What Might a Left Wing Economic Policy Begin to Like? Some Notes

Keywords: History of Ideas, Methodology & Philosophy;

It is best to think of this as a draft – and very preliminary. Comments welcome. Further of my writings on the left will be found at Economics of Socialism (Index).

The Listener column, ‘The Left and Economics (3 May 2003) elicited a number of the readers of the draft version asking me what a modernised economics of the left might look like. My response was ‘Who me? I’m only an economic columnist’. In any case few would put me among the Left, other than those who are so far to the right they object to the road rules.

However, there may be some obligation to say something more about future directions than I could in the column, for I am not unaware of some of the traditions of the Left and economics. But these are only notes, the sketching of a program.

Let me begin by avoiding the error of starting with policy conclusions. One of the failures of the Left (and indeed New Zealand analysts generally) is to begin at the policy end, which traps them to the analyses which prescribed those policies, so that cannot get to the fundamentals. I am also not going to refer particularly to the New Zealand scene, even though it may be one with which I have a little expertise.

Instead, I begin with the roots of the left-wing economic thinking. As the column says it was a response to nineteenth century industrialisation, as was one way and another, almost all the intellectual developments of the times. The responses might be divided into three major strands. There were the nostalgic such as Proudhon who thought the solution was to return to the past. I shall little more about them, except that perhaps much of today’s Left belongs here.

Then there were the incrementalists, of which the Fabians would be the best know British movement. The incrementalists worked so closely with the dominant economic paradigm that it is sometimes difficult to untangle them from it (or at least to do so is another very large article). Their essence was to work within the existing established institutions to transform the economy in a series of steps to a one dominated by the (national and local) government including social (and cooperative) ownership and direct economic controls and intervention.

The third group of radicals included such different bedfellows as Marx and the anarchists (when they were not nostalgic). Marx saw himself building on the economic paradigm, elaborating it both in a technical analysis and encompassing it in a wider social science. Their essence was a rapid transformation of society by working outside the elite institutions of the existing society. Their ultimate goal was similar to the incrementalists, although there was much divergence within them as to the degree of central government control versus local (typically worker) control.

The core issue was seen to be industrialisation and the destruction it appeared to wreck upon human society as it was then cherished. I dont recall the incrementalists actually saying so, but they probably recognised the benefits of the economic transformation, wanting to change the institutions of economic regulation for better ends. Marx also saw the potential benefits of the industrialisation – for him it was an historically progressive movement. His analysis proposed how eventually the benefits would be reaped by workers in the ‘communist’ state, although he was vague as what this state would be. (We had to wait for Lenin to be more programmatic.)

Both groups saw the industrialisation driven by capitalism, so much so they equated the two, which led to their policy conclusion of – in the famous fourth clause of the British Labour Party constitution – the social ownership of the means of production, distribution and exchange. Marx added to the framework his theory of class conflict. It was helpful to analyse nineteenth century industrial society into capitalists and workers, and Marx enhance this division by extending the class analysis to earlier social arrangements.

From today’s perspective, we may greatly respect the analysis of those times, but things change, and it has less relevance to the twenty-first century. There are three major changes to the picture in this brief thumbnail.

First, industrial society is not nearly so destructive today as it was 150 years ago – not in affluent societies anyway. I shall have more to say about its current destructiveness, but the point is the Left cannot meaningfully use the rhetoric of Engel’s The Conditions of the Working Class in England as if it applies to the vast majority of today’s population. Of course there are pockets of poverty, and larger groups under various economic stresses. But to claim that things are still like they were in the nineteenth century is to alienate reality – and the support of the majority.

Second, a two class society hardly applies today. Of course, one can shoehorn everyone into two boxes with the required labels, but it the result is not very satisfactory. A singular example is Giddens and his The Class Structure of Advanced Societies first published in 1973. (It looks at the various theories of class, rather than the empirical application of the theories). Twenty years later he has lost confidence in the elegance of the theory (or theories), to the point that he abandoned traditional socialism and articulated the ‘Third Way’.

That leads to the third point. Not only is capitalism fluid as far as classes are concerned, but the notion of ownership is fluid too. Rather than explore all the intricacies we simply note here that public ownership of capital can be and has been just as exploitive as private ownership. Moreover countries dominated by some forms of social ownership have been as coercive on their citizens as those dominated by private enterprise – in some cases it has been more exploitive. It is no longer obvious that ‘the social ownership of the means of production, distribution and exchange’, whatever that means, resolves the problems the Left were concerned with, unless the solution defines the problem.

Additionally, private ownership is fragmented into a variety of forms. Perhaps the most loathed nineteenth century form was the passive rentier capitalist, who lived on the returns from capital, but was otherwise idle rather than productive. There are probably absolutely fewer of such people today than there was 150 years ago (if we excluded the retired). Keynes promised the ‘euthanasia of the rentier’ because he saw in a stagnant economy the return on safe investments falling to zero.

What he did not envisage was the central role in a modern economy of innovation and the associated entrepreneurial capitalism. But even were all entrepreneurs loathsome individuals – they are not – there is no gainsaying of their contribution to economic welfare by the introduction of new products, better quality products, and more efficient production (i.e. lower cost, releasing resources for other uses) processes. The entrepreneur provides a major challenge to government dominated economies which are unable to parallel their dynamism. It is true that the government can focus on particular sectors in innovative ways – the Soviet Union built nuclear weapons. But its record of improving the lot of consumers with new, quality, and cheaper goods and services (including shopping services) is poor. The improvements have come from individual entrepreneurs. Keynes saw a continuing role for entrepreneurs, but like Marx and Schumpeter, he had no conception of the technological possibilities which have driven economic growth in the last half century.

Between these extremes of rentiers and entrepreneurs are a spectrum of other types of capitalists, although that perhaps does not capture the importance of corporations. Today, the classical entrepreneur is probably not as important as the business which acts like an entrepreneur, despite being dominated by bureaucrats (although the managers would dispute such a title). It is not in the scope of this paper to discuss the thorny issue of the importance of corporations in innovation and rising economic standards. The point here is simply that the private sector often does it better, in part because the function of the government is to stabilise society not to destabilise it. (Mao’s ‘permanent revolution’ illustrates the point: it did not last long.)

So the nineteenth century problem of industrialisation seems irrelevant to the twenty-first century, which may explain why the Left has lost its economic way. Yet there is another way of thinking about the issue which remains as true today. The Left’s response to industrialisation was about attempting to control the violent technological and economic forces which were transforming society in the nineteenth century. They generally attributed it capitalism, but that was the institutional arrangement which facilitated the forces. I avoid here saying ‘harness the forces’ because that would imply that there was a degree of control over them which hardly existed. Capitalists like to give the impression they are in control, and while for periods they may be, they come and go, while sometimes nobody seems in control. (See Galbraith’s The Great Crash for an example of the impotence of even the powerful American financial establishment during the Wall Street crash.)

During one of the debates that the British Labour Party had over the retention of clause four, it was said that the objective should have been the social control (rather than ownership) of the means of production, distribution and exchange. Providing we interpret ‘social’ with care – as I shall try to below – that implies a far better formulation of the problem: how are ‘we’ to harness the powerful, amazing and potentially creative technological forces, which we saw unleashed with industrialisation and which continue to drive the economy today, for some sort of social betterment? Indeed the social ownership was seen as an answer to the question – albeit with hindsight not as convincing an solution as it seemed at the time.

However the ‘social control’ version of clause four is not really an answer. Even though it leaves much unanswered, ‘Ownership’ is far clearer policy direction than ‘control’, and the formulation exposes questions about ‘social’ which the older one obscured.

What do we mean by ‘social’? It would be very easy to equate this with ‘national’ although the Fabians were committed to a role for local government and Guild Socialism, which grew out of them, wanted workers’ control (as did the more anarchist leaning syndicalism). Moreover we know that nations can be as repressive as has been capitalism.

What we might have in mind is that each person should have as much control over their life as is practical. It would be wrong to take an individualist or volunteerist approach here. Humans are social animals which a solely individualist philosophy overlooks. In any case many of the actions of one person cannot but impinge on others. Now of course individual can encompass voluntary associations but in practice there is a role for collectivist (that is compulsory) associations in the sense that individuals tend to be better at attaining their aims using them for some purposes. (The most obvious one is that without a government setting the framework for economic transactions the economy is likely to work much less efficiently.)

My tendency is to have a minimalist notion of social control which goes something like this. Individuals are usually the best judges of their own interests, even when they make bad decisions, for it is rare that someone else can make a better one. The main exceptions are children, the intellectually handicapped, and addicts, although even here their own preferences should be taken into account as much as is reasonable. I acknowledge the difficult problems raised by the stages of enlightenment: Mill’s argument that an unhappy philosopher is in a superior state to a happy pig. (Even so I find testing, the orchard scene in Brecht’s The Life of Galileo in which the priest argues that it is better for the peasants to have the certainty of a traditional-but-wrong theory of the universe rather than be disturbed by science’s new and better one.) The resolution is a culture (including its education system) which encourages the life long pursuit of enlightenment.

Individuals making their own decisions as far as is possible requires a high degree of social decentralisation. An economic mechanism for decentralised decision making, especially where the opportunities are complex and individuals varied, is the market. This is not to argue it is a perfect mechanism, but it is a good place to start. It requires a sound set of enforceable human rights and a distribution of the underlying resources of society (or a redistributing mechanism) which enables people to unlock their potential. It also requires various laws to make the market work, including solid private property rights.

Now this may be sounding like the prescription of an economic rationalist – or would if I had not mentioned the distributional problem. Perhaps that is why I am not considered on the Left – except by right extremists.

However, the decentralised market will not give as much social control as is possible, or desirable. So there is a need for a series of social institutions to attain this. I am pragmatic about intervention, right from my first full book Social Policy and The Welfare State in New Zealand which defended the welfare state by looking at where there was a ‘market failure’ (to use the jargon of the day), and what could be done to remedy it. In the privatisation debate of the 1980s and 1990s I was not so concerned at the reduction in social ownership but the cavalier way the assets were sold and the incompetent economic arguments used to justify them. I favoured some of the sales, although not where there was a natural monopoly, and have no difficulty arguing for (re)-nationalisation where pragmatic considerations warrent the purchase.

It is not necessary here to go through them all nor the host of resulting policy frameworks for such things as the macroeconomic stance, free trade, competitions policy, environmental policy … However there are some issues which are more central to a left-wing economics program. What the left needs to do is go through the existing economics and evaluate each component of the paradigm in terms of its relevance to effective social control. They will find that what have been treated as powerful justifications for economic rationalism can be turned upon their head, and used to justify quite different policies.

There are also lacuna. The most evident of is the way economists eschew distributional questions. They focus on ‘efficiency’ – maximising economic output, arguing that it is someone else’s function to make the equity decisions. But whom? It is a nonsense to imply that economics cannot contribute to those decisions by the simple act of setting down the distribution implications of a policy (or other) change and, often, measuring it.

The vast majority of policy changes have far greater distributional impacts than efficiency impacts (free trade for instance). Economists have nary a thing to say about these effects, and wander around innocently wondering why a policy that so obviously increases economic output (albeit by a negligible amount) is so bitterly contested by the competing groups, who may benefit or lose amounts far in excess of the output gains. It is not that economics is bereft of the tools to analyse such issues. It is just economists do not generally use them.

Although I have done considerable research on the aggregate distribution of income (and to a lesser extent wealth) and on poverty, I am no ‘bleeding heart’ socialist who sees the issue as redistribution of income and wealth to select groups. Yes, the distribution of the resource endowment (of wealth and abilities) is an issue, but it is not the only issue. It is certainly not about using bad economics to advocate on behalf of some of the poor at the expense of others. (As an indication of the gap between many advocates and reality, consider this: the majority of the poor are Pakeha, the majority of the poor are in households with two adults; the majority of the poor depend on wages; the majority of the poor live in their own housing. How come the bleeding hearts talk only of Maori and Pacific Islanders, single parent households, beneficiaries in rental housing?)

A rigorous approach to income distributional issues leads onto political economy issues. For starters, explain how is it that economists profess to be neutral to distributional issues in their advice, but the majority of the advice favours the richer end of the spectrum? (No, it is not just because most economists belong there too. It also says something about the nature of the policies that economists rail against, and an implicit normative framework behind their explicit positive one.)

Classic class analysis is no longer useful, because social position is so much more complex. (Where would one place a household whose husband is a doctor and wife is a receptionist? Those insensitive to feminism should skip this question, especially as the next one is what if the occupations are the other way around?) There remain tensions which are akin to the traditional class conflict. The most obvious is the contest for control of the work process. This may explain the difficulties that hospitals face, with managers and health professionals disputing as to whom determines staffing levels (although their rhetoric is resource shortages). This suggests that some traditional Left analyses may still have relevance, if it is sensitively adapted to new circumstances.

Then too how is the output constraint to be handled? There is only a certain amount to be shared (although the incentive structure of the economy may influence the amount available). Santa Claus policies do not work: the elves in the North Pole can producer only so much in a year. It is nonsense to claim that (unspecified and analytically muddled) policies of the Left can accelerate economic growth and making Santa’s sack large. Is accelerating growth a left-wing thing? Does the Left want to accelerate growth as it is conventionally measured? Is the quality of the output important? Railing against GDP is not enough, especially as most of the critics do not understand the measure.

What about the location of power, remembering that political power does not exactly align with economic power? Perhaps economics does not have much to say about this – so much the worse for the narrow scope into which the subject has evolved. But the paradigm has something to say about institutional decentralisation. There is a practical need for greater decentralisation of power under MMP, to local authorities as well as individual to prevent political stasis, but the notion of social control propounded here requires it any way. The same point applies to globalisation, which has been going on since the beginning of capitalism. Again the issue is the extent to which there is social control over the process – just as earlier the Left critique was about social control of industrialisation, for the two processes are closely connected.

The approach here is incrementalist rather than radical. But it addresses from the perspective of the existing paradigm, some of the economic issues which might be a part of a Left economic program, especially if the core of the Left’s concern is social control over forces which can be life enhancing but, if unharnessed reduce, individual freedom and welfare.

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