The Market Turn
Avner acknowledged that his 2006 study of affluence did not cover the complementary topics of public goods and collective welfare provision. In his next period of research, he entered this fray and carried the enquiry forward into recent decades of intellectual, political and financial history.
Avner analysed the turn to market definition of social relations that had taken place since the 1970s, both in high economic theory and in political discourse and action. Avner observed how the “market turn” had eviscerated social democracy, which he conceived as a pooling of life risks and production of public goods brokered by a trusted State. The ring-fencing of risk and smoothing of lifecycle earnings by non-market institutions (social insurance) has been replaced by market organisation of housing, education, health, employment and retirement through deregulated financial institutions. Politically difficult cross- generational welfare pacts have been replaced by unreliable contractual intra-generational savings and insurance deals. Arguing for the depoliticisation of an inefficient mixed economy, these reforms brought financial gains and political power for a small elite, matched by insecurity and stagnant incomes for the rest, with the result that the whole system regularly tipped into crisis.There was an intellectual story to be told. In The Nobel Factor, a co-authored study of the origins and history of the Nobel Prize in Economics, written with Gabriel Soderberg, Avner showed how the Riksbank, the Swedish central bank, had set up and paid for the Prize from the late 1960s with the purpose of celebrating economic theorising that questioned the social democratic consensus of high tax and transfer and strong public goods. The coterie of Swedish economists controlling the award of the Prize were discreet and nuanced as they set to work.
Survey data showed that some two-thirds of the economics profession had a left-of-centre policy orientation but approximately half the prizes went to conservative economists, including Friedrich von Hayek, George Stigler, Milton Friedman, James Buchanan and Robert Lucas. These awards enhanced the credibility of their free market theories and their often aggressively conservative or libertarian politics. Most of the other prizes went to liberal economists such as Paul Samuelson, Robert Solow, Kenneth Arrow and Joseph Stiglitz, who nevertheless were committed to the assumptions of neoclassical economics. Only one prize went to a social democrat, Gunnar Myrdal, from Sweden, though behaviourists such as Daniel Kahneman and Elinor Ostrom who received awards also stood somewhat outside the liberal consensus.Avner found much to deplore in the post-war development of economic science, with the Chicago School from Friedman to Lucas, and the wider (and somewhat different) circle of economists associated with Hayek and the Mont Pelerin Society. The moral and political values of conservative economics presented it as a “Just World” theory, in which the market gives everyone what they deserve, regardless of their prior endowments and how these might have been obtained. As Friedman put it: ‘The ethical principle that would directly justify the distribution of income in a free market society is, “To each according to what he and the instruments he owns produces”' (Friedman 1956: 1). The consequence is indifference to inequality. Prestigious branches of economic theory (such as optimal taxation and public choice) give precedence to policies based on the purported efficiency of imagined free markets over the proven benefits of social equity and public goods. In other words, economic theory can too easily serve as a “warrant for pain” (Offer 2014c).
In his solo and collaborative writings on the technical content of modern economic theory, Avner engaged with two main approaches which are inconsistent with each other.
One is “good faith economics”, which scales up the discretionary choices of omniscient individuals into a socially optimal general equilibrium. This is a harmony theory in which there is no conflict of interest. Alternatively, in “bad faith economics”, information is asymmetric and limited and everyone has an incentive to cheat. Good faith economics is unrealistic but specifies optimal policy solutions. Bad faith economics is more realistic but is empirically indeterminate and is unattractive ethically. Neither provides reliable guidance for policy.Can society do better? Hayek argued that it was impossible for any form of social management to encompass the richness of information handled smoothly by the market. In recent writings, Avner has produced powerful counterarguments to this based on the heuristics of time discounting and collective decision-making in conditions of uncertainty to make a positive case for public goods and social insurance (Offer 2003, 2012a, 2018). He names these “prudential goods” and shows how wealthy societies have historically expanded the production of such goods to form some 40% of the economy. Prudential goods are hardened into institutionally protected entitlements for good reason: not as illegitimate use of public power for sectional rent seeking, but rather as commitment devices to overcome market failures and coordination costs, to extend time horizons, to pool risks and benefits and help individuals smooth life-cycle earnings, and to achieve economies of scale. Since the 1970s, hostility from the high economic theorists, consumer restlessness, political boredom and division, and short-termism by politicians currying electoral favour combined to undermine investment in prudential goods, resulting in breakdowns in societal order that ultimately harmed individual prosperity for the majority or for large minorities—a price that the electorate seemed willing to pay or at least unwilling to recognise.
In recent work, Avner develops a new theory of the private-public boundary.
The efficiency attributes of the market are only available for short-term projects whose duration is determined by the break-even time horizon defined by the prevailing interest rate. The higher the interest rate, the shorter this time horizon. If a project has a longer break-even, it cannot be undertaken by profit-making business on its own. It needs to be undertaken directly by society (through public enterprise or not-for-profit), or by a “franchise” whose profit is underwritten by society. Between them, these social and hybrid forms of enterprise cover more than half of aggregate economic activity. Competitive markets are important enclaves, but cannot provide a template for society.One corollary of pervasive public and hybrid economic activity is widespread corruption which has increased in line with marketisation and finan- cialisation. A possible solution to such problems is indicated by the successful “integrity revolution” which took place in Northwestern Europe in the second third of the nineteenth century. This was achieved by aligning the interests of public servants with their occupational codes, and worked well for about a century until the privatisation of public services and the introduction of competitive incentives into those remaining in the public sector. Payment by results in the public service set up a conflict between the self-interest of officials and the public good. Meanwhile, the privatised utilities and services continued to depend on government support. This support extends to the very heart of capitalism, the financial system which relies on central bank clearing, regulation, credit and bailouts (Offer 2018, and current work in progress). Here was a tragic irony: myopic choice amplified by sectional interests and accelerated by economic ideology is strong enough to undo the commitment devices installed historically to counter it. The linked crises of 2020 in public health and the macroeconomy highlight what is at stake.
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