Quarterly essays (in English
and French) on the theme "Querying economic orthodoxy"
No. 55 - March 2012
The public good is of prime importance
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).
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
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.
A famous English economist changes tack
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
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
But the word 'state' in this context, like Aristotle's term πόλις,
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
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
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
A piece of very good news
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!
ANGUS SIBLEY is the author of The 'poisoned spring' of economic libertarianism'
(PAX ROMANA, 2011); see link.
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.