When several villages are united into a single community, perfect and large enough to be nearly or quite self-sufficing, the state [πόλις (pólis) = city, community, state, republic] comes into existence, originating in the bare needs of life, and continuing in existence for the sake of a good life.
Aristotle, Politics, trans. Benjamin Jowett, book I, chap. 1, part 2 (1252b).
Taxation, then, is not a charge upon wealth that is created only by the market sector; it is the price we pay for the creation of another kind of wealth.
Jacques Généreux, Les vraies lois de l'économie (Editions du Seuil, Paris, 2005), vol. I, p. 30.
A central element [of the current debate] is how to avoid extreme financial instability. Such instability is a public bad. Avoiding it is a public good. Those acting inside the market have no incentive to supply the good and avoid the bad. Martin Wolf, The world's hunger for public goods in Financial Times (London), 24 January 2012.
On 24th January 2012, there appeared in the Financial Times an excellent article by Martin Wolf, the paper's chief economic commentator, entitled The world's hunger for public goods. It is a panegyric on the benefits of state activities in the economy and the capital importance of these.
A public good, as Wolf defines it, is a benefit that every citizen can enjoy without paying specifically for his own personal use of it: for example national security, the services of the welfare state, or access to Hyde Park; and a benefit that any individual can enjoy without denying it to anyone else.
However, it is not so long since Wolf was putting forward very different arguments. European social democracy looks increasingly unworkable in the long run...the welfare state ...can go too far. In much of western Europe, it now has.1 Those all too familiar platitudes issued from his pen in 2006. But today, he prefers to explain that the modern state...has exploded in the range and scale of its activities. Will this be reversed? No.2 And he no longer sees much reason to deplore this tendency.
This conversion (since around 2008) is most welcome, since Wolf is a highly regarded expert on economic affairs. He has been called the world's preeminent financial journalist (Lawrence Summers, a leading American economist and member of the Clinton administration) and the world's premier writer on finance and eonomics (Kenneth Rogoff, professor ar Harvard).
In another recent article, Wolf recalls how in the 1970s, the view that democracy would collapse under the weight of its excessive promises seemed to me disturbingly true. I am no longer convinced of this.3 It was indeed entirely natural that Wolf, whose Jewish parents took refuge in England in the 1930s, and whose wife has a similar background, should have been in sympathy with the libertarian attitude that abhors the extensive state.
The great libertarian error
It was the bitter experience of the Nazi and communist eras that originally nourished the hatred of the state so vehemently expressed by libertarians today. Paradoxically, it is in the USA, which escaped the ravages of mid-twentieth-century European tyrannies, that the anti-statist rage is the most virulent. Doubtless because so many refugees from those tyrannies (or their descendants) live in America. But also because the cult of individualism has developed more strongly there than elsewhere.
On this theme, we may recall the somewhat outrageous statements that have emanated even from certain of America's most revered thinkers, such as Ralph Waldo Emerson: society everywhere is in conspiracy against the manhood of every one of its members;4 or Walt Whitman: nothing, not God, is greater to one than one's self is.5
The history of civilisation is a history of public goods. The more complex the civilisation, the greater the number of public goods that needed to be provided...the institutions that have historically provided public goods are states.6 Thus writes Wolf; his words recall the remark of a famous judge of the US Supreme Court, Oliver Wendell Holmes: I like paying taxes. With them, I buy civilisation.7 Or that of the German economist Adolph Wagner: The more society becomes civilised, the more the State spends.8
On the contrary, according to libertarian theory, we could very well do without an extensive state, replacing it with unhampered markets which, it is argued, are capable of directing the economy for the best without political intervention. Thus we could, by handing over power to the markets, abolish much of politics through constitutional restraints.9 Wolf now views this as a hopeless strategy, both intellectually and politically.
Wolf does not underestimate the difficulty of the better alternative. Ours is an ever more global civilisation that demands the provision of a wide range of public goods. The states on which humanity depends to provide these goods...are unpopular, overstretched and at odds. We need to think about how to manage such a world. It is going to take extraordinary creativity.10
But the word 'state' in this context, like Aristotle's term πόλις, (polis) can have a variety of meanings. The provision of public goods need not always be in the hands of a central state or federal government. It may be delegated to counties, cities, towns, villages, even voluntary citizen groups. This is the principle of subsidiarity, that decision and action on public goods should, so far as it is practical and reasonable, be exercised locally. But not abandoned to the commercial markets.
The myth of stable markets
Wolf complains that economists have tended to assume that the market economy is inherently stable.11 How right was that eccentric Cambridge professor Joan Robinson, when she observed that the purpose of studying economics is to avoid being deceived by economists! Where are the excuses for those who still think that the deregulated market economy is intrinsically stable? It is not just the present crisis that proves the contrary. What about the crisis of the 1930s?
And one can trace the problem back much further through the turbid history of laisser-faire economics. In Britain, the hundred years after resumption of the gold standard [in 1819] were marked by commercial and financial crises which recurred about every ten years.12 How then can one deny the inherent instability of deregulated markets?
But the economists, needless to say, have their answer. They insist that the stable equilibrium of the pure market economy can be demonstrated theoretically. And no doubt it can, if one assumes hypothetical conditions that have no chance of being realised in practice. However, in the real world, this theory does not work.
The obsession with theory
We touch here on a central deficiency of Western economic science, dating back to its origins in the eighteenth century: a persistent tendency to theorise about economics rather than to observe what happens in real-life economies. We see this phenomenon at its most extreme with the Austrian economist Ludwig von Mises: the economist does not base his theories upon historical research, but upon theoretical thinking like that of the logician or the mathematician...he does not learn directly from history.13
The heterodox economists who have refused this basic error have often been denounced as heretics, or simply forgotten. Naturally, they have not been translated into English, the language par excellence of Anglo-Saxon libertarianism.
The economists of the German Historical School, who did indeed prefer history to theory, were influential in Germany in the nineteenth century and beyond. They laid the foundations of the German economy that has been so successful both then and now. Yet no-one reads them today; they are even considered ridiculous. The masterpiece14 of their leader, Gustav Schmoller, sits on the shelves of the Bibliothèque Nationale de France in Paris, on open access, printed in 1979 but in mint condition, apparently never consulted.
The myth of stable markets
Orthodox economists are so convinced of the truth of their theory, that they are scarcely capable of imagining that it might be mistaken. Martin Wolf writes that the big surprise of the past few years is just how difficult it has proved to provide economic stability.15 Yet, for several decades, we have done everything to make our economies and markets less and less stable. What is really surprising, therefore, is the economists' surprise.
We have deregulated the creation of bank credit; and, as if that were not enough, we have set up a regime of strong competition between banks and other credit sources. All that has encouraged the formation of the gigantic property booms that, on bursting, have brought so much agony in America, in Spain, in Ireland...
We have allowed the big banks to acquire Stock Exchange firms, thus greatly enlarging their capacity for own-account trading in shares and bonds. Thus we have promoted the growth of unbridled speculation.
We have swept away most restrictions on international trade, thus declaring open season on our home preserves for the ravenous hunters of the low-cost developing countries, who have thus wiped out much of American and European manufacturing. All, we are told, for the benefit of us consumers.
For libertarian theory cares nothing for the interests of us workers; they exist only to grovel at our, us consumers', feet. Do I hear you retort that we consumers are ourselves we workers? Shut up, that is not part of the classical theory. The interest of the producer ought to be attended to only in so far as it may be necessary for promoting that of the consumers: Adam Smith himself said it.16
We have gone out of our way to reduce the stability and the benefits of employment by replacing permanent with temporary work, by weakening trade unions, by trimming employment-linked benefits, by relentlessly imposing ever-rising labour productivity, in order to face up to unlimited global competition - which is itself a basic principle of libertarianism.
And after all that, we find it a big surprise when we see our economies becoming intolerably unstable. Really? We must be joking! But this is not funny. We are concerned here with a real and serious sickness. Orthodox economics is blind to its own errors and paralysed by its own failure.
The absolute necessity of good government
Instead of keeping watch over the behaviour of the states responsible for supplying our public goods, libertarians strive to reduce the capacity of states to do that, in the vain hope that the markets may be able and willing to provide, more cheaply and better, all the public goods necessary for our civilisation.
Our present troubles demonstrate a truth as old as history: the absolute necessity, for any civilisation, of a virtuous and effective state. There are indeed many states that are tyrannical, corrupt, violent, incompetent; they need to be replaced.
But where there is bad government, the only worthwhile replacement is good government. Establishing and maintaining that is never easy. But the libertarian idea, that we can short-circuit the problem by minimising the state, by handing over its legitimate and necessary powers to the untrammelled market, is an utter delusion. Wolf, in the quotation at the head of this article, is right; markets lack the ability, and the motivation, to provide the public goods we need.
David, king of Israel, in his last words, was eloquent on the theme of wise and just government:
He that ruleth over men must be just, ruling in the fear of God. And he shall be as the light of the morning, when the sun riseth, even a morning without clouds; as in the tender grass springing out of the earth by clear shining after rain.17
Those words are as true today as in 970 BC, the probable year of David's death. Good government, guarantor of public goods, is of primary importance. Those who dream of replacing it with an impersonal self-regulating free-market mechanism are fundamentally mistaken.
For the market's vocation is not to govern. It has a very important, but quite different, function: to ensure the provision by us the producers of what we the consumers want as individual buyers. It would be stupid to deny the importance of this function.
But the market in no way assures justice in the distribution of riches; on the contrary, its most bigoted worshippers deny even the possibility of that kind of justice. Neither does the market assure the supply of many of civilised society's needs. Respect for the law, the cleanliness of the city, the preservation of the environment, defence against terrorism or invasion: all these and many other communal benefits are public goods. We enjoy them in common, rather than individually; we must buy them in common, rather than privately through the market.
The public good is now supranational
Here is another key comment from Wolf: Economic stability is a global good...So is control of organised crime, counterfeiting, piracy and, above all, pollution. So, even, is the supply of education or health...Our states cannot supply them on their own. They need to cooperate.18 That is an excellent reason for us Europeans to continue to develop our cooperation within the European Union, without giving ground to those sirens who plead for an obsolete notion of absolute national sovereignty.
A piece of very good news
Let us finish on a positive note. It is indeed very good news that Martin Wolf, one of the most prominent and most respected of British economists, has made clear his rejection of at least part of the libertarian free-market philosophy. May many others of his profession follow his good example!
Spero columnist Angus Sibley is the author of The 'poisoned spring' of economic libertarianism. See Equilibrium-Economicum.net
1 Martin Wolf, Time to reevaluate the European social model in Economist's View (2006) (http://economistsview.typepad.com/economistsview/2006/02/martin_wolf_tim.html).
2 Martin Wolf, The world's hunger for public goods in Financial Times (London), 31 January 2012.
3 Martin Wolf, What is the role of the State? in Financial Times (London), 8 October 2010.
4 Ralph Waldo Emerson, essay Self-Reliance (1841).
5 Walt Whitman, Song of Myself, no. 48 in Leaves of Grass (1855).
6 Martin Wolf, The world's hunger for public goods, loc. cit. supra.
7 See Felix Frankfurter, Mr Justice Holmes and the Supreme Court (Harvard University Press, 1961), page 7.
8 Adolph Wagner, Lehrbuch der politischen Okonomie (1872). The phrase quoted is commonly called Wagner's Law.
9 Martin Wolf, What is the role of the State?, loc. cit. supra.
10 Martin Wolf, The world's hunger for public goods, loc. cit. supra.
12 Marcello de Cecco, Gold Standard in New Palgrave Dictionary of Economics, vol. II (Macmillan, London, 1981), page 541.
13 Ludwig von Mises, The Ultimate Foundation of Economic Science (Van Nostrand, Princeton, 1962), page 73.
14 Gustav Schmoller, Grundriss der allgemeinen Volkswirtschaftslehre (Duncker & Humblot, Leipzig, 1900-1904). A French translation, by George Platon, is also available at the BNF, but there is no English translation.
15 Martin Wolf, The world's hunger for public goods, loc. cit. supra.
16 Adam Smith, The Wealth of Nations (1776), book IV, chap. 8.
17 2 Samuel 23:3.
18 Martin Wolf, The world's hunger for public goods, loc. cit. supra.