and supply-side economics, and the belief that our economy can be modelled using stable, predictable causal relationships.
This growing intellectual tide will reshape not just the economics discipline, but also our ideas on economic governance – or at least it ought to. It represents an invitation for policymakers to question many of their long-held assumptions about state and markets, to avoid simplistic assertions about the superiority of markets, and to think creatively about how activist government policies might improve social and distributional outcomes.
How might all this shape and influence governance in Singapore? I hazard three guesses. (I hasten to add that any prediction about a subject as complex as the future of governance should be taken with a healthy dose of scepticism. As the Norwegian physicist Niels Bohr once said, “Prediction is very difficult, especially when it’s about the future.”)
First and perhaps most importantly, our economic and social policy debates will become more vexed and contentious. Until recently, Singaporeans have largely accepted the government’s discourse on the primacy of growth (over distribution), the evils of redistributive welfare policies, trickle-down economics (or the idea that the best way to help the poor is to ensure high growth, which means having pro-business, pro-talent and market-friendly policies), and on the virtues of a small state. This quiescence is coming to an end; GE 2011 is a harbinger of future popular demands for a different socio-economic compact. And with this comes more polarising debates about the relative importance of growth and distribution, meritocracy and elitism, and inequality. I say polarising because these debates are not just technocratic in nature, but fundamentally about values.
Second, in the context of the changing political discourse, the government runs the risks of falling behind (some of) the public’s appetite for more just, more redistributive policies. Instead of leading the debate on how we can craft a fairer social compact, much of the government’s rhetoric in recent months has been aimed at reinforcing and defending the old socio-political compact of high growth, low taxes and government spending, self-reliance and limited welfare, and Singapore’s unique vulnerabilities as a city-state with no hinterland. The Prime Minister’s speech at the annual Economic Society of Singapore dinner – as articulate as it was – probably best exemplifies the government’s largely unchanged worldview.
Finally, we are likely to see a diffusion of power in terms of who commands the narrative, and sets the terms of the debate. In the era before social media, and when citizens largely agreed with the government’s key economic policies, government institutions were quite effective in setting the terms of the debate and in mobilising public support for pro-growth, pro-market policies. The convergence of two factors – the rise of the Internet and social media, and greater questioning of the government-led narrative on economic growth among significant segments of the intelligentsia – means that government will increasingly have to compete for the public’s hearts and minds. It will have to contend with a multitude of analysts, commentators, bloggers and civil society activists, many of whom would not agree with the government’s underlying assumptions and worldviews. All this makes for a more rambunctious, messier, and more interesting political milieu. The best thing policymakers can do to prepare and steel themselves for this future is to bone up on economic history and to understand the shifts that are now occurring in the economics discipline, and which will shape the future of economic governance. The books I recommend below might be a good place for them to start.
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Recommended books (and movies):
On inequality and why it matters:
• Robert H. Frank (2007), Falling Behind: How Rising Inequality Harms the Middle Class
• Raghuram Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy
• Robert Skidelsky and Edward Skidelsky (2012), How Much is Enough? Money and the Good Life
• Joseph Stiglitz (2012), The Price of Inequality: How Today’s Divided Society Endangers our Future
On how markets fail and the limitations of the conventional economics approach:
• John Cassidy (2009), How Markets Fail: The Logic of Economic Calamities
• Joseph Stiglitz (2010), Freefall: America, Free Markets, and the Sinking of the World Economy
• Jonathan Schleifer (2012), The Assumptions Economists Make
On the changing state-market balance in historical perspective:
• Robert Skidelsky (2009): Keynes: The Return of the Master
• Anatole Kaletsky (2010), Capitalism 4.0: The Birth of a New Economy
On market fundamentalism and the crisis:
• Justin Fox (2009), The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
• Andrew Ross Sorkin (2009), Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – and Themselves (there is also a HBO film based on the book)
• Gillian Tett (2009), Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
• Nouriel Roubini (2010), Crisis Economics: A Crash Course in the Future of Finance
• Lim Mah Hui and Lim Chin (2010), Nowhere to Hide: The Great Financial Crisis and Challenges for Asia
• Charles Ferguson, director (2010), The Inside Job (this is by far the best documentary-movie on the crisis)
On the behavioural revolution and the happiness movement in economics:
• Richard Thaler and Cass Sunstein (2008), Nudge: Improving Decisions About Health, Wealth and Happiness
• Dan Ariely (2008), Predictably Irrational: The Hidden Forces that Shape our Decisions
• Daniel Kahneman (2012), Thinking, Fast and Slow
• Richard Layard (2006), Happiness: Lessons from a New Science
On complexity science and its implications for economics and governance
• Duncan J. Watts (2004), Six Degrees: The Science of a Connected Age
• Eric Beinhocker (2006), The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics
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Top picture by: Andrew Loh.
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