In other disciplines, the modernist view that systems and knowledge can be derived from entirely general first principles has come and gone. In architecture, for example, the twentieth century view that ‘a house was a machine for living in’ – entirely rational, functionalist – has given way to post-modernism. Architectural rationalism discarded much that was valuable, but tacit rather than explicit, in the classical tradition and the emphasis on functionality in modern architecture proved ultimately not even to be effectively functional. (You can read more in an article I wrote in the Financial Times on 29 April 1998.)
Yet economics and business are today the last bastions of modernism. There is still a firmly rooted belief that there are right ways of organising firms and economies, not just for here and now, but as universal maxims: and that in matters of business and economics sensitivity to culture, context, tradition and history are unaffordable sentimentality.
I disagree profoundly with this modernist position. Social phenomena can never be successfully understood or analysed in this way. There are many perspectives – literary, anthropological, economic – on the ways in which we behave and in which our society is organised. Each of them has a measure of truth, neither is the whole truth. See FT article 7th March 2001
Markets are embedded in a social context
That modernist view is today most clearly found in views on the design of economic systems. Broadly, the ‘Washington consensus’ is that well-defined private property rights, active capital markets, and free internal and external trade, are necessary and sufficient for economic success. This is part of what Fukuyama, borrowing Nietzsche’s striking phrase, called the end of history. In the combination of late 20th century American progressive opinion, lightly regulated capitalism and liberal democracy we have arrived, once and for all, at the right answers.
I believe that this description of how market economies function is certainly superficial, and even wrong. I share the commitment to market economics and market economies. But I see the social context of markets not as a sideshow but as an integral part of how these markets work. And I believe it is the absence of an appropriate social context that provides the explanation of why the ‘Washington consensus’ has so often failed, just as socialism failed: because they relied on principles deduced in abstraction from the reality of the environment within which it was intended to function.
This social context is essential because
– modern economies need and process complex information. Asymmetry of information in transactions is handled by a range of rules, conventions and relationships between traders
– small group interactions frequently have pathological properties which need to be handled by contracts and conventions, by participation in hierarchically structured organisations, and by the development of sustained relationships
– many markets for risks do not and cannot exist: since the cost of insecurity to individuals may be very high, social as well as economic institutions for risk sharing and risk pooling are needed and are found in all societies
– property rights are not, in any but the simplest of economies, obvious or natural: they are social constructs and there are many different possible property rights régimes.
Reasoning of this kind denies the possibility of a single model, or blueprint, for economic systems. Properly functioning businesses, and markets, are particular products of specific social contexts and cannot easily be created outside of these contexts. See “The Good Market” from Prospect Magazine for an elaboration of this kind of thinking. A much more extended account will be found in my next book.