Capitalism done right: a co-operative system to solve human problems

By Brendan Maton

Photo by rawpixel on Unsplash

Eric Beinhocker has a sharp message for anyone studying economics:

“If we invented economics today from scratch, it would look nothing like what you see in textbooks.”

It is a radical message put forward by an interdisciplinary community of researchers studying the economy as a ‘complex adaptive system’. This approach recognises that social systems are dynamic, evolutionary, networked, and constantly generate new paths and ideas, which in turn are created by the way in which humans interact socially, the way they make decisions using instinct, rules of thumb, and learning, and the way they work together to solve problems. The complex systems approach provides a modern challenge to the traditional economics view that the economy is an equilibrium system composed of self-interested individuals making decisions in highly rational ways.

That belief in equilibrium was born out of a longstanding desire to make the maths in economics add up. This suited the nineteenth century when the only maths they had were the maths of mechanical equilibrium systems. If you want a metaphorical contrast between the old and new, think of the difference between William Paley’s analogy of God as a watchmaker and Richard Dawkins’ image of natural selection as a blind watchmaker which “has no mind and no mind’s eye.” Today we have a broad toolkit of approaches to understand how evolutionary processes, whether biological or economic, work; and how complex, networked systems, whether ecologies or economies, work.

For those who have questioned the overly tidy approach to human behaviour of economists, the arguments of Beinhocker, executive director of the Institute for New Economic Thinking at the University of Oxford, will be refreshing. Economics is, after all, a social not a natural science. Natural sciences have timeless, universal laws, such as general relativity or quantum mechanics. Whether someone believes in quantum mechanics or not doesn’t affect how the universe works. But economies are reflexive social systems, meaning that how economies work depends on what people believe, and what people believe affects their actions and how the economy works, which in turn affects what people believe, in an infinite loop. This means that while economies and people have regularities that can be scientifically understood, they don’t have timeless universal laws and are difficult to predict.

This is no reason to demote social sciences but every reason to revise the textbooks and think again about how economics can help us. Beinhocker argues that the mechanical, equilibrium view of economics may have led us astray in many areas of policy. He reckons that neoliberal political ideas, based on this view of economics, helped cause a shift from a constructive form of capitalism in the decades after World War II to an extractive capitalism. Since the 1970s, there has been a divergence between workers’ productivity and their compensation as middle incomes have stagnated while the top 10% of earners have run away. In addition, many families have seen their economic precarity increase. Companies during this period shifted from a balanced stakeholder model to one that purely focused on shareholders.

One negative consequence of these changes has been erosion of the social contract. Many workers, toiling ever more productively but for relatively less pay and with less job security, feel society has become unfair. It is not surprising that many people have been drawn to the extreme promises of populist politicians.

Beinhocker, however, does not see this as a failure of capitalism per se. He regards it as rather a failure of that neoclassical and neoliberal economic thinking that markets are self-correcting; that human beings behave as homo economicus, acting in individual self-interest and always making optimal decisions based on perfect information. In contrast, modern behavioural science shows that we are social beings, attuned to think of others when we act. By so doing, we strengthen the bonds of our group to mutual benefit.

Beinhocker argues that capitalism, understood properly, is a system of human co-operation born out of our pro-social instincts. What has made capitalism successful is our ability to co-operate to solve problems for each other on a large scale. Markets in this context can be thought of as evolutionary competitions to see who are the best co-operative problem-solvers.

What also makes humans unique as a species is our ability to divide knowledge up, specialise, and then share and bring knowledge back together to solve problems. This goes beyond Adam Smith’s division of labour in his famous pin factory example, but rather is a division of knowledge that makes the complex products and services of the modern economy possible. No single person on Earth has all of the knowledge required to build a jumbo jet or a smart phone, yet everyday they are built by the global co-operation of large numbers of people. Beinhocker goes further and argues that the purpose of the economy is “to solve human problems” and that capitalism done right is a system for facilitating co-operation to solve problems in new and better ways.

The key to making such a co-operative, problem-solving system work, Beinhocker argues, is inclusion and a fair social contract. In contrast, societies that are highly exclusive, that don’t have fair social contracts, and where elites exploit the broader citizenry, are never dynamic and innovative. Beinhocker references Acemoglu and Robinson’s work on the superiority of inclusive versus exclusive political systems and says the same holds true for economies (See Acemoglu and Robinson (2012), Why Nations Fail).

During Beinhocker’s recent UCL lecture, he was challenged on his definition of capitalism as a system that (when done right) solves human problems: what about all the frippery and tat that capitalism produces and sells? What is so noble or even good about stuff that ends up in landfill? His response was that by solving some problems (e.g. I want a quick meal), capitalism creates other problems (e.g. fast food packaging waste). In a democratic society people have a right to regulate the problems capitalism creates, and shape the problems that it solves. Markets don’t operate in a social or environmental vacuum. The biggest problem humans face is our destruction of the planet. Neoclassical economics says there is a trade-off between saving the planet and economic efficiency, jobs, and growth. Beinhocker says that if solving human problems is what really creates prosperity, then solving climate change and creating a sustainable economy is both an existential imperative, and the greatest single opportunity to increase prosperity of our age.

For more information see:

Eric Beinhocker is executive director of the Institute for New Economic Thinking at the University of Oxford and recently presented a lecture as part of of our Rethinking Capitalism undergraduate module on “The economy as a complex and evolving system”. These lectures will be released weekly to the public. Follow us on YouTube for more or check this page weekly.

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