What deeper reforms are needed to build back better?
Even before Covid-19, the multiple crises experienced by western economies over the last decade and more – the financial crash, the climate emergency and rising inequality – have led some commentators to ask whether a new ‘economic paradigm’ may be in the making.
An economic paradigm is the framework of economic theories, policies and narratives which come to define a particular era. In the 20th century two major periods of economic crisis led to changes in the dominant paradigm. Old economic orthodoxies proved unable to provide solutions, and new economic theories and policies took their place.
In the 1940s, following the Wall Street crash of 1929 and the Great Depression of the 1930s, Keynesian economics replaced the previous orthodoxy of ‘laissez faire’, leading to the ‘post-war consensus’ of full employment and the welfare state. In the 1980s, following the economic crises of the 1970s, free market economics became the new orthodoxy. But free market economics seems to have caused the crises we have recently experienced, and to offer little by way of solutions. Is another ‘paradigm shift’ due?
The free market economic ideas and policies which were first introduced in the 1980s under Margaret Thatcher in the UK and Ronald Reagan in the US came to be known as ‘neoliberalism’. Neoliberalism is the doctrine that economic growth and human freedom are best served by the expansion of deregulated markets and private enterprise, and a reduction in the activities and size of the state. It is often described as the dominant paradigm of the last four decades, effectively espoused not just by right-wing governments but by avowedly centre-left ones which (it is often claimed) failed to reverse or challenge its principal policies.
Neoliberalism has been widely criticised. Its economic policies have led to a significant growth in income and wealth inequality and pervasive environmental degradation. The globalisation of commerce and free trade promoted by neoliberalism has in many countries led to the destruction of traditional industries and the communities which have relied on them. Deregulation has led to a huge expansion of the financial sector, and of the influence of financial objectives in companies and society, a process often described as ‘financialisation’.
Though neoliberalism claims to promote market competition, in key sectors (such as digital platforms and public services outsourcing) it has enabled the development of extremely powerful companies operating as near-monopolies. The process by which wealth is extracted from the economy by a relatively small group of financial and monopoly asset owners has led some to describe the neoliberal economy as ‘rentier capitalism’.
There is as yet no widely agreed name for a new, post-neoliberal economic paradigm. But those seeking to build one largely agree on its core goals. They seek an economic system which is
In such an economy democratically elected governments would play a significant role, seeking to shape and regulate markets to serve the public interest, and limiting the power of major corporations and financial markets.
These goals cannot be achieved, it is argued, by minor reforms to present economic systems. Fundamental reform is required, a structural transformation which hard-wires these goals into the way the economy works.
The economic crises of the last decade have generated significant reassessment in the discipline of economics. The failure of mainstream analysis to anticipate the financial crash of 2008, the growth of inequality, the unexpected stalling of productivity and wage growth, and the increasing evidence of environmental breakdown, have led to a questioning of the theoretical foundations upon which much economic policy has been based. Mainstream economics has increasingly taken new perspectives on board, while alternative or ‘heterodox’ schools have become increasingly prominent.
In macroeconomics, ‘post-Keynesian’ analysis has emphasised the critical role of the financial sector and of uncertainty. Institutional and political economists have focused on the role of institutions and power relationships. Evolutionary and complexity economists have sought to understand the economy as a complex, adaptive system with a path-dependent history of technological and institutional development. Ecological economics has pointed out the environmental basis of all economic activity. Feminist economists have forced attention on its gendered nature. Behavioural economists have shown how people actually behave, contradicting the neoclassical model of ‘rational economic man’.
These developments have not yet led to any grand synthesis, but economics is in greater flux, and generating more interesting ideas, than it has for a generation.
At the same time as neoclassically-based economics has been criticised for its influence over orthodox economic policy, its central role in the teaching of economics has also come under scrutiny.
Complaining that traditional economics courses did not reflect the post-financial crash world they were experiencing, economics students have campaigned for reform of the curriculum. They and others have argued for economic ‘pluralism’, an acknowledgement that there are a variety of economic perspectives, not a single correct one.
New ways of teaching the subject have been developed which start with real world problems and data about them, not stylised theory.
Many of the organisations whose work features on Beyond Covid would argue for a new economic paradigm. A number of academic institutes, think tanks, practitioners and media outlets exist specifically to generate and promote new economic thinking in the round. Each has its own perspective and focus, but they share a general aim of changing the way economics is thought about and economic policy is designed.