The fact that Spanish and Italian bond yields are near 14-year highs matters for a simple reason - market opinion is self-fulfilling. If investors think Spain and Italy will be unable to service their debts, borrowing costs will rise so much that they will indeed be unable to do so.
This is an example of what John Searle called self-referentiality. There are some beliefs which can be true by virtue of enough people believing in them, for example:
- These scraps of paper in my pocket have value because others believe they have value, and so treat them as money.
- If enough people believe a monetary expansion will lead to higher prices, rather than to increased output, then it will do so, because inflation expectations will rise, and so firms will raise prices in anticipation of others doing so.
- Insofar as the press have power, it is because (some) people believe what they read. One effect of “hackgate” could be reduce the credibility of the press and hence its influence.
Feel free to add other, better, examples.
But here’s my question. Could it be that some aspects of “neo-liberal” economics possess this self-referentiality?
For example, if high earners believe high taxes are unfair, then they are more likely to stop work; no-one likes being ripped off. Or if firms believe that corporate tax cuts stimulate investment, they are more likely to invest if only because they expect other firms to invest and thus increase demand for their products.
The econometrician, looking at the effect of high income taxes or corporate tax cuts, might then infer that they have the effects that neo-liberals predict.
But this is only true because people have neo-liberal beliefs. If they believed that high taxes were a just contribution to society, they’d be less likely to reduce their labour supply. If they thought the effect of taxes on investment was small, firms wouldn’t invest in anticipation of others’ investment, so there’d be no investment boom.
Let’s go further. Imagine we lived in a society described by Joseph Carens in his out-of-print book Equality, Moral Incentives and the Market. In such a society people are egalitarians; they believe their talents do not entitle them to higher than average wages. Carens shows that this can reconcile equality and efficiency. Pre-tax wages are unequal, as now, and (some) folk choose the job that will maximize pre-tax wages on the grounds that doing so maximizes their contribution to society. But the tax system equalizes post-tax wages and no-one much objects because they are egalitarians.
In this society, the neo-liberals’ prediction that redistributive taxes reduce effort is plain wrong - it doesn’t.
So, what is the difference between the neo-liberal society and Carens’ society?
Bone-headed right-wingers will claim that the neo-liberal society is the real one we live in. But this begs the question. It’s possible that - insofar as neo-liberalism is true (and for the purposes of this piece I’m making the massive assumption that it is), it is true only because believing makes it so. If we had Carens-style beliefs, an egalitarian society would be self-fulfilling too.
Which leads me to a thought. Even if the economic “facts” seem to support neo-liberal ideas, this does not suffice to rule out radical change, because those facts might be true only by virtue of a particular set of beliefs. And if these beliefs are malleable in a Carens-ward direction, then socialism might have validity, even if the facts appear to suggest otherwise. It could be that every word Tim Worstall has written about Richard Murphy is true - and yet irrelevant.