In an article in Foreign Affairs entitled “The Future of History,” Francis Fukuyama pointed out that, despite widespread anger at Wall Street bailouts, there has been no great upsurge of support for left-wing political parties. Fukuyama attributed this — rightly, I believe — to a failure of ideas.
The 2008 financial crash revealed major flaws in the neoliberal view of capitalism and an objective view of the past 35 years shows that the neoliberal model has not performed well relative to the previous 30 years in terms of economic growth, financial stability and social justice. However, a credible progressive alternative has yet to take shape.
What should be the main outlines of such an alternative?
First, a progressive political economy must be based on a firm belief in capitalism — that is, on an economic system in which most of the assets are privately owned, and markets largely guide production and distribute income.
However, it must also incorporate three defining progressive beliefs — the crucial role of institutions; the need for state involvement in their design in order to resolve conflicting interests and provide public goods; and social justice, defined as fairness, as an important measure of a country’s economic performance.
It was a great mistake of neoclassical economists not to see that capitalism is a socioeconomic system and that institutions are an essential part of it. The recent financial crisis was made far worse by profound institutional failures, such as the high level of leverage that banks were permitted to have.
Empirical research has shown that four sets of institutions have a major impact on the performance of firms and, therefore, on a country’s economic growth.
These include the institutions underpinning its financial and labor markets, its corporate-governance arrangements, its education and training system, and its national system of innovation (the network of public and private institutions that initiate and diffuse new technologies).
The second defining belief of progressive thinking is that institutions do not evolve spontaneously, as neoliberals believe.
The state must be involved in their design and reform. In the case of institutions underpinning labor and financial markets, as well as corporate governance, the state must mediate conflicting interests.
Likewise, a country’s education and training system, and its national system of innovation, are largely public goods, which have to be provided by the state.
It should be clear that the role for the state that I have been describing is an enabling or market-supporting one.
It is not the command-and-control role promoted by traditional socialists or the minimalist role beloved by neoliberals.
The third defining belief of progressive thinking rejects the neoliberal view that a country’s economic performance should be assessed solely in terms of GDP growth and freedom. If one is concerned with a society’s well-being, it is not possible to argue that a rich country in which the top 1 percent hold most of the wealth is performing better than a slightly less wealthy country in which prosperity is more widely shared.
Moreover, fairness is a better measure of social justice than equality. This is because it is difficult to devise practical and effective policies to achieve equality in a market economy.