Values and Anti-values in Contemporary Economic Policymaking

Dimitris Psarrakis1

Executive Summary

Applied is all about who takes what and how much out of the mechanisms of markets and governments. In economic cycles, every turn has winners and losers. The very fact that economies face cyclical fluctuations proves that markets are not divine. Markets fail, and this failure can be manifested in many ways: , , information asymmetries that lead to moral hazard, and that have socially and environmentally costly outcomes. These economic inconsistencies create moral arguments about who pays what and how much. Thus economic morality arises from failure.

Market failure requires social corrections and government interventions. However, these corrections are not always welcome, particularly among economic actors who enjoy a privileged position in the top distribution of income. They are the advocates of the ‘protected ’ of the free market, not because they are liberals, but because they are allowed to exploit their unfair advantage in the current market structures. The same people will welcome aggressive, big-government intervention in the economy to bail them out and allow them to protect their advantages, especially if bailouts are made with taxpayers’ .

The ‘politics’ of economic policies is concentrated where the money is concentrated. This is not ‘free market’ economic governance. It is not ‘free’ because it allows the

1 The views and opinions expressed in this publication are those of the original author(s) and do not necessarily represent or reflect the views and opinions of the Dialogue of Civilizations Research Institute, its co-founders, or its staff members. 2 concentration of income and the exploitation of the unfair advantages of certain elites to endure, thus deepening social inequality and economic dependencies. It is also not ‘market’, because the solution is provided by strict, conservative fiscal measures of austerity and taxpayers’ contributions, and because decisions as to which industry or firm is to be saved is not determined by objective economic criteria, but is made behind closed doors. Entire countries are treated similarly. This is neither liberalism nor neoliberalism; this is the narrative of a reactionary, activist, aggressive, ‘old- school’ conservatism.

Therefore this paper argues that it is important to revisit old narratives and re- establish a consensus about the true values of liberal thinking, which was designed to emancipate the people and not to lead them to serfdom, dependency, and poverty traps. The author suggests a return to what the Ordoliberals proposed: a society that combines freedom with responsibility.

Policy Recommendations:

The return to Ordoliberalism could be based on the following principles of good economic governance:

 deliberately designing optimal market structures;  institutional capacity-building that enables markets to function efficiently;  building human capital;  taking a moderate view when considering re-distribution policies and addressing inequality issues;  understanding of the limitations of ‘full employment’ policies;  allowing to dictate ;  re-regulating the financial sector in order to transform it from a lab of regulatory arbitrage back into a -and-loss industry.

Keywords: moral anarchy; ; liberalism; freedom with responsibility; economic emancipation; reregulation

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Our desires are limitless, whereas our means and resources are constrained. The field of social enquiry that studies the way people use their limited means so as to achieve as many of their desires as possible is called economics. Economics is not the science of money; it is the science of decision-making. In the context of economic decision-making, values are highly instrumental. They are abstract objects necessary for defining the degree of significance of an idea or priority.2 They are used as a vehicle for the exploration of certain economic actions and the evaluation of economic alternatives. Thus, the role of economic values is to deal with economic deontology and economic axiology.

1. Economic Morality Arises from Market Failure

The cardinal moral argument of classical liberal economic theory derives from the

Adam Smith’s metaphor of the ‘invisible hand’. The invisible hand is a moral argument because it links the egoistic self- of individuals with the well-being of society. By establishing this moral link, Smith pulled Western intellectual history out of the Hobbesian trap of homo homini lupus. With the ‘invention’ of , Smith led us to the ideal of homo homini homo (Gauthier, 1986: 1–20).

The ideal market is the playground for the achievement of a human society. In an ideal market, if individuals’ endless endeavour to maximise their interest is the only way to benefit society as a whole, then the intervention of the sovereign will undermine this effort; thus it is immoral. The ideal market is ideally built upon the philosophical thought-experiment of ‘moral anarchy’ (ibid., 84).

It is worth noting that the very concept of economic decision-making in the classical liberal studies of the late eighteenth and early nineteenth centuries goes

2 For a more thorough analysis on the research program of human values, see Rokeach, 2000.

4 hand-in-hand with morality. The term ‘’ was born much later. ,

David Ricardo, , and many others had a clear view of the link between wealth creation and the well-being of a society. Their books were not titled with the term ‘economics’ but rather ‘’, and they were calling themselves not ‘’ but rather ‘moral theorists’ (see Ricardo, 1817; Malthus,

1820; Mill, 1848; Jevons, 1862). However, the field changed its orientation as early as

1838, when Antoine Agustin Cournot published his Researches on the Mathematical

Principles of the Theory of Wealth. With this study, Cournot established a mathematical argument for the workings of the economy and claimed that market harmony exists not because of the ‘metaphysical power’ of the invisible hand, but because of the ‘mathematical generosity’ that allows the direction of egoistic self- interest towards collectively profitable outcomes. Thirty-six years later (1874), Leon

Warlas set the formal framework of modern economics by deriving the concept of market equilibrium from the First of Thermodynamics (Warlas, 2003; for some unexplained reason, he and all his successors ignored the second law; see Kümmel,

2011), as if it were possible to apply physics to social interaction. In the view of this new tradition, the market can be described in the same elegant way as professors present mathematical models. Mathematics are perfect, so markets can be perfect.

In practice, however, the ideal market does not exist. To be honest, it never existed in history. Markets are not natural. They should be structured. The perfectly rational homo œconomicus does not exist either. He should be educated to act as economically as possible. The market, in order to function, needs governments to define and enforce rules. The market is part of our civilisation. The main element that distinguishes the jungle from civilisation is a consensus on well-elaborated rules that work for everybody (Reich, 2016: 1–10). And whenever the imperfect market fails, we

5 need social corrections and government interventions. If the limit of moral anarchy is the limit of the ideal market, then economic morality arises from market failure.

In the first century of the Industrial Revolution, it was apparent to everybody that capitalism and free markets create unprecedented wealth and standards of living, but they also create negative social outcomes on a massive scale. Marx and

Engels prematurely hailed the death of capitalism, but we now know, both from the social research program that followed and from historical progress, that a free is the worst system, except for all the other economic systems.

Capitalism was the best possible alternative, but somebody had to save it from the capitalists.3 In 1936, published his General Theory (Keynes,

1998). In this book, Keynes claimed that it is necessary to tame the power of capitalism and make it work for society. The best way of doing so is to expand the government’s economic responsibilities so as to correct the short-term imbalances caused by the . The government would have to intervene in the economy with short- and mid-term fiscal measures so as to boost spending, accelerate recovery, and ensure full employment. Keynes believed that, indeed, markets can correct themselves in the long run, but, as he pointed out, ‘in the long run we are all dead’. Thus, government has to intervene and correct the markets immediately.4

It is beyond the scope of this paper to critique Keynesian macroeconomic recipes. What government interventionists failed to understand is that, in times of economic disaster, the Keynesian description of ‘death’ does not come ‘in the long run’. When economic crisis hits, the long run is now. The Keynesian revolution

3 On the critique of capitalism and the need for a balanced view in the management of market economics and the global economy, see Keynes, 2009. 4 The most enlightening example of government intervention in the economy, based on the Keynesian tradition, can be found in the very important work of Minsky, 1986. For a similar type of Keynesian analysis published after the financial crisis of 2008, see Smithers, 2013.

6 allowed economies to fly while ignoring gravity for 30 years. Then everything collapsed under the weight of – economic stagnation coupled with increasing rates of and (Eichengreen, 2007: 252–93).

Keynesian interventionism with enormous government monopolies proved that it is not merely market failures we should worry about; it is government failures as well.

By the 1970s the puzzle was complete. Economic failure is not a synonym for market failure. Government can be as harmful to society as the market is.

2. Was the Market Failure of Our Times also the Failure of Liberalism?

In this paper, I will strategically focus on the ‘market aspect’ of economic failure because, in my view, the market is the cardinal variable for social prosperity and markets are more complex and faster-moving than arteriosclerotic governmental structures; thus they can be more dangerous. There are three types of economic failure: failures, information asymmetries, and externalities. The first type of failure creates the problem of oligopolies, monopolies, despotic elites, and oligarchies. The second type is about the problem of adverse selection, moral hazard, and fraudulent behaviour. Finally, the third type is related to the imposition of social costs, socio-economic imbalances, and environmental degradation.5 Today the global economy faces a ‘perfect storm’. We experience all of these aspects of market failure in tandem.

But in order to address the problems of market failure, we need, first and foremost, to accept that markets are not perfect. Furthermore, not everybody believes that market failures provide us with a significant reason for government

5 For a formal analysis of the elements of market failure, see Mas-Conell, 1995: 307–507.

7 intervention.6 In addition, government failures occur more often than market failures.

Many people stress this uncomfortable little truth. When they speak about a different government, most of the time they speak about a better and more efficient government. This is understandable. But the loudest and most vocal opponents of social correction measures when markets fail are those who desire a ‘better government’ for their patrons (Reich, 2016). They are economic agents who already enjoy a dominant position in the market structure and exploit the most profitable unfair competitive advantages. They do not want any change. In their view, the only reason for a strong government to exist is so that it can save them when the economic turbulence reaches them. For oligarchies and elites, the very concept of a

‘free market’ is both value and narrative that enables them to continue exploiting their unfair advantage, no matter if this advantage leads the majority to economic serfdom and poverty traps.

This is what moral theorists call the problem (and trouble) of ‘protected values’

– values that are not subject to compromises (Baron and Spranca, 1997: 1–16). The instrumental nature of values in economic decision-making creates a link between the moral language the stakeholders use about their protected values and the rationality of their moral views (Ritov and Baron, 1999: 79–94). This is critical because, as often occurs – especially in our days – moral language may rest on false assumptions. A protected value of this kind is the contemporary insistence of certain types of economic stakeholders on market deregulation and minimal government

6 was one of the proponents of government intervention in the economy in times of financial turmoil, but he expressed on many occasions that he does not support those who advocate an automatic government intervention in the economy whenever a problem appears. As long as the government is also prone to failures, there is not a positive ex ante guarantee that the government can help, what the cost of that help will be, and which part of society will lose as a result of this intervention. See Friedman, 2002.

8 intervention, as if the overriding goal of the free market is the free market per se and not the maximisation of the well-being of society as a whole.

This leads not to ‘de-’ (this is the common but not the correct term), but to ‘re-regulations’ that favour elites and economic oligarchies (Reich, 2016). This is a new type of social imperialism based on the free-market narrative, which is neither free (as long as it leads to economic and social dependencies and the pulverising of the middle class) nor market (as long as it is sponsored by enormous government interventions and taxpayers’ money).

This also leads to the unnecessary polarisation of the public debate between free-market proponents and government interventionists. This polarisation is completely irrelevant because, first, the question is not about the size of the government (or the size of market) but about something more practical: whether government and market actually work. Second, it obscures the cardinal question, which is very straightforward: What policy changes transformed capitalism from an engine of prosperity for the vast majority to a trap of misery for the most (ibid.)?

This question pervades the entire spectrum of the contemporary economic and financial malfunction that led to the financial crisis. This malfunction evolved in the following stages:

(1) growing inequality alarmed neoconservative elites;

(2) these elites attempted to bridge the inequality gap, at least temporarily,

with an irrational expansion of credit (Mian and Sufi, 2015);

(3) governments supported this idea by re-regulating the financial sector so as

to make the expansion of credit possible (Rajan, 2010: 21–45);

(4) when the financial system collapsed, governments ‘socialised’ the losses

by transferring them to the taxpayers;

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(5) the sovereign debt crisis that followed was considered a fiscal problem

(the taxpayer pays) and not a financial problem (the speculator pays);7 and

(6) the post-crisis market structure designs where only partially reshaped, but

not radically enough to allow a clear and concrete solution to the problem

of acceleration and the restoration of the principles of

consumer sovereignty and freedom (Reich, 2016).

A clear indicator of the unwillingness of the traditional open-market economies to redesign their market structures and liberate them from the deeply embedded of certain elites is depicted by the inability of the EU and the US to successfully conclude the TTIP as well as the reluctance of the emerging economies to move on decisively with the institutionalized cooperation of the BRICS countries.

This discourse leads us to a rather existential question: Is this economic mess a liberal policy failure?8 The ethical tradition of liberalism underscores the importance of competitive market structures, which allow the efficient allocation of resources for as many people as possible (this is J.S. Mill’s view of utilitarianism), whereas the current reality is all about protectionism and the preservation of oligopolies and monopolies. Liberalism is famous for its careful valuation of money and restrictions to credit provision, whereas the collapse of the financial markets was triggered by an unprecedented credit expansion to everybody. Liberalism is also famous for its open market and free policies, whereas the over-protectionism of the market structures that led the TTIP to a stalemate more closely resembles closed economies. Liberalism requires institutional design and human capital development as a prerequisite for market expansion, whereas the expansionist policy of the West

7 For a very important historical approach to the concept of debt and the changing mechanisms of payment enforcement in the global economy, see Graeber, 2014: 361–92. 8 The Chicago University (neo)liberal economist, , without hesitation, identified the financial crisis of 2008–2009 as an indication of the failure of capitalism. See Posner, 2009.

10 overlooked this reality and inflicted catastrophe and economic cacophony on emerging markets with high potential (such as Russia) as well as to weaker players

(such as Greece, Latvia, and Portugal). Liberalism is about efficiency and dispersion, whereas the current social and economic outcomes are characterised by concentration and stagnation. Liberalism is about punishing economic arrogance, lack of innovation, and the overexposure to risk through the Schumpeterian process of ‘creative destruction’, whereas in the current reality, economic arrogance is protected by massive government intervention, which exhausts the few resources of the many. Finally, liberalism is famous for its macroeconomic ‘neoliberal monetarism’, which means expansion of the monetary base to provide the economy with ‘fertilizer’ and to bail out those who have nothing to do with the crisis and deserve to survive, whereas the current management reflects an absolutist fiscal conservatism that drains the economy of the necessary liquidity and – without stable and clear criteria and behind closed doors – decides who is going to be rescued and who is going to die through strategic channelling of poor and ignorant taxpayers’ money.9

The same pattern of strategic favouritism or economic destruction applied to certain firms and industries is also expanded to include entire nations, who find themselves isolated, impoverished, and reduced to the status of de facto protectorates or ‘colonies of debt’. Moreover, similar methodologies are employed against individual citizens who are politically unpleasant to certain quasi-liberal governments that impose severe economic sanctions as a tool of blackmail or punishment for lack of compliance with the prevailing rules of the elite. How many of

9 These inconsistencies between the theory of liberalism and the behaviour of the elites. who claim that they act according to liberal ideals whereas they use government mechanisms to protect themselves from the adverse consequences of the business cycle, are eloquently depicted by the very important work of Philip Mirowski (2014).

11 these ‘strategic choices’ are the market choices of liberal regimes respecting individual ? None. Every major economic decision is made behind the closed doors of some governmental agency, which is unaccountable in most cases.

This is not market-passive (neo)liberalism. This is exactly the opposite. This is activist, radical, expansionist, old-school neoconservatism.10 We saw it with Reagan and Thatcher. It came again with Bush, and it will come again and again as long as we do not face the problems we have in front of us with ideological clarity. We will face it again as long as we allow reactionary conservatives to legitimise their anti- humane policies using the ethical arguments of free-market liberalism. The greatest victory of reactionary neoconservatism is that it thrives while at the same time everybody blames and directs their anger against neoliberal shadows.

This is the reason why I claim that the ‘conflict of narratives’ we usually encounter in the media and in public discourse about small government vs. big government, vs. deregulation, and intervention vs. discretion; these conflicts exist only to obscure the real issues and polarise public discourse, keeping the real enemies of the vast majority completely untouched. In 1936, Keynes wrote his ‘General Theory’ to save capitalism from capitalists. Today, we need to save liberal ethics from authoritarian, activist, neoconservative populism. We should never forget that between the two world wars, when socialists of all stripes were carelessly blaming free markets for everything and their so-called anti-liberal intellectuals were philosophising against the universal principles of the free society,11 it was the liberal

10 For a moderate political theoretical analysis of the characteristics of neoconservative policy-agenda and narrative, see Steinfels, 2013. 11 Well-known examples of ‘intellectuals’ who supported the rise of totalitarianism include the left-wing Bernard Shaw and the member of the Nazi Party, Carl Schmitt. Schmitt orchestrated a direct attack on the universality of liberal ethics in an attempt to explain that the ‘natural condition of man is the Hobbesian, bellum onmium contra omnes, and that the only understandable duality in the field of politics is that of “friend/enemy”’. His research program still finds many supporters among those who criticize liberalism. For a more systematic view of his argument, see Schmitt, 2007.

12 free market economists who, alone against the tides of time, first resisted the totalitarianism of the 1930s; they were also the first to experience defamation, imprisonment in concentration camps, and firing squads.

3. Exploring Commonly Accepted Economic Values

Paraphrasing the leftist former president of Uruguay, Jose Mujika, the problem of the people is that we try to solve our problems as nations or as ideological adversaries, whereas we should solve them as a species. In order to escape the crisis of our time, which is not only financial, but also economic, political, and social, our first action must be to rebuild our ideological and theoretical clarity and reconsider the set of universal values and moral words that bear the same weight in the hearts and on the lips of all of us, no matter our origin or background. A certain source of pan- human values can be found in the texts of the liberal writers of the Scottish

Enlightenment, and also among the economists and ethical philosophers of the

Freiburg School, who established the concept of Soziale Marktwirtschaft (Social

Market Economy), such as Walter Eucken, Ludwig Erchard, Alfred Müller-Armack,

Alexander Rüstow, and, of course, Wilhelm Röpke in his masterpiece, A Humane

Economy (1960).12

An acceptable set of values can be formed on the moral basis of freedom.

Freedom is a universal value, coupled with the necessity of ethically and legally responsible behaviour. ‘Freedom with responsibility’13 should be the protected value of a truly progressive, balanced, and sincere , aiming to address the

12 Röpke proposed that the effort of people to act economically in the free market is an ideal vehicle for their moral elevation. See Röpke, 2014. 13 Post-World War II Germany is the ‘textbook case study’ of the system of the social market economy project, which developed the concept of a liberal free market linked with responsibility for the formation of a legal and administrative framework. For aspects of this policy, see Erhard, 1958; Nichols, 2004. On the philosophical evolution of this tradition, see Foucault, 2008.

13 major problems we are facing. I hold the strong view that the way out of the crisis of our times will either be liberal and emancipating or it will not be progressive. But in order to succeed in this aim, we should protect ourselves from the temptation of populism. We must not try to satisfy the critical majorities, especially those who consist, or used to consist, of the middle class. We should be responsible and sincere to the people if we want to help them change the unsatisfactory orbit of their lives.

Thus I propose eight principles of affirmative economic action:

First we need to design optimal market structures that work efficiently for everybody, protect the freedom and sovereignty of the consumer, and correct inefficiencies whenever they arise so as to cope with monopolies (public and private) before they end up like every does: providing low-quality at an overly high . Moreover, new market structures must prevent and deal with the problem of pre-distributions. Pre-distributions are intra-market arrangements that allow those who enjoy a dominant position in a market to control or neutralise the incentives of their potential competitors to compete with them, thus distorting the price system at the expense of the consumers (Reich, 2016).

Second, we need to freeze the ardent expansionism of free market mania.

The only way free markets work is when countries and citizens are ready for them.14

First, we need to allow everybody to build institutions pertinent to the specific needs of their respective contexts. Second, we need to allow societies to mature in the market environment before we expose them to its dangers. The best way to do this is by developing social capital, and this is a process that takes time.

14 The most successful cases of liberal economies are always found among the countries that developed institutions that work for their specific needs. States compelled to internalise foreign institutions failed to incorporate competitive market structures. There is a rich bibliography on this specific subject of political economy, called ‘varieties of capitalism’. For more details about this research programme, see Hall and Soscice, 2001); see also Macartney, 2015; Hancke, 2009.

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Third, in order to build social capital, we first need to develop human capital.

This is the most important tool in order to address the problem of inequalities and the challenging new work environment in the long run.

Fourth, we need to be sincere with people. We need to understand that the process of the reduction of income inequality is slow and never complete. Some inequality is always desirable, because this is the engine of innovation and growth. A completely equal society is as immoral as a society that provides unequal opportunities. We need to urgently address the problem of unequal access to opportunities.

Fifth, we should reconsider the concept of ‘full employment’. Full employment is neither feasible nor desirable because it discourages investments and growth.15

Full employment is characteristic of un-free societies. It is important to develop policies to minimise the structural conditions of unemployment and to keep our minds on the cyclical conditions as much as possible. The important thing is to address the problem of chronic unemployment by providing a safety net, without allowing this safety net to create disincentives for people to return to the work.

Sixth, the policies of redistribution should not be violent. It is paramount to stress sincerely to the people that the only way to have a perfect redistribution of wealth is to kill the spirit of entrepreneurship and profit-seeking behaviour in our societies. This is neither moral nor desirable. This principle provides us with the optimal level of taxation. Knowing in practice that trickle-down economic policies do

15 The Philips curve provides a formal model of the trade-off between inflation and unemployment, which can be extended to the trade-off between employment and interest rates. The lower the unemployment, the higher the interest rates. But higher interest rates result in an increase in and a reduction in investments and growth. Thus the optimal level of employment is the one that allows a level of interest rates that does not provide friction with investment behaviour and growth. Full employment is historically linked with countries such as North Korea, the levels of growth of which are constantly low. Keynesian economists believed that full employment is critical for keeping consumption high, whereas Hayek’s critique was that ‘in full employment conditions, everybody has a job, but no food on the table’.

15 not work,16 we should be aggressive in high-income taxation. However, a wise fiscal policy focuses primarily on the creation of wealth and gives tax incentives for investments and growth. Tax policy should target idle capital, not active capital.

Moreover, fiscal harmonisation is necessary for any federalist system, and this is a field we work hard on in the EU.

Seventh, monetary policy should be dominant and active. Practically and in a few words, monetary policy is the wise alternative to the traditional ‘’ price system. In a monetarist world, the provides the (by controlling the quantity of money and the ) and, based on these prices, the market decides the quantities (Sargent and Valde, 2003: 3–14). The central bank should be independent, impartial, and proactive in the achievement of price stability and should also have an iron hand in the financial sector and in banking regulation.17

Eighth, the financial sector must become again a profit-and-loss industry. The main reason why the financial system collapsed was because the re-regulation of financial markets allowed the creation of a market structure that allowed aggressive market participants to more easily include in their investment portfolios increasingly risky speculative assets, with the implied and tacit government bailout guarantee in case of collapse. The implied insurance provision transformed the financial sector from a profit-and-loss market into an all-scale, risk-free, arbitrage-seeking regime, which distorted market incentives and increased the concentrations of systemic risk.

If new is to succeed, there are two possible paths: either by

16 Trickle-down-economics is the fiscal policy employed by regarding the taxation of income. The idea was that if the income were left untaxed, corporations would use it to make new investments and create new jobs. This never materialised. Trickle-down economics was part of the wider project of supply side economics, which was pointed out by its critiques as ‘neoliberal monetarism’, whereas it was only a poorly designed and executed fiscal conservatism favouring a certain elite to accelerate the concentration of capital at the top (also known as Reaganomics). For a detailed account of this subject, see Fink, 1982. 17 In the post-crisis period, central banking assumed extended responsibilities in the regulation of the financial sector. This pattern is similar to every major economy in the West. See Jones, 2013.

16 designing a true and unpatronised deregulation (i.e., deregulation without an implied bailout provision) or by wisely regulating profit-seeking behaviour. The second option is more desirable, in my view, as long as it does not jeopardise the flow of capital in investment opportunities in the real sector.18

In my view, these are the eight fundamental principles of a good, fair, flexible, and efficient financial system. They are clear, concrete, and simple. Most importantly, they avoid the trap of populism. At this point, I should not forget to stress that there are two kinds of populism in the economic narrative. The first is the expression of the popular need for change when things do not go well. This is a positive populism, because the messenger advocates the need for reforms and makes specific proposals. This is sincere and productive behaviour. But there is also another kind of populism, the populism that is not based on a reformative mindset.

Instead, it indirectly nurtures and promotes authoritarianism. The authoritarian demagogue claims that he understands the suffering of the people, chooses his words carefully to trigger and manipulate the anger and desperation of the vulnerable in society, and then he continues, ‘Look where the others led you with their policies’. This is a common characteristic of authoritarian demagogues. They always point a finger to an easily targeted scapegoat. And the moment when the people believe the simplified truth they hear is the moment that society takes its first steps on what F.A. Hayek called ‘the road to serfdom’ (Hayek, 2009). Europe has a long tradition of authoritarian populism in periods of high economic uncertainty and deep crisis in values.

Let’s hope that the crisis in economic and social values will not lead our societies to succumb to authoritarian populisms that promise the messianic arrival of

18 For a detailed account of the emerging trends in the regulation of the financial sector, see Moloney, 2016.

17 those who proclaim they will restore the virtuous societies of the past. Just like the ideal market, ideal society does not exist. It never existed. We will save our societies by ourselves. This is the most critical task for the younger generation and the responsibility of the intellectuals of our time.

4. What Should Be Done First? Build Capacity and Educate Ethical Economic Actors

I will use my last lines to underscore the point that the eight basic principles I specified above as building blocks for a good economic policy can be functional and suitable for making capitalism work again for the majority of our society only if each and every one of us understands that in the free market system, collective outcomes come from individual economic behaviour. Thus a cultivated economic understanding of which economic priorities every individual should value more is the sine qua non for a capitalist system to function and evolve sustainably.

The first step is to realise what a virtuous code of economic values looks like.

People have proved in their long history that they are easily tempted to compromise their values in order to gain a short- or long-term benefit. Cheating is in the

‘hardware’ of our psyche, no matter how good we are. A successful system of economic values should be one that restrains economic actors from cheating because it can ex ante make clear to them that deviation from the appropriate behaviour will not lead to a better individual outcome. And even if the ‘cheater’ succeeds in gaining a short-term profit from his or her misbehaviour, this gain will not endure in the long run.

Libertarian scholars, such as Nozick (2001) or Mises (2012), would suggest that the very concept of a free market completely immune to government interventions can achieve this end through the periodic occurrence of severe

18 economic crises. For the libertarians, economic crisis is a ‘natural’ moment of social correction. In their ethical code, crisis is desirable because it bursts the bubble created by the irrationality of economic actors. But libertarians obscure two facts: first, that people are just that, human beings, and not perfectly rational economic robots; and second, that in the time of the economic catastrophe, the first to suffer are not necessarily the perpetrators of the disaster, but the weaker strata of the economy and the ethical players in the system.

In my view, we need to solve these libertarian inconsistencies. At the governmental level, the inconsistencies can be fixed, first, by preparing institutional infrastructure that allows bailout strategies and safety nets for those who may need them in times of severe economic crisis, and second, by educating society as a whole that these bailout and safety net strategies are for the protection of social cohesion and the preservation of human and actual capital to be used for a smoother and faster recovery later. It might sound peculiar, but, nevertheless, in Europe and

North America, there are strong arguments against bailouts and safety nets because they are considered unethical on the basis of a Protestant theological tradition.

However, the most important issue is to build up a strong economic perspective in the minds of individuals. The ideal-type of homo œconomicus is unattainable, but humans approaching, as much as possible, a functional type of homo ethicus could be sufficient. By this I do not mean that we must ‘reshape’human beings, transforming them into a socially desirable caricature. This could be as immoral as the immorality of crony capitalism itself. What I mean is that, similar to the way young children learn appropriate behaviours in their family environment, they should also learn appropriate behaviours of economic action by developing a genuine respect for their and other people’s property, by learning how to honour their

19 agreements, by understanding the elements of an honest transaction or exchange, and finally by developing, from early on in their lives, a sensitivity to the fact that their own economic behaviour could have a positive or negative impact on a third person and to assume responsibility for that.

Family is thus not just the most important economic actor for the functioning of a sustainable . It is also on the front lines for any future society with solid economic ethical values, because family is the major developer of human capital.19 We cannot base our hopes for a more ethical economic system on solid ground unless we invest in the development of strong and ethical families.

5. Conclusion

In this paper I have analysed the role and significance of ethical principles in the context of economic decision-making. I described the origins of and the links between moral theory and economics and clarified the main principles of liberal economic theory. I contrasted those principles with the prevailing narrative we encounter in public discourse, and I explored the origins of this prevailing narrative by showing that the crises of economic values in our time are linked with reactionary, activist, neoconservative economic elites rather than with free-market liberalism. I stressed that the big government/small government debate, as well as similar dichotomies, obscure the real problems, polarise the audiences unnecessarily, and direct attention away from the most important problem, which is why governments and markets do not work and what kinds of policies transformed capitalism from an engine of prosperity into a factor of misery.

19 The Chicago School of Economics developed a very important research program, pioneered by Garry Becker, in which family (neither the individual nor the class) is the most important player in the economic system as well as the most important factor for the growth of human capital. See Becker, 1994, 1993, and 1978.

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I then provided a set of eight coherent principles of good and sustainable economic governance that can make capitalism work again for the majority. But in order for the free market system to work again, the vast majorities need to accept full responsibility in the endeavour to build a better society: first, by not paying attention to the messianic messages of populist demagogues who promise salvation and a quick fix to problems; second, by developing an understanding of the actual workings of the economy; and third, by building solid human capital aimed not only at the development of skills, but also at the creation of a code of ethical economic behaviour for every individual. Family is the most suitable institution for the development of ethical human capital.

Dimitris Psarrakis Financial Economist, Economic and Monetary Policy Advisor at the European Parliament, Brussels, Belgium

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