Introductory Overview: Institutionalizing Inclusion, Sustainability and Resilience in Market Economies

This chapter argues that the root of the increasingly serious crisis facing capitalism and liberalism more generally can be located in a fundamental distortion in the way its canon of economic principles and tools have evolved since the eighteenth and nineteenth centuries, and especially in the way they have been applied over the past several decades. In effect, generations of economists and policymakers have been trained to behave as if Adam Smith's “invisible hand” of market-based resource allocation can be relied upon to optimize not only the wealth of nations (its core function as stated by Smith) but also the well-being of their populations at large. A rising tide of GDP, as it were, ultimately lifts all boats. But Smith and other important pioneers of the field assumed no such thing. They believed that market-oriented measures to increase the production and wealth of nations were a necessary but by no means sufficient condition for raising the broad standard of living of their people. A range of institutions—legal and other norms, policy incentives and administrative capacities mainly but not only in the public sector—were required to ensure appropriate levels of social inclusion, environmental sustainability and human and systemic resilience. Modern economics’ policy immobility and political tin ear in the face of these challenges is rooted in a certain indoctrinated incomprehension. Its implicit assumption that GDP growth eventually diffuses or “trickles down” into broad socioeconomic progress and security has never been properly recognized and interrogated. The essential principle the book posits is that the broad living standards of nations—the main facets of the median household’s material well-being—deserve as much direct policy attention and institutional cultivation by economists and policymakers as the wealth of nations, that is to say, national income or GDP.