I have just been listening to Mark Pennington talking about his book in a podcast. I am no master of the theories of political economy so this is an amateur quick summary and aide memoire.
Pennington is basically trying to defend classical liberalism – including a belief in the market economy- against contemporary attacks on it.
He asserts that any idea for the best political economy a country might adopt should be tested to see how its stand up to two aspects of human beings:
1. Limited rationality – he seems to include limited knowledge in this phrase
2. Limited benevolence – which seems to include the way incentives influence us.
He then takes three contemporary attacks on classical liberalism to see how they stand up to these tests:
1. Market failure economics. This is the idea that the market often gets things wrong, so governments need to take a major role in putting everything in order. Pennington looks particularly at the work of Joseph Stiglitz who wrote Whither Socialism? Stiglitz’s critique of the market economy apparently accuses it of having transaction costs and the ‘principal-agent problem’ (“when one person or entity (the “agent”) is able to make decisions that impact…another person or entity” Wikipedia here.) Pennington replies that governments themselves have the same problems. He says governments have “the mother of all principal-agent problems”. (I suppose that governments are often making decisions which will not directly affect the ministers and bureaucrats in them). He says that typically those who espouse market failure economics judge the market economy against perfection. They do not judge it against the performance of governments.
The worth of governments should be tested on the basis of human limited rationality. Given that we all have limited rationality and knowledge, the market economy is a better process to establish the best way of doing thing because it allows different things to be tried. But when government imposes its idea of how things should be done, it squashes this experimentation.
2. Communitarianism. This seems to be the idea that the best results come from majority rule. It is argued that individuals often do not know enough to make good decisions but when they are grouped together in a democracy, the wiser view prevails. Pennington says this is a “hopelessly romanticised” view of how democracy actually works. This, too, suffers strongly from the “principal-agent problem” (presumably the majority is in a position to treat the minority badly). Again, majority rule suppresses the experiments of many people which can result in better answers. It also ignores the way in which the incentives in the market economy can break down prejudices. For example, an employer might find that he can profit by breaking away from a prejudice of other employers not to employ blacks or women. (Implicitly, Communitarianism destroys such incentives by imposing a rule).
3. Egalitarianism – or the drive for equality. Here he focuses on only one of the authors he mentions in his book, John Rawls. The most famous concept of John Rawls is the “veil of ignorance”. Rawls imagines that we have to choose a system for the world without knowing whether we ourselves would have a high or low position in it. He suggests, I think, that we would choose a system under which we would be in a pretty good position even if we were at the bottom. Mark Pennington criticises Rawls on the basis that he is not accepting limited rationality. If we were indeed behind this veil, we would not know which system would ultimately work out best for us and for humanity. Recognising our limited knowledge, we would want a system in which different ideas could be tried out.
I think Pennington also criticises the implicit suggestion of Rawls that we would want a welfare state with high levels of distribution. Rawls’ suggestion again comes up against the limited rationality problem: we do not know that a society would benefit from this without actual experience on the other side of the veil of ignorance. It might be that government imposed welfare has drawbacks and, presumably, these might apply even to those at the bottom of society.
I apologise for the undoubted failings of this summary. I seem to have failed to pick up properly on the role of ’limited benevolence’ very well. The podcast is on the Cato Institute website. It is dense stuff for those of us who are not academics specialising in this area.But it gives a quick introduction to the field. It is probably worth listening to several times to really understand it. Mark Pennington’s book is Robust Political Economy. http://www.amazon.co.uk/Robust-Political-Economy-Classical-Liberalism/dp/1849807655/ref=sr_1_1?s=books&ie=UTF8&qid=1396605863&sr=1-1&keywords=robust+political+economy
I should add that in the second part of his book, he goes on to apply the theory to the areas of poverty, international development and the environment. However he does not talk about this part in his talk.