Conclusion: Building on Keynes’s Middle Way to Renew the Liberal Tradition and Multilateral System in the 21st Century

Abstract

This chapter argues that rebalancing liberal economics through the new macroeconomic approach to welfare and institutional economics described in the book would reinforce Keynes’s “Middle Way” reforms of the 1930s, which were aimed at better reconciling capitalism with social justice by maintaining full employment in decent work through robust domestic demand and investor confidence. It would add a systematic institutional dimension to Keynes’s fiscal and monetary strategies, expanding the toolbox available to policymakers to run their economies relatively hot on a sustainable basis through ongoing improvement in the fundamental conditions underpinning of supply and demand rather than the mainly transitory macroeconomic or deregulatory stimulus measures traditionally favoured by the social democratic centre-left and conservative centre-right. Moreover, the Paris climate agreement requires a new Middle Way in economics to be forged over the next generation, this time between environmentally destructive growth and socially destructive stagnation or degrowth. By internalizing the relevant institutional drivers of a just climate transition in macroeconomic theory and policy, the concepts and tools of human-centred economics create the possibility of a such a “neoclassical-Keynesian-ecological synthesis” focused as much on the social and environmental quality of growth as its quantity. Policymakers must abandon the reflex of standard liberal economics to assume, whether explicitly or implicitly, that broad and sustainable progress in household living standards trickles down inevitably from higher national income. A certain intentionality is required to optimize both—a sustained process of institutional deepening and investment to foster movement closer to the frontier of good policy and institutional practice in the aggregate distribution function’s five domains. The chapter concludes by explaining how operationalizing this forgotten aspect of liberal political economy’s founding principles holds the key not only to satisfying societal demands for greater inclusion, sustainability and resilience but also to reversing liberalism’s declining political prospects within countries and the international system.

For nearly 250 years, economists have investigated with increasing precision the functioning of markets as a driver of resource allocation efficiency, capital accumulation and national wealth creation. Enormous advances in understanding have been achieved in this regard. Political economy, by contrast, is the craft of contextualizing markets, anchoring them in the service of society’s broader objectives through what the field’s founders called “human institution”. It has receded in importance relative to economic science as an intellectual discipline and has been particularly lacking in the recent exercise of liberal economics, which for all practical purposes has conflated economic growth with socioeconomic progress and thus grossly underinvested in the institutions that enable social inclusion, environmental sustainability and human resilience and dignity.

This neoliberal experiment has frustrated the aspiration for faster and wider improvement in living standards in many countries despite their considerable economic growth; it has left a legacy of undue inequality and insecurity, leaving far too many people to compensate by working harder, incurring more debt or doing without, in spite of the overall scale of resources available within their country’s economy. John Maynard Keynes had warned Friedrich Hayek about this prospect in a letter two years before his death: “Your greatest danger ahead is the probable practical failure of the application of your philosophy in the U.S. in a fairly extreme form.”¹

We are living now in Keynes’s proverbial “long run”. He made the famous quip that “in the long run we are all dead” in 1923 as a provocative rejoinder to the confident assumption of neoclassical liberalism’s more doctrinaire proponents that market economies have an innate capacity to self-correct over time in response to socially unjust disequilibria, such as high unemployment.² He deployed his dry wit in this way to puncture and indeed lampoon the implicit trickle-down, self-regulatory mental model at the heart of neoclassical liberal economic doctrine.

To be sure, Keynes considered himself a liberal. He was an unabashed believer in the superiority of distributed economic decision-making—in this central insight of Adam Smith.³ But he had equal conviction as a critic of the self-regulatory ethos of ordoliberalism or what is now called “neoliberalism”. He came to see the bulk of his life’s work as fleshing out what his biographer Lord Robert Skidelsky and others have called a “Middle Way” between laissez-faire market economics and centrally planned socialism.⁴ This evolutionary journey culminated in The General Theory of Employment, Interest and Money, but he never felt that he had fully completed this intellectual project.

Keynes understood that the macroeconomic strategies he advocated were blunt instruments, “coarse tuning” in modern parlance, for the regulation of the great engine of market-driven output so that it runs more smoothly in social and political terms—that is to say, in terms of social justice and cohesion and thus political stability and peace. Like Smith, Mill and Marshall, he was acutely conscious of the social context of his work, of the larger purpose of economics. He had come to prominence as a sharp critic of the Treaty of Versailles following the First World War, whose draconian, socially unjust economic terms he just as presciently argued would sow the seeds of future conflict.⁵

Towards a General Theory of Institutions, Distribution and Welfare

This book can be read as an attempt to build upon the tradition of Keynes’s Middle Way, which has fallen into a state of partial neglect, misinterpretation and disrepute during the past forty years of neoliberalism’s ascendancy. In effect, it tries to help raise that fallen standard and hoist it to new heights in the twenty-first century by supplementing the mainly macroeconomic strategy Keynes pioneered with the systematic institutional counterpart described in Chap. 4. It further stylizes and instrumentalizes the Middle Way by conceptualizing and providing a basis for measuring countries’ social welfare gaps, their areas of underperformance on median household living standards, including but not limited to employment opportunity, relative to countries having similar GDP per capita. I argue that policymakers need to be as focused on this welfare gap as on the output gap of their economy, which is to say at least as much on strengthening the economy’s institutionally enabled aggregate distribution function, or social contract, as on increasing its market-enabled production of goods and services. This is the golden rule of human-centred economics, which for all intents and purposes is a framework for rebalancing the discipline’s focus from the top to the bottom line of national economic performance, from the total production of goods and services or wealth of nations (GDP) to the median living standards of their people.

Keynes’s use of fiscal and monetary policy to support the economy’s propensity to consume and incentive to invest in order to boost employment and discourage less-productive, rent-seeking use of capital is essentially a production function strategy. It seeks to narrow the output gap particularly through fiscal policy’s contribution to consumption and monetary policy’s contribution to low interest rates and investor hurdle rates, thereby raising real economy investment and pushing the economy closer to the frontier of its potential output. In other words, it operates top-down through the main macro-channels that influence GDP or the quantity of growth, albeit often with important secondary effects on the quality of growth (e.g., through the higher real wages that tend to accompany tighter job markets).

The human-centred, living-standards-oriented approach described in these pages is a complementary “distribution function” strategy. It seeks to narrow an economy’s welfare gap by systematically applying policy and institutional strategies that together increase the diffusion of gains to living standards across the economy at the household level. It supports the material well-being, prospects and security of people more directly, through a more comprehensive and concerted application of labour, social protection, financial regulation, corporate governance, anti-trust and anti-corruption, infrastructure and other measures. In other words, it operates bottom-up to improve the social quality of growth, albeit often with important secondary effects on the quantity of growth (e.g., through higher labour force participation and productivity and increased aggregate demand as a result of greater human capability and agency and stronger household disposable income, purchasing power and consumption).

These principles and proposals are fundamentally an agenda to strengthen the relationship between economic growth and broad progress in living standards—to rebalance the standard liberal economic growth and development model by institutionalizing inclusion, sustainability and resilience in the way that market economies develop. They are the building blocks of what might be considered a general theory of institutions, distribution and welfare. Concerted, systematic use of them would effectively open a second lane within the Middle Way, a strategy of sustained institutional deepening to complement that of Keynes’s periodic fiscal and monetary coarse tuning. In other words, they offer the possibility of running an economy relatively “hot” on a stable and sustainable basis—that is to say, closer to the level of its potential productive output and social welfare based on the ongoing strengthening of its fundamentals (structural and institutional foundations) rather than the transitory and often difficult-to-time application of macroeconomic stimulus.

From an academic perspective, human-centred economics can be interpreted as adding a practical macroeconomic dimension to the subdiscipline of welfare economics, which has had a rather abstract, largely microeconomic focus for nearly a century. The foundation for it is a simple model of the main channels by which rising living standards propagate in an economy at the household level: the five areas of employment and entrepreneurial opportunity; disposable income; access to and affordability of material necessities; economic security; and environmental security. This “aggregate distribution function” is then translated into a policy framework, a map of the principal domains of policy and institutional strength that influence the transmission of higher household living standards through each of these five channels. This is an actionable framework for substantially improving the lived experience and material security and prospects of people throughout society, provided that governments invest in and across it on an ongoing basis as a core element of their growth and development strategy.

Chapter 5 provided extensive data demonstrating that all countries have considerable policy space to narrow their economy’s welfare gap, that is, their performance on one or more such aspects of median living standards relative to the frontier of leading policy practice of peer countries. By benchmarking their policy and institutional strengths and weaknesses, and investing in and learning from their peers with respect to the latter, they can significantly improve the lived experience of their people. I call this moving closer to the frontier of their economy’s living standards potential, analogous to the concept of a country’s growth potential. I define aggregate social welfare for macroeconomic purposes as a function of the combination of and interaction between the aggregate production and distribution functions and suggest that much more research is needed to better understand and improve guidance to policymakers on their relative importance and synergies as well as those of their constituent factors.

This internalization of the social contract in macroeconomic theory and policy would re-anchor modern economic science in its classical political economy foundation in a key sense. Smith, J.S. Mill, Alfred Marshall and other pioneers of the field consciously contextualized markets in the more fundamental quest for broad improvement in social welfare, for the amelioration of the human condition. Each in his own words emphasized the need for markets to be accompanied by a strong social contract of institutional arrangements for this purpose. But the link between the social contract and economics has remained ill-defined and ad hoc over the years. The approach outlined in this book is an attempt to treat it in a more structured and thus actionable manner, thereby giving liberal economics a distinctly more human-centred—that is, more inclusive, sustainable and resilient—character. This is what is required to move beyond the Washington Consensus paradigm of growth and development to what I call a “Roosevelt Consensus” in recognition of the central emphasis the two presidents Roosevelt placed on the institutional construction of the social contract through the Square Deal and New Deal, respectively, during the United States’ rapid industrialization in the early to mid 1900s.

It is well past time to move beyond the big-versus-small-government and socialism-versus-capitalism polemics of the twentieth century. The entire world is now living in Keynes’s Middle Way to one degree or another; essentially every country operates a mixed, market-based economy as illustrated in the Social Market–Market Socialism Corporate Governance Continuum presented in Chap. 5. In effect, that policy continuum, together with its sister Financialization–Real Economy Investment Financial Regulation Continuum and the Fiscal Expenditure and Revenue and the Decent Work Indicator Reference Ranges also presented in that chapter, provide more modern and precise flight instrumentation for countries wishing to chart their course and monitor progress along the Middle Way.

These practical tools and the theoretical construct underpinning them address what is arguably the central challenge facing economics in this century: how to strengthen growth while rendering it more inclusive, sustainable and resilient; indeed how to achieve the former through the latter. Human-centred economics has the potential to better capture the positive synergies between the pace and pattern of economic development and thereby to reverse the current negative synergy between liberal economics and politics.

The long-standing disconnect between production and distribution, markets and institutions, and growth and broad living standards in the teaching and practice of liberal economics has had a history of generating serious and at times violent social and political conflict. The ongoing failure to properly confront it is a growing strategic liability for the liberal tradition in a century characterized by rapid change and not infrequent upheaval in economic life. Business as usual in economic policy under these circumstances risks a further decoupling of growth from equity, sustainability and resilience. It risks a further corrosion of the sense of hope and shared destiny that broadly rising living standards inspire in societies and a corresponding erosion of social cohesion and popular trust in political institutions and leaders. Such a dynamic is toxic to the liberal values of rule of law, human rights, social tolerance and dialogue. The response to it therefore merits urgent and decisive action rather than the complacent and incremental current pace of reform.

This goes for international economic governance and cooperation as well. Like in Keynes’s time, a rebalanced Middle Way or Roosevelt Consensus approach to economic policy at the national level requires a reinforcing international policy agenda. As a chief architect of the post-war international economic system, Keynes was very focused on monetary issues, particularly the maintenance of sufficient liquidity and avoidance of deflationary pressures in the context of a system of fixed exchange rates linked to gold. In Chap. 6, I have elaborated an ambitious but politically and financially feasible reform agenda addressing serious contemporary international liquidity constraints. These include the difficult financial position of poor countries with limited fiscal space and large unmet social needs; the enormous gap in financing needed to accelerate the climate transition in line with the scientific community’s recommended timeline for emissions reductions; and a systemic misallocation of private capital that handicaps progress on both of these challenges as well as others. Grossly insufficient public investment and misaligned private investment are suppressing economic growth and employment opportunity in much of the world economy, aggravating already acute social justice deficits such as vast youth employment and informal sector underemployment and growing working poverty in many developing countries as well as some developed ones. These problems are combining with the spectre of increased precarity from the spread of automation beyond manufacturing into many services and the ongoing urbanization and saturation of cities and slums in poor countries to pose a growing danger to peace and stability within and among countries.

The international community was supposed to have learned the dangers of complacency in the face of such dangers in the last century. It enshrined the principle that social justice is the ultimate foundation of peace in the ILO Constitution in 1919 following the “war to end all wars”, Spanish influenza pandemic and Bolshevik Revolution, and it constructed a vast architecture of related norms and institutions following the Second World War, notably through the United Nations system and Bretton Woods institutions that Keynes helped create. But actual and perceived deficits in social justice are once again visibly tearing the social fabric of nations at all levels of economic development. Social frustration and political cynicism are spilling over into international relations, undermining the cohesion and stability of a multilateral system that was inspired by liberal values and the better angels of human nature.

To be certain, geopolitical tensions are also roiling the waters of international relations. But deficits in social and environmental justice are likely to deepen in the coming years as environmental, technological, demographic and other changes accelerate. Absent a major change in course by the international community, they could well accumulate to the point of endangering the economic and political stability of many countries at once, posing an existential threat to the multilateral system—to the liberal norms that have more or less succeeded in regulating the behaviour of states for the past 75 years. The UN Secretary-General has warned as much in his recent report on the future of multilateral cooperation, Our Common Agenda.⁶ If projections about the human and social implications of these transformations are anywhere near accurate, then shifting the prevailing economic growth and development model from a pushing-on-a-string, trickle-down mode to a people-centred, environmentally sustainable dynamic becomes a social, economic and political imperative—a sine qua non for the survival of the liberal tradition and multilateral system.

The Imperative Trinity of Human-Centred Economics

In the 1970s and 1980s, there was a big debate about the extent to which an inherent trade-off existed between efficiency and equity, that is to say, between growth and social inclusion.⁷ Echoes of that debate can be heard in the more recent polemic about the extent to which pro-growth policies are inherently unpopular, i.e., that good economics sometimes requires a dose of strong, socially distasteful medicine and for this reason democracies are at a disadvantage to governments less subject to regular popular electoral scrutiny. There is a germ of truth in both of these arguments; economic policymakers do sometimes face difficult trade-offs and dilemmas, some tractable and others more deep-seated or even inherent. A famous example of the latter is the Mundell–Fleming “impossible trinity” or “trilemma” of international monetary policy, namely that a country cannot pursue an independent monetary policy, maintain a fixed exchange rate and allow the free flow of capital across its borders at the same time—only two of the three are possible.⁸

Human-centred economics is the opposite of a trilemma. It presents not a quandary of three incompatible choices but the possibility of a trifecta of synergistic social and environmental, economic and political outcomes. It represents not just a possible trinity but an indispensable or imperative one for individual societies and economies as well as the world economy and international order as a whole. It represents a “triperative”, so to speak.

This triple imperative is achievable if policymakers refocus their attention from the top to the bottom line of national economic performance, from growth to aggregate social welfare, from the wealth to the living standards of nations. In practical terms, this means choosing carefully where they wish to position their economies on the Social Market–Market Socialism Corporate Governance and Financialization–Real Economy Investment Financial Regulation continua, since this determines what kind of mixed economy they wish to have and how actively they wish to incentivize financial intermediation to serve the real economy and discourage it from financing rentier behaviour. At the same time, it means increasing investment in people across the weaker dimensions of their economy’s aggregate distribution function or social contract on a systematic and ongoing basis, possibly using as their guide international reference ranges such as those presented in Chap. 5 pertaining to fiscal expenditure and revenue as well as decent work. Moreover, it means voting for the combined redeployment of international economic institutions to better support this agenda through the restructuring of their priorities and activities with respect to macroeconomic analysis and advice, development and climate financing, and trade and technology rules and facilitation, as outlined in Chap. 6.

I have gone to considerable lengths in these pages to spell out the social and environmental side of this triperative—how shifting to a human-centred, living-standards orientation in economic theory and policy is the key to improving inclusion, sustainability and resilience. Human-centred economics is fundamentally a strategy to invest more in people and to do so more directly across multiple dimensions of their material quality of life. Strengthening the social contracts of countries would certainly improve the distributional fairness and environmental sustainability of their economies, including by protecting the most vulnerable. There is much that can be done to strengthen median living standards in countries at every level of GDP per capita and thereby create a more just society that better fulfils the universal rights of people enshrined in the ICESCR.

However, human-centred economics is also an economic imperative in the current circumstances. It is a strategy to increase economic growth by broadening its base and strengthening its resilience. Investing more in people through tangible improvements in their household purchasing power, financial security, social protection, skills and access to decent work strengthens aggregate demand, worker productivity and investor and consumer confidence—the fundamental determinants of growth.

Such an added bottom-up impetus to growth could scarcely come at a better time for economies around the world that are struggling to wean themselves from a decade of unsustainable top-down monetary and fiscal stimulus. While crucial to stabilizing their economies during the Great Financial Crisis and COVID-19 pandemic, that growth engine has run its course, and much less policy space remains for a new round of massive deficit spending or liquidity expansion. A new engine is required not only for this reason but also because of the real possibility that generative artificial intelligence and machine learning will hollow out employment, purchasing power and aggregate demand over the next generation as much or more than digitization and globalization did during the last one. Deep decarbonization and population ageing are likely to complicate matters further, additionally disrupting the world of work.

Domestic action to improve the living-standards diffusion mechanism of economies could help to resist any secular softening of aggregate demand from these transformations, while facilitating a more orderly and socially just transition to them. At the same time, international action to redeploy the principal multilateral economic institutions to increase support for developing countries that pursue these strategies, including by overcoming the global misallocation of capital that restricts their access to financing, would support aggregate demand and economic growth in the world economy still further. By feeding this global macroeconomic virtuous circle—structurally increasing the “propensity to consume and inducement to invest” within and across countries, to invoke Keynes’s framework of analysis—the application of human-centred economics has the potential to lift the living standards of all nations. It looks to be the most viable available strategy for reinvigorating the win–win, positive-sum-game promise of liberal economics in an international community that has been demonstrably losing faith in it.

This new structural form of demand and supply management is particularly suited to twenty-first-century circumstances, in particular to the income- and opportunity-dispersing effects of digitalization, disruptive labour market effects of decarbonization and population ageing, and enormous pent-up social demands for greater social inclusion, environmental sustainability and human resilience and dignity. This reformulation of structural economic reform, or Roosevelt Consensus model of growth and development, boils down to devoting at least as much attention to investing in and measuring the progress of key elements of an economy’s aggregate distribution function as those of its aggregate production function, and doing so as an integral part of a country’s development strategy. This ongoing process of institutional deepening has the potential to narrow both the output gap and welfare gap of economies. Indeed, it makes added progress on the former by addressing the latter.

For this reason, governments should expand their macroeconomic targeting and measurement beyond the familiar targets and metrics corresponding to the quantity of economic growth (e.g., GDP growth, inflation, etc.) to those corresponding to the five “factors of distribution” in their aggregate distribution functions, which relate to the social quality of growth. Some countries have been doing so for many years, such as China with respect to employment.⁹ Others are experimenting with metrics and targets in other aspects of the aggregate distribution function, such as New Zealand’s Living Standards Framework,¹⁰ India’s Ease of Living Index¹¹ and the non-governmental Cost of Thriving Index developed in the United States.¹² The Wellbeing Economy Alliance is a growing coalition of jurisdictions experimenting with a wide range of such alternative economic policy approaches.¹³

The key aim should be to rebalance the focus of policy from liberal economics’ traditional emphasis on financial and physical capital accumulation to investment in the institutional drivers of progress in median living standards, people’s lived experience, defined by the policy framework presented in Chap. 4. This two-lens—growth-and-living-standards, production-and-distribution, markets-and-institutions—perspective on economic policy produces a sharper image of economic policy performance and policy priorities, similar to the way that people see better out of two eyes than one. It also improves the resolution of objects in motion in the sense that it offers a framework for operationalizing the still largely aspirational concept of just transition, whether with respect to climate change, automation, urbanization or other economic shifts and shocks.

Consider climate change, the most urgent just transition challenge facing policymakers and economists. The jury is still out regarding whether economic growth can be sufficiently decoupled from pollution to avert the environmental catastrophe that scientists project will occur later this century based on humanity’s current greenhouse gas emissions trajectory. Judging from the evidence to date, such decoupling is highly unlikely absent a paradigmatic shift in economics and economic policy.

Over the next generation, humanity will need to chart a new Middle Way in economics, this time between environmentally destructive growth and socially destructive stagnation or degrowth. In a world that still suffers from extensive poverty and social injustice, deliberate economic contraction to lower emissions is simply not politically realistic. But changing the composition of growth—improving its social quality while reducing its environmental externalities—might be. A new neoclassical-Keynesian-ecological synthesis in economics will be needed to chart this course and arrive at the destination of the major decoupling of economic progress from environmental degradation implied by the Paris climate agreement.

Constructing this new synthesis would appear to be the paramount challenge facing economic scholarship and policymaking in the 2020s and 2030s. Navigating an economically, socially and environmentally viable course between the prevailing resource-intensive model of economic growth and development and the steady-state economics many ecological economists believe is necessary to meet this challenge (let alone the more radical degrowth prescriptions of some of their colleagues) will ultimately depend on the innovative design and deployment of institutions—legal and other norms, policy incentives and public administrative capacities. One need not subscribe to the institutional approach advocated by the foremost theorist of steady-state economics, Herman Daly, (broadly speaking, regulatory caps on and the trading of natural resources and reproductive rights) to recognize that far greater extra-market intervention will be required by governments to achieve the decoupling of economic and social progress from fossil fuel energy consumption implied by their mid-century net-zero emissions commitments, of which 70 such targets had been set as of mid-2023.

Transforming the neoclassical-Keynesian synthesis model of growth and development that has endured for the past three-quarters of a century by systematically internalizing within it the institutional drivers of a green and socially just transition to a net zero world will require a different model of economic growth and development. The aggregate social welfare and aggregate distribution functions outlined in Chap. 4 provide the foundations of such a model to guide this rebalancing of national economic policy and international economic governance and cooperation. Use of these theoretical constructs and their accompanying policy framework would help to impose a certain discipline and accountability on the process, pushing economists and policymakers to strive to “solve simultaneously” for: a) growth and poverty reduction through the more efficient resource allocation techniques taught by neoclassical economics; b) full employment in decent work and social justice through robust utilization of fiscal and monetary policy as taught by Keynes and his intellectual heirs; and c) decarbonization and other critical aspects of environmental sustainability within planetary boundaries taught by ecological economics. Of course, framing and adopting a better mental model of economic progress is just half the battle; filling in the details of its implementation will be even more important and is far from straightforward. That is why practical policy and empirical research as well as education and capacity building in support of this new synthesis policy innovation, investment and integration agenda will be so important; it must become the central calling of the economics community and a high priority of adjacent social and hard sciences in academia and international organizations going forward.

Daly considered his vision of steady-state and broader ecological economics as representing a practical challenge ultimately governed by the laws of nature rather than any particular brand of politics. He believed his precepts transcended the traditional left-right political framework of analysis, as he viewed socialism and capitalism as both being caught up in “growth-mania” and thus distracted from the more fundamental requirements—the ultimate means and ultimate ends—of natural capital and social welfare, respectively.¹⁴ This is similar to the human-centred and living standards-oriented approach to economics elaborated in these pages, which is based on its own structural critique of the neoclassical synthesis, calling out its blind spot regarding the crucial role of institutions in addressing the wider distributional considerations of inclusion, sustainability and resilience. I have argued that the systematic institutional manifestation of the social contract is the missing link of macroeconomic theory and policy practice. It is tantamount to the dark matter of development economics—a highly consequential but barely recognized force that exerts a profound influence on both the productive transformation of and propagation of living standards within economies, every bit as important as the force neoclassical economics has succeeded in making so visible to students and policymakers: factor accumulation through market-based allocative efficiency.

For those wondering how countries will be able to afford the sustained investment in their social contracts necessary to render their development more inclusive, sustainable and resilient, recall the comparative data presented in Chap. 5 demonstrating that a large number of countries at every level of economic development have ample fiscal space to increase domestic resource mobilization (taxes and fees) quite substantially even if only to the median level of their peers. And as for countries with a high ratio of tax receipts to GDP relative to their cohort, there is often plenty of room for expanding revenues by raising or shifting taxes to pollution and wealth, reducing subsidies enjoyed by wealthier segments of the population, and accounting in a more economically rational way for investments that increase their country’s growth potential over the medium to long term (e.g., measures to expand labour force participation, skilling, technical progress and diffusion, and sustainable infrastructure). These expenditures warrant some degree of amortization of costs, and thus financing over several years or more, because they contribute to an enlargement of the economy over time and are thus different in character than government expenditures financing current consumption.

Indeed, one size will not fit all in the pursuit of this new synthesis. Policy and institutional mixes will differ according to political, economic, historical, demographic and other circumstances. Some advanced economies, such as Japan, are already demonstrating important characteristics of a steady state economy, e.g., very low rates of economic growth driven in part by low or outright negative population growth. They are already focusing on the goal of improving social welfare even in the absence of meaningful GDP growth through technological and policy innovation. Many poorer countries are looking to leapfrog the traditional carbon-intensive pathways of industrial development through the same.

The concepts and tools of human-centred economics presented in Chaps. 4 and 5 provide the recalibrated macroeconomic policy compass needed to navigate this new Middle Way—this neoclassical-Keynesian-ecological synthesis—on a country-by-country, polity-by-polity basis. At the same time, the major renovation of the international economic architecture outlined in Chap. 6 would promote the global coherence and sufficiency of such national efforts relative to the performance requirements humanity has set in the Sustainable Development Goals, Paris climate and Kunming-Montreal biodiversity targets and ILO Centenary Declaration for the Future of Work objectives.

The Political Imperative: Revitalizing the Liberal Tradition and Multilateral System

Human-centred economics and the new neoclassical-Keynesian-ecological synthesis it could help create would have the effect of bringing economics full circle, back to the original two-lens vision of Smith, Mill and Marshall, who viewed better markets and stronger growth as a necessary but not sufficient means to address the social injustices of their day. They were apprehensive about growing popular dissatisfaction with the working and living conditions of the Industrial Revolution and the risks these posed to political stability. Today, too, rapid technological change and environmental and demographic trends are creating powerful headwinds for governments and political parties of all philosophical stripes by exerting powerful centrifugal forces on their societies. These threaten to exacerbate inequality and insecurity beyond levels already elevated by decades of digitalisation and globalisation as well as the financial, pandemic and cost-of-living crises of the past 15 years. This dynamic is undermining social cohesion and fuelling political polarization in countries at every level of economic development irrespective of system of government.

Social fear is palpable at the prospect of a perfect economic storm in the second quarter of the twenty-first century consisting of a climate emergency and generative artificial intelligence-driven disruption of service sector employment, exacerbated by rapid population aging and the ripple effects of geopolitical tensions on international trade and investment. Perfect storm or not, these disruptive forces are likely to exert enormous additional pressure on the social fabric and political order within countries as well as on a multilateral system that was designed to move international relations finally beyond the law of the jungle.

These socioeconomically based political headwinds are particularly evident in liberal democracies, where they have combined with controversies over immigration and identity as well as the digital disintermediation of media to create enormous challenges for the political establishments of both right and left. These are countries that tend to have a particularly strong embrace of standard liberal economics and to be situated on the lefthand, less interventionist side of the Social Market–Market Socialism Corporate Governance Continuum and its Financialization-Real Economy Investment Financial Regulation Continuum counterpart. Some critics from countries whose forms of governance place them on the righthand side have recently taken to needling their liberal democratic counterparts by suggesting that their own comparatively statist political systems are inherently better suited to mobilizing the long-term real economy investments that are necessary to drive both robust economic growth and broadly based social development.

Such criticisms strike a nerve. They imply that liberalism is innately flawed—that there is a serious bug if not outright design defect in its governance operating system. These debates have contributed to the growing body of soul-searching analysis by liberals and provocations by liberalism’s critics since the Great Financial Crisis.¹⁵

This book has sought to demonstrate that the problem is decidedly a recent bug rather than congenital flaw. The design principles laid down by the discipline’s most influential founders and codifiers were sound. But a lopsided mental model of growth and development and a corresponding set of disequilibrating policy reflexes have crept into the practice of liberal economics, particularly during the past half-century.

Rising inequality and insecurity are not an iron law of capitalism or technological progress, and the choice that countries face in confronting them is not between big and small government or between socialism and capitalism. There are multiple policy and institutional levers that governments of all philosophical traditions can pull to mobilize a combined attack on the problem. The key is to recognize the critical role this structural policy ecosystem plays in shaping the inclusive and sustainable growth performance of economies and to place at least as high a priority on strengthening it as top economists and policymakers in government (most of whom are macroeconomists and bankers) have traditionally placed on improving allocative efficiency and macro-financial stability.

In today’s digitally and environmentally disruptive and globally integrated economy, more direct investment in people and the practical aspects of their standard of living is the key to not only a more equitable society but also a more rapidly growing and sustainable economy. The talent, purchasing power and fair employment and entrepreneurial opportunity of people are fundamental determinants of national economic success. Ensuring that these are widely distributed across society—instead of pumping more money at owners of capital and hoping that it trickles down through their increased investment activity—is what is most important for the strength of a nation’s economy and social fabric in this day and age.

In other words, a systemic–theoretical modernization of the economic model itself is required rather than patches or palliatives that address the symptoms of its shortcomings. Big-bang, silver-bullet interventions, including macroeconomic ones, should be treated with caution and considered in this larger context. The problems of inequality and economic and environmental insecurity are most effectively addressed through a more comprehensive and sustained effort to upgrade a country’s growth model and social contract, including in areas in which relatively weak or underdeveloped policy incentives and institutions are behind much of the inequality, exclusion and unsustainable natural resource depletion that markets are producing in the first place. Macroeconomic stimulus or “coarse tuning” has an important role to play, including by financing these structural–institutional improvements, but it is only one and, depending on the country’s circumstances, not necessarily the most important tool.

This fundamental critique corresponds more closely than the traditional political narratives of the centre-right and centre-left to the growing unease of citizens with their country’s economic performance. People instinctively sense that political and business leaders have been neglecting their economy’s fundamentals, especially the most important one: them. Strengthening skills, consumer purchasing power and business and public investment in the real economy would lift labour productivity, disposable income and aggregate demand. Adapting power, transport, water and industrial infrastructure to the requirements of the Paris climate and Kunming-Montreal biodiversity agreements would also boost employment and median incomes. Assessed against the bottom-line metric of national economic success—broad progress in living standards—these would be far more effective uses of additional public expenditures than, for example, the cuts in individual, corporate, estate and other capital income taxes that are the mainstay of trickle-down economics. A win–win–win—higher growth with greater equity and lower risk—result for the economy becomes possible when policy choices are viewed from the bottom-up, household perspective of human-centred economics rather than the top-down, corporate-boardroom vantage point of its trickle-down counterpart.

In other words, human-centred economics is kitchen-table economics—economics that is tangibly relevant to everyone. As such, it has the potential to help turn the political tide against the threat of demagogic populism and erosion of rule of law and human rights in countries facing widespread voter disillusionment and disaffection over the stagnation of living standards and hollowing out or otherwise limited prospect of industrial employment. If framed in the language of the universal values of equal access and opportunity as well as freedom from want and discrimination, the principles and tools of human-centred economics, while progressive and universalist in a Rooseveltian and United Nations Charter sense, have the potential to appeal to a much larger political coalition than either the establishment right or left currently commands.

The political affinities of people in many countries are in motion in a way they have not been for a generation or more. Especially in the wake of recent crises, people are impatient for major change. A full-court press of domestic and foreign economic policy reforms aiming to improve more directly their lived experience—making multiple aspects of their households’ standard of living rather than GDP the unit of analysis and top policy priority—might impress citizens sufficiently to overcome the distraction and cynicism that have infected the political culture of so many countries in recent years.

Former US President Trump had a point when, upon announcing his candidacy in 2016, he warned about the death of the American Dream of serial generational progress in living standards. And former UK Prime Minister Truss also had a point when in 2022 she called out her country’s habitually weak economic growth performance. But the programmes of both represented another instalment of trickle-down fiscal and deregulatory stimulus that continued the error of mistaking growth as the end rather than means of economic policy. They were neither a direct nor a durable response to the weakened relationship between, and sometimes outright decoupling of, national wealth creation from median improvement in living standards. Over time, such an approach is likely to widen rather than narrow this gap, leaving in its wake a bigger public debt and even bigger missed opportunity to strengthen the economy’s most valuable resource, its people. This hugely inefficient use of public resources and decreasingly effective growth and development model is an artifact of the late twentieth century and generally ill-suited to the challenges of the twenty-first century.

As argued in Chap. 1, if the planned-economy socialist experiment of the twentieth century failed because of its excessive focus on equity and control to the detriment of allocative efficiency and dynamism, the ongoing experiment in neoliberal capitalism is staring its own political failure in the face for the opposite reason—an unbalanced focus on efficiency and aggregate wealth creation over the breadth of the social payoff in terms of broad progress in living standards. This is what Keynes was warning Hayek about in his letter.

A comprehensive effort to elevate the practical aspects of the material quality of people’s lives to the top priority of a country’s economic strategy—reconstituting capitalism by locating and rectifying the original reason for its divergence from this course—has the potential to reorder the political landscape. An agenda to systematically strengthen the social contract in ways that relieve family budgets and bolster their employment prospects and security in the event of misfortune is highly relevant to entrepreneurs and workers, Millennials and Baby Boomers, conservatives and progressives, and foreign policy realists and activists alike. The kitchen-table focus of human-centred economics, combined with its sharp critique of the way that liberal economics has been applied in recent decades, gives it the potential to take the wind out of the sails of demagogic populism by providing a sharper contrast with the financial market trading desk logic of trickle-down economics.

However, liberals need to recognize that a more effective response to demagogic populism begins with the philosophical mea culpa in which human-centred economics is grounded—a fundamental critique of the prevailing trickle-down mental model of economic progress. This is the price of admission for political and business elites seeking to make common cause with the economic insecurity and sense of aggrievement of many of their fellow citizens. Such intellectual honesty, along with the fundamental, operating-system level of the proposed reforms, creates the potential for a different and more principled version of populism that exposes the false promises and short-term political expediency of its illiberal counterpart.

High-road liberal populism can defeat low-road illiberal populism if it genuinely constitutes a doctrinal shift in the way the economy is organized—that is, if it shows that the political and business establishments are ready to join in rewriting the rules of their country’s growth model in a way that properly emphasizes the ongoing institutional deepening of its social contract, and if this is communicated in the language of universal aspirations and values, including particularly the responsibility of older generations to leave their country’s economic fundamentals in sound shape for younger ones. By providing people with a clearer virtuous-circle vision of their country’s and the world’s economic future, human-centred economics has the potential to galvanize a big-tent, left–right, working-and-professional-class governing coalition of people more interested in getting ahead than putting other people down.

It is in this sense that this substantial reformulation of macroeconomics offers a lifeline to a proud if somewhat adrift liberal tradition in the twenty-first century. The major changes described in Chaps. 5 and 6 are what domestic and international economic policy would look like if they were guided by the bottom-line focus of human-centred economics on aggregate social welfare—on the median living standards at least as much as the aggregate wealth of nations. These are the most important reforms required to arrest the world economy’s current descent into a zero-sum-game, law-of-the-jungle dynamic and the many risks that this entails for international peace and security. They would provide the economic, social and environmental policy basis for the profoundly liberal people-centric (versus state-centric) vision of international relations framed by the Commission on Human Security co-chaired by Sadako Ogata and Amartya Sen following the end of the Cold War and genocides in Cambodia, Rwanda and Bosnia.¹⁶

Nothing would bind developing countries more tightly to the liberal principles of the current international order than an effort led by rich countries to mobilize a massive, genuinely Marshall Plan-like US$2 trillion acceleration of investment in sustainable development—in jobs, basic necessities, social protection and environmental security—as outlined in Chap. 6, all of which is feasible within the existing resource envelopes and political mandates of the principal international economic institutions. And nothing else would generate more worldwide goodwill and diplomatic capital for the present multilateral system and its main underwriters over the course of the next generation than a crash effort to invest in the most important near-term (accelerated removal and replacement of coal-fired power plants) and long-term (doubling of renewable energy and low-carbon agriculture RD&D) elements of a global strategy to avert catastrophic climate change by mid-century. In effect, these and the other major reforms of international economic cooperation outlined in Chap. 6 would constitute a new global social contract¹⁷ that reflects humanity’s deeper level of interdependence in the twenty-first century and provides more sufficient support to countries seeking to strengthen their national social contracts through strategies such as those presented in Chaps. 4 and 5. The proposed Roosevelt Consensus model of economic growth and integration would enable countries around the world to activate the aggregate distribution function of their economies much more fully, hardwiring social solidarity into them by institutionalizing inclusion, sustainability and resilience in their rules, incentives and administrative capacities, and in the process bending the arc of global development in the direction of the foundational vision of social justice expressed in the Declaration of Philadelphia.

Thus, there are compelling social, environmental, economic and political reasons to shift liberal economic governance from a capital-centred, trickle-down to human-centred, level-up logic. The economic philosophy and policy prescriptions of human-centred economics provide the compass for a major course correction towards a more socially “embedded” form of liberalism.¹⁸ By formally integrating into economics the critical role that institutions play in translating growth into broad progress in household living standards, these prescriptions lay the foundation for improving the political responsiveness of leaders to social demands for greater inclusion, sustainability and resilience. Such a fundamental rewiring of the liberal economic mind holds the key to moving the dismal science beyond its narrow concentration on allocative efficiency and capital accumulation to a more living standards-centred, lifting-all-boats construct that focuses at least as much on the seaworthiness and ecosystem stewardship of vessels and their crews as on the level of the tide. It is the combination of the two that ultimately determines whether the entire marina rises with and profits fully and sustainably from the sea’s incoming bounty.

This doctrinal departure from trickle-down economics is actually a rediscovery of one of economics’ first principles expressed throughout the writings of Adam Smith, John Stuart Mill and Alfred Marshall: the economy is a social construct that requires strong institutions in multiple domains if it is to fulfil its ultimate purpose of improving the general welfare of society. Re-embracing this old insight from the eighteenth and nineteenth centuries is what is required to revitalize the liberal tradition and multilateral system in the twenty-first century.

This journey begins by taking living standards more seriously in economic theory and policy and by contextualizing the crucial role of markets and economic growth in this wider conception of socioeconomic progress. It continues by recognizing that such progress requires an active role for political economy, not only markets, just as the original theorists and codifiers of the field envisioned.