This is the starting paper for the Future Markets Consultation, which will run into the fall of 2020. The goal is to develop a new economic vision for Europe, enabling human flourishing for all in an ecologically sustainable way. You are cordially invited to participate!


Market economies: between greatness and crises

The market economies that mankind has been building over the last two centuries have delivered impressive results in terms of combating poverty and creating wealth. Never before in human history has it been possible to improve the living conditions of so many people so substantially. This improvement continues right up until the present day. Markets, in spite of sometimes severe setbacks, have in general turned out to be an unprecedented platform for creative solutions and innovation, traits that we cannot do without.

However, in the last decades it has become increasingly clear that mankind cannot simply extrapolate this type of market economy indefinitely into the future. The shadier sides of our continuously growing economies are becoming only too visible: ecological overshoot and exhaustion, growing inequality, financialization, inadequate price-value relations leading to inadequate resource allocations, short-termism (often stimulated by particular profit- and bonus-structures), stress on social relationships, dissolution of the middle class, new unchecked (digital) power concentrations with great political clout, and individuals’ psychological overstretch. These are all on the rise to such an extent that they are becoming a direct threat to our quality of life and/or our sense of well-being, and for some in today’s world more than for others. The very success of the market economy also breeds its failures. Humanity should be able to do better than this.

The credit crisis of 2008, and the ensuing problems in subsequent years, was a clear wake up call. In the meantime, a “slower crisis” has also taken centre stage in public attention: the ecological pollution and exhaustion, and the resulting climate crisis. Awareness is growing that we simply cannot hand over the planet to the next generation in its present state. At the same time, we have become more and more aware that some of the key promises of free market economies, to bring prosperity and well-being to an ever-growing number of people – what Adam Smith in 1776 called the “wealth of nations” and would translate today as “wealth of people” – are not materializing. Although at a global level we can observe a decline of poverty and inequality between nations, in the abstract we see a rise of relative poverty and absolute inequality within many nations, between specific groups of people (although in Europe less than elsewhere). The return on capital and the political power of capital is increasing, but the reward for labor and the countervailing power of labor lag behind significantly.

“The current situation shows that an economy is not uncontrollable like the weather, but that economies are constructs of our own making.”
Most recently the corona crisis has occurred. This did not have its direct origin in the modern economy (pandemics have happened before in history, and some have been more severe than the current one) but it certainly requires a “reset” in many respects: it has triggered a severe economic crisis and has laid bare weaknesses in many economies and societies. The question is not only if, but rather, how we are going to repair our economies. Above all, the crisis has suddenly brought home that “the economy” is not an abstract machine that we as humans cannot touch. On the contrary, as humans we are able bring it almost to a full stop if we deem something dear to be more important. In the case of the coronavirus, the priority has been the health of ourselves and our fellow humans. The current situation shows that an economy is not uncontrollable like the weather, but that economies are constructs of our own making. The question then becomes: How can we design economies such that they deliver what we expect them to deliver? What is really important for us?

So the key question that we want to ask ourselves is:

Which values, which institutional arrangements (including market-state-civil society-mix) and which evaluation frameworks, are needed in the future to organize markets that are

  1. creative and innovative,
  2. create good life standards for all (inclusion/social justice) and
  3. are ecologically sustainable?

What markets should do: contribute to sustainable human flourishing

Since 1935, the only measure available for indicating how we performed economically, has been the GDP (developed only in 1935 in the US, previously there had been virtually no GDP!). After its introduction it gained iconic status, partly because it seemed so “objective,” so precise, so mathematically beautiful to work with, and partly because there was nothing else. Growth in GDP became, by default, the central policy goal to pursue, in spite of the fact that it neglected many crucial elements of “human flourishing.”

How this has changed! In recent years, we have witnessed something like a conceptual revolution in economic thinking, leading to a much broader understanding of personal and societal well-being being embraced. We now have a whole array of multidimensional yardsticks indicating how human beings are doing. Examples are the Human Development Index (UNDP), others have come up with a “capabilities approach” (Sen, Nussbaum) or “Sustainable Quality of Life” (Stiglitz, Sen & Fitoussi), the OECD has produced the Better Life Index and most recently the UN has put the Sustainable Development Goals (SDGs) squarely on the global agenda, in auditing the ESG-ratings have emerged.

So, if today we are asked the question “what do we expect from our market economies?”, we no longer fall silent, or have to resort to the skeletal, outdated measure of GDP-growth, but have a much richer vocabulary at our disposal, and connected with it a rich apparatus of quantitative and qualitative indicators, crystallizing around what can be called “sustainable human flourishing.” With this term we refer to a society and an economy, where people, all people, can live a dignified human life while at the same time preserving nature. Sustainable human flourishing combines a sense of subjective well-being with the acknowledgement that we have to heed the more “objective” preconditions for our common existence, now and in future generations. The new developments in economic science enable us to see and measure whether we are doing well, or better, or worse – in terms of sustainable human flourishing.

An emerging institutional, policy & practice gap

However, if we take stock of current developments in light of the goals that we should we heading towards, we can observe a remarkable gap between our long-term perspective and the present institutional frameworks, our present policies and practices – as businesses, as governments and political representatives, and as consumers. Everything and everybody seems to be geared in the short run toward the unhampered continuation of current economic recipes and practices. Moreover, our present valuation techniques are still very traditional (oriented to financial costs, profits, short term) and clearly not based on the multidimensional standards that have now been developed, such as the UN SDGs or other indexes mentioned above. So, in the short term we tend to just continue with “business as usual.” And as the short run creeps on everyday just a tiny bit, the long-term perspective that everybody knows is what we should be adopting, is postponed indefinitely, into an ever-receding future.

A lack of clarity about what “a market economy of the future” could actually look like may be a crucial factor in this future-avoiding attitude. How can an economy work, provide jobs, provide income, provide innovation, if it is to be sustainable and geared toward human flourishing?

If we want to break through our persistent “short-term-ism,” the endless deferral, we have to start now. Now is the time to make the transition toward the future that we all know is ours to realize anyway – if not now by choice and design, then later, for a next generation, by necessity, and probably by chaos and severe civil and political upheavals.

However, to close the gap between present and future and embarking on a meaningful future-oriented transformation, we need a firm basis of creative, innovative, and prudent thinking. We need to rethink markets, to rethink economics, to rethink the role of companies, to rethink the role of governments, to rethink the role of civil society, and to rethink the role of consumers.

Ultimately, we may even need to rethink our morals, and our sense of meaning and purpose, as it may well be that at the heart of our current economic problems are also problematic ideas of what “the good life” for humans is all about.

The hangover of old dogmas and the emergence of new insights

But where can we find innovative ideas that can really help us? We feel the force of the words of John Maynard Keynes when he was pondering the economy of the future (when as he expected “the economic problem of mankind has been solved”). He concluded that if we are ever to get there we have to stick to the current system, and for that reason “avarice, and usury and precaution must be our gods for a little longer still,” as only they can “lead us out of the tunnel of economic necessity into daylight” – which sounds like a recipe for eternal deferral, for lack of alternatives.

Indeed, for a long-time economic science has displayed a tendency to extoll “avarice and usury,” as Keynes claimed, circling around the largely unempirical, hence dogmatic, paradigm of “homo economicus.” This was often combined with a denial of the social, moral and political embeddedness of markets.

In the meantime, the actual functioning of markets has empirically never been totally dependent upon “homo economicus,” but has always been dependent upon a much broader set of human and social attitudes, even virtues, like trust, honesty, “pro-social preferences,” cooperation, and the inclusiveness, as opposed to the extractiveness, of institutions. In that sense, the “old gods” that Keynes identified were the wrong ones from the start. Great parts of our economies, and of our companies, wouldn’t function without at least a certain measure of this broader set of values and virtues.

the new generation of innovative economists do not argue for a flat-out rejection of capitalism and do not follow Marx’ call for collectivist solutions
In recent years, this awareness has made headway in economic thinking. There is a fast growing realization of the crucial importance of the social and moral embeddedness of markets – and hence of the empirical inadequacy of the “homo economicus” paradigm. Next to the abandonment of the GDP-only approach, referred to above, this can be seen as the second part of a conceptual revolution in contemporary economic science. This is also stimulated as well by new insights emerging in behavioral economics, neuroscience, and evolutionary economics, pointing to human proclivity for cooperation and pro-social preferences. The “common good” or “bonum commune” has started to return to the heart of economics, driving out what Keynes still considered as the unavoidable “old gods.” In fact, this implies a return to the old inspiration of Adam Smith economics: How to make life better for the many, not the few?

On this basis many leading economists have developed into innovative dissidents within their own discipline, asking the “big question”: Does our current economic system really contribute to the common good, to integral human flourishing, to an inclusive, sustainable economy?

The questions that they ask can be classified under the rubric “the future of capitalism.” However, the new generation of innovative economists do not argue for a flat-out rejection of capitalism and do not follow Marx’ call for collectivist solutions (which as a cure has often turned out to be worse than the disease). On the contrary, they seem to be involved in what can be called “saving capitalism from the capitalists”: How can the freedom, innovative potential and creativity of free markets be squared with the requirements of social justice and ecological sustainability? And what is most remarkable is that they try to come up with concrete, realizable ideas for how to start building the desired economy of the future. Given the emerging richness of new ideas recently, it is now time to bring their ideas together and end the culture of deferral.

The new geopolitical context

But where in our current globalized world is there a space to start building such an economy? Is there any chance that these new ideas on markets can be embodied anywhere?

In the past decade, we have seen the return of geopolitics, the strategic chess game of superpowers for geographic influence, commodities, and commercial positions. During this period, the US and China have emerged as the major players. Each has an economic system that, however different from the other, is severely wanting in terms of sustainable human flourishing. In both economies human dignity is jeopardized, be it, for example, by totalitarian control and lack of freedom or by poverty and inequality, poor access to healthcare, cronyism and powerful lobbies.

Neither superpower seems willing to tackle the structural problems of the international market economy. China does not, because it takes full advantage of it and, in spite of its official Marxist ideology, has become deeply entrenched in the current market economy.

The US does not, still believing that its system is the best of all possible worlds. Neither has any interest in creating something like a social or sustainable social market economy. It remains to be seen what a possible Biden-presidency can do in this regard but if we take the earlier Clinton- and Obama-administrations as predictors here, we shouldn’t count on that. The forces that defend an unbridled free market seem simply too strong.

If these two alternatives are all the world can produce, it will imply that one half of the world will be under the influence of a technological-totalitarian superpower that will permanently strengthen its own position of power at the expense of human freedom, while the other half has to hand itself over to a self-enriching financial elite and ever deepening inequality. Unless a third option presents itself.

Europe as a potential incubator for a new economy

Can Europe be that third option? The history of Europe, and related to that the way this history is perceived in the world, has deeply problematic pages. Europe has a history of imperialism, colonialism, racism, and violence, internally and externally.

But paradoxically enough, it is this very same Europe where democracy, the rule of law and above all human rights were invented, as a basis for criticism of these dark pages. Out of Europe, these humanitarian ideas have spread around the world – often much to Europe’s own surprise and chagrin.

Less well known is that Europe is also the cradle of views and practices that articulate and embody a different type of market economy than has become prevalent in the last two centuries and especially in the last decades (often called ‘neoliberalism’). In Europe, practices and ideas attempting to let markets function with an eye on integral human flourishing (however differently this may have been interpreted throughout the ages) go back to the medieval towns. Already then, the prohibition of usury, care for the poor and cooperative institutional frameworks were simultaneously developed with new crafts and extensive trade relations.

In other words, historically Europe has been the place where a century-long quest has been pursued and continues to this day, for ways to escape from both poverty and political and economic oppression, as well as ways to embed markets in a larger social and moral order. The work of Adam Smith, who wrote as extensively on morality as he did on free markets, is a clear example of this ongoing quest. And the work of the Italian economist Genovesi, a contemporary of Smith and writing about a “civil economy,” is part of the same quest (though some of his insights and emphases differ from Smith’s). And so is social protest part of this quest! From medieval times onward, via Marxism until the present day, we see social movements demanding a full and dignified place at the economic table, particularly as response to economic crises.

Although there always have been considerable national differences, there is nevertheless a common core here [in Europe]: the desire to build something like an economy for the common good
Perhaps the most interesting – and underexposed – episodes of this quest are the many attempts in Europe to find “third ways” in which freedom and equality are balanced. This balance is sought partly through civil society involvement, for example in the foundation of guilds, labor unions, and cooperative banks and cooperative housing associations; partly through government intervention, for example through working hour acts, poverty and pension schemes, or, starting in the UK with the Beveridge Report, the building of welfare states. It is also sought through innovative solutions within the market sphere itself, for example, cooperative businesses such as Friesland-Campina in the Netherlands or Mondragon in Spain, and practices of “socially responsible entrepreneurship” originating in the 19th century, and continuing in the present day.

As a result of this ongoing quest, something like social market economies have developed in Europe, both in theory and in practice. Although there always have been considerable national differences, there is nevertheless a common core here: the desire to build something like an economy for the common good. This core idea has gone under several names, like “civil economy.” “Rhinelandic model,” “mixed economies” or “social market economy” and has drawn upon various inspirational philosophies, such as social liberalism, revisionist socialism, Christian/Catholic social teaching. Some relied more on a relatively strong role for the state, others more on a relatively strong role for civil society alongside the market. And yet, in spite of these differences, there is a commonality which becomes evident if one compares Europe as a whole with almost any other part of the world.

It is only in recent decades that this tradition of “balancing,” of “third ways,” of social market economies, has fallen into disrepute and even oblivion, especially in academic economics. The exact reasons for this are hard to pin down. It may have to do with the educational usefulness of US textbooks in economics and management studies and with the dominance of US-based academic journals, it may have to do also with the mathematization of economics, and the hyper-specialization in academics generally. The result is that younger generation economists and managers have no systematic awareness of alternatives to what has established itself as “mainstream” economic thinking.

If we are looking for a place where the new perspectives on an economy geared toward sustainable human flourishing, an economy for the common good can be embodied, Europe […] seems to be the most likely candidate.
However, in business practices, in political institutions, in legal frameworks, and above all in the “hearts and mind”’ of many people in Europe, including business leaders and politicians, this idea of a social market economy is still alive and kicking. What has thus gone missing – and bothering everybody who shares this “heart-and-mindset”– is an academically calibrated vocabulary and shared discourse about what the present-day significance of this ideal can be. Fear of being out of sync with shareholders, or being out of sync with the “most recent insights,” has undermined the self-confidence of this European economic thinking and practice.

Given the long quest for economies of the common good, and the willingness to find concrete ways to concretely realize elements of this, we should pay new attention to Europe and what perhaps can be called the “European dream.” If we are looking for a place where the new perspectives on an economy geared toward sustainable human flourishing, an “economy for the common good” can be embodied, Europe, as the continent in which the search for such an economy has always been on the agenda, seems to be the most likely candidate.

In the past, Europe’s search was concerned mainly with a balance between freedom and social justice, today it will also have to include ecological sustainability.

Geopolitically and “geo-economically,” Europe is a crucially important region, as it is the largest economic zone in today’s world (in terms of aggregated GDP, after Brexit it may just be a bit smaller than the US), and therefore really has the scale to set its own course and create leverage in the world.

Therefore, working on a European model of a free, inclusive, and sustainable market is the call of the day. But of course: a focus on Europe is in no way meant to be exclusive. A well-functioning “European model” may be of great significance elsewhere and may well turn out to be a blueprint for market economies of the future.

 


This is the starting paper for the Future Markets Consultation, which will run into the fall of 2020. The goal is to develop a new economic vision for Europe, enabling human flourishing for all in an ecologically sustainable way. You are cordially invited to participate!


Authors / contributors