The Ethics of Capitalism, Class 4
2. The “Fragmented Age:” Economics and Political Philosophy in the 20th Century
Hyperspecialization in academia results in a move away from political economy to specialized studies in
economics. Economics increasingly used sophisticated mathematical tools and addressed more specialized
questions. This coincided with an important split in the study of economics between “micro” and “macro”
economics.
Macroeconomics is that study of the economies of nations and the world as a whole: Do high tax rates reduce
growth? Is free trade good for the poor? What causes inflation? Microeconomics, on the other hand, is the
study of how individuals and firms (and any other “rational” chooser) make choices in relation to prices and
scarcity. An important axiom of microeconomics, the “Law of Demand,” which states that “all things being
equal” individuals will tend to consume more of a good as the price decreases.
Generally, we can see microeconomics as having a secure logical and mathematical foundation, while
macroeconomics has no such foundation in microeconomics. A central question of macroeconomics would be
why and how depressions and recessions occur and what might prevent or mitigate them. Despite the wealth of
attention paid to this question, however, there is no generally accepted theory of the business cycle (what
economists also call the cycle of boom and bust).
As economics has focused on rigor and certainty in the realm of microeconomics, many of the more moralized
questions that animated political economists of the golden age were ignored or sidelined.
Along with the fragmentation of economics into specialized subdisciplines with less emphasis on the big
questions of political economy, philosophy took a similar turn. Political philosophy in the 20th century was
largely about the abstract analysis of political concepts, like freedom, equality, and fairness. But there was a
definite shift away from the concrete economic phenomena and policies to which these concepts have
application, like unemployment, contracts, taxation, and so on.
However, there is a sign of a return to political economy by reconsidering ideas of several thinkers: One was
John Rawls (1921–2002). His basic idea was to think of society as a “cooperative venture for mutual
advantage” that could only expect the allegiance of its citizens if it reliably makes them better off while
respecting their basic freedom to live according to their values.
Friedrich Hayek (1899–1992) engaged in a long-running and important debate with the greatest economist of
the era, John Maynard Keynes (1883–1946). This debate centered on one of the most important questions of
macroeconomics, the business cycle. Specifically, it was concerned with what caused the Great Depression and
what the government should do to prevent and end depressions in the future.
Keynes argued that depressions are ultimately caused by a lack of consumer spending. Sellers cannot find
buyers for their goods and are forced to lower their prices or take losses. To do this, sellers must cut the wages
of their workers, who are society’s consumers. This creates a vicious cycle, making it even more difficult to get
the economy going again. Keynes’s solution is that governments could use their spending and borrowing
powers to ensure that consumer spending stays strong. If an economic downturn does occur, the government
inject money into the system that promotes and increases spending.
Hayek believed that Keynes’s diagnosis was mistaken. He argued that economic downturns resulted from too
many investments in unproductive resources at one time. Sometimes this can be the result of a mania among
investors or as a result of mistaken government policy. For instance, Hayek would have argued that the problem
in the 2008 financial crisis in the United States was that too many investors put too much money in
unproductive assets (in this case, subprime housing), encouraged by low interest rates and a lack of oversight.
Crucially, Hayek’s solution to these problems was not to have the government spend more. Doing so, he
argued, would only make the problem worse.
3. The Idea of Economic Justice
When philosophers argue about justice, often under the guise of “social” or “distributive” justice, they are
concerned to develop theories about what justice requires. This involves developing a view about such things as
what it means to respect freedom, to treat people fairly, as equals, and so on.
When we think about economic justice, we’re trying to develop views about the same sorts of things. But we’re
trying to do this in ways that have more immediate application to the actual economy. We want theories that tell
us what fairness in (say) labor markets looks like, given the way these markets work and could be made to
work.
A broad concept of justice is something like “fair terms of cooperation” or a “fair distribution of society’s
benefits and burdens.” This is abstract and idealized influenced by Rawlsian ideal theory. Theories of
economic justice might take some inspiration from ideal theories of this sort, but they aim to say something
about how the economy, as it currently is, could be made more just. In this sense, theories of economic justice
are to some extent nonideal.
Consider as an example the welfare state. This seeks to help people find more productive jobs, typically by
providing conditional cash grants to unemployed job seekers. Proponents of the welfare state implicitly assume
that it would be a good thing to keep as many people working as possible. If society has reached a stage where
less production is necessary, or can be handed over to machines, we may need to take a different attitude about
human labor and its (un)employment. Why make cash grants conditional on the recipients finding paid work if
there is no work to be done? Why not let them just keep the money and let the machines do more work instead?
The general point we’re making right now is that, when doing political economy, we want to keep in mind one
of Smith’s remarks: “Laws frequently continue in force long after the circumstances which first gave occasion
to them, and which could alone render them reasonable, are no more” (WN III.2.4).
This claim is still true today, though it probably applies to a different set of laws from those to which Smith
wanted to apply it in his day.
Group Discussion Questions:
1. The example of the income tax as an element of economic policy is treated as if it must exist, without much
reflection, when there might be a case for regarding it as outdated.
2. Can you think of another example of a policy or practice that we just accept, without much reflection?
