How the Profound Changes in Economics Make Left Versus Right Debates Irrelevant

Traditional economics views the economy in a fairly mechanistic way. If people are rational and we want to change their behaviour then we just need to change their incentives. Thus, a lot of policy is conducted through tinkering with the tax code or subsidies, for example if one wants more innovation, give an R&D tax credit; if one wants less smoking, tax it heavily. Of course people aren’t immune to such incentives, but often the response is far less than policymakers would like.

Likewise, traditional economics views the economy as naturally being in a state of efficiency, and so by definition any interventions move it away from that state, making it less efficient. Thus, interventions are justified by market failures, the need to create some public good, or the need to avoid some negative spillover effects or externalities. For example, state support of R&D might be justified if there are market failures, or taxing smoking might be justified to reduce the externalities smokers create for non-smokers.

Finally, policies are evaluated through the lens of cost–benefit analysis, where future benefits and costs are projected and compared. For example, much of the debate on climate change policy has been over competing forecasts of future costs from climate damage and their likelihood of occurring, versus the potential benefits of action to avoid those costs.

[…]

…politicians are always expected to have clear plans, and simple, easy to understand answers in which they have unshakeable confidence. You would never hear a politician give a speech where she or he says ‘It is a complex problem, we’re not sure what to do. But we have several good ideas that we’ll try on a small scale. We’ll then ramp up the ones that work and close down the ones that don’t, and then have a good shot at solving it.’ For some reason we don’t mind such an approach when it is used by doctors looking for new drugs, energy companies looking for oil, or venture capitalists looking for the next big idea. But we seem to prefer politicians who tell us the world is simple and predictable, even though we know it to be complex and unpredictable.

[…]

The tradition of splitting politics into left and right camps dates back to the layout of the French National Assembly in the Revolution of 1789. Over the two and a quarter centuries since, both left and right have seen their political narratives evolve. The left has travelled an arc from Marx and Rousseau, through Victorian social reformers, to Keynes, the New Deal and to modern European notions of social democracy. Meanwhile, the right has travelled from Smith and Hume, through the Austrians, the Chicago revolution, Thatcher-Reagan, and to today’s European centre-right parties and America’s radicalised Tea Partiers. At the heart of both narratives have been differing views on the nature of the economy, the roles of the individual and the state, and notions of freedom and social justice.

New economics has the potential to significantly reframe these debates. It isn’t merely a matter of centrist compromise, of just splitting the difference. Rather it is a different frame that agrees with the right on some things, with the left on others, and neither on still other areas. For example, new economic work shows that Hayek was ahead of his time in his insights into the power of markets to self-organise, efficiently process information from millions of producers and consumers, and innovate. But new economic work also shows that Keynes was ahead of his time in his concerns about inherent instabilities in markets, the possibility that markets can fail to self-correct, and the need for the state to intervene when markets malfunction. Likewise, new economics research shows that humans are neither the selfish individualists of Hume nor the noble altruists of Rousseau, rather they are complex social creatures who engage in a never ending dance of cooperation and competition. Humans are what researchers such as Herb Gintis and Sam Bowles (2005) call ‘conditional co-operators and altruistic punishers’ – our cooperative instincts are strong and provide the basis for all organisation in the economy, but we also harshly punish cheaters and free-riders, and compete intensely for wealth and status.

Traditional economics tends to frame things in terms of market efficiency versus market failure, and those on the right emphasise the efficiency part and those on the left the failure part. This leads to differing views on the justice of market outcomes. The right generally believes that if markets allocate resources in the most societally efficient way then any interference in that process is morally suspect. Market outcomes may be unequal, but that is because the distribution of talent and hard work in the economy is also unequal – in general people get what they deserve. The left on the other hand tends to see unequal outcomes as an injustice in and of itself, and emphasises how powerful interests use markets to their benefit and can abuse or leave behind the less powerful. People often don’t get what they deserve and the state must intervene to protect the vulnerable, and correct both unfair processes and unfair outcomes.

To date there has been very limited work on questions of inequality, social welfare, and social justice from a complex systems or evolutionary economics perspective. But there are hints of a different view. Even models that start with perfectly equal or random distributions of income or wealth can produce unequal outcomes statistically similar to what is observed in the real world. These outcomes emerge because small, random differences can lead to self-reinforcing feedbacks that pull apart the tails of the distributions. For example, two people might start off with equal ability and starting circumstances, but by chance one gets an early lucky break and the other doesn’t leading to compounding differences in income over the rest of their lives. Thus even with equal initial endowments and a fair process, inequality may emerge. The right might be wrong in that inequality might not be merely the result of unequal distributions of talent and hard work and therefore justified. But the left might also be wrong in that inequality might not necessarily be the result of unfair processes. At the same time, the right might be correct that unequal outcomes are a natural and difficult to avoid outcome of market interactions, while the left might also be correct that a growing body of evidence shows that unequal outcomes are strongly associated with a number of social pathologies justifying state intervention to ameliorate those outcomes. In other words, a new economics perspective might not just split the difference on debates such as inequality, it might rescramble the terms of such debates.