The Theory of Power

Over the past three decades, laissez-faire economics has had an im-mense impact on our society, mostly for the worse. The elements have included privatization of public services, an assault on social benefits, and most important, deregulation of finance. Though free-market ideas are hotly debated in classrooms, op-ed pages, and journals, their influence on events has come not in a Platonic fashion, through the power of argument, but through power itself. Free-market theory has conveniently provided ideological coherence.

Elites find laissez-faire an immensely useful fable, because it serves as an expert brief against government interference. In the academy, dissenting economics has had trouble gaining a foothold. The reigning paradigm is simple and elegant: Free markets maximize individual choices and collective well-being, end of story. By contrast, dissenting economics is messy, historical, less like physics, more like sociology or journalism.

Because the paradigm assumes individuals freely making choices in a political vacuum, political power is seldom part of the economist’s story. Lately, however, even economists are increasingly finding the role of power hard to ignore. Unorthodox economists are becoming more numerous, more inventive, more influential within their profession. Yet the fact remains that even the financial collapse has not dislodged the hegemony of laissez-faire. If the economic catastrophe of our times is to be reversed, better theory will help. But that’s only a beginning—it will also require a shift in political power. Otherwise, prophetic economic dissenters will remain voices in the wilderness.

Sylvia Nasar reminds us that great economists of all stripes have long sought to influence not just academic theory but practical events. A former reporter for The New York Times, Nasar is best known for A Beautiful Mind, her acclaimed biography of John Nash, a protean and tragic figure whose conceptual breakthroughs bridged mathematics and economics until a descent into madness shortened his professional career.

In her epic Grand Pursuit: The Story of Economic Genius, Nasar attempts the even more challenging feat of multiple intellectual biographies, recounting the life and work of some two dozen politically engaged economists, from Karl Marx to Amartya Sen. Her tale begins with the bleak conditions of Dickensian London, where notable social critics such as Thomas Carlyle and Thomas Malthus projected that conditions could only worsen. Nasar aims to show how the economists that followed proved the Victorian pessimists wrong and contributed to improved material well-being. The book’s three sections are headed “Hope” (on Victorian reformism), “Fear” (on the period between the world wars), and “Confidence” (the postwar boom).

An emblematic chapter is Nasar’s paean to Alfred Marshall. As the leading economics professor at Cambridge in the late 19th century, Marshall put into mathematical form the theory that markets are self-regulating and prices adjust “at the margin” through the forces of supply and demand, which aggregate to an efficient equilibrium. Nasar offers relatively little on Marshall’s economics but much on his life. The young Marshall was appalled by the squalor around him and the counsel of political economists that reform efforts would only worsen conditions. In the 1870s, as a “radical liberal” at Cambridge, Marshall challenged those assumptions, giving speeches in favor of unions and urging more education for workers. Later, as a theorist, he saw rising productivity as the key to a wealthier society, and free competition as leading to shared prosperity. Nasar approvingly summarizes Marshall’s cure for poverty: “Competition for the most productive workers meant that, over time, firms had to share gains from productivity improvements.” This is surely overstated. In a climate of high unemployment, not to mention globalization, productivity gains are not necessarily shared with workers, unless your time horizon stretches centuries into the future. Nasar misses the irony that Marshall, who began with a civic concern to alleviate destitution, became the doyen of a classical school that warned against social meddling in almost the same terms as the Victorian pessimists he deplored.

Nasar next profiles non-economist Beatrice Potter, a well-born agitator who later married the socialist Sidney Webb. The two became leaders of Fabianism. Nasar uses the Webbs’ story to narrate reformist politics in Britain between the 1880s and the 1920s, when public works and social insurance went from being dangerously radical to mainstream (though not yet comprehensive public policy). In 1908, the Webbs wrote The Minority Report, a manifesto proposing that the state be responsible for the basic welfare of citizens. Even Winston Churchill, in those days a Liberal, applauded. William Beveridge, who worked as a junior researcher on The Minority Report, later became the architect of the post–World War II welfare state. He wrote that his design “stemmed from what all of us had imbibed from the Webbs.” Nasar writes admiringly that “the objectives went far beyond Marshall’s notions of increasing productivity and pay.”

After a long chapter on the American monetary economist Irving Fisher, Nasar takes stock of events on the eve of World War I. “In a period of sixty years,” she contends, Marshall had proved the pessimists wrong by describing how competition led to economic gains over time; Beatrice Webb had “invented the welfare state” (actually, it was Otto von Bismarck a generation earlier); and Fisher “identified a potential instrument—control of the money supply—that government could use to moderate or even avoid inflationary booms or deflationary depressions.” But this account vastly oversimplifies and misattributes cause and effect. The industrial economy took off in the 19th century long before Marshall or Fisher emerged on the scene. Still to come were the Great Depression (Nasar later admits that no existing school of economics foresaw or explained it) and the British welfare state.

Some of the best material in Grand Pursuit narrates the interplay of John Maynard Keynes, Fisher, Joseph Schumpeter, Friedrich Hayek, and other economists in the 1930s. Nasar tips her hand, however, when she says of the Great Depression, “In retrospect, modern scholars put the primary blame on mistakes by the Federal Reserve, the collapse in confidence and spending by consumers and businesses, and the wave of selling into falling markets by increasingly panicky investors.” That summary, however, omits the role of laissez-faire in facilitating the speculative bubble of the 1920s. Milton Friedman, who is generously though briefly treated, would doubtless agree.

Grand Pursuit is an ambitious project, and at points Nasar seems to drown in it. In her cameo portraits of the interaction of lives, events, scholarly arguments, and rivalries, she becomes so intrigued and distracted with Schumpeter as arriviste Austrian finance minister and dandy, the left-Keynesian Joan Robinson’s dalliance with Soviet Russia, and dozens of other digressions that she often loses the thread of her larger story. Her premise that the great economic thinkers ushered in a century of economic advancement sometimes clouds her judgment. Introducing Schumpeter’s master work, Capitalism, Socialism and Democracy, she writes, “For Schumpeter, the political triumph of left- and right-wing Socialist parties in Europe after World War I had proved that economic success alone was no guarantee of a society’s survival.” What success? Interwar Europe was an economic mess.

In Part Three, the reader can feel Nasar’s attention flagging. Turning to the postwar era, she trips through 60 years in just 50 pages, briefly using Paul Samuelson as an archetypal American Keynesian, checking in on Joan Robinson in Moscow, and ending with a skimpy chapter on Amartya Sen. It’s not clear whether Nasar just ran out of gas or her editors drew the line at 500 pages, but her postwar story is by far the weakest.

***

Beneath Nasar’s lush prose is an extended commercial for material progress as guided by economic genius—and with a few notable exceptions, the genius is of the free-market sort. Her selectivity is also eccentric. Fisher, Schumpeter, and Marshall get extensive treatment, but not Milton Friedman, much less Karl Polanyi, Albert Hirschman, or John Kenneth Galbraith. This book will command wide attention on the strength of Nasar’s range, writing, and reputation. But the reader interested in economic history and the evolution of economic thought would do better to consult the late Robert Heilbroner’s classic, The Worldly Philosophers.

Recent decades have not been kind to Nasar’s hypothesis. In an abbreviated three-page epilogue, she writes, “Since World War II, history has been dominated by the escape of more and more of the world’s population from abject poverty.” It would perhaps be churlish to point out that much of that progress in the past decade has occurred in China, a harsh and mercantilist economy with policies far from those of Marshall, Hayek, or even Keynes—or that the deflationary events of the past three years put us right back into the middle chapters of Nasar’s book, the section titled “Fear.”

One important economist engagé not treated by Nasar is Jeffrey Sachs, a man whose offended sensibility as a citizen has altered how he conceives of the economic project. In the 1980s, as many of his Harvard colleagues were advising investment bankers, Sachs was counseling debt-afflicted Latin American governments to resist crippling austerity demands from the International Monetary Fund, the U.S. government, and creditor banks. In Eastern Europe’s transition to a market economy, Sachs’s version of “shock therapy” was a temporary imperative en route to a humane form of capitalism. His odyssey, now emphasizing Third World poverty and sustainable development, and landing him as director of Columbia’s Earth Institute, has turned Sachs into something of a radical.

There is no shortage of books on why laissez-faire is bad theory and dangerous practice. For a succinct, humane, and politically astute tour of the horizon, it’s hard to improve on Sachs’s The Price of Civilization: Reawakening American Virtue and Prosperity. “My operating principle,” Sachs writes, “is that the economy is intimately interconnected with a much broader drama that includes politics, social psychology, and the natural environment. Economic issues can rarely be understood in isolation, though most economists fall into that trap.”

In an original treatment of globalization, Sachs observes that Federal Reserve Chair Alan Greenspan in the 1990s mistook low inflation resulting from cheap imports from China for a domestic productivity boom. For Greenspan, the low inflation allowed lax monetary policy. But Greenspan’s combination of low interest rates and deregulation invited the financial collapse and accelerated deindustrialization. “The Federal Reserve’s easy monetary policy succeeded in creating manufacturing jobs, but in China, not in the United States,” Sachs writes. The 2008 financial collapse was “a crisis of utterly mismanaged globalization.” In a global economy, he adds, transnational corporations benefit from the rising Third World productivity, cheap labor, and the tendency of governments to reduce taxes and regulation to attract business. “All three effects favor U.S. corporate investors, but all three jeopardize U.S. workers.”

Sachs lays out a detailed path to reform, regulation, and recovery that combines fiscal responsibility with increased social investment, pays for it with higher and more progressive taxes, and offers a broad vision of the good society. We are distracted, he writes, not just by the usual getting and spending but by several seductions that undermine our role as citizens, such as the marriage of media and “hyper-commercialism,” and aspects of the Internet that promise engaged community but deliver individualist narcissism. “As individuals,” he argues, “we need to regain the balance of our own lives between work and leisure, saving and consumption, self-interest and compassion, individualism and citizenship. As a society, we need to establish the right relationship of markets, politics, and civil society.”

Sachs admits that the politics will be the hard part, and he has more to say on the kind of society we need than on how our politics might get us there. He places great hopes on young Americans: “The Millennials are ethnically diverse, socially liberal, better educated (though struggling to meet tuition to complete four years of college), and more trusting of government.” As a realist, however, Sachs quickly adds, “Obama was their hope and has been their first political disappointment.” Quite so—and it’s not yet clear how severely this heartbreak will depress the natural reformism of the young. We may all grow old waiting for the youth to repair the folly of their elders.

 

Two recent currents in economics—neither addressed in Nasar’s history—are behavioral economics and the economics of networks. Cornell economist (and De¯mos fellow) Robert Frank has spent his career taking spirited though polite exception to many behavioral premises of the standard economic model. Despite prevailing theory, Frank writes, “unbridled market forces often fail to channel the behavior of self-interested individuals to the common good.” In The Darwin Economy: Liberty, Competition, and the Common Good, he uses Charles Darwin as a foil for Adam Smith. For Frank, Darwin is the father of such heterodox economic concepts as collective-action problems. For example: “Even though it would be better for all bull elk if each animal’s antlers were smaller, it would not be in any individual bull’s interest to have smaller antlers.” In human society, by analogy, it’s better for public policy to improve on nature than to wait for natural selection to remedy matters over time. Even if government makes mistakes, we can ameliorate how government intervenes, using incentives. This strategy he terms a “libertarian welfare state.”

Frank’s book is peppered with examples of how actions that improve the well-being of the individual harm the collectivity. A bicycle racer who disdains a helmet gains a speed advantage but forces the group to choose between speed and safety. Frank proceeds with wit and ingenuity through imperfections in labor markets, tax policy, income distribution, spending cuts that backfire, huge waste in the private sector, and chronic failures of individuals to make optimal decisions.

***

Like Sachs, Frank ventures into politics, gingerly at first, then more boldly. Libertarian views, he finds, did not just proliferate as a result of sheer merit. They were systematically propagated by such ideological entrepreneurs as the Koch brothers, Rupert Murdoch, and Richard Mellon Scaife. (This is a controversial finding only among economists.) He writes by way of prudent disclaimer—“Libertarians are correct, of course, that waste in government has a long and troubling history”—and then adds: “But does the fact that government is imperfect mean that complete policy paralysis is what most Americans really want?” Even if light-touch government intervention is “social engineering”—the worst libertarian epithet—so be it, Frank declares. All law, he reminds us, is a form of social engineering: “Only a committed anarchist could favor a world without social engineering.”

It’s not clear that this critique, familiar from Frank’s other work, requires Darwin. Frank himself acknowledges that “Darwin’s challenge has nothing to do with the kinds of competitive imperfections traditionally invoked by market skeptics.” But theory that opens up a new flank to challenge the hegemony of libertarian ideas is worthwhile. The trouble is that the political market for laissez-faire—the corporate elite—has its own agenda and is largely impervious to logical persuasion. “Antigovernment zealots” are in control of the conversation, Frank concludes, and he is willing to lock antlers: “Win or lose, we should fight them.” This call to arms is not exactly Darwinian in the sense Frank intends, but in academic economics, these are brave and welcome words.

 

Reformist social scientists and pamphleteers dating back to Marx, the 19th-century cooperative movement, and the creators of the Israeli kibbutz have long contended that a more collaborative society is not just more attractive but more efficient. A leading contemporary theorist who challenges the orthodoxy in this spirit is Yochai Benkler, the pioneering expert on the economics of collaborative networks as facilitated by the Internet.

Building on his widely acclaimed 2006 book, The Wealth of Networks, Benkler’s The Penguin and the Leviathan: How Cooperation Triumphs over Self-Interest, uses examples as diverse as Zipcar, Wikipedia, open-source software, and Chicago’s community policing to contend that cooperative systems often outperform the competitive and hierarchical ones of free-market theory. Benkler, who teaches entrepreneurial legal studies at Harvard Law School, is a witty and deft writer—English is not even his first language—and his book provides a much-needed shot of optimism at a bleak economic moment. It is also a pleasure to read a theorist who challenges bad theory by exploring the actual world.

Reviewing reams of experimental studies of the sort cited by Frank, Benkler finds that the economic paradigm misconceives human nature: “In practically no human society examined under controlled conditions have the majority of people consistently behaved selfishly.” We’ve all behaved reciprocally or done altruistic things, he writes, “because we knew intuitively that they were simply the right thing to do.” Happily, Benkler adds, “the Internet has allowed social, nonmarket behavior to move from the periphery of the industrial economy to the very core of the global, networked information economy.”

Benkler’s range and gift for original synthesis are stunning. He builds his case with material from evolutionary biology, experimental psychology, political theory, dissenting economics, and detailed knowledge of the dynamics of cooperative entrepreneurship. He is particularly fascinated by the culture of collaboration and trust of strangers fostered by the Internet, and the psychological and entrepreneurial dynamics of why collaborative enterprise works.

 For Benkler, the Leviathan of his title refers to both the bureaucratic state and the internally authoritarian corporation. The superior alternative to both is collaborative enterprise, symbolized by Tux the Penguin, the mascot and logo of Linux open-source software.

I find Benkler’s parallel universe immensely appealing, though I am less optimistic than he that the Penguin will triumph over the Leviathan. The ground rules of commerce can foster or strangle more collaborative forms of enterprise—and these rules are fruits of political power. In seeking to explain why such a misleading conception of human nature—selfishness—dominates prevailing assumptions, Benkler offers four conjectures: We are in fact partly selfish; we are stuck in an earlier phase of history; the market paradigm is appealingly simple; and we are creatures of habit. What he leaves out is that the libertarian fallacy and the policies that follow are immensely lucrative to society’s most powerful people. It’s not yet clear that the sheer logic of collaborative enterprise will transform the distribution of political power.

Long before its debut on the Internet, we’ve seen this movie. Half a century ago, America was far friendlier to credit unions, mutual insurance companies, nonprofit building-and-loan societies, farmer and worker cooperatives, and nonprofit hospitals and health plans. In the 1970s, authors were writing hopeful articles and books about worker-owned firms. This sector, which once accounted for a much larger share of American commerce, has mostly been bought out or crowded out by conventional business thanks to changes in rules promoted by economic elites. For example, Blue Cross in most states converted from nonprofit to for-profit because its executives saw a chance to make a buck and had sufficient influence on state governments to get the necessary permission. All the big mutual insurance companies save State Farm have likewise become stock companies. This is less about efficiency than profit and power to set the rules.

One must also be careful with technological determinism. Benkler is persuasive when he argues that the Internet facilitates collaboration and trust, just as the large integrated manufacturing enterprise facilitated the dehumanizing system of management known as Taylorism. But it doesn’t logically follow that collaboration will win out. The investment bankers and private-equity firms whose financial speculations and hostile takeovers have ruined so much of the economy use the Internet, too.

Political decisions will create the regulatory framework that allows the collaborative model to flourish or founder. We see this, for example, in a struggle dear to Benkler, the battle over the rules of net neutrality. Unfortunately, as Sachs and Frank point out, purveyors of conventional corporate power are in the saddle. Open-source innovators must contend not only with ordinary business competition but with political efforts by potent commercial rivals to rig the rules. It complicates the challenge that the prevailing ethic of Silicon Valley is libertarian. Enthusiasts of an open Internet need government rules to assure equal access and fair play but tend to mistrust government regulation.

 

With all of its practical failures and the availability of more attractive alternatives, laissez-faire is the zombie that just won’t die. For a fine analysis of its durability, one can read Colin Crouch’s The Strange Non-Death of Neoliberalism, a title that plays on George Dangerfield’s 1935 book, The Strange Death of Liberal England. Crouch, who teaches at the University of Warwick, distinguishes two phases of the resurgence of free-market ideology, often called “neoliberalism.” The first phase, from the 1970s to the 1990s, moved away from the postwar Keynesian welfare state and left society more unequal; the second phase, beginning in the 1990s, deregulated finance, setting up conditions for a crash.

Crouch offers a brilliant and original discussion of what he calls “privatized Keynesianism,” in which households with stagnant incomes took on debt to maintain their own purchasing power and hence, the aggregate demand of the economy: “Ordinary people played their part,” he writes, “not as workers seeking to improve their situation through trade unions, legislation protecting employment rights and publicly funded social insurance schemes, but as debt-holders.” Banks and corporations also went heavily into debt to finance speculation. When the crash came, it led to a deflationary unraveling but without an effective state to manage the process. This change, from public to private indebtedness with a weakened state as ultimate guarantor, “has imparted a fundamental rightward shift to the whole political spectrum,” Crouch argues. Post-crash, financial corporations continue to privatize gains and socialize losses. The similarity of the dynamics throughout the advanced capitalist world confirms Crouch’s contention that different forms of capitalism are converging in a neoliberal direction.

Why does free-market ideology survive largely intact despite its practical failure? One explanation, Crouch writes, is that neoliberalism is “nothing like as devoted to free markets as is claimed. It is, rather, devoted to the dominance of public life by the giant corporation.” Unlike Benkler, Crouch sees no evidence that changes in technology are altering the dynamics of influence. The deregulated economy may be a practical failure, he argues, but corporations retain their political power. Global firms in particular amass power at the expense of the democratic state. They can “regime shop,” and “the global economy itself constitutes a space where governmental actors are … relatively weak and corporations therefore have more autonomy.” The allure of globalization, despite the claims of libertarians, is less about economic efficiency and more about shifting the power balance from polity to corporation.

As these and other books suggest, the intellectual critics of laissez-faire have more than proved their argument, with events providing the exclamation point. Yet heterodox economists seem doomed to a Sisyphean labor, winning their case in theory and practice but losing in the court of elite opinion. So the argument must be made anew, again and again. If the debate is ever to be durably settled in favor of a more humane society, it will have to be won not just in economics but through politics.

Comments

Love your comments. In our book, The Boids and the Bees, we look at the same problem, but with a much wider brush. It's not just the economy, or for Joe Nye international relations and the use of power, or for those looking at school reform testing and accountability, or as Paul Starr should see in healthcare single payer or insurance regulation. In nature we see both survival and diversity as living organisms adapt to changes in their environments. Changes permeate all our systems and we adapt; and we can neither predict nor analyze our systems to find out how. Yet analysis is what makes our experts into experts. What is needed is more emphasis on guiding adaptation, much like Joseph Nye does for international relations, or Paul Ewald does for bacteria, and we do for these and more.

Bottom Line: try to find a different word than regulation; regulations are a threat and are gamed--what you want is a small environmental change to which the agent adapts.

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