The idea for the Theoretical Foundations work programme topic came from reading John Kay.
John Kay is a British economist and writer. He has been director of the Institute for Fiscal Studies and a columnist for the Financial Times. His most famous book is probably The Truth about Markets (2003), which I haven’t yet read.
But I have read “Market Failure”, a chapter in a book called Beyond New Labour: The future of social democracy in Britain edited by our old friends Patrick Diamond and Roger Liddle, that covers some of the same ground.
In this chapter, Kay discusses how modern progressives – he is focussing on New Labour in the UK but the lessons go wider – have embraced the doctrine of ‘market failure’ as a way of squaring an acceptance of a market economy with a continued desire to address inequality. This, he says, has been a mistake.
Under the market failure doctrine, effective market outcomes rely upon the following four conditions, and there is an ‘efficiency justification’ for state intervention if any of them are breached:
- A competitive environment
- Consumers have good information about their needs and the services available
- No ‘externalities’ (the good or service affects only the producer and the consumer, not any third parties)
- No ‘public goods’ (producers can identify the consumers of the service, and can quantify the consumption and charge for it).
We can probably all think of instances where such breaches occur. A number of environmental issues for instance, including the climate challenge, are situations where condition 3 does not hold.
The market failure doctrine therefore seems to offer plenty of scope for progressive action, while also feeling quite prudent and economically literate. It is understandable that it would have seemed an attractive approach for modernising progressive parties.
But, according to Kay, market failure is a bad argument for progressives to buy into. “By conceding too much to market fundamentalists it loses both intellectual coherence and political resonance.” (p. 74)
Kay mounts a comprehensive critique of the market failure doctrine thoughout his chapter, but the theoretical core of his argument can be found in the following paragraph (p. 76):
The basic philosophical differences that divide left and right concern the priority that should be given to claims of individual rights and private property relative to those of solidarity and social justice. The left insists, and the right denies, that the public interest is more than an aggregation of private interests. The model that underpins the market failure doctrine answers these questions, and others, in the right’s favour. A particular philosophy is inherent in the mathematics. The model takes individual preferences as given, along with personal resources and property rights, and sees social welfare as an aggregation of individual preferences. The primacy of material incentives as determinants of economic behaviour is not a prediction of the model, but an assumption.
Moreover, because the modern left has invested so much in market failure as its rationale for action, there is a temptation to frame everything they want to do as a response to market failure, however tenuous the basis for this may be. Kay cites the example of health, where Gordon Brown insisted on explaining his commitment to a tax-financed National Health Service by reference to market failures that, while real, did not actually justify the particular model he supports.
“More importantly, they have nothing to do with the real reasons why most people – including Brown – support a publicly funded NHS. These reasons begin from ethical concepts such as compassion and fairness rather than economic concepts such as information asymmetry.” (p. 76)
And this is the crux of the problem. “The notion that some economic choices are essentially collective, and cannot be described as a summation of personal of personal preferences, strikes at the heart of the market failure doctrine.” (p. 77)
I can relate to this. Back when I worked for NZUSA in the late 1990s there was a lot of debate about the extent to which tertiary education was a private good and should be privately funded through student fees. The students wanted to maintain that tertiary education was a public good and should be fully publicly funded. I was keen to dissuade them from this – while they had good arguments against particular claims about the private benefits from tertiary study, by buying into the public/private benefit argument, they undermined their own position. There is clearly some private benefit from study so you couldn’t argue for free education on public/private benefit terms.
Instead, I argued, they should seek to frame tertiary education as a collective good, i.e. one which society should agree to fund collectively as it does for school education.
John Kay makes a similar point: “The majority of contested economic policy issues reflect disputes about the nature of entitlements, or they occur when parties look to the government to fill in the implicit terms of imperfectly specified contracts.” (p. 81)
And, indeed, first amongst his list of illustrative recent policy issues is tertiary fees, framed not as public/private benefit or as (market failure) barriers to participation, but as “What rights of access do individuals have to higher education, and on what terms?”
Progressives in New Zealand have not made as extensive or explicit use of market failure as a theoretical framework as appears to have been the case in the UK. Nevertheless, these and other market-oriented economic concepts have permeated policy discussion pretty thoroughly in this country for the last twenty-five years, and to a large extent progressive policy thinking has accommodated itself within that discourse.
In the Theoretical Foundations work programme topic, I want to take a step back from that and have a look at the theoretical arguments we progressives rely upon to justify our actions and initiatives. Are they fit for purpose, or, like the market failure doctrine, do we end up either making tenuous linkages and/or conceding significant intellectual terrain to our opponents?
In Tuesday’s post, I’ll survey Kay’s proposed alternative to the market failure doctrine.