EGtext
Economy and Government
in the Postmodern Era
Richard A. Stanford
All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means—whether auditory, graphic, mechanical, or electronic—without written permission of the author, except in the case of brief excerpts used in critical articles and reviews.
CONTENTS
PART 1. POSTMODERNITY AND BEYOND
PART 2. ECONOMIC SYSTEMS
PART 3. LIBERTY IN ECONOMICS AND POLITICS Liberty
PART 4. GOVERNMENT ROLES IN THE ECONOMY
PART 5. LIMITS OF GOVERNMENT
PART 6. CONCLUISIONS
Glossary of Terms Used in This Book
1. The Postmodern Epoch
2. Ideology in Transition
3. Political Economy in the Postmodern Era
4. Comparing Economic Systems
5. The Death of Capitalism
6. Gift Economy
7. Liberty
8. Liberalism, Conservatism, and Social Justice
9. The Political Economy of Liberalism and Conservatism
10. Economizing Questions in Capitalism and Socialism
11. Capitalism and Democracy
12. The Role of Government in a Market Economy
13. Government and the Business Sector in a Market Economy
14. Perceptions of Market Failure
15. Government Efforts to Fix Market Failures
16. Government Failure in Addressing Market Failure
17. Government and Managerial Decision Making
18. Government and Comparative Advantage
19. Government and Globalization
20. Government and Macroeconomic Instability
21. How Much Government?
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PREFACE
One of the most prominent features of global political economy in the post-World War II era has been the expansion of the size of government relative to economy, and the ever-increasing involvement of governments of nation states in the workings of their economies. The academic debate over the role of government in the economy, ongoing from even before the publication of Adam Smith's Wealth of Nations in 1776, has taken new immediacy during the first decade of the twenty-first century. The principal difference between liberal and conservative political interests is perceptions of the appropriate role that government should play in society at large, and the economy in particular.
In this book, the term “economy” refers to a society’s institutional
arrangements for allocating its scarce resources, producing goods and services,
and distributing them to its population. The term “economics” refers
to the study of economic relationships, i.e., descriptions of economic
phenomena, theories about how they work, and policies to manage them.
Terms for many other disciplines that study their subject matters end in
“-ology”, e.g., theology, sociology, cosmology. A parallel term ending
in “-ology” to mean the study of economic matters would be “econology”,
but this term has not supplanted “economics” in popular usage.
Thesis
The thesis of this book is that the growth of government and calls for ever-increasing governmental involvement in economic affairs are manifestations of the late-twentieth century Postmodern and Communitarian transformations of American culture and ideology, with deleterious effects upon economy.
The greatest challenge to market economy in the twenty-first century is likely to be an ever-expanding role for government to play in the economy as called for by both Postmodern and Communitarian thinkers. Taken to its logical extreme, the end-point of such a progression could be either fascism (privately-owned means of production with state control over it) or authoritarian socialism (state ownership of the means of production and centralized decision making).
Early in the third millennium of the Common Era, we seem to be at a crossroads of intellectual and cultural thought. The general consensus among cultural and intellectual commentators is that the Modern epoch ended around the middle of the twentieth century and it has been supplanted by the Postmodern epoch. But the Postmodern epoch itself may be coming to an end with the opening of a so-called “Post-Postmodern” era. This on-going process of cultural transformation has implications for both economy and religion.
An underlying theme of this book is the importance of liberty to economics. The importance of liberty both to individuals and to social interaction is one of the few concepts upon which both Modernists and Postmodernists usually can agree.
By the beginning of the third millennium of the Common Era (C.E.), humankind had compiled a massive amount of scholarship about political economy and the Postmodern cultural environment. But there is also no universally accepted theory about the appropriate role of government in regard economy.
Economists often tell their students in introductory courses that economics
is a way of thinking about the world, the way it is, and the way it works.
This way of thinking seems to filter perceptions of all phenomena experienced
by one who has studied economics at all seriously. One who has taken a
graduate degree in economics can hardly think about social, political,
cultural, or even religious matters without applying the "economic way
of thinking" to an understanding of them. Perhaps this is the "economist's
disease".
Organization of the Book
As a platform for departure into the examination of the appropriate role of government in regard to economy and religion, the chapters in Part 1 lay out the characteristics of the post-World War II movements called Postmodernism and Communitarianism and provide an overview of global political economy events during the post-World War II era.
There is a progression of ever more advanced and complex economic systems, culminating in some form of market economy, or societies may choose some alternative to market economy. The chapters in Part 2 explore the alternative economic system choices available to societies.
Liberty is crucial both to the functioning of economy and to the practice of religion. The chapters in Part 3 elaborate the importance of liberty to the functioning of market economy.
Given the exponential expansion of government almost everywhere in the world during the post-World War II era, the chapters in Part 4 examine the roles that governments have come to play in the two most prominent forms of economic organization, market capitalism and authoritarian socialism.
Chapters in Part 5 examine the missteps that governments have taken in expanding their roles into the functioning of their economies.
The final section of the book offers conclusions with respect to the
role of the government in the economy.
Richard A. Stanford
February, 2011
BACK TO CONTENTS
Part 1. Postmodernity and Beyond
1. THE POSTMODERN EPOCH
Critics and commentators have outlined a progression of cultural epochs from the ancient understandings of the workings of the world through the Medieval Age, Enlightenment, Modern, Postmodern, and now post-Postmodern eras. What follows is a brief and admittedly superficial overview of the aspects of the epochal progression that pertain to economics and religion early in the twenty-first century.
Ancient peoples perceived that the universe was created and controlled by God (or gods), and all unexplained phenomena were attributed to divine causation. The Western Medieval worldview differed from the Ancient view in that God appeared to follow consistent patterns that became regarded as “natural law”. The Enlightenment of the late-seventeenth and eighteenth centuries shifted understanding of causation from subjective judgment and emotion to objective reason and rationality. The Enlightenment was the precursor to the so-called Modern epoch that most commentators describe as coincident with Industrial Revolution in the West and continuing to mid-twentieth century. The Modern epoch entailed the optimistic belief that the application of science and technology to industry could bring about a better world. The ideals of Modernity[1] included equality, democracy, freedom, and human rights.
Table 1 is a modified version of tables exhibited at the website “Modern vs. Postmodern Culture”.[2] The left side of Table 1 details selected Modern epoch characteristics that pertain to economics and religion and will be referred to in subsequent chapters. There are other characteristics of the Modern epoch pertaining to art, architecture, social relationships, and historical and literary criticism that are not represented in Table 1.
Prior to World War II, many Western economies were primarily industrial in the sense that half or more of their total employments was in manufacturing industry, and half or so of the value of their gross outputs (Gross Domestic Products) consisted of manufactured goods. In the early post-World War II years, many of the formerly industrial economies of the West made the transition to become principally service economies in which less than half of their employments and outputs were accounted for by industry. By the turn of the third millennium, less than twenty percent of US employment was engaged in manufacturing, but the US manufacturing output continued to be among those of the top half-dozen manufacturing countries in the world.
Coincident with this transition, a movement among European continental philosophers began to question the ability of industrial capitalism to continually bring about material improvement and emotional well being for their societies. They also focused upon negatives that they perceived were brought by industrial capitalism during the twentieth century: the Great Depression, two world wars and a “cold war”, the Holocaust, the prospect of nuclear annihilation, and ever more unequal distributions of income. By the last quarter of the twentieth century they had begun to exhibit a rising skepticism concerning absolutism in science and religion.
Table 1. A continuum between extreme Modernity and extreme Postmodernity:
Modernity [ - - - - - - - - - - - - - - - - - + - - - - - - - - - - - - - - - - - ] Postmodernity
|
At their extreme, Modernists . . . |
At their extreme, Postmodernists . . . |
|
1.
believe that objective knowledge (facts, observation, and exercise of logic)
can explain reality in an absolute sense; |
1.
believe that “facts” and “truth” are specific to circumstances and influenced
by the observers, so only qualified explanations of reality are possible; |
|
2.
trust what they perceive to be absolute truth, e.g., that God created the
universe and that God sent his Son to save humanity; |
2.
reject absolute truth and point out that reputed “truths” are based upon
assumptions; |
|
3.
seek objective knowledge (religious, scientific, historical, etc.) that
supports their absolutist doctrine; |
3.
revise doctrines (religious, scientific, historical, etc.) to include or
reflect new knowledge; |
|
4.
believe in the power of the individual to determine his own welfare; |
4.
conceive of contemporary culture as a spectacle before which the individual
is powerless; |
|
|
|
6.
regard industrialization as a vehicle to improve human welfare; |
6.
regard industrialization as a destructive province of capitalist elites; |
|
7.
subscribe to “grand narratives”, e.g., the Bible, the Industrial Revolution,
the rise of capitalism, the Marxist schema of social transformation; |
7.
reject “grand narratives”, including Judeo-Christian myth stories, theories
of capitalism, socialism; |
|
|
|
9.
are ethical absolutists who base beliefs, values, and hope on revealed
doctrine (orthodoxy); |
9.
are ethical relativists who base beliefs, values, and hope on socially agreed
“standards” that may change; |
|
10. believe that society
should follow religious or cultural standards that are considered inherently
correct; |
10. believe that society should
grant them rights to set their own standards and values; |
|
11. accept doctrinal creed or
logical proposition; |
11. emphasize story, personal
discovery, journey; |
|
12. desire to see all embrace
their absolutist doctrines; |
12. celebrate a diversity of
post-modern spirituality; |
|
|
|
14. believe that contact with
"other gods" is forbidden and that personal peace and oneness can
come only through their god; |
14. believe that other gods
and cultures can produce ultimate peace and oneness to their believers; |
|
15. regard church as the people of their god worldwide, saved
by faith, filled with their god’s spirit, and living by his word. |
15. regard church as an evolving organization continually in
need of revisioning and reconstruction to serve the
needs of the changing culture. |
Social commentators perceived that the cultural milieu of the late-twentieth century was becoming characterized by skepticism, ethical relativity, permissiveness, religious pluralism, and a victimhood mentality (i.e., everyone is a victim, no one is responsible, and society is to blame for anything bad that happens).[3] Crime and vandalism were on the increase. Expectations were rising that government should ensure that all of society’s needs are met and that government should prevent any from suffering harm or discomfort. For want of a better term, the emerging era became known by the rather unimaginative term “postmodern” to distinguish it from the Modern epoch prior to WWII.
The foundations of the so-called “Postmodern epoch” were laid during the nineteenth century by German and Austrian philosophers Karl Marx, Sigmund Freud, and Friedrich Nietzsche, and during the early twentieth century by French philosophers Jean-Francois Lyotard, Michel Foucault, and Jacques Derrida.[4]
In describing the present-day content of Postmodern thought, Edward W. Younkins says that
Many of today's leading intellectuals are postmodernists who accede to the ideas of anti-realism, skepticism, subjectivism, relativism, pragmatism, collectivism, egalitarianism, altruism, anti-individualism, the world as conflictual and contradictory, and emotions, instincts, and feelings as better and deeper guides to action than reason.[5]
Newspaper columnists add envy, resentment, self-righteousness, and outrage to this list. Thomas Sowell says that, “There was a time when most Americans would have resented the suggestion that they wanted someone else to pay their bills. But now, envy and resentment have been cultivated to the point where even people who contribute nothing to society feel that they have a right to a ‘fair share’ of what others have produced.”[6] Leonard Pitts says, “So much of what purports to be political discourse these days is instead this primal scream of self-righteousness and outrage.”[7]
Postmodernity has its detractors. M. J. Braun spoofs the physics quest for a unified theory of both cosmology and particle physics, i.e., a “unified theory of everything”, in a piece entitled "Postmodernism: A Unified Theory of All the Trouble in the World".[8] Edward W. Younkins, in a comment entitled “The Plague of Postmodernism”, says that “Postmodernism is the irrational response of today's intellectuals to the failure of socialism both in theory and in practice.“[9] Steve Mizrach surveys criticisms of postmodernism in his comment entitled “Talking pomo: An analysis of the postmodern movement”:
[Marxists] feel that postmodernism is a diversionary tactic, the last ditch of a late capitalism in the process of dying. …. Non-Marxist critics of postmodernism abound, too. The right wing foams at the mouth at the way it dovetails with multiculturalism, feminism, 'direct democracy,' the ‘communitarian’ movement, and some concerns they see as left-wing. The right-wingers feel that postmodernism is the last-ditch effort of a dying left wing.”[10]
Some commentators are uncertain whether postmodernity is a real phenomenon or only an expression of the hopes of certain cultural philosophers for transition to a utopian form of collective social organization. Nikolai Wenzel alludes to Postmodernism as a "cute way of interpreting literature, to the delight of sadistic faculty and the terror of students."[11] But he also says that Postmodernism is "more than a mere academic parlor-game, more than a technical and obscure fad for the salons of Europe, more than a fancy for a select few high priests at departments of cultural studies and English at scattered US universities."[12] Steven Yates is not hesitant to label Postmodernism a “racket” in a "hostile academic market" in which university academic departments "hire clones of themselves" to promote a collectivist agenda.[13] Both of these commentators acknowledge that the postmodern mindset has crept into Western intellectual thought to the point of influencing commercial decision-making and political policy, and it even shows up in various Christian literatures.
Assuming that the Postmodern worldview differs significantly from the Modern worldview and is influencing Western societies, some details of Postmodern thought that pertain specifically to economy and religion are summarized in the right side of Table 1 and will be referred to in subsequent chapters. Table 1 is constructed to enable row-wise comparisons of views between Modernists and Postmodernists. At the top of the table is a representation of a continuum between views of extreme Modernity and extreme Postmodernity. Intellectuals may define and comment upon the extremes, but the point of this continuum is that not all people in Western societies have adopted philosophical positions at either extreme, but rather may be somewhere between the extremes. Religious fundamentalists likely are closer to the Modernity extreme on the left end of the continuum. People who perceive themselves to be liberal and “liberated” from the constraints of doctrine and absolutist social values may put themselves closer to the Postmodernity extreme on the right end of the continuum. Many people will find themselves gradually moving in one direction or the other as they mature and as their social associations and perceptions change. There likely are generational differences in that people of older generations may tend to be closer to the Modernity extreme, while many in their child, grandchild, and subsequent generations may occupy social thought positions ever closer to the Postmodernity extreme. Great social transformations often take multiple generations to complete.
Postmodern commentators have generally favored socialism as the preferred form of economic organization to achieve distributional justice. It is ironic that toward the end of the twentieth century, many postmodern thinkers had come to a begrudging acknowledgement that the “end of history”[14] likely will include market economy as envisioned by Adam Smith in An Inquiry Into the Nature and Causes of the Wealth of Nations (1776) instead of the utopian communism envisioned by Karl Marx in Das Kapital (1867). The bases for the grudging acceptance of capitalism are threefold: the realization that capitalism is highest-level emergent form of economic organization, that capitalism has outperformed all other economic systems that have been tried, and that some form of capitalism is the natural fall-back position for societies that have experimented with other economic systems that have failed.
Early in the twenty-first century, Postmodernity’s extreme subjectivity, pessimism, ethical relativism, pluralistic tolerance of other religious traditions, and rejection of absolute truth seemed to produce a cultural malaise which weakened the “social glue” that binds society together. Some cultural commentators concluded that the fragmentation, pessimism, criticism, and nihilism of the Postmodern epoch is falling out of fashion, and that a new era refocusing on eternal truths and faith in them has begun to unfold. Some were even beginning to admit that ancient religious traditions continued to have relevance in spite of Postmodernists’ efforts to define them away. There also emerged an implicit recognition that many traditional pre-Modern beliefs that had been relegated by Postmodernists to the historical scrap heap had persisted through the optimistic Modern epoch and even survived the nihilistic Postmodern epoch. People again were feeling the need for more substantial bases of value in their lives. Positive themes identified in the new era are faith, trust, dialogue, and sincerity.
Cultural commentators have introduced various terms to describe the new era of the twenty-first century, including trans-modernism, pseudo-modernism, late-capitalism, the “New Sincerity”, and post-millennialism. But the least-imaginative descriptor, “post-postmodern,” seems to have stuck.* As with any newly emerging cultural orientation, it is difficult both to name it and to discern all of the emerging views and beliefs that ultimately may define it. And of course it remains to be seen whether post-Postmodernity has enough staying power that it can be regarded as a true “epoch”, or will it be only a passing intellectual fancy that withers on the vine after a few years. In any case, as with theories, it takes an epoch to displace an epoch.
Nikolai
Wenzel doesn't use any of the terms that have been proposed for the
post-Postmodern era, but he says that "parallel to the post-modern
rejection of modernity's bold aims, there is emerging a pre-modern religious
radicalization in the West" in the form of a "significant migration
towards more fundamentalist churches, especially in the US."[15] But post-Postmodern thought is not exclusively the
province of Christian fundamentalism. Its influence stretches into
mainstream American religious thought and practice as well.
___________
*In a New York Times column dated December 12, 2025, Thomas Friedman says,
(https://www.nytimes.com/2025/12/12/opinion/tom-friedman-david-brooks-polycene.html?campaign_id=39&context=audio&emc=edit_ty_20251212&instance_id=167855&nl=opinion-today®i_id=74240569&segment_id=212169&user_id=86b0d837dd357b2a6e0e749321f6ed7f)
Chapter 1 Endnotes:
[1] Some writers use the terms “modernism” and “postmodernism”. I prefer to use the corresponding terms ending with “-ity” rather than “-ism” on the assumption that “-isms” often refer to advocative ideologies, whereas “-itys” are more simply descriptions of states or conditions of thought that are not necessarily advocative.
[2] http://www.crossroad.to/charts/postmodernity-2.htm.
[3] Barry Spurr says that postmodernism is a political phenomenon deriving from a culture of resentment and victimhood, “Focus on Postmodernism: What is the difference between King Lear and Ginger Meggs?”, MercatorNet, June 2, 2006, http://www.mercatornet.com/articles/view/focus_on_postmodernism_what_is_the_difference_between_king_lear_and_ginger_/.
[4] Luther Tweeten and Carl Zulauf have provided an excellent discussion of the history and philosophical background of postmodernism in a paper presented to the 1999 annual meeting of the Agricultural and Applied Economics Association, “The Challenge of Postmodernism to Applied Economics”, http://aede.osu.edu/programs/anderson/papers_old/The%20Challenge%20of%20Postmodernism%20to%20Applied%20Economics.pdf.
[5] Edward W. Younkins, “The Plague of Postmodernism, http://www.quebecoislibre.org/04/041215-9.htm.
[6] Thomas Sowell, “Dismantling America, Part II”, August 18, 2010, http://jewishworldreview.com/cols/sowell081810.php3.
[7] Leonard Pitts, “A flagrantly reasonable conservative”, Miami Herald, August 22, 2010, http://www.miamiherald.com/2010/08/22/1787010/a-flagrantly-reasonable-conservative.html.
[8] M. J. Braun, (American Thinker, May 2, 2010, http://www.americanthinker.com/2010/05/postmodernism_a_unified_theory.html.
[9] Younkins.
[10] Steve Mizrach, “Talking pomo: An analysis of the postmodern movement”, http://www2.fiu.edu/~mizrachs/pomo.html.
[11] Nikolai Wenzel, "Postmodernism and Its Discontents: Whither Constitutionalism After God and Reason?" New Perspectives on Political Economy, Volume 4, Number 2, 2008, p. 179, http://pcpe.libinst.cz/nppe/4_2/nppe4_2_4.pdf.
[12] Wenzel, p. 160.
[13] Steven Yates, “A Thinker’s Guide to Postmodernism (Or: Anatomy of an Academic Racket)”, http://www.lewrockwell.com/yates/yates74.html.
[14] This is a term coined by Francis Fukuyama in his book The End of History and the Last Man, Free Press, 1992).
2. IDEOLOGY IN TRANSITION
The exposition of Postmodern cultural transition may have gained a lot of traction in the post-World War II era, but it is “not the only game in town.” “Communitarianism” began to be discussed during the last quarter of the twentieth century in reaction to John Rawls' 1971 book entitled A Theory of Justice.[1] Since the present work is about religion and economics, this chapter is focused upon an economics-based exposition of communitarianism in George C. Lodge’s 1975 book entitled The New American Ideology.[2] Lodge, a professor at the Harvard Business School, theorized that the ideology underlying American society is in transition away from its historical basis in Lockean individualism and toward European-style communitarianism. Although Lodge did not use the language of Postmodernity, what follows is a reconsideration of his thesis in light of early twentieth-century Progressivism and late twentieth century Postmodern thought. I have taken the liberty to use Lodge’s phraseology in the following discussion.
A common meaning of the term “ideology” is a value orientation that
advocates a relationship of political power or economic interest between
social groups. Such an ideology usually entails a program of political
action, e.g., communism, socialism, capitalism. Lodge uses a non-advocative
definition of ideology as a collection of ideas that underlie a good community,
i.e., the society's values that govern the ways in which its members behave
and relate to one another. Lodge says that a community depends upon
a common approach to values and some agreement as to how those values are
to be made operational in the real world.
The Emergence of Communitarianism
Lodge defines communitarianism as an ideology in which individuals finding meaning and fulfillment as members of the communities of which they are a part. In such communities enjoyment is found in the use of things that are not possessed as property. At the macro level (the whole society) such communities usually enable a planning role for the state to influence the allocation of resources that can meet community needs.
Lodge describes the dominant ideology of the ancient world as a primitive form of communitarianism. He explains that as populations grew and people began to live in close proximity to one another in what would become Europe, the community and its needs became ever more important relative to those of the individual. Individuals derived fulfillment and self-respect as members of the community of which they were a part. It became the role of property to promote the community welfare and to provide the economic goods needed by the community. Communitarianism evolved from its primitive state during medieval times to its late-twentieth century European form characterized by a focus upon community needs and a strong role for the state to play in defining and meeting those needs.
The ruinous wars among European nation states during the seventeenth
through early twentieth centuries may render suspect Lodge’s narrative
of the emergence of European communitarianism. However, in the wake
of World War II and in an effort to avert future wars among European neighbors,
a half-dozen European nation states in 1951 formed the European Coal and
Steel Community. Over the next half century this fledgling organization
morphed into the European Common Market, the European Community, and finally
the European Union encompassing twenty-seven nation states. The European
Union at the turn of the third millennium may be the clearest manifestation
of a macro-scale communitarian society as envisioned by Lodge.
Locke’s Ideology of Individualism
In contrast to the European experience, English philosopher John Locke's ideas about individualism[4] became the foundational ideology on the North American continent during the eighteenth and nineteenth centuries. Rugged individualism was essential to survival and success in the opening of American frontiers. In order to survive on the frontier, the individual had to exercise entrepreneurship by innovating and assuming risk. Individualism underlay the Declaration of Independence and the Constitution of the United States where Lodge says that it strengthened the sanctity of contract and the guarantee of equality of opportunity.
Lodge describes the eighteenth and nineteenth century Americanized version of Lockean ideology:
• Property rights are the best guarantee of individual rights to assure freedom from the predatory powers of the sovereign.
• Competition is essential to ensure that property is controlled by individual proprietors competing in an open market to serve consumer needs.
• Since the only reason for the existence of the state is to protect
the private rights of the individuals who comprise its society, the state
should be limited to serving this function.
Although present-day historians give little attention to the Progressive Movement of the 1880 to 1920 period, a careful examination of the tenets of Progressivism suggest that the roots of the American version of communitarianism lie in the Progressive Movement. The Progressive Movement was a post-Civil War effort by American social reformers to address the perceived ills brought on by the Industrial Revolution, the advent of modern capitalism, and the rise of corporations. American presidents Theodore Roosevelt and Woodrow Wilson were prominent Progressives. Although the Progressive era nominally ended around 1920, President Franklin Roosevelt’s “New Deal” depression recovery programs of the 1930s, President Lyndon Johnson’s “War on Poverty” and “Great Society” social programs during the 1960s, and President Barack Obama’s early twenty-first century programs to alleviate recession and restructure American society have followed in the Progressive tradition.
The political agenda of the 1880-1920 Progressive Movement included dealing with monopolistic control of markets, exploitation of workers, child labor, political corruption, and treatment of the poor, the mentally ill, and women. Political accomplishments of the Progressive era include passage of the Sherman Antitrust Act (1890), the Federal Reserve Act (1913), and the Clayton Antitrust Act (1914); amendments to the Constitution that provided for the enfranchisement of women (1920) and the prohibition of the production and sale of alcoholic beverages (1920, repealed in 1933); and the creation of a number of regulatory agencies, including the Interstate Commerce Commission (1887), the Food and Drug Administration (1906), and the Federal Trade Commission (1914).
Modern era thinkers placed great faith in the ability of science to improve human welfare. Progressives also value scientific advancement, but to be used for its political ends. Progressives rejected most of the other tenets of the Modern era. In his paper on “The Progressive Movement and the Transformation of American Politics”, Thomas West identifies beliefs commonly held by Progressives[3]:
Justice, rights, and freedom:
• there are no natural rights, only rights conferred by government;
• views of right and wrong are tied to particular times and specific circumstances;
• freedom is not a gift of God or nature, but of the state.
• consent of the governed and social contract are supplanted by the sovereignty of the state;
• the state is divine, the private sector is the realm of selfishness and oppression.
• government should protect the poor and other victims of capitalism through redistribution of wealth;
• government should manage the corporate sphere to avert victimization of the poor by the wealthy;
• government should exercise control over the details of commerce and production by dictating prices, methods of manufacture, and practices of the banking system;
• government should protect the environment through conservation of resources;
• government should provide "spiritual uplift" through subsidy and promotion of the arts and culture.
• scientifically and politically advanced nations should pursue international expansionism to foster law, order, righteousness, and peace (justifications for imperialism);
• only wise leaders educated in the social and natural sciences at the top universities should govern;
• private sphere productive activity should be managed by government agencies staffed by experts trained in advanced science.
American Ideological Transition
The Progressive Movement of the early twentieth century in America set the stage for what Lodge describes as an ideological transition from nineteenth-century Lockean individualism toward a European-style communitarianism during the post-World War II era. Lodge identifies a number of phenomena that have been instrumental in the American ideological transition: industrialization, urbanization, immigration, growth in the numbers and sizes of corporations, and unprecedented technological innovation. The Progressive Movement of the early twentieth century and the "Great Depression" of the 1930s resulted in an ever-expanding role for government in the American economy. Lodge notes that this expanding governmental role attained intellectual legitimacy with the publication of John Maynard Keynes' The General Theory of Employment, Interest, and Money (1936). The increasing urbanization of the American population after WWII led to expressions of increasing community needs in the form of public goods that are not produce by market economy.
Lodge says that corporations in the United States played roles in creating circumstances that have eroded individualism and induced communitarianism. In contrast to the historical perception of the corporation as the property of its shareholders who commission a management team to administer the corporate property to the benefit of shareholders, communitarianism has taken the form of consensus as the source of managerial authority.
Lodge notes that private property has ceased to be very important in the emerging American communitarian ideology. People realize enjoyment from the use of rented or leased things (apartments, furniture, appliances, electronic devices, automobiles) that do not have to be possessed as property. Rather than the survival of the fittest in the traditional Darwinian sense, in the emerging communitarianism of the late-twentieth century the right to own property has been replaced by an assumed right to comfortable survival, i.e., to enjoy adequate income, health, and other benefits associated with membership in the American community. The desirability of membership in the American community is evidenced by the continuing and increasing influx of immigrants, legal and otherwise, but such “membership” in the American community doesn’t necessarily require US citizenship.
In legislating rights (“entitlements”) to the benefits of community membership, American democratic polity has weakened the nexus between working and eating. By virtue of membership in the community, welfare safety nets have accorded community members the right to eat whether or how much they are willing to work. The continuing enrichment of welfare benefits is reputed to have impaired both work incentives and the drive to entrepreneurship as the vehicle for achieving survival.
A concomitant of declining entrepreneurship is increasing bureaucratization in the management of business organizations. Lodge says that businesses have ceased to be "enterprises" and have become simply productive organizations that are to be managed only in a routine sense. And with the emergence of consensus as the chief decision-making vehicle, even the need for management in the sense of authoritarian direction may become passé.
This emerging American communitarian ideology is characterized by an expanded process of planning to allocate resources in place of competitive market allocation, and by an ever-expanding role for the state as the agent to accomplish and implement the necessary planning.
According to Lodge, even as the underlying ideology is changing, American
society still indulges in the rhetoric of its old ideology of individualism,
and still attempts to cling to the tenets of the old ideology in spite
of the realities of social change. The consequences of an American
societal reluctance to accept or even recognize the realities of ideological
change are confusion over the roles of individuals, institutions, and the
state, and a questioning of institutional legitimacy and authority.
The institutions whose legitimacy and authority are most at question are
large corporations and government itself.
Postmodernity or an Alternative?
Lodge presents a vision of American ideological transformation that is coincident with Postmodern cultural transformation. Locke’s concept of individualism dates to the Modern epoch, but it is not clear whether Lodge’s thesis about the twentieth century American transition to a communitarian ideology is a complement of Postmodern thought or an alternative to it.[5] There are many contrasts and a few overlaps. Elements of both visions ring true. They differ in terms of social cohesion, but they come to similar conclusions in regard to the role of the state.
• Individualism plays a key role in both Postmodern thought and in Lodge’s thesis. Postmodern thought takes individualism to an extreme in the form of intense subjectivity of needs and wants. In Lodge’s thesis, individualism is suppressed by the rising importance of community needs.
• Lodge says that a community depends upon a common approach to values and some agreement as to how those values are to be made operational in the real world. He implies that a community’s collection of values emerges and stabilizes over a long period of time. This is consistent with Modern era belief in absolute values, but it is in conflict with the Postmodern notion that values should be subjectively determined and that socially agreed values and behavior standards must change in response to culture changes.
• Lodge implies that a transition to a communitarian ideology entails increasing social cohesion within the community. Postmodernists perceive Western society to be suffering ever more fragmentation and social disintegration.
• The increasing planning and regulatory role of the state in the American transition to a communitarian ideology is congruent with Postmodern advocacy of increased governmental regulation of market economy to correct its faults.
• Lodge’s observation of the diminishing desire to own private property and the increasing use of property to meet community needs is consistent with the Postmodern advocacy of the socialization of the ownership of property.
Lodge’s thesis culminates in a socially cohesive community that relies upon shared values that have been proven by the test of time. In this sense, Lodge’s perception of a communitarian ideology may be more applicable to micro-level communities than to the larger society. Although the European Union continues to exhibit the stresses and strains of ethnic and nationalistic diversity, it has demonstrated a modicum of social cohesion at the international level.
Both communitarian ideology and postmodern thought envision an ever-increasing role for the state to play in the economy. The communitarian requirement is for the state to undertake an ever-expanding role in perceiving community needs and planning for their provision. The postmodern requirement is for the state to undertake an ever-expanding regulatory role to offset or correct the flaws of market capitalism. The postmodern and communitarian agendas converge in that unregulated market economy fails to provide public goods that meet community needs.
In both visions, economic growth can be expected to slow as society
loses its entrepreneurial drive, as it becomes bogged down in bureaucratic
decision-making in both the public and private sectors, and as government
takes an ever-greater decision-making role in the economic realm.
Some may hope for a post-Postmodern cultural transformation to rescue future
societies from both of the extreme conclusions.
Post-Postmodern Cultural Transformation
What might a post-Postmodern cultural transformation look like? It is much too early in a post-Postmodern era to try to make definitive statements, but it is probably safe to predict that further cultural transformation of American society will depend upon politics and religion as the twenty-first century continues to unfold.
It is only a conjecture that if liberal political interests should continue to dominate American politics, further progression toward communitarianism likely will ensue with an ever-expanding role for government planning to meet perceived community needs.
It is also only a conjecture that should the forces of conservatism capture the American political apparatus, a post-Postmodern cultural reversion toward a more Lockean ideology may follow. However, much of the Progressive and communitarian agendas of the twentieth century have been institutionalized by law and are likely to persist. A more conservative American polity may constrain the growth of the taxing, spending, planning, and regulatory functions of government, and thereby facilitate the restart and acceleration of the economic growth process. If ballooning government budgets force the trimming of welfare entitlements, American society could experience something of a revival of personal responsibility for individual and family welfare. Critical enabling conditions for such a transformation would include a revival of religious faith and associated religious values, and a renewal of the importance of family and religious institutions for inculcating those values to succeeding generations.
These considerations imply three possible prospects for the further cultural transformation of American society:
• further progression toward communitarianism characterized by an ever greater planning role for government to identify and provide for community needs; or
• a post-Postmodern reversion to a more Lockean ideology of individualism, personal responsibility, and a more limited role for government.
Communitarian Ideology at the Micro Level
Communitarian ideology may be more important at the micro level of local organizations than at the macro level of a whole society.
The local church may be the epitome of a communitarian society at a micro level. Church memberships are self-selected on the basis of a number of criteria, two of which are mission and a shared set of values. Members who find that they no longer share the expressed values and mission of their church are free to leave that church and to seek another church that is more closely aligned with their own values and goals (consistent with Postmodern thought). The self-selection characteristic renders church membership relatively homogeneous with respect to shared values and mission so that social cohesion within a church membership usually is strong.
Most social, professional, and voluntary charitable organizations also exhibit communitarian characteristics in that they have self-selected memberships and are based on shared values. The social cohesion within such organizations depends upon the degree to which the goal of the organization is compelling and the strength of commitment of members to the organization’s goal.
The family may also exhibit the communitarian characteristics of social cohesion and shared values. Membership is automatic by birth, but either parent may depart the family community by divorce or death, and children usually depart the nuclear family as they mature. The degree of social cohesion within the family depends upon parental agreement or dominance, and the discipline that is imposed upon the children by the parent figure(s). The family may be nuclear consisting of only parent(s) and children (natural and/or adopted), or extended to include grandparents, grandchildren, aunts, uncles, cousins, etc. The social cohesion of an extended family may center upon a dominant patriarch or matriarch.
The ensuing social fragmentation, the breakdown of the family, and declining church attendance have been instrumental forces in bringing about the ethical relativity, permissiveness, victimhood mentality, and increasing crime and vandalism that have characterized the Postmodern era. As noted above, a revival of religious faith and associated religious values, and a renewal of the importance of family and religious institutions for inculcating those values to succeeding generations, would be crucial to a post-Postmodern emergence of a more civil ideology characterized by responsibility, honor, respect, and tolerance.
It may seem unlikely and perhaps ironic that social structures exhibiting
communitarian characteristics should be instrumental in transmitting a
more individualistic and self-reliant post-Postmodern ideology. The fact
that the local church and the family entail shared values and high social
cohesion doesn’t necessarily mean that they are the foundations of communitarianism
at the macro level, i.e., the level of the whole society. The family
is the first and principal venue for forming and conveying values to succeeding
generations. The church stands just behind the family in forming,
conveying, and reinforcing values. If we are indeed entering a post-Postmodern
era, any ideological and cultural transformation must begin with family
and church.
Chapter 2 Endnotes:
[1] John Rawls, A Theory of Justice, Harvard University Press, 1971. A good discussion of the idea of communitarianism and the late-twentieth century movement may be found in Daniel Bell’s entry in the Stanford Encyclopedia of Philosophy, http://plato.stanford.edu/archives/fall2010/entries/communitarianism/ and at http://plato.stanford.edu/entries/communitarianism/).
[2] George C. Lodge, The New American Ideology, Alfred A. Knopf, New York, 1975.
[3] Thomas West, “The Progressive Movement and the Transformation of American Politics”, The Heritage Foundation, July 18, 2007, http://www.heritage.org/research/reports/2007/07/the-progressive-movement-and-the-transformation-of-american-politics.
[4] John Locke, Two Treatises of Government, 1689.
[5] See Steve Mizrach’s discussion of criticisms of postmodernism
in “Talking pomo: An analysis of the postmodern movement”, http://www2.fiu.edu/~mizrachs/pomo.html.
BACK TO CONTENTS
3. POLITICAL ECONOMY IN THE
POSTMODERN ERA
A review of post-World War II political economy experience may be helpful as we attempt to discern the impacts of Postmodern and Communitarian movements upon economic systems and the role of government in the economy. The term “political economy” refers to the undivided study of economics and politics before the two disciplines drifted apart around the turn of the twentieth century. In the present day the term is taken to refer to the complex of interaction between the economic and political realms.
It is not certain how either Communitarian or Postmodern cultural and intellectual transformations of Western societies in the post-World War II period bear upon political economy. Nor is it clear how the post-WWII economic and political events bear upon Communitarian and Postmodern cultural and intellectual movements of Western societies. It is at least true that political economy changes and the Communitarian and Postmodern cultural and ideological transformations of Western societies have been contemporaneous in the post-WWII period. We will be on the lookout for possible symbiotic relationships between changes in post-WWII political economy and in Postmodern culture.
The political economy changes of the post-WWII era have occurred in
four broad areas: technological advances and the globalization of
commerce, monetary matters, economic and political integration, and the
diminishing importance of the nation state.
Technological Advance and the Globalization of Commerce
Post-WWII technological advances in transportation, communications, and computing have facilitated global trade and made it difficult to tell where economic transactions actually take place. The digitization of finance and market transactions has enabled the globalization of markets for capital, materials, components, final goods, services, and intellectual creations (intellectual "property" such as software, games, music, etc.). Both tangible products and services may be composites of elements or components sourced in different countries, so it may be difficult to specify “country of origin” except with regard to the final point of manufacture or service provision.
During the post-WWII era, the manufacturing of tangible goods has accounted for an ever-smaller proportion of global economic output, and many of the pre-war “industrial countries” have become predominantly service economies. Correspondingly, an ever-greater proportion of global output consists of intangible services and intellectual property, the ownership and control of which is becoming ever more tenuous. The concept of "property" itself is becoming ambiguous in terms of both the ownership of it and the distinction between private and public property. This is consistent with the communitarian ideology.
Multinational (or transnational) enterprises (or corporations), i.e., MNEs, MNCs, TNCs, have risen in pursuit of international resource allocative efficiency via foreign direct investment (FDI), offshoring, and outsourcing production of products and services that can be marketed globally. Early in the third millennium, the annual global gross sales revenues of many MNEs exceed the Gross Domestic Products of many of the nation states within which they conduct business. A global corps of elite managerial capacity has emerged to staff MNEs and non-government organizations (NGOs) without reference to national origin or identity.
The General Agreement on Tariffs and Trade (GATT) and its successor
organization, the World Trade Organization (WTO), have worked to diminish
international trade restraints in the forms of tariffs, quotas, and other
non-tariff barriers. In the face of protectionist sentiment, the
inability of the WTO to achieve universal elimination of trade barriers
has led governments of some countries to enter into bilateral and occasionally
multilateral agreements to establish favorable trading arrangements between
or among themselves. But nationalistic protectionism persists in
ever more subtle forms, often under pressures exerted by labor unions.
With the diminution of trade restraints, MNE supply and distribution chains
have become less constrained by political border formalities, and MNEs
have learned to play-off countries against one another in the quest for
most favorable production cost locations.
Monetary Matters
Western populations have continued to hold ever less of their money in the form of coin and currency, and more in the form of digitally-recorded bank account balances that facilitate international commercial transactions and fund transfers. Following the Allied victory in WWII, the US dollar (USD) has emerged in the post-WWII period as the currency most commonly used in international transactions. During most of the post-WWII period, the bulk of international trade transactions have been denominated in USD. Early in the third millennium, the dollar’s privileged position is being challenged by the European Union’s currency, the euro, and it may be challenged in the future by the Chinese yuan.
Money creation and monetary policy to control it are vested in the Federal Reserve (the US central bank established by Act of Congress in 1913) that is tasked with the dual responsibilities of maintaining price stability and promoting stable economic conditions (low-enough rates of unemployment, and fast-enough rates of economic growth). Discretionary policy enthusiasts maintain that over the course of the twentieth century, with the exception of the “Great Depression” of the 1930s decade, the centralized monetary and fiscal policy capabilities of the US federal government agencies have been reasonably successful in ameliorating the magnitudes of economic swings and limiting their durations. The exigencies of the “Great Recession” of 2008-10 have shaken faith in the capabilities of the Federal Reserve and the Treasury Department to maintain economic stability of the US economy.
The privileged position occupied by the dollar in the post-WWII era has enabled monetary policy implemented by the Federal Reserve to have global impact. Some other countries that have been unable to muster sufficient fiscal and monetary discipline to avert inflation have yielded monetary control to the Federal Reserve by “dollarizing” their currencies. Dollarization has occurred either by official government action (Argentina), or informally as their populations have preferred to use and receive dollars in commercial transactions (Peru). The dollar’s privileged position has also enabled the US Department of Treasury to finance US government budget deficits year-after-year by continually issuing ever more Treasury bonds that are desired to be held as “safe assets” by parties around the world, including governments of other countries. Excessive issuance of US Treasury bonds may in the future result in skepticism of the ability of the US government to redeem them, and thus to diminish their desirability if the quantity supplied of them begins to exceed the quantity demanded.
Since the turn of the third millennium, the euro has also attained a
similar (but lesser) privileged position, and the monetary policy implemented
by its issuer, the ECB, is also having global effects. A growing
proportion of world trade is being denominated in euros instead of dollars.
And, a few countries outside of the European Union either have “euroized”
their currencies or are contemplating doing so.
Economic and Political Integration
The United States of America is the epitome of successful economic and political integration across a continent-wide collection of constituent states that are subject to the authority of a federal form of national government. Under the Constitution of the United States of America, the constituent states have no money creation or monetary policy authority, and they are forbidden to incur more than occasional and trivial budget deficits that are financed by debt issuance. States are encouraged to build “reserve funds” during periods of economic expansion and increasing tax revenues to cover deficits that may occur during periods of economic contraction and falling tax revenues. The federal nature of the government of the US enables a central fiscal policy as authorized by Congress and implemented by the US Department of the Treasury. However, fiscal policy skeptics note that US fiscal policy is subject to unpredictable lags and often is dominated by the need to finance programs enacted by the Congress rather than the needs of economic stability. Also, given state-level program needs and so-called “unfunded federal mandates”, state government budgets rarely are able to build reserve funds during cyclical upswings that are adequate to meet deficits incurred during economic downturns.
In the early 1990s, the governments of the three countries of North America negotiated the North American Free Trade Agreement (NAFTA) to gradually enable free trade among the US, Canada, and Mexico. Although there continues to be opposition to NAFTA among US labor unions, there has emerged a general consensus that NAFTA has been an economic integration success in enhancing the welfare of the populations of the three countries. The Bush (G.W.) administration promoted discussion of the possibility of negotiating a Free Trade Agreement of the Americas that would span as many of the countries of the Western Hemisphere as wish to participate. Because negotiations in this regard seem to have bogged down, the US and various countries of the Western Hemisphere have negotiated bilateral trade agreements that are reputed to have mixed effects of trade creation and trade diversion for the global economy.
Late in the twentieth century, there have been movements of groups of neighboring countries in other parts of the world (Europe, South America, Southeast Asia) to pursue economic integration. The European Union (EU) thus far has achieved the greatest success in an effort at economic integration among its seventeen member states. Another eight states, most of them former constituent or client states of the Soviet Union in Eastern Europe, have applied for membership and are awaiting accession to the EU when their economies, currencies, and polities are judged of sufficient compatibility with the EU. Fiscal stresses of the 2008-10 “Great Recession” could slow or stop the process of political integration and possibly lead to “de-integration” of the EU if the more fiscally sound northern-European countries decide to part company with the more profligate southern-European countries that have indulged in ever-growing budget deficits.
States in other regions of South America and East Asia that have achieved some modicum of economic integration are contemplating further economic and political integration, but cultural and sovereignty issues may prevent full integration and could result in de-integration.
English became the lingua franca of the British Empire (over which “the
sun never set”) during the nineteenth century. Although French, Spanish,
Dutch, and Portuguese are widely spoken in the former colonies of other
European powers, English has emerged in the post-WWII era as the de facto
common language of commerce, industry, finance, technology, entertainment,
international airline travel, academia, and polity. An exception
has occurred in the EU as the preferred languages of the constituent states
have been preserved and continue to be translated in EU parliamentary and
directorate activities. The privileged position of English may be
challenged in the future by another language, most likely Mandarin Chinese
as the Chinese economy eclipses the US and other English-speaking Western
nations in population, economic size, and technological prowess.
The Nation State
The geographic political borders of the Modern era have become ever less significant to the regional movements of people, capital, materials, physical products, intellectual products, services, and technology in the post-WWII period. The diminishing significance of territorial borders has called into question the relevance of the sovereignty of nation states that came into existence during the Modern era. The diminishing relevance of territorial borders and state sovereignty has rendered ambiguous tax and regulatory jurisdictions of nation states.[1]
International immigration has increased as political borders have become more porous and economic integration processes have removed barriers to human mobility among the integrating states. Rising unemployment together with racial, ethnic, and labor union opposition to immigration has curbed mobility in some regions, notably North America and Western Europe.
MNE managements are exercising ever-greater influence over the governments of the countries in which they operate. Although Western political ideology favors democratic governance of independent nation states, MNE governance is hierarchically authoritarian (rather than democratic). There may be a semblance of democracy in MNE governance because MNE managements typically are appointed by boards of directors that are elected by shareholders. Since share ownership usually is widely dispersed, it is not uncommon for board elections and management appointments and compensation to be dominated by managements themselves through the proxy voting process. MNE managements, not democratically elected in any of the countries in which they operate, have learned to exercise political prerogatives and wield political influence over the governments of the countries in which they do business.
MNE growth has occurred by foreign direct investments (FDI) and international acquisitions and mergers. MNEs also negotiate international strategic alliances that are ad hoc relationships which expire once their strategic goals are met. Strategic alliances are hetarchical (rather than hierarchical) webs that span territorial boundaries.
Supernational NGOs have become internationally active and influential. Among them the various agencies of the United Nations, the International Monetary Fund, the International Labor Organization, the World Bank, the World Trade Organization; various religious missionary organizations such as the Catholic Relief Organization and the International Mission Board of the Southern Baptist Convention; and secular eleemosynary organizations such as Green Peace and Doctors Without Borders.
An ever-growing number of terrorist and pirate organizations have arisen
to wreak havoc upon international economic activity and political relations
among nation states.
Political Economy in the Postmodern Epoch
Economic growth has ensued around the world during the post-WWII period, usually at faster paces in market economies with democratic polities than in authoritarian states.[2] The effect of growth has been to alleviate poverty and improve human material welfare, though unevenly as income distributions, both within nation states and among them, have become more unequal.
Capitalism, criticized by Postmodern commentators for exhibiting numerous faults and shortcomings, has survived challenges of fascism, socialism, dependency theory, and liberation theology. Some form of capitalism remains the fallback economic system when experiments with other forms of economic organization have failed.
Democracy, the political form favored by most Western nation states, continues to be challenged by communitarian and postmodern advocates of socialist political structures. Yet it persists because, as explained by Winston Churchill, “No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”[3]
While some commentators take the European Union to be a manifestation of communitarianism, others have suggested that the European Union may be an example of postmodern thinking in regard to political economy.[4] Within the EU the Modern era structure and sovereignty of the nation state is gradually being demoted to the status of a constituent region of a greater communitarian political entity. Although the constituent regions nominally retain their Modern era identities as nation states, sovereignty has been yielded to the Union, cross-border formalities are being eliminated within the EU, national laws and regulations are being harmonized to Union standards, commodity and financial markets are being homogenized under the guise of the “single market” system, and religious influence over EU polity has all but evaporated.
Offsetting this “postmodernization” of the larger European region has been the gradual acceptance by the member states of a proposed constitution that provides for an executive (a “president”) and a Union-level officer to represent a unified political voice and face to the outside world in regard to international affairs. The new EU constitution stops short of full political integration to establish a federal system with a centralized treasury that can exert a Union-wide common fiscal policy. Critics of the EU constitution (many of whom are also advocates of an American style federal system) assert that without a centralized fiscal authority the member states can continue to run unconstrained budget deficits. Inevitably, deficits financed by issuing ever more public debt are likely to be monetized as the ECB attempts to control interest rates, and the growing money supply has the potential to accelerate inflation. The economic stability of the EU thus will remain tenuous in spite of the best efforts of the ECB to avert inflation by exercising monetary policy over the sixteen states of the “euro area” (more commonly referred to as the “eurozone”), i.e., those that have opted to replace their national currencies with the euro. Three member states (the UK, Denmark, and Sweden) have negotiated the continued use of their heritage currencies, but eight future accession states are legally required to adopt the euro as soon as accession requisites are met.
In the absence of full political integration that would enable a common fiscal stance across the EU, the “Great Recession” of 2008-10 has put fiscal stresses on the governments of some of the member states of the EU (notably Greece, Ireland, Portugal, Spain, and Italy) as their government budget deficits have grown and their public debts have mounted. Other EU states (notably Germany and the Netherlands) have continued to be models of fiscal probity. The accumulation of public debts by EU member states is threatening the viability of both the euro and the Union itself.
Stephen J. Kobrin conjectures that medieval forms of political organization may help to discern the political nature of the world during the Postmodern era and what it might be like in the future[5]. He notes that during the Medieval epoch, there were no nation states, defined borders, or national sovereignty, all of which emerged during the Modern epoch. Kobrin says that “Medieval European borders were diffuse, shifting and permeable”[6] such that political power was wielded within a complex system of overlapping authorities with respect to which political authorities owed multiple allegiances that might or might not be hierarchical in structure.
Early in the twenty-first century, political power may be exercised in a manner similar to medieval political structures in that territorial borders are of diminishing significance to both political authority and economic activity. NGOs, MNEs, and other non-state political actors operate across political borders, and territorial borders have become virtually inconsequential within economically integrated regions. Kobrin suggests that the nation state may be an anomaly of the Modern epoch that may not survive the Postmodern epoch. Modern era nation states may not completely disappear, but communitarian polities on the EU model appear to be the most likely successors.
Present-day MNEs conduct sourcing, production, and distribution activity and are learning to exercise political prerogatives almost without regard to political boundaries. The strategic alliances negotiated by MNEs are webs of commercial relationships that resemble the complex and overlapping authorities of the medieval epoch.
Orthodox Christianity served as the unifying political as well as religious ideology of the Medieval epoch. Kobrin says that “cyberspace is not physical, geometric or geographic” and “External reality seen through the World Wide Web may be closer to medieval Christian representations of the world than to a modern atlas.”[7] A problem for a postmodern world characterized by extreme subjectivity and social fragmentation is the absence of an effective unifying ideology. Kobrin suggests that in the Postmodern era a number of “unifying and universal ideologies, such as liberalism, democracy, a belief in the power of technology or environmentalism”[8] are possible. Yet another possibility is that Judeo-Christian beliefs may be sufficiently resilient to serve as the foundational ideology of the post-Postmodern era.
Nikolai Wenzel notes a late-Postmodern era turn toward religious fundamentalism
in Western societies, particularly in the US, but he says that fundamentalism
“is not, per se, a postmodern phenomenon” because “it rejects Modernism’s
secularization and Postmodernism’s rejection of truth.”[9] Rather,
it is a “rejection to the radical relativism of Postmodernism.” In
this sense it may be a harbinger of the end of the Postmodern epoch and
the beginning of what is being called the “post-Postmodern” era.
Chapter 3 Endnotes:
[1] See discussions about the diminishing significance of territorial borders by Robert Cooper in “The new liberal imperialism”, Observer Worldview Extra, April 7, 2002 (http://www.williambowles.info/sa/robert-cooper.html), and Steven J. Kobrin in “Back to the Future: Neomedivalism and the Postmodern Digital World Economy”, Chapter 6 in The Globalization and Governance, Aseem Prakash and Jeffrey Hart, eds., Routledge, 1999.
[2] The recent higher annual rates of growth of the Chinese economy appear to be an exception, but the authoritarian Chinese Communist Party adopted market economy vehicles to accelerate growth by the last decade of the twentieth century and provided artificial export advantages for the Chinese domestic economy by keeping its currency, the yuan, undervalued relative to other currencies.]
[3] Winston S. Churchill, speech in the House of Commons, November 11, 1947.
[4] See Robert Cooper’s discussion about the EU as an example of a postmodern system in “The new liberal imperialism”, Observer Worldview Extra, April 7, 2002, http://www.williambowles.info/sa/robert-cooper.html.
[5] Stephen J. Kobrin, “Back to the Future: Neomedivalism and the Postmodern Digital World Economy”, Chapter 6 in The Globalization and Governance, Aseem Prakash and Jeffrey Hart, eds., Routledge, 1999.
[6] Kobrin, p. 8.
[7] Kobrin, p. 11.
[8] Kobrin, p. 26.
[9] Nikolai Wenzel, “Postmodernism and Its Discontents: Whither
Constitutionalism After God and Reason?” New Perspectives on Political
Economy, Volume 4, Number 2, 2008, p. 172.
BACK TO CONTENTS
PART 2. ECONOMIC SYSTEMS
4. COMPARING ECONOMIC SYSTEMS
Both Postmodern and Communitarian thought envision fundamental changes in the structure of the economy and the role of government in it. The purpose of this chapter is to consider implications for religious practice of the alternative forms of economic systems that societies may choose.
“Comparative Economic Systems” (CES) was a standard course title in
the course listings of undergraduate economics departments in US colleges
and universities prior to about 1990. The principal subject matter
of a CES course was a comparison of the organization and functions of the
two types of economic systems seemingly joined in mortal combat after World
War II and during the so-called “cold war” era.
Capitalism Contested
The grand contest between market capitalism and authoritarian socialism, begun in 1917 with the Bolshevik Revolution in Russia, came to an end in 1989 with the demise of the Soviet Union. The Soviet experiment with authoritarian socialism failed because of inherent inefficiencies of centralized direction, ever worsening bureaucratic morass, and fiscal "bankruptcy" precipitated by the Soviet effort to match the American "cold war" military buildup. With the final discrediting of authoritarian socialism, market capitalism stood as the clear winner. Since 1989, most of the former historically planned economies (HPEs) have been attempting, with varying degrees of success, to resurrect or establish functional market economies. HPEs are said to be in transition from central control of their economies toward decentralized functioning as market economies.
In the wake of the demise of the Soviet Union, CES courses disappeared from many economics department course listings because the competition between market capitalism and authoritarian socialism seemingly had been settled. Few new editions of CES textbooks were written. Socialism had failed; capitalism was still standing. The contest was over. What was left to compare? Only around the turn of the third millennium did the subject matter of CES begin to reappear in economic department course listings, often in the guise of a new course title, “Transition Economies”, with focus upon the HPEs.
Karl Marx in Das Kapital identified a number of different systems for organizing an economy: communalism, tribalism, feudalism, capitalism, socialism, and communism. The first four of these are a succession of naturally emerging stages of ever-greater sophistication and complexity. Capitalism, the "end-game" of this natural progression, is also the default form of economic organization in the sense that it is the form of economic organization that a society will end up with unless the society makes a deliberate choice of some other form of economic organization. Market capitalism can be described as a combination of private ownership of the means of production coupled with dispersed and participatory decision making through markets.
Marx thought that societies inevitably would choose an alternative to market capitalism. He hypothesized that capitalism would exhibit an ever sharper dichotomization of society into a property-owning class of capitalists and a propertyless laboring class. Worsening class conflict would culminate in violent revolution of the laboring class to overthrow the capitalist class in order to establish a "dictatorship of the proletariat." Authoritarian socialism, Marx's "dictatorship of the proletariat" can be described as a combination of state ownership of the means of production coupled with centralized decision making.
The Marxian schema beyond capitalism has not happened, at least not in the industrial societies of Western Europe where Marx anticipated it. It didn't occur to Marx that the revolution would come in the near-feudalistic state of Czarist Russia. It was never very successful there because Russia simply had not first passed through a capitalist phase. The Soviet authorities found that they had to accumulate a stock of capital before they could make progress in the socialist quest to achieve efficient production through managerial rationalization. In the end, a faulty incentive system and bureaucratic excesses coupled with efforts to match the American "star wars" military expenditures brought the socialist experiment to an end. Today, virtually all of the former constituent states of the Soviet Union as well as its former client states are hastening to privatize state-owned assets and establish working market economies.
The principal reason that the socialist revolution never occurred in the industrial countries of Western Europe where Marx expected it is that their societies found a mutuality of interests. Workers became capitalists through their pension funds, and capitalists became hired managers working for the shareholders. Today in these countries and the United States, the ownership of corporate shares is widely dispersed, both to pension funds and to individual persons. It is doubtful that a Marxian-style revolution ever will be a realistic prospect for the United States or the market economies of Western Europe.
During the 1930s and '40s, an authoritarian variant of capitalism, fascism,
was implemented in Spain, Italy, Germany, and Japan. Fascism couples private
ownership of the means of production with centralized determination of
the answers to the fundamental economizing question. Although Fascism nominally
was banished from the world stage by the victorious Allies in 1945, variants
of it can still be found in certain third-world countries.
The Bible on Economic Systems
Since market capitalism seems to have withstood all onslaughts, one might well ask, “Is God a capitalist?” A good friend and colleague who is a political scientist says that I make God out to be a capitalist. Although he says it in jest, perhaps this is a good point at which to confront the charge.
It is noted in Acts 2:44 and 4:32 that members of the early church pooled their possessions and held all things in common. In Acts 2:44, they “parted” (distributed) to all according to need, thereby establishing a model for socialism. Given the proclivities of Christians to altruistic giving and sharing the wealth, an equally good question might be "Isn't God a Socialist?"
The Judeo-Christian Bible provides no guidance in the selection of an economic system, perhaps because economic systems were not topics of discussion in biblical times, or perhaps because God simply leaves this matter to human discretion. In any case, the Bible does not contain the words "capitalism", "socialism", or any other term that might be construed as a form of economic organization.
There are certain proxy words for capitalism that do appear in the Bible. Markets are central to private enterprise capitalism. Biblical references to markets, trade, and merchants suggest that people have been engaging in trade nearly from the beginning of time, and that markets were the normal venues for conducting trade. There is no suggestion that an economic system based upon markets is per se undesirable or inappropriate. The extensive reliance upon markets for distribution of goods and allocation of resources during biblical times confirms the existence of private property since one must have a property right in something in order to sell it.
Merchants were the instrumental agents on the seller's side of biblical markets, just as they are in modern markets. Although most of the references to merchants are neutral, in Hosea 12:7 the writer says that "The merchant uses dishonest scales; he loves to defraud." (NIV) It is not clear whether this should be taken as a reference to all merchants, or to one particular merchant. In Isaiah 23:8 the merchants of Tyre are described as “princes, whose traders are renowned in the earth”; in Matthew 13:45 Jesus says that “the kingdom of heaven is like a merchant looking for fine pearls.”
Postmodernists abjure what they call “grand narratives”, including not
only the creation myth stories and resurrection accounts in the Judeo-Christian
Bible, but also expositions of the rise of capitalism and the prospects
for socialism to replace it. Late in the Postmodern era, postmodern
thinkers seemed to come to a grudging acceptance of capitalism for a number
of reasons. One is that capitalism is the highest-level emergent
form of economic organization. Another is that alternative systems
that have been tried have failed. Capitalism is the system upon which
societies have fallen back when they have experimented with fascism, socialism,
and other forms of economic organization. Capitalism has out-performed
all other economic systems in generating economic growth that has improved
material human welfare by increasing per capita incomes.
Virtues and Problems of Capitalism
Several factors commend market capitalism as the economic system of choice.
• Except to maintain the "rules of the game," market capitalism does not require the exercise of centralized authority unless its market mechanisms do not function satisfactorily (a charge that is commonly leveled by Postmoderns and other critics of capitalism).
• Competitive market participation makes for "consumer sovereignty" rather than state sovereignty. In competitive markets consumers dictate to producers what to produce.
• Indeed, as long as markets yield a socially satisfactory mix of consumer
goods and services, no central direction or coordination is needed; the
system "works itself".
• The incentive structure of market capitalism contains a mechanism
that automatically pursues economic efficiency.
• Because of private ownership of property in capitalism, the problem of "dipping from a common pool" is avoided.
• Perhaps the most important aspect is that market capitalism is the
economic system that provides best venue for the exercise of both economic
and religious liberty.
• Markets may fail to recognize some costs and some benefits. Markets tend to overproduce goods causing “spillover costs” and underproduce goods providing “spillover benefits”.
• Markets won't produce "public goods" because they are too expensive for single consumers to purchase, because individual consumers cannot exclude others from the use of them, and because it is difficult for consumers to meaningfully assess their benefits relative to their market prices.
• In a market economy, competitive conditions may be impaired when some producers are able to attain monopoly power or position.
• Market economies naturally entail some degree of instability in the form of cyclical expansion and contraction, with attendant episodes of unemployment and inflation.
It is likely that God leaves economic arrangements in this material world entirely to human discovery and discretion. Market capitalism may be only the end stage in economic system evolution from primitive communalism through tribalism and feudalism. But it is the economic system that society gets if it does not make a deliberate choice of an alternative form. The two most prominent of the alternatives that have been tried during the twentieth century, fascism and authoritarian socialism, require deliberate political choice effected through the ballot box or by revolution, but both have been demonstrated by historical experience to be even more flawed than is capitalism.
President George W. Bush, in a speech to the Manhattan Institute, defended
U.S.-style "free-market" capitalism as the best hope to cure the world's
financial problems and promote prosperity in both developed and developing
nations:
Chapter 4 Endnotes:
[1] George W. Bush, "The Surest Path Back to Prosperity," The Wall
Street Journal, November 15-16, 2008, p. A11.
BACK TO CONTENTS
5. THE DEATH OF CAPITALISM
Humans have been trading with one another from nearly the beginning of their existence on earth. Chapter 25 of the book of Genesis relates the exchange of a birthright for bread and pottage between brothers Esau and Jacob.
Market economy has continued to emerge and survive through the ages. It may be tempting for thinkers on the political right to argue that capitalism must be ordained of God. But in their saner moments they surely must recognize that capitalism and all other forms of economic organization are purely human organizational contrivances.
During the twentieth century, capitalism has been the fallback economic system when experiments with others have failed. This begs the question of whether it has endured by God's acquiescence. But the recent tribulations of market-organized economies makes one wonder if God's tolerance of humankind's longest-surviving form of economic organization may be coming to an end.
The end of capitalism has been foretold almost from the beginning of its identification by Karl Marx in Das Kapital (1867) as a form of economic organization characterized by investment in capital for profit. Marx himself hypothesized that internal contradictions of capitalism (bourgeoisie exploitation of the proletariat) would bring about its end. It would terminate in violent revolution as the proletariat rose up against the capital-owning bourgeoisie that would be replaced by a dictatorship of the proletariat.
During the financial turbulence of late 2008, there has been a revival of assertions of the death of capitalism, or at least "American style capitalism". The cover of the October 18th edition of The Economist shows a relief of a mortally wounded lion with the caption "Capitalism at Bay".[1] The cover of the October 27 issue of Business Week depicts images of Henry Paulson and Ben Bernanke with the caption "The Future of Kapitalism".[2] Anthony Faiola, a Washington Post staff writer, posted a news analysis piece in which he asserted, "The worst financial crisis since the Great Depression is claiming another casualty: American-style capitalism.”[3] Speaking in Toulon, France, on September 25, French president Nicolas Sarkozy said, "Self-regulation as a way of solving all problems is finished. Laissez-faire is finished. The all-powerful market that always knows best is finished."[4] He asserted "The present crisis must incite us to refound capitalism on the basis of ethics and work."
The laissez faire advocated by Adam Smith in The Wealth of Nations always was an ideal, but American capitalism has never been pure, unregulated laissez faire. Smith himself identified a number of legitimate functions for government in a market economy. Government has been involved in the operation of the American economy almost from the moment of the founding of the Republic in setting weights and measures, providing money, establishing a system of contract law, subsidizing canals, roads, and railroads, etc. The practicality of American capitalism has been a workable blend of market economy and government involvement.
Marx in Das Kapital speculated that human nature could be overcome in solving the economic problem (the juxtaposition of insatiable human wants against scarcity in nature). He reasoned that capitalist production could be rationalized to increase the flow of goods and services and that people could be conditioned to no longer want what they did not have or what other people had. In the latter case, Marx thought that human nature could be overcome by a political process of indoctrination. That Marx misperceived this aspect of human nature is attested by the failure of authoritarian socialism almost everywhere that it has been tried.
In like fashion, it is a misperception that the natural human proclivity to "truck, barter, and exchange" (Adam Smith's phraseology) can be overcome by law or circumstances. The fact that people have traded with one another from the beginning of human existence suggests God's tolerance of market economy even if it is not ordained by God himself. In an editorial commentary in Barron's, Thomas G. Donlan asserts that "Capitalism--investment for profit--is universal. Neither politics nor revolution can kill it.”[5] Just as Mark Twain quipped that "The report of my death is an exaggeration," the proclamation of the death of capitalism is at least premature, if not greatly exaggerated.
Markets persisted even in the Soviet Union, despite concerted efforts to eliminate them. Any economic system must address four fundamental economizing questions: what should be produced, how should the product mix be produced, by whom should it be produced, and to whom should the output be distributed. In addressing these questions the Soviets, during their seventy-year grand experiment with authoritarian socialism, attempted to eliminate all remaining vestiges of capitalism. They came close to achieving complete authoritarian control in regard to the "what" and "how" questions, but they failed miserably in accomplishing their objective with respect to the "by whom" and "to whom" questions. The sheer complexity of a multimillion person population continued to require reliance on markets to allocate resources and distribute the output of their economy.
Capitalism, the most advanced naturally-emerging form of economic organization, may not be dead, but it likely will continue to morph into forms that will meet the needs of generations to come. This morphing process may present a long-run problem for capitalism. Marx predicted that violent revolution would establish a "dictatorship of the proletariat", but this never happened in any of the market economies of Western nations because of an emerging mutuality of interest between employees and the owners of the capital that the workers used. Workers became owners of capital through their pension funds, and the managers of capital themselves became employees. But there is a danger that in a democratic polity the morphing process will entail a gradual drift toward socialism. This process, which has been described as "socialism through the back door" and "stealth socialism", may occur so gradually as to be unnoticed until some future generation wakes up to the realization that Marx's conclusion was correct even though his specified route to it was wrong.
Indeed, the efforts of the Bush Administration to address the financial
turbulence beginning in 2008 have already resulted in a significant socialization
of finance and industry in the United States. The Obama Administration
has continued to move the U.S. economy further along the route toward socialism
with the provision of universal health care, expanded regulation of finance
and industry, and governmental acquisition of ownership shares in the automobile
and other major American industries.
Chapter 5 Endnotes:
[1] The Economist, October 18, 2008, cover showing a relief of a mortally wounded lion with the caption "Capitalism at Bay".
[2] Business Week , October 27, 2008, cover depicting images of Henry Paulson and Ben Bernanke with the caption "The Future of Kapitalism".
[3] Anthony Faiola, “The End of American Capitalism?", Washington Post, October 10, 2008.
[4] Nicolas Sarkozy, http://euobserver.com/9/26814/?rk=1.
[5] Thomas G. Donlan, “The Crash must Come," Barron's, October
27, 2008, p. 58.
BACK TO CONTENTS
6. GIFT ECONOMY
Several Postmodern thinkers have advocated replacing both market capitalism and authoritarian forms of economic organization with a “gift economy”. The concept of a gift economy has emerged more at the hands of anthropologists than economists. It seems that there are numerous examples of what economists might have called a "transfer economy" in the primitive societies usually studied by anthropologists.
Anthropological literature contains accounts of various tribal and feudal
societies within which a wealthy member, often the tribal chief or lord
of manor, provided sustenance and other bequests to members of the local
community, and in so doing achieved and maintained elevated status within
the community. Such "gifting" may have served as the basis of allegiance
and loyalty. It could preserve the status of authority and control
as long as the benefactor was able to continue the beneficence.
Gifts in the Modern Economy
Eric Raymond argues that gift cultures are predicated upon material abundance.[1] In contrast, market-based economies have arisen to deal with allocating resources and distributing product through trade in an environment of material scarcity.
Most transactions in a modern market economy are of the quid pro quo nature, i.e., a two-way (bilateral) exchange of values, "this for that." A "transfer" is a one-way (unilateral) flow of value from one party to another with no counter flow of value, "quid non quo". Such transfers may occur at the individual level or the international level. Examples of individual-level transfers include birthday and Christmas gifts and charitable contributions. Contributions to support foreign mission efforts are international transfers. Foreign aid is a so-called "unilateral transfer" of purchasing power, commodities, weapons and ordinance, etc., from one government to another.
In modern market-based economies, status has traditionally been ascribed
to members of society on the basis of education, earning power, and inherited
or accumulated wealth. Lewis Hyde points out that in a gift economy, status
is accorded to those who give the most to others.[2] In the early twenty-first
century, people like Michael Blumberg and Bill and Melinda Gates have been
socially acclaimed not only because of their great accumulations of wealth,
but also for their generosity in giving away substantial portions of their
wealth. To the extent that status ascription by giving becomes more prominent,
education, earning power, and inheritance will recede as bases of social
status. This leaves ever less room for those at the lower ends of the income/wealth
spectrum to achieve social status. For churches and other charitable organizations
to take advantage of status ascription by giving, ways will have to be
found to make public both the identities of the givers and the amounts
given.
True Gifts
A "true gift" is a unilateral transfer of value that does not incur any obligation to reciprocate to the giver. "Gifts" that are predicated upon the expectation of a return gift or which elicit a return gift are actually quid pro quo transactions, possibly with a delay built in between the original gift and the reciprocal gift.
Within a household, the sustenance provided by parents to their offspring is usually construed as a true gift, but it may not be a true gift if there is a hope on the part of the parents that the offspring who mature to adulthood will reciprocate care and sustenance to the parents in their dotages. Aside from expectation of care during old age, parental sustenance may be a true gift to offspring even if it creates an obligation on the part of the children to "pay it forward" to their offspring in subsequent generations.
If the motivation to donate to a charity or contribute to a church is
a "feel-good" effect in return, it can be argued that such donations and
contributions are not true gifts, but rather implicit quid pro quo
transactions. From the perspective of the economic theory of consumer behavior,
it is rational for a person to incur the cost of doing something only if
he or she can expect the same or greater value in return. People often
assist neighbors during times of need with the expectation that the neighbors
would do the same for them in their times of need. Such neighborly assistance
would also be a form of implicit quid pro quo transactions rather than
true gifts. What about the Old Testament dictum of an eye for an eye and
a tooth for a tooth? How do Jesus' teachings bear upon this? Do unto others...,
...turn the other cheek, the rich young ruler instructed to give away all,
the good Samaritan, the widow's mite, etc.
Micro-Level Gift Economies
There are numerous examples of modern gift economies at the microeconomic level, e.g., the household, churches, charities, close communities, etc., all of which are nested within macroeconomies organized around markets with invested capital, i.e., "market capitalism". It is also possible and likely that micro-level gift economies have existed in authoritarian economies (e.g., fascism and authoritarian socialism) within households and very close local communities.
Micro-level gift economies seem to be quite workable as long as the number of constituents remains relatively small, perhaps no more than 150, the so-called Dunbar number first proposed by R. I. M. Dunbar as a theoretical limit to the number of people with whom one can maintain stable social relationships.[3] Once the number of members of a micro-level economy increases beyond some such relatively small number, quid pro quo market transactions enabled by the formal institution of contract law make it possible for people who do not know each other well to take advantage of specialization and division of labor and to engage in exchange.
In a seminal article entitled "The Nature of the Firm", Ronald Coase
described the business firm as a hierarchically-organized productive entity
operating within a competitive market environment.[4] Coase quoted D. H.
Robenson's description of firms as "islands of conscious power in this
ocean of unconscious co-operation like lumps of butter coagulating in a
pail of buttermilk".[5] Coase noted that resources flow among firms in
response to competitive market signals, but within firms in response to
authoritarian direction. Business enterprises may thus exhibit the characteristics
of a micro-level gift economy because the limited resources available to
the enterprise are directed (given) to its various activities and departments
(gift recipients) by an internal budget authority (the gift giver). Gifting
through this same budgeting process applies to government agencies and
eleemosynary institutions as well.
The Gift Economy at Large Scale
There are a number of examples of gift economies at larger scale. Gifford
Pinchot points out that academics across the world operate a gift economy
with the products of their academic research and writing that are made
freely available to colleagues in print and internet.[6] Voluntary blood-bank,
food-bank, and organ donation systems are large-scale gift economies. The
open software community is in effect a global-scale gift economy. And the
Wikipedia project exhibits the characteristics of a global-scale gift economy.
Feminist Advocacy
The Postmodern feminist movement has taken up the cause of the gift economy on the macroeconomic level. In her book, For-Giving: A Feminist Criticism of Exchange, author Genevieve Vaughan makes a case that women are naturally giving by virtue of their childbirth and child-rearing roles.[7] Men are conditioned toward quid pro quo exchange that is the basis for what she asserts to be the patriarchial orientation of both capitalism and communism. In Vaughn's words, "The agenda of feminism is to liberate everyone--women, children and men--from patriarchy" with the replacement of capitalism by a feminist gift economy on a global scale.
Vaughan, in a paper given in the summer of 2002 at the Women's World Conference at the University of Makerere in Uganda,[8] questioned the morality of market exchange because "exchange creates adversarial relations since each of the exchangers is trying to get the most possible out of the transaction." She further indicts patriarchal capitalism: "By possessing and dominating large amounts of wealth Capitalists - along with other powerful men in political and religious institutions, can not only keep the wealth in their own hands and but they can also keep it away from the needs of the many." This is the basis upon which she advocates a feminist movement to replace patriarchal capitalism with gift economy: "In order to combat this state of affairs it is important to unite the women's movement with the movement against Globalization and Patriarchal Capitalism, not to look at feminist issues as those having to do with the self interest of women - according to the logic of exchange - but to look at feminist issues as having to do with a logic of gift giving as opposed to the logic of the market."
An economic response to Vaughn’s characterization of exchange as adversarial
is that exchange, if it is voluntary, results in both parties to the exchange
gaining from the exchange, even if each party perceives him- or herself
to gain at the expense of the other. A voluntary exchange will not
take place unless both parties perceive themselves to gain from the prospective
exchange. In this sense, instead of being adversarial, exchange is
a process of meshing diverse human wants to the benefit of both parties
to the exchange. Such market meshing surely is socially preferable
to theft or a military process of invasion and capture, both of which clearly
are adversarial. Vaughn also seems to be unaware that most of the
market traders in lower-income countries are women, and that department
stores, grocery stores, and other shops in higher-income countries are
both staffed and frequented more often by women shoppers than by men.
Problems for a Macro-Level Gift Economy
While Vaughn and other postmodern thinkers have advocated replacing market and authoritarian forms of economic organization with a gift economy at the macro level, it is questionable (and perhaps doubtful) that such is possible. One reason is that while gift giving might serve as the distributional mechanism in a macroeconomy, there is no obvious resource allocation mechanism in a gift economy other than that the gift giver must be the sole user of all resources in producing and generating all value to be distributed by gift-giving. In this sense, the concept of a macro gift economy converges upon that of an authoritarian socialist economy in which the state owns and allocates all resources as well as distributes all product.
Also missing in a hypothetical macro-level gift economy is a production incentive mechanism. Who other than the gift giver has any incentive to produce goods, provide services to others, or improve the efficiency of production or provision? In an authoritarian economy, these activities can be forced only with strong-arm methods of direction and compliance.
As has been demonstrated in the welfare states emerging in Europe and North America, gift giving in the form of welfare distributions, both to those who cannot find work and those who choose not to work, results in dependence upon the welfare provider (the gift giver). This welfare dependence can develop into a culture of dependence that persists from generation to generation as children born into welfare support perceive the world (or the welfare provider-giver) to owe them sustenance. The emerging language of "entitlement" reinforces the culture of dependence. Should an entitlement culture become pervasive in a society, its production incentive structure might become permanently and irreversibly impaired.
Another problem with a gift economy is the absence of price signals that would communicate changes of demand and supply to producers and demanders of goods and services. In the absence of such market-implemented price signals, it is up to the gift giver's perception and judgment to allocate resources and distribute products. The larger and more complex a society, the more heroic would be the requisites of perception and intelligence to accomplish these necessary functions.
Yet another reason that a macro-level gift economy is unlikely to be workable is that in a hypothetical gift economy the gift-giver exercises sole discretion over the self-perceived needs and wants of the gift recipients. The preferences of the gift giver would have to dominate and displace the preferences of the gift recipients. The paternalism (or maternalism) of such an authoritarian gift giver would be completely incompatible with the Postmodern belief in the subjectivity of values. Such a distributional mechanism might be workable if the gift giver asks and acquiesces in the expressed preferences of the prospective gift recipients. Within the household, the parental gift givers may indulge their offsprings' expressed wants. Within an organization, preferences are expressed as budget requests that the budget authority may grant, deny, or modify.
Alternately, the gift giver must be all-knowing of the needs (irrespective
of the wants) of the prospective gift recipients, or at least must be empowered
to exercise personal (and political) authority to override the personal
needs and wants of the prospective gift recipients. Parents often ignore
or override the wants of their children in providing for their needs. Parents
who regularly acquiesce in their children’s pleadings may find that that
they have raised “spoiled brats” who as adults have every expectation that
society will take care of them, whether or not they contribute to society.
Budget authorities, when constrained by limited resources within the organization,
may have to deny or diminish selected budget requests.
Liberty and the Gift Economy
If the gift giver asks prospective recipients what they want, they might enjoy some modicum of liberty to the extent that their expressed needs and wants are honored by the gift giver. If the gift giver is empowered to override the expressed wants and needs of the prospective recipients, they enjoy no such liberty. For example, people who are incarcerated are entirely at the mercy of the "gift" food, clothes, etc., provided by their imprisoners.
Gift recipients may perceive that the gifts make them better off only
to the extent that there is a coincidence between what the giver chooses
to distribute and their own perceptions of their needs and wants. But they
may perceive themselves worse off if the gifts were not sought or are not
wanted.
Chapter 6 Endnotes:
[1] Eric Steven Raymond, "The Hacker Milieu as Gift Culture", http://futurepositive.synearth.net/stories/storyReader$223.
[2] Lewis Hyde, The Gift: Imagination and the Erotic Life of Property, Vintage Books, 1983.
[3] R. I. M. Dunbar, “Neocortex Size as a Constraint on Group Size in Primates”, Journal of Human Evolution 22 (1992): 469-493.
[4] Ronald Coase, "The Nature of the Firm", Economica, November 1937, Volume 16, Number 4, pp. 386-405.
[5] D. H. Robenson, Control of Industry, 1923, p. 85.
[6] Gifford Pinchot, "The Gift Economy", http://www.context.org/ICLIB/IC41/PinchotG.htm.
[7] Genevieve Vaughan, For-Giving: A Feminist Criticism of Exchange, Plain View Press, 1997, http://www.for-giving.com/.
[8] Genevieve Vaughan, paper given in the summer of 2002 at the Women's
World Conference at the University of Makerere in Uganda, http://www.gift-economy.com/articlesAndEssays/theGiftEconomy-article.html.
BACK TO CONTENTS
PART 3. LIBERTY IN ECONOMICS AND POLITICS
7. LIBERTY
The characteristic of a market economy that commends it over all other possible forms of economic organization is the personal liberty that it accords to market participants in the forms of freedom of enterprise and consumer sovereignty. Religious liberty benefits from the enterprise freedom and consumer sovereignty of the market economy in the personal volition of income earners to make contributions to churches, charities, and other eleemosynary institutions.
Several of the original thirteen American colonies were founded by people fleeing the strictures of church authority in the “Old World” and seeking freedom to practice their religions unconstrained by government or church authority in the “New World”. Their economies were natural market economies that exercised and relied upon economic as well as religious liberty.
Liberty means the ability to act without constraints by others. "Others" include government, parents, bosses, peers, spouses, church authorities, etc. "Constraints" may be formal as imposed by laws, regulations, and rules; or they may be informal in the sense of customs, conventions, and peer pressures. To be "at liberty" to do something is to be "free to act," i.e., able to act without constraint.
"Liberty" shares a root with "liberation", "liberalization", and "liberal". Liberation means to set free to act upon one's own volition. Liberalization means to diminish or eliminate the constraints imposed by authorities. A liberal (in the "true" sense of the word) is one who advocates a modicum of freedom to act without constraints. This is in contrast to the latter-day (capital "L") meaning of "Liberal", i.e., one who advocates a pragmatic approach in addressing perceived social ills.
Pragmatism often entails more (rather than fewer) constraints imposed by authorities and greater collective decision-making and programs in lieu of private initiative. Pragmatism (a.k.a. "Liberalism") involves doing "what is necessary" to address perceived social problems, even at the expense of personal liberties. Liberalism entails a willingness to expand the authoritarian role in the economy because of a basic mistrust of individual pursuit of self-interest.
Liberty is important to the successful functioning of a market economy because of the presumption that individuals know best what is in their own interests. This condition, dating from Adam Smith’s The Wealth of Nations published in 1776, is congruent with late-twentieth century postmodern thought. If people are constrained unduly by the laws, regulations, rules, and pressures imposed by others, they are unable to pursue their own interests.
Smith believed that the pursuit of self-interest by individuals, more often than not, coincides with the public interest. When an individual acts to produce a good or provide a service that is demanded by others, he or she benefits from the income or sale proceeds, but so also do the parties who need and buy the good or service. This was a radical notion in 1776 and it continues to be so today. Postmodern economic thinkers focus almost exclusively upon the well-being of the individual and tend to ignore links between individual welfare and the collective welfare of a whole society.
It must be admitted that the rational pursuit of self-interest does not always serve the welfare of the larger society. Greed may (and lately has been shown to) elicit individual behavior that exploits the public interest to capture returns greater than warranted by contributed effort. Herein lies an appropriate role for authority to impose constraints upon the pursuit of private interest. The "trick" is to impose just enough of the right kinds of constraints to curb excesses without stifling productive activity. This is an indistinct divide over which modern-day "Liberals" and "Conservatives" often disagree. Postmodern thinkers are inclined to invoke the offices of government to establish and enforce constraints upon the pursuit of private interest, but they find themselves in the ironic position of being unwilling to trust any such exercise of collective will.
Economies have been shown to work best when individuals are free (within limits) to purchase what they want, to seek highest-income employments and/or employments that yield greatest job satisfactions, to produce what yields the most profit or other income, to innovate (i.e., to try new and risky ventures) in the pursuit of profit, to fail when innovative efforts do not "pan out", and "to gift" other members of society (family members, churches, charities) as they wish. Examples include many of the market economies of North America and Western Europe.
Economies with histories of authoritarian controls that stifle individual initiative have fared poorly in terms of welfare and growth. Witness the experiences of Cuba, North Korea, and most of the Eastern European countries prior to 1990. But “historically planned economies” have fared better when they have undergone economic and financial liberalization processes that have unleashed ("liberated") creative processes and given individuals stakes in the pursuit of their own well-beings. In September of 2010, the Cuban government announced a revamp of the Cuban economy toward a more market-oriented structure.[1]
Religious liberty is sometimes asserted to be incompatible with capitalism
because of the latter’s propensity to yield an unequal distribution of
income that constrains the range of consumption choice for poorer people
while enabling the wealthy to enjoy a wider range of choice in what they
can consume. But capitalism works best in a society in which there
is a free marketplace of ideas in addition to free markets for goods and
services. The marketplace of ideas includes individual preferences
for religious beliefs and practices.
Chapter 7 Endnotes:
[1] José de Córdoba and Nicholas Casey, writing in The
Wall Street Journal, say “Cuba will lay off more than half a million
state workers and try to create hundreds of thousands of private-sector
jobs, a dramatic attempt by the hemisphere's only Communist country to
shift its nearly bankrupt economy toward a more market-oriented system.”
“Cuba to Cut State Jobs in Tilt Toward Free Market”, The Wall Street
Journal, September 14, 2010, p. A1, http://online.wsj.com/article/SB10001424052748704190704575489932181245938.html?mod=djemTMB_t.
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8. LIBERALISM, CONSERVATISM,
AND SOCIAL JUSTICE
The meanings of the words "liberal" and "conservative" have changed in religious, social, political, and economic discourse over the past couple of centuries. Political parties too have changed their orientations in regard to liberalism and conservatism over this period. While there are many ways in which we can attempt to understand the historic and current meanings of liberal and conservative, the most crucial is the orientation toward social justice.[1]
Distributive justice is achieved when benefits and burdens of a social process are distributed fairly, i.e., when the outcome of a social process is fair, whether or not the procedures are deemed fair. For one who favors distributive justice, ends may justify means. Procedural justice is when a fair social process is employed, whether or not the resulting distribution of benefits and burdens is deemed fair. For one who favors procedural justice, the means are more important ends than are the outcomes.
A twenty-first century social liberal might hope for both procedural and distributive justice, but he or she probably prefers distributive justice in the outcomes of social processes, even if the procedures are not deemed just. For a social liberal a "good society" involves neither income nor wealth being too unequally distributed. A social/political liberal in addition favors participation by all on an approximately equal basis in social decision making and thinks that the well-being of the individual is found in its societal setting so that government is an appropriate vehicle for ensuring just outcomes.
In contrast, a present-day social conservative is likely to think that the method of achieving justice is more important than the outcome of the process. For a social conservative, justice is served when people take responsibility for their own lives and are rewarded according to their contributions to society, even if the consequence is a more unequal distribution of income or wealth.
A mid-twentieth century development in America has been a process of liberalization in theological discourse. This liberalization stood in juxtaposition to the historical approach of literalism in the application of scripture to daily life. Religious liberalism freed some (but of course not all) biblical scholars to engage in more imaginative interpretation of scripture. The imaginative interpretation of scripture fits nicely with the postmodern literary method of discerning meaning by deconstructing textual matter.
A pendulum swing of the late-twentieth century has resulted in the reemergence of religious conservatism in America that became known as "fundamentalism". This religious fundamentalism was based upon renewed biblical literalism coupled with return to application of religious doctrine strictly to daily life. Some social commentators take the reemergence of religious fundamentalism to mark the beginning of a new epoch of intellectual and cultural thought that has become referred to as post-Postmodernity.
Religious fundamentalists also resolved to gain dominance on the political scene. This religious fundamentalism stood in contrast to what had emerged as religious liberalism in the interpretation and application of scripture to everyday life during the Postmodern epoch. Some religious liberals adopted an alias as they began to employ the term "moderate" to describe themselves and their orientation toward pragmatism in the application of scripture to daily living.
By the late-1980s, religious fundamentalism had captured the "right-wing"
Republican Party in the United States to produce a curious convergence
of market liberalism, biblical literalism, and social conservatism. In
keeping with their stance of biblical literalism, members of the "religious
right" of the Republican Party also espoused a so-called "pro-life" position
in opposition to abortion, an attitude that seemed incongruent with the
free-choice orientation of market liberalism. Republicans who espoused
market liberalism and limited government thus found themselves alienated
from the "Grand Old Party" (GOP) in the 1990s and in search of another
political home.
Chapter 8 Endnotes:
[1] Some writers use the term “economic justice” to refer to fair distribution,
but they typically do not use the term to mean that processes are fair.
A better pairing of adjectives with nouns might be “social justice” and
“economic efficiency”. As discussed in the chapter entitled “Postmodern
Elements in Economic Thought”, market economy contains a built-in mechanism
for pursuing economic efficiency but none for achieving either distributive
justice or procedural justice. Both distributive justice and procedural
justice are matters to be pursued and ensured by political processes rather
than expected from unconstrained economic activity.
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9. THE POLITICAL ECONOMY OF LIBERALISM AND CONSERVATISM
A couple of centuries ago as the words "liberalism" and "conservatism" came into popular use, their original meanings were quite different from today's usage. The word "liberal" comes to English from the Latin through the French. In Latin, the word liberalis referred to a freeman. In French, the verb liberer means to liberate. In most of its twentieth century English applications the word "liberal" suggests the freeing of someone from some sort of constraint. Examples include liberal education (which purports to liberate students from ignorance, dogma, and prejudice), financial liberalization (by which the financial sector is freed from governmentally imposed restrictions on lending, interest rates, and exchange rates), trade liberalization (by which imports, exports, and foreign investments are freed from governmental restraints), and liberation theology (the assumed responsibility of the Church in freeing poor peoples in third-world countries from economic exploitation by rich industrial societies).
Adam Smith, in The Wealth of Nations (1776), criticized mercantilism with its advocacy of state regulation of industry and trade. With the view that individual self-interest often is coincident with the "public weal", Smith contrived an intellectual justification for a laissez faire approach to commercial relationships, and so ushered in an era of economic liberalism that implied a freeing of commerce from the constraints of bureaucratic control.
In England economic liberalism became the foundation for an advocacy of free trade early in the nineteenth century by the Whig political party that became the Liberal Party later in the century. The Liberal Party in England declined early in the twentieth century to become displaced by the newly-formed Labour Party in the 1920s.
By the middle of the nineteenth century, "liberalism" in economic literature implied a minimal role for government to play in the economy, the so-called "night-watchmen functions" described by John Stuart Mill. These included the establishment and enforcement of the "rules of the game," the protection of property rights, domestic law and order, national security, setting weights and measures, provision of money, etc.
Opposing nineteenth century economic liberalism was British conservatism which was identified with the propertied class and which valued the status quo of one's position and place in the class structure. Nineteenth century conservatives favored the protection of English agriculture by the "corn laws", with the state playing whatever role necessary to preserve the hegemony of the English ruling class against cheap imported grains. Pragmatism in the role of government thus was the eighteenth century province of the Tory Party, which became the Conservative Party in the nineteenth century.
In contrast to the twentieth-century orientation of liberals toward distributive justice, nineteenth century Whig liberalism seemed to be more concerned with procedural justice (free trade) than the fairness of the outcome. And in contrast to the twentieth-century orientation of conservatives toward procedural justice, the nineteenth-century Tories seemed more concerned with distributive justice, i.e., the fairness of a system that preserved their class status.
By the end of the nineteenth century, on both sides of the Atlantic social reformers had become concerned with the well-being of the disadvantaged of society and had concluded economic disadvantage to be attributable to the exploitative behavior of the privileged classes. The nineteenth-century liberal concern with the fairness of social processes gave way to a twentieth-century concern for the fairness of outcomes of social processes. Political liberals, taking up the concerns of social reformers, became ever more willing for governments to undertake the relief of social distress. By the Postmodern environment of the late twentieth century, political liberalism had become manifested in paternalistic governments that seemed willing to assume responsibility for nearly all aspects of human existence.
The so-called "Great Depression" of the 1930s shifted the tectonic plates of Western economic thought. With the advent of Keynesian theory and policy in 1936, the term "liberalism" took on the mantle of pragmatism as it blended social concerns (particularly the welfare of the poor) with the need to stabilize the economy over the course of the business cycle. Keynesian theory, by justifying budgetary deficits as the means for countering depressions, liberated government administrations from the requisites of fiscal responsibility.
In the United States President Franklin D. Roosevelt, a Democrat, had to deal with the exigencies of the Great Depression. Political and social liberalism became associated with the Democratic Party in the post-depression era. As the twentieth century wore on, the Democratic Party became a coalition that championed the interests of "the little man", the labor unions that represented him in the workplace, and a variety of racial/ethnic interests which had become perceived by social liberals to be economically disadvantaged. This was a fertile garden for the growth of pragmatic liberalism in the United States. The private sector was perceived to be the problem, and government action was the solution. The exception lay in a southern conservative wing of the Democratic Party, many of whose members became progressively less comfortable with the direction taken by the national Democratic Party. Eventually some of these southern Democrats (or their children) forsook the party to become Republicans, and many others simply became disenchanted with politics.
Even before the Great Depression, the Republican Party had been the party of "big business" and protectionism. In addition, the Republican Party never developed a tradition of vigorously enforcing the antitrust laws in the interest of preserving competition, a legitimate function of government that the staunchest nineteenth century liberal could espouse. Early twentieth-century Republicans thus seemed more concerned with outcomes than with the fairness of the processes. Even though the Republican Party contained a moderate wing, it could be characterized generally as more conservative in orientation than the Democratic Party.
By the 1980s Republican "conservatism" seems to have undergone a sea-change in becoming more concerned with processes than with outcomes as the Reagan administration became the venue for the reemergence of market liberalism. During the last decade of the twentieth century, even as the Republican Party under House Majority Leader Newt Gingrich called for a reduction in the function and size of government (the nineteenth century sense of liberalism), it seemed to renew its historic embrace of protectionism (a traditional attitude of conservatism). At the same time, the Democratic Party of the Clinton Administration manifested nineteenth century liberalism in its vigorous enforcement of antitrust laws and by becoming the new champion of free trade.
It is curious that by the 1980s in the U.K. the Conservative Party also had reversed its historic orientation to become under Prime Minister Margaret Thatcher the late-twentieth century standard-bearer of "liberalism" in the nineteenth century sense of the word. This market liberalism surfaced in the guise of privatization of formerly nationalized industries and utilities, and in a general contraction of the role of government in the U.K. economy. The Labour Party flirted with socialism in the post-war era and thus became the proponent of pragmatic liberalism with respect to the role of government in the economy and society.
By the last quarter of the twentieth century, the Conservative and Labour Parties in the U.K. had effectively reversed field from their historic orientations. "Conservatism" had come to mean freeing markets from governmental constraints (a concern with the fairness of processes), while "Liberalism" had come to mean pragmatism in extending the hand to government to deal with any issue needing treatment (a concern with the fairness of outcomes).
The words "liberalism" and "conservatism" have so changed in meaning
over the past couple of decades as to have little content early in the
third millennium. The irony of the Postmodernists’ openness to invoking
the powers of government to address perceived social ills against their
skepticism of government’s ability effectively to address those ills makes
it difficult to correlate Postmodern ideas with the meanings of “liberalism”
and “conservatism”.
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PART 4. GOVERNMENT ROLES IN THE ECONOMY
The motivating and decision-making vehicle of capitalism is the market.
Economists theorize that under ideal circumstances markets can "work themselves"
without government intervention. Postmodern thinkers criticize both
the functioning of market economy and economists' explanations of it as
mechanistic. This chapter provides such a mechanistic explanation
of how a market economy is supposed to work under ideal circumstances,
and then finishes with a description of how socialism would work under
its ideal circumstances. The ideal circumstances for market capitalism
include sufficiently competitive conditions (i.e., the absence of monopoly
power), adequate knowledge of market realities, and the absence of externalities
(spill-over effects). The ideal circumstances for authoritarian socialism
include adequate information about resource availability and consumption
needs, knowledge of alternative production functions for all items in the
chosen product mix, sufficient data processing and decision-making capacity,
and absolute political power to make the allocation and distribution decisions
effective.
Dollar Votes
The functioning of market economy can best be described with the analogy of the political system of democracy. Market economy may be said to democratize economic decision-making (compared to the centralized decision making of authoritarian socialism) by enabling dispersed and participatory decision-making through market mechanisms. In freely functioning markets, all transactions are presumed to be voluntary. No one will enter into any transaction that does not benefit him or her in some way. Thus both parties to a transaction must benefit, or the transaction will not take place. Another way to say this is that market economy functions as a "positive sum game".
The theoretical distributional principle of socialism is need-based, i.e., "to each according to need". The practical problem of identifying needs among multi-million person populations necessitated a shift to a more practical principle in applied socialism, "to each equally", but equal distribution turned out to be as elusive to achieve as needs were to perceive. In contrast, the distributional principle of market capitalism is "to each according to his or her contribution to production of things that other members of society want". This merit-based distributional principle, because of differences among people in inherent abilities, education, training, and motivation inevitably results in unequal distributions of income and wealth.
In market capitalism consumers are free to expend their incomes or wealth
on whatever they wish to acquire. They in effect vote their incomes and
wealth (denominated in currency units of the realm) upon the goods and
services that they most want. This process of democratization is admittedly
imperfect because different people have different amounts of income and
wealth to expend as votes due to the merit-based distributional principle
of market capitalism. Progressive taxation, i.e., ever higher tax rates
applied to a succession of ever higher brackets of income, may have the
effect of leveling the potential to vote, and transfer payments (e.g.,
unemployment compensation, welfare benefits) may enable economic voting
by people who earn no income or have little wealth.
Demand and Supply
Increasing dollar votes for particular products may be perceived to increase the demands for those items. When the demand for a product increases relative to the supply of it, the price tends to rise in the market for the product. Products are supplied by the business firms that produce them. Product price may also rise if supply decreases relative to demand. A rising price signals to producers one of three possibilities: that demand has increased, that supply has decreased, or some combination of the two. A falling price signals a decrease of demand, an increase of supply, or some combination of the two.
The firm's revenue from selling an item is the product of the price
times the quantity sold. A rising price has a dual effect of increasing
revenue per unit sold, but decreasing the number of units sold. Likewise,
a falling price has a dual effect of decreasing revenue per unit sold,
but increasing the number of units sold. Because of these offsetting effects,
it is possible to predict the effect of a price change upon revenue only
if the relative magnitudes (i.e., the percentage changes) of the price
and quantity changes are known. Revenue can be increased either by raising
price when the negative quantity effect is smaller than the positive price
effect (demand is said to be "inelastic" with respect to price), or by
lowering price when the positive quantity effect is larger than the negative
price effect (demand is said to be "elastic" with respect to price). Revenue
will diminish when price decreases and the positive quantity effect is
smaller than the negative price effect (demand is inelastic), or when price
rises and the negative quantity effect is larger than the positive price
effect (demand is elastic).
Economizing Questions in Market Capitalism
Every economic system, no matter how it is organized, must answer four basic economic questions: what to produce, how to produce it, by whom it should be produced, and to whom it should be given. The “what” question means the product mix that the society should produce. The “how” question is about the best methods of production (i.e., the most efficient technologies). The “by whom” question is about the allocation of the economy’s scarce resources to production of all of the items selected for the product mix. The “to whom” question is about who should receive all of the units of the items produced in the economy.
In a market economy, the dollar (or whatever currency denomination) votes of spenders are tallied on the revenue side of the “income and expense” statements (a.k.a. “profit and loss” statements) of business firms that produce goods and services. Production costs are registered on the expense side of the income and expense statements. Firms find motivation to produce (and continue to produce) only those goods and services that can be produced profitably, i.e., those for which revenues from sales exceed costs of production. Firms whose managers fail to perceive market realities with respect to their selected product mixes will suffer losses and eventually go out of business. The "what" question is thus answered in market capitalism jointly by consumers in response to price signals, and by producers in response to profit outcomes.
There are usually a number of methods for producing any particular good or service. In their zeal to maximize profits or minimize losses, producers of goods and services find incentives to choose the very most efficient methods so as to minimize costs of production. Higher-cost producers who have not adopted the lowest-cost production methods can expect to realize smaller profits or larger losses, and ultimately to fail. The "how" question is answered in market capitalism by producers motivated to minimize costs of production.
Owners of resources behave rationally to seek the highest incomes or returns for their resources. Firms buy or hire resources to be used only in the production of profitable goods and services. As demands increase in the markets for the resources used in production of the desired items, rising resource prices elicit an inflow of resources seeking higher compensations. Falling demands for goods no longer desired result in falling prices in both the final goods markets and in the markets of the resources used in the production of those final goods. Resources tend to flow away from production of goods that can no longer be produced profitably. The "by whom" question is thus answered in market economy jointly by producers in offering wages and resource prices, and by the owners of resources in seeking maximum incomes.
The output of a market economy is distributed to citizens who exercise
personal discretion in choosing how to vote their dollar incomes or wealth.
Those who want products badly enough to part with their incomes or wealth
get the output of the economy. The "to whom" question is thus answered
by the society itself as its members vote their dollar incomes and wealth.
Economizing Questions in Authoritarian Socialism
The responses to the economizing questions in an authoritarian socialist economy are straightforward. Under ideal circumstances in authoritarian socialism, a central planning authority determines the product mix, dictates the methods of production, allocates resources, and distributes output. The ideal conditions for authoritarian socialism include adequate information about resource availability (supply) and consumption needs (demand), knowledge of alternative production functions (technologies or recipes) for all items in the chosen product mix, sufficient data processing and decision-making capacity, and absolute political power to make the allocation and distribution decisions effective. Needless to say, these ideal conditions have not obtained in any instance of socialism that has been tried. Even the most determined socialist dictators have found it necessary to rely upon market mechanisms to allocate resources and distribute product.
The next two chapters address the flaws and failures of market economy
that are attributable to the non-ideal circumstances under which real-world
market economies actually operate. In the Postmodern view, the flaws
and failures of market economy are sufficient to warrant a transition to
socialism. In lieu of such a transition, Postmodernists favor government
intervention in the market economy to correct the flaws and avert the failures
of market capitalism.
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Democracy is perhaps the form of political organization most congenial to capitalism and to the process of economic growth. Capitalism may be construed to be a form of democracy in the sense that market mechanisms, the decision making and motivating vehicles of capitalism, have the effect of democratizing consumer decision making. Market economy enables those with income or wealth to vote their dollars (or whatever is the currency du jour) on what they most want to purchase.
But political democracy can attempt to make up for these economic democratic deficits though the legislative process. Parliaments, congresses, and legislatures enact legislation to level incomes and wealth via progressive income taxation and property taxes, and by establishing “safety nets” that have the effect of providing dollar-voting ability to those with no property and low or no incomes.
A similar statement
might be made about capitalism, so we paraphrase:
Capitalism is the worst form of economic organization except for
all of the other forms that have been tried.
Chapter
11 Endnotes:
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12. THE ROLE OF GOVERNMENT IN A MARKET ECONOMY
Postmodern thinkers judge that market capitalism outcomes are bad enough to warrant replacing capitalism with socialism so that “philosopher kings” can make wise economic decisions on behalf of their societies. With the failures of virtually all socialist experiments that have been attempted, Postmoderns have begrudgingly recognized that capitalism is likely to be the dominant form of economic organization into the foreseeable future. In lieu of replacing capitalism with socialism, Postmoderns have favored government interventions to correct the perceived faults and failures of market capitalism.
BP's 2010 deep-water oil well disaster in the Gulf of Mexico at first revealed a culture of public belief and expectation that government both can and should address any ill that may befall society. This belief and expectation is rooted in the Progressive Movement of the early twentieth century. While the Obama Administration early-on “took ownership” of the Gulf oil disaster, its seeming inability to bring the disaster to a conclusion for over three months may have led many to lose faith in the extent of government’s powers. This is of course no surprise to Postmodern thinkers who harbor deep skepticism of government’s abilities to solve all of society’s ills.
The proper role of government in the economy has become the compelling object of political debate during the run-up to the 2010 mid-term Congressional elections. Arthur Brooks (president of the American Enterprise Institute) and Paul Ryan (Republican congressman from Wisconsin) describe the issue:
As we move into this election season, Americans are being asked to choose between candidates and political parties. But the true decision we will be making—now and in the years to come—is this: Do we still want our traditional American free enterprise system, or do we prefer a European-style social democracy? This is a choice between free markets and managed capitalism; between limited government and an ever-expanding state; between rewarding entrepreneurs and equalizing economic rewards.[1]
The terms “free enterprise system” and “free market economy” are
bantered
about, often by non-economists, and particularly by Postmodern critics
of capitalism who wish to point out the faults and failures of market
economy.
In fact, there is no such thing as a pure “free market economy”, and
there
never has been. Virtually all economies throughout history have
been
so-called “mixed economies” in the sense that important economic
functions
have been performed by both markets and governments.
The world has seen no examples of pure capitalism. Even the North
American
continent has never seen pure capitalism. The British crown always
played
a decision-making role before the Revolution, and the newly established
"federal government" of the United States began to be economically
active
immediately upon its founding in 1779.
Nor has the world seen any examples of pure socialism. During its heyday of the 1960s through the 1980s, the Soviet Union was a mixed economy that attempted to move ever closer to pure authoritarian socialism. Because of bureaucratic limitations it had to continue to use market-type decision mechanisms to allocate most resources and distribute most products. Softer variants of socialism combine state ownership of the means of production with political democracy, i.e., "democratic socialism".
The term “mixed market economy” describes an economy in which markets play predominant roles in addressing fundamental economizing questions (what mix of products to produce, how to produce the product mix, how resources should be allocated to producing each of the selected products, and to whom the output should be distributed), with minimal intrusion by government. In an extreme libertarian view, there would be no role of significance for government to play in a market economy.
The greatest challenge to market economies in the twenty-first century is likely to be an ever-expanding role for government to play in the economy as expected by both postmodern and communitarian thinkers. Taken to its logical extreme, the end-point of such a progression could be either fascism (privately-owned means of production with state control over it) or authoritarian socialism (state ownership of the means of production and centralized decision making). In either case, the loss to society would be the curtailed personal liberties of market participants. Karl Marx in Das Kapital (1867) predicted the end of capitalism (a.k.a. “market economy”) by violent revolution of the working class against the capitalist class to establish an authoritarian socialist state. Joseph Schumpeter in Capitalism, Socialism, and Democracy (1942) also predicted the demise of capitalism and its replacement by socialism, but by the democratic legislative process rather than by violent revolution.
The progressive socialization of income and spending entailed in an
expanding role of government militates against personal discretion to
make
voluntary contributions of earned income to churches, charities, and
other
eleemosynary institutions. A well-observed phenomenon in Europe
is
that when churches became supported by the state, voluntary
contributions
diminished along with church attendance and religious participation.
Basic Premises
The foundation premises underlying a market economy are:
(b) The state (or government): exists to serve the interests of the individuals that compose the society.
(c) Freedom: People “yearn to breathe free” (caption on the tablet held by the Statue of Liberty), i.e., with minimal constraints on their political, social, personal, and economic decision-making.
(d) Information: no one knows better than the individual, ex ante a decision, what he or she wants or prefers.
(e) Subjectivity of judgment: ex post a decision, the individual may recognize that he or she made a good decision or a bad decision; others, too, may judge that the decisions made by any particular individual were good or faulty, but there is no objective ground for comparing the preferences of individuals and the decisions that they make.
The opposite of consumer sovereignty is the concept of “state sovereignty” which is based upon premises opposite to those listed above:
(b) The state: Individuals and the society exist to serve the state.
(c) The interest of the state: the liberty of individuals is of secondary (or minimal) importance to the interest of the state.
(d) Information: wise leaders (planners, dictators) can know better what is in the interest of the society (and all of the individuals composing it) than can any individual member of the society.
(e) Objectivity of authority: decisions made by a wise authority are by definition correct, irrespective of the subjective judgments of individuals composing the society.
“Democratic sovereignty” is exercised by individuals when they cast their political votes in the voting booth for the candidates whose expressed positions are most congruent with the preferences of the individual voters, and without fear of political reprisals.
Consumer sovereignty is exercised by individuals when they “vote” in the market place their incomes or their wealth (however accumulated) on those things and services that they think will yield them the greatest personal satisfactions, and without fear that their private decisions will be blocked or overridden by actions of the political authority (i.e., the state). Consumer sovereignty includes the personal choices to spend all or part of received income, to save (i.e., not spend some part of received income), and to use some part of received income to make contributions to churches, charities, and eleemosynary institutions. “Freedom of enterprise” is the ability of any member of society to enter into any line of commerce that he or she chooses to pursue, without fear of constraint or competition by government.
Consumer sovereignty and freedom of enterprise are parallel and
compatible
with democratic sovereignty. Consumer sovereignty and freedom of
enterprise may be uncomfortable bed fellows with state
sovereignty.
The full and complete exercise of consumer sovereignty, freedom of
enterprise,
and religious liberty requires a constrained role for the state to play
in the market economy.
The Need for Government
Why does a society and its economy even need a government? We won’t attempt to recount the rich history of political thought about this question (see John Locke, Two Treatises of Government, 1689, and Jean Jacques Rousseau, The Social Contract, or Principles of Political Right, 1762) except to note that one of the earliest cases for government was made by Thomas Hobbes in his book entitled Leviathan (1660). Hobbes argued for the establishment of the state (the “Leviathan”, Hebrew for “sea monster”) by a social contract among the members of society because, in his words, life in a state of nature is “nasty and brutish and short”, in effect a “war of every man against every man.” In Hobbes’ view, the Leviathan would have to be a sovereign power entrusted with absolute authority to ensure domestic security and the common defense.
Adam Smith, author of the original "capitalist manifesto" (An Inquiry into the Nature and Causes of the Wealth of Nations, 1776), was a staunch advocate of laissez faire and so is regarded as a “classical liberal”. Nonetheless, he identified essential roles that government must play in a market economy. He recognized that a society must protect itself from foreign threats, that every member of society should be protected from oppression by other members of society, and that public goods must be provided through the collective action of society. Smith pointed out that the greatest incentives for crime are property and wealth. The protection of property entails the enforcement of contractual agreements and the right to restitution in the case of fraud. Smith also noted that the nonpayment of debt constituted theft just as much as the taking of an item without paying for it.
Friedrich Hayek in his 1944 book, The
Road to Serfdom, acknowledged
that the state has legitimate functions ranging from correcting market
failures to ensuring a minimum standard of living.[2]
A Postmodern view is that there are so many faults and serious
imperfections
in the structure and functioning of market economy that they must be
corrected
by displacement (i.e., replacing capitalism with socialism), or that
not
possible, by authoritarian intervention in the workings of the market
economy.
Before addressing efforts to correct these perceived “market failures”, we should note the so-called "night-watchman functions" of government (John Stuart Mill, Principles of Political Economy, 1899) that nearly all (liberals and conservatives alike) can agree are the minimal functions to be performed by government, quite apart from efforts to fix perceived defects of the market economy:
- establishment of the "rules of the game" by enacting a system of law; providing for the protection of property;
- ensuring domestic serenity with well-organized, trained, and restrained police forces; providing for national security by maintaining an efficient military establishment for defensive purposes;
- maintaining and enforcing a system of weights and measures;
- providing a reliable and elastic money supply, i.e., one that meets the requisites of economic growth but which is not increased so fast as to cause inflation.
Chapter 12 Endnotes:
[1] Arthur C. Brooks and Paul Ryan, “The Size of Government and the Choice This Fall”, The Wall Street Journal, September 13, 2010, page A21, http://online.wsj.com/article/SB10001424052748704358904575478141708959932.html?mod=WSJ_hps_RIGHTTopCarousel_1.
[2] Friedrich Hayek, The Road to Serfdom, University of
Chicago
Press, 1944.
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13. GOVERNMENT AND THE BUSINESS SECTOR IN
A
MARKET ECONOMY
Because
capitalism is the
form of economic organization to which the world seems to be drawn, we
shall
presume the general characteristics of market economy in subsequent
discussion
of the role of government in the business sector of a market economy.
Points of Contact between the Business Sector and the Government
There are six
principal
points of contact between private sector business firms and the
government of a
market economy.
(2)
Business firms pay taxes to the government. The
taxes may be related to the firms' profits, their sales, their
inventories or
other assets, or the wages that they pay to their employees.
Tax-related record
keeping and reporting often become burdensome to business firms, and
tax
liabilities and rates are subject to change at the dictatorial or
parliamentary
whims of the state. Tax burdens give private sector business firms
incentive to
avoid taxes by taking advantage of tax “loopholes”, and otherwise to
consider
moving the venues of their activities abroad to lower tax jurisdictions.
(3)
Depending upon the government's particular political,
social, and military programs, various firms in the economy may become
objects
of support by the government. Such support may take the forms of
subsidies,
approval of licenses, preferential contracts, or other encouragements.
Governments
often attempt to structure such activity as a coherent industrial
policy for
the promotion of international competitiveness of domestic companies.
During
the twentieth century, U.S. governments generally favored market
determination
of industrial success or failure, and so avoided establishing an
official industrial
policy. Twenty-first century U.S.
governments seem to be more favorably disposed toward implementing de facto industrial policy, even while
officially opposing it.
(4) In
pursuit of its agenda, government's interests
in firms may extend beyond support to efforts to control the activities
of
firms. Objects of governmental controls may include directions of
research and
development efforts, determination of product mixes and item
specifications,
selection of capital investment alternatives, eligibilities for import
or
export licenses, and employment practices. Early in the twenty-first
century, these
activities are becoming elements in a de
facto U.S. industrial policy.
(5) The
private sector may become an object of
regulation by the government in the interest of employees, consumers,
or other
interests in the economy. Such regulation almost always imposes
additional
costs upon business firms, and consequently squeezes profits or results
in
higher market prices.
(6) The
private sector may become the object of
efforts either to promote and encourage competition, or to stifle or
prevent
competition. In the former case, "antitrust" or
"antimonopolies" laws may be enacted and enforced; in the latter case
the government may become the prime mover in the effort to
"rationalize" or cartelize industry (also a possible component of an
industrial
policy).
In their
extreme manifestations, points (1) and (4)
above may devolve to the characteristics of fascism, i.e.,
authoritarian
direction of privately-owned capital. We may also note that the
government can
effect a ready transformation to the characteristics of socialism
simply by
nationalizing private-sector firms so that they become government-owned
and
directed enterprises. The purpose in making these observations and
otherwise
identifying the various points of contact between firms and the
government is
to note that the operation of government in a nominally capitalist
economy may
pose threats to private sector firms as well as provide opportunities
that they
may attempt to exploit.
The
Maintenance of
Competitive Conditions
Viable competition
among
business firms in each market is the sine
qua non of market capitalism. It is competition which ensures that
firms
efficiently produce only those goods and services demanded by the
consumers of
the society. But there is an inherent divergence of interest between
the firms
in an industry and their customers. Although customers surely benefit
from
adequate competition (lower prices, higher quality merchandise, greater
product
variety), firms might achieve greater profits in cooperation with each
other or
as sole monopolists of their respective markets.
Firm
managements have incentive to try to achieve
monopoly of their markets by internal growth, acquisition of
competitors, or
engaging in practices to destroy the abilities of competitors to
effectively
compete. If the achievement of monopoly is blocked by public policy
(e.g.,
antitrust law and its effective enforcement), they may attempt to
cartelize the
industry. If cartelization is prevented, firms may attempt to collude
with
competitors to set prices or allocate sources of materials or markets.
If all
of these avenues are blocked, the firms in an industry may engage in
price leadership-followership
behavior that effectively veils monopolistic intent.
Governments
of democratic societies find rationale to
undertake the promotion and preservation of competitive conditions in
their
economies. This is usually done by enacting legislation that declares
the
existence of monopoly to be unlawful (in the U.S. this is accomplished
by
Section 1 of the Sherman Antitrust Act) and the perpetrator of monopoly
to be
guilty of an unlawful act (Sherman, Section 2), or that enumerates
specific acts
or activities that diminish competition and which are thus unlawful
(the
Clayton, Robinson-Patman, and Wheeler-Lea acts). But the enactment of
legislation alone is not enough. The government must further establish enforcement authorities (in the U.S., the
Federal Trade Commission and the Antitrust Division of the Department
of
Justice) and resolve to make effective the enforcement of the relevant
legislation. This resolve may differ significantly according to the
political
party in office and the particular agenda that it is attempting to
implement.
Because of
the determined enforcement of laws that are
intended to preserve and maintain competition, managers of business
firms make
themselves knowledgeable of the pertinent laws and make calculated
judgments as
to whether to risk violating such laws in any of their sourcing,
producing, or
marketing activities. It may also be worthwhile to note that in a
society
governed by law (as is the U.S.), innocence is presumed until guilt has
been
established. The significance of this is that no act undertaken by the
management of a business firm is necessarily in violation of the law
until it
has been tested in the courts.
In a legal
environment of presumed innocence, even
though a law may declare a certain act unlawful and other firms
engaging in the
act have been indicted and successfully prosecuted, the act may be
repeated by
yet another firm. In order for the firm to be penalized under the law,
the act
must be detected, indicted by an appropriate legal authority, and
successfully
prosecuted in court. Because failure may occur at any of these stages,
the
managements of business firms behave rationally to assess the
probability of
detection, the probability of indictment if detected, the probability
of
successful prosecution if indicted, and the magnitude of the penalty if
found
guilty under the law. Then if the "expected value" of a penalty
(i.e., the conditional probabilities multiplied by the likely penalty)
is
judged small enough, the management of a business firm may deliberately
assume
the risks of detection and prosecution by engaging in the act. Indeed,
it is
not uncommon for business firms to maintain legal staffs or contingency
funds
to cover legal fees and any penalties that are actually assessed.
Rationales
for Governmental Involvement in the Market
Economy
The most
fundamental role for
government to play in the market economy is the maintenance of an
environment
that is hospitable to the functioning of market economy and the
exercise of
entrepreneurship. At very minimum this means establishing the rules for
holding, transferring, and arbitrating disputes over the possession of
private
property, determining weights and measures, providing a stable money
supply,
insuring the sanctity of contracts, and otherwise maintaining law and
order.
John Stuart Mill during the nineteenth century referred to these
minimal roles
for government as the "night-watchman" functions (John Stuart Mill, Principles
of Political Economy, 1899).
Beyond the
night-watchman functions are four other
significant rationales for governmental involvement in the market
economy: to
maintain competition among business firms in the same industry, to
reallocate
resources, to redistribute incomes, and to stabilize the economy. Each
of these
rationales is founded upon some fault, shortcoming, or failure in the
functioning of the market.
From this
perspective it may be noted that any problem
in the functioning of a market may invite some response from government
to
address the perceived problem. And if market mechanisms exhibit
traumatic
failure or become fundamentally distrusted by the political leadership
of the
society, these constitute the rationales for shifting to fascism by
conferring
product-mix decision making upon a central authority, or to socialism
by
nationalizing privately-owned productive resources and imposing central
planning and direction. By the same token, failure of authoritarian
socialism
constitutes the rationale for shifting from authoritarian control to
some form
of market economy. It appears that this latter phenomenon is being
widely
experienced in the Eastern Europe even as some economies of the West
experiment
with more statist orientations.
The next two chapters address the flaws and failures of market economy that are attributable to the non-ideal circumstances under which real-world market economies actually operate. In the Postmodern view, the flaws and failures of market economy are sufficient to warrant a transition to socialism. In lieu of such a transition, Postmodernists favor government intervention in the market economy to correct the flaws and avert the failures of market capitalism.
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14. PERCEPTIONS OF MARKET FAILURE
Only the most extreme libertarian would advocate a night-watchman-only role for the state. Most modern economists, even those who consider themselves fairly conservative, recognize that there are shortcomings of the market economy that can be addressed by government authority. Indeed, with the emergence of Postmodern culture during the twentieth century, society has become more accepting of government involvement in the economy, and more demanding of it as well. Critics of market capitalism characterize these shortcomings as “market failures”. To the extent that these market failures constrain consumer sovereignty and freedom of enterprise, they may also have negative effects on religious liberty.
A market economy works best under ideal circumstances, i.e., when no
market participants have any special advantages, there is sufficient competition
among market participants, all effects of every transaction are fully reflected
in the outcome of the transaction (there are no spillover effects), there
is adequate public good infrastructure (e.g., transportation, communication,
water, sewage, power), and the macroeconomy is sufficiently stable that
it does not significantly affect the fortunes of individuals. But these
very conditions, if they are not met, provide reasons (or excuses) for
governmental intervention into the economy.
Types of “Market Failure”
Monopoly Power. Inevitably, some market participants are born with advantages not possessed by others, and some market participants, by virtue of race, position, connection, or other characteristic are able to acquire special advantages, perhaps though education, training, or life experiences. These inherited or acquired advantages often serve as the bases for curbing competition and achieving monopoly power in markets. Monopoly power may allow the possessors of it to capture incomes greater than commensurate with their productive capacities. The exercise of monopoly power distorts the allocation of resources and the distribution of incomes in the economy. The exercise of monopoly power by those who possess it limits the personal liberty, freedom of enterprise, and consumer sovereignty of those who do not possess it.
Income Distribution. Productivity suffers when the allocation of resources is distorted, and incomes become more unequally distributed when those with monopoly power capture incomes greater than warranted by their productive capacities (a phenomenon described as “exploitation”, the religious implications of which are discussed in Chapter 30). The distribution of an economy's output by dollar voting often raises the equity issue because the merit-based distributional principle of market capitalism inevitably results in an unequal distribution of income. The wealthy simply have more dollars (or euros or other currency units) to vote than do the poor. The classic objection is that the wealthy afford champagne even when the poor can't afford milk for their babies.
Externalities. Another reputed defect of market economy is that transactions may result in spillover effects (a.k.a. “externalities”) that are not reflected in the market outcomes. A positive spillover effect results when a transaction between two parties (the first and second) unintentionally helps a bystander (a third party to the transaction). Private health maintenance and education expenditures that benefit not only those who purchase them but also other members of society often are cited as examples of positive spillovers. A negative spillover effect results when a transaction between two parties unintentionally harms an innocent bystander. There are many examples of negative spillovers, among them roadside trash, noisy side effects of production or entertainment, smoke, particulate and chemical pollution in the atmosphere or streams, and the list goes on. Positive spillovers may enhance the exercise of enterprise freedom, consumer sovereignty, and religious liberty by market participants; negative externalities diminish them.
The “services” rendered by churches and charities to their members and clients are like spillover benefits in that they are unrecognized by markets at not compensated in market transactions. Quid pro quo market transactions are so-called bilateral transfers of value in that values are exchanged between the market participants. Contributions to churches and charities, like taxes paid to governments, are so-called “unilateral transfers” of purchasing power from the donor or payer to the recipient. Since the market underallocates resources to the services provided by churches and charities, they must employ such non-market means of raising revenues as soliciting pledges of voluntary contributions by their members. Governments that are favorably disposed to such private contributions may attempt to correct the resource allocation distortion by providing implicit subsidies to them in the form of income tax deductions. However, opponents of such subsidies often invoke the Constitutional requisite of separation of church and state to threaten the removal of tax subsidies to private contributions.
Public Goods. Economists distinguish between “private goods” and “public goods”. The personal incomes and wealth of many people are sufficient that they can purchase private goods and then use them to their own exclusive benefits. For example, I can purchase a television receiver, take it into my house, close the doors and draw the blinds, and so exclude all others from enjoying it. Private goods are produced for the market in response to price and profit signals. Public goods, however, are not subject to the so-called “exclusion effect”, i.e., one cannot purchase a public good and successfully exclude others from using or enjoying it. For example, while television receivers are private goods, television broadcasts are public goods that I cannot keep other people from enjoying if they too have television receivers. And because public goods are usually large and “lumpy”, their prices are so high that individuals (other than Donald Trump) typically cannot afford to purchase them. Examples are local roads, national highways, bridges, tunnels, canals, ports, airports, stadiums, parks, water and sewer systems, communications and power transmission networks, etc. Another characteristic of public goods is that one person can use ever more of a public good, but that person’s use of it leaves no less of it for other persons to use (the “more for me, no less for you” characteristic). Examples include bridge crossings and visits to public parks. The facilities of churches and synagogues exhibit many of the characteristics of public goods even if they are not supported by state finances.
These characteristics of public goods mean that the market does not respond to price and profit signals to produce public goods. This is usually construed as a failing of market economy that can be remedied only by government funding and provision of the public goods. Government itself may provide the public goods, or it may fund and commission the provision of the public goods by private sector providers. But the private producers of public goods do so only at the behest of government, and only with government funding. Governmental provision of public goods that facilitate the efficient functioning of markets expands freedom of enterprise and broadens the range of private goods produced in response to market signals.
Markets also don’t respond to price and profit signals to produce church facilities which provide services that exhibit the characteristics of public goods. The financing of churches requires a social resolve of the respective memberships rather than public decisions rendered through the offices of governments (unless, as is the case in many European countries, the state has taken responsibility for financing church establishments). Unable or unwilling to offer religious services on a quid pro quo basis (i.e., service for price), church and synagogue memberships must mount fund-raising campaigns that are designed to elicit sufficient voluntary contributions to support the services and finance construction of facilities.
Social Goods. Economists also identify an intermediate type of goods between private goods and public goods. “Social goods” are like private goods in that some quantity of each is produced in the private sector in response to price and profit signals, but because social goods entail spillover benefits that are not recognized by the market, the market underallocates resources to their production and causes the underproduction of social goods relative to the quantities that would be produced if all spillover benefits were recognized by the market. Because the spillover benefits are unrecognized, the allocation of resources is distorted and consumer sovereignty is unduly constrained. The solution is for government to encourage the production of more of the social goods by providing subsidies to private sector producers or consumers. The “trick” is for government to provide just the right amount of subsidy to encourage private sector production of the amount of the good that would be produced if all spillover benefits were recognized by the market, else the subsidy perpetuates or worsens the allocative distortion.
Macroeconomic Instability. Instability of the macroeconomy (the economy of a large region, province, or nation) may have effects upon individuals that are beyond their control and thus may impinge upon their personal liberty, freedom of enterprise, consumer sovereignty, and religious liberty. Economic expansions can provide employment and entrepreneurial opportunities not possible in a stable or contracting economy, thus enhancing enterprise freedom and consumer sovereignty. Economic contractions may result in layoffs of workers and failure of businesses as markets contract, thus diminishing enterprise freedom and consumer sovereignty. Inflation, if unanticipated, can cause losses of purchasing power to savers, lenders, and people whose incomes are fixed or indexed at rates slower than the actual inflation rate. Deflation, though it may increase the purchasing power of incomes, often is accompanied by falling incomes, decreased profitability of businesses, and business failures with accompanying job losses. Economic instability that diminishes incomes is likely to reduce voluntary contributions to churches and charities and can have deleterious effects on their budgets and service provision levels.
Greed. Critics of market economy sometimes imply that market transactions must be zero- or negative-sum “games”, i.e., if one party to a transaction gains, the other party must have lost and may have lost more than the first party gains. Indeed, prior to 1776 it was the conventional wisdom that selfish private pursuits must diminish the welfare of society. One of Adam Smith’s most radical suggestions in The Wealth of Nations was that when a self-interested person produces goods or services for the market, the welfare of the larger society is also served because other people need and want those goods. This was a radical notion in 1776, and it continues to be poorly understood to this day. A modern version of this notion is that market activity can be a positive-sum game because if both parties to a transaction enter into it voluntarily and with adequate knowledge of what is being transacted, both must expect to gain from the transaction.
Fraud. Even though market transactions can be positive-sum games, market economy is fraught with the potential for greedy individuals to perpetrate fraud upon their fellow market participants, and thus to capture gains for themselves at the expense of others. Fraud occurs when there is intentional deception resulting in harm or injury to other parties. Examples include misrepresenting the characteristics of products or services being offered in the market, hoaxes in the form of product or service offers that are never delivered, and agreeing to contract terms that are not fulfilled. Fraudulent activity impairs enterprise freedom, consumer sovereignty, and religious liberty. Most can agree that government should enact laws prohibiting and punishing fraudulent activity.
Ethical Issues. Aside from fraud, there are ethical problems when self-interest is taken to the extreme of greed. Unethical behavior occurs when greed causes people to pursue self-interest to the detriment of other members of society. Although ethical orientations differ widely across cultures, behaviors that most people in Western nations would judge to be unethical (whether or not construed as fraudulent under law) include bribery, embezzlement, conversion of company property for private use, breaking contracts, price fixing, collusion, deceptive advertising, falsification of expense accounts, underreporting of income or padding of expenses on tax reports, use of substandard materials, producing and selling products that fail to function as advertised, failing to divulge to consumers possible product dangers, and so on. Any of these unethical behaviors may constrain the freedom of enterprise and consumer sovereignty of other market participants.
But this begs the very important question of whether government should attempt to legislate morals and regulate ethical behavior based upon moral precepts. And if so, whose moral precepts? Modernists seem to have little trouble in authorizing government to enact and enforce laws based upon Christian moral standards, but Postmodernists are ethical relativists who base beliefs, values, and hope on agreed “standards” that may change, and they believe that that society should grant them rights to set their own standards and values.
A related question is whether ethics can serve as a basis for law, or should law serve as a basis for ethical behavior? Some people feel that if they have met the “letter of the law”, they have behaved ethically. Citizens of a state should of course attempt to obey all reasonable laws and regulations, but it is unlikely that laws can be passed or regulations established to cover all situations involving questionable ethical aspects (although the French system of code law attempts to do just this). It is more likely that ethics can serve as an appropriate basis for law than that law can serve as an adequate basis for ethical behavior. Citizens who regard certain laws or regulations to be unreasonable (e.g., speed limits that are perceived to be unduly low or traffic light waits that are considered to be too long) will tend to flout them and deny that violating those laws involves unethical behavior. Once people become conditioned to flouting minor regulations without repercussion, they tend to have fewer qualms about flouting more serious laws. American jurisprudence has favored establishing general-principle laws and regulations, and then letting case adjudication establish precedents that deal with details. Even so, general-principle law and case precedents cannot deal with every ethical situation that may arise. Postmodernists would not be favorably disposed toward either general-principle law or French-style code law that constrains their individual liberty to set and abide by their own moral standards.
Consumerism. Even if fraud is not perpetrated and ethics are not otherwise at issue, a society that enjoys “easy credit” and is continually bombarded by advertising may exhibit the characteristics of a consumer mentality, or “consumerism”. Consumerism results when consumer sovereignty is taken beyond the bounds of human need. The continuing message in the media is that “more is better”, old possessions are obsolete, and new models are “must have” items. So, even if the things that one possesses are adequate to a comfortable lifestyle, one is confronted continually with the message that he or she needs to dispose of the old model and buy the new model. A society experiencing consumerism also has been described as a “throw-away” society. Here the language of “want” and “need” intentionally is obscured in advertising that is intended to create wants that are represented as “must have” needs. The more gullible and inexperienced members of society, particularly the young who are dependants of adults who pay for their sustenance, fall prey to such must-have advertising. It is arguable whether such want-creation advertising is unethical by either Modern era standards or by Postmodern subjective standards.
Most can agree that government should issue regulations requiring “truth
in advertising”, but a more difficult question is whether there is an appropriate
role for government to play in curbing want-creation advertising.
Any such governmental action would constrain both freedom of enterprise
and consumer sovereignty. This question is made even more difficult
by the fact that consumerism in countries like the US and many of those
in the EU helps to drive economic growth, not only in those countries,
but globally as well. Occasionally political spokes-persons of other
countries chide the US and EU nations for their consumer mentalities accompanied
by escalating debt levels and deteriorating trade balances. But economic
welfare and growth in many developing nations is especially dependant on
sustained and increasing consumption in developed nations. As the
saying goes, “when the United States sneezes, the rest of the world catches
pneumonia.” When the US goes into a recession, those same spokes-persons
who chided US consumerism now call for a reflation of consumer spending
in the US.
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PART 5. LIMITS OF GOVERNMENT
15. GOVERNMENT EFFORTS TO FIX MARKET FAILURES
Given the laundry list of market economy failures, what are the appropriate roles for the state to play in a workable market economy? The liberal principle that has persisted through the Modern era is that government should establish the “rules of the game” and function as a neutral umpire in the market. When government ceases to be a neutral umpire or goes beyond to become a player in the market, it jeopardizes the exercise of enterprise freedom and consumer sovereignty. But with the emergence of Postmodern culture and communitarian ideology during the twentieth century, society has become more accepting of government involvement in the economy. Postmoderns and communitarians both see roles for government beyond serving as neutral umpire.
Wise Authority. Basically there are only two possible governmental approaches to dealing with reputed market failures. One, often perceived to be the easier approach, is to replace market decision-making with centralized, authoritarian decision-making. The underlying premise is that a “wise authority” (a so-called “philosopher king”) can make better economic decisions than those made by a multitude of individual market participants, each pursuing his or her own personal interest.
To be consistent with their subjective values and ethical relativist positions, Postmodern thinkers might prefer the personal responsibility of a caveat emptor (“buyer beware”) approach. A “wise authority” approach typically has been implemented in Postmodern era democratic polities by legislation to establish decision-making or regulatory commissions that are empowered to specify and enforce standards of performance and maintenance, prices or price changes, and labeling of products. Although such regulations may constrain freedom of enterprise, the intent is to enhance the ability of market participants to exercise both consumer choice and enterprise freedom. Governmental actions that correct or offset perceived market failures may also serve to enhance religious liberty.
Nationalization. The extreme variant of the “wise authority” approach is nationalization of all private-sector enterprises coupled with central planning to answer the fundamental economizing questions (what, how, by whom, and to whom). Nationalization substitutes the authority of the state in place of enterprise freedom and consumer sovereignty. Governments that have nationalized privately-owned production facilities typically have not been congenial to the exercise of religious liberty. Universal nationalization of all productive facilities results in authoritarian socialism, the form of economic organization typically preferred by Postmodernists, but which is inconsistent with their preferences for subjectively-determined values and ethical relativism.
The alternate approach to dealing with market economy defects, but one which may be more difficult to perceive or to implement, is to leave in place the market mechanisms but design ways to make the market mechanisms work more satisfactorily. In lieu of actually replacing capitalism with socialism, Postmodernists favor intervention by governmental authorities to correct or offset market “failures”.
Inequality. Inequality in the distribution of something across a population is a descriptive or factual matter. Inequity is a subjective matter, a matter of perception that the degree of factual inequality is unsatisfactory. A national income that is perceived to be too unequally distributed across the population of the nation may be judged to be inequitable. By the same token, a perfectly equal distribution of income across a society that values productive contribution and rewards merit also might be judged to be inequitable. In such a society, some distributional inequality attributable to reward for meritorious productive effort might be accepted as equitable.
In democratic societies, a market-modification approach is typically used in dealing with the perception of inequity of the income distribution. The approach is to couple progressive income taxation with a transfer payment system. Progressive income taxation applies ever-higher tax rates to a succession of higher personal income tax brackets, thereby to level disposable incomes "from the top". The tax proceeds, or some of them, are then redistributed to lower-income members of society upon some pre-established means criteria to raise disposable incomes "from below". Leveling disposable incomes from the top and raising the income floor from below has the effect of moderating the degree of inequality of the income distribution.
The effect such a redistribution strategy is to enhance the exercise of consumer sovereignty at the lower end of the income distribution spectrum at the expense of enterprise freedom toward the upper end of the income distribution spectrum. An unintended side effect of income redistribution is likely to be impairment of incentives at both ends of the income spectrum. Why should a higher-income recipient continue to work so hard and assume so much risk if an ever-larger proportion of his additional income is taxed away? Why should a lower-income recipient continue to work as hard if his subsistence and comfort requirements can be met by ever-richer transfer payments (e.g., welfare entitlements)?
A conjectured effect of income redistribution is the creation of asymmetry in church and charitable contributions across the income spectrum. Lower-income recipients of distributions are likely to increase spending more on perceived needs than on charitable contributions. The increased level of charitable contributions by poorer people receiving income distributions is therefore unlikely to be as large as the loss of contribution receipts from wealthier people who could afford to make larger contributions before their incomes were diminished in the redistribution.
Governments of most Western nations typically use a variant of the progressive taxation and transfer payment approach to ameliorate inequalities in the distribution of income. But, outside of Western Europe and North America, governments often run such substantial budgetary deficits that raising taxes to fund expenditures is far more important than achieving distributional equity. In such cases, taxes are high on everyone, the rich and the poor alike, often to the point of expropriation. Manipulation of the tax rate system to achieve equity simply may not be within the realm of political possibility. In some nations, more extreme inequalities of income distributions have precipitated revolutions to replace capitalism with authoritarian means of distributing incomes.
Monopoly power. There is substantial consensus among economists globally that the accumulation of excessive amounts of monopoly power is undesirable because of the negative welfare effects and the resource allocation distortion effects. The US was (one of) the first nations to recognize this problem in law with the enactment of the Sherman Antitrust Act in 1890 and a number of other pieces of anti-monopolies legislation since then. Some nations at various times in history have promoted national monopolies as means to develop their economies. Examples include Germany and Japan during the 1930s and '40s, and a number of third-world nations implementing import substitution industrialization (ISI) development strategies in the second half of the twentieth century. Most developed nations, recognizing the need to curb monopoly structure and behavior, have enacted anti-monopolies legislation along the lines of US or EU models. However, the enactment of such legislation is one thing; the vigorous enforcement of it is another. Without sufficiently vigorous enforcement, the anti-monopolies legislation “on the books” is meaningless.
Externalities. In centrally planned economies, spillovers (or externalities) can be dealt with simply by planning to increase the production of (allocate more resources to) those goods yielding spillover benefits, and to diminish the production of (divert resources away from) goods causing spillover costs. Unfortunately, neither spillover costs nor spillover benefits were high in the central planning priorities of the Soviet Union or its satellite states. Education and health services were typically underfunded, and pollution was usually ignored. And, regrettably, developing nations in the so-called "third world" rarely are able or willing to address either spillover benefits or spillover costs. Some developing nation governments have been known to invite polluting industry relocation from "first world" countries with stringent anti-pollution requirements in order to gain the job creation and income generation benefits, in spite of the pollutants that will descend upon their citizens and their neighbors.
Spillover benefits and costs are also known as "externalities" because the causers of the spillover effects neither enjoy the spillover benefits nor suffer the spillover costs. In both cases, the effects are external in the sense that they descend upon third parties. Developed nations with market economies often adopt market-modification approaches for dealing with spillover effects. Market-modification approaches have included subsidies to encourage the production of more of those goods yielding positive spillover benefits (e.g., health and education services) to third parties, and taxes levied upon goods causing spillover costs in order to discourage the production and consumption of as much of those goods. These approaches enhance enterprise freedom to produce goods yielding positive spillovers, but constrain enterprise freedom to produce goods causing negative spillovers. Subsidies that encourage the production of goods yielding spillover benefits broaden the range of consumer choice; taxes that discourage the production of goods causing spillover costs narrow the range of consumer choice. The “trick” is to provide just enough subsidies or impose just enough taxes to achieve optimal enterprise freedom and consumer sovereignty, but this has proven a difficult task for even the most sophisticated and well-intentioned democratic governments.
The tax on spillover-cost pollution internalizes the externality by raising the cost of continuing to pollute. The polluter can avoid the cost of the pollution tax only by diminishing the pollution. But the equipment necessary to diminishing the pollution (filters, scrubbers, coolers, noise dampeners, etc.) must be purchased, and this too tends to internalize the external cost. Once a pollution tax has been levied, a second-level approach, but one rarely implemented, is for the government to use the tax revenues to compensate the innocent third parties who have suffered the adverse effects of the spillover costs. More often than not, governments find other uses for such tax revenues that are unrelated to the pollution that was taxed.
Another, but more controversial, market-based approach to dealing with spillover costs is to specify rights to pollute at levels that society deems tolerable (in current political discussion, a “cap” on pollution), and then allow (and promote) market trading of the pollution rights among firms in polluting industries. In a so-called “cap and trade” approach to dealing with environmental pollution, the expenses that firms incur to buy such pollution rights cause them to internalize the spillover costs of pollution so that they show up in the firms’ income statements. Firms that sell their pollution rights have to incur the expenses of diminishing their pollution, thereby internalizing the spillover cost. However, if pollution rights are set too high or are given away to current polluters (as provided in the Waxman-Markey Bill, HR2454, passed by the US House of Representatives in 2009), the “cap and trade” system will be meaningless.
Market modification approaches, when they are successful, may head off
more extreme approaches to replace market capitalism with more authoritarian
forms of economic organization. Market modification approaches that
enhance consumer sovereignty and enterprise freedom also serve to foster
religious liberty.
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16. GOVERNMENT FAILURE IN ADDRESSING MARKET FAILURES
To this point we have considered the postmodern notion that the good offices of government can be invoked to fix the "market failures" of an economy organized as market capitalism. While well-designed government interventions often do alleviate market dysfunctions, economists focusing upon public choice issues have pointed out that government itself sometimes fails in its efforts to fix the deficiencies of the private sector. Public choice is about whether any particular decision is most effectively taken in the private sector or in the public sector. Government failure that constrains consumer sovereignty and freedom of enterprise may also impair religious liberty.
The broad categories of government failure in regard to the economy include:
- failing to enact and enforce laws or directives that support and enhance the functioning of market economy;
- failing to account for secondary (and tertiary, etc.) effects of well-intentioned government actions, resulting in unintended consequences;
- basing programs and policy actions upon the requisites of political expediency rather than economic realities;
- basing political actions upon the requisites of regime preservation rather than the needs of public welfare;
- inability or unwillingness to exercise fiscal or monetary discipline;
- policy overreactions that increase economic instability;
- ceasing to function purely as a neutral or disinterested umpire in the market economy; over-stepping the role of rule-maker and umpire to become a player in the market;
- attempting to controvert natural comparative advantages; and
- enacting legislation that invites moral hazard.
Rule of Law. Failure to enact the necessary legislation and abide by the rule of law (rather than rule by authority) results in a lawless and uncertain society within which commerce cannot be conducted with confidence. The security of privately owned property is crucial to the success of a market economy. Without the institutions of law and order that establish clear title to privately-owned property, provide for the orderly transfer of ownership of property, and settle disputes over the ownership of it, market economy cannot function. People will simply not assume risk in undertaking commercial ventures if they cannot be confident that they can enjoy the benefits of commercial success. Business enterprises will not be inclined to invest in assets and set up operations in a nation in which company assets are not secure from government seizure. Nationalization with adequate compensation is one thing, but there are recent examples in Latin America and Africa of government expropriation (i.e., nationalization without compensation) of both foreign- and domestically-owned company assets.
Antitrust Law. Anti-monopolies laws may be enacted but they will have little effect to prevent the accumulation of monopoly power or moderate the exercise of it if they are not vigorously enforced. Even in the United States we have seen that historically one political party (the Democratic Party), when it occupies the Whitehouse, has tended to enforce the antitrust laws more vigorously than does the other party (the Republican Party) when it is in power. We have also seen changes over time in the inclination of each party to enforce antitrust laws.
Unintended Consequences. The law of unintended consequences is the proposition that unperceived secondary (and subsequent) effects of a political action may undermine the effectiveness of the action. An example lies in the area of transfer payments that are intended to alleviate human suffering, but which tend to impair the society's incentive structure with respect to work, risk assumption, and entrepreneurship. For example, welfare benefits that are rich enough to enable eligible recipients to avoid work may decrease labor force participation. Unemployment benefits of long duration or large proportion of last earned income tend to extend job-search periods and may actually cause unemployment to persist and the unemployment rate to increase. A progressive income tax rate system intended to alleviate income distribution inequality may discourage additional work activity or precipitate reduced work effort if the high marginal tax rates take too large proportions of marginal income. Increased public sector spending to stimulate the economy may become ineffective if it causes interest rates to rise and choke off (or crowd out) private sector investment or interest-sensitive consumer spending.
Political Expediency. Political expediency often comes into conflict with economic realities. Because of "the squeaky wheel gets the grease" principle, vested interests (a.k.a. "rent seekers") lobby vote conscious politicians to enact legislation or otherwise grant political favors ("rent") to them, even to the detriment of the greater public. This can happen because the benefit to the vested interest is large but the cost to each party outside the vested interest is so small as to be negligible. Indeed, some have theorized that it is rational for most voters to remain ignorant of most political issues because of the negligible magnitude of the impact of each upon the voters. The vote-conscious politician thus can glean more votes by favoring the vested interest than he or she might lose from the general electorate.
Bureaucratic Morass. Bureaucracies are hierarchically organized management structures in private business firms and not-for-profit institutions as well as in government structures. In any of these areas, complexity can increase though innumerable layers of decision-making to create what might be described as "bureaucratic morass," i.e., the inability to exert effective oversight, coordination, and control throughout the organization from the top down to the level of performance of the organization's mission. Bureaucratic morass impairs the efficiency of the internal resource allocation process within the organization. Bureaucratic morass tends to be self-limiting in private-sector commercial enterprises that must operate profitably or fail unless “bailed-out” (Chrysler, 1974, 2009; General Motors, 2009) or subsidized by government. There seems to be no such limit on bureaucratic extent in the public sector. Sometimes, bureaucratic extent and complexity are used by government as a means to provide employment and income to large segments of the population that otherwise are unable to find productive employments in private-sector enterprises. In some nations, this approach may contribute to chronic budgetary deficits, monetary expansion, and inflation.
Self-preservation. For whatever legitimate reason that a bureaucracy is established, once it is in operation its primary goal often becomes self-preservation. Political regimes, however they come to power, often succeed in co-opting the civil service and capturing control of the military establishment to assist in preserving the regime. Supporting compliant civil services and military establishments is yet another reason that government budgets tend toward deficits that become monetized and contribute to inflation.
Rent-seeking Activity. Government officials have been described by public choice economists as political entrepreneurs who provide political goods (e.g., appointments, employment, favors to vested interests, sponsorship of legislation desired by constituents, etc.) in exchange for political profits in the form of votes or other modes of support that ensure their political survival. Those who seek such political goods are said to engage in "rent-seeking" activity. Democratic processes together with a free and probing press tend to curb tendencies for political entrepreneurs to abuse their positions. However, some government officials, particularly in authoritarian regimes where the press is controlled and democratic processes are absent or not effective, may be tempted to aggrandize their political profits by taking bribes for granting licenses or providing other favors to supporters. In some countries, government officials with budget authority or access otherwise to government funds have been discovered to have "raided the treasury" (or any budget to which they have access) and transferred public funds to private (and often secret) bank accounts in other countries. Cases like this have been described as “kleptocracies”.
Lack of Fiscal Discipline. Fiscal discipline is the ability and willingness of the government to restrain its period (usually annual) expenditures to the revenues that are available to be used during the period. Fiscal discipline requires that any new or expanded government program be accompanied by provision for additional revenues (tax or other source) to pay for it. Lack of fiscal discipline on the part of the regime often culminates in expenditures increasing faster than revenues, budget deficits financed by monetary expansion, chronic inflation at high rates, a severely depreciated currency, and such uncertainty in commercial transactions as to impair normal commerce. The Turkish lira, which exchanged for the US dollar at the rate of 6 to 1 in the mid-1970s, exchanged for US dollars at the rate of 1.4 million to 1 in June of 2003.
Becoming a Market Player. Perhaps the most subtle way in which government impinges negatively on a market economy is when it ceases to be a neutral umpire and becomes a player in the market by favoring some private sector market participants or industries while penalizing others. The United States has long shunned European style “industrial policy” in which the government “picks winners”, i.e., it decides what industries and companies within industries should survive, and ensures their survival by subsidies and protectionist policies (e.g., tariffs on competing imports). The US government recently (2009-10) has exhibited tendencies toward implementing an industrial policy.
Governments may discourage selected industries and companies by levying discriminatory or punitive taxes. Government officials may also pressure companies to locate plants at politically desirable sites, or to prevent the closing of unprofitable plants where politically important constituencies reside (GM, 2009). When a government uses subsidies, tariffs, punitive taxes, and political pressure to achieve its product mix, industrial mix, and locational goals, it abridges the sovereignty of consumers to decide for themselves what products to buy; it also curbs the freedom of enterprise of producers in their attempts to succeed in the markets of their choosing and at their preferred sites.
Competing with the Private Sector. A less subtle way in which governments have negatively impacted market economies occurs when they have deliberately started or acquired state-owned enterprises (commonly referred to as SOEs) to compete with private producers. In the US, the federal government has come into the ownership of private sector companies, wholly or in part, through the bailout and bankruptcy processes (AIG, 2008; GM, 2009). In some countries (Bolivia, Venezuela, Cuba), governments have nationalized whole industries, often with little or no compensation of the former owners. Where this has happened, privately owned assets have been confiscated. Confiscatory loss of assets also occurred in the US (2008-2009) when the federal government pressured mortgage lenders to write down the amounts of non-performing mortgage loans, and banks to write-down the values of homes that serve as collateral for mortgage loans. Such government actions have been clear violations of contract law.
Moral Hazard. Moral hazard is a problem that occurs when a principal commissions an agent to act on his behalf, but the agent engages in shirking, pursues self interest to the detriment of the principal's interest, or indulges in dishonest or immoral behavior. A special case of moral hazard occurs when one party in good faith attempts to provide some possibility of benefit other parties, but finds that beneficiary parties take advantage of the possibility in ways not perceived by the provider and to the detriment of the provider, themselves, or innocent bystanders. This phenomenon, referred to as "beneficiary moral hazard", may originate in the private sector, but government itself may invite beneficiary moral hazard.
The classic example of government inspired beneficiary moral hazard occurs when government agencies offer below-market hazard insurance rates for businesses and homes constructed in flood or hurricane prone zones. People who qualify for such sub-market insurance rates are encouraged to rebuild after the flood or hurricane has destroyed their property, in the same places, and often with grander edifices. Had the hazard insurance not been offered at all, or only at market-determined rates, rational people would have had incentive to build or rebuild at less risky sites.
A special case of government-inspired beneficiary moral hazard occurs when a government banking authority offers sub-market deposit insurance rates to commercial banks. Bankers, secure in the knowledge that their clients’ deposits are insured, issue ever more risky loans. And depositors, believing that their deposits are adequately insured against bank failure, pay less attention to the soundness of the bank. Yet other instances of beneficiary moral hazard occur when government legislates and enriches unemployment and welfare benefits. The longer the duration of unemployment benefits (increased in the US to 99 weeks in 2010) and the larger the proportion of an unemployed person’s last earned income, the longer the job-search process tends to be and the “pickier” are those searching for jobs. If welfare entitlements are sufficient to provide an adequate level of living, recipients who qualify for the benefits may choose to exit the labor force.
Averting Failure. Government sometimes fails because it attempts to avert failure in the economy. Just as death is a part of life, failure is a part of the working of the market economy. There are no guarantees of the success of any newly-launched venture. As we have seen in recent months and years, the world is a risky place in which to operate. Joseph Schumpeter described the turbulence of a market economy as "a perennial gale of creative destruction" in which new ventures are started and rise to success as they destroy the monopoly power of older ventures that eventually fail if they cannot compete with new technologies or modes of production (Capitalism, Socialism, and Democracy, 1942). Business failures in the process of creative destruction have a cathartic effect for the economy, much in the way that forest fires in national parks have beneficial effects. Forest fires clear out the dead wood and underbrush on the forest floor, and the heat of the fire opens seedpods (e.g., pine cones) to disperse the seeds and give new life to the forest. In similar fashion, the market economy's process of creative destruction helps to clear out the dead wood in the economy's business sector and gives life to vibrant new competitors. The new competition curbs the monopoly power of the old survivors. As we have seen in the US economy recently (2008-2009), the federal government has construed some corporations as “to big to fail” (GM) or too crucial to the financial system to fail (AIG, Merrill-Lynch). The government’s response has been to bail out some failing companies and acquire equity interests in others.
Efforts by government to avert failure or minimize the pain of failure tend to prolong and aggravate the circumstances that result in failure by preventing the cathartic effects. As nice as it might seem for government bailouts to prevent business failures, the bailouts cause both the companies that are bailed out and those that are not to receive and send the wrong market signals (GM and Chrysler vs. Ford, 2009). Consumer sovereignty is subverted because companies survive whose products do not receive enough consumer expenditure votes. Freedom of enterprise is impaired because new companies must try to compete on a non-level playing field with established companies that are failing but have been bailed out. And once some companies in an industry have been bailed out by government, others expect similar treatment and adjust their operating policies to the expectation.
* * *
The ever-increasing involvement of governments in the workings of their
market economies has led conservative critics to describe such governments
as “nanny states” in the sense that they have attempted to regulate personal
consumer behavior in detail, alleviate all possible sources of pain and
failure, provide extensive welfare entitlements, and channel business endeavors
into what are perceived to be socially-desirable directions. Such
nanny-state intrusion can constrain consumer sovereignty and freedom of
enterprise.
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17. GOVERNMENT
AND MANAGERIAL DECISION MAKING
The decision making
principles and decision criteria elaborated in managerial economics
textbooks are
postulated for the context of privately-owned, profit-motivated
business
enterprises operating within market capitalism. It is not clear that
these
principles and criteria are also applicable either to microeconomic
production
units in a centrally planned and directed economy, or to governmental
departments and their subdivisions and agencies. While each is oriented
toward
pursuit of some mission, that mission is not to realize the maximum
possible
amount of net income.
The
Applicability of
Managerial Decision Criteria
In most government
agencies,
the financial requirement is simply to remain within budget (i.e., a
budgetary
non-negativity constraint) rather than to maximize profit (net
revenue). In
many cases the requirement may be to minimize the operating deficit of
the
department or agency. A similar constraint usually is imposed upon a
factory in
a centrally-planned economy. However, this is not unlike satisficing in
the
for-profit sector of a market economy, i.e., the pursuit of a target
return on
invested capital as originally hypothesized by Herbert Simon[1]. In a government agency, the target return is
simply zero rather than some positive net amount. If for-profit
business firm
managers can target some (any) positive amount of net income rather
than try to
realize the maximum possible, it should be feasible for the managers of
government
departments to employ the same decision criteria in pursuit of a zero
or non- negative
return. Zero should be as good a target as some positive amount.
Managers
of for-profit business firms may attempt to
optimize rather than maximize with respect to profit. Optimization
means
maximization of a primary goal subject to one or more constraints that
are
imposed by the existence of subsidiary goals. William Baumol
hypothesized that
many managers, instead of attempting to achieve the maximum possible
profit,
actually pursue some non-profit goal, e.g., sales volume or share of
market,
subject to a minimum acceptable profit constraint (e.g., a target
return on
invested capital).[2] A government department always has some mission
to
accomplish or some goal to pursue. Often the mission or goal can be
expressed
in some quantifiable but non-pecuniary form. For example, the manager
of a
Soviet factory may have been required to meet an output quota imposed
by the central
planning authority while remaining within the factory's budget. This is
a fairly
straight-forward application of the Baumol thesis taking the minimum
acceptable
amount of profit as zero (i.e., no loss or negative profit).
Production
units in centrally planned economies and departments
of government in market economies are notorious for inefficient
operation in
the sense that costs tend to be excessive and goal achievement seems to
be
deficient in comparison to comparable for-profit enterprises. A
significant
problem in these situations is that it is very difficult to provide the
manager
with performance incentives. It is also difficult to link the process
of
mission pursuit to any factor that constitutes a performance incentive
for the
manager. This linkage often is achieved in the for-profit sector of the
market
economy by letting the manager share in the net income of the
enterprise
(bonuses, stock options). But this is a problem of linkage, not a
problem of
the applicability of managerial decision criteria.
A final
problem that we shall note is that of
organizational bureaucracy. Typically there are several levels of
management in
any complex organization. Managerial decision criteria are most
appropriately
employed at the highest level of managerial policy making where the
manager can
take a view that oversees the whole enterprise. These principles may be
of
lesser applicability at any intermediate level within the bureaucracy
where the
department or division-level manager can see and exercise control over
only the
few variables associated with the department. But bureaucracy is no
less a
problem for the corporation in the for-profit sector than for a factory
in a
centrally planned economy or a department of government in a market
economy.
The
conclusion to which we have been moving is that
managerial decision criteria should be applicable to decision making in
government agencies, but there are other problems of
performance-incentive
linkage and bureaucracy that must be dealt with.
Benefit-Cost
Analysis in
Government
If the principal
objective of
a government department is to maximize some aspect of its non-pecuniary
mission, the marginal comparison criteria applied in the for-profit
sector to
revenues and costs should be equally applicable in the not-for-profit
sector to
the quantifiable characteristics of the mission being pursued.
"Benefit-cost" analysis may provide decision criteria for the manager
in the government sector. The sum of all benefits (non-pecuniary as
well as
revenue) resulting from mission pursuit constitutes the numerator, B,
of the
benefit-cost ratio. Its denominator, C, consists of the sum of all
costs
(non-pecuniary as well as pecuniary) incurred in pursuing the mission.
If the
value of the ratio is a number greater than unity (i.e., B/C > 1),
then the
activity under analysis is justifiable; any benefit-cost ratio less
than unity
(i.e., B/C < 1) suggests that the activity is unwarranted.
Simple
benefit-cost analysis has been extended to the
concept of marginal benefit-cost analysis. This version is applicable
to
situations where the question is whether to do more or less of the
activity
that is already in progress. The numerator of the marginal benefit-cost
ratio (DB/DC) includes only the additional benefits that
are
expected to flow from some increment of the activity; the denominator
sums only
the increased costs incurred by the activity increment. The same
decision
criterion holds for the marginal as for the simple benefit-cost ratio:
a value
greater than unity (DB/DC > 1) warrants the activity
increment while a value less than unity (DB/DC < 1) indicates that the activity
increment should not be
undertaken.
Both
simple and marginal benefit-cost analyses are
subject to bias and fraught with the potential for abuse. This
potential for
abuse seems to be endemic to decision making within government. The bias follows from the requirement to
include all benefits (psychic and other non-pecuniary benefits as well
as any
revenues resulting from the activity) and all relevant costs
(non-pecuniary
psychic and opportunity costs as well as explicit money costs). The
problem is
that a decision maker who is has a predisposition favoring a proposed
activity
tends to exhaustively identify all possible benefits and also tends to
overestimate their money value equivalents. A decision maker with such
a
predisposition also tends to be more casual about identifying the
relevant
costs, and may also be inclined to underestimate their money value
equivalents.
By the same token, a decision maker with a predisposition against an
activity
tends to do the opposite, i.e., to casually overlook some benefits and
underestimate the values of those identified, while exhaustively
finding all
relevant costs and carefully estimating their full money-value
equivalents.
Because of the subjectivity involved, it is entirely possible for two
decision
makers, confronted by precisely the same prospects and with the same
information, to estimate widely divergent benefit-cost ratios and reach
opposite decisions about whether to proceed with the activity.
In the interest
of undertaking or perpetuating the activities under their authority
Government
officials charged with conducting benefit-cost analyses often have
incentive to
aggrandize the benefits of their activities and overlook or
underestimate the
costs associated with them. When this happens, the effect is to
recommend
undertaking new activities that may not be warranted, or to ensure the
continuance of activities already underway.
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18. GOVERNMENT AND COMPARATIVE ADVANTAGE
The theory of comparative advantage, now nearly universally accepted
by economists, holds that nations ought to specialize their production
in the goods and services that they can produce at lowest opportunity costs
(i.e., their comparative advantages) in order to achieve global resource
allocation efficiency and welfare maximization.
Governments sometimes attempt to contravene the comparative advantages of their regions by creating artificial advantages for their domestic producers or neutralizing the comparative advantages of their trading partners. They do this by implementing protectionist measures that offset the comparative advantages of their trading partners. Protectionism becomes manifest in the enactment of tariffs on imports, subsidies for domestic producers, and so-called “non-tariff barriers” (NTBs, e.g., quotas on imports, health and safety restrictions on imports, import packaging and labeling requirements, discriminatory performance standards for imports, etc.) that are intended to curb imports or raise their delivered prices. Protectionist policies may expand or preserve employment and enterprise opportunities for the country’s own workers and companies, but it diminishes freedom of enterprise and employment opportunities within the trading partners. Labor unions are almost universally in favor of “leveling the playing field” (i.e., neutralizing the foreigners’ comparative advantages) by implementing protectionist policies.
Protectionist policies implemented by the government of a country also limit the consumer sovereignty of its own people by narrowing their range of consumer choice (including making religious and charitable contributions), but at the same time they increase the range of consumer choice for people of its trading partners. When a government implements protectionist policies, it risks eliciting rising protectionist pressures in its trading partners. Rising protectionism is dangerous because it tends to induce reciprocal protectionist responses by trading partners. The US Smoot-Hawley Tariff Act of 1930 did just this, and it spawned global protectionism that aggravated the Great Depression.
During the second half of the twentieth century, governments in a number of countries (mostly Latin American and East Asian) pursued import-substitution industrialization (ISI) policies in efforts to contravene their natural comparative advantages or develop new or latent comparative advantages (“infant industries”). The usual vehicles of ISI policy implementation have been subsidies for domestic producers and tariffs on imported goods that would compete with domestically produced goods, with the intent of reserving the domestic market for exploitation by domestic companies. ISI has been the development approach favored in the Liberation Theology critique of capitalism (Chapter 14).
ISI development policies have failed almost universally, not only because they contravened the comparative advantages possessed by those nations that implemented them, but also because they induced more imports of raw materials, machinery, and technology than the reduction of imports that were tariffed. While ISI policies have attempted artificially to broaden domestic entrepreneurial opportunities at the expense of foreign firms, they have also narrowed the range of consumer choice to higher-cost domestic goods. In most countries where ISI policies have been attempted and failed, they have been succeeded by export-oriented investment (EOI) policies that exploit the country’s natural comparative advantages.
But there can be too much of any good thing. While EOI development strategies usually are congruent with the principle of comparative advantage, governments sometimes attempt to gain artificial advantages or increase their regions’ natural comparative advantages by manipulating the exchange rates between their own currencies and those of their trading partners. By keeping their currency exchange rates artificially low, their exports appear to be cheap to foreign buyers, and foreign imports appear to be more expensive to domestic purchasers. This strategy increases exports and decreases imports, thereby producing trade surpluses (or diminishing trade deficits) and alleviating domestic unemployment. This has been described as a “beggar my neighbor” policy because it increases domestic employment at the expense of rising unemployment in the trading-partner countries.
The Chinese government has taken the exchange rate undervaluation strategy to an extreme in order to provide enough employment for its labor force, the world’s largest. By keeping exchange rates between its currency (the yuan or renminbi) and other currencies fixed at sub-market levels, the government of China has created an artificial advantage for its manufacturing enterprises. This artificial advantage has sustained Chinese employment by enabling perpetual trade surpluses for China and corresponding trade deficits vis-à-vis China for many of its trading partners, including the US and many EU member countries. Since such a strategy tends to cause unemployment in the trading partners, US and EU officials have pressed Chinese officials to cease fixing yuan exchange rates, thus allowing the yuan to appreciate relative to the currencies of its trading partners. Yuan appreciation would discourage imports from China and encourage Chinese imports of goods and services from the trading partners, thus alleviating the trade imbalances with China and unemployment in the trading partners.
Given the deleterious effects of government efforts to contravene comparative
advantages with protectionist policies and exchange rate manipulation,
most economists (other than those who are on the payrolls of government
agencies and labor unions) come down on the side of free trade and advocate
trade liberalization, i.e., the elimination of tariffs, subsidies, and
other NTB constraints on trade.
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19. GOVERNMENT AND GLOBALIZATION
Economists identify three dimensions of the “perfection” of competition: perfect market knowledge, instantaneous adjustment to changing market conditions, and costless adjustment.
Of course, competition in the real world is imperfect in all of these dimensions: people rarely have full knowledge of what they are buying before they actually buy it; it usually takes a good bit of time for information about changing market conditions to filter through the economy to both buyers and sellers; the times required for shipping materials from places of extraction to points of production and the time for shipping finished goods to market are lengthy; and the costs of production and transportation are never zero.
However, the inexorable march of technological advance, especially during the past two centuries, has diminished the degrees of imperfection in all of these dimensions: the inventions of steam motive power, internal combustion engines, jet and rocket propulsion, and refrigeration have shortened the times of delivery of merchandise and enabled consumption of goods produced at great distances; the development of assembly lines, just-in-time inventory management processes, and hierarchical management structures have reduced the costs of production; and the developments of computing and wireless and satellite communications have made ever more information available ever sooner.
Along with these technological advances has come “globalization”, i.e., the increased mobility of humans in search of better job opportunities and living conditions (immigration and emigration) and the quest by business firms to locate production geographically at the least-cost and most efficient production sites. The process of globalization has entailed both offshoring (shifting production to foreign locales) and outsourcing (acquiring materials, parts, and components from foreign producers) because it turns out that capital is even more mobile than are human labor forces. Organized labor has abhorred both processes because jobs are lost in the regions from which industries are moving. And companies complain because they no longer have competitive advantages in regions that are losing comparative advantages. But jobs are gained and new enterprises succeed in regions to which comparative advantages are moving. This is cold comfort to labor and businesses in the formerly comparative-advantaged regions. Labor unions rarely recognize that the release of labor from industries that no longer have comparative advantages allows it to seek higher-income employments in other industries for which the region does have comparative advantages. In the United States, this has entailed a shift of production and employment opportunities from “brownfield” industries to technologically intensive manufacturing and service industries.
Governments can enable the globalization process by simply letting it happen, or they can facilitate it by encouraging and subsidizing technological advance, enterprise development, and resource mobility. However, governments often have attempted to impede the process of globalization. Because comparative advantages are not “struck in stone”, they tend to move geographically from their historical locales to new locales where ever less costly labor or materials can be found. Examples for the United States have included the cotton textile, steel, and automobile industries. But governmental efforts to stem the movements of industries to new comparative advantaged locales have proven ineffective or even detrimental to their economies as companies in non-comparative advantaged industries are subsidized and companies that offshore production or outsource components are vilified and punished with taxes on their foreign incomes.
Governmental efforts to impede globalization and accompanying comparative
advantage shifts have impaired freedom of enterprise in both the regions
from which industries are departing and the regions to which they are shifting.
Such efforts also have constrained the sovereignty of consumers to purchase
ever less-expensive goods that are produced in comparative advantaged regions.
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20. GOVERNMENT AND MACROECONOMIC INSTABILITY
Macroeconomic Instability
There's no way around it. Any economy organized around markets experiences macroeconomic swings in the form of expansion and contraction of output, falling and rising unemployment levels, greater or lesser rates of inflation, and variations of interest rates, more-so for short-term rates than for long-term rates. Macroeconomic instability creates uncertainty that constrains enterprise freedom. And instability that diminishes welfare more on the downswings than it increases welfare on the upswings has the potential to limit consumer sovereignty and religious liberty.
Marxians and other critics of capitalism (including Postmodernists and Liberation Theologians) have advocated the replacement of the capitalist form of economic organization with authoritarian socialism, both as a means for achieving distributional equity and as a way of ending macroeconomic instability. However, neither of these goals was accomplished and other problems with authoritarian economic organization during the twentieth century resulted in the failure of central planning experiments. Following these failures there has been a wholesale return to market economy, even with all of its "wrinkles, scars, and warts". Postmodernists have begrudgingly accepted that “the end of history” will involve market capitalism rather than Marxian socialism.
After the Great Depression and World War II, the British and American
governments were the first to assume responsibilities for trying to stabilize
their predominantly market economies by maintaining high-enough levels
of employment, i.e., low-enough levels of unemployment. Over the next half-century,
these governments gradually took on responsibilities for other dimensions
of macroeconomic stability, particularly the control of the price level
in order to avert excessive inflation. Soon after the turn of the third
millennium, the prospect of deflation became a serious concern. Governments
of other countries also began to assume macroeconomic stability responsibilities.
Fiscal Policy
Possibilities for exercising macroeconomic policy lie in two broad realms, fiscal policy and monetary policy. Fiscal policy entails manipulation of the government's own budget to counterbalance swings of spending in the private sector, i.e., in the business and consumer sectors. The idea, first proposed by John Maynard Keynes in The General Theory of Employment, Interest, and Money (1936), is to deliberately cause the government's budget to go into deficit (disbursements exceeding revenues) as the macroeconomy contracts. This may be accomplished by reducing taxes, increasing purchases or transfer payments, or some combination of the two. Tax cuts leave more purchasing power in the hands of taxpayers to spend, and increased government purchases and transfer payments actually inject more purchasing power into the economy. If such fiscal policy actions work as expected, the economic contraction will come to an end and the economy will begin to expand, returning production, employment, and income generation to more normal conditions.
Sometimes the turn-around from macroeconomic contraction goes too far,
and the expanding economy begins to "overheat" as it approaches and exceeds
its normal operating capacity. Or, quite apart from any action by
government to bring about recovery from a recent downswing, the private
sector of the macroeconomy may expand of its own volition (as may have
happened in the US economy during the 1990s). Excessive inflationary
pressures, lower than usual rates of unemployment, and plant operation
above normal capacities are evidences of macroeconomic overexpansion.
When this happens, Keynesian economists advocate that the government should
deliberately take its budget into surplus by increasing taxes and decreasing
purchases and transfer payments. These actions are intended to siphon
purchasing power out of the economy so as to curb excessive spending, alleviate
inflationary pressures, and bring the macroeconomy to more normal conditions
of production, employment, and inflation. Of course, there is always the
risk of overdoing the fiscal dampening to precipitate undesirable economic
contraction.
Monetary Policy
The same risk of overdoing policy also applies to monetary policy. Monetary policy is the effort by a government’s monetary authority to determine and control the quantity money in circulation and the interest rate (the “price of money”). In most countries monetary policy is the province of a central bank, and lately there has been a growing global consensus that a nation's central bank should be as independent as possible of the political process in order to avert pressures for inflationary money supply increases as governments run budgetary deficits that have to be financed.
Monetary policy may be implemented primarily in two ways: by manipulating the interest rate, or by changing the nation's money supply. Without doubt, a central bank can change its own interest rate, i.e., the one that it charges to commercial banks when they borrow from the central bank, but it is not at all clear that the central bank's changing its own lending rate causes market-determined interest rates to change. A central bank interest rate change might precipitate market interest rate changes in the same direction if banks and other lenders have been holding their lending rates constant in anticipation of a central bank rate change.
It's much more likely that market interest rates can be manipulated indirectly by the central bank with actions to change the quantity of money in circulation. The Federal Reserve Bank is the name of the central bank of the United States. The "Fed" increases the US money supply when it buys US Treasury bonds from the bond “open market”, paying for them with deposits to the sellers' bank accounts and additions to commercial bank reserves. Bank reserves are highly liquid assets that commercial banks, by legal requirement or banker volition, maintain in order to meet demands by depositors for withdrawals of funds. The bond sellers' increased bank deposits are additions to the money supply. When banks sell bonds, the increases of their reserves enable them to increase lending to customers, and thereby to increase the quantity of money in circulation. The Fed reduces the US money supply as it sells bonds in the open market because non-bank buyers have to pay for the bonds that they purchase by giving up some of their bank deposits, and banks that buy bonds have to give up reserves to pay for the bonds that they purchase.
The enabling condition for the conduct of open market operations by a central bank is the existence of a large mass of public debt and an open market in which that debt is traded. But very few of the other nations' central banks are so fortunate as the US Federal Reserve in its ability to conduct open market operations to manage the US money supply. While many nations' governments chronically have run budgetary, the deficits often have been financed by direct money creation (printing it) rather than issuing bonds, so there is no mass of public debt in the form of bonds and no open market in which it is traded. Some governments have financed their public debts by issuing bonds, but the bonds have been sold and are traded in open markets elsewhere in the world. There is little point in their central banks engaging in open market purchases and sales of bonds (theirs or others) in an ever more global open market because such open market transactions mostly affect money supplies in other countries or the global money supply rather than the local money supply.
Some nations' central banks do not specify legal reserve requirements for their commercial banks to meet, leaving the determination of the amounts of such reserves to the discretion of individual commercial bankers. In these nations, monetary policy is executed by the central bank primarily in manipulating the central bank's lending rate or by engaging in open market operations.
Central banks that enforce reserve requirements but do not have access to the facilities of open markets in their own countries are constrained to executing monetary policy by adjusting the reserve requirement ratio that they impose on their commercial banks. This is something that the US Federal Reserve is empowered by law to do, but the Fed seldom changes reserve requirements because of the potentially large and disruptive effects on the nation's money supply.
The process of globalization with ever more-open economies, instantaneous communications, and round-the-clock bond market trading has rendered the conduct of monetary policy largely ineffectual to all but a very few central banks in the very largest economies, notably the US and the EU. It is heroic to presume that a central bank in a third-world country can significantly affect its own money supply through open market operations, reserve ratio adjustments, or central bank lending rate changes. Smaller countries are looking ever more to the US Federal Reserve or the European Central bank as the global makers of monetary policy.
To an ever-increasing extent, the money supplies of most countries are
affected more by the respective government's budgetary policies and how
it finances its deficits than by its central bank. Lack of fiscal discipline
resulting in chronic budgetary deficits that are monetized directly by
treasury departments (or indirectly by central banks under the domination
of treasury departments) causes inflation--too much money chasing too few
goods. This has become such a serious problem worldwide that governments
of a growing number of nations are "dollarizing" or "euroizing" their currencies
(or at least considering doing so). This means that they are adopting the
dollar or the euro as the local currency and proceeding to replace their
local currencies with dollars or euros as international trade and financial
conditions permit. What they gain in dollarizing or euroizing their currencies
is the monetary discipline that the US Fed or the European Central Bank
exercise in restraining the growth of dollars and euros. What they lose
is local control of their domestic money supplies, but it may be an illusion
that they actually ever had effective control over their domestic money
supplies.
Problems with Government’s Efforts to Address Macroeconomic Instability
At the middle of the twentieth century, macroeconomists thought that by engaging in fiscal and monetary policies they could fine tune a market economy to avert both cyclical swings and oscillating pressures of inflation and deflation. But experience has demonstrated in both developed and less-developed economies that government budgets are much more attuned to the requisites of program finance than to the needs of macroeconomic stability. Especially in democratic polities, legislative assemblies often perceive the need or the desire to mount new programs or enhance existing programs. But each expanded program or newly enacted program has to be financed. If financing provision is not made by way of increasing some tax, new or expanded programs contribute to growing deficits. The deficits result in inflationary pressures if they are financed with direct money creation or if the central bank feels compelled to expand the money supply to prevent interest rates from rising. Program-oriented budget finance thus has an inherent inflationary bias.
Even if a government does attempt to manage its budget in the interest of economic stability, a growing number of economists have come to believe that deliberate fiscal actions by the government may elicit counterproductive changes in the private sector that tend to neutralize the deliberate fiscal stimulus. For example, increases of government spending to alleviate recession may increase the budget deficit, causing interest rates to rise, thus crowding out private sector borrowing to finance investment or interest-sensitive consumer spending. Or, decreases of government spending during a period of contraction may so lower market interest rates as to elicit crowding in of private sector borrowing to finance more investment or consumer spending. Both crowding-out and crowding-in effects in the private sector tend to neutralize the deliberate fiscal policy actions taken in the public sector.
During the late-twentieth century and early in the twenty-first century, governments in a number of Western countries attempted to use monetary and fiscal policies in efforts to stabilize their economies. Experience with these efforts has convinced many economists that deliberate policy activism often involves policy overreactions due to time lags in recognizing changing conditions, initiating policy actions, and the completion of adjustments. Today, economists are not so sure that deliberate manipulation of the government's budget in efforts to diminish macroeconomic instability doesn't inject more instability into the economy than would be present if the government simply left the macroeconomy to manage itself.
Similar statements can be made with respect to monetary policy actions by the central bank that are intended to stabilize the economy, but which, because of various time lags, may tend to destabilize the economy. The financial turbulence and recession of 2008-2010, together with the efforts by the US and other governments to stem the recession tide, may provide an interesting test case of this proposition.
When unemployment or inflation have “reared their ugly heads”, politicians usually have felt compelled to follow the admonition, “Don’t just sit there, do something!” Because discretionary policy overreactions may tend to destabilize a macroeconomy rather than stabilize it, a growing number of macroeconomists have become discretionary policy skeptics. But politicians have difficulty following the reverse admonition: “Don’t just do something, sit there!” The ability to wait patiently is simply not in the genes of political animals. Political inaction may be worse for a politician’s career than policy overreaction.
Discretionary policy skeptics have more faith in the automatic self-correcting features that are inherent to any well-functioning market economy than in the ability of government officials to exert stabilizing macropolicies. Policy skeptics have come to favor so-called automatic stabilizers such as a progressive tax rate system. During a period of economic expansion as more people gain employment, wages and salaries increase due to rising wage rates and overtime work, and bonuses increase. Because people's incomes reach ever-higher tax brackets, the increase of tax payments to the government has the effect of siphoning purchasing power out of the economy to dampen the expansion. The process also works in reverse to leave more purchasing power in the economy during an economic contraction.
An unemployment compensation system also can act as an automatic stabilizer. During an economic contraction, ever more people lose employment and become eligible for unemployment compensation (UC). The UC benefits serve as an injection of purchasing power into the economy that replaces some of the earned income that was lost due to unemployment. The system also works in reverse to diminish the injection of purchasing power into the economy when it expands and people go back to work.
But UC is not necessarily the automatic stabilizer panacea that many have hoped for. Some economists argue that UC benefits that are “too rich” (i.e., an amount that is too large as a proportion of the previously earned income) can have a job-search disincentive effect if they make staying of work too comfortable. A matter of continuing debate during the protracted 2008-2010 recession is whether extending the duration of unemployment benefits from twelve months to 99 weeks will have the effect of prolonging unemployment. The rationale of this argument is that UC benefit recipients have little incentive to seek work until their benefits are about to run out.
It may be possible to moderate macroeconomic instability with successful
implementation of monetary and fiscal policies, but there is an emerging
view among a growing number of macroeconomists that imperfect governmental
efforts to moderate instability may actually have the effect of amplifying
the instability, thereby threatening consumer sovereignty, enterprise freedom,
and religious liberty.
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PART 6. CONCLUSION
21. HOW MUCH GOVERNMENT?
The laundry list of faults and failures of market economy leads Postmodern
critics to favor replacing it with a collectivist form of economic organization,
and that failing to implement various interventions to correct the faults
and failures. But the laundry list of problems that have followed
governmental efforts to fix the “failures” of market economy and address
macroeconomic instability has led libertarians and even less extreme conservatives
to favor smaller governments and less governmental involvement in the market
economy. Economist Milton Friedman maintained that the so-called
“failures” of market economy probably do less harm to the welfare of a
society than the harm that can be done by too much governmental intrusion
into the functioning of a market economy.[1] So the question remains
an object of intense debate between liberals and conservatives: “How much
government?”
As we have seen over the past three and a half centuries since the first publication of Hobbes’ Leviathan, once established, the state seems to feed upon itself to become ever larger and to assume ever more responsibilities on behalf of its society, and particularly in the economic realm. Witness the size and extent of the present government of the United States of America relative to its former self in its early decades of the late eighteenth and early nineteenth centuries.
One factor contributing to the persistent growth of the size of government is that democratically enacted legislation rarely contains “sunset provisions”, i.e., termination of the legislation by some criterion or by date. Another contributing factor is that there seems to be a compulsion in democratic polity to enact ever more welfare entitlements and to continually enrich them as time passes. Arthur Brooks (president of the American Enterprise Institute) and Paul Ryan (Republican congressman from Wisconsin) express the issue:
Chapter 21 Endnotes:
[1] Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962.
[2] Arthur C. Brooks and Paul Ryan, “The Size of Government and the
Choice This Fall”, The Wall Street Journal, September 13, 2010,
page A21,
http://online.wsj.com/article/SB10001424052748704358904575478141708959932.html?mod=WSJ_hps_RIGHTTopCarousel_1.
[3] Justice Potter Stewart, concurring opinion in Jacobellis v. Ohio,
378 U.S. 184 (1964), regarding possible obscenity in The Lovers.
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Glossary of Terms Used in this Book
This glossary contains economic terms that are used in the text plus some additional terms that are used in other glossary entries. The included meanings, elaborations, and examples pertain specifically to the contexts of discussions in this text. Undoubtedly, many of the terms have other meanings than those included here. No effort has been made to include religious and theological terms in this glossary on the assumption that the reader already has some familiarity with them or can glean their meanings from other sources.
abundance, the unusual economic condition of the material world such that more of an item is available for human consumption than humans need or want; the opposite of scarcity; the evidence of abundance is a zero or negative market price.
administered price, the valuation of a good as determined by an authority.
advancing technology, discovery or development of new ways of making a material good or improving the function or quality of the good.
affluence, a high state of human well-being characterized by the ability to consume in excess of subsistence requirements and the possession of wealth greater than necessary for comfortable survival.
agent, one who acts on behalf of another (the “principal”) in conducting business activity; moral hazard occurs if the agent engages in shirking, pursues self interest to the detriment of the principal's interest, or indulges in dishonest or immoral behavior.
amortization, the process of paying down and eventually paying off a financial debt; literally, “to kill” the debt.
antitrust law, a.k.a. “antimonopolies” law, legislation enacted with the intent of preventing the acquisition of monopoly position and attendant monopoly power by business firms, and to punish or criminalize the exercise of monopoly power; American antitrust law began in 1890 with the passage of the Sherman Antitrust Act.
authoritarian capitalism, a.k.a. “fascism”, a form of economic organization that involves investment in capital for profit by private owners who respond to the dictates of an state planning agency that determines product mix, product characteristics and qualities, and production quotas.
automatic stabilizers, mechanisms installed by legislative action into economies that work automatically to offset macroeconomic swings; once installed, automatic stabilizers require no further human intervention; examples include a progressive tax rate system that leaves more purchasing power in citizens pockets as an economic downswing decreases incomes, and unemployment compensation that increases the spendable income of eligible recipients as unemployment rises; both system automatically decrease the injection of purchasing power into the economy as it recovers.
bail-out, financial support provided by government to a private-sector entity (productive or financial) to prevent its failure.
beggar-my-neighbor policy, a trade strategy designed to steal the natural comparative advantages of trading partners by creating artificial competitive advantages for domestic producers; the usual methods are to subsidize domestic industry or to keep the domestic undervalued on world markets, thereby increasing employment in domestic export industries at the expense of employment in the trading partners’ economies.
benefit-cost analysis, an analytical process used by economists for comparing the sum of the benefits (B) of a contemplated action to the sum of the costs (C) that are likely to result in undertaking the action; if the B is greater than C, or if the value of the ratio B/C is greater than 1, the contemplated action is desirable or justifiable on economic grounds, abstracting from moral implications unless the values of moral outcomes have been imputed and included in the benefit or cost totals; the contemplated action is undesirable if B is less than C, or if the value of the B/C ratio is less than 1; benefit-cost analysis is fraught with the potential for abuse if conducted by interested parties, e.g., advocates are likely to overstate benefits and understate or omit some costs, while opponents are likely to omit or understate benefits and overstate some costs.
bourgeoisie, the wealthy capitalist class comprised of successful entrepreneurs who have wrested control over production processes that was once exercised by individual craftsmen.
budget deficit, the excess of expenditures by an entity (person, company, government) over its revenues during an accounting period, usually the year; governments typically run budget deficits more often than budget surpluses; government budget deficits are financed either by direct money creation or by issuance of government bonds which often results indirectly in new money creation and inflation as a consequence.
budget surplus, the excess of the revenues of an entity (person, company, government) over its expenditures during an accounting period, usually the year; governments rarely run budget surpluses, but a surplus occurs there usually is a political debate over whether to increase spending, decrease outstanding debt, or impound the surplus.
bureaucratic morass, the increase in the complexity of decision-making through innumerable layers of bureaucracy in private business firms, not-for-profit institutions (including churches), and government offices.
business ethics, a term implying that there is a special variety of ethical rules for business decision-makers; there actually is no such thing as a particular variety of ethics peculiar to business; discussion should be about ethics in the generic sense, but as applied to business settings.
capital goods, "man-made" means of production that can be used to produce consumer goods or other capital goods; capital goods are durable and typically have multi-year lives over which a stream of productive services are yielded, but which depreciate (deteriorate) due to use and weathering during their useful lives; capital includes plant (the buildings within which production takes place) and equipment (the machines and tools used to convert raw materials into finished consumables).
capitalism, a form of economic organization that involves investment in capital for profit.
common pool, the existing quantity of a resource that is owned in common (i.e., by no one) and is available to all to use as they wish; rational users of the resource naturally have incentive to dip (use the resource) from the common pool early, often, and as much as possible to preempt other users from the resource; such “dipping” tends to exhaust the common pool; examples include the village green, the open range, ocean fisheries, mineral and petroleum deposits, and space.
communism, the utopian culmination of the transition among forms of economic organization envisioned by Karl Marx in which the economic problem of scarcity relative to want insatiability has been solved by production rationalization and social indoctrination.
communitarianism, an ideology characterized by individuals finding meaning and fulfillment as members of communities of which they are a part; by the enjoyment of the use of things that are not possessed as property; and by a planning role for the state to influence the allocation of resources to achieve community needs.
comparative advantage, the economic principle that individuals, groups, regions, or nations should specialize in producing those goods or services that can be produced at lowest opportunity cost compared to others so that welfare gains can be realized by exchanging those goods or services with trading partners whose comparative advantages lie with other goods for which the individual, group, region or nation is a higher opportunity cost producer.
competitive advantages, advantages (cost, performance, marketing, etc.) that are specific to a particular business firm relative to its competitors; competitive advantages are firm-specific; to be distinguished from comparative advantages which are region-specific.
conservatism, a political orientation that emphasizes personal decision-making discretion, private ownership and control of property, personal responsibility for well-being, and minimal role for government to play in social processes and personal activity; conservatives generally value historical and traditional cultural norms and political modes and often are resistant to change when confronted by new circumstances.
consumer durables, consumer goods with durable characteristics that have lives typically longer than a year and yield a stream of services or satisfactions over their useful lives; examples include household appliances, housing, and motor vehicles used only for personal conveyance, i.e., not in commercial applications.
consumer non-durables, consumer goods that typically have lives less than a year and yield all of their satisfactions upon consumption; examples include foodstuffs and articles of apparel.
consumer sovereignty, the personal liberty of the individual to choose how to spend (or not spend) his or her disposable income.
consumerism, a societal mentality that results when consumer sovereignty is taken beyond the bounds of human need; the continuing message in the advertising media is that “more is better”, old possessions are obsolete, and new models are “must have” items, so even if the things that one possesses are adequate to a comfortable lifestyle, one is confronted continually with the message that he or she needs to dispose of the old model and buy the new model; a consumerism mentality emerges in the form of a “bandwagon” effect that induces a growing element of the population to submit to the advertising pressures.
corporation, one of three principal forms of business organization, the other two being single proprietorship and partnership; under incorporation laws in most countries, a corporation is a legal person that can sue and be sued in courts of law; the corporation has a life apart from its owners that begins with the legal process of incorporation and ends with final bankruptcy; in the US, corporate charters are issued and supervised by state governments, usually the office of Secretary of State; the other forms of business organization are coincident with the lives of the owners and thus suffer unlimited liability in regard to what the owners do, but the corporate form of business organization enjoys limited liability in the sense that shareholders of a corporation cannot be sued for what the corporate legal person does; hence the assets of the shareholders of a corporation are protected from suit; the officers of a corporation can be prosecuted for criminal activity or subjected to civil suits for damages that are attributable to decisions made by the corporate officers; corporate net incomes (revenues less allowable expenses) usually are taxed at “flat rates” (rather than progressive rates) in most US states and by the US federal government; corporations enjoy financing advantages over other forms of business organization because corporations can issue additional shares in themselves or indebtedness claims (corporate bonds) against their assets; in most market economies, the corporate form of business organization is becoming more popular to take advantage of its limited liability and capital financing features even though business and tax reporting requirements are more stringent and costly for corporations.
crowding-out effect, the decrease of private sector investment consequent upon an increase of interest rates due to an increase of government expenditures that require financing a deficit by borrowing from the capital markets.
deflation, the negative of inflation, occurs when the general price level falls; sometimes referred to a “too little money chasing to many goods”, deflation often occurs during the recession phase of a business cycle due to declining incomes that cause demand for goods and services to decrease relative to supplies; deflation may be a consequence of a decrease of the money supply of a region.
demanders, those humans who are “in the market” seeking to purchase quantities of a good.
democratic sovereignty, the right of citizens of a democratic polity to cast their political votes for the candidates whose expressed positions are most congruent with the preferences of the individual voters, and without fear of political reprisals.
dictatorship of the proletariat, the authoritarian socialist management mechanism that Marx thought would succeed capitalism once the proletariat rose up in violent revolution to overthrow the bourgeoisie.
diminishing returns, the economic production phenomenon of output increasing at a decreasing rate as ever more inputs are employed in a fixed production process; Thomas Malthus theorized that as population continued to increase relative to the fixed production capacity of the earth, diminishing returns to labor would be exhibited by falling per capita incomes.
diminishing marginal utility, a variant of the principle of diminishing returns that applies to consumption experience; in successive units (e.g., bites) of a consumable good, normal people gain less and less additional satisfaction from the marginal (additional) units.
distributional principles, in economics: to each according to need; to each equally; and to each according to contribution or effort; to a principled socialist, the first principle would be fair but difficult to implement, the second would be a pragmatic substitute, but the third would be unfair; to a principled capitalist the third principle would be fair because effort is rewarded, but neither the first nor the second would be regarded as fair.
distributive justice, the form of social justice in which the burdens of a social process are distributed fairly, irrespective of whether or not the procedures are deemed fair.
dollarization, either the deliberate or unintentional substitution of another nation’s currency (often the dollar, sometimes the euro) for the domestic currency of a nation; the main reason for dollarization of a nation’s currency is the inability of its government to effect fiscal discipline or control its money supply to prevent inflation; when a nation’s currency becomes dollarized, the government of the nation loses control of domestic monetary policy that is in effect ceded to the central bank of the foreign nation whose currency becomes used in the nation.
dollar votes, the expression by consumers of their preferences by spending to purchase goods and services; dollar votes are tallied in the income statements (a.k.a. "profit and loss statements") of business firms; firms whose managers choose to ignore the preferences of consumers by producing goods that they do not care for will suffer losses and eventually failure; firms whose managers recognize and meet consumer preferences may enjoy profits and survival.
economic development, a change in the social structure of society; the various dimensions of social structure include economic, social, political, moral, religious, and environmental; development is both a requisite of growth and a consequence of economic growth.
economic efficiency, the relationship between quantities of resources used in a production process and the quantity of output that can be produced by the resources; economic efficiency is served by reducing the quantity (or cost) of the inputs necessary to produce a particular quantity of output.
economic good, any material good for which the sum of human needs and wants exceed the quantity available such that it has a positive price, thus exhibiting the characteristic of scarcity.
economic growth, an improvement in the material well being of humans, usually measured as the rate of increase of per capita real income or output of a society, and usually accompanying or preceded by a change in the structure of society, a.k.a. “economic development”.
economic integration, the process of removing territorial barriers to the transaction of goods and services and the movement of materials, capital, and people across historical territorial boundaries; economic integration enables trade creation in pursuit of indigenous comparative advantages within the integrating region, but may entail trade diversion as trade (imports, exports) are shifted away from true comparative advantages that lay outside the integrating region.
economic liberalization, the political process of removing or diminishing existing restraints on trade.
economic resources, three categories of productive resources identified by nineteenth century economists are labor, land, and capital; modern economists also acknowledge a fourth productive resource, entrepreneurship.
economic system, the set of social, political, and economic arrangements by which a society determines its product mix, how goods and services are to be produced, allocates its scarce resources to alternative uses, and distributes its product to its members.
efficiency, the relationship between the output of a productive processes and the inputs necessary to produce the output; efficiency is served by reducing the quantity of inputs necessary to produce a specified quantity of output; there often are trade-offs between efficiency and equity in pursuit of either.
elasticity of demand, the ratio of the percentage change of quantity demanded of a good or service to the percentage change of its price or the incomes of buyers that measures the relative responsiveness of quantity sold to a change of price or income.
entitlement welfareism, a distributional system that provides material or monetary unilateral-transfer benefits to eligible recipients who are entitled by the law to receive them.
entrepreneur, the “moving force” in the market economy; one who assumes risk in the process of innovation by introducing a new product, process, or organizational structure; a successful entrepreneur is rewarded by profit in a market economy, but since there is no guarantee of success, the entrepreneur might suffer loss if the innovation is unsuccessful.
entrepreneurship, the process of innovation and assumption of risk in the effort to launch a new business venture or alter the structure or functioning of an existing business; there is no guarantee of success in a truly entrepreneurial venture; success of a private-enterprise entrepreneurial venture is rewarded by profit; failure is punished by loss which may be personal and emotional as well as financial; from a sociological perspective, entrepreneurship is a form of social deviance.
equipment, the machines and tools used to convert raw materials into finished consumables; equipment is usually housed within a producer’s “plant”.
equity, the goal of fairness in the distribution of something across a population of possible users; there often are trade-offs between efficiency and equity in pursuit of either.
exploitation, the phenomenon of one human taking advantage of or controlling the productive abilities of other humans; the ability to capture value greater than warranted by one’s own contribution to a production process; exploitation occurs if a resource receives compensation that is less than the value of its marginal contribution to the production process.
externalities, a.k.a. “spillovers”, a so-called “market failure” consisting of positive and negative side-effects of consumption or production activity that impinge upon innocent by-standers to market transactions and thus are not recognized by markets; negative externalities resulting from the production or consumption of a good result in the market over-allocating resources to production of the good; positive externalities resulting from the production or consumption of a good result in the market under-allocating resources to production of the good; examples of positive externalities include the benefits of public health care and public education; examples of negative externalities include various kinds of environmental pollution.
factors of production, four categories of productive resources: land, labor, capital, and entrepreneurship.
failure, the inability to succeed in a venture undertaken; business failure is inability to generate enough revenue from sale of produced goods or services to cover operating costs and amortize debt incurred in purchasing capital assets; the consequence of entrepreneurial failure is loss, the opposite of profit.
fascism, a.k.a. “authoritarian capitalism”, a form of economic organization that involves investment in capital for profit by private owners who respond to the dictates of an state planning agency that determines product mix, product characteristics and qualities, and production quotas.
fiduciary trust, the responsibility of one who holds assets belonging to another to preserve those assets and return them to the owner intact.
financial liberalization, the process by which the financial sector is freed from governmentally imposed restrictions on lending, interest rates, and exchange rates.
fine tuning, the belief held by many economists in the second half of the twentieth century that fiscal and monetary policies could be managed with such precision as to eliminate business cycle swings and the oscillating pressures of inflation and deflation; economists of the late-twentieth century have come to the realization that fiscal and monetary policies are not so amenable to fine tuning as to eliminate or even ameliorate cyclical swings.
fiscal discipline, the ability and willingness of a political administration to restrain its expenditures to the revenues that are available to be used during the period, e.g., to balance its budget.
fiscal policy, the deliberate manipulation by the government of its own budget to counterbalance swings of spending in the private sector, i.e., in the business and consumer sectors; fiscal policy action involves increasing spending or decreasing taxation during a downswing in order to counterbalance decreased spending in the private sector, and vice versa for an upswing; if a fiscal policy stimulus works as expected, an economic contraction will come to an end and the economy will begin to expand, returning production, employment, and income generation to more normal conditions; implementation of a fiscal policy change usually is a time-consuming and cumbersome process that requires legislative action; a growing number of macroeconomists have become skeptical of the ability of government policy makers to implement fiscal policy changes without overreaction that aggravates macroeconomic instability.
foreign direct investment (FDI), the establishment or acquisition of productive facilities in countries other than the home country of the investor (person or company), and in which the investor acquires and retains a controlling interest in the investment; in the case of an acquired company with widely dispersed shareholding, a “controlling interest” may be as little as (or even less than) ten percent of the outstanding shares of an acquired entity; in distinction to foreign portfolio investment (FPI) in which the investor has a non-controlling interest, typically less than ten percent of outstanding shares of the acquired company.
fraud, intentional deception perpetrated by one party to a market transaction upon the other party to the transaction in order to capture gain in value at the expense of the other party; examples of fraud include misrepresenting the characteristics of products or services being offered in the market, hoaxes in the form of product or service offers that are never delivered, and agreeing to contract terms that are not fulfilled.
free agency, the reputed ability of humans to assess alternatives and choose from among them without external influence or control, e.g., by a divine being.
free good, any material good that is available in sufficient abundance relative to human need or want for it such that its market price is zero.
free market economy, a market economy with no significant role played by government in the processes of determining product mix, methods of production, resource allocation, or output distribution; a term used mostly by non-economists and particularly by critics of market capitalism who wish to point out the faults and failures of market capitalism; technically, there is no such thing as a free market economy since virtually all economies throughout history have been mixed economies.
general price level, a macroeconomic measure of the average of all commodity prices in a region or nation; in computing the general price level average, the included components are usually weighted by the quantities of the goods purchased.
gift, something of value that is provide free of charge to a recipient; a unilateral transfer of value with no expectation of reciprocity.
gift economy, an economy in which production is accomplished or controlled by a single entity (often a tribal chieftain) and distribution is accomplished at the discretion of the producer/controller who makes all decisions about the needs of his or her constituents.
globalization, the increased mobility of humans in search of better job opportunities and living conditions (immigration and emigration) and the quest by business firms to locate production geographically at the least-cost and most efficient production sites; globalization has been fostered by technological advances in transportation, communications, and computing; the process of globalization has entailed both off-shoring (shifting production to foreign locales) and out-sourcing (acquiring materials, parts, and components from foreign producers).
goods, things with tangible characteristics that are consumable by humans; some matter taken from the natural environment (i.e., God's creation) are directly consumable; other consumer goods are processed or manufactured from matter taken from the natural environment.
government failure, the inability of government to alleviate or repair perceived market failures with market modification approaches; examples include failing to enact and enforce laws or directives that support and enhance the functioning of market economy; failing to account for secondary (and tertiary, etc.) effects of well-intentioned government actions, resulting in unintended consequences; basing programs and policy actions upon the requisites of political expediency rather than economic realities; basing political actions upon the requisites of regime preservation rather than the needs of public welfare; inability or unwillingness to exercise fiscal or monetary discipline; policy overreactions that increase economic instability; ceasing to function purely as a neutral or disinterested umpire in the market economy; overstepping the role of rule-maker and umpire to become a player in the market; attempting to controvert natural comparative advantages, and enacting legislation that invites moral hazard.
greed, extreme form of self-interest that impinges upon the welfare of other members of society.
Gross Domestic Product (GDP), a measure of the market value (at current prices) of all final goods and services (excluding all purely financial transactions) produced within a country and sold legally (including the imputed value of rents, but excluding illegal transactions and Do-It-Yourself activity) in a given time period (excluding used goods produced in prior periods); GDP is admittedly an imperfect measure of the value of the output of a country due to many (e.g., the output of informal and underground economic activity), but it is used nearly universally by multinational organizations to make international comparisons of well-being at the level of the aggregate economy and is at present the best available measure of macroeconomic output.
ideology, (1) a value orientation that advocates or legitimizes a relationship of political power and/or economic interest between social groups; a concrete program or plan for political action; examples: communism, socialism, capitalism; (2) a collection of ideas that makes explicit the nature of a good community; the ideas by which a community translates its values into reality; examples: individualism, communitarianism.
import substitution industrialization (ISI), a strategy implemented by the government of a nation to contravene the natural comparative advantages of other nations or develop new or latent comparative advantages (“infant industries”) within the nation; the usual vehicles of ISI policy implementation have been subsidies for domestic producers and tariffs on imported goods that would compete with domestically produced goods, with the intent of reserving the domestic market for exploitation by domestic companies; ISI development policies have failed almost universally, not only because they contravened the comparative advantages possessed by those nations that implemented them, but also because they induced more imports of raw materials, machinery, and technology than the reduction of imports that were tariffed.
incentives, factors taken into consideration that can motivate an action; for an entrepreneur, the expectation of a return adequate to compensate effort and risk; for an employee, adequate wage income and low-enough taxes to motivate work effort.
income, the monetary purchasing power received by a human factor of production; any income may a composite of wage (labor income), interest (capital income), rent (return due to unique ability), and profit (a residual of total income less all other incomes).
income distribution, the range of income received by a population quintiles or deciles arranged from lowest to highest.
individualism, an ideology characterized by the notion that the community is no more than the sum of the individuals in it, and that each individual finds fulfillment in a struggle for survival; by property rights as the best guarantee of individual rights; by the presence of competition to ensure an appropriate allocation of resources; and by a role for the state which is limited to protecting the private rights of the individuals who comprise its society; the economic philosophy associated with political philosopher John Locke.
industrial policy, an strategy of a political administration to determine what industries and companies within industries should survive, and actions to ensure their survival by subsidies and protectionist policies (e.g., tariffs on competing imports); some European governments historically have implemented industrial policies, but American administrations usually have rejected industrial policy, preferring to allow market mechanisms to determine industrial success or failure.
inequality of the distribution of income, a factual description of the proportions of the income of a society received by successive deciles or quintiles from lowest to highest; to be distinguished from distributional inequity which is a matter of perception that the degree of factual inequality is socially unacceptable; the merit-based distributional mechanism of capitalism virtually ensures that income is unequally distributed.
inequity of the distribution of income, the perception that the degree of factual inequality in the distribution of income is socially unacceptable; the merit-based distributional mechanism of capitalism virtually ensures that income is unequally distributed, but it is an object of debate as to whether the existing distribution is inequitable.
infant industry, a fledgling industry in a region that may or may not have natural comparative advantages suitable to the industry; governments pursuing import substitution industrialization (ISI) development policies often have imposed trade restraints and provided subsidies to what they perceive to be infant industries; the intent is to reserve the domestic market for domestic producers so that they can “grow up” by exploiting latent scale economies and be able to compete with the larger-scale producers in other countries; infant industry protection and support rarely has been successful in ISI strategies.
inflation, the macroeconomic phenomenon of an increase in the general price level or a region or nation; to be distinguished from an increase in the price of a single good (a microeconomic phenomenon that results from changes of demand for or supply of the good); inflation, sometimes described as “too much money chasing too few goods”, is caused by government budget deficits that are financed by money creation, either directly (printing it) or indirectly as a consequence of financing the budget deficit by issuing bonds when interest rates are kept from rising; the negative of inflation, deflation, occurs when the general price level falls.
investment, the process of acquiring additions to the stock of capital by diverting some portion of earned income from consumption to enable the purchase of real capital assets (plant and equipment); “investment” in a financial sense is the use of savings to purchase financial instruments (stock shares, bonds, etc.).
kleptocracy, a political administration with budget authority or access otherwise to government funds that have been transferred to private (and often secret) bank accounts in other countries.
interest, the return (or income) to any human-made productive resource, i.e., capital.
interest rate, the price for using a dollar’s worth of money for a specified time period, usually the year.
invention, the process of developing an idea for a new product or process; to be distinguished from entrepreneurship which is the innovation and assumption of risk in implementing a new process or putting across a new product on commercial scale.
laissez faire, the economic philosophy introduced by Adam Smith in his 1776 book, An Inquiry into the Nature and Cause of the Wealth of Nations that favors a minimal role for government to play in the market economy.
labor, the productive resource inherent to the human being; the physics concept of “work” (mass times distance moved) accomplished by the human agent; the more modern term for labor s “human resources”.
land, a productive resource understood by early economists to be a "free gift of nature," the quantity of which is not capable of augmentation by human effort; the more common term is “natural sources” to refer to the now archaic term “land.
legal reserve requirement, the requirement mandated by law or administrative fiat for commercial banks to hold reserves in the form of very liquid assets (usually vault cash and government bonds) that can be quickly liquidated to meet sudden and unexpected cash withdrawals by depositors; in the US the required reserve ratio usually ranges between 7 and 12 percent of a bank’s outstanding deposit liabilities, depending upon the size of the bank; the required reserve ratio may be changed by the central bank in implementing monetary policy, but this has become a rare occurrence in the US due to the amplified effects of a reserve ratio change on the volume of bank deposits.
leveling the playing field, action by government to offset or neutralize the advantages of foreign companies in selling merchandise in local markets.
Liberal, one who is willing to take pragmatic approachs to dealing with society’s ills, including expanding the role of government as needed.
liberal, one who prefers a minimal amount of intrusion of authority into personal decision-making.
liberalization, the process of removing constraints upon personal and commercial decision-making imposed by governments or religious authorities; types include economic liberalization, financial liberalization, trade liberalization.
Liberation Theology, a movement by Catholic priests, principally in Latin America, that emphasizes the Christian mission to bring justice to the poor and oppressed through political activism.
loss, the negative of profit; the excess of operating expenses over revenues during an accounting period; a loss signals the producer that the rate of production of a good or service should be decreased or that it should no longer be produced for the market.
macroeconomy, the economic relationships among a large number of participants, often represented as the whole economy of a region or nation; macroeconomies may entail any number of microeconomic entities and relationships.
management, the routine oversight, coordination, and control of on-going production processes once they have been established on commercial scale; to be distinguished from the functions of invention and entrepreneurship, although there are a few examples of all three functions be accomplished by the same person, e.g., Thomas Edison.
managerial rationalization, the (unspecified) process envisioned by Karl Marx by which the state would take over the stock of capital and improve the efficiency of the production processes to such an extent as to relieve scarcity.
market capitalism, a form of economic organization that involves investment in capital for profit and employs market processes as the principal decision-making and motivating vehicle; market capitalism entails private ownership of the means of production and participatory decision-making through market mechanisms.
market failure, a term often used by critics of market capitalism to refer to faults or shortcomings in the functioning of capitalism; reputed market failures include externalities not recognized by markets, public goods not provided by the private sector in response to market price and profit signals, the accumulation of monopoly power by producers of goods or services, and macroeconomic instability.
market liberal, one who prefers a minimal role for governmental authority to play in determining the nature of the outcome of market exchanges.
market mechanism, the decision-making and motivating vehicle of market capitalism; a market mechanism involves the interaction of demanders and suppliers to determine market price of a good when its quantity demanded is matched to its quantity supplied.
market price, the valuation of a good transacted in a market as determined by interaction of demanders and suppliers.
maroeconomic instability, expansion and contraction of output of a regional or national economy accompanied by falling and rising unemployment levels, greater or lesser rates of inflation, and variations of interest rates, more so for short-term rates than for long-term rates; macroeconomic instability creates uncertainty that constrains enterprise freedom.
mercantilism, a government policy advocating state regulation of industry and trade, originally practiced in the sixteenth to nineteenth century era of nation state-making, but persistent into the twenty-first century in the form of protectionism and industrial planning.
microeconomy, the economic relationship among a small number of participants, e.g., the market for a particular good; in distinction from a macroeconomy, a large-scale economic system at the level of region or nation.
miracle, a phenomenon that appears to violate understood physical laws or the economic characteristic of scarcity.
mixed capitalism, predominantly a market economy in which government implements various market modification actions to address perceived market flaws or failures.
mixed economy, an economy entailing a combination of market mechanisms and authoritarian direction to determine product mix, methods of production, resource allocation, and output distribution.
mixed socialism, an economy that is predominantly an planned and directed by centralized authority to determine product mix, but which employs market mechanisms to determine methods of production, resource allocation, and output distribution.
Modernity, the cultural and intellectual milieu of the period roughly coincident with the Industrial Revolution up to the middle of the twentieth century, and characterized by individualism, belief in the possibility of gathering absolute facts and reliance upon reason to discern absolute truths (religious and scientific), ethics based upon religious teachings and cultural conventions, and monotheism; see Table 1 in Chapter 1 for a list of characteristics of Modernity pertaining to economics.
monetary policy, the deliberate manipulation by the government (usually its agent, the central bank) of the money supply or the interest rate (the so-called “price of money”) in the interest of offsetting macroeconomic swings in the economy; while monetary policy changes can be implemented by decisions of the monetary authority (rather than by legislative action) more quickly than can fiscal policy changes, a growing number of macroeconomists have become skeptical of the ability of central bankers to implement monetary policy changes without overreaction that aggravates macroeconomic instability.
monopoly power, the ability of a producer or seller to exercise pricing or other discretion by virtue of being the only producer or seller in the market for a good.
monopsony, a market for a good or service in which there is only one buyer, i.e., monopoly on the buyer’s side of the market.
moral hazard, a problem that occurs when a principal commissions an agent to act on his behalf, but the agent engages in shirking, pursues self-interest to the detriment of the principal's interest, or indulges in dishonest or immoral behavior.
natural resources, non-manmade materials in nature that can be used in economic production of consumer goods or capital goods.
night-watchman functions, the routine functions that government must undertake on behalf of a market economy, including enacting a system of law, providing for the protection of property, ensuring domestic serenity with well-organized, trained, and restrained police forces, providing for national security by maintaining an efficient military establishment for defensive purposes, maintaining and enforcing a system of weights and measures, and providing a reliable and elastic money supply, the quantity of money in circulation outside of the banking system of a country; the money supply (narrow definition) consists of coin and currency held by persons and organizations outside of banks, checkable deposits owned by members of the public and held as liabilities of banks, and travelers checks; other liquid assets such as savings accounts and time deposits may be included in broader definitions of the money supply; no coin or currency held within the banking system as till or vault cash is part of the circulating money supply.
open society, one that is without a well-defined class structure and in which it is possible for individuals to rise from impoverishment to affluence by personal effort.
nominal value, the monetary value of an economic good as determined in markets by the forces of demand and supply; a value that has not been adjusted to remove the effects of inflation or deflation.
normal profit, the amount of profit that is typical of an industry and can that can be earned in other uses of a firm’s resources in the industry.
nuisance good, any material goods that is present in such abundance exceeding the total quantity of it needed or wanted such that one would not pay a positive price to acquire more of it; some humans might pay others to rid themselves of some quantities of a nuisance good; implicitly, the price of a nuisance good is negative; a.k.a. “bads”; examples include garbage, sewage, pollutants in the air or water.
offshoring, shifting production to foreign locales.
open market operations, purchases or sales of bonds in the bond market by the central bank of a nation, the side effects of which are to increase or decrease, respectively, the quantity of money in circulation; only the treasury department of a government can issue government bonds, but the central bank of a nation usually is empowered to buy and hold previously-issued government bonds in its inventory, and then to sell bonds as it deems necessary to meet the needs of macroeconomic stability.
open-economy world, an international trading context in which governmentally-imposed hindrances to trade (tariffs, quotas, subsidies, etc.) are non-existent or minimal.
opportunity cost, what must be given up in order to acquire something; the usual presumption is that the true opportunity cost of something acquired is the highest-valued item or activity given up; a.k.a. “real cost”.
optimization, maximization of a desirable goal relative to constraints that prevent absolute maximization; constraints often are subsidiary goals relative to a selected primary goal to be pursued; many business decision-makers are thought to engage in optimizing (rather than maximizing) behavior with respect to profit by pursuing a target rate of return on invested capital.
outsourcing, acquiring materials, parts, and components from foreign producers.
patriarchial capitalism, a system of economic relationships dominated by male members of the society and characterized by investment in capital for profit.
perfection of competition, three dimensions include perfect market knowledge, instantaneous adjustment to changing market conditions, and costless adjustment; none of these dimensions are descriptive of real-world competitive conditions, but technological advances in transportation, communications, and computing have diminished the degrees of imperfection in all three dimensions.
plant, the buildings within which production takes place; the producer’s plant houses the productive “equipment”.
policy activism, the deliberate manipulation of the government’s budget and the money supply in the effort to achieve and maintain macroeconomic stability.
political economy, the complex of political system and economic system in place in a region; typically, a mixed market economy is coupled with a democratic polity, or a socialist form of economic organization is paired with a centralized and authoritarian polity; historically, “political economy” referred to the undivided study of economics and politics before the two disciplines drifted apart around the turn of the twentieth century.
polity, the political system in place in a country.
political entrepreneurs, government functionaries that innovate and assume risk in promising or proposing the provision of political goods to favored interests.
political goods, benefits provided by government functionaries to favored interests in the forms of appointments, employment, sponsorship of desired legislation, etc., in exchange for votes or other modes of support to ensure the political survival of the functionaries.
political integration, the process of establishing a super-national or super-regional political administration encompassing a number of nation states or regions and entailing the surrender of elements of national sovereignty to the super-national or super-regional political entity; a politically-integrated super-state may be organized as a unitary state (with no significant political subdivisions), a confederation of constituent states that retain significant elements of sovereignty, or a federal state that is fully sovereign but which may allow elements of sovereignty to constituent political subdivisions; the United States of America is a politically integrated region with a constitution, governed by a presidential-congressional polity, and organized as a federal system with centralized fiscal (including taxation and spending) and monetary policy powers; the “eurozone” (twelve of the current fifteen member states of the European Union) has a super-national monetary authority (the European Central Bank) that coordinates monetary policy among the central banks of the eurozone member states; the European Union has a parliamentary assembly, a high court, and a “commission” that oversees regulatory harmonization, but it has yet to achieve full political integration that would enable either coordinated or centralized fiscal policy; with the approval of a constitution, the EU seems to be moving toward becoming a federal political entity.
pollution rights, the specification of permissions for business enterprises to continue to pollute the atmosphere or waterways at levels that society deems tolerable (in current political discussion, a “cap” on pollution), and then allow (and promote) market trading of the pollution rights among firms in polluting industries; in a so-called “cap and trade” approach to dealing with environmental pollution, the expenses that firms incur to buy such pollution rights cause them to internalize the spillover costs of pollution so that they show up in the firms’ income statements; if pollution rights are set too high or are given away to current polluters, the “cap and trade” system is meaningless.
positive-sum game, a term borrowed from the mathematics of probability theory which in economic contexts describes a market transaction in which both parties to the transaction gain value even though each party may perceive the other party to lose value in the exchange; in distinction to a “zero-sum game” in which if one party to a transaction gains value, the other party must have lost an equivalent amount of value.
Postmodernity, a post-World War II cultural and intellectual transformation of society described by certain philosophers and social commentators and characterized by subjectivity, social fragmentation, ethical relativism, literary and theoretical deconstruction, rejection of absolute truth, and religious pluralism; see Table 1 in Chapter 1 for a list of characteristics of Postmodernity pertaining to economics.
post-Postmodernity, hypothesized by some social commentators to be the successor to the Postmodern cultural epoch and characterized by social revulsion at the extremes of the Postmodern epoch, reversion to pre-Modern reliance upon religious traditions of belief in absolute truth and associated ethical values, but conditioned by the Postmodern insistence upon religious pluralism; religious fundamentalism or reawakening is cited by some social commentators to evidence a post-Postmodern cultural transition; the characteristics of post-Postmodernity are continuing to evolve.
pragmatic liberalism, the social and political willingness to employ the offices of government as needed to address perceived social ills.
principal, an owner or dominant decision-maker in a venture who commissions others to (agents) act on his behalf.
private goods, goods produced in a market economy in response to market price and profit signals, and which have prices low enough that individual members of society can purchase them and secure them for their exclusive use.
producer sovereignty; the ability of the management of a company with sufficient monopoly power to impose its product-mix will on consumers by first deciding what they wish to produce, and then through manipulative marketing efforts attempt to convince consumers to want those products.
productivity, the relationship between outputs of production processes and the inputs used to produce the outputs; productivity is increased when the quantity of output that can be produced by given amounts of inputs into the production process increases.
profit, the net difference between revenue and the total of all production costs, including both explicit (monetary) and implicit (psychic) costs; the return (or income) to an entrepreneur for achieving success in innovation and attendant risk assumption of risk; before the fact of innovation the expectation of profit serves as a motivation to assume risk; after the fact of innovation profit is a reward for the assumption of risk if the innovation is successful, but a negative profit (a loss) is a penalty for assumption of risk if the innovation is unsuccessful.
profit maximization, the behavioral premise usually taken by economists to govern the behavior of business decision makers.
program finance, the determination of the government’s budget to achieve program goals rather than manipulating the government’s budget in the interest of macroeconomic stability.
progressive income taxation, the application of a progression of higher income tax rates to successively higher brackets of income; the justification for progressive income taxation is “fairness”, i.e., the presumption that higher income recipients should pay more in taxes than lower income recipients; the marginal tax rate applied to the highest income tax bracket in the US presently (2010) is 36 percent, but if the Bush tax cuts are allowed to expire at the end of 2010, this rate will rise to 39 percent.
proletariat, the working class comprised of people who have lost whatever control they (or their forebears) may once have had as craftsmen over their own resources and ability to produce consumable articles.
property, material goods, land, and structures on land held in ownership; property is “private” if ownership is held by persons or groups of persons; property is “public” if ownership is held collectively or by the state.
protectionism, a political strategy to “level the playing field” by offsetting or neutralizing the cost or performance advantages enjoyed by foreign producers; protectionism is usually implemented by imposing tariffs, quotas, and other so-called non-tariff barriers (NTBs) upon the imports of foreign merchandise; special interest groups (a.k.a. “rent seekers”) typically lobby law-making bodies to impose protectionist trade restraints.
psychic cost or benefit, the non-pecuniary negative or positive feeling, respectively, experienced by a human in regard to some economic activity in which the human is engaged; efforts often are made by economists to estimate monetary equivalents of psychic costs or benefits for inclusion in economic models.
public choice, the analysis of whether any particular decision is most effectively taken in the private sector or in the public sector.
public goods, goods that are “large and lumpy” in the sense that they are of large-enough scale and cost that individual members of society are unlikely to be able to afford to purchase them alone; public goods are an example of a so-called “market failure”; public goods are not subject to the so-called “exclusion” principle, i.e., individuals can not acquire the good and exclude others from its use; public goods are also not subject to the “more for me, less for you” principle, i.e., uses by individuals leave no less of the public good for others to use; the provision of public goods is not in response to market price and profit signals, and thus requires a collective action by the society to finance and produce the public good or to commission its production by private sector producers; examples of public goods include streets and highways, water and sewer systems, ship ports and airports.
quid pro quo transaction, an exchange between two parties in which each party conveys to the other party something of value acceptable to the other party for what he or she gives up; literally, “this for that”; a so-called “bilateral exchange” of things of value; in present-day quid pro quo transactions, the “thing” is an amount of money surrendered in order to acquire a good or service; in distinction from a so-called “unilateral transfer”, i.e., a one-way transfer of value with no corresponding counter transfer of value.
quota, a form of trade restraint that imposes an absolute quantity limitation upon the volume of imports allowed to enter a nation; quotas generate no revenue to the government unless the government auctions licenses to import the allowable quota quantity to the highest bidders.
rational expectations decision maker (REDM), one who possesses high intelligence, a good understanding of "the way the world works," awareness (perceptivity) of what is going on, a long-enough time horizon (i.e., concern for what the future holds), and a drive to use all available information in forecasting future states; REDMs are not always right in their forecasts, but their forecast errors tend to be random rather than systematic; to the extent that their forecasts are accurate, REDMs can make decisions to take advantage of opportunities and avoid (or manage) risks.
real, a descriptive adjective that in economics means that adjustments have been made to nominal income to eliminate the effects of inflation (or deflation) so that the real component of nominal income change can be examined.
real value (wealth, income, money balances), a “deflated” value of a monetary amount after removal of the effects of inflation or deflation; the “true” or opportunity cost of acquiring something by giving up something else.
rent, the return (or income) to land or any resource that is fixed in supply and incapable of being augmented by human effort.
rent-seeking activity, the effort by government functionaries to capture personal or institutional benefits by virtue of monopoly position in the provision of “political goods”.
required reserve ratio, the proportion of outstanding deposit liabilities that a commercial bank is required to maintain in the form of very liquid assets (usually vault cash and government bonds); in the US the require reserve ratio usually ranges between 7 and 12 percent of a bank’s outstanding deposit liabilities, depending upon the size of the bank; the required reserve ratio may be changed by the central bank in implementing monetary policy, but this has become a rare occurrence in the US due to the amplified effects of a reserve ratio change on the volume of bank deposits.
return, the income to a productive resource; nineteenth century economists designated the return to labor as “wage”, the return to capital as “interest”, and the return to land as “rent”; modern economists also designate the return to successful entrepreneurship as “profit”.
risk, the chance that an expected or hoped-for outcome of an event will not occur; risk is usually assessed by estimating the probability of non-occurrence of an event; riskier activities usually require greater expected returns in order to motivate participation in the activities; normal human behavior is risk averse; gamblers by definition prefer risk.
rule by authority, the specification by the political administration of rules that govern social, political, and economic relationships among citizens; such rules are specific to the current political administration and may change at the whim of the administration or when a new administration succeeds the previous administration, e.g., by coup or revolution; to be distinguished from rule of law.
rule of law, the legislation of rules that govern social, political, and economic relationships among citizens, and which stand irrespective of the identity of the current political administration; to be distinguished from rule by authority which is specific to the current political administration and may change at the whim of the administration or when a new administration succeeds the previous administration, e.g., by coup or revolution.
safety net, a government welfare program intended to put a “floor” under the well-being of the lower-income members of its society.
satisficing, term coined by economist/psychologist Herbert Simon to describe the behavior of many real-world business decision makers; an example of satisficing behavior is to pursue a target rate of return on invested capital.
scarcity, the normal economic condition of the material world such that humans need and want more of an item than is available; the opposite of abundance; the evidence of scarcity is a positive market price.
self-interest, the orientation of individual humans to protect themselves and enhance their own welfare by acquiring consumable goods and durable assets.
services, activities without tangible characteristics in themselves and with short lives that expire when their benefits are immediately consumed; examples include repair services and personal services such as haircuts and pedicures.
social goods, goods that entail positive externalities not recognized by markets; an example of a so-called “market failure” because markets tend to under-allocate resources to the production of social goods; governments often attempt to correct for the under-allocation of resources to social goods by subsidizing the production or consumption of them.
socialism, a form of economic organization in which the means of production are owned by the state and authority to determine product mix, means of production, allocation of resources, and distribution of product are vested in a state planning authority.
spillovers, a.k.a. “externalities”, a so-called “market failure” consisting of positive and negative side-effects of consumption or production activity that impinge upon innocent by-standers to market transactions and thus are not recognized by markets; negative spillovers resulting from the production or consumption of a good result in the market over-allocating resources to production of the good; positive spillovers resulting from the production or consumption of a good result in the market under-allocating resources to production of the good; examples of positive spillovers include the benefits of public health care and public education; examples of negative spillovers include various kinds of environmental pollution.
state sovereignty, the authority and power of a political entity to do whatever it wills to do with the resources contained within its boundaries, including the human resources of its population; in authoritarian economies, state sovereignty entails the power to determine product mix, methods of production, resource allocation, and output distribution.
state-owned enterprise (SOE), a production unit owned and operated by a government authority, often in competition with private-sector enterprises; SOEs have been more common in mixed socialist economies, but a few exist in mixed market economies, e.g., the Tennessee Valley Authority that generates and sells electricity in the southern region of the United States; governments of some countries have acquired productive enterprises by nationalization; during the 1980s in many European nations and during the 1990s in the former Soviet Union, processes of “privatization” were launched to dispose of state ownership interests in many SOEs.
subsidy, a payment by a government to a private-sector productive unit to offset some portion of the costs of production as an encouragement to increase the volume of production; a subsidy may be paid to consumers to offset some portion of the price of an item the consumption of which the government wishes to encourage; subsidies to domestic producers can be a form of protectionism in the sense that they offset or neutralize the competitive advantages of foreign producers.
sunset provision, a provision included within the legislation of a government program for its termination once the original need for the program has been met.
super-normal profit, an amount of profit in excess of what other firms in the industry with similar resources can earn; super-normal profits are attributable to exceptional entrepreneurial ability or monopoly power; in competitive markets, super-normal profits may fleeting as they are competed away by price and performance competition from other firms.
suppliers, those humans who are “in a market” offering to sell quantities of a good.
tariff, a form of tax imposed upon merchandise that moves across national boundaries; tariffs usually are imposed upon imports into a nation, but some nations that export large quantities of raw materials (agricultural, mineral, or petroleum products) also impose tariffs on exports; tariffs may be imposed by a government to raise revenue or to protect its domestic industry from competition by foreign producers; given elasticities of demand for and supply of imports, there is an optimal tariff that maximizes the tariff revenue; a protectionist tariff usually is higher than a revenue tariff, and often high enough to choke off all imports; a protectionist tariff often elicits reciprocal imposition of tariffs by trading partners.
technological advance, discovery or development of new ways of making a material good or improving the function or quality of the good; a debatable question is whether technological advance is purely a human achievement or is a provision of new knowledge by God.
technology, the known ways of making a material good; primitive technology is the most basic method of doing something and using the most rudimentary tools, often of wood, stone, or shell construction and powered by humans, animals, or water; advanced technology is the most recent or most efficient or most productive technology available, employing steel or other metals and alloys as well as complex chemicals, and powered by electricity, combustion of fossil fuels, or nuclear fission.
third-world country, a now archaic term that refers to low-income countries using primitive technologies, and typically relying on one or a few crops or mineral resources for income at or near a subsistence level; the term originally accompanied “first world” which referred to the high-income democratic, industrial, market economies of the “West” that develop and use advanced technologies, and the “second world” which referred to the authoritarian socialist countries of Eastern Europe (the Soviet Union and its satellites); the failure of the Soviet Union in the 1990s has rendered “second world” irrelevant as the Russian Republic and many of the former satellite countries of Eastern Europe are in the process of becoming “first world” countries; contemporary and more politically correct terms are “low-income countries’, “poor countries”, and “developing economies”.
trade creation, trade diversion, the effects of regional economic integration and bilateral and multilateral trade agreements to increase or decrease trade, respectively, among the constituents or participants; trade creation is judged good/bad by economists if regional integration or trade agreements induce regions to increase/decrease specialization in producing goods and services that exploit their true comparative advantages; trade diversion is judged bad/good by economists if regional integration or trade agreements induce regions to decrease/increase specialization in producing goods or services that exploit their true comparative advantages.
trade liberalization, the process by which imports, exports, and foreign investments are freed from governmental restraints.
trade restraint, a form of protectionist government policy intended to limit the importation of foreign merchandise that competes with domestically-produced merchandise; domestic producers typically lobby law-making bodies to impose trade restraints.
trickle-down effect, the reputed benefit to lower-income members of society in the form of provision of employment and income-earning potential provided by investment in capital by higher-income members of society; the fact that critics of capitalism typically disparage the possibility of trickle-down does not render the process impotent; 127.
true gift, a unilateral transfer of value that does not incur any obligation to reciprocate to the giver.
unethical business practices, activities of business decision makers that violate conventional or established business norms, including bribery, embezzlement, breaking contracts, price fixing, collusion, deceptive advertising, falsification of expense accounts, underreporting of income or padding of expenses on tax reports, use of substandard materials, producing and selling products which fail to function as advertised, failing to divulge to consumers possible product dangers, etc.
unilateral transfer, a one-way transfer of value with no corresponding counter transfer of value; in distinction to a quid pro quo two-way exchange of values; examples of unilateral transfers include gifts, charitable contributions, church contribution, foreign aid.
unintended consequences, unpredicted secondary (and subsequent) effects of well-intended political actions taken to address perceived “market failures”; examples include welfare benefits that are rich enough to enable eligible recipients to avoid work and unemployment benefits of long duration or large proportion of last earned income that tend to extend job-search periods and cause unemployment to persist.
venture capitalist, someone of wealth who has funds to invest but who does not himself undertake the entrepreneurial role; the venture capitalist evaluates would-be entrepreneurs and their proposals, choosing to reject some and entrust funds to others; the venture capitalist shares the profit/loss of the entrepreneur on an agreed formula; most venture capitalists are sufficiently risk averse that they choose investment opportunities with favorable odds of success so that they can continue to "stay in the game".
victimhood mentality, the widespread social view that everyone is a victim, no one is responsible, and society is to blame for anything bad that happens.
wage, the return (or income) to labor, the human factor of production; to be distinguished from rent, interest, and profit income.
wealth, material things of value and financial instruments that are accumulated and held in ownership by humans; wealth-holdings are increased when some portion of earned income is diverted from consumption spending to purchase assets such as houses and real estate; “real wealth” is increased by investment in capital that enhances productive capacity; “financial wealth” is said to be “created” by earned interest, asset value appreciation, and market trading that takes advantage of price differentials.
zero-sum game, a term borrowed from the mathematics of probability
theory which in economic contexts involves a fixed amount of value such
that if one party gains value from a transaction, other parties must have
lost an equivalent total amount of value; economists generally deny that
market transactions are zero-sum games because in order for a transaction
to be completed, both parties to the transaction must perceive themselves
to gain even though each party may perceive the other party to lose value
in the exchange.
BACK TO CONTENTS
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BACK TO CONTENTS
SUGGESTED
FURTHER READINGS
The following items, though not referenced in the text of this work, have served to deepen the author’s understanding of postmodern thought, and are recommended to those who are interested in further pursuing these topics.
Burke, Barry (2000) “Post-modernism and post-modernity”, The Encyclopaedia of Informal Education,
www.infed.org/biblio/b-postmd.htm. Last update: 03-Sep-2009 (http://www.infed.org/biblio/b-postmd.htm).
Chicago,
University of, Conference on After Postmodernism, November 14-16, 1997 (http://www.focusing.org/apm.htm).
Cobb, John B.,
Jr., "Constructive Postmodernism" (http://religion-online.org/showarticle.asp?title=2220).
Davis, Ben,
"The Age of Semi-Post-Postmodernism", ArtNet
(http://www.artnet.com/magazineus/reviews/davis/semi-post-postmodernism5-15-10.asp).
Fackerell, Michael,
"Postmodernism and the Death of Truth" (http://www.christian-faith.com/forjesus/postmodernism-and-death-truth).
Gottschalk, Adam, "POST Postmodern Manifesto" (http://www.adamgottschalk.net/words/popomo.html).
Kirby, Alan,
"The Death of Postmodernism and Beyond", Philosophy
Now, June/July 2010 (http://www.philosophynow.org/issue58/58kirby.htm).
Nobel, David,
"Postmodern Economics--Introduction", Understanding the Times: The Collision of Today’s Competing Worldviews (Rev. 2nd ed),
Summit Press, 2006 (http://www.allaboutworldview.org/postmodern-economics.htm).
Peters, Michael
A., "Globalism and its Challenges:
The Postmodern State, Security and World Order" (http://globalization.icaap.org/content/v2.2/04_peters.html).
Scribd,
"Post-postmodernism" (http://www.scribd.com/doc/5710598/Post-Post-Modernism).
Sinckler, Christopher,
"Post Modern Economic Globalization--The implications for small
states", February 27, 2003 (http://www.cpdcngo.org/article.php3?id_article=26).
Watson, P. J., "Christian
Psychological Research and the Post-Postmodern Future" (http://christianpsych.org/wp_scp/wp-content/uploads/christian-post-postmodernism-pjwatson.doc).
Witcombe,
Christopher L. C. E., "Modernism and Politics" (http://witcombe.sbc.edu/modernism/modpostmod.html).
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