Home > The Economics Profession > Natural Liberty or Democracy?

Natural Liberty or Democracy?

from Peter Radford

There seems to be a lot of angst as to why standard macroeconomics ignores the government in its analysis. Or, rather, that when the government slips into the picture it is almost invariably in the form of an evil presence mucking up the sweet operation of market magic and thus stalling us all on our way to the happy place economists love to call equilibrium.

This is quite simple to answer: economists of the standard ilk are opposed to democracy.

Why?

Because, since its very inception, modern economics in most its forms has been the study of the private economy. Listen to Quesnay:

“All trade ought to be free … It is enough for the government to watch over the way the expansion the revenue of the kingdom’s property; not to put any obstacles in the way of industry; and to give the people the opportunity to spend as they choose”

Listen to Adam Smith:

“According to the system of natural liberty, the sovereign has only three duties to attend to … the provision of national defense, the provision of civil justice, and the duty of erecting and maintaining certain public works and certain public institutions”

Further, according to Smith, the economy was so complicated and worked in such an obscure yet magical way that it was here folly for anyone to imagine they could constructively interfere with its working:

“The statesman, who should attempt direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but would assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

In other words: government ought get out and let laissez-faire do its work.

Of course we should doff our hats to those who argued for a modicum of modesty on the part of market magic. McCulloch, for instance in 1848, gives us this more pragmatic view:

“The principles of laissez-faire may be safely trusted to do in some things, but in many more it is wholly inapplicable; and to appeal to it on all occasions savors more of the policy of a parrot than of a statesman or a philosopher.”

We could go on, but what’s the point? What we all need to remember is that economic theorizing, and thus the theories we find cluttering our discourse, are all historical artifacts. They were created in various times and places to respond to what were perceived to be great issues of the day.

All those quotes above share a common theme: that of an attempt to break society apart so that the economic aspects of our lives can be considered a separate domain subject to its own rules and theories of operation. This was important because as modernity took hold and as older more traditional structures, especially those of autocratic monarchist governance, were challenged people needed new tools and insights to justify the change.

Thus all the prattle about something called “natural liberty”. It was essential to present such liberty, which was a dire threat to the old order, as being somehow “natural” since that made it more difficult to object to. If it’s natural we just have to live with it. Don’t we?

This original perspective became deeply entwined with economic theorizing and has remained ever since, albeit carefully hidden in the attic of such theorizing. It lingers on in every economics text book where the economy is presented as a domain somehow apart from the other, and supposedly less rigorously theorized, aspects of social life such as politics and sociology.

This fracturing of the social sciences is perpetuated for a number of reasons. It provides great job security for academics who specialize in one or other part. They don’t have to rise to any meta level and discuss the messiness of society in toto. Instead they can opine as experts on some arcane locality, whilst occasionally being asked to comment on the map as a whole. Naturally, when they do so opine, they are careful to ensure that we acknowledge their expertise is insufficient for their global comments to be taken too seriously.

Economists are the exception to this modesty. They brazenly ramble all over the social field commenting on things that their expertise in no way equips them for. This is what I call the “Becker Effect”. For some bizarre reason economists, having carefully limited the economic domain as being unique enough for special theorizing, then presume that the theories developed for that unique domain can be generalized far afield. This is an arrogance that we would all laugh at were they not so determined. And the reason that they are so determined is that they have duped themselves into believing that they have insight into human behavior through the entry way of their microeconomics. This, as we all know, is the place where economists pretend humans are automatons. And not just any automatons: they are automatons that think like economists. This leads us to the not too pretty situation where those automatons are prone to cheating and conniving, because, again as we all know, those who study economics also tend to display those less than socially sound behaviors.

But, perhaps the more important legacy that natural liberty, whatever that is, has left us is, the notion that government is a separate domain from the economy. Don’t forget that back in the days of Smith, and nowadays in the age of the Chicago School, government was the state, and the state was some meddlesome individual intent on extracting wealth from his [or, rarely, her] much put upon citizens. In other words the state was a source of hostile oppressive intrusion. Including it in a comprehensive analytical framework for society as whole made no sense: if you did that you had to concede that naked power relations played a significant part in trade, commerce, and so on, thus denuding the notion of natural liberty of much of its force. Natural liberty had to be presented as a counterweight to the oppression of the state. And if it was successfully thus presented the more enlightened monarchs might just be persuaded that their own wealth would rise more if they let the economy secede from the state.

Once this hostility to the state found its way into the bedrock of economics it stayed there. Moreover this anti-government perspective, that colored all subsequent economic theorizing, attracted to it analysts who were like minded. We thus find a positive feedback between the anti-state foundations of economics and those who then carry the theory forward.

In contemporary terms this has profound consequences. One of which, as I mentioned at the beginning, is that standard economists are openly and brazenly opposed to democracy.

Why?

Because, apparently unbeknownst to economists, the social and political milieu within which the economy sits, has undergone radical change since the 1700’s. We nowadays have far fewer autocratic monarchs prone to meddling in popular affairs, and significantly more democracies where the people who are the erstwhile agents of the economy are also the agents  of self-government. Regular people, unlike economists, admit of more than one social domain. They operate in many all at once. The notion that we the people actually govern ourselves has been born and adopted around the world. But it hasn’t seeped into economic theory, where the government is resolutely presented as a hostile and incompetent force just as it was two hundred or more years ago.

So when we the people want to raise taxes to pay for our retirement and to establish a collective to help administer that retirement, this act of communal spirit is seen within the walls of economics as an infringement on natural liberty. Standard economics has no other way of viewing it. It is a monotone discipline in a multicolored world.

And in such a monotone world, where the people act only in their self-interested economic way, there is no space for government. Were we to bring the government into standard economic theory as a fully fledged partner we would have to modify that theory to such a degree that it would be easier to toss it out and start again. For one thing we would have to theorize afresh about human motivations and the distressing, to economists, habit people have of being able to hold contradictory thoughts and not burst into flames as a consequence.

In the end, I suppose, the fact that standard economics is caught up in its 1700’s roots is both quaint and annoying. It is quaint because it gives us an insight into the big issues of those long ago years. It is an artifact of history akin to the battle of Waterloo and allows astute historians to look at what intelligent people thought back then. It is annoying because all our social progress during the interim is apparently of no interest to standard economists. They want to live in the past and thus impose the past on the present whenever they offer us all advice.

Which is a pity because I think the ongoing fight for equality and democracy is just as important, if not more so, that the preceding fight to establish the notion of natural liberty. Whatever that is.

 

Acknowledgement:

I found all those quotes above in Steve Medema’s essay “The Economic Role of Government in the History of Economic Thought” which is a chapter in Samuels, Biddle, and Davis “A companion to The History of Economic Thought”. If I mis-typed them, that’s my fault!

  1. June 1, 2015 at 5:11 pm

    What is perhaps surprising though, is that for all his preference for laissez-faire as the default economic policy option, Adam Smith had a surprisingly modern insight into the harm that could be done when commercial interests were too influential with government. His trenchant criticism of that situation is very applicable to modern industrial economies where (free enterprise rhetoric aside) the nexus between large private corporations and government is very tight, and the alienation between small business and government is wider than ever. It is almost as if Smith recognized in the 1770s, much of what we know today, and think we discovered after him. A hypothetical general equilibrium under imaginary conditions of static preferences, static technology, perfect competition and no externalities, WOULD give us an optimum result in terms of allocative efficiency (but not of course any guarantee of appropriate macro scale (as Daly has pointed out) nor adequate distributive justice, as we have known for some time). But in a world comprised mostly of monopolies and oligopolies, and with government altogether too responsive to large-scale commercial interests, all bets are off. We all know that Smith had strongly negative views about monopolies of all kind. Less well-known, was how strongly the champion of the “invisible hand” also criticized any regime where public legislation was strongly influenced by specific commercial interests. One has to ask oneself whether modern, so-called “free market” economies more closely resemble the hypothetical model of Walrasian general equilbrium or instead, a regime (so strongly criticized by Adam Smith) where legislatures and senior bureacrats are rather too much in thrall to executives and other agents of powerful commercial enterprises who, to paraphrase Smith, know their own specific interests with much greater clarity than that with which they recognize any public interest.

    Michael Barkusky
    Pacific Institute for Ecological Economics
    Vancouver BC
    Canada

  2. June 2, 2015 at 12:14 am

    Completely agreed with @ecolecon above… that said I believe the author here is attacking a political strawman. The choice between laissez-faire and centrally planned economies is a false dichotomy used to rally political bases that won’t listen to more nuanced arguments. Unfortunately this kind of grandstanding has become the language du jour, rather blurring the lines between policy and rhetoric.

    No real economist, or anyone trained in analytical reasoning, would suggest that we should exist in the extremes. Like all organic systems the economy is a symbiotic relationship between buyer, seller, planner, and market maker. The literal trillion dollar question is finding the happy medium.

    Furthermore, I think the conjecture that most economists are “opposed to democracy” is kind of a large leap to make. I think Occam’s Razor leads us to the more plausible scenario that government intervention is extremely messy and prone to all kinds of unintended consequences, which makes it easier to simply leave it out of the equation in a lot of cases.

  3. June 2, 2015 at 2:06 am

    There are several issues intertwined here, and they’re worth deconstructing because the simple objections mask the more profound ones.

    There’s government as incompetent due to lack of meritocracy, or government as corrupt due to principal-agent problems. By this view government should privatise to be more efficient. But there are also bad firms, usually correlated with bad governments. Market discipline and a more mature business ethos fixes these problems, not private interest per se.

    Then there’s the failure of central planning, where government fails at everything because it is one. But unity of purpose is compatible with diverse structure. The US government managed to put people on the moon by setting up a network of agencies and suppliers. The Soviets single-mindedly created some impressive explosions http://en.wikipedia.org/wiki/N1_(rocket)

    A deeper objection is dislike of a collective outcome, either because of stifling sameness or for fear of equality. Equality is bad for the privileged but good for the fortunate. It depends on ethos and your point of view. If powerful people recognise themselves as fortunate or great, a different and more egalitarian worldview may once again prevail.

    Deepest is refusal to see government as the guardian of collective wealth. Capital is private, government is public, so there can be no government capital. Only debt is allowed. If there are any public assets they must be sold so that the gains accrue privately. Government may tax and redistribute in a hand-to-mouth manner, but may not invest.

  4. John McDonald
    June 2, 2015 at 3:34 am

    While it appears true that, “economists of the standard ilk are opposed to democracy,” it might also be true that they are also rather ignorant of the connections between theology and economics.

    See for example, Mark C. Taylor’s book, “Confidence Games: Money and Markets in a World Without Redemption,” where he makes the provocative statement, “Though rarely recognized, the relation between the divine and the human lies at the heart of the modern understanding of markets. Calvinism not only prepared the way for a flourishing economy but also provided principles for understanding and justifying market activity. The first person to use the image of the invisible hand was not Adam Smith but John Calvin. For Calvin, God’s providence is the invisible hand that sustains the order of the world even when it is not immediately evident. Smith appropriated Calvin’s doctrine of providence to explain the machinations of the market….With Smith’s translation of theology and aesthetics into economics, the source of order shifted from an external agent, i.e., God, to internal relations among individual human actors. From this point of view, the market is a self-organizing system that regulates itself.”

    Well, wasn’t this all explained in R. H. Tawney’s “Religion and the Rise of Capitalism?”

    Sure, to some extent, but Taylor is far from through. He goes on to argue, with the “death of God” movement, “… it is clear that God did not simply disappear but was reborn as the market. In contemporary society, the market has become God in more than a trivial sense. The terms many economists and analysts use to describe the market implicitly suggest language once reserved for God: the market is omniscient, omnipotent, and omnipresent. Since the market knows best, it should be allowed to operate according to its own principles with minimal interference from humans, whose knowledge is unavoidably limited. By the late 1970s, belief in the market had become a widely accepted orthodoxy.”

    To be honest, I suppose the main reason for my comment is to plug Taylor’s book. There are simply too few good books being published that expose the deep and important connections between economics and theology.

  5. June 3, 2015 at 3:56 am

    The world would be a much better place if an economist, any economist, could be bothered to learn what Adam Smith said from a philosophy professor and not another economist.

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