Ricardo Hausmann — The Economics of Inclusion aka Inclusive Capitalism

Economists have struggled with the tradeoff between growth and equity for centuries. What is the nature of the tradeoff? How can it be minimized? Can growth be sustained if it leads to greater inequality? Does redistribution hamper growth? 

I believe that both inequality and slow growth often result from a particular form of exclusion. Adam Smith famously argued that, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” So why would growth not include people out of self-interest, rather than requiring deliberate collective action?

The answer is very simple. Economists other than Marxists and some other heterodox economists are unwilling to consider that extreme economic inequality results from two sources.

First, the mechanics of capitalism itself, which is based on the "rationality" of maximizing self-interest and the assumption that do so enables market forces to allocate scarce resources as efficiently and effectively as possible so that in the long run the tendency is toward a general equilibrium in which all are justly rewarded based on marginal contribution. In this view, it simply is not possible for individuals to conceive of how to improve a society through their own individual behavior, in the first place, and secondly, it is not the purpose of free market capitalism to do so. That is assumed to happen through natural operation of market forces if market forces are left to themselves, that is, "free." This is the basis of economic liberalism.

Secondly, conventional economists ignore institutional factors that influence social, political and economic processes such as class structure and interest, institutional power and the privilege it conveys on some individuals, investment in the status quo, and the like, which are all familiar to sociologists.

Economists really need to get out more and reframe their assumptions based on reality rather than ideology.

Ricardo Hausmann is involved in complexity economics. Surely he understands this?

Project Syndicate
The Economics of Inclusion
Ricardo Hausmann | former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Professor of the Practice of Economic Development at Harvard University, where he is also Director of the Center for International Development