Capitalism's human face

RECENT world events may give rise to a new form of economics based on moral values.

MORAL capitalism may sound like an oxymoron, but as democratic political revolutions sweep across the Middle East a revival of human-centred economics is beginning to break the surface of rhetoric about Western decline. And the emerging solution to Western economic decline is child to the cause: the attempt to create a financial system based on common moral values.

Harvard-educated economist Diane Coyle is calling for systemic financial reform in the West based on the early moral writings of Adam Smith. Her new book, The Economics of Enough, offers a blueprint for a values-based economy that produces supply for today but is regulated to sustain future generations.

Coyle proposes that three enablers are required to bring about lasting economic reform: a renewed understanding of the relationship between economic systems and human values, improved statistical measurements and more efficient institutions. She enjoins the human-oriented work of economist Amartya Sen with the values of happiness, nature, posterity, fairness and trust, concluding markets operate within a framework of values and that the value proposition should drive capitalist reform.

The idea that capitalism should be based on values is not new but has gained a resurgence following the global financial crisis. In particular, economists such as Nobel laureate Paul Krugman are arguing for a renewal of Keynesian redistributive approaches in apparent opposition to the economic liberalism and free-market designs refined and popularised by Chicago School economists during the 20th century.

The leader of the Chicago School (so named because its adherents taught at the University of Chicago) was Milton Friedman, who was also an adviser to Ronald Reagan.

Its economists were philosophically devoted to the libertarian principle of unfettered individual liberty. I write in past tense because in the aftermath of the GFC some of its greatest proponents, such as judge Richard Posner, denounced laissez-faire capitalism and defected to the Left in support of Keynesian economics.

But the notion the free market espoused by the Chicago School was value-free or somehow anti-human is historically inaccurate. Friedman's famous 1953 essay The Methodology of Positive Economics, on which much of the school's methodology rested, did not propose that the economy was value free but that the predictive power of economics lay in the creation of a formal distinction between citizens' values-based arguments and methods used to test the validity of economic theories.

He proposed the introduction of a scientific approach to the study of economic phenomena and provided one of the most comprehensive early arguments for evidence-based policy: an increasingly dominant approach to public administration.

Friedman's scientific approach to economics may have influenced the redirection of the discipline towards applied mathematics, but the gulf between formal economic theory and human values was produced by more than a methodological approach championed by the Chicago School.

It was deepened by a destructive academic elitism that has cut both ways since the 1980s.

The culture wars exposed a narrow-minded side of the humanities committed to trumpeting postmodern ideology over fact and hostile to the positivist methodologies that can powerfully counterweigh dogma.

But the stand-off between economists and humanists cannot be maintained given the scale of material problems arising in all corners of the globe that demand an integrated higher education contribution to global solutions.

The Arab Spring may be the genesis of Middle Eastern democratisation. The desire for political freedom expressed in recent popular uprisings in Tunisia, Egypt, Libya and Syria is combined with the demand for food and shelter, material needs that require gainful employment and more equal distribution of resources.

The political viability of democratic revolution in the Middle East thus requires a version of Coyle's economy for tomorrow.

University rankings suggest the West should be in a position to contribute theoretically to the intelligent design of an economic system that will sustain emerging international democracies.

Among the universities listed in the top 100 Shanghai Jiao Tong index for economics and business, 98 are Western. One is in Beijing and the other in Hong Kong. Selection bias or intellectual merit? Either way, such geographical concentration of research excellence may diminish the capacity of the West to contribute to the development of nascent democracies and the economies that will sustain them.

While the Western system of capitalism is deeply diminished in the public imagination, it offers wise tutelage in the lesson of democratic economy forged across centuries on the horns of a trilemma: liberty, equality and, at least once a generation, how to rise up after falling into the ashes.

And 21st-century economics may yet be the place where C.P. Snow's clash of two cultures between the humanities and the sciences finds a common language, where Enlightenment finally finds a home in humanity.

Jennifer Oriel is a Melbourne-based writer and higher education analyst.