Global Policy Forum, Yaroslavl 8-10 September

Global economic integration, as measured by the ratio between world exports and world GDP, regressed slightly in 2009 only to resume its course immediately at an even faster rate. Globalisation, however, has not been matched at all - for better or worse - by the progress of global governance institutions. This is why the feeble and fragmented powers of international economic institutions - over 2,000 of them - are accompanied only by ad hoc arrangements from G-n groupings (from the G-1, i.e. the USA, to the G-24 of most advanced countries or the recently emerging G-20 including large less developed actors) to various Global Forums with the participation of some world politicians, businessmen and intellectuals. The Davos World Economic Forum was first and remains the foremost, but others have arisen in equally desirable locations. The millenary town of Yaroslavl - an ancient, former temporary capital of Russia - is hosting its second Global Policy Forum on 8-10 September, with prospective participants including the Russian President Dmitry Medvedev, the Spanish Premier José Luis Rodriguez Zapatero and the French Premier Francois Fillon. it is devoted to the general theme “The Modern State: Standards of Democracy and Criteria of Efficiency”.

Having accepted an invitation to join the Yaroslavl Forum, I was asked by the editor of the Conference website http://en.gpf-yaroslavl.ru/, Dr Dmitry Uzlaner, a number of interesting questions, listed below with my answers.

You are going to take part in the section 'The State as an Instrument of Technological Modernization'. What are your expectations about it? What problems seem to you most topical in this context?

Technological modernisation should not be understood as the introduction, at the fastest rate and on the largest possible scale, of the latest technique available, or the most productive in a physical sense. Modernisation is desirable only if

1) it introduces the best-practice technique, i.e. that which minimises total production costs calculated at the competitive market prices of all inputs, and

2) on the scale determined by total costs not exceeding the operating costs of production on already existing plant, whose historical capital cost is sunk and therefore irrelevant.

When input prices change, or some costs formerly neglected are included in production accounting, the best-practice technique also may change. The technique that is best for oil at $10 a barrel is not the same for oil at $150. The technique that is best when producers do not pay for the pollution generated in the production or consumption of their products is not that which is best when they do pay for it. A significant rise in the price of oil, or taking into account pollution costs previously unaccounted for, can require not only a technological change but possibly a “regression” to older and/or less productive techniques. This problem is well understood by economists and businessmen, but is all too often neglected by politicians and the general public.

The role of the State is paramount in: funding fundamental research and general technical education; enforcing market competition (for imperfect competition will distort the incentives to modernize and adversely affect the scale though not necessarily the occurrence of modernization; generally creating an economic environment favourable to modernization, for instance striking a balance between the production of new technology via patents protection, and the diffusion of technology. But there is no case for the State to have a direct hand in the choice of particular techniques in particular sectors let alone enterprises.

Which economic systems are doing better in the modern world? What factors determine success and failure of the system?

The collapse of the Soviet-type system in 1990-91 has led to a widespread conviction of the superiority of the capitalist system: the combination of market efficiency and the private appropriation of efficiency gains is a major stimulus to technical progress and innovation. For instance, Janos Kornai (Innovation and Dynamism, WIDER Working Paper No. 2010/33) argues that capitalism provides a strong incentive to dynamism, enterprise and the innovation process, and that every revolutionary new product for civilian use - such as information technology, the computer, the mobile phone and internet - has been brought about by the capitalist system. However, we should take into account the role of state-initiated and state-funded research, in this case space research, and its impact on such technical developments. It is true that Silicon Valley could not have developed in a centrally planned economy, but what seems indispensable is not necessarily a capitalist system, but a competitive market environment. Managers of private enterprises are already more motivated by profits than their shareholders, and equivalent incentives can be replicated in state-owned enterprises. China today, for instance, displays more dynamism, enterprise and innovation - and more resilience to economic crisis - than the traditional capitalist system, though this has far reaching implications for democracy.

Today Russia strives for the creation of modern high-tech infrastructure and technological renovation of the entire production sector. What to your mind are the best development strategies for countries like Russia? Which post-communist states were most successful in economic and political modernization? What factors determined their success?

In its current situation Russia, having suffered from decades of central planning inefficiencies, cannot go wrong by upgrading infrastructure and production; the question really is at which point such policy should be subjected to a strict analysis of economic efficiency. Russia has been blessed by an abundance of natural resources, notably oil and gas, which is an opportunity to be exploited. But the development of a diversified industrial basis is essential in the medium-to-long run.

Among post-communist states, economic success has not always gone hand in hand with democratic progress (from Poland to Belarus and to some extent Russia itself), but democracy must be regarded as a necessary pre-condition of long-term sustainable economic development.

What trends in modern economic theory you find most interesting and percective?

The global financial crisis of 2007-2010 has led to a considerable re-assessment and down-grading of the hyper-liberal economic theories of the 1990s and most of the 2000s. Markets are often non-competitive; in any case they are incomplete, given the lack of inter-temporal and contingent markets, leading agents to act on the basis not only of current prices and quantities of today’s goods, but also of their expectations of future prices and quantities. This is why higher savings might lead to a depression, and a global lowering of wages might increase unemployment. We live in a Keynesian world. Not only are markets somewhat inefficient and unstable, they are also patently unfair as demonstrated by rising national and global inequality.

Having said that, we must recognize that markets - with strong qualifications for at least some financial markets like derivatives - are absolutely indispensable in any economic system, for they provide automatic mechanisms of economic adjustment: of enterprise production to prices, of prices to excess or deficit demand, of actual to desired capital through capital stock adjustment via investment, of inputs supplies to actual outputs. We cannot live without markets.

What, to your mind, are the main problems of interaction between the intellectual community and policy makers? What form of communication is urgently needed? Is it just financing of intellectual think-tanks by some governmental bodies, or a kind of intellectual intercourse like forums in Davos, St. Petersburg, or Yaroslavl, etc.?

The decisions taken by policy-makers reflect mostly their own interests and values and those of their clients, and are rarely purely technical decisions that might be influenced by arguments developed by the intellectual community which, moreover, itself might not be representative of the people. Therefore problems of communication and interaction arise only in the narrow range of decisions open to a technical/intellectual argument; such is the natural limited area of operation of both think-tanks and forums. The real problem is that of democratic formulation and implementation of the public interest, and in a global dimension - though think-tanks and forums such as that of Yaroslavl can indeed have positive effects.

Markets: Incomplete, Inefficient, Self-Fulfilling – But Irreplaceable

A major review of “The state of Economics” was published by The Economist of 18 July 2009 (printed version; online version 16 July). It consisted of a general introduction on What went wrong with economics – And how the discipline should change to avoid the mistakes of the past, and two articles on “The turmoil among macroeconomists”, The other-worldly philosophers and on the foundations of financial economics: Efficiency and beyond, (all three pieces unsigned).

The review has both the merit and the demerit of being non-partisan, trying to be impartial and, therefore, being doomed to inconclusiveness. For instance, while it begins by defining Robert Lucas as “one of the greatest macroeconomists of his generation” it reports on many of the telling criticisms to which Lucas has been subjected. On The Economist‘s Blog (16 July), maxreuter soberly but most effectively commented on Lucas:

“Surely you jest. A more accurate description would be ‘successful economist’ or perhaps ‘leading economist’ of his generation. Remember, this is the gentleman who claims that there is no such thing as ‘involuntary unemployment’ – that all unemployment is purely voluntary. No doubt he believes that what happened during the Great Depression, and what is going on now is really an epidemic of laziness.”

“As the article points out: ‘...economists missed the origins of the crisis; failed to appreciate its worst symptoms; and cannot now agree about the cure. In other words, economists misread the economy on the way up, misread it on the way down and now mistake the right way out’. To refer to an economist whose theories were in large part responsible for much of the above as 'great' is a somewhat unorthodox use of the word indeed.”

“Finally a memorable quote from the 'great' Mr Lucas: ‘...the central problem of depression-prevention has been solved, for all practical purposes...’ – Robert Lucas, Presidential Address to the American Economic Association 2003. Perhaps we should leave it to history to judge the greatness of Mr Lucas and the usefulness, if any, of his contributions to economics.”

In spite of inconclusiveness, by and large The Economist’s review is useful and timely. There is no point in trying to summarise it, as it is already dense and condensed, it is available online and has been subjected to various commentaries in the press and on the blogs.

Three comments are offered here instead, on the importance of markets incompleteness and sequentiality, on the implausibility of the so-called Efficient Markets Hypothesis (EMH), and the frequent self-fulfilling nature of expectations. While these arguments amount to a strong criticism of any market system and its efficiency, in the end it must be emphasised that markets – for all their incompleteness, inefficiency, self-fulfilling nature – are the irreplaceable engines that keep an economic system moving. When these engines are running, a government can try and steer the economic machine. This machine may get out of control on its own, or the government itself may drive it off the road, or crush it. But when the markets/engines are not running, the whole economic system grinds to a halt. However, financial markets are different and do not deserve the same positive appreciation and the consequent free reins.

Incompleteness

The Economist‘s review rightly criticises those economists who conveniently “assume that markets are ‘complete’ – that a price exists today, for every good, at every date, in every contingency”. These are the followers of the modern general equilibrium approach developed after Léon Walras by Kenneth Arrow and Gérard Debreu (Econometrica, vol. XXII, 265-90; Debreu’s Theory of Value 1960, etc).

An irrefutable criticism, as futures markets – apart from a handful of currencies, and standardised raw materials over a short time horizon of 3-6 months – are not the rule but the exception, not to speak of contingent markets. But this is the least of those economists’ worries, for they can and do argue – as Christopher Bliss did when I raised this issue with him a long time ago – that markets have a cost, and therefore only those markets will be activated whose expected benefits exceed their costs. Thus in spite of missing markets we remain in the best of all possible worlds.

As a matter of fact the incompleteness of markets cannot be dismissed, for there is one commodity – labour services – for which a forward market could be contemplated only in a society of serfs or slaves, not in a society of free individuals. An irrevocable commitment to deliver one’s labour services in the future to a given master, or a given firm, at a price agreed in the past, would involve a feudal/slave tie inconceivable in a capitalist economy characterised by wage labour (a tenured job involves an option to sell one’s labour at a predetermined wage, but not an obligation to deliver it). Therefore market incompleteness is not a question of costs exceeding benefits of missing markets (unless we tautologically define an institutionally impossible market as infinitely costly), but of the incompatibility between capitalism and feudal institutions in labour relations. It is no accident that Gérard Debreu never speaks of capitalism, but of an unspecified exchange economy. It is not (only) a question of realism, but of which economic system we are talking. One thing are the “parables” often indulged in by neo-classical economists, another thing the science fiction of imaginary planets on which with absolute certainty nobody has ever set foot or ever will.

The lack of future markets for labour services is also why lower wages may not deliver higher labour employment – because those lower wages cannot be guaranteed to continue in the future once unemployment falls – and why a social contract between capital, labour and government may be a superior arrangement with respect to labour market flexibility.

Sequentiality of markets

Nevertheless, the real problem is not so much markets incompleteness but their sequentiality, which is largely ignored. For markets to deliver an efficient resource allocation they should open for the very short time, ideally an instant, that it takes for all economic agents (including representatives of future generations, but let this pass) to express their demands for and supplies of all goods, on the basis of their individual preferences and original “endowments”, thus determining inter-temporal, contingent, equilibrium prices and quantities. Then, once an intertemporal equilibrium is reached for all states of the possible world, markets should shut for ever while all transactors and their successors execute without fail all their transactions to kingdom come. (We leave aside here the thorny issues of existence, uniqueness and stability of such equilibria; complications with externalities, increasing returns, public goods; and the only too often forgotten departures from perfect competition, not because these issues are negligible or unlikely but because they are too large and complex to handle here, and even in their absence there is more than enough to shake anybody’s complacency).

Fortunately for us, and unfortunately for market efficiency, our markets do not function as in this unknown and grotesque economic system. Markets open, shut and reopen incessantly, indeed in the global economy today they seldom shut, for almost invariably you can transact anything at any time of the day and the night somewhere or other on the globe.

In the world as we know it, in order to secure a good’s availability tomorrow, we do not have to express our demand for it today, even if in principle the good could be transacted today in any number of future markets. Therefore all the time, beside taking into account current prices of current goods, we act on the basis not of today’s spot prices of future goods, but of our expectations of their spot prices tomorrow (and of the quantities associated with them). This is the ultimate foundation of the keynesian theory of unemployment due to lack of effective demand; of liquidity preference and of the associated need for fiscal policy. If today’s savers had to express today a demand for future goods, current investment would be activated for their future supply and a generalised excess capacity could only be structural, i.e. due to mismatching of the structure of capacity and of demand. As things are now, whoever saves creates unemployment unless his savings are being spent simultaneously by someone else. It is odd that even critics like Joseph Stiglitz should concentrate on markets incompleteness (as well as asymmetry of information, see his Whither Socialism?, Cambridge Mass, MIT Press, 1994) and neglect their sequentiality.

The trouble is that the Arrow-Debreu model is the only rigorous theory that would support the claim of an efficient market economy. From this viewpoint we can conclude that an efficient market economy is a utopia, in the literal sense that it does not exist, it has never existed and will never be capable of existing anywhere. What had began as an attempt to theorise the efficiency of markets ended up, by the successive tightening of all the conditions necessary to such efficiency, conclusively demonstrating their inefficiency.

Paradoxically the most effective critique of this kind of general equilibrium theory has come from within that same theoretical tradition, from Jacques Drèze and his work on temporary equilibrium. This is a Hicksian concept (from Value and Capital), infinitely more destructive and promising, at the same time, than anything produced by neo-marxian or neo-ricardian or neo-keynesian economists, so much so that it leads straight to keynesian conclusions.

The Efficient Market Hypothesis

In the 1960s Eugene F. Fama at Chicago University and Paul A. Samuelson at MIT independently put forward the Efficient Market Hypothesis, i.e. the proposition that “prices fully reflect all available information” (Fama 1965). The title of Samuelson’s 1965 article, ‘Proof that Properly Anticipated Prices Fluctuate Randomly’ says it all: if markets are informationally efficient, in the sense of prices incorporating the information and expectations of all market participants, price changes cannot be forecast, and viceversa. Everybody will exploit the slightest informational advantage in profitable transactions. As the old story goes, if you see something looking like a $100 bill on the pavement you should leave it where it is, for if it really was a $100 bill someone else would have picked it up already.

Lucas (1978) buttressed this hypothesis with his notion of “rational” expectations, efficiently embodying the sum total of economic information (although really we should call them “successful” expectations, for there is nothing rational or irrational about them). These are the foundations of the denial of the Phillips trade-off between unemployment and inflation; of the presumed ineffectiveness of government policy; and of the theory of Central Bank Independence with sole responsibility for inflation targeting.

This Panglossian view of the efficiency of markets is reminiscent of the parallel claim, by Soviet planners, that their central planning was always necessarily optimal, because if they had known any better they would have made it better. Admittedly it should be easier for countless, decentralised market transactors to recognise mutually advantageous improvements through bilateral exchanges, than for a single central planning agency to spot and implement planning improvements unilaterally; but if plan construction was decentralised, as Oskar Lange had proposed back in 1937, mutatis mutandis the Efficient Market Hypothesis and the Optimum Planning Hypothesis would be equally plausible (or, rather, equally implausible).

The Economist‘s review covers some of the criticisms raised in the literature to this construct. “In 1980 Sanford Grossman and Joseph Stiglitz [AER 70, 393-408], pointed out a paradox. If prices reflect all information, then there is no gain from going to the trouble of gathering it, so no one will. A little inefficiency is necessary to give informed investors an incentive to drive prices towards efficiency.” This is a confusion between the properties of the end-result and those of the process by which that end-result is obtained.

The Economist‘s criticisms of EMH include also the neglect of “institutional frictions” in markets, such as the presence of some less well-informed “noise traders”. But The Economist‘s strongest criticisms rest on the challenge to markets’ inherent rationality raised by behavioural economics in the past decade.

The behavioural approach

Andrew W. Lo (2007), a contributor to the EMH who now seeks its synthesis with behavioural economics, i.e. the Adaptive Markets Hypothesis, characterises the behavioural approach thus:

“Human decision-making under uncertainty” exhibits systematic biases “several of which lead to undesirable outcomes for an individual’s economic welfare – for example, overconfidence (Fischoff and Slovic, 1980; Barber and Odean, 2001; Gervais and Odean, 2001), overreaction (DeBondt and Thaler, 1985), loss aversion (Kahneman and Tversky, 1979; Shefrin and Statman, 1985; Odean, 1998), herding (Huberman and Regev, 2001), psychological accounting (Tversky and Kahneman, 1981), miscalibration of probabilities (Lichtenstein, Fischoff and Phillips, 1982), hyperbolic discounting (Laibson, 1997), and regret (Bell, 1982). These critics of the EMH argue that investors are often – if not always – irrational, exhibiting predictable and financially ruinous behaviour” (see Lo’s references list for bibliographical details).

The latest contribution to this approach is Animal Spirits, by George Akerlof and Robert Shiller, entitled after what Maynard Keynes regarded as the ultimate urge to practice enterprise and to invest[1]. More power to their elbows. But ultimately the strongest criticism of EMH is epistemological, for that hypothesis is based on a peculiar theory of knowledge.

The EMH suffers from what we could call the X-Files Syndrome, “The Truth Is Out There”. Out there is The Truth, some of which is naked and visible to all market participants; some of which is covered in such a way as to be visible only to some of them – either with total certainty or with an attached probability which is the same for all – and the rest of which is unknown but is known with certainty to be unknown. Information available therefore is somewhat limited, but what information is available is true – or likely to be true with equal probability for all those who share it – otherwise its privileged use would not necessarily give an advantage.

Instead of which, in the world as we know it, market participants have different beliefs about the probability of truth of the information they possess; the same “quantum of information” may be viewed as a gold nugget by some and as utter rubbish by others (for instance, the time sequence of numbers generated by a fair roulette to date, with a view to predict future numbers). Otherwise it would not be possible to even talk of “noise traders”; whoever uses this concept should explain what can be relied upon to contain the noise level below a critical, deafening number of decibels, while a bubble inflates up to the point when it bursts. I guess one can belong to the behavioural school without even realising it.

Self fulfilling expectations

If he were to re-write The General Theory – Maynard Keynes wrote in the Introduction to one of its later editions – he would distinguish between economic agents acting on the basis of wrong expectations and of right expectations. He also wrote: “For if we consistently act on the optimistic hypothesis, this hypothesis will tend to be realised; whilst by acting on the pessimistic hypothesis we can keep ourselves forever in the pit of want” (Preface, Essays in Persuasion, 1931). Joan Robinson used to quote Shakespeare to express the possibility of self-fulfilling expectations: “[… for there is nothing either good or bad, but] thinking makes it so”(Hamlet to Rosencrantz, Act 2, scene 2).

The Economist‘s review states: “… Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.” But in a recent, inspiring article (Economics is in crisis: it is time for a profound revamp, FT 21 July 2009). Paul De Grauwe explains beautifully the self-fulfilling nature not just of expectations but of dominant economic theories.

“Take government budget deficits, which now exceed 10 per cent of gross domestic product in countries such as the US and the UK. One camp of macroeconomists claims that, if not quickly reversed, such deficits will lead to rising interest rates and a crowding out of private investment. Instead of stimulating the economy, the deficits will lead to a new recession coupled with a surge in inflation. Wrong, says the other camp. There is no danger of inflation. These large deficits are necessary to avoid deflation. A clampdown on deficits would intensify the deflationary forces in the economy and would lead to a new and more intense recession.”

“Or take monetary policy. One camp warns that the build-up of massive amounts of liquidity is the surest road to hyperinflation and advises central banks to prepare an ‘exit strategy’ [see our post on “Exit Wounds”, 3 August 2009]. Nonsense, the other camp retorts. The build-up of liquidity just reflects the fact that banks are hoarding funds to improve their balance sheets. They sit on this pile of cash but do not use it to increase credit. Once the economy picks up, central banks can withdraw the liquidity as fast as they injected it. The risk of inflation is zero.”

“Does it matter that economists disagree so much? It does. Take the issue of government deficits. If you want to forecast the long-term interest rate, it matters a great deal in which of the two camps you believe. If you believe the first one, you will fear future inflation and you will sell long-term government bonds. As a result, bond prices will drop and rates will rise. You will have made a reality of the fears of the first camp. But if you believe the story told by the second camp, you will happily buy long-term government bonds, allowing the government to spend without a surge in rates, thereby contributing to a recovery that the second camp predicts will follow from high budget deficits.” …

“This conflict matters not only for market participants, but also for policymakers.” … “The cacophony of analysis helps to explain why policymakers react in different ways to the same crisis and why it is so difficult for them to come up with co-ordinated action.”… “How to resolve this crisis in macro-economics? The field must be revamped fundamentally” (De Grauwe, cited).

Back to the drawing board, then: “We need a new science of macroeconomics. A science that starts from the assumption that individuals have severe cognitive limitations; that they do not understand much about the complexities of the world in which they live. This lack of understanding creates biased beliefs and collective movements of euphoria when agents underestimate risk, followed by collective depression in which perceptions of risk are dramatically increased. These collective movements turn uncorrelated risks into highly correlated ones. What Keynes called ‘animal spirits’ are fundamental forces driving macroeconomic fluctuations” (De Grauwe, cited).

Markets as indispensable homeostatic mechanisms

Well, markets are incomplete, sequential, inefficient, self-fulfilling… So what? All of these considerations taken together do not eliminate the absolute need for markets in resource allocation, for they are irreplaceable homeostatic, self-regulating mechanisms that adjust prices to excess demand (Walras), quantity produced to excess price over cost (Marshall), and actual capital stock to desired capital through investment decisions. Axel Lejonhufvud stressed long ago the markets’ self-regulating role (which should not be confused with self-regulation of their own functioning). More generally, markets also adjust production capacity and production of inputs to those of outputs (Dick Goodwin on the Multiplier as a Matrix).

Sometimes the self-adjustment is too fast, sometimes it is too slow - as it happens with all homeostatic mechanisms, like thermostats - but it is there; the alternative is manual control, i.e. central planning. As I tell my students, there may be special circumstances in which manual control is superior to an automatic mechanism. In Star Wars, when Luke Skywalker targets the heart of the Empire, he disables automatic controls and goes manual, and succeeds. But he only had one target; there were only two alternatives, hit or miss; and … the Force was with him. In Central Eastern Europe, on the contrary, the inability to introduce markets in almost forty years of attempted reforms – primarily because of persistent endemic excess demand, but also for the leadership’s fear of loss of political power and control – was the ultimate economic cause of collapse of centrally planned economies in 1989-91.

We could paraphrase Wiston Churchill’s dictum about democracy, and say that the market economy is the worst economic system except all the others that have been tried. But markets alone do not, on their own, characterise an economic system. We are engaged now, as never before, in an intellectual struggle over what ownership mix, what rules of the game, what share of government expenditure, what social and re-distributive policies, what global governance institutions should prevail in the modern market economy. While economic arguments are used, the choices involved are essentially political, and attempts to control or replace markets as the economy’s engines are always grabs for political power and control.

Except…

… that the markets' homeostatic properties praised above demonstrably do not apply to most credit and financial markets, where products may multiply instead of reducing and spreading risk; securities may go toxic; transactions are more likely to be fraudulent because of lack of transparency; there is a corporative system of rewards masquerading as a market for managerial skills; leveraged bets in derivatives markets can inflict massive damage on innocent bystanders; banking pyramids proliferate; profits are privatised and massive losses are eventually socialised. Here the primacy of markets must give way to effective regulation, first national then global.


[1] “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” (The General Theory of Employment, Interest and Money, 1936, pp.161-162). Akerlof and Shiller take “animal spirits” to imply irrationality, but the urge to action rather than inaction could well be a rational survival strategy, instead of the neglect of reason.

On Charity and Truth – from/to Stefano Zamagni

Stefano Zamagni, professor of economics at Bologna University, has commented via e-mail (in Italian) on my post on the recent encyclical Caritas in Veritate (Love in Truth, or Charity in Truth): The Vatican Road Is Paved With Good Intentions, Thursday 16 July 2009. He kindly expressed his interest and appreciation and gave his immediate responses. His original e-mail is reproduced at the end of this post.

Veritas in Caritate and its inverse

First, Zamagni considers my writing "about Love in Truth and its apparently equivalent inverse, Truth in Love". He argues that “the difference between the two is great and therefore there is no equivalence. Caritas in Veritate means the affirmation of primacy of the good over the truth and the just (Aristotle); Veritas in Caritate instead means following Plato, who affirmed the primacy of the true over the good and the just. A herd of philosophers has debated at length on this theme: they should not be ignored”[“the just” seems to have been misplaced the first time it occurs, but there is no ambiguity, DMN] . The Encyclical states, at the very beginning, “… the need to link charity with truth not only in the sequence, pointed out by Saint Paul, of veritas in caritate (Eph 4:15), but also in the inverse and complementary sequence of caritas in veritate” (para. 2). I only meant to say that the notions of caritas in veritate and its inverse were equally plausible. I suppose that strictly speaking both I and Zamagni are wrong here: we should have both spoken of complementarity, instead of equivalence (DMN) or opposition (SZ).

Superfluous versus overabundant

Second, Zamagni points out that “The concept of overabundance is philosophical and not economic. It has nothing to do with the notion of superfluous as we use it today. Thomas Aquinus devotes two chapters of his Summa to explain the difference”. The fact is that in the New Oxford Dictionary of English (the language of the official version of Caritas in Veritate used in my post) superfluous means “unnecessary, especially through being more than enough”, overabundant means “excessive”, while abundance is “a very large quantity of anything”, and all have similar roots meaning overflowing: respectively super-fluere and abundare. Anybody giving uncommon meanings to common words has the duty to indicate in what ways they depart from standard uses, under penalty of being misunderstood without redress.

“Civil markets”

Third, Zamagni says that I have missed the central point of the encyclical. The true, great novelty of Caritas in Veritate, he claims, is the proposition that “the civil market economy should not be confused with the capitalist economy. The civil market is the genus, the capitalist market is one of its species. The market is a way of organising economic activity; capitalism is a model of society – as Marx taught. Finally, the civil market was born at least three centuries before capitalism, as all the great historians have long recognised. Thus what Caritas in Veritate says is that, in today’s conditions, we can and we should go back to the civil market economy, whose characteristic is the inclusion of the reciprocity principle into the economic sphere, in addition to (not instead of) the other two founding principles: the principle of the exchange of value equivalents and the principle of redistribution. The difference between civil markets and capitalist markets has not been realised precisely because until a few years ago economists have continued to think that the exchange of equivalents was the same thing as reciprocity (see S. Kolm, Reciprocity, CUP, 2008)”.

I confess that I have not ever heard before the term “civil market”, which I can only take to mean a market tout court – unless it is a market that is not “incivil” in the sense of being monopolistic and generating unemployment, poverty, inequality and environmental destruction. Markets do not lend themselves to qualifiers other than those indicating their object (e.g. financial markets) or their degree of competition, such as competitive/oligopolistic/monopolistic, regulated/unregulated. In his encyclical Benedict XVI never speaks of a “civil market”, no wonder I missed it. If you Google “mercato civile” you find references either to the civilian/military dichotomy or to recent publications authored/co-authored by Stefano Zamagni; if you Google “civil market” you get masses of references almost exclusively of the first kind. This again indicates a rather idiosyncratic, maybe formerly common but now obsolete, personal usage of these terms. Words can change the world by inspiring human action, not by the manipulation of concepts and labels.

“Civil economy”

Benedict XVI does mention “civil economy” in Caritas in Veritate, in the context of the relationship between business and ethics. “In recent decades a broad intermediate area has emerged between the two types of enterprise [profit-based companies and non-profit organizations]. It is made up of traditional companies which nonetheless subscribe to social aid agreements in support of underdeveloped countries, charitable foundations associated with individual companies, groups of companies oriented towards social welfare, and the diversified world of the so-called “civil economy” and the “economy of communion”. This is not merely a matter of a “third sector”, but of a broad new composite reality embracing the private and public spheres, one which does not exclude profit, but instead considers it a means for achieving human and social ends. Whether such companies distribute dividends or not, whether their juridical structure corresponds to one or other of the established forms, becomes secondary in relation to their willingness to view profit as a means of achieving the goal of a more humane market and society. It is to be hoped that these new kinds of enterprise will succeed in finding a suitable juridical and fiscal structure in every country. Without prejudice to the importance and the economic and social benefits of the more traditional forms of business, they steer the system towards a clearer and more complete assumption of duties on the part of economic subjects. And not only that. The very plurality of institutional forms of business gives rise to a market which is not only more civilized but also more competitive.” [para. 46]. This is not a new dawn, it is something that “is to be hoped”, and really not all that much to go by.

In his lecture Dal mercato capitalistico al mercato civile (15/9/2008) Stefano Zamagni advocates “… transforming the capitalist market to a civil market. This is not a Darwinian market, like the capitalist market that tends to reward the best and marginalize the less efficient. This is not acceptable... I propose a return to the spirit of the origins when the market was born, so as to resolve the embarrassment of riches and avoid the stagnation of the circuit of wealth production and of distribution so as to include all”. In practice, this involves 1) “opposing the financialisation of the economy by means of alternative financial instruments,” raising the share of “ethical finance controlling today 20% of global transactions” [he gives no definitions and no source]. 2) Microcredit, which he says was first practiced by the Franciscans in the XV century; 3) Fair trade [commercio equo e solidale] initiatives, which Zamagni recognizes to be stagnant at the moment. In truth, again, not much to go by.

Of course – at least in principle if seldom in practice – markets can be used by economic systems other than capitalism, but neither Benedict XVI nor Stefano Zamagni characterise a new economic system, or even a significantly reformed capitalist system. I would be very interested in Stefano Zamagni fleshing out in significantly greater detail the market system he has in mind (or pointing at the relevant literature). Is it a pre-capitalistic system? Is it a globally regulated market system, especially for financial instruments? Are "civil markets" segmented; are prices controlled; do markets clear? Who picks the winners in a non-Darwinian system? Is there a role for collective and/or state ownership and entrepreneurship? Who re-distributes what to whom? What is the transition path that might lead us there from where we are now? Hopes alone do not change the world.

Value, Profit, Non-Profit

The notion of an intrinsic value of commodities, distinguished, and therefore possibly diverging, from their market prices, involves the imposition of an arbitrary and therefore indeterminate set of values. In the last twenty years the price of oil varied between $9 and $148 a barrel: at what point and in terms of what, was it at or closest to equivalent exchange value?

Marx talked of relative values for the purpose of asserting the existence of exploitation even if profit made relative prices diverge from relative labour values (the labour actually embodied in commodities, directly and indirectly) and was not talking of those values as a basis for equivalent exchange (an improper use to which his epigones put the labour theory of value). I respect Serge-Christophe Kolm’s work, particularly his Caffè Lectures on Reciprocity, but I find it of limited application here (and, frankly, in most other areas of real economic policy).

Zamagni goes on to say that “This is why the approach of Mauss and that of non-profit institutions has nothing to do with the current of thought of the civil economy – which is typical of the Italian Enlightment: the Milan School (Beccaria, Verri, Romagnosi) and the Naples School (Genovesi, Galiani, Dragonetti)”. He is also surprised at being classed as a supporter of non-profit institutions, against which he has been fighting for many years. His objection is that the non-profit approach “views capitalism as something that is there and should not be touched; state failures and market failures are there and non-profit institutions have the role of patching the system and calming street protests. Whereas the idea of the civil economy is that of changing the capitalist logic from inside in order to go beyond it, which is probably what young Marx had in mind before getting bogged down with the so-called Transformation Problem”. “This is the true ‘revolutionary’ road in the present circumstances, … while left wing politicians (including the extreme left) continue to invoke and hope for a real revolution which they know will never be realised, and right wing politicians continue to support the purely cosmetic non-profit approach and corporate philanthropy.”

I am sure I am not the only person who associates Stefano Zamagni’s work with the non-profit approach, not least in view of his interview on Italian radio on 7 July, but I stand corrected. Yet I cannot regard his as a revolutionary road, for the little he has given us of his destination is only a marginal reform of the capitalist system.

Is the Church concerned with its own laicity?

Finally, Zamagni notes that “The Church does not want to, and should not, put forward concrete action proposals” like the ones suggested in the last paragraph of my post, for “that would be a patent violation of the principle of laicity [laicità], as understood by Rawls and Habermas.” I do not expect my suggestions should be ever entertained by the Church, which is fair enough, but frankly I do not see how the actions I recommend would contravene the principle of laicity, when the diametrically opposite actions actually taken by the Church are not thought to contravene it. Moreover, the Church does not seem to me to be concerned with maintaining its own laicity in the first place.

Traduttore traditore, possibly. So, for the benefit of my Italian readers, and for the record, I reproduce here the original text of Stefano Zamagni’s e-mail, for which I thank him hoping that he might be induced to comment further.

Stefano Zamagni’s original e-mail

Caro Mario, grazie molte per la tua nota che ho letto con piacere e con interesse. Ti scrivo alcune reazioni a caldo.

Primo. "about Love in Truth and its apparently equivalent inverse, Truth in Love" (p.6). la differenza è grande e dunque non c'è equivalenza. Caritas in Veritate (CV) significa affermare il primato del bene sul vero e sul giusto (Aristotele); Veritas in Caritate significa invece seguire Platone che affermava il primato del vero sul bene e sul giusto. Una schiera di filosofi ha poi discettato a lungo sul tema: concediamo loro almeno l'onore delle armi!

Secondo. Il concetto di sovrabbondanza è filosofico e non economico. (p.7). Non c'entra nulla con la nozione di superfluo, così come la usiamo noi. oggi. Tommaso d'Aquino dedica due capitoli della sua Summa per spiegarne la differenza.

Terzo. Il punto centrale della CV non è quello che tu hai notato. Si tratta di un punto che costituisce la vera grande novità di questa enciclica, soprattutto rispetto alla Centesimus Annus. Infatti, viene qui chiarita quella confusione di pensiero che ha generato lotte (anche cruente) e dissapori tra studiosi per quasi due secoli: l'economia di mercato civile non va confusa con l'economia capitalistica. Il mercato civile è il genus; il mercato capitalistico è una sua species. Il mercato è un modo di organizzare l'attività economica; il capitalismo è un modello di società - come Marx ha insegnato. Infine, il mercato civile è nato almeno tre secoli prima del capitalismo, come tutti i grandi storici hanno da tempo riconosciuto. Allora ciò che la CV dice è che, nelle condizioni odierne, si può e si dovrebbe tornare all'economia di mercato civile, la cui cifra è l'inclusione dentro la sfera economica del principio di reciprocità, in aggiunta (ma non in sostituzione) agli altri due principi fondativi: il principio dello scambio di equivalenti di valore e il principio di redistribuzione. E' perche' fino a pochi anni fa gli economisti hanno continuato a pensare che lo scambio di equivalenti fosse la stessa cosa della reciprocita' che non si e' colta la differenza fra mercati civili e mercati capitalistici. (Se ne ha voglia, cfr. S. Kolm, Reciprocity, CambridgeUniv. Press, 2008).

Ecco perche' l'approccio di Mauss e quello del non profit - da te citati - nulla hanno a che vedere con il filone di pensiero dell'economia civile - che e' tipico dell'Illuminismo italiano: scuola di Milano (Beccaria, Verri, Romagnosi) e scuola di Napoli (Genovesi, Galiani, Dragonetti). Chi mi conosce sa che da anni mi batto contro il non profit ( e ora anche in sede istituzionale ): mi ha dunque sorpreso che tu scriva il contrario di cio' che e'. (Se fossi interessati e ne avessi tempo non ho esitazione ad inviarti i miei scritti dell'ultimo decennio sull'argomento). Perche' non mi piace il non profit? Perche' la sua logica e': c'e' il capitalismo e non si tocca; ci sono tuttavia fallimenti sia del mercato sia dello Stato; allora si facciano intervenire le organizzazioni del non profit per porre un qualche rimedio, per attaccare pezze e per tenere "calma la piazza". L'idea dell'economia civile invece e' quella di mutare dall'interno la logica del mercato capitalistico per andare verso il suo superamento. A mio giudizio, questo era l'intendimento implicito anche del Marx degli scritti giovanili, prima che il nostro si impaludasse nel "problema della trasformazione".

Forse l'ho tirata troppo in lungo, anche se avrei tante altre osservazioni da avanzarti. Termino dicendo che mi vado sempre piu' convincendo che questa e' la vera via "rivoluzionaria" nelle condizioni storiche del momento. Con l'azione politica, si tratterebbe solo di accelerare la transizione - che e' concretamente possibile. Invece, e' la societa' civile (alcuni suoi spezzoni) a tirare con fatica la carretta, mentre i politici di sinistra (anche estrema) continuano a invocare o a sperare la rivoluzione vera e propria perche' sanno che mai potra' realizzarsi, e i politici di destra continuano a sostenere il non profit e la filantropia d'impresa (corporate philantropy) in chiave cosmetica.

Un'ultima annotazione. La Chiesa non vuole e non deve avanzare proposte concrete di azione come quelle da te suggerite nell'ultimo paragrafo della tua nota. Sarebbe una patente violazione del principio di laicita', cosi' come inteso da J. Rawls e J. Habermas.

Grazie ancora Mario per il tuo spunto. Sarebbe bello poterne discutere liberamente e senza filtri ideologici. Ma ormai l'Accademia non e' piu' il luogo in cui si coltiva il pensiero critico.

Ti invio un saluto caro e buon lavoro,Stefano Zamagni

P.S. - Ti allego un mio scritto recente sulla crisi in atto. [The lesson and warning of a crisis foretold: a political economy approach].