The Mixed Economy Manifesto – Part 3

By Michael Hoexter, Ph.D.

Mr. Smith’s Unattainable Ideal

Another cause for this polarized view (of capitalism) has been the separation of the study of the functions of the state from the study of the economy, with the eclipse of the older discipline “political economy” of the 18th and 19th Centuries by a supposedly value-free “economics”.  Economists, thinking they were isolating the essence of a politics-independent economy, gravitated throughout the 20th Century towards greater mathematization and abstraction.  Markets, a copious supplier of often indecipherable numbers, became the raw material for formal models that had little to do with the actual economy.  Non-mathematical methods to study politics and social institutions and economically-relevant cultural practices became uninteresting to economists.  As a general tendency, economists also became more and more ignorant of the real world around them and almost completely unconscious of the effects of their theorizing on that world, making them ideal candidates to become “useful idiots” for powerful economic interests.

Readings, but more often glosses, of Adam Smith, by prominent, largely conservative, economists are also in part responsible for the urgent need now to discover the outlines of our already-existing mixed economy, a combination and interaction of a state and public sector and a private sector.  Most economists and students of economics seem to forget that Adam Smith wrote Wealth of Nations as a polemic, a document to persuade government officials and the public that they should abandon mercantilism as a guiding economic policy and instead allow trade and domestic markets to manage themselves.  As a polemic, Wealth of Nations employs more colorful and elegiac language, (i.e. “the invisible hand”) in pushing for lesser government involvement and “freer” trade and this is what most casual readers of Smith take away from reading his work.  More careful or progressive readers of Smith point out his support of government provided public goods, including ports, roads and education but these are not illustrated with colorful metaphors.  Furthermore, Smith’s earlier work, Theory of the Moral Sentiments, is cited by these more progressive readers as an indication that Smith believed that people were motivated by morality in addition to self-interest, i.e. unlike the “invisible hand”.  Unfortunately the division of labor between these two works has helped reinforce a framework whereby economists and those influenced by various schools of economics and economic philosophy have tended to shuttle back and forth between defending and castigating self-interest.  Misread or carefully read, the impulse towards allowing long-dead social philosophers/scientists to determine the boundaries of present day social theory is itself a problematic enterprise.

Students of economics or business who would like to hold little else in their minds except a few passages of Wealth of Nations, will have to look long and hard in economic history to find anything resembling the autonomous market of the “invisible hand”.  Most of what is recognizable as a modern economy has benefited from collaboration between government actors and private actors that violate the more polemical aspects of Smith’s magnum opus.  The early American government helped build an industrial base via the “American System” of protective tariffs against European competition.  The early development of infrastructure was often financed by government, such as the Erie Canal built by the State of New York.    The economic “miracles” of almost all current industrial powers, including the rapidly developing nations of East Asian and Latin America, have been engineered by for the most part adequately-designed industrial policies that violate the shibboleths of free trade ideology.  Almost all developed nations have substantial infrastructure that was built with public funds, without which the rapid growth of private enterprises would be unthinkable.  The belief in “free markets” from a selective reading of Smith acts in reality as a virtuous-seeming straitjacket used to limit rational thought and observation about how economies actually work.

In practice, the economic policy of governments has for the most part recognized the limitations of the airy abstraction of an autonomous, self-organizing, self-righting market.  From early on, government actors sympathetic to the development of capitalism have recognized that market actors do not automatically provide for and often endanger public welfare.  Efforts from the side of government to ameliorate some of the worst conditions created by capitalism without overturning capitalism itself can be traced to the 1870’s when German Chancellor Otto von Bismarck created the first welfare state in response to increased German immigration to America as well as a growing socialist and workers’ movement in Germany. Bismarck also instituted protective tariffs, which had long been an instrument of governments to protect domestic industries.  The terms from the Bismarck era Sozialstaat (social state) and Sozialpolitik (social policy) were forerunners of the notion of the “welfare state” in English.  Later on, reform and “good government” movements in the United States in the early 20th Century were reactions to the growth of capitalist oligopolies and monopolies as well as populist, and workers’ movements in the United States.   Using the lens of Smith’s classical or, the now current neoclassical economics, a study of economic history would appear to be simply the story of series of lapses from an unrealistic economic ideal.  Instead, the only way to write a meaningful narrative of economic history and to chart its near future development is to use the concept of a mixed economy as an overarching framework.

Keynes and the Great Depression

As capitalism showed renewed signs of fragility and instability in the early mid-20th Century, the outlines of how governments and non-government economic actors interact was made for a time the focus of public policy and economic thought.  The social and political ferment that followed the financial crisis of the 1920’s and the worldwide Great Depression of the 1930’s, provided an impetus for inserting government, heretofore largely untheorized in Anglo-American economics, as an important force in the economy.  The work of John Maynard Keynes provided a bridge into neoclassical economics of the idea that government was a part of a functioning economy.  Keynesians whether self-identified or, like Franklin Delano Roosevelt, Keynesians in deed, believed among other things that Communism could be thwarted by diminishing the crisis-prone nature of capitalism and its tendency towards inequality.  Out of the Great Depression and the experience of a world torn apart by armed conflict came the notion that both economies and political conflicts should be managed by national governments and by an association of national governments via the UN.

Despite its reputation on the Right as the entering wedge for state control of the economy, Keynes’ work and Keynesianism deliver a somewhat diffuse picture of the work and role of the state in the economy.  While some advocate a reading of Keynes’ work as sufficient, a “return to Keynes”, Keynes represents a moving target throughout his professional life, sometimes adopting and later rejecting neoclassical economic principles.  Keynes’s early death and changes in his views throughout his career, as well as a preference for elegant but elliptical self-expression did not produce a systematized view of what a real mixed economy, with a government and a private sector might look like.

Uncertainties about the direction of Keynes’ work after his passing also led to a fragmentation among Keynes’s students with the formation of neo-Keynesian, New Keynesian, and Post-Keynesian schools among others.  Students of Keynes and other economists who have grappled seriously with mixed economy dynamics have objected to the interpretations of Keynes that became popularized after WWII, finding the work of John Hicks and Paul Samuelson, the most prominent proponents of what was supposedly Keynes’ work, to have tailored Keynes to the prejudices of neoclassical economists rather than grappled with the real dynamics of the capitalist mixed economy.  Keynesianism became viewed as primarily a policy instrument as well as a political tendency within economics but fundamental tenets inspired by Keynes were not worked out into a consensus view of how either government or markets actually function in the economy.

Despite these drawbacks, Keynes and Keynesianism highlighted the value of the functions of government especially in a great economic crisis like the Great Depression.  Keynes was the founder of the discipline of macroeconomics, the economics of statecraft and of management of a globally linked economy by national governments singly and in concert.  Keynes’s opposition to hard-money ideology, i.e. the “Treasury View” that to him favored the rentier class led to his advocacy of governments spending on deficit to encourage growth in economies caught in what might be characterized as a “debt deflation” (not Keynes’ term for it), where investors and banks hoard money rather than invest it.  Instead of seeing government’s economic role as protecting passive investors (i.e. rentiers), Keynes defined the purpose of economics and government economic policy as promoting overall social welfare and in particular committed to generating and maintaining full employment. Keynes’s re-discovery of the “paradox of thrift” and its placement within the center of economic doctrine called attention to the limitations of economic doctrines that held out saving as the sole economic virtue. Assumed but not stated in bold terms in Keynes’ work was the value of the instrument of government, a bit of Oxbridge subtlety which turned out to be a major error in the tactical war with Keynesianism’s economic opponents.

Formalizing and systematizing the insights of Keynesianism was postponed, paradoxically, by Keynesianism’s early success in influencing government policy during the Great Depression, WWII, and the post-War era.  So dire was the situation of economies during the Great Depression and so unrealistic were the ideologically-charged policy prescriptions of its opponents, that victories for this approach were won by the success of activist policies by governments in Europe and North America.  This government activism also was spurred on by the building and management of war machines on both sides of the Allied-Axis conflict during the late 1930’s and 40’s, a conscious and unconscious “War Keynesianism”.

The pragmatic approach of Keynesians and actual policy success may have led over time to theoretical eclecticism, which stealthily re-installed existing dogmas from earlier economics, including laissez-faire notions about the functioning of markets.  These openings in the vaguely Keynesian consensus facilitated its fall from grace, when real-world success in steering government policy eluded Keynesian economists during the stagflation of the 1970’s.  If “government” as defined by the self-described Keynesians of the period couldn’t deliver results, it seemed reasonable to some that maybe one could dispose of “government” as defined in the political-economic discourse, and campaign against its role and even its existence inside economic theory.  To some pragmatism is the hallmark of solidity in any approach to the world but in this case, a commitment to pragmatism left little room for ongoing refinement of an accurate portrayal of the world that may or may not respond directly to actions informed by a still-evolving theory.  Rushed into practice, Keynesianism did not convince its most hard-bitten critics that they were as wrong as they actually were.

2 responses to “The Mixed Economy Manifesto – Part 3

  1. An ancient goal is to read Adam Smith’s “Wealth of Nations”, so far about 1/3 accomplished. It has been interesting reading in that the language has changed in the 230+ years since it was published which makes for careful comprehension of what had been written and its intent and translating that into more familiar terms. Adam Smith lays out the economic geography of his day and how that economic geography had changed over time, in some instances going back into the feudal era (for grain prices) or to foreign economies e.g. Spanish monetary policies or development of French manufacture and trade. It is interesting the wide written economic resources he used in reference to make his observations.

    Maybe my reading (a Modern Library copy of the Cannon edition) is deficient or I have not yet arrived at the passages, but nothing attributed to Adam Smith’s “Wealth of Nations” by ‘modern scholars’ (particularly of the Chicago school) shows itself to exist or be implied in the book I have; quite the contrary, Smith implies markets undistorted by dominant actors (oligarchy or monopoly) or their manipulations. I strongly suspect that claims of those ‘economists’ to have actually read and comprehended Adam Smith’s works to be fraudulent at minimum and an outright blatant falsehood in all probability. Unfortunately, scholarship is not now what it once was, and the mercantilists have usurped Adam Smith’s arguments to their own advantage and educated ignorance allows them to do so.

    It is a withering thought that original authors are not read in the original at the highest educational levels, rather opinionated synopsis had become the foundations of modern knowledge. As for the study of economics itself, it has little changed since the first drawings were done in caves. Economics is the study of mankind’s ecology and the superstructures which have been built upon that ecology.

  2. Hi Michael:

    In your first paragraph you say: ” Economists, thinking they were isolating the essence of a politics-independent economy, gravitated throughout the 20th Century towards greater mathematization and abstraction. ”
    One of the reasons for this was to “abstract” out all opportunity for morality to play any limiting role whatever in economic activity. In real democracies all government has the duty and ability to act morally while national democratic governments also have the ability to force amoral market forces and actors to act in response to morality and be moral which, as we have seen, eliminates unlimited greed which destroys populations, societies and natural environments.
    The transition of “economics” from a philosophical to a “scientific” basis allows it to look predictive. This is very attractive to unlimited greed because it can and is manipulated by omission and distortion of reality to support unlimited greed; for which convenient manipulation wealthy elites are willing to, and do, pay handsomely! And as we know “he who pays the piper calls the tune!” The tune being piped by the also well paid media minions of unlimited greed is, when the “unlimited market forces” are freed from the unproductive moralistic government which retards real growth and social development, society will ascend immediately, or maybe not so immediately, to the lofty heights of a perfect society. Of course the actual “mechanisms” being promoted for this job are in fact all counter intuitive and in real terms offer no real connectivity of action and desired result unless your desired result is accumulation of great wealth by a few and hardship and destitution for the vast majority. Predictive economic theory became both rewarding and self justifying for an elite few, and economists went from almost impoverished social commenters to very very well paid apologists for naked unrestricted greed – all because their economics theories predictive powers overcame the limitations of reality which place a limit on wealth accumulation by a very few economic elites which unlimited wealth accumulation by these elites causes destitution and economic stagnation for the vast majority. Predictability, manipulability and self justification of unlimited greed thereby serving the wealthy elites proved to extremely profitable and literally thousands of economists jumped on that wagon and grew wealthy – or at least had tenure and job security.