Sunday, May 9, 2021

Europe and our global political challenges

Today is Europe's day, and it is a good time to reflect about the necessary contribution of Europe to addressing the global political challenges of our time.

In Economics, we teach that free markets are not always like Adam Smith thought, but sometimes (many times, actually), they result into so called market failures, cases in which markets do not guarantee efficiency (maximizing the size of the welfare pie) at all. Examples of this include the existence of public goods, externalities or market power. In the past, the typical examples where traffic lights or defence for public goods, pollution for externalities, and telephone companies for market power. Local and national governments were designed to address these failures and fix the problems. The dominant market failures of our time, though, are global in nature and pose enormous political challenges.

Public Goods (goods that are non-rival and non-excludable) today are global financial and economic stability and peace and security. The provision of these public goods must be global in nature, as we are seeing these days with the scientific progress associated to COVID-19 remedies and vaccines.

Externalities (effects of actions not captured in prices) today also go much beyond the nation-states in many relevant dimensions, most obviously with the problem of climate change. National and local solutions are necessary, but they fall short in the absence of global action. For example, a global carbon tax would avoid adjustments at the border to neutralise the impact on trade, and would be much more effective than the current patchwork approaches.

Market Power (cases where some firms can raise prices without much worry) today is not about physical local networks, but mostly about large global technological multinationals, like Amazon, Apple, Google, or Facebook, which take advantage of fragmented polities to increase their market power, and their political power.

Initially, public goods, externalities and market power are efficiency problems, but they are inseparable from distributive implications, which must be addressed at the same time. These distributive implications are also global in nature.

We should fight for a currently hard to achieve global democratic government, but in its absence the big democratic jurisdictions, when they are in good hands, can provide leadership. This is a role that the EU is playing and can play more and more.

An integrated and stable Europe is making and can make an enormous contribution to addressing these market failures in their contemporary reincarnation of global political challenges. A federal and sovereign Europe that goes beyond their constituent member states is key to making progress in all these fronts. That is why I just signed this Manifesto, together with hundreds of Europeans.

Some economists fear that promoting activism about these issues may compromise the scientific standards of economics. But I can't see how you can teach these global political challenges without trying to convey to students the urgency of their activism to address these issues.

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