Human-Centred Economics

This chapter argues that the root of the increasingly serious crisis facing capitalism and liberalism more generally can be located in a fundamental distortion in the way its canon of economic principles and tools have evolved since the eighteenth and nineteenth centuries, and especially in the way they have been applied over the past several decades. In effect, generations of economists and policymakers have been trained to behave as if Adam Smith's “invisible hand” of market-based resource allocation can be relied upon to optimize not only the wealth of nations (its core function as stated by Smith) but also the well-being of their populations at large. A rising tide of GDP, as it were, ultimately lifts all boats. But Smith and other important pioneers of the field assumed no such thing. They believed that market-oriented measures to increase the production and wealth of nations were a necessary but by no means sufficient condition for raising the broad standard of living of their people. A range of institutions—legal and other norms, policy incentives and administrative capacities mainly but not only in the public sector—were required to ensure appropriate levels of social inclusion, environmental sustainability and human and systemic resilience. Modern economics’ policy immobility and political tin ear in the face of these challenges is rooted in a certain indoctrinated incomprehension. Its implicit assumption that GDP growth eventually diffuses or “trickles down” into broad socioeconomic progress and security has never been properly recognized and interrogated. The essential principle the book posits is that the broad living standards of nations—the main facets of the median household’s material well-being—deserve as much direct policy attention and institutional cultivation by economists and policymakers as the wealth of nations, that is to say, national income or GDP.

This chapter investigates whether modern economics’ shortcomings with respect to inclusion, sustainability and resilience—its treatment of living standards as a residual consideration—can be attributed to the original conceptualization of liberal political economy or a subsequent misapplication of its founding principles. It finds that the discipline’s most influential early theorists and codifiers—Adam Smith, John Stuart Mill and Alfred Marshall—explicitly contextualized their insights about the power of market-based resource allocation in a larger perspective and complementary set of prescriptions. These emphasized the important role of institutions—legal and other norms, policy incentives and public administrative capacities in multiple domains—in helping to translate the increased economic growth enabled by market-based resource allocation into broad improvement in social welfare. Each of these pioneers considered increased production and national income, the wealth of a nation, as a means and not an end in itself. Each emphasized that the ultimate purpose of an economy is to advance the material well-being, or standard of living, of society as a whole. The chapter makes extensive reference to their original texts and traces how their shared view of the crucial institutional underpinnings of inclusion, sustainability and resilience got lost in translation during the evolution of eighteenth- and nineteenth-century political economy into twentieth-century economic science.

This chapter presents an agenda for deep reform of international economic governance and cooperation based on the human-centred logic of placing the bottom-line measure of national economic progress, broad progress in living standards, rather than GDP growth at the heart of international macroeconomic policy cooperation; the international financial architecture; and international trade and technology governance. This twenty-first century renovation of the international economic architecture is based on a “Roosevelt Consensus” model of growth and development that emphasizes the social contract's crucial role in advancing inclusion, sustainability and resilience. Major reforms are proposed to IMF and World Bank macroeconomic policy analysis and advice, including debt sustainability methodology; and international development and climate finance, through the tripling of ODA-related external flows to more than 80 of the poorest countries in each of the next seven years, including for the purpose of retiring and replacing most of the world’s coal-fired power-generating capacity over the next 15 years while doubling global annual investment in renewable energy research and development. Additional proposals are made to rebalance international trade policy by coordinating trade, labour, climate change and development cooperation to a far greater extent through new types of international economic alliances, including one that could create a workable solution to the thorny issue of climate leakage, and giving the WTO a new lease on life facilitating discussions among plurilateral trade agreements and their members about how the best normative and facilitative features of such agreements could ultimately be knit together into a reconstituted, high-road multilateral trading system. Together, these reforms would greatly accelerate progress toward UN goals.

This chapter argues that rebalancing liberal economics through the new macroeconomic approach to welfare and institutional economics described in the book would reinforce Keynes’s “Middle Way” reforms of the 1930s, which were aimed at better reconciling capitalism with social justice by maintaining full employment in decent work through robust domestic demand and investor confidence. It would add a systematic institutional dimension to Keynes’s fiscal and monetary strategies, expanding the toolbox available to policymakers to run their economies relatively hot on a sustainable basis through ongoing improvement in the fundamental conditions underpinning of supply and demand rather than the mainly transitory macroeconomic or deregulatory stimulus measures traditionally favoured by the social democratic centre-left and conservative centre-right. Moreover, the Paris climate agreement requires a new Middle Way in economics to be forged over the next generation, this time between environmentally destructive growth and socially destructive stagnation or degrowth. By internalizing the relevant institutional drivers of a just climate transition in macroeconomic theory and policy, the concepts and tools of human-centred economics create the possibility of a such a “neoclassical-Keynesian-ecological synthesis” focused as much on the social and environmental quality of growth as its quantity. Policymakers must abandon the reflex of standard liberal economics to assume, whether explicitly or implicitly, that broad and sustainable progress in household living standards trickles down inevitably from higher national income. A certain intentionality is required to optimize both—a sustained process of institutional deepening and investment to foster movement closer to the frontier of good policy and institutional practice in the aggregate distribution function’s five domains. The chapter concludes by explaining how operationalizing this forgotten aspect of liberal political economy’s founding principles holds the key not only to satisfying societal demands for greater inclusion, sustainability and resilience but also to reversing liberalism’s declining political prospects within countries and the international system.