Loaded for Bear: ‘Licence for Plunder’ – a Nobel prize-winning economist has second thoughts

In the March issue of Finance & Development, the flagship journal of the International Monetary Fund (IMF), Scottish economist Angus Deaton calls for a radical rethink of entrenched views in the face of rising inequality.

Read more here: Rethinking Economics or Rethinking My Economics by Angus Deaton 

“Like many others, I have recently found myself changing my mind, a discomfiting process for someone who has been a practising economist for more than half a century,” Deaton writes. 

Power, ethics and efficiency are among the issues he raises. 

“Our emphasis on the virtues of free, competitive markets and exogenous technical change can distract us from the importance of power in setting prices and wages; in choosing the direction of technical change, and in influencing politics to change the rules of the game. 

“Without an analysis of power, it is hard to understand inequality or much else in modern capitalism,” Deaton notes. 

He goes on to say that while economists of the past – from Adam Smith to Karl Marx and even Milton Friedman – often applied their minds to philosophy and ethics, this was no longer broadly the case. 

“... we have largely stopped thinking about ethics and about what constitutes human well-being. We are technocrats who focus on efficiency... 

“We often equate well-being with money or consumption, missing much of what matters to people. In current economic thinking, individuals matter much more than relationships between people in families or in communities.” 

One upshot is that efficiency has taken centre stage and with it, a “licence for plunder”.

“Efficiency is important but we valorise it over other ends,” Deaton writes, noting that many economists subscribe to the view “... that economists should focus on efficiency and leave equity to others, to politicians or administrators. 

“But the others regularly fail to materialise, so that when efficiency comes with upward redistribution – frequently though not inevitably – our recommendations become little more than a licence for plunder.

“Keynes wrote that the problem of economics is to reconcile economic efficiency, social justice and individual liberty. We are good at the first, and the libertarian streak in economics constantly pushes the last, but social justice can be an afterthought.”

Deaton has also had a rethink about the demise of unions and the virtues of free trade, especially concerning how these trends have played out in the US. 

“Like most of my age cohort, I long regarded unions as a nuisance that interfered with economic (and often personal) efficiency, and welcomed their slow demise. But today, large corporations have too much power over working conditions, wages and decisions in Washington, where unions currently have little say compared with corporate lobbyists... 

“Their decline is contributing to the falling wage share, to the widening gap between executives and workers, to community destruction, and to rising populism.”

While unstated, this rise in populism includes the fascist and theocratic Maga cult of Donald Trump, who has exploited the grievances and declining living standards of the white working class in America.

“I am much more sceptical of the benefits of free trade to American workers, and am even sceptical of the claim – which I and others have made in the past – that globalisation was responsible for the vast reduction in global poverty over the past 30 years,” Deaton writes. 

He said he no longer buys into the narrative that trade has been a driving force behind poverty reduction in India. 

As for China, he contends that its road to relative prosperity did not need to be paved with wage stagnation and decline for workers in rich countries if Chinese policies had not been so focused on savings, “... allowing more of its manufacturing growth to be absorbed at home”.

“Economists could benefit by greater engagement with the ideas of philosophers, historians and sociologists, just as Adam Smith once did.”

Deaton’s work has focused on how data regarding consumption can be used to analyse poverty and economic development. 

He won the Nobel Memorial Prize in Economic Sciences almost a decade ago for his work on “consumption, poverty and welfare”, so one imagines his rethink of economics orthodoxy has been bubbling for some time. 

Still, Deaton – while his work focused on human welfare – clearly feels that he and many of his peers have failed to frame the issues in a way that adequately addresses this issue. 

On subjects such as globalisation and the decline of unions, the scales seem to have fallen from his eyes. 

The fact that he is US-based and has witnessed the maniacal rise of Maga has no doubt influenced his thinking. 

Of course, economic orthodoxy has long had its dissidents. 

The French economist Thomas Piketty has offered powerful critiques of inequity through the prism of “inequality regimes” and historical access to the ownership of assets that generate wealth.

Read more in Daily Maverick: Book Review: Piketty’s survey of inequality has some salient lessons for South Africa.

And for a South African audience, Deaton’s questioning of many of the key tenets of his discipline’s faith is of more than passing interest. 

For example, one way to improve efficiency in one sector of South Africa’s retail economy would be to allow motorists to fill their own tanks at the petrol pump. This is the norm in North America because it lowers the industry’s wage bill, making the operation more efficient: the same volumes of petrol or diesel get pumped at lower costs.

But that would put tens of thousands of petrol station attendants out of work, many of whom are supporting families in an economy with an unemployment rate that is effectively over 40% based on its widest definition.

What about the role of unions? 

Well, under South African labour laws, they have considerably more clout than their much-diminished US counterparts. One could perhaps argue that the pendulum has swung too far one way there, and could swing a bit in that direction here.  

Current South African labour legislation was largely crafted from a leftist vantage point, but the difficulty of trimming workforces is also seen by many as a deterrent to hiring in the first place. 

‘Labour market rigidities’ is the term of art and it is a thing. Employers are often hesitant to offer regular jobs because it is cumbersome to fire underperforming staff or retrench in the face of squeezed margins. 

More widely on the global stage, have policy goalposts shifted so much in favour of companies and capital that they now have a “licence for plunder”? 

And how does that fit with the corporate embrace of so-called ESGs, or environmental, social and governance concerns? 

Deaton has certainly put these issues on the radar screen by airing his views in an IMF publication, and they are subjects that require debate. One might add that debates around these issues have never really gone out of fashion. 

The pendulum simply keeps swinging, often over well-worn terrain. DM