Something of value

The Reith Lectures are a long-standing tradition in British radio broadcasting, running back to 1948, in which a leading figure of the day tackles a subject of contemporary interest. One of the consequences of the lockdown is that I had a chance to listen to this year’s lecture series given by Mark Carney, former BoE Governor, and very interesting it was too, for it tackled the issue of how financial value has usurped human value and what we can do to turn this around (the transcripts of his lecture series are also available at the link shown above).

What is value?

This subject is of relevance to all economists, but it is of particular interest to me because as I have noted previously, it is one of the motivating factors behind starting this blog in the first place. Carney’s jumping-off point is to acknowledge that the moral sentiments espoused by Adam Smith, the father of the invisible hand, have become financial sentiments and that “societies’ values became  equated  with  financial  value.” I have raised similar points over the years, arguing in 2017 that Smith “never advocated the devil-take-the-hindmost policy which many of his adherents claim.” Indeed, Carney notes that Smith uses the phrase “invisible hand” only once in his magnum opus The Wealth of Nations. My own introduction to Smith’s work (more years ago than I am prepared to admit) focused on his role in developing the idea of comparative advantage in trade rather than his espousal of free markets – a point that Carney reiterated: “the central concept that links all of Smith’s works is the idea that continuous exchange forms part of all human interactions.”

A few weeks ago I referenced a study conducted by the ESCoE into public attitudes towards economics in which those questioned “often associated the economy with money.” Carney highlights that “Smith’s writings warn of the mistakes of equating money with capital.” Somewhere along the line we appear to have drifted a long way from the original ideas sketched out by one of the founding fathers of modern economics. One of the underpinnings of this shift has been a change in the nature of value. In Carney’s interpretation of Smith’s world, value is derived from our desire to be well regarded by others which creates “incentives to achieve mutual sympathy of sentiments.” In recent years, however, value has taken on a more subjective hue as the neoclassical revolution has gone mainstream. In this scheme, people are encouraged to assign a value according to the utility they assign to a particular good (or service). In other words, value becomes what people are willing to pay. What complicates matters enormously is that since tastes can change very quickly, these values are not stable over time. But following the Reaganite/Thatcherite revolution of the early-1980s which unleashed the power of markets as the ultimate arbiter of choice, this model of value generation has become extremely well entrenched.

However, markets are underpinned by the laws and values of the society in which they operate. They do not spring out of nowhere – the invisible hand must be attached to an invisible arm. A good example of this is the Glass-Steagall Act of 1933, which separated the deposit taking activities of US banks from more risky investment banking operations. It came into being because society was not prepared to condone a repeat of the 1929 Wall Street Crash and the associated economic hardship. Fast forward to 1999 and society’s concerns about the risks associated with banking had diminished to the point at which the US Congress felt able to repeal it. Quite clearly the law operated in the context of the prevailing social norms.

By contrast, Milton Friedman was an arch-proponent of free markets who argued that we could separate market outcomes from their social context. In a famous article published in the New York Times 50 years ago he argued that a business executive who exercises social responsibility in the course of their work “must mean that he is to act in some way that is not in the interest of his employers.” Businesses that do anything other than maximise profits are “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades” and are guilty of “analytical looseness and lack of rigor.” But Friedman’s failure to take account of social context is a major omission. What might have been acceptable corporate behaviour in  the 1970s and 1980s no longer is. Moreover, a purely market oriented policy that fails to take account of social norms would damage a company’s image and be harmful to its long-term survival prospects.

One of the problems with our current system of value setting is that since we define the worth of activity purely in financial terms, we cease to value that which we cannot price. Accordingly mainstream economics now tries to assign a price to civic and social virtues in order to give them meaning. In this way, we have gone beyond operating in a market economy and we are now operating in a market society. But as Carney points out, “there is considerable evidence that commodification, putting a good or service up for sale, can corrode the value of the activity being priced.” The standard example of this are charitable events which seek to raise money for good causes. The primary motivation is altruism, but would more money be raised if participants were paid? The answer, it turns out, is no.

Will Covid change how we value things?

These philosophical ramblings are all very interesting but what bearing do they have on the issues we face today? In a world where all members of society have been affected in one way or another by Covid, many people have done extraordinary things to help their communities, for which they received no payment. Milton Friedman might have argued that they were crazy, giving away their labour for no monetary reward. But they did so because they believed in the cause for which they were working. In a wider sense, Covid will force societies to re-evaluate their priorities. In the Anglo Saxon world, the burden of risk has increasingly been shifted onto the individual as the state has reduced its role in the economy. For example, if you lose your job, you have to find another one quickly because the state will not provide for you. But during the pandemic, that is precisely what the state has been forced to do. Does society really want to revert to what went before?

I recently gave a presentation in which I suggested we may be about to relive a 1945 moment. At that time in the UK, memories of high unemployment in the 1930s were still vivid and voters in the first post-war election opted for a government that promised radical social change. Radical post-Covid change will likely be driven by younger voters who wish to see changes to an economic model that has benefited their parents’ generation but done little for them. For example, voters may demand that the state plays a bigger role in the economy in future, since one of the things the state does well is to correct the market failure from negative externalities (e.g. ensuring widespread access to healthcare and education). This in turn could have a major bearing on the way in which society assigns values and would give the green light for future governments to adopt a slow course back to fiscal rectitude rather than a headlong rush.

Obviously we do not know what the future holds but I have long argued that more market-type solutions are not the answer to the mounting economic problems faced by European economies. This is not to say that we should revert to 1970s-style efforts to centralise economic decision-making. But as we learned in 2008 and again in 2020, markets can fail without the right kind of support. The fact that we value intervention in order to avoid worst case spillover effects suggests that we should not be afraid to impose limits on the extent to which we allow free markets to make our value judgements for us