New Labour economics, in both private and public sectors, is based on the idea of market failure. But the doctrine smuggles in too many neoliberal assumptions, and does not acknowledge collective choices. The centre-left needs something betterby John Kay / August 1, 2007 / Leave a comment
Published in August 2007 issue of Prospect Magazine
Does the modern centre-left have an economic theory? It has come, reluctantly, to acknowledge the primacy of the market, but demands intervention to reduce inequality of outcomes and to improve equality of opportunity. The most articulate rationale for this economic philosophy is the doctrine of market failure. This notion was the centrepiece of Gordon Brown’s most extended exposition of economic philosophy, a speech to the Social Market Foundation in 2003. The argument was then amplified in a book published a year later, entitled Microeconomic Reform in Britain. (The status of this volume, part economic treatise, part political tract, is curious. The author is given as “HM Treasury,” and the editors are Ed Balls, Brown’s right-hand man, and now in the cabinet as children, schools and families secretary; Joe Grice, a career civil servant; and Gus O’Donnell, then permanent secretary at the treasury and now cabinet secretary—with a foreword by Brown himself.) The market failure doctrine described in Microeconomic Reform has been the guiding principle of Brown’s treasury. Sophisticated lobbyists have learnt to frame arguments in terms of market failure. The thesis also wins wide acceptance among economists, and is influential in Brussels as well as in Whitehall. In this essay I explain the content and origins of the market failure doctrine, why it cannot provide the economic philosophy which the moderate left is seeking and what the outline of an alternative might look like.
The central claims of the centre-left remain valid. Unaided, markets do not give acceptable outcomes to the provision of education and pensions, transport and health, because in these spheres choices are unavoidably political, in the sense that such choices are and should be based on collective decisions about the nature of society, not simply on the self-interested decisions of individuals. Nor is there in these areas, or in general, a dichotomy between the economic sphere and the political: far from being in opposition to the market, social and political dimensions of conduct are central to an understanding of how markets work. The doctrine of market failure fails to accommodate these considerations, and by conceding too much to market fundamentalists, loses both intellectual coherence and political resonance. The market failure doctrine is based on an imperfect understanding of why markets succeed, not just why they fail, and hence provides a misleading guide not only to when government intervention is appropriate, but also to the ways in which market forces can improve the operation of the public sector.