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Nowhere else to turn

Human beings are not mere selfish agents

Thursday Dec 4 2008 14:10

The twin perils of financial crisis and economic recession have caused politicians and regulators alike to tear up the rule book in recent weeks. The result has been a huge public bail-out of the banking sector and a massive fiscal and monetary stimulus. As we look further ahead, however, the crisis has also shown that we cannot ignorethe need for a drastic revision in the public understanding of economics itself.

At its deepest level, the crash arose because people and markets did not behave in the way described in economic textbooks. People are not always economically rational. They borrowed too much money to buy houses, then remortgaged to buy other things. Free markets are not always efficient. They mispriced credit as banks hyped 125 per cent mortgages and other debt products to a credulous public, then mispriced it again as the wholesale markets went into gridlock rather than lend against possibly toxic assets. Finally, poorly conceived policy and poorly crafted institutions can fail. There was a huge institutional failure in the regulatory system and in government oversight of the economy.

The basic problem is this: British government and the British people have become far more knowledgeable about economics since the 1970s. But they have grown up with a caricature of what economics is and of economic man as perfectly rational and self-interested. This has had two disastrous effects. The first is political. It has massively encouraged centralisation, complexity and micro-management within government. The result has been an extension of the tax and benefits system to include nearly 70 per cent of the adult population; an obsession with setting and monitoring performance targets; endless fiddling with programmes in response to new initiatives or political wheezes; and a gigantic waste of human and financial resources. 

Within the public sector as a whole, it has helped to create a culture of low innovation and low productivity. It has systematically distorted our national understanding of risk. It has led to a huge semi-public client state of consultants and quangos. These are structural weaknesses that it will take a generation to overcome.

Yet if the understanding of economics within government is radically incomplete, it is worse in society generally. We are daily conditioned to think of human beings as "economic agents": as purely self-interested, endlessly calculating costs and benefits and highly sensitive to marginal gains and losses.

But a problem arises when this economic image feeds back into society and becomes our default picture of human motivation. We secretly know this picture is wrong; and our best economists know it is wrong too. We are aware that it cannot explain such things as volunteering or philanthropy. We fret about excessive materialism. We yearn endlessly for the things money famously cannot buy: love, friendship, joy. Yet without an alternative picture of what a human being is, we have nowhere else to turn.

We need a different vision and a richer conception of humanity in our public policy. Such a vision starts by recognising the limits of human nature. It emphasises the importance of independent institutions, competition and entrepreneurship as factors driving prosperity. It rejects the idea that humans are merely passive vehicles for utility, in favour of a far more dynamic conception of human capability.

The centre-right has a particular responsibility here. Recent bank nationalisations notwithstanding, communism and socialism have failed. The centre-left in Britain has run out of ideas, temporarily at least. We should not mistake the present reversion to 1970s economic policy for new thinking.

Yet our corporate capitalism, despite its achievements, also has major weaknesses. Fifteen years after Francis Fukuyama announced that capitalism had won in The End of History, the time is right for a reassessment. For as recession bites, there is real danger of a backlash against capitalism itself.

The need for new thinking about economic fundamentals is thus of great public importance. For too long the casual assumption has been made that any critique of textbook economics must be leftwing. But in fact it is deeply conservative to correct mathematically pure theory to reflect how people actually are: the crooked timber of humanity. Conservatives should understand this and claim ownership of these ideas.

The writer is the Conservative candidate for Hereford and South Herefordshire. His book, Compassionate Economics, is published this week by Policy Exchange

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