Home > Uncategorized > What happened to the public economy in economics?

What happened to the public economy in economics?

from June Sekera

More than a century ago, the effective operation of the public economy was a significant, active concern of economists. With the insurgence of market-centrism and rational choice economics, however, government was devalued, its role circumscribed and seen from a perspective of “market failure.” As Backhouse (2005) has shown, the transformation in economic thinking in the latter half of the 20th century led to a “radical shift” in worldview regarding the role of the state. The very idea of a valid, valuable public non-market has almost disappeared from sight.

In 18th and 19th century Germany, Kameralwissenschaft (“Cameralism”) represented a form of public economics. Backhouse (2002, p. 166), describes this school as the era’s “science of economic administration,” which had three components: public finance, economics, and public policy. The “Historical School” of economics emerged in later 19th century Germany and viewed government positively as a system for promoting social well-being (Bogart, 1939; Shionoya, 2005). It stopped short, however, of explaining the operational or production aspects of the system. During the late 19th and early 20th centuries, economists wrestled with the question of how the “public economy” operates. A “voluntary exchange” theory of the public economy was advanced by Emil Sax, DeViti De Marco, Knut Wicksell and Erik Lindahl (Sekera, 2016). During the 1940s–50s, Richard Musgrave argued against the voluntary exchange concept and pursued a line of thinking that led to the construction of a concept of “public goods” that was eventually adopted, mathematicized and popularized by Samuelson (Desmarais-Tremblay, 2013). Samuelson’s widely-disseminated 1950s formulation of public goods as stemming from market failure (following Musgrave) soon led to their devaluation, and a wholesale devaluation of government, by market centrists and libertarians, eventually by all tributaries of mainstream economics. What had begun as a serious effort to understand the important role of public sector production ended in its willful neglect.

In an important paper, Roger Backhouse (2005) describes the “profound changes in economic theory” that took place between 1970 and 2000. With the triumph of rational-choice economics came “a radical shift of worldview” and a “remarkable and dramatic change in attitudes toward the role of the state in economic activity.” The rise of “free market” economics and the “ideology of rational choice” created a “climate of opinion” that seriously biased economics against government and led to a view of the state as an agent whose actions lead to perverse outcomes. As Backhouse shows, however, “the shift toward market solutions did not occur spontaneously: it was actively promoted by groups of economists committed to opposing socialism [and] making the case for free enterprise.”

In his landmark book, A Perilous Progress: Economists and Public Purpose in Twentieth-Century America (2001), Michael Bernstein explores the evolution of economics from an academic field marginal to public policy into a powerhouse that influenced and oriented government decision-making. Economists in the late 19th and early 20th centuries ardently sought to cultivate influence with elected and appointed officials to shape public policy and contribute to “purposeful management” and “statecraft.” These were among the driving ambitions of the economists who led the American Economics Association after its founding in 1885. Seeking respect for economics as a new “scientific” field (no longer framed philosophically as “political economy”), “scholars sought a privileged and powerful access to public policy debate, formulation and implementation.” Once the influential Cambridge University economist Arthur C. Pigou asserted in 1922 that it was not the business of economists to tell businessmen how to run their companies, it became all the more critical that economists claim for their discipline a legitimate role in statecraft. And they got their big chance in war. Tracing the many roads by which economists entered the public arena, Bernstein finds that the profession came fully into its own through its impact on national decision-making during World War II. Ironically, “Not individualism but rather statism provided the special circumstances” for American economists to obtain prestige and power (p. 89). “In point of fact, it was statism and centralized economic policy practice that had brought economists and their discipline to the prominence and influence they [came to] enjoy
(p. 194).”

Yet even when applying their theories and practices to the non-market environment of government, mainstream economists have relied insistently on the market model. Because mainstream economists in the U.S. and elsewhere have been so market-focused for so long, production outside the market has been erased from the equations of economics. So now, government action is regarded as an “intervention” that “distorts” smooth operation of an otherwise beneficent market. Government is considered to have an economic role only (or primarily) in cases of so called “market failure.” Consequently, there is no viable and explanatory concept of an actual, let alone a legitimate, public non-market economy. So pervasive is the creed that government only “intervenes” in what is thought to be the valid, market economy that even literature from the Congressional Research Service (Labonte, 2010) relegates government to an outsider role.


  1. Robert Locke
    June 12, 2019 at 8:23 am

    Why can’t people on this blog get the story about Germany strait. The German “historical school” was not the driving force behind the growth of the German econojmy c. 1900,German Business Economics, a new field, was, and continues to be be to this day,, 30% of students in the top ten majors study this field, founded at the beginning of the 20th century, not kammeralwissenschaft. I wrote a book on the development of this subject in this period up to 1940 that was published in 1984. That’s 45 years ago,. and so what is new ion this blog. Then I wrote a second book published in 1989 in which German BWL since 1940 was extensively handled, including the role German BWL people played in post WWII recovery. Ludwig Erhard was a graduate from the Handelshochschule Nuremberg. He was a Dipl. Kaufmannn, not an Economist. Then more recently I explained how German business ecoomics evolved differently than US business studies. The most recent paper is being published in the next issue of the rwer. It has already been published in Spanish, where German business economics made a big impression on studies in business economics before 1940. And the same paper is being published in Management Review, at the end of the year, which is a review centered on central and northern Europe. What an ignorant lot I have been dealing with.

    • Robert Locke
      June 12, 2019 at 9:25 am

      In that 1984 book, The End of the Practical Man, I wrote, about the creation of German business schools and business economics. “In 1900 the Prussian state made the following contributions to higher education: universities RM 10,238,535; technical institutes RM 2,264, 589; agricultural institutes RM 1,571.000; and veterinary institutes RM 1,264.589. Further, the state spent over six million marks on secondary trade and commercial schools. Not one Pfennig, however, was provided for the new business schools. (p.199) … The business schools were not, then, state institutions. Initially they relied on chambers of commerce and industry, municipalities, and wealthy business benefactors for financial support. …They were well established before the state ever proffered aid.” p. 200.

      • Robert Locke
        June 12, 2019 at 2:59 pm

        “Government is considered to have an economic role only (or primarily) in cases of so called “market failure.” Consequently, there is no viable and explanatory concept of an actual, let alone a legitimate, public non-market economy.”

        This might have been what happened in alnglo=saxonia, but it does not explain the historical school in Gerlmany as a counter=welight to neo-classical economiocs. German historical economists never got involved in running the ecomony; they did not work for firms; they did not work for goverment; they were university professors who sought to explain the evolution of capitalism, e.g. Max Weber’s protestant ethic and the spirit of capitalism, or Sombart’s on the influence on modern Technik on economic life. The historical school did not like neoclassical economics, but they also did not like the new business economics, and vigorouly opposed its growth in German higher education. They lost out not only to neoclassical economics but to business economics in Germany.

        Business economics was, for irs part, firm oriented not market oriented; it sought to promote a Wissenschaft that would promote firm efficiency; Whether that efficiency was sought in a firm operating in the open market place, or in a state regulated economy was of less moment to the business economists, although a very large number of them believed firm efficiency depended on co-determination regimes in firm governance.

  2. Ken Zimmerman
    June 17, 2019 at 1:29 pm

    In his first inaugural Address January 20, 1981, Ronald Reagan said, “In this present crisis, government is not the solution to our problem; government is the problem.” The statement was specifically about the economic situation of the late 1970s to early 1980s recession and “stagflation.” Reagan was asserting that more taxes and regulations were not the solution to the “current” economic “crisis” (that big government wasn’t the solution in terms of economics). While Johnson, Nixon, and Carter had expanded the role of government economically, Reagan wanted to shrink it by cutting:
    The growth of government spending (including defense).
    Both income taxes and capital gains taxes.
    Regulations on businesses.
    The expansion of the money supply.
    In other words, Reagan is laying the foundation for what would become Reaganomics (trickle down, supply-side). Reagan isn’t proclaiming that government is the problem in general. Quite to the contrary, his record shows he used government liberally at times despite his general small government message. In this regard some of his more critical admirers claim Reaganomics would have worked if it wasn’t for all the other government spending! Today people often treat the quote as if it applied to any issue of government, but Reagan didn’t say it that way, and Reagan didn’t govern that way.

    Whether Reagan believed the changes he proposed would help the national economy and American society is difficult to say. Reagan’s well documented esteem for FDR and the New Deal and his comment that he was never trying to undo the New Deal as he admired President Franklin D. Roosevelt and voted for him all four times suggest that Reagan saw what he was doing as an extension of the New Deal. That is not the case today and has not been since Republicans took control of Congress in the mid-1990s. Today “small government” is generally just a statement behind which to hide Republican plans to reduce taxes on the rich and government programs helping the poor, not a stance on military spending, debt, or religious-based government policy. The evidence on the Presidencies of Reagan, the Bushes, and Trump don’t show “small government.” It confirms tax cuts for the wealthy, especially in terms of wealth taxes, the creation of new debt, increasing economic inequality, lots of military spending, and select uses of government power when it suits their agenda. Republicans argue this makes wealthy Americans and American corporations better off, and thus increases economic growth. At the same time, it also increases wealth and income inequality. Hardly a recipe for less government, but certainly one for less democratic and more oppressive government.

    In the context of this history, there is little chance the public economy can grow. But it has not shrunk as much as some believe. About 23% of paid employment in the US is in the public sector. Canada exceeds that by only one percent. The UK by only 5% and France by only 4%. The only Nordic nation for which I could find data has 38% of its people employed in the public sector. And pay between the public and private sectors are generally the same in these countries (all data from the World Bank). So, public economics is not dead, yet. But as you suggest it is under severe and unrelenting attack by such entities as the Koch brothers, the Mercatus Center at George Mason University (funded by the Koch brothers), and of course the entire psychopathology of Public Choice economics. But at its base it is a gross, almost reverse interpretation of Ronald Reagan’s political and economic positions. Deliberately, in most instances in my view. Not the first time in US history when unscrupulous parties with a political and economic agenda have used lies, deceit, and political warfare to move the nation in the way they wanted. And likely not the last.

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