The Mixed Economy Manifesto: Part 1

By Michael Hoexter, Ph.D.

A spectre is haunting Europe, the United States, and the world, the spectre of social science unmoored from reality.   Economics, under the influence of an alliance of otherworldly academics and short-sighted businesspeople has lost touch with the reality of a functioning economy, the reality of ordinary people, and the on-rushing challenge of overburdened planetary systems, in particular human-caused changes in the chemical composition of the atmosphere and oceans.

Unlike the most famous manifesto, Karl Marx’s Communist Manifesto, this Mixed Economy Manifesto encourages, for the moment, abiding by many of the realities of the present-day world rather than striving now to reach a completely new, ideal social order, imagined by either the Right or the now marginalized Left.  Using ethical or philosophical ideals as a guide to action is critically important but we have learned from bitter experience that many efforts to jump to an ideal, imagined social system have tended to fail, especially given our inadequate and often highly polarized understanding of social systems and human nature more generally.  Besides the obvious examples of left-wing efforts to realize a utopia in the nominal service of disenfranchised peasants and workers (the Soviet Union, Maoist China, Khmer Rouge Cambodia), we have discovered that embedded in mainstream economics are similarly utopian assumptions about humanity and society, weighted towards the vision of the current right wing.  After we clear away ideological clouds from the Right and, now more faintly, from the Left, we might contemplate the transition to a new, better social system.  Yet at this point in time, we see that the best of what we currently have is being overlooked or denigrated by those who seem bent on destroying the basis of almost all of what might be called wealth and with it, much of what we might call civilization.

What is being obscured by both the majority currents in academic economics and the “folk economics” that these currents have inspired in the general public, is the value of a strong mixed economy, where there are distinct roles and legitimation for both government and the public sector as well as the private sector and market mechanisms.  The most successful and progressive societies seem to be those (mostly European social democracies) that at least before the breaking of the current madness regarding fiscal austerity, recognized the role of government as critical to overall social welfare, resisting for a time the pull of unreal ideas about how markets will solve all social problems.  That they succumbed to the currently fashionable economic madness is a testament to the need for this Manifesto.

Rather than merely being a concern of academics and researchers, the unreal economics that has ruled the past 30 years has pushed the world into a second Great Depression and threatens to keep the world’s economies locked in stagnation for years to come.  Now the European Community, one of the pinnacles of human achievement after centuries of war, is threatened by misunderstandings about economics, and social science more generally, misunderstandings that accompanied the introduction of the Euro currency as the extension of a European community.  The possible disorderly collapse of the Euro-zone now threatens to deepen the ongoing economic Depression throughout the world.

Furthermore economics and the instabilities caused in part by unreal economics have distracted from or diminished the major challenge facing humanity in the next decades: slowing or ameliorating the degradation of planetary systems which are vital to life and civilization as we know them.  As much as many of us would like to rely on “common sense”, our own experience, and intuition, there is no substitute for social science.  Good or better social science is an expression of our self-understanding as human beings buttressed, we hope, by ongoing efforts at validation against both numerical and qualitative data as well as informed by ethical concern for others and for the future.

In our complex world, large-scale political decision-making over the past 250 years often has attempted to find justification and inspiration in the work of or inherited ideas from, social and natural scientists like Adam Smith, Karl Marx, Charles Darwin, Henry George, John Maynard Keynes, Friedrich von Hayek, and Milton Friedman as well as philosophers of varying quality including John Locke, Thomas Hobbes, David Hume, Jean-Jacques Rousseau, Immanuel Kant, Thomas Paine, James Madison, John Stuart Mill, Herbert Spencer, Friedrich Nietzsche, William James, Hannah Arendt, Isaiah Berlin, Herbert Marcuse, Leo Strauss, E.F. Schumacher, John Rawls, Robert Nozick, and Ayn Rand.  The resulting political decisions, in turn, have over time shaped economic policy, the development of the legal system and subsequently, trends in the economy and society more generally.  While social science may never be objective in the sense that physics is, there are social science postulates and theories that are better born out by quantitative and qualitative data than others.  Additionally there are social science ideas that are more germane to the maintenance and improvement of human welfare than others.  Current “conventional wisdom” unfortunately rewards those who continue to get it wrong while ignoring those who most often get it right.

Economics has always been divided into schools but in the past 30 years, the dominant neoclassical school buttressed by its sometime-critic sometime-ally, so-called “Austrian” economics has achieved a largely unchallenged position in government policy circles and mainstream academic forums through its political vehicle, the neoliberal political philosophy.  Summarized in a sentence, neoliberalism in its ideal form holds that the promotion of the welfare of the individual and the welfare of society and the economy as a whole are the same thing.  In practice, neoliberal policies have lead to promotion of the interest of financial businesses and the wealthiest in the developed and developing world with some benefit accruing to the middle and working classes of rapidly developing nations.  Consumers in the developed world have benefited from a wider selection of low cost goods but at the same time seen their incomes shrink over time.

While after the Second World War, one of the dominant economic approaches was Samuelson’s synthesis of neoclassical with Keynesian elements, in the 1970’s and later the influence of “Austrian” inspired neoliberal politicians and economists marginalized Keynesian influences in the dominant synthesis in favor of a neoclassical economics stripped of any interest in government management of the economy for the benefit of the disadvantaged.  The latter group has been called the so-called “Freshwater School” of economics centered at the University of Chicago. Strangely exempted from the critiques of the neoliberals was the also-Keynesian policy of cutting taxes as a response to a recession, as marginal tax rates decreased in the US in particular.

Under attack by this politicized group of social scientists and political pundits were the elements of Keynesianism that advocated managing economic demand and increasing overall social welfare via government social insurance programs, targeting full employment, and taxation policies that reduce social inequality.  Government for the “Austrian” or “Austrian” influenced neoclassical economist is always preferentially a punitive institution in society, at least as regards the less fortunate classes. Particularly galling to these critics were the ideas from Keynesianism that suggest that government might also provide care for the majority of the population, in addition to punish wrongdoing and provide national defense.  The interpretation of “Austrian” economics that is most popularized on the political Right tends to as well overlook the less sanguine views of capitalism produced by Joseph Schumpeter, also originally an Austrian national.  While “Austrian” economics and neoclassical economics disagree in some important areas, they both agree that government is largely an “externality” in the real economy and for the most part is a hindrance to strictly “economic” processes.  Both neoclassical economics and Austrian economics consider the “real” economy to be purely in private ownership.

Those within the Left of neoclassical economics (neoclassicism and neoliberalism are similar but not the same thing), most of whom identify themselves as Keynesian, think that government can have a positive role as a manager and regulator of the market.  Some of these identify themselves with “Saltwater” economics that is centered at universities located on the West and East Coasts of the US.  In the models of the neoclassical Left, government is most often called upon in times of crisis rather than in every day life.  For the neoclassical Left, government institutions, true to the neoclassical model focused on supply and demand in the marketplace, are not treated as substantial, semi-permanent, and well-differentiated entities within the foundational literature of neoclassicism.   For those in the neoclassical spectrum, the inclusion of government actions as an important factor in the economy within the neoclassical worldview becomes then a matter of individual economic “taste”, political persuasion, or personal moral effort and not a necessity compelled by the theory.  Data from the real world is used to show that government is a “good idea” but not fundamental to the functioning economy.  More specifically, left neoclassical economists attempt to show how various government policies can influence pricing in markets and fine-tune economic incentives more generally by pushing various externalized costs into the market itself, thereby, it is hoped, perfecting the market and therefore the economy.  The object and focus of economics in this framework is, for the most part, the market, as if no substantial economic institution existed outside of markets.

There are also those on the Left of neoclassical economics, who sometimes join with die-in-the-wool “Austrian” and libertarian true believers, who question the sincerity of right-wing neoliberals in their support for a markets-only approach.  Dean Baker, a Left neoclassical, points out that those who trumpet markets on the Right are supportive of government interventions in the market that favor the wealthy and large corporations.  Baker’s campaign to claim free markets for the Left is an interesting intellectual exercise but has its own inconsistencies in downplaying his own support for government provision of public goods and interventions in markets in favor of ordinary people.  However, it is absolutely correct to point out that profession of belief in laissez-faire, neoliberal economics leads, in most political and economic actors, by no means to support for the actual implementation of laissez-faire policies that are applied across the board, hurting the patrons of laissez-faire ideologues.

9 responses to “The Mixed Economy Manifesto: Part 1

  1. I’m a little lost on one point. How many “Austrian” politicians are there besides Ron Paul and maybe 3 or 4 others. It doesn’t seem to me like they hold much *political* or *academic* sway, unless you are making the argument that vis a vis Hayek and Morgenstern’s work on game theory they’ve influenced the development of neoclassical economics in that direction.

    As an aside, it is worth noting that in many ways, Hayek though an opponent of Keynes at times was far from being a hardcore anarchist opposed to compromise as is oft portrayed- he did support a basic income guarantee and some other provisions for the social welfare. Hayek is perhaps the model of a free marketeer to whom to appeal with a pitch of post-Keynesianism to right wingers. His version of the Austrian Business Cycle Theory tends to emphasisizes inherent instability in fractional reserve banking as opposed to just central banking in away that could be interpreted as complimentary to Minsky’s FIH.

  2. Tom,
    “Austrianism” has pulled the neoclassical synthesis to the Right through both the political triumphs of neoliberalism and via the shared adoration of markets in both neoclassicism and “Austrian” economics. The roots of neoliberalism are “Austrian” even though some contemporary “Austrians” are trying to disown neoliberalism. In this framework, almost the entire US Republican Party spouts “Austrianisms” about the role of government and the idealization of markets. To Austrian true-believers they are of course inauthentic corporatists but these true-believers do not understand their own role in functioning as useful idiots for corporatism by pushing academic economics and economic discussions on the Internet to the right.

    I go into this some in subsequent parts of this piece but Hayek’s supposed support for various roles of the state, including some social welfare provisions, distract the literal-minded from the influence of Hayek on political discussions and the almost universal tendency of Hayekians to push the idiotic line that markets are infallible and government is entirely fallible. The blogger Unlearning Economics has some brilliant takedowns of Austrianism on his or her blog, including beliefs about Hayek among Austrians. Hayek was an interesting thinker but used his intelligence in the service of ideology. Your claims for Hayek and “Austrianism” appear to me to be “special pleading” for an ideology that you seem to like. I am with “Unlearning” in most of his criticisms here:

    To me arguments about varieties of “Austrianism” are Internet parlor games and de-rail discussions of how economics can become a better social science.

  3. The three great schools of economic thought in vogue are:

    The Chicago School of Economic Phrenology

    Harvard School of Business Chicanery

    The London School of Economic Legerdemain (sometimes Ledger Demesne)

  4. Dale Pierce

    Ayn Rand. Ayn Rand? A “philosopher of varying quality”? AYN RAND??????? She belongs in this list about as much as her disciples, Alan Greenspan and (boy genius) Paul Ryan, do.

    But hey, welcome aboard anyway. We need all the help we can get.

  5. It isn’t very surprising that von hayek, mises and meneger extolled free deregulated markets as opposed to a more dirigistic approach given the fact that the Rockefeller Foundation financed his entire career as an economist. The austrians were just commissioned apologists for the sort of predatory monopolistic capitalism pracitced by the private central banks and large corporations. Their role was to capture and control any geniune dissent to the socialistic and communistic systems the financial elite advanced as well.

  6. Dr. Hoexeter,

    I’m not an ideologue of any type…I’m merely saying that there’s no reason to alienate potential fellow travelers with any inaccurate arguments. Good ideas can come from anywhere. No one school of thought can claim to be the exclusive explanation of *all* economic downturns therefore it is useful to look at the ideas of potentially useful ones. Hayek is useful for that. Are some Hayekians terrible? Yes. Are some Keynesians terrible? Yes! Many people interpret Keynes in ridiculous ways just as many people turn Hayek in to a proto-Lucas or a Rothbard. All I was saying is that an interesting thinker with some interesting proposals should not be unfairly maligned especially if one wishes to convert some of his more intelligent and honest followers to MMT or PKT in part or whole, which is an easier task than converting say somebody who believed in the Gospel of Mankiw or Krugman in many cases.

    Perhaps for the past few years one can make the argument that Austrianism has grown within the Republican polity. However, I think its fairly clear that an actual Republican fiscal policy would be closer to George W. Bush than Ron Paul when actually in power. That’s not to say that many Republicans don’t have some Austrian or “Austerian” notions but very few have of these notions have such power over actual Republican action. I would go so far as to say that Austrians have comparable political influence to post-Keynesians.

  7. Sorry, a lot of that was babble. This fellow says it better than I ever could:

    In a way there are different economics spectra- New Keynesians/New Classicals would be one, old Keynesians vs. Monetarists another and MMT/Austrianism another. Perhaps more effort should be spent attacking those other more popular spectra than the ones on the same spectrum with much shared common ground.

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