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September 04, 2005

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 Europe and given rise to a political mass movement. In Germany it caused the government to react with the introduction of the Social Security System (1884), beginning with compulsory accident insurance followed by sickness insurance and old-age pensions. Taxpayers were to subsidize all. It led the workers to believe that Marx was right and that the government sought to ameliorate the exploitation.

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.

Hans F. Sennholz
www.sennholz.com

Copyright © 2002-2007 Hans F. Sennholz

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