The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [11]
My preparatory economics education ended in 1980 with my PhD. I had entered Harvard as a freshman in 1972 during the Age of Paul Samuelson and joined the Harvard faculty as an assistant professor in the fall of 1980 at the start of the Age of Milton Friedman. That year, Ronald Reagan won the presidency on a platform of rolling back the role of government. Across the Atlantic, the United Kingdom’s new prime minister, Margaret Thatcher, stood for the same. Together, Reagan and Thatcher launched a rollback of government the likes of which had not been seen in decades. Many of the measures of the Reagan presidency, notably the sharp cut in the top tax rates and the deregulation of industry, won support throughout the economics profession and the society.
The main effect of the Reagan Revolution, however, was not the specific policies but a new antipathy to the role of government, a new disdain for the poor who depended on government for income support, and a new invitation to the rich to shed their moral responsibilities to the rest of society. Reagan helped plant the notion that society could benefit most not by insisting on the civic virtue of the wealthy, but by cutting their tax rates and thereby unleashing their entrepreneurial zeal. Whether such entrepreneurial zeal was released is debatable, but there is little doubt that a lot of pent-up greed was released, greed that infected the political system and that still haunts America today.
The Case for a Mixed Economy
We need to understand precisely where the free-market ideology goes awry. A good starting point is the most basic functioning of the market economy, notably the law of supply and demand. It is when supply and demand stop functioning effectively that government must step forward.
In a competitive market, where there are large numbers of potential suppliers and consumers, the price of each good and service adjusts to balance the supply and demand. If at the current price firms want to supply more than is demanded by consumers, the price will decline, leading firms to cut back on their supplies and consumers to step up their purchases; if at the current price firms want to supply less than is demanded by consumers, the market price will rise, leading firms to increase their supplies and consumers to trim their purchases. When the balance of supply and demand is reached for each and every good or service, we say that the economy has reached “market equilibrium.”
The key idea of Adam Smith, the late-eighteenth-century founder of economic science, is that the market equilibrium is reached without a central planner and that it has desirable results for the nation, notably in the forms of high productivity and wealth. With every firm and household pursuing its own self-interest, the resulting market equilibrium can almost miraculously lead to the well-being of all. Smith gave a famous and enduring name to the process by which the individual actions of millions of individuals and firms combine for the common good: the “invisible hand,” encapsulating the paradox that self-interest in the marketplace can lead to the common good. As Smith famously declared:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages [in supplying what we demand as consumers].2
In modern scientific terms, the invisible hand of the marketplace