A Happy New Year to the Liberator Collective and Liberator’s readers.
Your blog post yesterday on a new capitalism mentioned Adair Turner in passing. I recommend wholeheartedly his series of Lionel Robbins Memorial Lectures on the overall theme of ‘Economics after the Crisis’, given in October 2010 at the LSE:
- Economic Growth, Human Welfare and Inequality
- Market Efficiency and Rationality: Why Financial Markets are Different
- Economic Freedom and Public Policy: Economics as a Moral Discipline
Turner begins by setting out what he calls the ‘Instrumental Conventional Wisdom’, the three main planks of which are, first, that the object of policy should be to maximise Gross Domestic Product (GDP) per head; second, that the primary means of doing this is to create freer markets; and third, that increased inequality is acceptable as long as it delivers superior growth. But does this lead to an increase in human happiness?
In developed economies since 1958, the six-fold rise in real GDP per head has led to no discernible change in measures of life satisfaction. (Bruno Frey and Alois Stutzer, Happiness and Economics, Princeton University Press, 2002).
Beyond a certain level, human contentment does not continue to rise with increased income. Turner develops a new theory of marginal utility (MU) for this stage in development, in which MU appears to rise ahead but when, once reached, delivers the same level of total utility. For societies at this stage of development, new products and services do not result in increased levels of contentment.
At this point, it is relative income that matters to consumers with a developing fixation on positional goods: rising expenditure on fashion and branded goods, increased competition for scarce positional goods, and rising congestional externalities.
Happiness becomes a function of others’ income as well as one’s own.
Turner then leans on Roger Bootle’s distinction between ‘creative’ activities, which increase the net real income available for consumption, and ‘distributive’ activities, which win increasing income at expense of others. (Bootle, The Trouble with Markets, chapters 4 and 5).
He sees this process leading to (a) a fall in lowest decile income relative to the median and (b) a rise in the top decile relative to the median (and actually a huge increase in the top 1% or even 0.0001% relative to the rest of that top decile).
This accelerative inequality at the top is driven by celebrity rents, increased potential for rapid private value creation, highly remunerative distributive activities (PR, lawyers, etc., around the celebrities and high-value entrepreneurs) and cross-comparisons, changing social attitudes, and the role of agents.
Turner goes to Wilson and Pickett to assess the impact of rising inequality accepting much if not all of the conclusions of their research (see The Equality Trust and The Spirit Level). The best indicator of a country’s rank on measures of general well-being is not the difference in wealth between them, but the difference in wealth within them.
Under the Instrumental Conventional Wisdom, the journey matters, not the destination. Economic freedom is valued as an end in itself.
This rough outline covers just the first of Turner’s lectures, the aim of which is to explain why in rich countries growth should not be the objective. It is not possible here to do justice to the sustained thinking behind the lectures, so reading the texts or watching the podcasts is very much worth the time, especially on dark post-festive evenings by a fireside. Or read Turner’s book based on his lectures, Economics After The Crisis (reviewed here by Robert Skidelsky).
Adair Turner was once a member of the Social Democrats. He sits in the House of Lords. He ends his job very soon at the Financial Services Authority. We should seek to involve him in the development of our thinking about the future of capitalism and, thus, the future political direction of the Liberal Democrats.
Or go listen to The Byrds.