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Mainstream economics and the state

from June Sekera

In standard economics scripting, government is most often cast in the role of bumbler or villain. Whether as market fixer, intervenor, enforcer or redistributor, its actions are portrayed as resulting in “distortion,” “inefficiency,” “deadweight loss,” and worse.

Three quarters of a century ago, Paul Studenski rejected such casting. He found government to be a vital figure whose role was not simply to intervene or redistribute. Government was a producer. A professor of economics at New York University (1927-55), an authority on public finance, and a widely-respected historian of national income accounting,[1] Studenski argued that “government is a productive, wealth-creating organization. It supplies direct utilities as well as aids to private production” (1939, p. 34). He elaborated:

“Under all forms of organized society, economic activity has required some collective effort in addition to the individual one, and this is still true of the modern society. The notion that production for exchange is alone ‘productive’ is preposterous.

Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value-namely, utility and scarcity. They satisfy human needs and must be economically used. Government is, therefore, engaged in production just as much as is private enterprise. Government employees are just as much producers as are private employees and entrepreneurs. To deny this fact is to demonstrate one’s faulty economic education or the fact that one’s idolatry for business has thwarted one’s vision” (emphasis added). 

His language and logic challenged mainstream economic thought, which by his era had turned to “exchange” theory and had sidelined “production”. However, production had been of central interest to 18th century and subsequent generations of economists, who were concerned with the processes by which value was created. But, even then, government had persistently been placed outside the “production boundary” (Mazzucato, 2018) and the state was, at most, assigned only a supporting role. Even Karl Marx, who wrote of the “hidden abode of production” in the first volume of Capital (Böhm & Land, 2012) did not address the state’s role as producer. And once Marx adumbrated a “labor theory of value” that could be used effectively to reveal the exploitation of workers by employers, liberal economists began to downplay the significance of production itself. In reaction to Marx, mainstream economists moved “to recast economics as a science of exchange rather than production” (Perelman 2006). This transformation facilitated mathematical modeling in economics and the eventual construction of a quantitatively precise but pragmatically constricting “production function.”

In short, by the time that Studenski was writing, not only was government viewed as not productive, there was essentially no basis for even considering government as a producer, since economics had made “exchange” [2] between sellers and buyers the embodiment of economic value.

But Studenski’s stance would not have been out of line with the thinking in the “German Public Economics” school that had flourished in the late 19th and early 20th centuries. Economists in Germany (and other European countries) had concerned themselves with “[u]nderstanding the economic foundations and explaining the scope of the state” (Sturn, 2010). Some saw the state as “a framework of collective agency for common purposes,” and understood government as a producer – the “mechanism” for producing the goods and services necessary to meet “collective needs.” However, with the rise of Nazism and the emigration of many of these theorists, a flourishing school of public economics fractured and the very idea of a “public economy” was eventually expunged from mainstream economics.

This paper calls for recognition of the public economy, argues for a reformed public economics, and proposes the elements of a new conceptual model.  read more


[1] In The Income of Nations (1958), Studenski traced the history of national income accounting and competing historical conceptions of production. Descriptions of Studenski’s work can be found in Warren 2005 and Ogle 2000.  

[2] Concerning the diminished role of production in neoclassical theory see:  Bernstein, 2001, p. 95; Haring and Douglas, 2012; Stretton and Orchard, 1994, p. 158. Hudson (2012) writes: “Today’s supply and demand approach treats the economy as a ‘market’ in a crudely abstract way, as quantities of goods (already produced), labor…and capital…are swapped and bartered with each other.” Ogle traced the history of production in his 2000 thesis. He writes: “According to Walras, ‘The theory of exchange based on the proportionality of prices to intensities of the last wants satisfied … constitutes the very foundation of the whole edifice of economics.’” … “Neoclassical economics thus posited a definition of production based on the preferences of (autonomous, rational, utility maximising) individuals expressed through the market.”

  1. antireifier
    August 20, 2018 at 1:05 pm

    A good counter to Public Choice Theory developed by James McGill Buchanan and popularized by the economists supporting the oligarchs such as the Koch brothers by their funding of various so-called think tanks and university departments to produce propaganda in favour of Public Choice Theory.

  2. Prof Dr James Beckman, Germany
    August 20, 2018 at 1:25 pm

    June, thank you for this important information. How government can go from being “good” to “bad” in peace of course suggests ulterior motives: economists working for their economic masters. Buchanan reminds me of Fox News thinking, cast in academic terms.

  3. patrick newman
    August 20, 2018 at 4:57 pm

    The productiveness of the state (both national and local) is virtually self-evident but the ideology of laissez-faire, free-market private enterprise has an extraordinary ‘after’ life in the USA and UK. Even the so-called socialised health care of the UK’s NHS is obviously a highly productive (and efficient) enterprise which foster much private sector economic development generally through guided procurement and sponsorship!

  4. Rhonda Kovac
    August 20, 2018 at 6:34 pm

    ‘Government’ is not a system separate from ‘the economy’. Government is part of economic process, and vice versa. To treat economics as independent — such as by attempting to set economic policy based purely on economic behavior, or attempting to predict economic outcomes based solely on economic inputs — is an exercise in futility.

    As soon as events impinge on the interests of those who control the political system, laws and regulations are changed to ‘correct’ them. This in turn changes thw economic rules, invalidating the presumptions that went into the original policy calculation.

    Such a mechanism, unfortunately, represents not an occasional aberration, but rather a pervasive and continuous ‘regulation’, at least insofar as any policy of significant impact on the lives of large numbers of people is concerned.

  5. August 27, 2018 at 7:09 am

    First, let’s get some basics out of the way. In 1987, according to Margaret Thatcher, “They are casting their problems at society. And, you know, there’s no such thing as society. There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbours.” Thatcher was notoriously wrong in this statement. More generally, the notion that individuals exist apart from society is nonsense. Similarly, economics is society. Not just entangled in society but not separate in any way from society. Consequently, it’s ridiculous to assert that government is not economics or that economics is not government. Studenski’s arguments about economic performances and government are correct, as far as they go. They just don’t go far enough. Economic activity requires a cultural setting which defines it and the concerns it will address. Human communities create cultures, in a variety of forms. All governments and economics work as culture designs them to work. Cultural creations called “individuals” are intended to perform certain work in society, including in governments and economies. Cultural creations don’t always perform as intended but ignoring them to conclude that the society cultures create does not exist merely demonstrates the culture from which that statement springs. The speaker of the statement denies the very thing that is the statement’s root. An extreme case of cutting off your nose to spite your face.

    • Prof Dr James Beckman, Germany
      August 27, 2018 at 10:33 am

      Ken, I believe you have gotten it right. As individuals we are conditioned by our early culture, which of course Thatcher neglected to mention. We practice our social nature in virtually everything we do, as we operate socially within various cultural settings.

      • August 27, 2018 at 12:59 pm

        James, as in most situations involving persons with cultural inclinations like those of Thatcher, the real goal seems replacing one culture with another. To replace a reviled culture with an admired one. The rock bands that celebrated Thatcher’s departure captured the mood of those in that reviled culture. Particularly the band Pulp with their song, “Common People.”
        You’ll never live like common people
        You’ll never do whatever common people do
        You’ll never fail like common people
        You’ll never watch your life slide out of view,
        And dance and drink and screw
        Because there’s nothing else to do.

      • Prof Dr James Beckman, Germany
        August 27, 2018 at 1:55 pm

        Indeed, Ken, the “elite” do many of the the same things as the rest, as I early saw by attending some Hollywood parties courtesy of my psychiatrist father.

      • August 28, 2018 at 8:11 am

        James, those whom Thatcher attacked felt attacked and Thatcher made it very clear she was attacking these “undesirables.” Her attacks provided no help for the UK, or the world. But they opened a new era of class warfare in the UK. So, it’s not surprising that the “lower” classes partied for weeks when Thatcher left office and hate her to this day.

  6. Helen Sakho
    August 29, 2018 at 1:04 am

    In addition to earlier comments just posted, I would only add that the poor families and children that Thatcher managed to rip off basic nutrition, are now even poorer and grateful for a few pence that their equally poor mothers have managed to let them save during their long summer holidays. Their greater degree of gratitude was openly expressed on the BBC to “free” school meals that fills their little stomachs just about enough to forget the harsh memories of the holiday. All the wonderful teachers and parents have to worry about is how to pay for school uniforms now.

    • August 29, 2018 at 10:35 am

      Helen, on the mark. Thanks. Elites have dozens of ways to diminish and control those they label unfit or just plain rejects. That’s anyone who is not wealthy and well connected politically. Luckily not all the wealthy or politically powerful take this path. But those who do use their money and power in the service of building a society in which they always win, and the rejects always lose. These elites have attempted dozens of coups beginning after the American Civil War. And they don’t like Trump. His stupidity and arrogance undermine their work, their dreams. I’ve heard rumors there are similar groups in the UK. Can’t confirm that from my own experience.

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