The flipside of American progress: economic failure or failed economics?

Unbridled capitalism—an idea often mistakenly attributed to Adam Smith—has flourished in the United States. But it ignores deep inequalities, not just economic but also in health and wellbeing.

Economic systems should help people to prosper and flourish, but today’s capitalism is failing in this basic task. Progress has come to a halt for many—not just material progress, but also in health and wellbeing.

Growth in per capita gross domestic product (GDP) continues, albeit sluggishly. For those who believe in economic growth as the overriding goal, the United States is seen as a positive exception, an example to other rich countries. Many take this as a cause for celebration, not only for Americans, but also for the relatively unbridled capitalism that the United States has come to represent.

Some might even hark back to Adam Smith and claim that the United States has done so well because it has closely followed the market-centred policies that are seen as Smith’s greatest legacy. Compared with the UK and the European Union (EU), the United States has been more reluctant to use government to regulate markets. It also uses markets where others do not, most notably in healthcare. And it has not stifled innovation or growth: Amazon, Facebook, Google, Microsoft and Netflix, are all American companies. European successes are in less innovative luxury companies such as LVMH, which owns Christian Dior, Moët & Chandon, and Bulgari, among many other high-end brands.

But growth is worthless to those who do not share it. GDP is blind to who benefits and who loses, and over the last half century, the majority of Americans have not seen the growth in incomes that might seem warranted by the growth in the economy.

Being rich is no good if you are dead, and individual-based measures of money and health miss the social aspects of wellbeing, relationships with family and loved ones, the sense of accomplishment that comes from work, and positive daily experiences of life. For the two-thirds of Americans without a four-year college degree, these aspects of life are worse now than 50 years ago, notwithstanding some post-Covid-19 improvements, which are likely to be temporary.

Smith understood and celebrated the power of markets, but he did much more. Fewer of his other insights and warnings feature in today’s mainstream economics. The transformation of Smith’s economics into Chicago economics has not only emaciated the subject, but it has done great harm to public policy and is at least partly responsible for what I see as a failure of American society.

Yet it did not have to be this way. Economists such as Tony Atkinson, Jim Mirrlees and Amartya Sen have pursued a broader programme, worrying about poverty and inequality, and about health and its place in wellbeing. Sen traces a key misstep, not to Milton Friedman, but to Lionel Robbins, whose definition of economics as the study of allocating scarce resources among competing ends narrowed the subject, compared with what Hilary Putnam calls the ‘reasoned and humane evaluation of the social wellbeing that Smith saw as essential to the task of the economist’.

This applies not just to Smith, but also to his successors, who were philosophers as well as economists. Sen contrasts Robbins’ definition with that of Arthur Cecil Pigou who wrote that: ‘It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science’.

Economics should be about understanding the reasons for and doing away with the sordidness and joylessness. But that is not how it worked out in America.