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The Biophysical Basis of Production and the Public Economy

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This is an extract from June Sekera, “Missing from the mainstream: the biophysical basis of production and the public economy”, real-world economics review, issue no. 81, 30 September 2017, pp. 27-41.

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

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

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

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

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

The term “non-market” and its meaning remain elusive. For example, Karl Polanyi wrote extensively about the differences between markets and non-markets but did not deal with the dynamics and forces of production in the non-market public economy (Krippner, 2001; Mayhew, 2016; Zaman, 2016). Polanyi argued that the market was embedded within, and enabled by, the public sector, but did not concern himself with the operations – forces, dynamics, drivers – of the public non-market system itself. Neither do such widely-cited economists of the public sector as Robert Dahl and Charles Lindblom, Charles Wolf or Kenneth Arrow (Sekera, 2016). Joseph Stiglitz produced an entire textbook on “the economics of the public sector” (the latest edition in 2000) without recognizing the distinctive characteristics of a public non-market.

As I noted earlier, the “public choice” school has become the framework to which economists default for an explanation of the public economy. Backhouse (2005) outlines the development of the public choice school, which stems from a cluster of works published in the 1950s and 1960s by James Buchanan, Gordon Tullock, Mancur Olson, and Anthony Downs. It became a school, and a movement, when James Buchanan and Warren Nutter found a home for their efforts at George Mason University in Virginia. In the mid-1980s George Mason opened the Center for the Study of Market Processes, with its largest supporter being the Koch Family Foundations. Stretton and Orchard (1994) have demonstrated the anti-government, anti-democratic stance of public choice theorists in their extensive treatment of the school in Public Goods, Public Enterprise, Public Choice; Theoretical Foundations of the Contemporary Attack on Government. After critiquing the theory in economics terms, they suggest that public choice “reasoning seems to arise from the theorists’ reluctance to ‘come out’ and identify themselves as open enemies of democracy or at least of universal suffrage…Governments are viewed as exploiters of the citizenry, rather than the means through which the citizenry secures for itself goods and services that can best be provided jointly or collectively.”

A theory of the public nonmarket remains woefully lacking. The absence is not just an academic gap; it leaves a vacuum that undermines the public provisioning required to meet societal needs and to develop solutions to pressing common problems, including the depletion of high-EROI energy sources.

From: pp.8-9 of WEA Commentaries 8(1), February 2018

Download WEA commentaries Volume 8, Issue No. 1, February 2018 ›

2 responses

  • John Vandenberg says:

    An excellent start to a long neglected discussion. For too long, government activities ( and civil servants) have been branded as ‘inefficient’ (whatever that means) ; a ball and chain that hinders the effective operation of the ‘free’ market.
    On the contrary, governments are the only agents that can deliver the benefits of a social system that creates and upholds the rule of law, and that can deliver the public philanthropy of a redistributive taxation system. Without stable, democratic, public policy-driven government action, we would return to a world of robber barons and squabbling warlords.

    • James Beckman says:

      Indeed, John, all this talk of “the magic of the market” allows for unsafe consumer products, a poor infrastructure (I teach in China from time to time), environmental degradation, and increasingly poor employment terms. Most of the economic science we observe is about profit enhancement for the firm, at cost of nearly all else. Economic nationalism has now entered with Mr Trump, while a case is made for the same by PM May. I suspect the economics’ profession may individually agree that all life on this earth is so entwined that we ultimately all prosper enough or all life will ultimately be jeopardized. There isn’t such a public discussion yet in our profession to my knowledge, but my other profession of anthropology seems to accept our mutual global dependency with no hesitation.

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