The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [102]
Dramatic economic growth comes about when the structure of the economy changes—new technologies are introduced, existing businesses are severely disrupted as old working patterns and organizational structures change. The changes in the economy due to the spread of new information and communication technologies have been discussed at several points in this book. As this kind of restructuring involves changes in everyday social relationships and habits, great strides in economic potential often feel uncomfortable. There has been a long tradition of cultural and social opposition to these effects of capitalism, as described in chapter 1. The shape the opposition takes will change with the times. Certainly, the absence of communism and socialism as credible alternative systems makes current distaste for “market fundamentalism” very different in flavor compared with previous periods such as the 1930s and 1960s when the pendulum of opinion has swung that same way. Be that as it may, the crisis of recent years has certainly reinforced the view that markets have—in some way—gone too far.
But is the antimarket backlash any more than an emotional outburst before the bankers return to business as usual? After all, there were good reasons capitalism triumphed over communism in the Cold War. The alternative economic system of central planning was an utter failure in both economic and moral terms. It delivered neither economic results nor political legitimacy. Built on mass deaths inflicted by brutal dictators, it was morally bankrupt. Nostalgia for an ideology emphasizing social solidarity shouldn’t be mistaken for practical politics.
The power of markets, on the other hand, is almost miraculous, as Paul Seabright so eloquently describes in The Company of Strangers. It is through markets that the massive complexity and variety of the modern global economy is coordinated. Only markets can convey the vast array of detailed information about preferences, incomes, the demands of buyers, and the costs of sellers. All of this is captured in the prices and quantities of goods and services exchanged, and the pressure for changes in prices and quantities whenever supply and demand are out of line. “The mutuality of advantage from voluntary exchange is . . . the most fundamental of all understandings in economics.”3
Critics of economics are skeptical about the benefits of markets, arguing that economists have to make too many ridiculous assumptions for their conclusions to have any validity. For example, this line of argument goes, people don’t have fixed preferences, don’t necessarily know what their preferences are, certainly don’t undertake any kind of rational calculations when they go shopping. On the contrary, people are irrational, impulsive, inconsistent. True, up to a point, but these arguments are often irrelevant. Many of the assumptions for which economists are mocked are made for the convenience of writing out mathematical versions of their theories. These mathematical models are useful for working out what will happen. Apart from anything else, mathematics is intolerant of internal contradictions and errors, and so a useful flashlight for exposing flawed theories. But they are only rarely essential to the fundamental insights. So, for instance, the key point about the economist’s assumption of rational “selfishness” is not that people really are utterly selfish or that they do formal calculations before purchasing everything, but rather that it’s entirely realistic to assume that people will act in their own self-interest on the basis of the information available to them. There is nothing in this that runs counter to human nature—on the contrary, it’s in the genes. And the assumption of rational self-interest forms the basis of a powerful way to analyze situations where people do appear to be acting counter to their own interests—it can help identify the information asymmetry or the transaction cost or the psychological trait that would explain the divergence between actual behavior