Tremors in the Paradigm

Sometimes, paradigm changes are hard to detect as they begin, and other times they begin loudly and, like a wet firecracker, sputter and fizzle.  So it’s hard to know right now what is actually occurring, but there’s definitely the smell of paradigm combustion in the air.  The Euro is undergoing a crisis of confidence before our eyes while both global financial markets and parliaments burn with indignation.   Arab Spring and Occupy are blossoming now across Eurasia, in places as diverse as St. Petersburg and a Chinese village.  Occupiers in the U.S. spread their sleeping bags from Wall Street to Oakland.  And the economists and politicians point in so many directions at once that the editorial page reader feels surrounded by invisible walls of enemies.

A few perceptive commentators seem to be struggling toward a realization of sorts.  Eugene Robinson describes the issues as more political issues of democracy than economic ones, Howard Meyerson sees fundamental problems from the human pain of downgraded and displaced jobs as a cause, and even an ardent conservative like Ed Rogers recognizes that, somehow, democracy itself is part of the issue.  In fact, in a wrongheaded sort of way, Rogers pinpoints the fact that large groups of participants in a democracy actually want something besides market optimization.

Adam Smith would probably have a much easier time diagnosing the problem than would most of his adherents.  A professor of moral philosophy and collaborator with David Hume, he had interests far beyond the economics for which he is famous. His other great work besides The Wealth of Nations was The Theory of Moral Sentiments, and in it he deplored “the corruption of our moral sentiments, which is occasioned by this disposition to admire the rich and the great, and to despise or neglect persons of poor and mean condition.”  I suspect he would be horrified at the use put to his great phrase, “the invisible hand of the market.”  For that phrase, like a scalpel, immediately served to sever the irresponsible rich from the moral and social consequences of their economic activity.  And it cemented the shift from the social market paradigm which preceded Smith to the rational market paradigm which followed, i.e., it turned us all from neighbors to mutual predators.

In the social market paradigm, considerations include not just the costs of production and need for profit; they include knowledge and consideration of the circumstances of the purchaser. The price differs for stranger versus friend; a poor widow may get a price not available to a rich banker.  In effect, prices are on a sliding scale, and the purchaser’s position on that scale depends on things other than rational consideration of supply and demand.  The banker wielded power in the village, but only within defined social limits. Sanctions ranging from slow deliveries to expulsion from the village could apply to violators of the unwritten social norms.  We probably all have encountered such markets in local lemonade stands and in third world villages.  They are the economics of a world where people are neighbors, and they describe most human activity down through history.

Smith certainly deserves no blame for the misuse of his language, or for the death of the social market paradigm.  In the western world, it had fallen to its knees long before Smith, and a coroner’s report would surely show cause of death as “speed of transportation.”   Europe was at the peak of its great age of exploration; the rapidly increasing speed of transportation meant that new markets were reachable everywhere, and most of them were so distant given the then maximum speed of transport that social relationships between buyers and sellers were out of the question.  The time was ripe for a new paradigm, in which rationally efficient meant that consideration of social aspects of buying and selling were no longer feasible. And so we lived for almost three hundred years.

In the process, we thought we waged a great struggle between Capitalism and Communism, but that battle had already been lost by the time it came.  For both sides had as the same central tenet, the idea of “economic determinism.” And by that was meant, the rule of rational economic efficiency over social considerations.  Of course, removing social transactions from economic theory left only economic determinism.  So Marxism and Capitalism differed mainly in what each considered the best approach to achieving the efficiency objective while palliating the social evils that transpired.    

But times have changed yet again.  We live now in an age where supersonic jets and gigabit-speed communications mean we can again be neighbors in a global village; we again know about each other and feel the pangs of a social conscience even at great distances.  We recognize mal-distributions of wealth and irresponsible treatment of the needy in our societies or others for what they are – failed social market transactions – and we look to see consequences for those failures. “The invisible hand” no longer satisfies as an explanation or excuse.

And that is the common thread among Arab Spring, Occupy Wall Street, European Union protests, and the whole range of protest movements now afoot.  They are not only threats to the established order; they are the opportunity to find ways to satisfy our own economic needs while not forgetting  the needs of our neighbor; to purchase our bread without selling our soul.