Economics and Politics
By Hans
F. Sennholz
Economics
is a theoretical science that analyzes the economic consequences of all modes
of human action. It examines goods
prices, wage rates, and interest rates and inquires into the principles of
production, distribution and consumption.
It searches for the most direct means for the attainment of ends
chosen. It neither justifies nor
condemns the motives of any economic action; it is *value-free.* Politics is the art
of government including its policies, goals and affairs, its methods and
tactics, and its partisan or factional ambitions and actions. It appeals to various motives and intentions
and is guided by preferences many of which are moral choices made by
individuals in their relationship with others.
Politics has also been defined as *who gets what, when, how.* In the words of
President John F. Kennedy, *political action is the highest responsibility of a
citizen.*
The
connection between economics and politics is clearly visible. Economic production sustains human life
which, for most people, is the most important concern in life. The prestige of democratic government, its
rise and fall, usually depend on its economic performance. Economic policies must please the greatest
number of people who decide democratic elections and reelections. But voters, as well as the representatives
they elect, may also be guided by economic notions and doctrines that are
popular rather than fitting and exact.
Public opinion may be swayed by appeals to emotion and preconception
rather than reason and common sense.
Political writers and speakers may dwell on controversy and conflict
rather than on theoretical correctness; periodicals, newspapers, broadcasts on
radio, television, and other forms of communication may follow suit. Articulate politicians usually add their
explanations and interpretations. They
may prefer to be popular rather than correct.
The
supply of economic goods is naturally limited, which obviously creates a
conflict of interest. But human
cooperation and division of labor greatly increase productivity and the supply
of goods, which removes the natural conflict.
Large-scale production by scores of workers reduces the unit costs of
production and lowers goods prices. It
makes for harmony of interests of all members of society. Similarly, implements of production increase
productivity. Simple labor produces
little unless it is aided by the employment of tools and machines. They are provided by savers and entrepreneurs
who are no less indispensable than the workers who are using the tools and
operating the machines. Surely, it may
be more popular to ascribe all productivity to the laborers, but it is
incorrect to ignore the contributions made by the providers of tools and the
directors of production.
The
most influential political writer of the 19th century undoubtedly was Karl Marx
whose writings popularized doctrines of societal conflict and class
warfare. His Communist Manifesto [1848]
and Das Kapital [1867]
became the foundation of international socialism. He did not create the conflict ideology, but
it owes its fame mainly to his writings and those of his followers. It permeates public thought and policy even
today, some 150 years after he first expounded it. Although Marx did not favor labor legislation,
countless laws and regulations now seek to protect employees from the avarice
of their employers. Every
administration, whether Democratic or Republican, seeks to improve their
protection and add new healthcare and retirement benefits. Most political debates about economic matters
dwell on notions of conflict; just listen to loud debates on the floor of
Congress, and you may wonder how the speakers manage to live together in peace.
The
value of an economic good, according to Marx, is determined by the amount of
labor required for its manufacture. Any
price higher than the cost of labor, that is, any surplus value represents a
profit of the capitalists. It is gross
exploitation of the laborer! To call a
halt to such injustice, Marx believed, all instruments of production should be
concentrated in the hands of the state.
Government should either own them outright or at least control
them. Socialistic governments all over the
globe now own them, social-democratic administrations
usually regulate them.
Economists
summarily deny that labor is the yardstick of all value and that *surplus
value* is gross exploitation of a workingman.
The ultimate determinant of value is the value judgment of consumers;
their buying or not buying determines the formation of the market price of all
economic goods, including that of labor.
Wage rates themselves are the resultant of the value judgments of the
buyers of labor. It does not matter
whether employers and capitalists are softhearted or hardhearted,
they are subject to the commands of the consumers most of whom are earners of
wages and salaries. Employers must pay
the market wage. If they should dare to
offer lower rates, they may lose their workers.
If they are forced to pay higher rates, their customers may force them
to discharge the labor. Employers as well as employees are guided by market
wages which offer employment to all willing workers.
The
Marxian doctrine of class conflict found ready acceptance in many European
countries. By the time of Marx*s death
(1883) his teaching had spread throughout
In
the United States Karl Marx undoubtedly paved the way for several schools of
conflict-thought that interpreted American conditions. Institutional Economics was essentially an
American movement in academic thought which for a time (1933-1937) had great
influence on U.S. Government policies.
The central figure was Thorstein Veblen whose books The Theory of the Leisure Class [1899],
The Theory of Business Enterprise [1904], The Engineers and the Price System
[1921], and Absentee Ownership and Business Enterprise in Recent Times [1923],
dwelled on the conflict between those who produce economic goods, that is,
workers, foremen, and managers, and those who own the firms. Businessmen seek pecuniary gain which may not
be beneficial to society. They may
indulge in *conspicuous consumption,* *conspicuous leisure,* and *conspicuous
waste.* They
may enjoy monopoly powers * competition does not restrain them.
Other
critics of the enterprise system made monopolistic and imperfect competition
their focal points. There was the
English economist Alfred Marshall who exerted great influence on economic
thought in all English-speaking countries.
His Principles of Economics [1890] was for many years the standard
textbook at American colleges and universities.
Other English economists followed suit.
In The Economics of Imperfect Competition [1933] Joan Violet Robinson
was especially outspoken in her criticism of social and economic injustices
against developing nations. In the same
year Edward Chamberlin published The Theory of
Monopolistic Competition which suggested that most economic situations are
composites of both, monopoly and competition.
The emphasis on monopolistic tendencies and imperfection in competition
and the charges of waste and exploitation obviously lend support to demands for
government control.
Since
Veblen, the most vocal American critic of the market order, has been John Kenneth Galbraith. Building on Veblen*s
analysis of conspicuous consumption, Galbraith in The Affluent Society [1958]
argued that there are economic and social imbalances. Competition has been superceded by
countervailing powers. The growth of
large corporations has led to the growth of powerful labor unions. Moreover, we now produce and consume large quantities
of high quality consumer goods but are content with quantities of inferior
public goods. American society enjoys
conspicuous private consumption but silently suffers decaying public
facilities.
During
the Great Depression the conflict doctrine was bolstered and buttressed by
Keynesian thought which holds that the unhampered market order breeds mass
unemployment and that maintenance of full employment is the proper and feasible
objective of government. The grievous defects of capitalism, according to John
Maynard Keynes, *are its failure to provide for full employment and wealth and
incomes.* [The General Theory, 1936, p. 372.]
Keynes apparently maintained his faith in the capitalist economy; he
called on government to stimulate it, not eliminate it. Most politicians and officials undoubtedly
embrace this train of thought and joyfully engage in deficit spending. In fact, Keynesian economics stands as the
most influential economic formulation of the 20th century, appealing to both
politicians and academicians. It has
ushered in an age of inflation the end of which is not yet in sight.
Political
popularity now builds on Keynesian thought and policy. It allows governments to manipulate their
policies in such a way that economic conditions are especially favorable before
election day.
They may create *political business cycles* by accelerating their
deficit spending and credit expansion well in advance of an election. A feverish boom may clinch the
reelection. Afterwards they will have to
cope with the undesirable consequences of the tactic, such as soaring goods
prices and declining real wages. They
may even reduce the deficits and refrain from further credit expansion * until
a new election comes in sight.
The
doctrine of societal conflict has invited formation of *interest groups* that
seek to handle the protection of their members.
Eager to promote their economic interests, the groups may influence the
political parties and even general public opinion. Their major target and area of concentration
usually is the U.S. Congress. Promising
financial support for friendly members of Congress or assuring votes by
interest-group members at the next election, they hope to persuade legislators,
especially committee chairmen, to sponsor and endorse favorable
legislation. Much pressure is exerted
also on government officials who manage independent regulatory agencies, e.g.
the Federal Communications Commission, the Securities Exchange Commission, and
the Interstate Commerce Commission.
Their executives are very vulnerable to the influence of the people they
regulate.
There
are a great many categories of interest groups that seek to mold public
opinion: some are patriotic, others racial, occupational, and
professional. Some use the public
communication media and embark upon open mailing campaigns; others may seek to
hide their influence from the public at large.
Well-known pressure groups use both approaches. There are The National Association of
Manufacturers, the American Legion, the American Farm Bureau Federation, the
American Federation of Labor (AFL), the Congress of Industrial Organizations
(CIO), and many others.
There
is always some basic principle that keeps an interest group together. That principle is the promotion of its
special interests, to sustain the privileges it acquired in the past, to win
new favors, and to shield it against other groups bent on depriving them of the
favors and on snatching their income and wealth. Politicians seek to lead the groups by
placating and flattering their constituents and promising ever more benefits in
the future.
Politics
is the activity of common men. When they
succeed they become important leaders in the eyes of their followers. But most of them merely echo public opinion
which was molded and fashioned by eminent authors, such as those mentioned
above. Politicians may recount the
teaching of their college professors of political science and economics, or
relate to the lessons and stories told by famous authors and commentators. Public opinion and public policy are shaped
by authors and teachers of thought. They
created and disseminated the conflict doctrine that is guiding our politicians
and government officials. They are
ultimately responsible for the economic war in which the triumphs of some
groups are the defeats of others.
Since
economic conflict begins in the minds of men, it is in the minds of men that
peace must be restored. Authors and
teachers must again analyze the economic consequences of human action and
enlighten the public about the basic harmony of interest in a free
economy. Unfortunately, there are only a
few who are teaching harmony and pointing toward peace. They can barely be heard in the clatter of
the conflict doctrine.
August, 2005