Discussion: Angus Deaton’s “Rethinking My Economics”

Since the Cold War era, a widely popularised narrative is that a free, less regulated economy with high competition is ideal, such as in the US, while socialist Europeans are stagnant or “living in the past”. Although America once enjoyed a rising quality of life fueled by the vast wealth accumulated after two world wars, much of that wealth was distributed upward into the hands of the top 1%, as reflected in its persistently high Gini coefficient of around 0.48.

We all know that income inequality is due to a vicious cycle that surrounds wage differential in the labour market, or patterns of unemployment that could be explained by the difference in people's education level, financial capital or even cultural capital. The reason why such a vicious cycle of low income cannot be broken stems from a lack of public policies that are oriented toward human beings such as a strong social safety net, a lack of publicly provided education or universal healthcare. Similarly, we know that policy gaps exist partly due to the economic thinking of policymakers - and the rest is because of the unbalance of power. Especially in capitalist countries whose policies are shaped by the theoretical foundations of Adam Smith, Milton Friedman, or Keynes, which often underestimate the ethics and human welfare of economics. Thus, a nation that “fails” its bottom 99% is one that has failed to strongly recognise or acknowledge the moral shortcomings embedded within those economic frameworks.

1. Deregulation & Competition

A foundational premise of economics is that competition efficiently allocates resources and benefits society as a whole. That is, competition fosters innovation in the production of goods and services, raises GDP, and improves citizens’ quality of life. Based on this premise, governments worldwide in the second half of the 20th century adopted policy reforms such as tariff cuts and deregulation to stimulate competition. For example, South Korea was one of the poorest countries in the world after World War II. Under Park Chung-hee’s leadership, its economy underwent major reforms, including deregulation and corporate tax cuts, effectively practising a nearly free-market economic model. From a rudimentary economy where labour and resources were inefficiently used, South Korea turned into one of the world’s leading exporters. Extreme poverty rates fell from 66.9 % in 1961 to just 11.2 % in 1979 thanks to rapid economic growth, and rising per-capita income also meant greater access to basic rights such as healthcare and education.

However, this free-market doctrine has consistently underestimated the role of power in shaping prices and “fair” competition. (Deaton, 2024) In the absence of regulation, large firms are free to engage in mergers and acquisitions (M&A) which often reduce competition rather than increase it. Empirical evidence from Grullon et al. (2017) study found that following the decline in antitrust enforcement under Presidents George W. Bush and Barack Obama, the Herfindahl-Hirschman Index (HHI), which measures market concentration, rose systematically across 75 % of U.S. industries. In other words, less government intervention has enabled market leaders to consolidate power and expand their market shares within their respective industries. 

When essential goods and services are provided by a few dominant firms, consumers are forced to pay higher prices. Since the demand for food, healthcare, and other basic utilities is relatively price inelastic, suppliers can take advantage of their market power and increase prices, and this action has a disproportionate effect on low-income households. To illustrate, a $10 increase in the price of a staple food represents a much larger percentage of a poor household’s disposable income compared to that of a more wealthy household. In short, the system that claims to ensure “fair competition” actually widens inequality. 

A frequently cited example is the U.S. health insurance industry, where four major insurers including UnitedHealth, Anthem, Aetna, and Cigna control most of the market. According to the American Medical Association (2021), most states have just two or three insurers controlling 80–90 % of market share thus creating effective monopoly or oligopoly power. This market structure leads to the highest healthcare costs in the world, without corresponding gains in access or quality. Although the U.S. enjoys high per-capita GNI, its Human Development Index (HDI) lags behind other developed nations such as Canada, South Korea, and the Nordic countries due to lower life expectancy and higher inequality (UNDP, 2020). In other words, the impact of power on basic human rights rights such as access to healthcare are underestimated by the free market doctrine. 

2. The Friedman doctrine 

In economics, “Friedmanism” refers to the belief that a company’s sole responsibility is to maximise profits for its shareholders, while questions of equity and social justice should be left to politicians and regulators. In capitalist systems, corporate ownership structures are designed such that firms must minimise costs, maximise profit and thus be able to survive in competitive markets. On the positive side, this pressure incentivises innovation and drives companies to develop lower-cost production techniques, therefore, even lower prices for consumers. 

However, “cost-cutting” can also be in various forms, from denying insurance claims to mass workers lay-off, to paying lower wages or limiting employee benefits. Friedmanism often legitimises these actions as long as they serve profit maximisation. For example, after the assassination of UnitedHealth’s CEO sparked public outrage, the company reduced its profit-maximising strategies by approving more care requests (i.e. approving more healthcare claims). However, UnitedHealth was sued by its own shareholders afterwards as the additional spending cut into profits and sent its stock price tumbling 22 % in a single day. This particular case demonstrates how the dominant corporate ownership structure in highly capitalist economies makes it impossible for companies to pursue humanitarian responsibilities.

Workers’ rights are among the most severely impacted by the imperative to maximise shareholder returns. During recessions, labour input is often the first to be cut as wages are the most expensive variable cost for firms. Once laid off, workers face not only income loss but also resume gaps that make securing stable employment harder in the future. Particularly, severance packages are often minimal or nonexistent, particularly for low-skilled workers. Several meta-analyses have shown that five years after a layoff, displaced workers earn about 16 % less than comparable workers who were not laid off, driven by both a 40% decline in hourly wages and a 60% reduction in hours worked. Beyond the immediate effects of lost income, long-term unemployment is tightly correlated with workplace discrimination and psychological decline, particularly among marginalised groups. Hamilton et al. (1993) found that initial job loss disproportionately triggered depression and future unemployment among Black workers, South Asian men, and workers with lower educational attainment, and it is reported that discrimination played a mediating role in these outcomes.

3. Current improvements in theories and practice

The U.K.’s Competition and Markets Authority (CMA) has aggregated 17 of its most recent studies evaluating the effectiveness of antitrust enforcement in blocking mergers. Between 2012 and 2015, CMA interventions delivered approximately £745 million in direct annual benefits to consumers, with a benefit-to-cost ratio of around 12:1 - and these benefits largely came from preventing collusion (cartels) and price-fixing. It can be seen that governments’ justified caution against market power can produce significant welfare gains for citizens. Another example of governments acknowledging capitalism’s flaws comes from the Nordic countries. These nations maintain strong worker protections that shield employees from exploitative cost-cutting measures. For example, trade unions long derided as obstacles to efficiency by corporates and their lobbyists (Deaton, 2024), but recently more academics have changed their view to agreeing that trade unions in the labour market (e.g. collective bargaining or restricting supply, boosting demand) can help secure higher wages, safer working conditions, and most importantly, protection from arbitrary layoffs. According to Statista (2024), countries with the highest unionisation rates such as Iceland, Finland, Denmark, and Sweden are also known for their high human-rights and happiness indices.

4. Conclusion

Although much of economic thought developed in the West has played a significant role in improving living standards and reducing global poverty, some of its core tenets, especially its belief in the “free market” are being increasingly challenged by empirical evidence. In our post-growth societies, the continued practice of this current ownership structure and economic model gradually erodes human rights rather than strengthening them. We need not reject this entire historical chapter, as capitalism was a necessary stage in humanity’s economic evolution. Yet it has passed its “golden age” and now produces increasingly severe human-rights consequences, thus highlighting the need for a more sustainable economic order.