## RETHINKING ECONOMICS

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### Pandemic, market failure, and ethical concerns
- The pandemic exposed that many "essential" workers (eldercare, supermarkets, distribution warehouses, meat-packing plants, restaurants) earn low pay and faced added risk of serious illness; their only recourse was to walk away from jobs, risking livelihoods.
- The pandemic and the climate emergency demonstrate that "market failure is now the norm not the exception," rendering the standard economic model anachronistic.
- Moral discomfort around these choices has pushed economics to confront ethical concerns traditionally left to religious leaders and philosophers.

### What students prioritize and implications for a new paradigm
- Between 2016 and 2020, 9,032 students in 18 countries were asked, at the beginning of their introductory economics course, to name the most pressing problems economists should address; responses most frequently cited: inequality, climate change, and unemployment.
- A new benchmark model increasingly taught is encouraging students who care about these issues to stay in economics.

### Integration of economic models with moral frameworks
- Historical paradigms succeeded when economic models aligned with complementary moral and political values and became embodied in emblematic policies and ordinary discourse:
  - Classical liberalism paired commitments to order, equal dignity, anti-paternalistic liberty, and utilitarianism with competitive markets, division of labor, and specialization; hallmark policies included free trade and antitrust.
  - Keynesian economics combined commitments to reducing economic insecurity and raising incomes for the less well-off with propositions about saving behavior, automatic stabilizers, and aggregate demand; its coherence relied on the belief that egalitarian policies would support higher and more stable output and employment.
  - Neoliberalism advanced two normative pillars: "freedom from" government coercion and a procedural view of justice; it treated people as individualistic and amoral actors engaging in exchange under complete contracts; emblematic policies included school vouchers and a negative income tax.
- Paradigms can fail when their models poorly approximate economic reality (examples: Great Depression for classical liberalism; stagflation in the 1970s for Keynesianism; global financial crisis of 2008 for neoliberalism).

### Contemporary economics: incomplete contracts and moral sentiments
- The behavioral revolution shows people are "neither omniscient nor entirely self-interested" and are moved by "moral sentiments" (dignity, ethical convictions, concern for others, altruism, reciprocity, parochial intolerance, tribal hostility).
- Information economics reveals most contracts are incomplete; effects on others not covered by contracts are the rule.
- Consequences of incomplete contracts:
  - Excess supply or demand can persist even in competitive markets.
  - Employers may pay wages higher than a worker's next best alternative, creating a rent that workers fear losing—this can motivate compliance (e.g., working while risking health) rather than self-isolation.
  - Where losing a job is costly, unemployed workers will exist.
- Employment contracts include a "transfer of power" from worker to employer (Coase); models recognizing this transfer allow policymakers to address employer abuse and the plight of low-paid essential workers.
- Policy initiatives range from expanding workers' individual rights on the job to support for those who stay home to minimize epidemic spread.

### Expanding policy space: government, markets, and civil society
- The new benchmark model extends economic analysis to motivations including justice, dignity, and voice, and to institutions beyond markets and government: private power and social norms.
- Chart 2 repositions policy options from a one-dimensional government–market continuum to a triangular space with three poles: government, markets, and civil society. Policies can be placed inside the triangle and towards the center when they blend mechanisms.
- Examples illustrating the three poles and mixed policy responses:
  - Government: compliance with state authority, implemented by fiat and elections.
  - Markets: material incentives, implemented by prices and competition (note: classical "complete contracts" assumption).
  - Civil society: reciprocity, altruism, fairness, sustainability, identity, implemented by social norms and private power.
- Specific policy comparisons:
  - "Carbon tax and dividend" and "cap and trade" sit at different points along the horizontal continuum but that continuum is "cramped" because it presumes sufficient information for mechanism design and ignores social-norm-based solutions.
  - A richer policy toolkit uses combinations of state capacity, market mechanism, and social norms.

### COVID-19 as a test of synergistic policymaking (Chart 3 insights)
- Responses to COVID-19 demonstrate government, markets, and civil society working synergistically, "best exemplified by the development of vaccines."
- Illustrative measures placed across the three poles include:
  - Government implementations: UK National Health Service call for volunteers; mandatory risk sharing (transfers); reallocation of labor—20,000 Qantas workers hired by government as contact tracers.
  - Market implementations: fast-track approval for private-sector-developed virus tests; reallocation of labor—Amazon hires 100,000; virus testing and tracing in South Korea.
  - Civil society implementations: mask wearing; care work at home; social distancing; reciprocity, altruism, fairness, sustainability, identity.
- Research, production, distribution, and population coverage of a vaccine occupy a central position using a mixture of all three mechanisms.

### Policy implications and opportunities
- Ethical considerations of fairness and solidarity are unavoidable in pandemic policymaking (e.g., vaccine priority, defining essential workers).
- The new benchmark model integrates ethical concerns with an economic model recognizing:
  - connections via markets and contracts,
  - private exercise of power,
  - spread of infection,
  - effects on the biosphere,
  - ties of in-group membership,
  - concern for the common good.
- This integration opens policy options implemented by combinations of market instruments, government action, and civil-society mechanisms, not limited to price signals or government fiat.

*Samuel Bowles and Wendy Carlin, Finance & Development, March 2021. Bowles, corrected 2/3/21. Bowles, 2/1/21.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2021/march/en/rethinking-economics-by-samuel-bowles-and-wendy-carlin-en.pdf_