I came across this interesting article in my mailbox (ht: Vaidy). It talks about how voters in the age group of 18-24 favour hard Left candidates. That is not quite ‘Millennials’. But, the short-hand works for expository convenience.
It was the case with Bernie Sanders in the American Presidential elections, with Jean-Luc Mélenchon in the French Presidential polls last month and with James Corbyn, now in the UK elections due on June 8. They have made the race a lot tighter than it appeared in April.
There was one sentence that I could not quite understand:
As the world is going against a concrete wall of debt, the youngsters may think accelerating one more time could work.
Was the writer being ‘tongue-in-cheek’? Perhaps. That remains a big risk with hard Left policies.
The young just do not want the Left but the hard Left. That is a bit worrying because Theresa May’s Conservative Party is not Margaret Thatcher’s Conservative Party. Her speech at the Party Annual Conference in 2016 was a watershed moment. I wrote a column in MINT on it in October last year.
Coincidentally, only last morning, I had finished reading Kenneth Arrow’s ‘A cautious case for Socialism’, a speech delivered at Columbia University in 1978. Yes, Kenneth Arrow!
While he was not sure if democracy and socialism could co-exist, he said the following about democracy and capitalism:
In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham. In a sense, the maintained ideal of democracy makes matters worse, for it adds the tensions of hypocrisy to the inequality of power.”
Even more breathtakingly, he said that it was near impossible to have prices for all State-Contingent situations in future because the market for uncertainty was not developed. In other words, he was prepared to throw a big pail of water on his groundbreaking work with Debreu on the allocative efficiency of a competitive market equilibrium.
In practice, it simply did not exist. In that sense, perhaps, we had misinterpreted their work, all along!
I recall my professor in the Grad School at UMASS Amherst back in the 1990s telling us that Modigliani and Miller, they did not set out to prove that capital structure was irrelevant. By showing that it was irrelevant only under extreme assumptions that did not prevail in reality, they actually proved that capital structure mattered. It had stuck with me ever since.
In a way, Arrow and Debrew were doing the same thing. Only by knowing all future States, the state contingent claims and if a market existed that priced all State contingent claims, could the allocative efficiency achieved by a competitive market economy be superior – without scarcity or surplus – to that of a planned economy.
Since those conditions are never met, the case for the superior allocative efficiency of a competitive market economy was never established! Professor Arrow was actually admitting to that in that speech!
The central argument, which implies the efficiency of a competitive economic system, presupposes that all relevant goods are available at prices that are the same for all participants and that supplies and demands of all goods balance. Now virtually all economic decisions have implications for supplies and demands on future markets. The concept of capital, the very root of the term “capitalism,” refers to the setting-aside of resources for use in future production and sale. Hence, goods to be produced in the future are effectively economic commodities today. For efficient resource allocation, the prices of future goods should be known today. But they are not. Markets for current goods exist and enable a certain coherence between supply and demand there. But very few such markets exist for delivery of goods in the future. Hence, plans made by different agents may be based on inconsistent assumptions about the future. Investment plans may be excessive or inadequate to meet future demands or to employ the future labor force.
The nonexistence of future markets is no doubt linked to uncertainty about the future. But this points to an even more severe shortcoming of the actual capitalist system compared with an ideally efficient economic system. The uncertainties themselves are relevant commodities and should be priced in such an economy. Only a handful of insurance policies and, to a limited extent, the stock market serve to meet the need for an efficient allocation of risk-bearing.
In the ideal theory of the competitive economy, market-clearing prices serve as the communication links that bring into coherence the widely dispersed knowledge about the needs and production possibilities of the members of the economy. In the absence of suitable markets, other coordinating and communicating mechanisms are needed for efficiency. These come close to defining the socialist economy, although admittedly wide variations in the meaning of that expression are possible.
Of course, I would admit to a few caveats. He was speaking in 1978, at the height of the period of economic turbulence in the West – wars, oil shortage, stagflation, etc. The weaknesses of the Soviet economy had not been exposed yet (sub-caveat: to a large extent, the Soviet economy was undone by a combination of arms race with America in the Eighties combined with the collapse of the price of oil in the same decade).
Further, many state-contingent financial products were developed in the Eighties and Nineties. But, of course, they did zilch to the allocative efficiency of the economies nor did it prove that financial markets knew how to price uncertainty. To date, the answer is an emphatic NO. Financial markets know next to nothing about how to price risk, let alone uncertainty.
So, who is to say that the hard-Left policy agenda – Sanders, Corbyn, Mélenchon – would be worse, in economic terms? I feel certain about lesser and lesser things these days.
Where the Hard Left worries me is with their their conflation of secularism and appeasement of hardcore Islamists. They are very likely wrong on that one and that would be disastrous for the rest of the society and the country. What has been happening in Britain in the last few months is, perhaps, a culmination or lagged effects of misguided policies of the last several years or even decades. But, that is a separate topic.
[Postscript: I just read two tributes to Kenneth Arrow who passed away few months ago. I liked this one a lot better than this one. But, both do not mention the speech I mention here. Pity. He was teaching a class even at 94. Incredible.]