It Ain’t Necessarily So

Any sufficiently advanced technology, as the saying goes, can be “indistinguishable from magic.” Likewise, almost any man-made institution—old, established, and operating in the background—can be disguised as nature. And political economy is all about man-made institutions.

In this interview with The Straddler, economic historian Peter Temin was asked “What’s natural?”:

In my opinion, macroeconomics has lost its way. The kind of models that many people use—general equilibrium models—start from assumptions of perfect competition, omniscient consumers, and various like things which give rise to an efficient economy. As far as I know, there has never been an economy that actually looked like that—it’s an intellectual construct. But many people claim that the outcomes of that economy are natural outcomes. When you say “natural,” you already have an emotionally laden term. Deviations from the “natural”—say, like, minimum wage laws, or unions, or governments that give food stamps, or earned income tax credits—are interferences with the natural order and are therefore “unnatural.”

In work Frank Levy and I did, we talked about a period we called the Treaty of Detroit (1945—1970s), where you had a lot of government intervention, and then this later period which we nicknamed The Washington Consensus (1970s—present), where there was minimal government intervention. At first, our tendency was to say that the later period was natural competition and the earlier period was unnatural government intervention. But then we had to say, no, the government is involved in all of these things, it’s just that government policy is different in one period than in another period. It’s not that one is natural and one is unnatural. It’s that one does something, and the other does something else. Since we’re both economists, we had to cleanse our language because it was such a natural a thing for us to be talking about the habitual and unnatural.

Value judgements can be smuggled into the definitions of what is “natural” or necessary, and what is “artificial” or distortionary. Concede those definitions, and you concede most of the debate. And the debate matters, because the sleights of rhetoric obscure much of how the country is governed.

As for breaking the rhetorical tics, Temin is not alone. Dean Baker can always be relied upon to call bullshit on “‘free’ market for thee, not for me”. Suzanne Mettler has mapped the submerged state of tax expenditures, which favors the privileged. David Moss explained the government’s role as risk manager, not merely through social insurance, but also through limited liability corporations and bankruptcy protection. Through monetary policy, there is a public provision for sound money.

Such interventions are not exclusive to our recent history or to the last century. Since this country was founded, American capitalism has been shaped by intelligent design. As Brad DeLong said, “the Founding Fathers were keen on redesigning the infant American economy.” DeLong elaborated:

In particular, [Alexander] Hamilton was convinced of the importance of a sophisticated banking system to support the growing economy. And he and his Federalist colleagues, including John Adams, believed strongly in providing infant industries with room to grow—even using money from the Department of War to fund experiments in high-tech industry.

When the Democratic-Republicans, led by Thomas Jefferson and James Madison, replaced the Federalists, they quickly decided that their small-government principles were an out-of-power luxury. Wars of conquest, territorial acquisition, continental surveying, and canal and then railroad subsidies were good for voters, immigrants, and pretty much everyone else except the outnumbered and outgunned Native Americans who got in the way.

Indeed, any government that builds infrastructure and allocates land titles on the scale of the nineteenth-century US government is “Big Government” incarnate. Add steep tariffs on imported manufactured goods—rammed through over the angry protests of farmers and southern planters—and you have the policies that intelligently designed much of nineteenth- and early twentieth-century America.

After World War II, it was again government that led the redesign of the US economy. The decisions to build an interstate highway system (and to spend most of that money on suburban commuter roads) and to jump-start the long-term mortgage market—reflecting the widespread belief that General Motors’ interests were identical with America’s—literally reconfigured the landscape. Combine that with the large-scale development of the world’s leading research universities, which then educated tens of millions of people, and with the tradition of using defense money to finance high-tech research and development, and, voilá, you have the post-war US economy.

These interventions should not be dismissed as the cheap hypocrisy of frail mortals who could not live up to a noble but austere ideal. It is not the world that has betrayed the ideal, but the ideal that is distorting our conception of the world. The honest debate is not whether we actively govern our economic lives but how.

Earnest libertarians, who are more accurately described as propertarians, would amputate these encroachments to save their wounded ideal from the gangrene of socialism. Yet no amount of dismemberment can alleviate their need for a powerful state, unless they are willing to give up on capitalism. Actual capitalism, as Cosma Shalizi said, requires a powerful state:

I do not see why my aside about capitalism and state power should be the least bit controversial. Since my libertarian friends seem more comfortable with deduction from first principles than empirical observation, let’s try it this way. Capitalism needs private property. Since there will be disputes about property, there must be an institution for settling those disputes effectively. That institution is the state. (Yes, I know about anarcho-capitalist ideas for private, market-driven courts and policing. These would last about a week: at best, they would re-sort themselves into territorial states, or more likely those doing the guard labor would ask themselves what they guard should belong to someone else.) Capitalism thus presumes a state which decides who owns what, and is (almost) unquestioningly obeyed. Again: capitalism needs contracts, there will be disputes about contracts, there must be an institution which can settle those disputes. Thus capitalism presumes a state which can decide who owes what to whom, and force them to pay. Capitalism with intellectual property is even more demanding: copyright presumes a state exercising minute control over the content of all modes of communication; patents presume a state exercising minute control over processes of production and the use of knowledge. (And then we can get into what the state has to do by way of culture and education, i.e., reshaping the mentality of the population.) When such powers are used stupidly or capriciously, capitalism suffers, but when such powers are absent, capitalism does not exist.

States underpin markets. Markets depend upon rules of trade, constraints on behavior, and means of enforcement; markets are supported by public goods.

Admittedly, the more individuals esteem themselves as self-made, the easier it becomes to mistake public benefits for private achievements.