Misunderstanding Markets – the Failure of UK Economic Policy

Anyone following the twists and turns of the British Conservative government’s economic policy might be forgiven for concluding that the drunks had been put in charge of the brewery. This would be a mistake. The policy is not the result of stupidity or greed so much as of a narrow view of sovereignty, economics and markets whose failings have been cruelly exposed, at the expense of the British people.

Trussonomics, as it has come to be called, is a more extreme version of Reagonomics, a doctrine that failed to address the same problems of industrial decline and low productivity when it was tried in the US. It is a right-wing version of ‘socialism in one country’, where an economic and political experiment can be pursued regardless of international interdependencies. It has its roots in the naivete of classical economics about the nature of markets, a naivete that sociologists have been trying to dispel for at least 150 years.

Much of this error goes back to fundamental misunderstandings of Adam Smith. He certainly saw liberating markets as a precondition for economic development, freeing both consumers and producers from the constraints of the medieval guilds and their micro-management of trade. Producers were free to innovate in methods of manufacturing and distribution: in Smith’s famous example, pin-making was transformed from an expensive artisan craft to a cheap mass-production process.

But Smith always set his economics within a context of law and morals. Wealth of Nations is not somehow separate from the thinking in Moral Sentiments or Lectures on Jurisprudence. We may obtain our bread through the baker’s self-interest – but their self-interest in producing cheaply is checked by their moral understanding of the damage that would be caused to that interest by fraudulently using plaster dust to bulk out the flour. Where markets fail because of imbalances in knowledge – the professions are his example – law and licensing provide an alternative to guilds as institutional modes of regulating quality.

He sees the risks of corrupted politics – merchants, the finance capitalists of his day, cannot be trusted to think of the long-term impact of their actions or to refrain from rigging markets in their favour. They must be balanced in political institutions by landowners, whose independent wealth and multi-generational interests in passing on sound estates to their heirs allowed them to be more concerned for the moral integrity of political actions.

As later authors pointed out, this model did not work well as societies became larger in scale and the interests of labour came to be recognized alongside those of land and capital. Where classical economics simply ignored Smith’s concerns, assuming that this was just evolution in action, classical sociologists sought to find alternative solutions. This is most obvious in Durkheim’s work on civic education, professional morals and occupational associations, which examined how the restraints that Smith had seen to be essential foundations for markets could be created and sustained in mass societies. Weber’s thinking on the organisational forms of bureaucracy and on the impartiality of law also contributed, looking for impersonal arbiters to hold market actors accountable.

Even some of the heroes of libertarian economics have their concerns about the consequences of unrestrained markets. Hayek’s critique of central planning has many echoes of Smith’s critique of medieval guilds but he also has lengthy discussions of the problems of trust, of imperfect knowledge, and of the legal frameworks upon which markets depend.

A major weakness of contemporary sociology is its lack of engagement with conservative and libertarian thought. Our concern with the distributional consequences of markets and the justice of those outcomes has distracted us from the study of markets themselves.

There are real challenges to which we have not developed good responses. In general, is it better for people to keep what they earn, by whatever means, and allocate it according to their own priorities than for the state to intervene by way of taxation? When can the state know better than individuals? When is collective provision justifiable, either to avoid free-riding or to achieve economies of scale or control of natural monopolies like the supply of gas, electricity or water? What makes taxation ethical – if it is just to allocate resources according to the personal preferences of some group of activist politicians, how would we distinguish it from extortion? Can we set floors in markets without creating moral hazard – is this at the base of the low productivity in welfare state economies? Could we turn safety nets into trampolines if there were more conditionality associated with welfare transfers? Are sociologists too keen to spend other people’s money without thinking about how wealth is generated in the first place?

The failure of libertarianism has left a serious vacuum in conservative political thought. If all that is left is the prosecution of culture wars, it is a hollow legacy from 250 years of serious intellectual debate. If sociology is to be more than a woke caricature, though, it needs to rediscover its historic concerns for the problems of order in market societies – and to recognize that its audience is to be found as much among conservatives and liberals as social democrats or socialists.