Economics as Anarchy

by George Hatjoullis

The word Anarchy derives from the Greek ἄναρχος meaning without rulers or leadership. It has come to mean different things to different people. In broad terms it rejects central government and advocates a society of voluntary and free association. It has come to be synonymous with chaos and disorder. The challenge for Anarchists is to construct a framework that brings order from free association. One early attempt to do this was by political economists such as Adam Smith. It is the basis of (micro) economic theory. Few seem to grasp this.

The mechanism for bringing order through free association is of course the market and the invisible hand. Markets are characterised as free associations. Price guides individuals to produce the things people want and into occupations that serve these wants. There is no central authority, as in Soviet Russia, instructing factories and farms what to produce. An invisible hand guides the economic process meeting wants and needs. Economics, as taught to undergraduates, is about determining the minimum conditions whereby the market system will produce a ‘socially optimal’ outcome without central intervention. Individuals freely pursuing their own self-interest results in a socially desirable outcome in this framework. It is trying to achieve pure anarchy.

Despite some mathematically elegant hypothetical constructs economics failed in its quest. First it encountered externalities. It may be in your self-interest to pollute a river but those downstream pay the price. Theoretically this can be dealt with as incomplete markets but in practice it requires a central authority to complete the markets. Anarchy is compromised.Second, we run into a fallacy of composition. Individual self interest need not equate to collective self interest (even if markets are complete) in a money system. We cannot all save, someone has to spend, otherwise demand will not match potential output. A government can spend what we do not wish to collectively spend but the more we save the more the state must get into debt to pick up the slack. Yet we demand the government not get into debt on the principle of individual household budgeting. Finally, and most seriously, the market system says nothing about income and wealth distribution. Well not quite nothing.

Implicit in the anarchic economic system is the notion that whatever income distribution emerges is ‘just’. This is because it is the result of individual effort and skill, and risk taking, and luck. The only problem acknowledged is that as wealth collects it can lead to monopoly power which undermines the elegant anarchic market system and monopoly needs to be countered (by a central authority). Intergenerational inequalities also emerge though these are not considered a problem within the anarchic system. They are considered socially unjust and central governments have tended to try to reduce such inequalities.

The attempt to construct and implement an anarchic economic framework with minimal central control has self evidently failed, yet it is still the basis of all undergraduate economics. Periodically politicians emerge (Thatcher) that try to take us as close to this idealised market system as they can. The market system still has a place in the allocation of resources to different activities if only because no one has yet identified a ‘better’ mechanism. It has serious limitations and cannot serve the idealised anarchy it was hoped to provide by the political economists. It needs central intervention, not merely to complete the market and eliminate monopoly power, but also to address demand adequacy and income distribution. These latter two are inextricably linked in my view.

Income distribution is not a problem simply for reasons of social justice. It is a practical problem (and many of my blog posts have tried to elaborate).  Rich people save a lot in financial terms. So who is spending? Extreme income inequalities, apart from being unjust, also unbalance demand relative to potential supply. This pushes growth lower and makes the whole economy poorer (at least, in material terms). Income distribution can no longer be treated as an add-on in economic theory or as an outcome. It has to take centre stage in the theoretical schema. This is what is meant by “New Economics’.