POLITICAL ECONOMY

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Political Economy
A COMPARATIVE
APPROACH
Second Edition

Barry Clark

PRAEGER Westport, Connecticut

London
Library of Congress Cataloging-in-Publication Data
Clark, Barry Stewart, 1948-
Political economy : a comparative approach / Barry Clark. — 2nd
ed.
p. cm.
Includes bibliographical references and index.
ISBN 0-275-95869-8 (alk. paper). — ISBN 0-275-96370-5 (pbk. :
alk. paper)
1. Comparative economics. I. Title.
HB90.C52 1998
330—dc21 98-15657
British Library Cataloguing-in-Publication Data is available.
Copyright © 1998 by Barry Clark
All rights reserved. No portion of this book may be
reproduced, by any process or technique, without the
express written consent of the publisher.
Library of Congress Catalog Card Number: 98-15657
ISBN: 0-275-95869-8
0-275-96370-5 (pbk.)
First published in 1998
Praeger Publishers, 88 Post Road West, Westport, CT 06881
An imprint of Greenwood Publishing Group, Inc.
Printed in the United States of America

The paper used in this book complies with the

Permanent Paper Standard issued by the National
Information Standards Organization (Z39.48-1984).

In order to keep this title in print and available to the academic community, this edition
was produced using digital reprint technology in a relatively short print run. This would
not have been attainable using traditional methods. Although the cover has been changed
from its original appearance, the text remains the same and all materials and methods
used still conform to the highest book-making standards.
Contents

Introduction ix

PART I • POLITICAL ECONOMY: AN OVERVIEW 1

Chapter 1 Politics, Economics, and Political Economy 3

Politics and Economics 3
The Market as an Economic Institution 6
The Market as a Political Institution 9
Government as a Political Institution 12
Government as an Economic Institution 15
Political Economy 18
Chapter 2 The History of Political Economy 21
Origins of Political Economy 21
Classical Political Economy 25
The Radical Extension 25
The Conservative Response 28
vi Contents s

Neoclassical Economics 31
Modern Political Economy 33

PART II • CONTENDING PERSPECTIVES IN POLITICAL

ECONOMY 39

Chapter 3 The Classical Liberal Perspective 41

Architects of Classical Liberalism 41
Principles of Classical Liberalism 48
Classical Liberalism Today 49
An Assessment of Classical Liberalism 52
Chapter 4 The Radical Perspective 55
Architects of Radicalism 55
Principles of Radicalism 63
Radicalism Today 64
An Assessment of Radicalism 68
Chapter 5 The Conservative Perspective 71
Architects of Conservatism 72
Principles of Conservatism 79
Conservatism Today 81
An Assessment of Conservatism 85
Chapter 6 The Modern Liberal Perspective 89
Architects of Modern Liberalism 89
Principles of Modern Liberalism 97
Modern Liberalism Today 98
An Assessment of Modern Liberalism 101

PART III • CONTEMPORARY ISSUES IN POLITICAL

ECONOMY 105

Chapter 7 Government and the Market 107

The Classical Liberal Perspective 107
The Radical Perspective 114
The Conservative Perspective 118
The Modern Liberal Perspective 122
Contents vii

Chapter 8 Inflation and Unemployment 133

The Classical Liberal Perspective 133
The Radical Perspective 138
The Conservative Perspective 143
The Modern Liberal Perspective 146
Chapter 9 Poverty and Inequality 157
The Classical Liberal Perspective 158
The Radical Perspective 163
The Conservative Perspective 168
The Modern Liberal Perspective 172
Chapter 10 Labor and Industry 183
The Classical Liberal Perspective 183
The Radical Perspective 187
The Conservative Perspective 192
The Modern Liberal Perspective 195
Chapter 11 Minorities and Discrimination n 203
The Classical Liberal Perspective 204
The Radical Perspective 207
The Conservative Perspective 210
The Modern Liberal Perspective 213
Chapter 12 The Political Economy of Gender 219
The Classical Liberal Perspective 220
The Radical Perspective 224
The Conservative Perspective 228
The Modern Liberal Perspective 232
Chapter 13 Education and Culture 241
The Classical Liberal Perspective 242
The Radical Perspective 245
The Conservative Perspective 251
The Modern Liberal Perspective 255
Chapter 14 Pollution and the Environment 263
The Classical Liberal Perspective 264
The Radical Perspective 268
viii Contents

The Conservative Perspective 272

The Modern Liberal Perspective 274
Chapter IS International Trade and Development 283
The Classical Liberal Perspective 284
The Radical Perspective 288
The Conservative Perspective 292
The Modern Liberal Perspective 295
Chapter 16 Science, Ideology, and Political Economy 307
Economics as Ideology 311
Rejoinders from Economists 315
The Science of Political Economy 318
Conclusion 322
Bibliography 329
Index 353
Introduction

Political economy was the original social science. Theorists such as Adam
Smith, John Stuart Mill, and Karl Marx developed broad visions of the
social system. Not until the latter half of the nineteenth century did politi-
cal economy splinter into economics, political science, sociology, social his-
tory, social psychology, and social philosophy. The motives for this
reorientation were mixed. By partitioning the study of human behavior and
society into narrower subdisciplines, social scientists hoped to emulate the
analytical power and precision of the natural sciences. However, ideologi-
cal motives also played a role in the disintegration of political economy.
The all-encompassing visions of Smith, Mill, and Marx revealed conflict
and tension in society. As political resistance to free-market liberalism
mounted in the mid-nineteenth century, social scientists attempted to estab-
lish a body of objective knowledge from which to formulate reasoned argu-
ments for particular social policies. By adhering to strict logic and factual
data, they hoped to resolve divisive political issues.
Proponents of each of the new social sciences recognized the importance
of defining their scope and method of analysis to establish boundaries sep-
arating the disciplines. As the most immediate heir to the legacy of politi-
cal economy, economics held the greatest potential for emulating natural
science because its scope was confined to behaviors most amenable to
X Introduction

observation and measurement. The political, social, cultural, historical,

and psychological dimensions of human existence were relegated to other
disciplines, while economists focused on the individual pursuit of material
well-being in the market. The assumption of individual rationality and the
use of money as a yardstick for measuring cause and effect enabled econo-
mists to construct an impressive theoretical edifice borrowed largely from
nineteenth century physics.
Modern economics often elicits skepticism from other social scientists.
Criticism is directed toward its simplistic assumptions about human behav-
ior, its focus on material and pecuniary interests, its blindness to social rela-
tionships, and its esoteric jargon, graphs, and mathematics. Yet,
simultaneously, many social scientists tacitly proclaim their admiration of
economics as they increasingly borrow concepts, theories, and methods of
analysis from the so-called "dismal science."
These conflicting attitudes are evident even among economists. On one
hand, economics has been labeled the "queen of the social sciences," and
economists have extended their scope of analysis to include issues ranging
from government and law to family life and sexual behavior. Yet, underly-
ing this hubris is a caldron of internal dissension. In addition to the expected
attacks by non-mainstream economists, various Nobel prize winners and
widely respected theorists have expressed qualms about the direction in
which modern economics is moving. The focus on mathematics and theo-
retical rigor, they charge, has pushed aside questions of relevance or applic-
ability. Until recently, economists were faced with the discomfiting fact that
as their models gained elegance, the real economy was relatively stagnant
and a wide range of social problems were actually worsening. A question
poses itself: how can a discipline in such internal disarray merit emulation
by other social scientists?
The answer to this paradox lies in the allure of science. Scientific analy-
sis carries tremendous weight in settling intellectual disputes and formulat-
ing public policy. In the social sciences, the quality of scholarship is often
judged by its resemblance to the physical sciences, and no other social sci-
ence has been able to match the rigor and elegance of economic theory.
Economists have been successful in large part because their simplistic
assumptions and narrow focus permit them to borrow mathematical tech-
niques from the physical sciences.
Historians, political scientists, sociologists, and psychologists have been
unable to reach consensus on a single scientific paradigm within their
respective disciplines. Economists, however, formed such a consensus
from the 1950s to the early 1970s, and their advocacy of Keynesian poli-
cies propelled them into positions of influence at the highest levels of gov-
ernment. Yet the breakdown of the Keynesian consensus during the 1970s
and economists' inability to converge on a new paradigm have diminished
Introduction xi

the scientific status of economics even as other social scientists increas-

ingly rely on its reputed scientific models and methods.
The quest for a science of economics has not been futile. The sophisti-
cation with which empirical data is gathered and analyzed, the construc-
tion of elaborate models of the macroeconomy, and the application of
microeconomic theory to decisionmaking have all been impressive. Yet the
public image of economics remains clouded. If economists are indeed sci-
entists, citizens expect the same expertise and objectivity exhibited by engi-
neers or medical professionals. When economists pronounce widely
divergent assessments, forecasts, and policy prescriptions, public reaction
ranges from skepticism to disdain. However, economists disagree not
because they are inept, but because they are humans who embody the con-
flicting values present in modern societies.
The claim that value judgments underlie economics does not necessarily
imply that economists consciously seek to advance their personal visions of
the good society. For the most part, economists are committed to scientific
research in which the facts are permitted to speak for themselves. However,
values enter into economics even before research commences. Values affect
the choice of issues to be investigated, the theoretical concepts to be used,
and the selection of variables to be measured. Although the scientific
method of controlled experimentation is designed to keep values out of
research, this method has limited applicability in economics, where the lab-
oratory is human society with its complex interaction of innumerable and
often unmeasurable variables.
Economists may deny or suppress ideological disputes within their pro-
fession for several reasons. First, the reasoning and conclusions of econo-
mists lose the aura of scientific authority if they reflect the same unresolved
value conflicts confronting all citizens. Most economists view themselves as
social scientists seeking to objectively analyze and improve the workings of
the economy. Any admission of value commitments might undermine their
status as experts possessing higher forms of knowledge.
Second, economic education is transformed when alternative values are
introduced into the classroom. The principles and applications of neoclas-
sical microeconomics and Keynesian macroeconomics that now occupy a
substantial portion of the curriculum can no longer be treated as the whole
of economic wisdom. Students face the challenge of grasping several com-
peting perspectives from which to understand the economy, and professors
can no longer rely on their own mastery of a single theoretical approach if
students are to be fully exposed to the breadth of economic thought.
Finally, many economists suppress the ideological dimensions of their
discipline because they believe that ideological debate can have no resolu-
tion. Without scientific appeals to objective evidence, disagreements may
degenerate into open conflict. If economics were perceived as merely
Xll Introduction

sophisticated ideology, authoritative decisions by policymakers could be

replaced by chaotic struggles for power among competing interests.
Despite these concerns, maintaining the myth of value-free economics
poses corresponding dangers. First, economics embodies ethical judgments
that would be controversial if made explicit. When these judgments are
introduced into policy under the guise of science, one set of values prevails
without public debate, violating the principles of a democratic society.
Second, in the realm of economic education, students may gain impres-
sive technical sophistication while remaining naive about the values
underlying their knowledge and skills. Lacking this awareness, students
believe they have acquired a genuinely scientific technique for analyzing
social issues and making policy recommendations. Those students who
become professional economists or policy analysts may be baffled when
their scientific prescriptions are regarded by others as simply one view-
point among many.
Third, the effort to minimize public dissent by maintaining the scientific
status of economists' advice reflects a low opinion of citizen participation
in democratic societies. By promoting one set of values and portraying
other values as merely "special interests," economists narrow the scope for
popular input into political decisionmaking. Citizens biased by personal
interests are portrayed as incapable of making responsible choices in polit-
ical matters. However, by sealing important decisions from democratic
input, "scientific" policymakers offer little incentive to develop citizenship
skills or to engage in public dialogues concerning competing visions of the
good society. Moreover, scientific analysis of social issues contains an
inherent bias. Policymakers relying on scientific methods will inevitably
focus on observable aspects of an issue while de-emphasizing or ignoring
intangible or ethical considerations. The method of science tends to limit
the scope of analysis to that which can be measured.
This text provides a balance to the currently dominant focus on scientific
technique in economics education. Integrating economic analysis with mate-
rial from history, political theory, sociology, psychology, and ethics reveals
the underlying value commitments fueling debates over public policy. Social
science cannot be value-free, but the values underlying various theories and
techniques can at least be made evident and open to discussion.
The purpose of textbooks is to present a body of knowledge nearly uni-
versally accepted within a particular academic discipline. In the case of
political economy, however, even the most basic terms and principles are
subject to debate. The many contending perspectives in political economy
dictate a comparative approach to the subject. In this text, four perspec-
tives—Classical Liberal, Radical, Conservative, and Modern Liberal—are
covered. Political economy is introduced in the first two chapters; the next
four chapters are devoted to the theorists and ideas associated with each of
the four perspectives. Chapters seven through fifteen cover major issues in
Introduction
n
xm

modern political economy and, for each issue, examine the analyses and
policies offered by these perspectives. Finally, chapter sixteen examines the
roles of science and ideology in political economy.
The contending perspectives struggling for dominance in political econ-
omy represent dramatically different visions of the good society. Theoretical
debates over economic and political issues are ultimately based on these
visions, and citizens need to be aware of and consider the value commit-
ments underlying alternative policies before choosing among them.
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PARTI

POLITICAL ECONOMY:
AN OVERVIEW
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Chapter 1

Politics, Economics,
and Political Economy

In all the political systems of the world, much of politics is

economics, and most of economics is politics.
Charles Lindblom

Economics does not usefully exist apart from politics.

John Kennethh GGalbraith

There is no such thing as a purely economic issue.

Milton Friedman

POLITICS AND ECONOMICS

As a prelude to the study of political economy, a firm grasp of the words
politics and economics is essential. Unfortunately, these widely used terms
lack clear definition. As depicted below, politics and economics can be dis-
tinguished with reference to three characteristics: the primary goal being
pursued, the institutional arena within which the goal is pursued, and the
primary actor who chooses the goal.
4 Political Economy

Economics Politics
Primary Goal Prosperity Justice
Institutional Arena Market Government
Primary Actor Individual Community

Using these distinctions, economics might be defined as the individual

pursuit of prosperity through the market, while politics is the communal
pursuit of justice through government. Closer scrutiny of each of the three
distinguishing characteristics, however, will reveal the unsatisfactory
nature of these definitions.

P r i m a r y Goals
Economics is associated with efforts to achieve the highest possible
material standard of living from available resources. The primary eco-
nomic goal of prosperity has three dimensions: efficiency, growth, and sta-
bility. Politics, on the other hand, is linked with efforts to establish and
protect rights so citizens can receive and hold that to which they are enti-
tled. The primary political goal of justice, too, includes three dimensions:
individual freedom, equity in the distribution of benefits and burdens, and
social order.
However, distinguishing between economics and politics solely by
referring to their respective goals is ultimately unsatisfactory because
prosperity and justice are inextricably linked. A prosperous society is
more likely to be perceived as a just society because the range of indi-
vidual choice is broadened and order tends to prevail. Conversely, a just
society fosters prosperity by providing open opportunities, fair rewards,
and individual security to motivate production and accumulation of
wealth. Because prosperity and justice are often mutually reinforcing,
distinguishing between economic and political processes by referring to
their different goals is inconclusive. Both economics and politics are
concerned with promoting human well-being by maintaining prosperity
and justice.

Institutional Arenas
Politics often refers to activities associated with government, while
economics deals with activities occurring in the market. We use this dis-
tinction when we label campaigns, elections, and lawmaking as "political
activity," while referring to exchanges of commodities and money as
"economic activity." This method of distinguishing between politics and
economics is certainly common, but it also leads to ambiguity. Like eco-
nomic transactions, political activity often consists of mutually beneficial
Politics, Economics, and Political Economy 5

exchanges among self-interested persons or groups. For example, citizens

consent to obey laws in exchange for governmental protection of their
rights. Politicians provide particular programs or laws in exchange for
votes or money. Indeed, with the possible exception of establishing a con-
stitution, government activity can be viewed as a series of exchanges in a
political market. Government also functions as an economizing agent
when it seeks to achieve public goals at minimum cost and directs
resources toward their optimal use.
Conversely, the market has various political dimensions. The prevalence
of the corporate form of enterprise demonstrates that economic activity is
often pursued by large groups of people collectively focused on a common
goal. Within a corporation, workers are subject to the sometimes arbitrary
power of their employer. Just as governments punish those who violate the
law, employers rely on sanctions such as dismissal or demotion to maintain
control over workers. Corporate executives establish goals and rules with
little input from workers, and corporate power is often exercised to influ-
ence government policy. In addition, many market activities have public
consequences and, therefore, become political issues of concern to the com-
munity as a whole. Finally, when income and wealth are highly concen-
trated, the power of the rich to command others resembles the prerogatives
of a political dictator. Based on these observations, sole reliance on distinct
institutional arenas does not provide an adequate basis for distinguishing
between economics and politics.

Primary Actors
From this perspective, economic activity is pursued by persons acting as
autonomous individuals, while political activity represents the efforts of an
entire community to collectively pursue goals. This distinction is observ-
able in the origins of the words "economics" and "politics." Economics
derives from the Greek words oikos, meaning household, and nomos,
meaning principle or law. As the principle of household management, eco-
nomics deals with efforts to attain private goals with available resources.
Economizing behavior can be directed toward any goal and practiced in
any institutional arena. Reflecting this approach, economics is sometimes
defined as the science of rational choice or the use of scarce means to
achieve specified ends.
Politics, on the other hand, derives from the Greek word polis, mean-
ing community or society. According to Aristotle, the public life of the
polis is the arena within which true freedom and human development
occur. Although economic activities are essential to human survival, they
fail to engage the uniquely human capacities for cooperation and collec-
tive decision-making based on reasoned argument, dialog, persuasion,
and compromise.
6 Political Economy

Distinguishing between economics and politics by reference to the pri-

mary actor is problematic due to the porous boundary separating the pri-
vate and public spheres. In democratic societies, the collective choices of
the community should largely reflect aggregated individual preferences.
Much of the public choosing of goals through government consists of reg-
istering citizen preferences through voting or poll-taking. Moreover, public
choice often reflects the influence of private individuals and groups exerted
through lobbying, campaign contributions, and control over the selection
of candidates for public office.
Conversely, the quality of public life affects the goals that individuals
choose or are able to pursue. The material and social environments within
which people live shape their language, self-image, desires, and goals. Given
this interaction between public and private spheres, the distinction between
individual and community as primary actors is not fully sustainable.
If politics and economics cannot be clearly distinguished, perhaps these
terms are simply two names for the same process. Both are concerned with
organizing and coordinating human activity, marshalling resources, man-
aging conflict, allocating burdens and benefits, and providing for the satis-
faction of human wants and needs. However, to completely collapse
politics into economics or vice-versa would gloss over important differ-
ences between political and economic goals, institutional arenas, and
actors. While prosperity/justice, market/government, and individual/com-
munity may be interrelated, they are not identical. Therefore, despite the
considerable overlap between politics and economics, they can initially be
analyzed as distinct processes.

THE MARKET AS AN ECONOMIC INSTITUTION

The market is a system of exchanges in which individual choices to sup-
ply or demand resources or products interact to determine prices. To assess
the market's potential for achieving the economic goal of prosperity, one
must examine each of the three dimensions of prosperity: efficiency,
growth, and stability. For each dimension, arguments both for and against
the market are presented.

Efficiency
For the market. A perfectly competitive market will, with some excep-
tions, direct resources toward their most highly valued use, resulting in a
"Pareto optimal" or efficient economy in which no person can be made bet-
ter off without making someone else worse off. The market coordinates vast
numbers of transactions with minimal political supervision as prices provide
information and incentives to guide individuals and businesses in making
rational choices about employing resources and purchasing products.
Politics,Economics,andPolitical Economy 7

The market achieves efficiency by allowing individuals to make mutu-

ally beneficial transactions. Individuals will exchange with one another
until they have reached the maximum level of utility permitted by the
resources with which they enter the market. Competition also promotes
market efficiency. Firms and individuals are under constant pressure to
adopt the most efficient technology, enabling them to produce at the low-
est possible cost.
Against the market. Competition is imperfect due to barriers to entry,
immobility of resources, lack of information, product differentiation, and
concentrations of power caused by both technical conditions of production
and the efforts of individuals to protect themselves from competition.
These imperfections cause inefficiency.
Transaction costs also reduce efficiency. A transaction cost is any
cost associated with conducting a transaction, as opposed to the actual
cost of the commodity being bought or sold. Transaction costs include
the costs of gathering information, specifying contracts, and enforcing
the terms of contracts. High transaction costs sometimes prevent the
formation of markets for certain goods. For example, a market for
clean air does not exist because citizens would have to devote consid-
erable time and expense to organizing themselves and negotiating with
firms to reduce pollution. When some markets are missing, external
costs and benefits arise from existing market transactions. Without a
market for clean air, the production of steel imposes the cost of pollu-
tion on local residents. When external costs are present, government
may be able to improve efficiency by taxing or regulating the industry.
On the other hand, when the external benefits of a good are very large,
government can increase efficiency by providing the good at public
expense. Examples of "public goods" include national defense, high-
ways, and police and fire protection.
The competitive individualism underlying market behavior may also be
detrimental to efficiency. Intense competition may weaken social bonds,
causing alienation, apathy, or hostility. These psychological conditions
often manifest themselves in lower productivity, crime, and civil unrest, all
of which interfere with efficiency.
Even if the market achieves economic efficiency, it may fail to attain the
broader notion of social efficiency. Whereas economic efficiency refers only
to the fulfillment of individual preferences backed by money and capable
of satisfaction through commodities, social efficiency also recognizes goals
adopted by society through government that may not be backed by indi-
vidual purchasing power, or may be attainable only through collective
action. For example, a handicapped person's need for public access or a
homeless person's need for housing will be ignored by the market, but a
community that values decent treatment of all citizens can increase social
efficiency by using government to direct resources toward these needs.
8 Political Economy

Growth
For the market. The market is a powerful mechanism for increasing
both the availability and productivity of economic resources. By placing
both negative and positive consequences of decisions directly on the indi-
vidual, the market provides strong incentives for prudent and industrious
behavior. When individuals know they will personally reap the rewards or
suffer the consequences of their actions, they are motivated to consider
their choices more carefully. As a result of the market's incentives, addi-
tional resources are made available, the quality of resources is upgraded,
and innovation and risk-taking are encouraged. The combination of tech-
nological development and expansion of resources provides an impetus
for economic growth.
The market also fosters psychological changes conducive to growth.
By minimizing the constraints of moral and cultural norms, the market
encourages individuals to create their own identities by transcending the
bounds of traditional roles and expectations. Self-reliant individuals may
experiment with diverse lifestyles and forms of expression. Formerly dor-
mant talents and desires are awakened. This process of self-discovery and
self-renewal becomes a significant source of the dynamism of market
societies. The productivity and innovation flowing from energized indi-
viduals contributes to rising standards of living that, in turn, broaden the
range of individual opportunities and renew the motivation essential to
economic expansion.
Against the market. The market's capacity for growth may be con-
strained by an inability to establish adequate social and economic infra-
structure. Growth requires transportation systems, education, and other
public goods that the market is ill-equipped to provide because of the dif-
ficulty in charging individuals for benefits received. Another constraining
factor is uncertainty due to lack of information. Investors may be reluctant
to finance ventures essential to growth when they are unable to accurately
assess the degree of risk involved. Growth may also be hindered by insuf-
ficient demand if wealth and income become so concentrated that spend-
ing on consumer goods lags.
The competitive individualism associated with markets may also func-
tion to obstruct growth. Competition for social status may entail excessive
consumption in order to display affluence. While high levels of consump-
tion contribute to immediate expansion of the economy, the correspond-
ing low level of saving may impede investment and therefore undermine
long-term growth. Competition may also foster frustration and envy that
interfere with productivity and growth. Finally, because competition cre-
ates insecurity, individuals may attempt to protect themselves by forming
organizations and interest groups to suppress the flexibility and dynamism
of the market.
Politics, Economics, and PoliticalEconomy 9

Stability
For the market. The market is extremely flexible in responding to chang-
ing patterns of consumer preferences, technology, and resource availability.
Through the price mechanism, these changes quickly elicit appropriate
reactions as businesses and consumers adjust their production and con-
sumption decisions, respectively. The market contributes to stability by
adjusting quickly before serious imbalances arise. Competitive pressures
reward prompt and effective responses to a changing business environ-
ment. Financial markets also contribute to stability. When the economy
slows, interest rates fall until borrowing and investing are again attractive.
Conversely, when the economy begins to overheat, rising interest rates
choke off borrowing and spending until stability is restored.
Against the market. "Boom and bust" cycles have persisted since the
market became the dominant institution for organizing economic activities.
In earlier years, these cycles were often confined to a particular market in
which a "speculative bubble" would develop as buyers anticipated ever-
rising prices. Eventually, the bubble would burst, bringing financial ruin to
some speculators. In modern times, however, the connectivity of markets
and the emergence of financial markets have created national and even
global cycles of instability.
This instability is partially explained by the role of expectations. A psy-
chological shift toward pessimism among investors may create a financial
crisis that spills over into the real economy, resulting in recession and
unemployment. Conversely, optimism leads to new investments and higher
spending that may trigger inflation.

THE MARKET AS A POLITICAL INSTITUTION

Although the market is usually viewed as an economic institution, it
also performs important functions in achieving the political goal of justice.
The market's role as a political institution can be understood by assessing
its capabilities in promoting three dimensions of justice: freedom, equity,
and order.

Freedom
For the market. The market provides a wide range of freedoms.
Individuals have the right to make choices concerning employment, place
of residence, consumption patterns, and social relationships. Competing
alternatives constrain the power of any single person or firm to oppress and
manipulate others. The sense of freedom offered by the market may partly
explain the popularity of shopping. Consumers tend to enjoy the experi-
ence of being able to select from an array of alternatives—the power to
10 Political Economy

choose with whom they shall transact. The market also provides citizens
with opportunities to engage their resources, including entrepreneurial tal-
ent, in the most advantageous way. Finally, the market potentially protects
individuals from abuses of governmental authority by establishing decen-
tralized bases of power from which citizens can express opinions and orga-
nize opposition.
Against the market. While the market offers a considerable range of
choice, it also limits choice. The market provides only commodities that
can be sold at a profit and therefore fails to respond to demands for
goods such as national defense, a clean environment, or public trans-
portation. Since only a subset of human interests is expressible in the
market, the freedom of individuals to pursue their goals is correspond-
ingly narrowed.
Not only does the market limit the range of interests capable of fulfill-
ment, it also conditions individuals to tailor their interests to suit the capa-
bilities of the market. A social environment in which profitable commodities
are the major source of satisfaction causes humans to develop capacities
oriented toward consumption of commodities and diminishes their freedom
to establish self-directed goals.
Although individuals in a pure market are largely free of legal restric-
tions on exchange, the freedom of persons with few marketable assets will
be limited by their financial inability to pursue personal goals. Moreover,
the prospect of hunger and deprivation effectively coerce individuals to
seek employment. Once on the job, workers surrender much of their auton-
omy and self-direction to the authority of employers.
Even as consumers, citizens may not experience genuine freedom in the
market. In real-world markets, consumers have only limited information
and producers tend to be well-organized. Instead of being sovereigns of the
market, consumers may feel like the prey, surrounded by manipulative
advertising, inflated prices, shoddy merchandise, and deceitful sellers.
Historically, the link between markets and freedom has been based on
the assumption that the interests of different individuals are ultimately
harmonious. If no transactions are coerced, then all transactions must
benefit both buyer and seller and hence increase the overall well-being of
society. However, the record of real-world markets amply illustrates that
the freedom of one individual may restrict the freedom of another.
Markets allow practices such as monopolization of industries, pollution of
the environment, and discrimination, all of which narrow the choices
available to citizens.

Equity
For the market. With the forces of supply and demand establishing
resource prices, the market distributes rewards according to each person's
Politics, Economics, and Political Economy 11

ability to provide valuable resources. The market permits individuals to

decide how many of their resources to make available and how much time
and expense to engage in upgrading the quality of their resources. By plac-
ing much of the responsibility for personal income in the hands of individ-
uals, the market distributes the benefits and burdens of society's productive
activities in a manner seemingly independent of political authority.
The market's potential for achieving equity is also enhanced by the
presence of opportunity. In a perfectly competitive market, individual
characteristics such as race, gender, religion, or ethnicity should be irrel-
evant in determining a person's success. For less successful individuals,
resentment is dampened by awareness of opportunities to offer resources
and by the perception that rewards accrue to resources in accordance
with productivity.
Against the market. Concentrations of wealth and power typically
appear in a market economy either because technological conditions favor
large producers over smaller businesses or because individuals intentionally
create large organizations to suppress competition and gain some control
over market forces. These concentrations change the market's prices and
allocation of resources. As a result, personal income reflects not only the
productivity of resources provided to the market, but also an individual's
status in the power structure. Those persons belonging to powerful groups
are likely to receive income in excess of their productivity, while members
of disadvantaged groups are likely to receive lower incomes than they
would in a competitive market.
Even if the market is perfectly competitive, the distribution of income
will reflect the pattern of ownership of productive resources. Wealthy own-
ers of land or capital may be richly rewarded without any current personal
contribution to production. Since various unethical and illegal means have
been used in the past to accumulate property, the current distribution of
income is unlikely to be equitable.
Equity in a market society requires equal opportunity, but when compe-
tition generates substantial inequality of property holdings, the opportuni-
ties of some people are restricted. Individuals enter market competition
with burdens or advantages bequeathed by their family backgrounds,
neighborhoods, schools, and cultures. When these conditions vary widely
in preparing individuals for productive employment, genuine equality of
opportunity cannot exist.
Finally, the market may be inequitable because it responds only to those
human needs and desires backed by money. The market neither recognizes
nor allocates resources toward the protection of human rights entitling
individuals to certain benefits regardless of ability to pay. Examples of
human rights might include the right to legal counsel for accused criminals,
the right to public access for the physically challenged, and the right to a
basic level of health care.
12 Political Economy

Order
For the market. The market erodes traditional human relations based on
arbitrary privilege and hierarchy. By virtue of property rights and civil
rights, individuals engage only in transactions of their own choosing.
Freedom of choice and a sense of autonomy contribute to personal well-
being, and a satisfied citizenry usually implies an orderly society.
The market also fosters order by increasing specialization of labor, so that
formerly diverse and separate groups become mutually dependent. When
individuals benefit from market transactions, they have an interest in treat-
ing each other respectfully. Even nations may be less belligerent when their
economic well-being depends on the prosperity of their trading partners.
Finally, the market contributes to order by distributing society's benefits
and burdens without visible political authority. Each person's success or
failure appears to result from impersonal market forces, so there is no obvi-
ous target for resentment or envy. When individuals accept responsibility
for their own fate, they are less likely to disrupt society.
Against the market. The dynamism of the market undermines traditional
values and social structures. As individuals pursue their private interests,
cohesive communities and shared purposes are increasingly displaced by the
pursuit of satisfaction through consumption and ownership of commodities.
This individualism undermines the self-restraint and virtue essential to social
order. The market functions well only within a social context based on
respect for ethical norms and individual rights. When self-interested behav-
ior degenerates into unbridled selfishness, social bonds begin to unravel.
Another potential source of disorder in market societies arises from the
conflict of interest between owners of productive property and workers
dependent on employment for their livelihood. Owners generally seek max-
imum production from workers at minimum cost, while workers want
higher wages and more satisfying working conditions. This conflict may
extend beyond the workplace as class resentment and hostility manifest
themselves in crime and racial and ethnic unrest.

GOVERNMENT AS A POLITICAL INSTITUTION

As a political institution, government seems well-suited to pursue justice
by promoting freedom, equity, and order. However, government also has
significant potential to violate these ideals.

Freedom
For government. Government enables citizens to reach goals they would
be unable to attain through private action, and therefore contributes to free-
dom by broadening the range of feasible choices. For example, education,
Politics, Economics, and Political Economy 13

national defense, and security from crime may be better obtained through
government financing.
Freedom is more than the absence of external constraints; it also requires
a basic level of material well-being and a social environment conducive to
developing and practicing a broad range of human capacities. Government
may contribute to these conditions of freedom and also restrain powerful
individuals and groups from restricting the freedom of others.
By providing an alternative to the market as an arena in which goals can
be pursued, government not only increases the choices available to citizens
but allows for the development of a broader range of preferences and val-
ues. For example, citizens' commitment to racial equality or environmental
protection may be strengthened when they observe the authority of gov-
ernment being directed toward those goals. Government serves as a model
and teacher, enabling citizens to develop their capacities more fully.
Against government. Few public policies have unanimous support and,
therefore, government necessarily infringes on the freedom of some citi-
zens. Taxes, regulations, and laws are considered legitimate restrictions
when they are approved by the majority, do not violate individual rights,
and are aimed at promoting the public interest. However, since modern
societies often lack a clear consensus on the meaning of both individual
rights and the public interest, particular government actions may be per-
ceived as violations of freedom. More generally, democratic governments
may be coercive to the extent that they enable the will of the majority to be
imposed on the minority.
With its monopoly on the legitimate use of force through command over
the police and military, government has the potential to severely restrict
freedom. Some governments have either revised or abandoned the rule of
law to engage in arbitrary arrest, seizure of property, and surveillance.
Freedom can also be curtailed without resorting to visible oppression. If
factions of society hold undue influence over government, it ceases to
represent the public interest and becomes a tool with which powerful
groups oppress their fellow citizens.

Equity
For government. Equity requires that people be treated in accordance
with their rights. Whereas the market recognizes only property rights in
determining the distribution of income, a broader conception of equity
includes the recognition of human rights. Property rights entitle owners to
market-determined earnings of their resources, while government assigns
human rights to secure those individual interests deemed worthy of support,
even if they are not backed by individual purchasing power. While equity
based on property rights relies solely on the criterion of productivity, human
rights may recognize other criteria of equity such as need, dignity, or simply
14 Political Economy

a person's status as a citizen. If human rights entitle individuals to economic

resources, only government can protect these rights and secure equity.
In the case of a clearly specified human right such as the right to legal
counsel for accused criminals, government's responsibilities are discharged
by providing public defenders. However, human rights are often not codi-
fied, but rather implied by legislation aimed at alleviating perceived
inequities. For example, welfare programs and regulated prices imply that
citizens have a right to a decent standard of living, but government has
never explicitly enacted such a right. As a result, government's responsibil-
ities in pursuing an equitable distribution of income are ill-defined and sub-
ject to ongoing political contestation.
Against government. A competitive market distributes income in accor-
dance with the productivity of resources. When government overrides mar-
ket distributions, it confronts the problem of formulating an alternative
criterion of equity. A democratic government will respond to input from
citizens, yet citizens with different conceptions of equity will send conflict-
ing messages to government. Moreover, some citizens may promote their
private goals by wrapping their appeals to government in the cloak of
equity. For example, tobacco farmers may base their requests for govern-
ment subsidies on the need for economic stimulus to regions lacking a
strong industrial base.
These demands from citizens may degenerate into competition among
interest groups seeking to control government for their own benefit. More
powerful groups are likely to win this battle, enabling them to use govern-
ment to oppress less advantaged groups. As a result, government itself may
be perceived as a major source of inequity by those who lose income, sta-
tus, or power as a result of taxes and regulations. In summary, when gov-
ernment supersedes the market's linkage of rewards with productivity, the
absence of consensus on alternative criteria of fairness may result in wide-
spread perceptions of inequity.

Order
For government. Government promotes orderly human interaction by
defining and enforcing rights and obligations, thereby enabling individuals
to form stable expectations of human behavior. Without public knowledge
of the law, resolution of conflict would absorb substantial economic
resources. Government also fosters order by maintaining society's culture,
traditions, and boundaries. As a visible symbol and expression of society's
collective identity, a respected government becomes an object of psycho-
logical allegiance, facilitating the formation of both individual identity and
a sense of shared purpose and trust among citizens.
Government further contributes to order by promoting equality of
opportunity. When disparities of income, wealth, and power impede social
Politics, Economics, and Political Economy 15

mobility for less advantaged persons, order is jeopardized by anger, frus-

tration, and alienation. Finally, government secures order by altering incen-
tives to make self-interest more consistent with the public interest. For
example, the threat of punishment may discourage disorderly behavior. By
controlling crime, government may reduce defensive aggression such as
purchasing guns for self-protection.
Against government. Because government can supersede the market's dis-
tribution of income, citizens may attempt to use governmental authority to
benefit themselves. Moreover, this process often becomes self-reinforcing.
As some individuals or groups gain benefits from government, other citizens
conclude that money flows to power, and power requires organization.
Interest groups proliferate and demands on government intensify. This
politicization of the economy may contribute to disorder in two ways. First,
productive resources are diverted to the political struggle for control of
government, resulting in slower growth and reduced competitiveness.
Second, when government becomes a major determinant of individual suc-
cess in a society lacking consensus about social justice, resentment toward
government erodes support for public authority. Citizens perceive govern-
ment as simply a tool with which some groups maintain privileges at the
expense of others. The combination of a sluggish economy and political
alienation results in social disorder.

GOVERNMENT A S AN ECONOMIC INSTITUTION

A primary human goal is the quest for security. One strategy for achiev-
ing security is individual action aimed at claiming resources for private use;
such behavior created the market as a social institution. However, an alter-
native approach to security is cooperation and purposeful coordination of
human activities to increase a group's ability to cope with scarcity and
uncertainty. Because collective action can often be more effective than indi-
vidual action, humans have a strong interest in forming organizations with
rules and structures of authority. These organizations range from labor
unions to corporations to government. Government is unique in that its
laws are applicable to all persons within its jurisdiction and can be
enforced through the legitimate use of force. One reason citizens consent to
governmental authority is to secure justice, but government also con-
tributes to the economic goals of efficiency, growth, and stability.

Efficiency
For government. Government may improve efficiency by responding to
imperfections in the market. For example, lack of information can be reme-
died by government provision. Concentrations of private power that impede
competition can be addressed with antitrust lawsuits, regulation, or public
16 Political Economy

ownership. When externalities exist, government can redirect resources by

taxing, subsidizing, regulating, or directly financing goods such as national
defense and highways.
Government also promotes efficiency by enhancing the quality and quan-
tity of resources available for production. During recessions, government
may pursue policies to create jobs and increase production. Public education
contributes to a skilled labor force. The stability created by a system of laws
encourages owners of resources to engage their assets in risky ventures. Even
the redistributive activities of government may promote efficiency by revital-
izing human resources and by creating the perception of fairness. Individuals
work together more effectively when they share a sense of community, and
social solidarity is enhanced by an equitable distribution of income.
In addition to improving economic efficiency, government can con-
tribute to a broader social efficiency by pursuing goals incapable of attain-
ment in the market. Citizens may want safe neighborhoods, clean air, and
social justice, but the market responds only to money-backed demand for
profitable commodities. If preferences for noncommodities are also recog-
nized, then efficiency requires government action to reallocate resources.
Against government. Government lacks the internal pressure for effi-
ciency created by competitive market forces. Since public goods are
financed through compulsory taxation, government may provide unsatis-
factory services without fear of losing customers. Moreover, bureaucratic
processes are typically slow and inflexible. All these problems are com-
pounded by the self-interest of politicians and bureaucrats whose pursuit
of higher incomes and increased power may subvert efficiency.
Even when politicians have the best of intentions, government may be
insensitive to citizens' preferences communicated through voting. Elections
are held only periodically, and voters must select among candidates offer-
ing entire packages of programs. As a result, voters cannot precisely spec-
ify which programs they support. The voting process also fails to allow
citizens to express the intensity of their preferences, and, with a system of
majority rule, those citizens who are outvoted will be forced to pay taxes
for programs they do not support. For these reasons, voting may be a less
efficient method for registering preferences than is the process of spending
money in the market.
In addition to its own inefficiency, government may cause inefficiency in
the market by imposing regulations, altering incentives, and redirecting
resources. Government intervention undermines the security of property
rights and reduces the motivation of individuals to make rational choices. In
theory, the buyer of a commodity in the market pays the full cost and enjoys
the full benefit of that commodity, but the costs and benefits of public goods
are spread across the entire population. Since individuals will neither bear the
full cost nor enjoy the full benefit of their political choices, they are less moti-
vated to make decisions based on careful assessments of costs and benefits.
Politics, Economics, and Political Economy 17

Growth
For government. Growth is contingent on the ability of society to pro-
duce more than it consumes and to direct this surplus into productive
investment. Government may be able to improve the market's ability to
produce a surplus. When custom and tradition keep resources out of pro-
ductive use, government has the power to pry these resources loose and
place them into active production. Furthermore, with its control over taxes,
spending, and interest rates, government can steer resources toward capital
accumulation. By financing education and research, government can con-
tribute to the long-run growth of the economy. Finally, government reduces
uncertainty for private investors by establishing well-defined property
rights, a smoothly functioning legal system, and stable market conditions.
Against government. Government taxation and borrowing absorb
money that might otherwise have flowed into productive private invest-
ment. Regulations may divert resources from their most efficient use and
contribute to stagnation. Subsidies and other forms of protective legislation
shield firms from competitive pressures to innovate and modernize.
Government redistribution of income may undermine incentives to engage
in productive activity. Not only is the positive incentive of higher income
diminished by taxes and regulations, but the disincentives posed by hunger
and deprivation are partially removed by welfare programs and social secu-
rity. Government efforts to achieve greater equality through income redis-
tribution tend to penalize success and reward failure, potentially
diminishing the market's dynamic potential for growth.

Stability
For government. The very presence of government authority increases
stability by minimizing conflict and providing security of property.
Appropriate government policies encourage "business confidence" that is
essential to stability. Even policies opposed by some businesses may be ben-
eficial to the economy. For example, antitrust policies, minimum-wage
laws, and progressive taxation can counterbalance the market's tendency to
foster concentrations of wealth and power that jeopardize stability. Finally,
when recession or inflation occurs, government can respond with appro-
priate fiscal or monetary policies.
Against government. Government efforts to redirect resources and alter
the distribution of income may, by reducing profitability and undermining
business confidence, contribute to instability. Government also has the
power to create a "political business cycle" as politicians seeking reelection
overstimulate the economy in hopes of creating a temporary boom to
please voters. Once the election is over, the stimulus is withdrawn and the
economy slips into recession. Even when government officials act with the
18 Political Economy

best of intentions, the tools of monetary and fiscal policy may increase
instability. By the time bureaucrats and politicians recognize a problem,
formulate a response, implement the policy, and wait for results, economic
conditions may have changed so that the policy is no longer appropriate.
More generally, by seeking to perpetuate prosperity, government may sup-
press the mechanisms, such as rising interest rates, that allow the market to
stabilize itself. When prosperity is artificially prolonged, the subsequent
recession may be more severe.

POLITICAL ECONOMY
Analysis of the market and government as political and economic insti-
tutions suggests that neither is solely capable of organizing society to secure
prosperity and justice. Both institutions are sufficiently flawed to require a
balancing of political and economic processes to sustain a healthy society.
In a positive sense, each institution serves to complement weaknesses of the
other. However, the market and government also generate powerful forces
reverberating against each other with potentially damaging consequences.
Since the market and government interact with each other, efforts to
analyze them separately will yield only partial, and therefore distorted,
understandings of the social system. Politics and economics are simply two
facets of the process by which society is organized to achieve both individ-
ual and community goals. To study this process, the interdisciplinary
approach provided by political economy is essential. Although political
economy was abandoned by most social scientists in the nineteenth cen-
tury, events of the twentieth century have accentuated its relevance. As a
result of the Great Depression and two world wars, issues such as growth,
distribution, and stability were transformed from economic into political
issues. The boundary between public life and private life was redrawn, with
politics encompassing an ever-larger realm of human activity. More
recently, deterioration of the natural environment and growing concerns
about the quality of life have led to renewed conflict and negotiation over
the appropriate boundary between public and private spheres. As the
domains of politics and economics vie for dominance, the interdisciplinary
approach of political economy offers great potential for analyzing and
responding to the problems confronting modern societies.

ADDITIONAL READING
Bell, Daniel, and Irving Kristol. The Crisis in Economic Theory. New York: Basic
Books, 1981.
Boulding, Kenneth. Towards a New Economics. Brookfield, VT: Edward Elgar,
1992.
Politics, Economics,and PoliticalEconomy 19

Brittan, Samuel. Capitalism with a Human Face. Cambridge: Harvard University

Press, 1995.
Dahl, Robert A., and Charles E. Lindblom. Politics, Economics, and Welfare. New
York: Harper 6c Row, 1953.
Etzioni, Amitai. The Moral Dimension: Toward a New Economics. New York: Free
Press, 1988.
Heilbroner, Robert. Behind the Veil of Economics. New York: W. W. Norton, 1988.
Hirschman, Albert O. Rival Views of Market Society. New York: Viking Press, 1986.
Kuttner, Robert. Everything For Sale: The Virtues and Limits of Markets. New
York: Alfred A. Knopf, 1997.
Lane, Robert. The Market Experience. Cambridge: Cambridge University Press, 1991.
Levine, David P. Wealth and Freedom: An Introduction to Political Economy. New
York: Cambridge University Press, 1995.
Lindblom, Charles E. Democracy and Market Systems. Oslo: Norwegian University
Press, 1988.
Lowe, Adolph. Essays in Political Economics: Public Control in a Democratic
Society. New York: New York University Press, 1987.
Lutz, Mark A., and Kenneth Lux. Humanistic Economics: The New Challenge.
New York: Bootstrap Press, 1988.
Wolf, Charles, Jr. Markets or Governments: Choosing Between Imperfect
Alternatives. Cambridge: MIT Press, 1988.
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Chapter 2

The History of Political

Economy

A study of the history of opinion is a necessary preliminary to

the emancipation of the mind.
John Maynard Keynes

He who knows only his own side of the case knows little of that.
John Stuart Mill

Current political and economic issues cannot be fully understood without

an appreciation of the historical evolution of both institutions and ideas.
Although the history of political economy remains obscure for most citi-
zens, many of its ideas have become part of the collective wisdom of soci-
ety. Before beginning a survey of political economy, a word of caution is in
order. All history is subject to interpretation, and the history of ideas is par-
ticularly controversial. No single interpretation of the history of political
economy commands universal agreement.

ORIGINS OF POLITICAL ECONOMY

The period between the fourteenth and eighteenth centuries witnessed a
"great transformation" in Western Europe as the impact of commerce
gradually eroded the feudal economy of the Middle Ages. The newly
22 Political Economy

emerging market economy provided opportunities for the expression of

individual aspirations and encouraged entrepreneurial behavior that had
previously been suppressed by church, state, and the community. Although
the church struggled to maintain its control over society by placing limita-
tions on the accumulation and use of property, the growing desire of indi-
viduals to free themselves from social constraints led to diminishing
popular support for both the church and the feudal state.
Along with changes in production and trade, new ideas were emerging.
The Renaissance of the fourteenth century paved the way for the scientific
inquiries of Copernicus, Galileo, Bacon, and Newton. Another impetus for
change came from the Protestant Reformation initiated by Martin Luther
in Germany. By the early eighteenth century, the Age of Reason, or
Enlightenment, had arrived, and with it came a rejection of the medieval
view of society as a divinely ordered hierarchy in which each person had a
proper role and purpose. The new worldview centered around the
autonomous individual and the human capacity for reason.
The Enlightenment was most prominent in France, where thinkers such as
Voltaire, Diderot, D'Alembert, and Condillac sought to demolish supersti-
tion and tradition by subjecting all aspects of human existence to the scrutiny
of reason. These philosophers believed that most human problems were
attributable to poorly structured institutions and to uncritical acceptance of
traditional authority emanating from church and state. They blamed preju-
dice, intolerance, and emotions for suppressing the human capacity to envi-
sion a better society and to act accordingly. The leaders of the Enlightenment
were optimistic about the power of reason to clear away the debris of past
mistakes, leaving an open path for continual social improvement.
To free reason from the shackles of existing traditions, Enlightenment
thinkers demanded the liberation of the individual from all social, political,
and religious bonds. Only then could humans choose rationally without the
taint of prejudice, loyalty, or superstition, and they would presumably
choose to abolish all institutions that could not be justified as serving the
enlightened interests of mankind. Leaders of the Enlightenment called for
nothing less than a total restructuring of society.
Science rose to prominence during this period because it seemed to offer
a method for distinguishing between truth and superstition. By revealing
the universal laws that govern nature and society, science would liberate
mankind from both material deprivation and social oppression. Although
the scientific method was initially applied to the external environment, it
soon was turned toward the analysis of human existence, first to under-
stand the physical functioning of the body, and then to investigate the oper-
ation of the mind. With advances in the understanding of human behavior,
Enlightenment thinkers began to anticipate a science of society. If the laws
and regularities of human interaction could be understood, a scientific
basis for identifying the ideal set of social institutions would be established.
The History of Political Economy 23

This emergent science of society came to be known as political economy.

The same rational, economizing principles that individuals applied to the
pursuit of their private interests would be extended to restructure the entire
polity. The actual term "political economy" was introduced in 1616 by a
French writer, Antoyne de Montchretien (1575-1621), in his book Treatise
on Political Economy. The first known English usage occurred in 1767
with the publication of Inquiry into the Principles of Political Economy by
Sir James Steuart (1712-1780). These early political economists sought to
develop guidelines and offer policy recommendations for government
efforts to stimulate commerce. Markets were still relatively undeveloped at
the time, so government took on significant responsibilities in opening new
areas for trade, offering protection from competition, and providing con-
trol over product quality. The ideas and policies developed for this early
stage of capitalism came to be known as "mercantilism." Active involve-
ment by government in the economy was thought to be a necessary condi-
tion for economic prosperity.
By the late eighteenth century, however, the prevailing attitude toward
government changed dramatically. Many manufacturers and merchants
perceived government not as a beneficent director of economic activities,
but as a major obstacle to the pursuit of wealth. Their hostility toward gov-
ernment was based on changing economic and political conditions. In its
early stages of development, a flourishing market economy requires that
producers have ready access to resources in the form of easily purchasable
commodities. In addition, both producers and consumers must be free to
pursue their interests relatively unencumbered by social customs and polit-
ical authority. Both of these conditions were rapidly materializing in
England by the second half of the eighteenth century.
The formation of markets for resources proceeded along three lines.
First, the elimination of many single-family farms created a market for
cheap and mobile labor. Second, the accumulation of wealth through
piracy, looting, and early successes in commerce created a mass of financial
capital available for borrowing. Third, the confiscation and subsequent
sale of church property and public land that had previously been reserved
for common use created a market for land. As for political freedom, the
combination of the Magna Carta, the English civil war, and the Glorious
Revolution of 1688 greatly diminished the power of the monarch and the
aristocracy. With these changes in place, the market became a dynamic
engine for the production of wealth, far overshadowing the power of gov-
ernment to dispense privileges and grant protection. The future was clearly
discernible; the market would become the dominant institution for orga-
nizing society.
The subsequent evolution of political economy over the next two cen-
turies is depicted in Figure 2.1. The remainder of this chapter and the next
four chapters provide elucidation of this diagram.
Figure 2.1
The History of Political Economy

Neofascist
Theory

Romanticism
Edmund
& Corporatism
Burke
Nationalism

Neoconservatism

The Conservative Perspective

Neo-Austrian
Economics

Austrian Public Choice

Economics Theory

New Classical
Economics
Classical Neoclassical The Classical Liberal Perspective
Political Economics
Economy
New Keynesian
Economics

Cambridge Neocorporatism
Economics

Post-Keynesian
Economics

The Modern Liberal Perspective

Institutional
Economics

karl Social Social

marx Democratic Economics
Theory
Post-Marxian
Theory

The Radical Perspective

The History of Political Economy 25

CLASSICAL POLITICAL ECONOMY

Adam Smith (1723-1790), a Scottish professor of moral philosophy,
was fascinated by the market's potential for promoting both individual
freedom and material prosperity. Although he was not the first person to
advocate laissez-faire policies by government, his book The Wealth of
Nations (1776) presented the case for free markets with such wisdom that
it formed the basis for classical political economy. This school of thought
dates roughly from 1776 to the mid-nineteenth century and its proponents
include, in addition to Smith, Thomas Malthus (1766-1834), David
Ricardo (1772-1823), Nassau Senior (1790-1864), and Jean Baptiste Say
(1767-1832).
Classical political economists combined both optimism and pessimism
in their visions of a market economy. The optimism centers around the
anticipation that the market will generate both increasing wealth and indi-
vidual freedom without the need for supervision by church or state. In this
sense, classical political economy is linked with the Enlightenment, demon-
strating that when the shackles of religious and political restrictions are
removed, individuals will prosper and society will remain orderly.
Yet beneath this rosy vision lurked impending disaster. Adam Smith
repeatedly suggested that the market could not work its magic indefinitely.
Malthus and Ricardo were even more pessimistic. With population grow-
ing rapidly and the available supply of land relatively fixed, they predicted
an inevitable future of subsistence living for the vast majority of the popu-
lation. Landlords would prosper as they received ever-larger rents due to
the increasing demand for land on which to grow food, but capitalists'
profits would dwindle as they were forced to pay higher wages so workers
could afford to buy increasingly expensive food. Eventually profits would
be insufficient to provide capitalists with either the incentive or the means
to expand production, and the entire economy would settle into a gloomy
"stationary state."
Despite these predictions of widespread poverty and an end to growth,
classical political economists remained largely committed to laissez-faire.
The future would be grim, but attempts by government to intervene would
only worsen the situation because government could control neither the
scarcity of land nor the human tendency to overpopulate. The only relief
would come from depopulation caused by plagues, famines, and war, or
from trade with other countries possessing plentiful land and cheap food.

THE RADICAL EXTENSION

As classical political economy veered toward pessimism, Radical theorists
continued to defend the Enlightenment vision of continual progress through
the rational reconstruction of society. From the Radical perspective, the
26 Political Economy

classical political economists were failing to carry out the mission of the
Enlightenment. Although the power of the state had been challenged and
restrained, the power of private property had actually increased due to the
elimination of most government restraints. In the spirit of the Enlightenment,
Radicals demanded that every aspect of society be subjected to criticism to
see whether it could withstand the test of reason. The rights of private prop-
erty were viewed as no more sacrosanct than the authority of church or state.
Central to the Radical call for a reconstruction of society was a strong
commitment to egalitarianism. Until all persons directly participated in the
formation of the institutions governing their lives and shared in the bene-
fits derived from those institutions, society would necessarily appear arbi-
trary and oppressive, and individuals would remain alienated. Radicals
condemned private property for breeding selfish interests that conflict with
the common good of society. In a private property system, individuals have
opposing interests and social cohesion disintegrates as the owners of prop-
erty oppress those with little or no property. Although each individual is
free to choose, oppression arises because inequality of property makes the
poor vulnerable to exploitation as the threat of starvation coerces them to
work for subsistence wages.
Radicals also condemned private property for alienating individuals
from any sense of community or control over their work. Relying on the
optimism of the Enlightenment, they concluded that people can join
together to collectively direct their social existence. Radicals envisioned a
classless society in which free individuals could live in harmony with each
other in their work, their communities, and their government. Such a soci-
ety would be egalitarian and communal, with citizens sharing a broad
range of common interests, including a commitment to maintain appropri-
ate conditions for the development and security of every person. Genuine
freedom requires access to sufficient resources for well-rounded human
development and hence can be secured only when the community as a
whole controls productive property.
Examples of early Radical thinkers include William Godwin (1756-1836)
in England, Thomas Paine (1737-1809) in America, and the Marquis de
Condorcet (1743-1794) in France. These writers were opposed not so
much to the principle of private property as to the excessive concentration
of ownership that restricted the opportunities and freedom of the majority
of the population. In the early 1800s, thinkers such as Robert Owen
(1771-1858) of England and Charles Fourier (1772-1837) and Henri de
Saint-Simon (1760-1825) of France popularized the idea of eliminating
private property. These " Utopian socialists" formulated detailed plans for
small communities based on shared ownership of property. Owen actually
put his ideas into practice, moving to the United States with a group of fol-
lowers to establish a community in Indiana called New Harmony.
Hundreds of other small experiments with communal living occurred
The History of Political Economy 27

during the nineteenth century in both Europe and North America. Growing
apprehension over the effects of industrialization and modernization
undoubtedly spurred this interest in alternative forms of society. The loss
of tradition, the squalor of large cities, and conditions in the early factories
persuaded many people that fundamental change was required to improve
the quality of human existence.
The influence of Radical thought was heightened immeasurably by Karl
Marx (1818-1883), a German philosopher and political economist who
constructed an impressive theoretical analysis of capitalism by weaving
together classical political economy, the ideas of the German philosopher
G. W. F. Hegel (1770-1831), and the communal vision of the Utopian
socialists. Building on the pessimistic theories of the classical political econ-
omists, Marx developed an elaborate theoretical argument that capitalism
would eventually crumble and be replaced by a society in which the means
of production were communally owned and operated. This new society,
Marx claimed, was incubating within capitalism and its birth would coin-
cide with the death of the parent. Thus, unlike the Utopian socialists who
sought to turn their backs on capitalist society, Marx portrayed capitalism
as the essential precondition for a new and better organization of society.
In capitalist factories, workers were acquiring the technical knowledge,
cooperative skills, and sense of solidarity that would enable them to revolt
and establish a communal society.
After Marx's death, his ideas inspired several distinct political traditions.
Several theorists, including Georgi Plekhanov (1857-1918) in Russia and
Karl Liebknecht (1871-1919) and Karl Kautsky (1854-1938) in Germany
upheld Marx's belief in the historical inevitability of communism.
However, when a proletarian revolution failed to appear by the early twen-
tieth century, Russian theorists V. I. Lenin (1870-1924) and Leon Trotsky
(1879-1940) introduced into Marxism the notion of a "vanguard party"
of intellectuals who would lead the workers in the struggle for socialism.
This strand of Marxism served as the theoretical basis for the Soviet Union.
In Western Europe and the United States, a different revision of Marx's
ideas was formulated by theorists such as Edward Bernstein (1850-1932) in
Germany, Sidney and Beatrice Webb (1859-1947 and 1858-1943) in
England, Jean Jaures (1859-1914) in France, and Eugene Debs (1855-1926)
and Norman Thomas (1884-1968) in the United States. Acknowledging the
rising standard of living enjoyed by workers in capitalist societies, these
"social democrats" rejected the Marxian concept of proletarian revolution.
Instead, they defended socialism as a more just and efficient economic system
whose obvious appeal to the working class would permit an evolutionary
transition from capitalism to socialism through the democratic political
process. The task of the revisionists was not to foment revolution, but to
establish a working-class political party and to educate all citizens about the
attractions of socialism.
28 Political l EEconomy

Another important figure in the historical evolution of Radical thought

was the U.S. economist Thorstein Veblen (1857-1929). Veblen rejected
much of Marxism as being unscientific and metaphysical, but he remained a
trenchant critic of capitalism. His ideas became influential in the Progressive
political movement in the United States that sought to reform capitalism by
enlarging the role of government in coordinating economic activity.

THE CONSERVATIVE RESPONSE

The progress fostered by the Enlightenment was a mixed blessing. The
attack on repressive social institutions broadened the scope for individual
initiative and development, resulting in the industrialization and urbaniza-
tion of western Europe. However, disintegration of the traditional social
order created both economic and emotional insecurity for many people.
Feudalism had been based on stable, hierarchical social relations, with indi-
vidual identity derived from one's role within a web of mutual expectations
and duties. Such a society may have repressed initiative, but it did provide
familiarity and stability within a community. In contrast, the newly emerg-
ing industrial society wrenched people out of their accustomed roles. A per-
son might grow up in a rural village, migrate to the nearest city, and seek
employment in a factory surrounded by hundreds of other similarly
uprooted workers. People no longer felt "at home" in an unfamiliar world
of anonymous strangers.
The market's need for readily available resources resulted in most citi-
zens being separated from any viable means of self-sufficiency. Many small
farmers, having lost their land, became itinerant workers available for hire.
Skilled artisans, who might previously have been members of professional
guilds, could not compete against mechanized industry and were forced to
seek employment in the factories. Even aristocrats suffered declining power
and status as capital replaced land as the primary source of wealth. With
these changes, the social bonds maintaining the hierarchical order of feu-
dal society began to disintegrate. People formerly enmeshed in extended
families, neighborhoods, churches, and communities now faced the imper-
sonal forces of the market as isolated entities.
The French Revolution of 1789 magnified concerns about a "dark side"
of the Enlightenment. The linkage between this conflict and Enlightenment
thinking is evidenced by the revolutionaries' call for "liberty, equality, fra-
ternity." The chaos and bloodshed of the revolution cast doubt on the
effort to remake society in accordance with human reason. To halt the cor-
rosive impact of the Enlightenment, a renewed defense of traditional soci-
ety was needed.
Edmund Burke (1729-1797), an Irish member of the British parliament,
was among the first to develop a Conservative critique of the Enlightenment.
Burke claimed that the Enlightenment effort to fundamentally restructure
The History of Political Economy 29

society was destroying the authority and emotional attachments that unite
individuals into communities. Self-interested human reason, he posited, will
always resent authority for placing limitations on the scope of individual
action. But without authority, all persons suffer as society degenerates into a
morass of conflicting desires and passions. Since human reason was not a
reliable guide for redesigning society, Burke proposed that the exercise of rea-
son should be confined to efforts by individuals to improve their private
lives. The grand schemes of intellectuals and Utopians would only disrupt the
traditional patterns of human interaction, engendering chaos.
Attempting to develop a defense of established traditions, Burke and
subsequent Conservatives looked back to the merits of medieval society. A
stable social order must be grounded in traditional institutions such as the
church and the patriarchal family. When efforts to reconstruct society
destroy traditional institutions, individuals are uprooted from their cus-
tomary roles in the community. Deprived of a cultural heritage, isolated
individuals lose meaning in their lives, become concerned solely with self-
gratification, and neglect their duties to others and to society as a whole.
From the Conservative perspective, the degeneration of the French
Revolution into violent anarchy was attributable to individualism and the
pursuit of self-interest. The Revolution foreshadowed an impending col-
lapse of civilization that could be averted only by strengthening traditional
values and institutions.
As the Enlightenment was sweeping Great Britain and France, a reaction
was brewing in Germany. Having been subjected to military conquest by
France and the threat of economic domination by British industry, many
Germans expressed disdain toward the cultures of their western neighbors.
Fearing the cosmopolitan values and lifestyles spawned by urban industrial
society, they were determined to avoid disintegration of their own culture.
This reaction to the Enlightenment has been labeled "romanticism."
Writers such as Johann Fichte (1762-1814), August von Schlegel
(1767-1845), Friedrich von Schelling (1775-1854), and Johann Herder
(1744-1803) expressed their opposition to the effects of modernization on
Germanic culture. Whereas the Enlightenment stressed the rationality of
humans, the importance of science, and the mechanical nature of reality,
the German romantics defended the unpredictability and irrationality of
humans, the importance of traditional culture in maintaining a cohesive
society, and a view of reality that includes spiritual and even mystical ele-
ments. Rather than adopting the analytical methods of modern science, the
romantics sought to develop their intuition and instincts, their passions and
feelings, their sensitivity to beauty, and their sense of harmony with nature.
They believed that personal fulfillment could be achieved only within the
context of a stable culture based on widely shared values. From their per-
spective, the Enlightenment view of humans as autonomous, rational, and
calculating, merely described the sordid conditions of English culture. The
30 Political Economy

autonomy so highly prized by Enlightenment thinkers was, for the roman-

tics, isolation from the social bonds essential to human happiness.
Even England, the most industrialized country in the world, experienced
a flourishing romantic movement. Partly inspired by their German coun-
terparts, British writers such as Samuel Taylor Coleridge (1772-1834),
William Wordsworth (1770-1850), and William Blake (1757-1827)
expressed the common theme that society had been damaged by modern-
ization and industrialization. Blake referred to the early factories as "dark,
satanic mills," and English romantics were generally contemptuous of busi-
ness and commerce. They sought happiness and fulfillment by turning
away from modern society to focus on unspoiled nature and metaphysical
contemplation. Ironically, this inward focus on the self would subsequently
steer many romantic writers toward support of liberal and radical notions
of individual freedom from repressive social institutions. For this reason,
romanticism today remains ideologically ambiguous.
A similar ambiguity surrounds the second major thread of nineteenth-
century Conservatism. Nationalism originally flourished as an outgrowth
of the liberal Enlightenment ideals of popular sovereignty and the rights of
man. The idea that a group of people sharing a common language, culture,
and heritage could collectively determine their future lay at the root of the
French Revolution and many other conflicts of the late eighteenth and early
nineteenth centuries. However, the alliance between nationalism and liber-
alism was short-lived. Whereas liberalism stresses the rights of autonomous
individuals, nationalism demands submersion of personal identity in the
national group. After the defeat of Napoleon in 1815, a Conservative reac-
tion swept across Europe as governments sought to strengthen their nations
against the demands for democracy and individual freedom.
By the mid-nineteenth century, Conservatives in Europe had gained the
upper hand in their battle against the forces unleashed by the Enlighten-
ment. The failures of the revolutions of 1848 persuaded Conservatives that
the masses could be allowed some participation in politics without desta-
bilizing society. Later in the nineteenth century, Bismarck in Germany and
Disraeli in England sought to gain popular support for Conservative gov-
ernments by establishing rudimentary welfare programs. Government
would replace the aristocracy in dispensing charity.
However, an even more important change in Conservatism was the har-
nessing of nationalist sentiments to promote the goals of stability, order,
state power, and economic expansion. Conservatives claimed that a true
nation is more than just a collection of individuals sharing the same geo-
graphical space; it is based on a common language, common bloodlines,
and common culture. This emphasis on cultural purity led Conservative
nationalists to oppose free trade. Any nation opening its borders to the free
flow of resources, products, and ideas will gradually lose its unique iden-
tity, without which, the shared values forming bonds between individuals
The History of Political Economy 31

disintegrate and a nation loses its vitality and power. Only government can
effectively oppose the cosmopolitan influences of the international market
economy. A strong government enables a nation to be self-determining, free
from constraints imposed by other nations and by the forces of the market.
Conservative nationalism is typically linked with cultural and politi-
cal chauvinism, which explains why racial and ethnic strife, imperialism,
and war often accompany nationalist sentiments. The desire for self-
determination frequently results in military conquest to expand national
borders or spheres of influence against real or imagined foreign threats.
Nationalists also find war and imperialism to be useful in diverting pub-
lic attention away from internal problems and toward the glory and
prestige of the nation. Some writers even touted war as a rare opportu-
nity for individuals to transcend the routine of everyday life and display
the noble human sentiments of courage, valor, strength, and patriotism.
An illustrious example of a nineteenth-century nationalist is the German
historian and philosopher Heinrich von Treitschke (1834-1896), whose
racist and militarist writings would later provide inspiration for Adolf
Hitler (1889-1945) and the Nazi movement.

NEOCLASSICAL ECONOMICS
The rise of Radicalism and Conservatism established alternatives to clas-
sical political economy. However, both perspectives met with considerable
opposition. Radicalism aroused fears of the confiscation of private property,
while many regarded Conservatism as a threat to democracy and modern-
ization. Despite the resistance to Radical and Conservative ideas, the influ-
ence of classical political economy waned during the nineteenth century for
several reasons. The classical predictions of widespread poverty and slow-
ing growth failed to materialize, raising doubts about the theories underly-
ing those forecasts. Also, Marx's use of classical political economy to attack
capitalism caused mainstream political economists to dissociate themselves
from Smith and Ricardo. Finally, the combination of an increasingly pow-
erful working class and social problems accompanying industrialization cre-
ated new demands for government intervention to improve education,
old-age security, public health, and occupational safety. In the face of these
pressures, the policy of laissez-faire became increasingly unpopular.
With the three dominant perspectives all seemingly flawed, an ideologi-
cal vacuum was developing. The time was ripe for a new approach to polit-
ical economy capable of defending both democracy and private property.
In 1871, three theorists, writing separately and unknown to one another,
simultaneously developed this new theory. Carl Menger (1840-1921) of
Austria, W. Stanley Jevons (1835-1882) of England, and Leon Walras
(1834-1910) of Switzerland changed the focus of political economy from
the classical concern with distribution and growth to a "neoclassical"
32 Political Economy

orientation that dealt solely with the behavior of individual consumers and
firms operating in competitive markets.
To emphasize their focus on individual choice, the neoclassical theorists
even changed the name of their field of study. Jevons referred to political
economy as "the old troublesome double-worded name of our science" and
urged his colleagues to replace it with the term "economics." His sugges-
tion gained wide acceptance, and by the beginning of the twentieth century,
neoclassical economics had attained dominant status among competing
perspectives in political economy. Neoclassical economists sought to con-
struct a theory that matched the scientific rigor of physics. To achieve this
goal, they applied mathematics as an analytical method to explain the
choices of individual consumers and producers. Under conditions of perfect
competition, individuals would engage in mutually beneficial exchanges
until they gained the most satisfaction possible from the resources at their
command—a situation labeled as efficient by the neoclassical economists.
Having demonstrated that free markets result in efficiency, the neoclassical
economists largely affirmed the classical prescription of laissez-faire while
avoiding the objectionable ideas of class conflict and economic stagnation.
Although early neoclassical economists shared many of the same values
and tools of analysis, disagreement among economists in Austria and
England gave rise to two separate traditions: Austrian economics and
Cambridge economics. Austrian economists were undoubtedly influenced
by the political climate in their country during the late nineteenth century.
As the Hapsburg empire crumbled, the working class grew increasingly
receptive to socialist ideas. In this environment, a group of academic econ-
omists in Vienna, including Carl Menger, Friedrich von Wieser
(1851-1926), and Eugen von Bohm-Bawerk (1851-1914) sought to
demonstrate the appeal of a free-market economy with virtually no gov-
ernment intervention.
In addition to defending the virtues of capitalism, Austrian economists
have been harsh critics of Marxism and socialism. Ludwig von Mises
(1881-1973) claimed that without the forces of supply and demand oper-
ating in a free market, prices could not accurately reflect consumer prefer-
ences or the relative scarcity of different resources. Socialist planners, he
argued, could not possibly gather enough information about resource avail-
ability and consumer preferences to permit calculation of appropriate prices
for all products and resources. As a result, shortages and surpluses for dif-
ferent commodities would inevitably plague a socialist economy and ineffi-
ciency would be rampant. Only capitalism provides incentive for gathering
the information required for efficient choices by allowing individuals to reap
the rewards of their own foresight, initiative, and innovation.
In contrast to Austrian economists, Stanley Jevons and subsequent econ-
omists at Cambridge University recognized a more positive role for gov-
ernment. Although committed to preserving the freedom of individual
The History of Political Economy 33

choice, their analysis of market failures provided rationales for government

intervention to improve the workings of the market. The most prominent
of the early Cambridge economists, Alfred Marshall (1842-1924), demon-
strated that economic efficiency could be enhanced by taxing those indus-
tries in which average costs rose as output expanded and using the revenue
to subsidize those industries, such as utilities and transportation, in which
average costs fell as they served more customers.
Another Cambridge economist, Arthur C. Pigou (1877-1959), developed
the analysis of externalities in which the market fails to allocate resources
efficiently because the actions of one person or firm create costs or benefits
that are not reflected in market prices. Pigou recommended taxation of
those actions creating external costs and subsidies for actions creating exter-
nal benefits. Since externalities pervade society, the scope for government
intervention created by this market failure is potentially quite large.
In 1933, Cambridge economist Joan Robinson (1903-1982) showed
that the absence of perfect competition will cause an inefficient allocation
of resources and exploitation of workers. She suggested that government
could intervene either to promote competition or to directly respond to the
problems caused by lack of competition. Three years later, the most signif-
icant contribution of Cambridge economics occurred with John Maynard
Keynes's (1883-1946) powerful claim that laissez-faire capitalism is inher-
ently prone to depression and unemployment. To remedy this problem, he
proposed active government policies to stimulate the market.

MODERN POLITICAL ECONOMY

Within the field of political economy, four broad perspectives currently
contend for prominence: Classical Liberalism, Radicalism, Conservatism,
and Modern Liberalism. The persistence of these dramatically different
viewpoints attests to an irreducible ideological element in political econ-
omy. Scientific methods cannot resolve the disputes among alternative per-
spectives because their differences are ultimately based on commitments to
conflicting values. To understand these divisions within political economy,
we need to briefly review the historical evolution of ideological labels.
The ideas associated with the Enlightenment have traditionally been
called "liberal." Liberalism stands for individual freedom and rights
against the arbitrary exercise of power by church, state, and other persons.
This commitment to individual freedom and autonomy originally made lib-
erals strongly egalitarian in supporting equal rights for all citizens. In con-
trast to the hierarchical structure of feudal society, liberals anticipated that
the consequence of equal rights would be substantially greater economic
equality. As liberals challenged aristocratic privileges, the labels "right"
and "left" became part of popular political discourse. In the French
National Assembly of 1789, the defenders of aristocratic privilege and
34 Political Economy

hierarchy stood on the right side of the chamber, while the proponents of
greater equality and individual freedom stood on the left. As a result, pro-
ponents of equality have since been called "leftists," while those who
defend hierarchy are called "rightists."
Rightists claim that hierarchical social relations are essential to a good
society. Individuals need distinctions of status to differentiate themselves
from others. A society lacking sufficient hierarchy will fail to provide
incentives for citizens to excel, resulting in a stifling mediocrity and drag-
ging the entire society into economic stagnation, boredom, and apathy.
Rightists also defend hierarchy as essential to organize the complex social
processes needed to maintain prosperity and order. Just as armies rely on
hierarchical chains of command to wage war, other institutions such as
corporations, schools, and families also must be hierarchically structured
to achieve their objectives.
Leftists, on the other hand, claim that human development flourishes
when individuals engage in cooperative, mutually respectful relations that
can thrive only when excessive differences in status, power, and wealth are
eliminated. According to leftists, a society without substantial equality will
distort the development of not only deprived persons, but also those whose
privileges undermine their motivation and sense of social responsibility.
This suppression of human development, together with the resentment and
conflict engendered by sharp class distinctions, will ultimately reduce the
efficiency of the economy.
The right/left dichotomy is often treated as synonymous with the con-
servative/liberal dichotomy. Although this usage of ideological labels may
have been appropriate for analyzing political debate in the late eighteenth
century, modern discourse has become more complex. In addition to the
dispute over hierarchy and equality, both rightists and leftists have devel-
oped internal splits over another question: should the private interests of
individuals take precedence over the interests of society? Individualists
defend the priority of individual interests, while communitarians defend
the priority of society's interests.
Individualists claim that a community has no interests other than the
aggregation of the individual interests within it. Therefore, the notion of a
public interest or common good is a myth; the good community is one that
allows individuals to freely pursue their private interests. Individualists are
not directly concerned about the well-being of the community because they
remain confident that any community securing individual freedom will be
made prosperous by the energies and talents of its citizens. For individual-
ists, freedom means the right to pursue one's interests with minimal con-
straint by society.
In contrast, communitarians view human development as a function of
the quality of the social environment and therefore expect the community
to provide a supportive and nurturing environment. By themselves,
The History of Political Economy 35

individuals are rather helpless in the face of social forces over which they
have no control, but the community as a whole can consciously engage in
actions to facilitate the development of individual interests and shape indi-
vidual character.
Individualists and communitarians have sought to discredit each other
through caricature. Communitarians are portrayed as supporting "anthill"
or "beehive" societies in which members simply serve their assigned role
with no room for individual creativity or expression. Individualists, on the
other hand, are accused of advocating an amoral society in which selfish,
isolated persons pursue their narrow interests, constrained only by laws
and the threat of punishment. Yet communitarians are vigorous defenders
of individual dignity, claiming that a nurturing community enables indi-
viduals to achieve their full potential. Conversely, individualists value
healthy communities but argue that communities are most peaceful and
prosperous when individuals are permitted to freely pursue their interests.
The debate between individualists and communitarians has occurred on
both the right and left sides of the political spectrum, resulting in four
major perspectives within political economy. The differences among these
four perspectives are illustrated in Figure 2.2.
In the top-right quadrant, the Classical Liberal perspective is associated
with both hierarchy and individualism. Although the earliest forms of lib-
eral thought were highly egalitarian, by the beginning of the nineteenth
century, many liberals concluded that the pursuit of individual freedom

Figure 2.2
Value Commitments of Perspectives in Political Economy
INDIVIDUAL

Modern Classical
Liberal Liberal

EQUALITY HIERARCHY

Radical Conservative

COMMUNITY
36 Political Economy

results in hierarchy and that hierarchy is essential for economic prosperity.

Classical Liberalism was clearly articulated in the early nineteenth century
by classical political economists and was later reinvigorated by neoclassical
economists, particularly those of the Austrian school.
In the bottom-right quadrant, the Conservative perspective defends both
hierarchy and community. Conservatives from Burke onward have stressed
the importance of a harmonious community in molding virtuous persons,
but they also view hierarchy as essential to provide leadership by those
with superior abilities. A hierarchical community not only establishes the
authority and traditions essential for inspiring loyalty and allegiance
among citizens, but it also provides the social context within which indi-
viduals can successfully find meaning and purpose in their lives.
The bottom-left quadrant shows the Radical perspective combining
commitments to both equality and community. Radicals uphold the origi-
nal egalitarian impulse associated with early liberalism but view this goal
as achievable only when the entire community is empowered to collectively
establish institutions and allocate resources. Radicals believe that when all
citizens participate in constructing society, both personal development and
economic prosperity will advance.
Finally, the top-left quadrant illustrates the Modern Liberal perspective's
simultaneous commitments to equality and individualism. Like Classical
Liberals, Modern Liberals view individual autonomy as essential to guar-
anteeing both human dignity and a thriving economy; however, they also
defend substantial equality as necessary for all persons to develop their
capacities fully. Although Modern Liberals recognize potential conflicts
between the values of individualism and equality, they remain confident
that the two values can reinforce each other when the powers of govern-
ment and the market are appropriately balanced.
The next four chapters examine each of these contending perspectives
separately, seeking to develop an understanding of the value commitments
underlying much of the controversy in political economy. This controversy
represents more than mere academic debate; the future of mankind is liter-
ally at stake. As John Maynard Keynes observed: "The ideas of economists
and political philosophers, both when they are right and when they are
wrong, are more powerful than is commonly understood. Indeed, the
world is ruled by little else."

ADDITIONAL READING
Arblaster, Anthony. The Rise and Decline of Western Liberalism. New York: Bas
Blackwell, 1984.
Baradat, Leon P. Political Ideologies: Their Origins and Impact, 3rd ed. Englewo
Cliffs, NJ: Prentice-Hall, 1988.
The History of Political Economy 37

Cole, Ken, John Cammeron, and Chris Edwards. Why Economists Disagree: The
Political Economy of Economics. New York: Longman, 1983.
Elliott, John E., and John Cownie, eds. Competing Philosophies in American
Political Economics. Pacific Palisades, CA: Goodyear, 1975.
Heilbroner, Robert. The Worldly Philosophers, 6th ed. New York: Simon 6c
Schuster, 1986.
Hoover, Kenneth. Ideology and Political Life. Monterey, CA: Brooks/Cole, 1987.
Polanyi, Karl. The Great Transformation: The Political and Economic Origins of
Our Time. Boston: Beacon Press, 1944.
Prychitko, David L., ed. Why Economists Disagree: An Introduction to the
Alternative Schools of Thought. Albany, NY: State University of New York
Press, 1998.
Schwarzmantel, John. The Age of Ideology. New York: New York University
Press, 1988.
Sowell, Thomas. A Conflict of Visions: Ideological Origins of Political Struggles.
New York: William Morrow, 1987.
Spechler, Martin C. Perspectives in Economic Thought. New York: McGraw-
Hill, 1990.
Voeglin, Eric. Prom Enlightenment to Revolution. Durham, NC: Duke University
Press, 1975.
Ward, Benjamin. The Ideal Worlds of Economics. New York: Basic Books, 1979.
Whynes, David K., ed. What Is Political Economy} New York: Basil Blackwell, 1984.
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PART II

CONTENDING
PERSPECTIVES IN
POLITICAL ECONOMY
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Chapter 3

The Classical Liberal

Perspective

Classical Liberalism envisions society as an aggregation of autonomous

individuals seeking to pursue their private interests. Ideally, all social inter-
action should consist of voluntary exchanges among persons, and every
individual has the right to be free from the arbitrary exercise of power.
With its focus on individual choice as the primary determinant of social
outcomes, Classical Liberalism is ideally suited for expression in the form of
economic theory. In fact, the historical development of Classical Liberalism
closely aligns with the history of economic thought, starting with classical
political economy, continuing with the Austrian branch of neoclassical eco-
nomics, and culminating in a variety of current bodies of thought including
neo-Austrian economics, public choice theory, new classical economics, law
and economics, new institutional economics, constitutional economics, lib-
ertarianism, supply-side economics, monetarism, and property-rights theory.

ARCHITECTS OF CLASSICAL LIBERALISM

Thomas Hobbes (1588-1679)
English philosopher Thomas Hobbes was one of the first social theorists
to adopt the methods of the newly emerging natural sciences for the
analysis of human behavior. Influenced by other philosophers such as
42 Political Economy

Francis Bacon (1561-1626) and Rene Descartes (1596-1650), Hobbes

envisioned the world as a mechanical system operating according to precise
laws of nature and devoid of any inherent meaning, purpose, or morality.
He sought to uncover the natural laws governing society by analyzing indi-
vidual behavior. Humans, he claimed, were constantly propelled into
motion by the need to satisfy their appetites and desires. Although Hobbes
acknowledged nonmaterial desires such as the need for social recognition,
he claimed that such desires were best met by the pursuit of wealth.
Furthermore, since the universal pursuit of wealth would bring individuals
into conflict with one another, humans must become aggressively material-
istic to protect themselves from others. In the absence of morality, humans
will do whatever gives them pleasure and avoid whatever causes pain.
Hobbes concluded that in a "state of nature" prior to government or laws,
life would be "solitary, poor, nasty, brutish, and short" because a "war of
all against all" would result from the unrestrained pursuit of wealth.
Since violence and death obviously interfere with pleasure, Hobbes rea-
soned that self-interested persons would voluntarily enter into a "social con-
tract" with others to establish a government with absolute authority to
define and protect individual rights. Two points about the social contract are
noteworthy. First, it can include only laws that potentially could gain uni-
versal consent. Since people would presumably refuse to consent to any law
that restrained or harmed them more than other individuals, the government
cannot legitimately oppress any particular group or person. Second, since
government is created by the people, it must serve the interests of the people.
Hobbes opposed the idea of "divine right" as the source of royal power.
The Hobbesian legacy has had a major impact on Classical Liberalism. By
starting his analysis with the isolated individual in a state of nature, Hobbes
portrayed society and government as secondary and artificial creations. The
pursuit of private interests is presumed to be the only purpose of human exis-
tence, with politics merely a necessary activity to maintain social order.
Hobbes rejected the earlier Aristotelian notion of political activity as the site
of human development gained through participation in public life.
Despite Hobbes's strong commitment to individualism, he concluded that
government must have absolute authority to establish and enforce laws. So
long as the monarch maintained public order, the people could not resist
royal authority. The title of Hobbes's major book Leviathan (1651) has
become synonymous with an authoritarian state. Thus, although Hobbes
was a founder of Classical Liberalism, his conclusions about the scope of
government authority have been rejected by subsequent Classical Liberals.

John Locke(1632-1704)
John Locke, an English philosopher and physician, followed the
Hobbesian method by building his theories on assumptions about
The Classical Liberal Perspective 43

individuals in a state of nature. Like Hobbes, Locke assumed the self-inter-

ested and acquisitive nature of humans, but he believed that the capacity
for reason enabled people to discover "natural laws" that would serve as
guides both for restraining the pursuit of self-interest and defining the
proper role of government. Whereas Hobbes relied on government to
establish and protect property rights because his pessimistic view of
humans made the "state of nature" an arena of violence, Locke claimed
that property rights existed before government, and therefore government's
authority was limited to protecting those natural rights.
In Two Treatises of Government (1689), Locke claimed that people's
ownership of themselves and their labor is a self-evident truth. When indi-
viduals "mix" their labor with a part of nature unclaimed by anyone else,
that portion of nature becomes their property. Since this process requires
no government action or consent of others, Locke concluded that property
rights are natural and therefore no person or government can legitimately
violate them.
Locke's writings exhibit the dual commitment of Enlightenment thinkers
to freedom and equality. His explanation of the origins of property rights
seems to support unlimited freedom to accumulate property and therefore
substantial inequality. However, Locke attached two "provisos" to the
right to obtain property: property must be used without spoilage or waste,
and any claim to property is valid only when "there is enough, and as good
left in common for others." Yet, having placed these limits on accumula-
tion, Locke proceeded to remove them. He argued that the use of money
permits people to accumulate wealth without spoilage and that the
"enough and as good" restriction becomes impractical once all valuable
land in a country has been claimed.
Locke's apparent acceptance of unlimited accumulation should be under-
stood within its historical context. At the dawn of the capitalist era, liberal
thinkers were confident that individual rights and freedom would result in
substantially more equality than had existed under feudal domination.
Locke's defense of freedom to accumulate wealth was not insensitive to those
who lacked property. He argued that private property benefits all persons in
society; poor citizens are better off as wage laborers in a private-property sys-
tem than if they were living in a society with communal ownership. This shift
from defending property as a natural right to defending property for its
social benefits is the beginning of a split within Classical Liberalism that ulti-
mately gave birth to a new perspective—Modern Liberalism.

Adam Smith (1723-1790)

Adam Smith, a Scottish professor of moral philosophy, was the first to
articulate Classical Liberalism in the form of economic theory rather than
the political language of Hobbes and Locke. By Smith's time, political
44 Political Economy

disorder in Great Britain had been largely resolved, and the task at hand
was to raise the material standard of living.
In his first major work, The Theory of Moral Sentiments (1759), Smith
argued that humans are able, through social interaction, to overcome their
narrow self-interest and view situations from the perspective of an "impar-
tial spectator." The human capacity for sympathy would restrain aggres-
sive, selfish behavior and create a stable society. Yet Smith was deeply
concerned that the emerging market economy unleashed powerful and
potentially dangerous motives such as greed, envy, and selfishness. The
aggressive pursuit of self-interest threatened to erode the social bonds of
sympathy and concern for others. Given these pressures, Smith wondered
whether human virtue could withstand the temptations of wealth.
Motivated by these concerns, Smith turned his attention from moral phi-
losophy to political economy. After being introduced to the idea of laissez-
faire by a group of French political economists known as the Physiocrats,
he concluded that a market society could not only withstand the effects of
acquisitive selfishness, but could actually steer this "vice" into productive
and socially beneficial channels. Without meaning to do so, self-interested
individuals actually promote the good of society by engaging their talents
and resources in the most profitable use. By the time he published The
Wealth of Nations in 1776, Adam Smith had substituted the market for
individual conscience as the mechanism for reconciling self-interest with an
orderly and prosperous society.
Although Smith is often portrayed as the champion of capitalism, he was
not completely optimistic about the market. He found self-interest com-
patible with the public good only when competition prevailed, and he
warned that businessmen would constantly seek to suppress competition
and deceive the public to increase profits. Smith also expressed concern
about the well-being of workers in a market economy. While he recognized
the tremendous efficiency gained by dividing production into separate, rou-
tine tasks, he worried that the monotony and mindlessness of factory jobs
would render workers "as stupid as it is possible for a human being to
become." Finally, Smith set the tone for subsequent classical political econ-
omists with his fear that the dynamism and growth of a market society
would eventually come to an end as profitable investment opportunities
were exhausted.
Whatever qualms he may have expressed about capitalism, Adam
Smith's legacy has been his defense of free markets and nonintervention by
government. During the seventeenth and eighteenth centuries, mercantilist
policies had involved government in taxing commerce, opening new mar-
kets in foreign lands, protecting companies from competition, and assuring
product quality. Smith believed this meddling interfered with the potential
benefits of the market and proposed that government be limited to three
The Classical Liberal Perspective 45

functions: law enforcement, printing of money, and provision of certain

public goods such as harbors and roads.

T h o m a s Malthus ( 1 7 6 6 - 1 8 3 4 )
Malthus, a professor of history and political economy at the East India
College in England, was most responsible for steering Classical Liberalism
away from its earlier predisposition toward the Enlightenment values of
optimism, egalitarianism, and faith in reason. In contrast to Enlightenment
thinkers, Malthus believed that human misery was caused by nature rather
than badly organized institutions. In his book An Essay on the Principle of
Population (1798), Malthus claimed that population grows at a faster rate
than do food supplies because of the limited availability of fertile land.
Population growth could be restrained either by "positive checks" such as
famines, plagues, and wars, or by "preventive checks" such as delayed
marriages and "moral restraint."
Malthus had little hope that humans would be capable of exercising the
restraint required to control population growth, so positive checks would
be the effective controls on overpopulation. Moreover, Malthus believed
that government should not attempt to interfere with the operation of these
positive checks. He proposed that raw sewage be permitted to flow in the
streets, that insect-infested swamps remain undrained, and that cures for
disease be suppressed, thereby allowing nature to carry out the grisly task
of limiting population growth.
In addition to rejecting efforts to help the poor, Malthus argued that the
privileges and wealth of the upper classes benefitted all of society. He rea-
soned that workers as a group received insufficient wages to permit them
to purchase the vast array of goods being produced by the new factories,
so the economy would be plagued by periodic "gluts" of unsold goods
unless some members of society could afford to spend large amounts on
consumption without adding to production. Idle consumption by the rich
was therefore essential to maintain high levels of employment.
Malthus represents a turning point in Classical Liberalism. The
Enlightenment attack on aristocratic privilege evolved into a defense of
capitalist inequality. Later in the nineteenth century, Malthus's ideas would
resurface as "social Darwinism." Relying on the evolutionary theory of
Charles Darwin, Herbert Spencer (1820-1903) in England and William
Graham Sumner (1840-1910) in America claimed that the human species
evolves according to the principle of "survival of the fittest." Any attempts
by government to aid the poor would cause deterioration of the human
gene pool by allowing unfit members of the human species to survive and
reproduce. This biological argument for hierarchy and inequality became a
powerful ideological force in Europe and the United States.
46 Political Economy

Priedrich A. Hayek ( 1 8 9 9 - 1 9 9 2 )
Although born in Austria, Hayek spent most of his adult life in England
and America, where he devoted himself to defending laissez-faire capital-
ism against the challenges posed by Conservatives, Modern Liberals, and
Radicals. In The Road to Serfdom (1944), Hayek rejected the notion of a
middle ground between capitalism and socialism; the concept of a "mixed
economy" is untenable. Government intervention disrupts the smooth
functioning of a free-market economy, thereby generating the need for
additional corrective intervention. This vicious circle by which govern-
ment-induced problems lead to a larger role for government will eventually
push society toward socialism. The only way to halt this process is to resist
the initial temptation to improve society through government action.
The movement of Classical Liberalism away from the Enlightenment's
optimism and confidence in human reason can be clearly discerned in Hayek's
writings. He defended the market not because he believed in the power of
individual reason, but rather because of his skepticism about the capacity of
the human mind to obtain knowledge. Since each person can have detailed
knowledge of only a small portion of society, humans lack sufficient knowl-
edge to plan or direct the entire economy. Hayek explicitly denounced what
he called "constructivist rationalism," which seeks to remake society in accor-
dance with more humane and enlightened values.
Hayek praised the market for upholding individual freedom and empha-
sized its ability to process and transmit vast amounts of information about
individual preferences, availability of resources, and technology. Prices
reflect the conditions underlying supply and demand, so individuals are
able to compensate for their personal lack of knowledge by simply com-
paring prices. Moreover, through their own particular experience, individ-
uals gain specialized knowledge of niches in the market and may take
advantage of any profitable opportunities they discover.
Hayek's distrust of human reason led him to oppose virtually all gov-
ernment activity on the grounds that politicians and bureaucrats cannot
know what is best for society. The task of politics should be merely to
establish a constitution and set of laws restraining individuals from harm-
ing others. Hayek warned that when government is permitted to expand its
activities Seyond the protection of property rights, it will inevitably become
the tool of special interests. Various groups will claim that their interests
should be met to promote the public good or to achieve social justice, but
these appeals are simply disguised attempts to secure government benefits.
The public good is simply the aggregation of the private interests of indi-
viduals, and justice is a "mirage" based on the false supposition that some
interests are more deserving of fulfillment than others.
Hayek rejected the notion that economics can provide a scientific basis
for predicting or attempting to control the future of the economy. Not only
The Classical Liberal Perspective 47

is the economy too complex to comprehend, but individual behavior is

unpredictable and therefore not amenable to scientific analysis. The most
that economics can accomplish is to demonstrate the wisdom of free mar-
kets and minimal government. Attempts to use economic theory to guide
monetary and fiscal policy will fail.
Hayek also opposed efforts by economists to identify market failures that
might warrant government intervention. He claimed that the efficiency of the
market in processing information, providing price signals to guide individual
choice, and encouraging innovation more than offsets any inefficiency result-
ing from market failures. Moreover, government does not possess sufficient
knowledge to improve the workings of the market. Intervention is likely to
cause greater disruption than the market failure.

Robert Nozick ( 1 9 3 8 - )
A recent restatement of Classical Liberalism has been undertaken by
Harvard philosopher Robert Nozick in his book Anarchy, State, and
Utopia (1974). Nozick argues that the free market will create justice in the
distribution of rewards if the following three conditions are met: (1) prop-
erty must be acquired without theft, fraud, or coercion; (2) transfers of
property from one person to another must occur through free exchanges,
inheritance, gifts, or charity; and (3) any property holdings failing to meet
the first two requirements must be "rectified" through redistribution.
Nozick rejects the notion that justice requires any specific distribution
of rewards. On the contrary, if a particular "pattern" of distribution
were enforced, then government would have to confiscate and redistrib-
ute income earned in the market, thus violating individual liberty.
Nozick also dismisses any conception of justice linking reward with indi-
vidual merit. There are many possible criteria of merit including effort,
need, productivity, contribution, social status, or virtue, but society has
no way of objectively choosing from among these criteria. Therefore,
Nozick argues, any effort to assess individual merit and reward it would
be arbitrary.
Nozick instead proposes the following definition of justice: "from each
as they choose, to each as they are chosen." Each person's reward should
be determined by his or her choices of what to offer in the market and by
other people's choices to buy the person's goods or services. Personal
income may be justifiably low if an individual chooses not to offer much
or if what is offered is not desired by others.
For Nozick, inequality is the result of individual choice. So long as peo-
ple are free to choose, markets will tend to generate inequality, but this
inequality will be fair. In fact, attempts by government to interfere with
market distributions are the major cause of injustice. Nozick equates
taxation with slavery, claiming that it forces citizens to work for the
48 Political Economy

government. The only legitimate role of government is as a "nightwatch-

man" protecting property rights and preserving individual liberty.
In every society, the accumulation of wealth has sometimes involved
theft, fraud, or coercion and has therefore violated Nozick's definition of
legitimate acquisition of property. If property holdings are illegitimate,
Nozick's version of justice requires "rectification" through government
redistribution. Nozick acknowledges that his arguments for laissez-faire
are undercut by past injustices in the acquisition of property. He even con-
cedes that because current poverty is most likely to be found among the
descendants of those who suffered from past injustices, government redis-
tribution might legitimately attempt to make the poorest citizens as well off
as possible. In summary, while Nozick defends laissez-faire in principle, his
commitment to rectify past injustices leads him to acknowledge the legiti-
macy of redistributive policies. Most Classical Liberals have been unwilling
to accept this particular conclusion.

PRINCIPLES OF CLASSICAL LIBERALISM

The essential features of Classical Liberalism are contained in the defi-
nitions it gives to some of the most controversial terms in political economy.
Human Nature. Humans are self-interested and capable of acting
autonomously by using their capacity for reason to discover the most effi-
cient means to satisfy their needs and desires.
Society. Society is an aggregation of individuals and has no goals or pur-
poses of its own. The good society permits individuals to pursue their pri-
vate interests free from arbitrary constraint.
Government. Individuals create government for the purpose of protect-
ing their rights as established by a constitution. Beyond this function, gov-
ernment is best when it governs least.
Morality. No objective method exists for discerning which values are
superior to others; therefore, individuals should be free to determine right
and wrong based on their personal preferences. The only valid social values
are those that all citizens would support. Since nobody wants their property
or civil rights to be violated, such violations are wrong and should be illegal.
Freedom. Synonymous with autonomy and independence, freedom is
the absence of coercion by government or by other people.
Authority. Legitimate authority arises only through the consent of indi-
viduals to relinquish a degree of their autonomy. For example, authority in
the workplace may be consented to by employees in exchange for a wage.
Authority by government may be consented to by citizens in exchange for
protection of their rights to freedom and property.
Equality. Equality means that all citizens have the same opportunity
to engage in economic activity and the same civil rights as established by
the constitution.
The Classical Liberal Perspective 49

Justice. Justice requires protection of property rights and civil rights

established by the constitution and punishment of those who violate the
rights of others.
Efficiency. Efficiency is a situation in which no person can be made bet-
ter off without making someone else worse off. In other words, resources
are allocated to those persons most willing and able to pay for them.

CLASSICAL LIBERALISM TODAY

The Great Depression of the 1930s dealt a crushing blow to Classical
Liberalism by persuading large numbers of citizens that the free market
could not be trusted to organize economic activities. From the Depression
to the 1970s, Classical Liberals were conspicuously absent from public dis-
course, the primary exception being some members of the economics
department at the University of Chicago. However, the combination of high
inflation, high unemployment, and slow growth during the 1970s set the
stage for a resurgence of Classical Liberal thought. Almost overnight, jour-
nals, newspapers, and public debates were filled with Classical Liberal pro-
posals for solving the crisis of the modern welfare state. During the past two
decades, virtually every country in the West has moved toward reductions
in government spending, taxes, regulations, and public ownership. Inflation
and unemployment have improved dramatically, and only one recession has
occurred in the United States during the past fifteen years. Three of the most
prominent schools of thought in contemporary Classical Liberalism are neo-
Austrian economics, public choice theory, and new classical economics.

Neo-Austrian E c o n o m i c s
The conquest of Austria by the German army during World War II forced
many intellectuals in that country to emigrate. Ludwig von Mises
(1881-1973) and Friedrich A. Hayek were the principle carriers of Austrian
economics to England and the United States. Although never fully embraced
by mainstream economists, Mises and Hayek managed to gain the respect
of influential economists such as Lionel Robbins (1898-1984), Fritz
Machlup (1881-1973), Oskar Morgenstern (1902-1977), and Gottfried
Haberler. More recently, a neo-Austrian school of thought has developed in
the United States under the leadership of Israel Kirzner, Murray Rothbard
(1926-1995), and Roger Garrison. Neo-Austrian writings are featured in
the Austrian Economics Newsletter, the Journal of Libertarian Studies,
Social Philosophy & Policy, and Critical Review.
Although neo-Austrians are committed to free markets and personal lib-
erty, they reject the neoclassical assumption that individuals possess full
information. If full information prevailed, then planners could conceivably
replicate the market, and the defense of private property would be weakened.
50 Political Economy

Neo-Austrians willingly concede that markets are fraught with shortcomings

including monopolistic elements, uncertainty, and externalities. Their defense
of the market rests not on its ability to allocate resources efficiently at any
single point in time, but on its role as an engine for discovering and applying
knowledge that will raise standards of living. Individuals occupying unique
niches in the market have the best information and the strongest incentive to
innovate. No planning agency or bureaucracy can match the dynamism of
entrepreneurs in pushing technology forward. In fact, according to neo-
Austrians, government intervention will almost always be detrimental
because government caters to special-interest groups rather than promoting
the public good.
Without the rationality assumptions of neoclassical economics, neo-
Austrians rely less on mathematics and more on persuasive argument. In
fact, they join with Radicals in rejecting the neoclassical effort to create a
scientific economics analogous to physics. Ironically, neo-Austrians con-
clude that economics is largely a completed project. Having demonstrated
the efficiency of markets and the failures of government, neo-Austrian
economists have nothing left to do except to continue the effort to persuade
other economists, politicians, and the public that laissez-faire is the best
policy. The neo-Austrian perspective has influenced mainstream economics
through the development of game theory to illuminate situations in which
decisions must be made without full information.

Public Choice Theory

In recognition of the growing power of government in capitalist soci-
eties, some Classical Liberal theorists have attempted to analyze political
decisionmaking by applying the same principles of rational individual
choice used to explain the actions of consumers and firms. Rejecting the
Modern Liberal view of government as an impartial promoter of the well-
being of society, public choice theorists claim that voters, bureaucrats, and
politicians behave in the same fashion as do private consumers and pro-
ducers: they pursue their private interests, seeking maximum utility at min-
imum cost. Citizens vote for candidates who will deliver the most benefits
and the lowest taxes. Bureaucrats seek job security, high wages, profes-
sional advancement, and social status while minimizing their work effort.
The guiding principle of politicians is vote maximization since they must be
reelected to maintain the benefits of public office.
Politics is viewed by public choice theorists as simply economic activity
conducted in the public sphere of government instead of the private sphere
of the market. This approach to political economy is sometimes called the
"Virginia school" because its leading proponents taught at the University of
Virginia in the 1960s, moved to Virginia Polytechnic Institute in the 1970s,
and finally established a permanent base at George Mason University in the
The Classical Liberal Perspective 51

1980s. The most prominent public choice theorist is James Buchanan,

winner of the Nobel Prize in economics in 1986. Other important contrib-
utors include Anthony Downs, Gordon Tullock, William Riker, and
Richard McKenzie. Buchanan and Tullock founded the Public Choice
Society in 1963. Writings from this perspective are featured in the journals
Public Choice, Constitutional Political Economy, The Independent Review,
and Economics & Politics.
Public choice theorists uphold the Classical Liberal faith in free markets,
but they express concern that democratic politics creates an avenue by
which individuals and groups can gain economic benefits while spreading
costs among all taxpayers. Because individuals can be expected to pursue
their interests by any means available, ending this abuse of democracy
requires strict constitutional limits confining government to its appropriate
role as protector of property rights.

New Classical E c o n o m i c s
When Keynesian policies faltered in the early 1970s, Classical Liberals
were quick to fill the theoretical void. New classical economics describes
the modern revival of laissez-faire ideas from the nineteenth century. Some
of its leading proponents are Thomas Sargent, Neal Wallace, Robert Lucas,
and Robert Barro. Writings by new classical economists can be found in the
Journal of Political Economy and the American Economic Review.
New classical economists focus on the role of expectations in affecting
individual behavior. Sargent and Wallace developed the theory of "rational
expectations" to demonstrate the fallacy of Keynesian efforts to lower the
rate of unemployment. If citizens have rational expectations, their behav-
ior will take into account any anticipated effects of government policy.
When government attempts to stimulate the economy, citizens anticipat-
ing greater inflation will raise their wage demands, thereby offsetting any
tendency for employers to hire more workers. In short, any deliberate
effort by government to increase economic activity will be frustrated by
the reactions of citizens seeking to defend their income against antici-
pated inflation. The new classical economists conclude that government
cannot lower the level of unemployment and therefore ought to abandon
such attempts.
Closely related to new classical economics are two other theoretical
approaches: monetarism and supply-side economics. The former, champi-
oned by Milton Friedman, seeks to revive the classical idea that the amount
of money in the economy affects prices but not the level of employment or
output. Monetarists conclude that active monetary policy by the Federal
Reserve System can have no positive impact on unemployment and there-
fore should be abandoned in favor of steady growth of the money supply
at a rate sufficient to accommodate increases in real output.
52 Political Economy

Supply-side economics is so named because it rejects the Keynesian

focus on demand management and instead proposes to stimulate the econ-
omy through deregulation, tax cuts, and privatization. These policies
mesh perfectly with the new classical goal of minimizing the size and role
of government.

AN ASSESSMENT OF CLASSICAL LIBERALISM

Classical Liberalism originally provided the ideological ammunition to
dislodge the feudal aristocracy from power and to create a society in
which individual freedom and aspirations were both permitted and
rewarded. By undermining superstition, tradition, and arbitrary power,
Classical Liberalism promoted a wider scope for individual expression and
cultural diversity. With its insistence on the priority of individual liberty
over all other values, Classical Liberalism has served as a bulwark against
the abuse of political power. This ideology insists that for individuals to
develop and maintain personal identities, an irreducible core of their exis-
tence must remain separate from—and even opposed to—larger social
processes. Any society that represses the individual desire to formulate and
pursue a personal set of goals will lose the human energy unleashed by the
pursuit of self-interest. Such energy has been a mainspring of social and
economic progress.
However, the changing nature of Western societies poses several chal-
lenges to Classical Liberalism's commitment to the market as the primary
institution for organizing society. First, industrialization and urbanization
have contributed to a proliferation of "externalities" that cause the market
to allocate resources inefficiently.
Second, the large-scale production required to take advantage of econ-
omies of scale associated with modern technology has proven subversive to
effective competition. Without competition, the market contains no mech-
anism for guiding self-interest into socially useful channels.
Third, the same self-interested behavior motivating individuals and
firms to compete in the market also drives them to form groups and seek
government protection against the competitive pressures and instability of
the market. The resulting politicization of the economy can be reversed
only by a government sufficiently powerful to override the groups benefit-
ting from political activity. Thus, Classical Liberals face the paradox that a
very powerful government may be necessary to minimize the role of gov-
ernment. The question of whether such a government could be trusted to
exercise its power judiciously remains unanswered.
Finally, Classical Liberalism fails to adequately recognize the human
desire for community and a sense of common purpose. Individuals want to
pursue their private goals and achieve personal success, but they also
exhibit commitments to collective goals and the quality of public life. In
The Classical Liberal Perspective 53

fact, with rising standards of living in Western societies, "quality of life"

issues have become more significant. Concerns about environmental degra-
dation, crime, the spread of AIDS, homelessness, and drug abuse reflect a
growing realization that personal income and wealth cannot secure a high-
quality lifestyle when public life is deteriorating.

ADDITIONAL READING
Barry, Norman P. Hayek's Social and Economic Philosophy. London: Macmillan,
1979.
Boaz, David, ed. The Libertarian Reader. New York: The Free Press, 1997.
Boaz, David, and Edward H. Crane, eds. Market Liberalism: A Paradigm for the
21st Century. Washington, DC: Cato Institute, 1993.
Brittan, Samuel. A Restatement of Economic Liberalism, 2nd ed. London:
Macmillan, 1988.
Buchanan, James M. Post-socialist Political Economy. Lyme, NH: Edward Elgar,
1997.
Burke, T. Patrick. Ethical Principles for a Free Market. New York: Paragon House,
1993.
Conway, David. Classical Liberalism: The Unvanquished Ideal. New York: St.
Martin's, 1995.
Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press,
1962.
Friedman, Milton, and Rose Friedman. Free to Choose: A Personal Statement. New
York: Harcourt Brace Jovanovich, 1980.
Hendrickson, Mark W., ed. The Morality of Capitalism. Irvington-on-Hudson, NY:
The Foundation for Economic Education, 1996.
Machan, Tibor. Capitalism and Individualism. New York: St. Martin's, 1990.
McKenzie, Richard, and Gordon Tullock. Modem Political Economy. New York:
McGraw-Hill, 1978.
Rand, Ayn. Capitalism: The Unknown Ideal. New York: Signet, 1967.
Roberts, Paul Craig. The Supply-Side Revolution. Cambridge: Harvard University
Press, 1984.
Rockwell, Llewellyn H., Jr., ed. The Free Market Reader. Burlingame, CA: The
Ludwig von Mises Institute, 1988.
Rothbard, Murray. For a New Liberty. New York: Collier-Macmillan, 1978.
Rowley, Charles K. Liberty and the State. Brookfield, VT: Edward Elgar, 1993.
Schotter, Andrew. Free Market Economics. New York: St. Martin's, 1985.
Shand, Alexander H. Free Market Morality: The Political Economy of the Austrian
School New York: Routledge, 1989.
Stigler, George J., ed. Chicago Studies in Political Economy. Chicago: University of
Chicago Press, 1988.
Vaughn, Karen I. Austrian Economics in America. New York: Cambridge
University Press, 1994.
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Chapter 4

The Radical Perspective

Although Radical ideas can be traced to antiquity, modern Radicalism was

born out of conflict between the democratic aspirations of the Enlighten-
ment and the emerging power of private property rights. Radicals claimed
that public control of production was essential to attaining the
Enlightenment values of freedom, equality, and justice. During the nine-
teenth century, as Classical Liberalism became increasingly pessimistic and
anti-egalitarian, Radicalism exerted an immense influence among the work-
ing class and intellectuals. It raised the possibility of transcending capitalism
to achieve a more humane, cooperative society. The specter of socialism was
sufficiently threatening to defenders of private property to trigger major
revisions in liberal theory and policies. Thus, while Radicalism's direct influ-
ence in the United States and Western Europe has been minimal, it has indi-
rectly changed the contours of society by pushing liberalism toward
acceptance of the welfare state and government regulation of business.

ARCHITECTS OF RADICALISM
Jean Jacques Rousseau (1712-1778)
Unlike Hobbes's and Locke's portrayal of humans as self-interested crea-
tures who establish government only to protect their individual rights, the
56 Political Economy

French philosopher Rousseau claimed thai humans need to be engaged in a

community to develop fully. Without a network of social relations, the indi-
vidual is isolated, lonely, and helpless. For Rousseau, "our sweetest exis-
tence is relative and collective, and our true ego is not completely inside us."
Yet despite his praise of social life, Rousseau was a trenchant critic of
existing societies. In Discourse on the Origin of Inequality (1775), he
blamed unequal holdings of property for destroying the naturally peaceful
and cooperative nature of humans. Inequality enabled wealthier individu-
als to dominate others, and this subordination caused selfish and competi-
tive traits to appear as people sought to protect themselves from the power
of the wealthy. Unlike Classical Liberal theorists, who attributed acquisi-
tive materialism to human nature, Rousseau believed that human behavior
adapted to social circumstances. Different institutional arrangements
would cause evolution in patterns of behavior. Rousseau proposed a reor-
ganization of society to promote greater individual freedom, equality, and
a sense of community.
In On the Social Contract (1762), Rousseau outlined the details of this
reorganization. He advocated popular sovereignty in which all citizens
would actively participate in politics. For Rousseau, government by the
people meant more than the clashing of individual or group interests. The
experience of living in a true democracy would teach citizenship skills, par-
ticularly the ability to merge one's personal interests with the public inter-
est. Rousseau called the public interest the general will and claimed that it
reflected the interests of people in their roles as citizens rather than as pri-
vate individuals. To assure that the general will would prevail, Rousseau
proposed the abolition of all groups seeking to promote their own narrow
interests at the expense of the well-being of society.
Once the general will had been determined, each individual would be
morally obliged to obey it. Rousseau suggested that recalcitrant persons
who placed their private interests above the good of society should be
"forced to be free." This phrase has echoed hauntingly in the twentieth cen-
tury as totalitarian regimes have banished dissidents to labor camps and
mental asylums for "reeducation." However, Rousseau claimed that the
opportunity to participate in shaping society's rules and institutions would
create the desire to protect and promote the interests of society.
Participatory democracy was the key to solving the tension between indi-
vidual freedom and social order. Individuals could conform to the general
will and yet still be free if they participated in establishing the institutions
by which they were governed. For Rousseau, government was not a threat
to individual freedom if it functioned simply as a means by which citizens
could realize and pursue their common interests.
To facilitate participatory democracy, Rousseau envisioned small com-
munities in which private interests and the public interest would be harmo-
nized through face-to-face dialog among citizens. Ongoing discussion and
The Radical Perspective 57

debate would create shared values and a sense of solidarity. Rousseau also
believed that democracy and freedom required greater equality of property
holdings so that no citizen would be completely dependent on others for
survival. This equality would be maintained by a progressive income tax, a
tax on luxury goods, and government regulation of economic activity.
Although Rousseau was a vehement critic of repressive governments, his
legacy has provided support for totalitarianism. By portraying narrow self-
interest as immoral and damaging to society, Rousseau created the ratio-
nale for extending government control over all aspects of life to assure that
private interests do not interfere with the public good. While Rousseau
relied on small communities to harmonize private and public interests with-
out coercion, the potential for oppression increases as the size of the com-
munity grows. If the community is an entire nation, the opportunities for
meaningful political participation are limited, and any proclaimed general
will is likely to reflect the decisions of a small ruling party. Without politi-
cal participation, enforcement of the general will will be perceived as
oppressive by many citizens.

Karl Marx ( 1 8 1 8 - 1 8 8 3 )
Marx, a German political economist, spent most of his adult life in
London. After earning a doctorate in philosophy at the University of
Berlin, where he was heavily influenced by the ideas of G. W. F. Hegel,
Marx discovered socialism by reading the works of the Utopian socialists,
including Fourier and Saint-Simon. A friendship with Friedrich Engels
(1820-1895) established a lifelong working relationship resulting in many
coauthored works.
Marx believed that the material conditions of society, specifically the
production process, exerted a profound influence on all other dimensions
of human existence, including politics, religion, and ideas. Marx's critics
have labeled his approach "economic determinism," but he acknowledged
mutual interaction among the economy, other social institutions, and
human consciousness.
Marx mocked the Utopian socialists for their naive belief that small
groups of people could simply retreat from capitalist society to form com-
munities based on collective property. Without the benefits of modern tech-
nology, the division of labor, and large-scale production, these communities
would be doomed to poverty and failure. Marx was convinced that a suc-
cessful socialism could emerge only out of capitalist society, so he dedicated
himself to understanding the inner workings of the capitalist system and
the reasons for its ultimate demise.
According to Marx, the accumulation of capital is the driving force
shaping all other aspects of the social system. In Das Kapital (1867), he
analyzed the process by which capital seeks self-expansion through profits.
58 Political Economy

Because capital accumulation proceeds in a fashion largely independent of

the will of any person or of society as a whole, Marx argued that capital,
rather than government or citizens, is the actual ruler of society. Capital
dictates both public policy and individual behavior. Whereas Classical
Liberals defended the autonomy of capital as essential to protecting indi-
vidual freedom from oppression by government and aristocrats, Marx
argued that the power of capital subverted the ability of citizens to shape
society in accordance with their democratically determined collective inter-
ests. In short, the freedom of capital meant a loss of freedom for people.
Competitive pressures forced even the capitalists to adhere to the dictates
of capital. They could not pay higher wages or provide safer workplaces
without losing their competitive edge. Capitalists were not evil people; the
blame for society's problems lay with capital—that "cancerous cell" whose
growth would eventually destroy existing society.
Marx's claim that capital accumulation is the primary force shaping cap-
italist societies seems to imply that machines have a demonic control over
human beings. However, Marx used the word "capital" to signify more
than just machines and factories; capital is the social relationship between
owners and workers. According to Marx, capital creates profits not
because machines are productive, but because the dominant power of the
owners of capital enables them to pay workers a wage worth less than the
products being manufactured. When Marx attributed exploitation and
other social problems to "the logic of capital accumulation," he was not
blaming machines; instead, he faulted the class structure that gave power
to a small minority of the population.
Marx's understanding of capitalism led him to predict that the system
would result in a falling rate of profit, increasing centralization of owner-
ship, the elimination of the middle class, and perpetual misery for workers.
Yet he also viewed capitalism as laying the groundwork for a future social-
ist society. In its short lifespan, capitalism had brought about more tech-
nological developments and accumulation of productive assets than had
occurred in all previous history. Moreover, the experience of working in
large factories was causing workers to develop more cooperative attitudes
and a greater sense of solidarity. The combination of "class consciousness"
and the depressions brought about by falling profits would eventually trig-
ger a proletarian revolution and the establishment of socialism.
Marx anticipated that a proletarian revolution would entail a massive
uprising by a vast majority of the population and therefore would be
quite democratic. To prevent a counterrevolution and to handle the
administration of the new socialist society, a "dictatorship of the prole-
tariat" would be necessary. However, even this dictatorship would be
democratic in that it would represent the interests of nearly all citizens
and would oppress only ex-capitalists and reactionaries who attempted to
resist the will of the people. In a socialist society, productive assets would
The Radical Perspective 59

be subject to public control, and people would be paid according to their

productive contribution to society.
After an unspecified number of years, socialism would complete the task
of enlarging productive capacity and creating a more cooperative "social-
ist man." With the advent of communism would come an end to scarcity
and a "withering away of the state" since a highly cooperative society
would have no need for police, courts, or prisons. Communism would
operate according to the slogan: "from each according to his ability, to
each according to his needs."

Edward B e r n s t e i n ( 1 8 5 0 - 1 9 3 2 )
Because of his political activism, Edward Bernstein was exiled from his
native Germany and lived in England from 1880 to 1901. Bernstein formed
a strong friendship with Friedrich Engels and became a major figure in
Marxist political circles. At the same time, however, Bernstein met Sidney
and Beatrice Webb (1859-1947 and 1858-1943), who had founded a
Radical group called the Fabian Society. Under the influence of the Fabians,
Bernstein concluded that orthodox Marxism had been rendered obsolete
by the evolving nature of capitalism. The middle class was growing rather
than disappearing, workers' standards of living were rising, ownership was
being dispersed through the public sale of corporate stock, and the increas-
ing market power of large corporations was putting an end to cut-throat
competition. Bernstein concluded that neither the collapse of capitalism
nor a proletarian revolution was inevitable. Instead, socialism could be
ushered in gradually and peacefully through the democratic political
process because workers outnumbered capitalists. To facilitate this process,
political leadership and educational programs were needed to demonstrate
to workers that their interests lay with socialism.
In Evolutionary Socialism (1899), Bernstein explicitly broke his allegiance
to Marxism. He objected to the Hegelian aspects of Marxism that portrayed
history as the inevitable movement toward a predetermined endpoint. In addi-
tion, Bernstein rejected Marx's claims to have developed a science of society.
Socialism, he claimed, would materialize not because "laws of motion" would
determine the course of history, but because socialism was a morally superior
and hence more appealing system for a large majority of the population.
In place of Hegel, Bernstein relied on the ethics of the German philoso-
pher Immanuel Kant (1724-1804) to argue that capitalism was immoral
because it encouraged people to regard one another as means to achieve
their own private ends. Socialism, by contrast, would enable people to
respect and be compassionate toward others without falling behind in a
competitive struggle for dominance. Bernstein's ideas were important in
establishing a Radical tradition known as "revisionism," which provided
the basis for social democratic political parties in Europe.
60 Political Economy

Thorstein Veblen ( 1 8 5 7 - 1 9 2 9 )
A distinctly American brand of Radicalism was founded by Thorstein
Veblen, a political economist whose caustic critique of corporate capitalism
and bourgeois lifestyles influenced American social theory significantly. In
his book The Theory of the Leisure Class (1899), Veblen contrasted
"dynamic" aspects of society such as science, the use of tools, and the
"instinct for workmanship," with "static" aspects such as superstition, rit-
ual, and habit. Veblen praised modern technology for undermining old tra-
ditions and myths, but argued that capitalist production, with its focus on
profits, tended to thwart the potential dynamism of technology.
Although capitalism was once a progressive force in vanquishing feudal
customs and authority, it spawned a new privileged class. This "leisure
class" had little direct involvement in production but lived in splendor on
income derived from the ownership of property. Veblen argued that the
leisure class interfered with the efficiency of capitalism by serving as role
models for the rest of society. The extravagant lifestyles of the rich set a
standard to which all other classes aspired. Unable to afford genuine lux-
ury, the middle and lower classes attempted to emulate the leisure class by
engaging in "conspicuous consumption." Since the motivation behind con-
spicuous consumption is to relieve the insecurity and sense of inferiority
created by the existence of a leisure class, Veblen concluded that abolishing
this class would conserve resources and make everyone happier.
Another problem created by the leisure class is erosion of the "instinct
for workmanship." While capitalism depends on the work ethic, Veblen
argued that the frivolous lifestyle of the leisure class creates frustration
and resentment throughout society. Seeking to emulate the leisure class,
people develop an aversion to work and seek shortcuts to success. Even
businesses are prone to this syndrome. Rather than encouraging innova-
tion and the production of high-quality products, corporations try to
manipulate the market and the consumer in pursuit of short-term profits.
Veblen coined the term "planned obsolescence" to describe the manufac-
ture of products that quickly deteriorate, forcing consumers to replace
them often.
Veblen believed that modern technology made large corporations and
concentrations of business power inevitable. Returning to an earlier era of
competitive capitalism was not a feasible option, so he proposed that con-
trol of corporations be delegated to engineers and scientists who, by virtue
of their training and temperament, focus on efficiency and quality. By rely-
ing on "technocrats" to restore dynamism to modern societies, Veblen
steered a path between capitalism and Marxian socialism. While convinced
of the waste and inefficiency of modern capitalism, he was also critical of
Marx and had no confidence in government expropriation of the means of
production. He anticipated that scientists and engineers would operate
The Radical Perspective 61

businesses in the public interest without the bureaucracy and concentration

of power entailed by government ownership.
Veblen left a dual legacy. First, his ideas served as inspiration for the
American populist movement with its mistrust of corporations, govern-
ment, and the rich. In the 1920s and 1930s, the Progressives and even the
Democratic Party were influenced by Veblen as they attempted to clean up
government and end business corruption. Second, in the realm of theory,
Veblen was the intellectual inspiration for a tradition within political econ-
omy known as "institutional economics."

V. I. Lenin ( 1 8 7 0 - 1 9 2 4 )
Vladimir Ilyich Ulyanov, Russian theorist and activist who adopted the
name "Lenin," led the first successful socialist revolution in 1917. An
extremely forceful personality and skilled debater, Lenin almost single-
handedly refashioned Marxism to address the particular situation of Russia
in the early twentieth century. Because Marx had said very little about con-
ducting a revolution or about the nature of postrevolutionary society,
Lenin faced a formidable task.
Marx had envisioned socialism as arising from the misery and alien-
ation of workers in the most advanced capitalist countries. Moreover,
given Marx's predictions of centralized business power and a vanishing
middle class, the workers would constitute a vast majority of the popula-
tion so that a proletarian revolution would be spontaneous, widely sup-
ported, and democratic. In contrast, Lenin was faced with a backward
country ruled by an autocratic tsar and lacking a large industrial working
class. In What Is To Be Done? (1902), Lenin proposed that a "vanguard
party" of dedicated intellectuals take responsibility for initiating the revo-
lution and providing leadership for the masses. He also urged Radicals to
resist the temptation to join reform movements that would accomplish
only minor changes in the status quo; a genuine revolution was the only
solution to Russia's backwardness.
In Imperialism, The Highest Stage of Capitalism (1916), Lenin developed
another theoretical argument favoring the possibility of revolution in Russia.
He claimed that capitalism had evolved from its earlier competitive phase
into a monopoly phase that required corporations to move beyond national
boundaries in their quest for cheap resources and markets for their products.
Imperialism had three major consequences. First, it generated higher profits,
thereby permitting capitalists to pay higher wages to their workers in the
industrialized countries of Western Europe and North America. Lenin con-
cluded that workers in these countries had unwittingly become incorporated
into the exploiting class because they were benefitting from the profits
extracted from their fellow workers in the less-developed countries. As an
"aristocracy of labor," workers in the industrialized countries could no
62 Political Economy

longer be expected to provide the impetus for a socialist revolution. Second,

increasing oppression of the less-developed countries would fuel revolution-
ary anger outside the core of the global capitalist economy. Lenin argued that
Russia, as the most backward of the European nations, was the "weakest
link" in the capitalist chain and therefore would be the first to break. Finally,
imperialism would lead to war between the advanced capitalist nations as
they struggled for control of global resources and markets. Lenin viewed
World War I as an imperialist conflict and was confident that the capitalist
countries would so devastate each other that socialism would quickly spread
from Russia throughout Europe.
Lenin left an ambiguous legacy. His insistence on the role of a vanguard
party in leading the revolution has given the Leninist tradition a permanent
antidemocratic imprint. Leninism is associated with a mistrust of the
masses and the consequent need for authoritarian leadership. Lenin is
accused of establishing a brutal, paranoid style of governing that set the
stage for later atrocities committed by Stalin. However, defenders of Lenin
point out that he called for decentralization of power as soon as the revo-
lution had succeeded and that he abandoned this policy only when the
threat of counterrevolution and economic collapse endangered the new
socialist society. When the crisis passed in 1921, he again initiated decen-
tralization with the New Economic Policy. Had Lenin not died in 1924, the
Soviet Union might have taken a dramatically different course than it did
under Stalin.

Jiirgen Habermas ( 1 9 2 9 - )
Habermas is a German social theorist whose prolific writings during
the past thirty years have had a major impact on Radical thought. Like
many Radicals, Habermas was deeply disillusioned by Stalinism and the
authoritarian nature of the Soviet Union. Rather than dismissing Soviet
practices as an aberration from true Marxism, he has attempted to con-
struct a new Radicalism more explicitly sensitive to concerns about
individual freedom.
In Knowledge and Human Interests (1968), Habermas argues that
humans have three distinct types of interests: an interest in controlling
nature, an interest in improved communication with others, and an inter-
est in eliminating oppressive social structures. He indicts capitalism for
promoting the interest in control at the expense of the interests in commu-
nication and liberation. The profit motive constantly drives firms to
increase the technical efficiency of their production; this pressure spreads
throughout society as education, social interaction, family life, and recre-
ation become merely rational means to achieve the end of greater wealth.
Instead of earning money to live a more expressive and fulfilling life, peo-
ple learn to structure their lives to increase their earning potential.
The Radical Perspective 63

In a more recent book, Communication and the Evolution of Society

(1979), Habermas relies on the notion of "communicative ethics" to
develop a critique of both capitalist and authoritarian socialist societies. If
humans do indeed have an interest in improved communication, then they
will seek to remove any structures of domination in society that interfere
with sincere and meaningful dialog. Habermas defines an "ideal speech sit-
uation" as one in which neither party to a conversation has power over the
other. The outcome of the dialog will be determined by the quality of the
ideas being exchanged, not by the relative power of the participants. He
claims that hierarchical power relations in capitalism and authoritarian
socialism block the human interest in communication.
Habermas perceives the major challenge to capitalism coming not from
workers demanding a more equal distribution of income, but rather from the
social movements that have coalesced around such issues as environmental
protection, women's liberation, and nuclear disarmament. The very success
of capitalism in raising standards of living frees individuals to focus on
improving the quality of their lives. The major obstacle to this goal, accord-
ing to Habermas, is the dominance of profit-making and technical rational-
ity over the human interests in expressive communication and liberation.

PRINCIPLES OF RADICALISM
The following definitions capture many of the essential features of the
Radical perspective.
Human Nature. Humans have certain biological needs and a capacity
for reason, but their social and natural environments significantly affect
their consciousness and behavior. The social context provided by language,
traditions, values, and modes of interaction is so essential to human devel-
opment that individuals cannot fully realize their talents and capacities
except in association with other persons.
Society. Society is more than just a collection of individuals. Society is a
living organism into which individuals enter at birth and leave at death.
Because society precedes the individual, it has interests apart from—and
potentially conflicting with—any particular individual's desires. A good
society encourages the fullest possible range of personal development and
social relations based on mutual respect.
Government. Government properly serves as the representative of the
collective interests of citizens. Government permits citizens to do for them-
selves collectively what they cannot accomplish as individuals.
Morality. Although Marxists have traditionally rejected the notion of a
Radical ethic, non-Marxist Radicals find a basis for morality in the human
need for social relationships based on mutual respect. An individual action
or a social system is immoral if it treats people as objects and demeans
their humanity.
64 Political Economy

Freedom. Freedom is the ability to fully develop one's human capacities.

Freedom can be achieved only in the context of a nurturing community
based on cooperation and participation.
Authority. With the possible exception of revolutionary leadership,
authority is legitimate only when democratically established, based on
widespread participation, and publicly accountable.
Equality. Equality means not just equal opportunity, but also substan-
tial equality of result. To achieve equality may require taxation or even
confiscation of property income along with governmental efforts to assist
disadvantaged persons.
Justice. Justice means that rewards are distributed in accordance with
those rights established by the democratic political process. Citizens should
have rights to those conditions essential to human development such as
material necessities and health care. Justice also includes the impartial
administration of the law.
Efficiency. Efficiency means that society's resources are used in a way
that maximizes the attainment of society's goals including such intangible
goals as justice, solidarity, and human development.

RADICALISM TODAY
The brutality of Stalinism during the 1930s and 1940s was a major blow
to the credibility of Radical ideas. After World War II, the anticommunism
of the McCarthy era effectively suppressed Radical voices in America until
the 1960s. However, with the emergence of mass political movements for
civil rights, student power, women's liberation, environmental protection
and an end to the war in Vietnam, the Radical perspective enjoyed a renais-
sance. Three of the most important contemporary Radical schools of thought
are institutional economics, social economics, and post-Marxian theory.

Institutional Economics
Institutional economics arose out of Thorstein Veblen's scathing criti-
cism of both Marxism and neoclassical economics. Veblen found the neo-
classical portrayal of autonomous individuals rationally pursuing
maximum utility to be as implausible as the Hegelian dialectics underlying
Marxism. He proposed to analyze the economy as an evolving process
embedded in an institutional framework including the legal system,
political system, educational system, family life, work, customs, and ethics.
Because the entire array of institutions allocates society's resources and dis-
tributes income, to study the market in abstraction would be a pointless
and misleading exercise.
Veblen's approach was indebted to two major intellectual influences.
Pragmatism, a philosophical perspective developed by John Dewey
The Radical Perspective 65

(1859-1952), William James (1842-1910), and Charles Sanders Peirce

(1839-1914), evaluated moral principles and scientific beliefs according
to their usefulness in solving practical problems. The "historical school"
of political economy, developed in Germany in the mid-nineteenth cen-
tury by Wilhelm Roscher (1817-1894) and Gustav Schmoller
(1838-1917), emphasized the evolutionary nature of economic systems
and the importance of constructing economic theory on a solid base of
data gathered through empirical research. One of Veblen's teachers,
Richard T. Ely (1854-1893), did graduate work in Germany during the
1870s and was largely responsible for introducing the ideas of the his-
torical school to American economists. Ely was the principal founder of
the American Economic Association, the leading professional organiza-
tion of economists.
Prior to World War II, a strong case can be made that institutionalism
was the dominant approach to economics in the United States. In 1920,
institutional economist Wesley C. Mitchell (1874-1948) established the
National Bureau for Economic Research, which is today the leading private
organization for gathering statistical data on the U.S. economy. During the
1930s, many of the economists advising Franklin Roosevelt in fashioning
the New Deal were institutionalists. At the University of Wisconsin, John
R. Commons (1862-1945) created a flourishing center of institutional
research; Clarence Ayres (1891-1972) later did the same at the University
of Texas.
Despite these successes, institutionalism lost its prominence after World
War II. Its decline can be traced to three factors. First, the rise of
McCarthyism and the Cold War created a political climate that was hostile
to any ideas suggesting major restructuring of capitalist institutions.
Second, the apparent success and acceptance of Keynesian economics eased
many doubts about the viability of capitalism and undermined proposals
for radical change. Third, the publication of Paul Samuelson's Foundations
of Economic Analysis in 1949 marked the full-fledged mathematization of
economic theory. Institutionalism is less suited for expression in mathe-
matical form because it analyzes customary patterns of group behavior
rather than the rational behavior of individuals. The institutional approach
has been described as "storytelling," relying on a narrative style to convey
understanding of economic processes. As economists gained increasing
influence in government policymaking, the more "scientific" mathematical
methods of neoclassical economics successfully dominated the less rigorous
institutional approach.
Institutionalists criticize the neoclassical assumptions of rational con-
sumers and perfect competition for disguising the power relations and inef-
ficiency of real-world capitalism. They devote much of their research to
issues such as economic development and industrial organization, where the
perfectly competitive neoclassical model is least appropriate. Institutionalists
66 Political Economy

have been reluctant to specify their visions of the proper balance between
market and government, but underlying their approach is an emphasis on the
Radical values of equality and community.
Among the prominent contemporary institutionalists are Daniel
Fusfeld, Marc Tool, Douglas Dowd, Ron Stanfield, and William Dugger.
Institutionalist writings are presented in the Journal of Economic Issues.

Social Economics
The roots of social economics lie in nineteenth-century continental
European economic thought. German and French political economists
exhibited much greater skepticism toward free markets than did their British
counterparts. They were particularly concerned about the effects of markets
on culture and the spiritual well-being of citizens. In 1931, Pope Pius XI
issued an encyclical criticizing markets for undermining the moral basis of
society. In 1941, the Catholic Economic Association (CEA) was founded in
the United States as part of an effort to engage Christian ethics and eco-
nomic theory. In 1970, the CEA changed its name to the Association for
Social Economics and opened membership to non-Catholics.
Social economics also has secular roots. In 1936, John Maurice Clark
(1884-1963), an ex-president of the American Economic Association,
published Preface to Social Economics, in which he urged the inclusion of
values and ethics in economic reasoning. Over the past half-century, social
economics has been closely linked with institutional economics as many of
the same theorists identify with both schools of thought. Prominent con-
temporary social economists include Amitai Etzioni, Warren Samuels, and
Stephen Worland. The major journals in which writings from this tradi-
tion can be found are the Review of Social Economy and the Forum for
Social Economics.
Like institutional economists, social economists have devoted much of
their effort to criticizing neoclassical economics and constructing alterna-
tive methods for analyzing economic activity. Social economics is touted as
offering a more integrated, holistic, evolutionary approach incorporating
social, cultural, and political factors into its understanding of economic
affairs. The ethical vision of social economists points toward greater equal-
ity, decentralization, and accountability of power, and the priority of
human development over profit.

Post-Marxian Theory
During the nineteenth and early twentieth centuries, Marxism was
hardly visible in the United States due to rising standards of living and gov-
ernment repression of Radical organizations. Even when the Great
Depression triggered a resurgence of Radicalism, little of it was explicitly
The Radical Perspective 67

Marxist. By the 1950s, Marxian economics in the United States was con-
fined primarily to the works of two theorists—Paul Sweezy, the editor of
Monthly Review, and Paul Baran (1909-1964), a professor of economics
at Stanford University.
However, the 1960s witnessed a renewal of the Marxist tradition. Under
the umbrella of the Union for Radical Political Economics (URPE), Marx-
ism gained recognition as a legitimate field of scholarly research. However,
few Marxists in the United States or Europe aligned themselves with the
Soviet version of socialism as consisting of centralized planning, public own-
ership of all means of production, and an authoritarian government.
Western Marxists sought to develop new critiques of capitalism that would
eventually lead to decentralized, democratic, and participatory forms of
socialism. Within this "post-Marxian" tradition, a variety of approaches
have flourished. Some theorists, including Howard Sherman, Duncan Foley,
and David Laibman, have retained traditional Marxian concepts such as the
labor theory of value and the falling rate of profit. Writings from this per-
spective can be found in journals such as Marxism Today, Science &
Society, and the Review of Radical Political Economics.
A second post-Marxian approach rejects most of Marx's theoretical cat-
egories, claiming that changes in capitalism have rendered Marx's original
analysis obsolete. Marx himself is criticized for being insufficiently sensi-
tive to issues of individuality, race, gender, and pluralism. Indeed, theorists
from this perspective are so intent on preserving individual rights and
enlarging the scope of freedom and democracy that they might be labeled
"post-liberals" rather than post-Marxians. Among the most prominent the-
orists representing this approach are Herbert Gintis, David Gordon
(1944-1996), Samuel Bowles, Richard Edwards, and Thomas Weisskopf.
This perspective is represented in journals such as Politics & Society,
Socialist Review, Radical America, and New Left Review.
A third version of post-Marxism is called analytical Marxism. Theorists
such as John Roemer, Jon Elster, and Adam Przeworski have adopted the
techniques of neoclassical economics, including game theory and mathe-
matical modeling, to demonstrate Marxian concepts such as exploitation
and class conflict. Finally, other post-Marxian theorists, including Richard
Wolff, Stephen Resnick, and Jack Amariglio, have sought to revitalize
Marxian analysis by introducing concepts from contemporary philosophy
including poststructuralism and postmodernism. Their writings are pre-
sented in the journal Rethinking Marxism.
Post-Marxian visions of socialism do not preclude the possibility of con-
siderable private ownership of property and reliance on markets. To pre-
vent abuses of government power, post-Marxians emphasize the necessity
of participatory democracy; elected officials and bureaucrats should be
publicly accountable for their actions, and citizens should be actively
involved in the political process. Another bulwark against tyranny is
68 Political Economy

democratization of the workplace, giving workers extensive control over

the production process. With these institutional safeguards, post-Marxians
are confident that tensions between individual freedom and social order
can be minimized.

AN ASSESSMENT OF RADICALISM
Radicalism grew out of the industrialization process of Western Europe.
A new class appeared, lacking access to productive property and, therefore,
having no means of support except selling labor for wages. As capitalism
undermined the self-sufficiency of rural areas, farmers flocked to the cities,
only to find squalor, disease, horrendous working conditions, and subsis-
tence wages. These conditions contrasted so sharply with the bright future
anticipated by Enlightenment thinkers that attention turned toward private
wealth as the last bastion of privilege and unaccountable power. Some
workers and intellectuals began to demand the abolition of private owner-
ship of large-scale means of production.
Radical demands for greater equality have been partially realized
through the welfare state. By threatening to confiscate property, Radicals
forced the wealthy to make concessions. For example, the extension of civil
and human rights in democratic societies has given workers greater pro-
tection against the power of employers. Government support for labor
unions and a minimum wage partially insulates workers from competitive
market forces.
The perennial appeal of Radicalism is the vision of human liberation.
Radicalism shares the hope fundamental to nearly all religions—the com-
ing of a new age when people will live together in universal peace and pros-
perity. Marxism has been called a religion for those who have lost faith in
God. Radicalism also holds out a more secular appeal with its promise of
giving people control over their lives and destiny by restructuring social
institutions. For those who feel oppressed by slave owners, feudal lords, or
capitalist bosses, this opportunity for self-determination through coopera-
tion has been a powerful magnet.
With its emphasis on the social dimension of human existence,
Radicalism is attuned to Western religious and ethical beliefs that have tra-
ditionally condemned selfishness. Even if the pursuit of self-interest pro-
motes economic prosperity, theorists have perennially been concerned with
its potential for undermining individual virtue and distorting human rela-
tions. By appealing to the human capacities for cooperation and compas-
sion, Radicalism stakes out the moral highground in its confrontation with
liberal individualism.
Despite these strengths, the Radical perspective is currently in consider-
able disarray. Radicalism has been badly tarnished by the behavior of gov-
ernments purportedly following Marxist principles. The bleak and
The Radical Perspective 69

oppressive conditions in countries that have tried socialism provide power-

ful testimony against Radical proposals. In fact, with only a few excep-
tions, every country in which socialism occurred is currently moving
rapidly toward capitalism, introducing private property, competition, prof-
itability, and decentralized authority as solutions to the failures of a cen-
trally planned economy.
Radicals initially anticipated that changes in Russia and Eastern Europe
signaled not a rejection of socialism in favor of capitalism, but a victory of
democracy over totalitarianism. With dictatorial regimes removed from
power, they hoped that citizens might establish the first genuine forms of
democratic socialism. However, these visions are fading as industrial assets
in Russia and Eastern Europe are rapidly accumulating in the hands of
small numbers of powerful individuals. Radicals now foresee a phase of
"robber capitalism" resembling the United States economy in the late nine-
teenth century and express concern that reactionary nationalism may
develop as citizens express their disillusionment with capitalism.
Even before communism began to crumble, many Radicals were
rethinking their principles in light of disappointment with existing socialist
societies. Radicals now acknowledge that some of the problems tradition-
ally blamed on capitalism may be inherent in any form of social organiza-
tion. For example, the problem of motivating productive activity does not
disappear with the advent of socialism, nor does the problem of scarcity of
resources and making choices between alternative uses of those resources.
Not all conflicts in society are class conflicts, and therefore not all conflicts
will disappear with the elimination of classes. Moreover, problems of indi-
vidual loneliness, alienation, and frustration do not vanish along with cap-
italism. If conflict will persist in any future society, then Marx's vision of
communism as a society in which neither market nor government mediates
conflict should be rejected. Government serves not only to represent the
collective interests of society, but also to resolve the conflicting interests of
individuals and groups within society. Furthermore, given the inherent
problems of relying on government to mediate all conflict, the market may
be essential to socialist society as an arena in which the private interests of
individuals find expression and fulfillment.
The flaw with any pure form of Radicalism is neglect of the private
sphere within which individuals formulate life-plans and pursue interests.
While humans may have significantly greater capacities for sympathy and
cooperation than have yet been exhibited, an irreducible core of each per-
son must remain self-interested. To completely merge one's identity with a
larger group would mean the loss of any identity distinct from the group.
Without individual aspirations to motivate action, no society can retain its
vitality.
Stated differently, while free individuals might collectively choose to
establish a more egalitarian and cooperative society, they cannot be
70 Political Economy

expected to permit society to determine their destiny. In addition to their

social selves, humans have private lives, and liberty must mean something
other than conformance to the will of society. The compatibility between
individual liberty and social solidarity is limited by the fact that individu-
als remain separate entities distinct from the society in which they live.

ADDITIONAL READING
Attewell, Paul. Radical Political Economy Since the Sixties. New Brunswick, NJ
Rutgers University Press, 1984.
Bowles, Samuel, and Richard Edwards, eds. Radical Political Economy. Brookfield,
VT: Edward Elgar, 1989.
Burkitt, Brian. Radical Political Economy. New York: New York University
Press, 1984.
Coughlin, Richard M., ed. Morality, Rationality, and Efficiency: New Perspectiv
on Socio-Economics, Armonk, NY: M. E. Sharpe, 1991.
Dugger, William M., ed. Radical Institutionalism. Westport, CT: Greenwood,
1989.
Edwards, Richard C, Michael Reich, and Thomas E. Weisskopf. The Capitalist
System, 3rd ed. Englewood Cliffs, NJ: Prentice-Hall, 1985.
Fold vary, Fred E., ed. Beyond Neo-classical Economics. Brookfield, VT: Edwar
Elgar, 1996.
Heilbroner, Robert. Marxism: For and Against. New York: W. W. Norton, 1980.
. The Nature and Logic of Capitalism. New York: W. W. Norton, 1985.
Lippit, Victor D., ed. Radical Political Economy: Explorations in Alternative
Economic Analysis. Armonk, NY: M. E. Sharpe, 1996.
Mosely, Fred. Heterodox Economic Theories: True or False. Brookfield, VT:
Edward Elgar, 1995.
Roberts, Bruce, and Sue Finer, eds. Radical Economics. Boston: Kluwer, 1992.
Sawyer, Malcolm C. The Challenge of Radical Political Economy: An Introduction
to Alternatives to Neo-Classical Economics. Savage, MD: Barnes 6c Noble,
1989.
Sayer, Andrew R. Radical Political Economy: A Critique. Cambridge: Blackwell
1995.
Sherman, Howard J. Foundations of Radical Political Economy. Armonk, NY:
M. E. Sharpe, 1987.
Stanfield, J. Ron. Economics, Power and Culture: Essays in the Development of
Radical Institutionalism. New York: St. Martin's, 1995.
Wolff, Richard D., and Stephen A. Resnick. Economics: Marxian versus Neo-clas-
sical. Baltimore: Johns Hopkins University Press, 1987.
Chapter 5

The Conservative
Perspective

At the outset of this chapter, a word of caution about ideological labels is

needed. In the nineteenth century, "conservative" referred to ideas and the-
orists defending hierarchy and community against the perceived threats
posed by capitalist individualism and democracy. At that time, Conserv-
atism was a backward-looking reaction to the disintegration of traditional
society caused by industrialization and mass political movements in
Europe. In the United States, nineteenth-century Conservatism was pri-
marily a southern phenomenon oriented toward defense of traditional
ways of life based on the plantation system and slavery.
By the beginning of the twentieth century, however, Conservatives con-
cluded that the working class was not a mob intent on attacking all privi-
lege and could be persuaded to support Conservative ideals. As Classical
Liberalism collapsed in Europe in the 1920s and in the United States a
decade later, a rightist coalition emerged with Classical Liberals affirming
Conservative ideals of nationalism and tradition while Conservatives
yielded to the Classical Liberal priorities of free markets and individual lib-
erty. Modern Liberals hastened this ideological realignment by attaching
the label "conservative" to Classical Liberals so that Modern Liberalism
could lay claim to the tradition of freedom and democracy.
The marriage of Classical Liberalism and Conservatism after World War II
was advantageous to both groups. Most Conservatives were anxious to rid
72 Political Economy

themselves of the taint of fascism and to embrace capitalism and democracy

as bulwarks against totalitarianism from both the left and the right. Classical
Liberals, sensing that the tides of history were shifting against them, viewed
Conservatives as their most obvious allies in resisting communism and
defending the unfettered rights of private property. This rightist coalition was
institutionalized in 1946 with the establishment of the Foundation for
Economic Education, which assembled U.S. corporate sponsors to fund
research and publish papers and books defending liberty and property. The
following year, Friedrich Hayek organized the Mont Pelerin Society, named
after the Swiss town where the first conference was held, to provide a sup-
portive organization for intellectuals seeking to reverse the trend toward gov-
ernment power. Although Hayek, Milton Friedman, and other Classical
Liberal members insisted they were not Conservatives, they made little effort
to dispute the Modern Liberal claim to the liberal tradition.
Starting in 1955, William F. Buckley Jr.'s National Review magazine
actively promoted the fusion of Conservative and Classical Liberal per-
spectives. Conservatives would swallow their fear of the market and yield
to laissez-faire economic policies, while Classical Liberals would accept the
role of government in policing internal dissent and challenging communism
around the world. Since the 1950s, the political spectrum has been effec-
tively reduced to three camps: conservatives (including Conservatives and
Classical Liberals), liberals (meaning Modern Liberals), and Radicals.
Despite the fact that ideological defenses of free markets and individual
liberty are now labeled "conservative," this text continues to use the nine-
teenth-century meaning of that label. Although this unconventional usage
may pose minor difficulties in translating current political discourse into
the framework developed in this book, the insights gained through main-
taining the distinction between Conservatism and Classical Liberal are sub-
stantial. When Classical Liberalism is called "conservatism," genuine
Conservatism tends to be forgotten or ignored. Also, the goal of under-
standing the historical roots of modern debates is better achieved by conti-
nuity over time in the meaning of ideological labels. Finally, the alliance
between Classical Liberalism and Conservatism appears to be disintegrat-
ing in the absence of a global communist threat. The nineteenth-century
distinction between the two ideologies may become increasingly relevant in
assessing the political debates of the twenty-first century.

ARCHITECTS OF CONSERVATISM
E d m u n d Burke ( 1 7 2 9 - 1 7 9 7 )
Burke, a member of the British parliament and a distinguished orator,
was a reform-minded Whig who opposed royal authority and supported
the American quest for independence. He was not opposed to change in
The Conservative Perspective 73

principle, but the bloodshed and anarchy of the French Revolution

persuaded him that a vigorous defense of traditional society was needed to
prevent revolutionary sentiments from spreading throughout Europe.
In Reflections on the Revolution in France (1790), Burke blamed the
Revolution on the ideals of the Enlightenment. The revolutionary goal of
total social change is doomed to failure because society is not a mechanism
that can be taken apart and then restructured. Society is a fragile organism;
its institutions are not products of rational human design, but have evolved
over the ages to suit the unique features of particular peoples and countries.
Values and beliefs should not be changed abruptly because they represent
the "collective wisdom of the ages." Burke even defended prejudice as a
force steering people toward traditional behavior without the need to think
about what is right.
According to Burke, humans are neither autonomous nor rational. They
are passionate beings who need the institutions, customs, and rules pro-
vided by society to control their desires and form personal identities. He
viewed isolated individuals, ruled by their passions, as incapable of achiev-
ing the fulfillment that comes from virtuous living within an orderly com-
munity. Fearing that traditional values of respect, duty, and patriotism had
been vanquished by selfish materialism, Burke declared: "The age of
chivalry is gone. That of sophisters, economists, and calculators has suc-
ceeded, and the glory of Europe is extinguished forever."
Claiming that individuals need moral guidance and authority, Burke
proposed a national church and an aristocratic government. He distrusted
democracy, arguing that the common person had neither the time nor incli-
nation to acquire sufficient knowledge to vote wisely. Democracy would
only turn the political process into a battle between competing private
interests. Aristocrats, he believed, were ideally suited to govern because
their wealth and leisure freed them from the scramble for personal gain,
thereby enabling them to impartially promote the public interest.
Burke supported private property and a market economy, but he claimed
that self-interest must be restrained by moral considerations. He urged
businessmen to behave in an honorable and chivalrous manner by placing
their duties to society above their quest for maximum profit. Burke wanted
economic activity to remain relatively free from government intervention,
but he also believed that freedom requires structures of authority to
restrain the passions of individuals. He envisioned a society in which
authority would be so embedded in traditional hierarchical structures that
it would be largely invisible.

T h o m a s Carlyle ( 1 7 9 5 - 1 8 8 1 )
Carlyle, a British social critic and historian, was a major figure in the
Conservative reaction to industrialization. He feared that commercial society
74 Political Economy

was destroying the emotional bonds and sense of duty that made civilization
possible. In particular, Carlyle scorned classical political economy, calling it
"the dismal science" and "pig philosophy" because it portrayed society as
an arena in which pleasure-seeking individuals struggle against each other
to get ahead.
Carlyle believed in the necessity of a hierarchical society governed by
charismatic leaders who could generate consensus among different groups.
Yet he was not simply a defender of the status quo. He blamed the British
aristocracy for neglecting its duty to govern wisely as it was swept up in the
capitalist pursuit of pleasure and profit. In On Heroes and Hero-Worship
(1841), he claimed that certain individuals are born leaders and should be
permitted to rise to positions of power. Unlike Burke, Carlyle admired
Robespierre and other leaders of the French Revolution for seizing the
opportunity to regenerate a stagnant society.
However, Carlyle was no democrat; he viewed rule by the masses as a
tragedy stemming from the aristocracy's failure to govern wisely.
Democracy spawns a clamor of competing interests, each lacking a vision
of the public good. His preferred model of society was revealed by his
admiration of Prussia and its military spirit. The ideal society would have
no political campaigns or elections. The wisest and most capable individu-
als would simply be promoted to positions of authority as is done in an
army. A hierarchical and authoritarian society promotes order, discipline,
cohesion, and a sense of purpose. Such societies become great nations and
citizens prosper both materially and spiritually.
In addition to his rejection of democracy, Carlyle condemned liberal
notions of freedom. If freedom means that individuals have no duties
restraining them, then the free pursuit of desires will lead to anarchy and
the destruction of society. Genuine freedom can be achieved only in the
context of a society based on shared values and common goals. Carlyle
feared that capitalism was undermining freedom and order by replacing the
traditional hierarchy based on virtue and wisdom with a new hierarchy
based on wealth. Traditional hierarchy had been a stabilizing force because
each class recognized its duties and functions; the aristocracy would gov-
ern wisely, while the rest of the population labored and lived in peace.
However, because capitalism promotes competition among self-interested
individuals, the resulting hierarchy of wealth does not carry with it any
sense of social obligation. Those who succeed feel no duty to wield their
power for the social good, and those who fail have little respect for or alle-
giance to society and its leaders.
To dampen the effects of capitalism, Carlyle proposed that political lead-
ers should take responsibility for the moral and spiritual regeneration of
society through a government-sponsored national church. In addition, gov-
ernment could provide public assistance programs, regulation of business,
and efforts to reform social relations within factories. While granting that
The Conservative Perspective 75

"despotism is essential in most enterprises," Carlyle suggested that hierar-

chical authority would be more effective if people had an emotional attach-
ment to their place of work, and this could be achieved by giving workers a
voice in the decisionmaking process. This suggestion illustrates a recurring
tendency in Conservative thought to propose quasi-socialist solutions to the
problems of capitalist society. Conservatives share common ground with
Radicals in viewing an active community life as the antidote to the destruc-
tive forces of competitive individualism.

Vilfredo Pare to ( 1 8 4 8 - 1 9 2 3 )
An Italian economist and sociologist who spent most of his career at the
University of Lausanne in Switzerland, Pareto's fame derives primarily
from his book Manual of Political Economy (1906) in which he argued
that competitive markets and free trade result in an efficient allocation of
resources. His definition of efficiency, now referred to as "Pareto optimal-
ity," was a situation in which no reallocation can make one person better
off without making another person worse off.
Despite his arguments for the economic advantages of free markets,
Pareto's Conservatism, exhibited in The Mind and Society (1916), led him
to claim that all societies are naturally and inevitably controlled by elites.
He even developed a mathematical formula, known as "Pareto's law,"
showing the degree of inequality that is natural for any society. In addition
to defending a natural hierarchy, Pareto argued that power passes back and
forth between two fundamentally different elite groups. He used the label
"foxes" to describe cunning, flexible, risk-taking elites. Foxes are likely to
be innovative capitalists who thrive in a dynamic social environment. Lions,
on the other hand, are resistant to change and willing to use force to defend
the status quo. Lions are found in the aristocracy and in that portion of the
capitalist class that has made its fortune and now lives on property income.
When foxes control the government, society is dynamic and markets are
relatively free, but foxes will not exert the force necessary to maintain an
orderly society. In particular, the openness of a fox-controlled government
permits non-elites, such as workers and farmers, to gain greater political
power. In response to political instability, lions will overthrow the fox gov-
ernment in a "circulation of elites." Lions will use whatever force necessary
to restore order. They are likely to suppress free trade and to restrict
democracy, but these actions protect property and profits from the dangers
of egalitarian social reforms.
Pareto believed that both foxes and lions are essential to society. Foxes
sustain economic prosperity but fail to resist disorder, while lions defend
private property but are likely to cause the economy to stagnate under
their heavy-handed tactics. When Benito Mussolini and the Italian fascists
took power in 1921, they honored Pareto as an intellectual founder and,
76 Political Economy

indeed, the fascists were a classic example of a "lion" government.

However, the fascists ignored Pareto's prediction that lions would eventu-
ally be overthrown.

Joseph Schumpeter (1883-1950)

An Austrian native, Schumpeter studied under Wieser and Bohm-Bawerk
at the University of Vienna. Although he is sometimes linked with the
Classical Liberalism of the Austrian school, he constructed a unique analy-
sis of capitalism that places him within the Conservative perspective. After
immigrating to the United States in 1931 to escape Nazism, Schumpeter
taught for several decades at Harvard. Along with Keynes, he is widely
regarded as one of the most eminent economists of the twentieth century.
In The Theory of Economic Development (1911), Schumpeter outlined
his vision of capitalism. The driving force behind the system is the entre-
preneur who, through continual innovation, creates profitable investment
opportunities and thereby sustains economic growth. However, the essen-
tial role of the entrepreneur is also the weak point of capitalism. In
Capitalism, Socialism and Democracy (1942), Schumpeter praised success-
ful entrepreneurs for creating huge enterprises with sufficient resources to
fund research and innovation. He had no doubt that corporate capitalism
was far superior to the free-market competition of earlier periods.
However, with the bureaucratization of innovation and administration, the
entrepreneurial function was becoming increasingly obsolete. Ironically,
the success of capitalism in promoting efficiency was simultaneously
destroying the very source of its own dynamism.
Another trend highlighted by Schumpeter was the democratizing of the
political process. With special interests vying against each other to gain
political power, Schumpeter believed that politicians seeking reelection
would increasingly pander to narrow interests. A democratic government's
tendency to experiment with reform and intervention would gradually
undermine the traditional values and hierarchical social structures essential
to maintaining the public's sense of patriotism, loyalty, and morality.
Without these traditional sentiments to buffer a market economy, the dis-
integrating effects of competition and rational self-interest would cause the
entire system to self-destruct.
As an example of the dangerous consequences of rational self-interest,
Schumpeter claimed that capitalism threatens the nuclear family because
fewer people will choose to marry or have children once they calculate the
actual costs and benefits. The prosperity created by capitalism gives rise to
a class of intellectuals who, frustrated by their failure to achieve the status
and wealth of successful entrepreneurs, seek to turn public opinion against
big business and private property. The relative power of intellectuals is
heightened by the growing passivity of capitalists who, having withdrawn
The Conservative Perspective 77

from active participation in production, lose their strong emotional attach-

ment to private property. As absentee owners, the capitalists lack the char-
acter or energy to resist their enemies.
Convinced that socialism would replace capitalism, Schumpeter tried to
envision a socialism that would be acceptable to Conservatives. He con-
ceded that capitalism was already largely socialized because the dynamic
entrepreneur had been replaced by bureaucratic administrators. If social-
ism simply meant that government bureaucrats would replace corporate
bureaucrats, there would be little impact on efficiency, and government
would gain greater control over the destructive tendencies of the market.
With government and business working together to maintain a stable, hier-
archical society, socialism could be compatible with Conservative goals.
However, the key to Conservative socialism is government's ability to
administer the economy without being influenced by popular pressures and
the demands of special-interest groups. To insulate government,
Schumpeter opposed active and widespread participation by citizens in the
political process. As long as the political realm remained sealed from demo-
cratic pressures, government administration of the economy might be bet-
ter suited than capitalism to sustaining Conservative values of stability,
order, and hierarchy.

Leo S t r a u s s ( 1 8 9 9 - 1 9 7 3 )
Leo Strauss, a political philosopher at the University of Chicago for
many years, devoted himself to resolving what he called "the crisis of
modernity"—the corrosive effects of the Enlightenment legacy of individu-
alism, ethical relativism, and faith in technology. In Natural Right and
History (1953), he contrasted two conceptions of natural right. In Greek
and early Christian society, natural right was based on a morality existing
independently of individual desires. Humans had a moral duty to seek the
good, and the purpose of politics was to cultivate virtue among citizens.
By contrast, early liberal theorists such as Hobbes and Locke used the
notion of natural right to refer to the rights of autonomous individuals to
pursue their self-interest without arbitrary restraint. This liberal version of
natural right unlinked the earlier connection between rights and corre-
sponding moral duties. Although Hobbes and Locke may have contributed
to the toppling of the aristocratic power structure, they opened a Pandora's
box of social disruptions. According to Strauss, when moral issues are rel-
egated to individual choice, society will lack standards of excellence, truth,
justice, and beauty. By making individual autonomy the primary social
value, liberalism transforms society into a mass of rootless individuals pur-
suing their private passions, undermines the moral framework essential to
nurturing civic virtue, and thereby condemns humans to alienation, anomie,
narcissism, decadence, and nihilism.
78 Political Economy

The impact of democracy on modern society disturbed Strauss as well.

Democracy permits people lacking in virtue and wisdom to become the
rulers of society. Democratic governments are controlled by the short-
sighted demands of citizens. Strauss worried that citizens in democratic
societies are so preoccupied with private pleasures that they lack the
courage and conviction to respond to broad social issues.
Another aspect of the "crisis of modernity" is the tendency of science
and technology to push aside morality. Liberal societies seek to resolve
problems by gaining greater technical mastery over nature to better sat-
isfy human desires. However, Strauss believed that the most fundamental
problems facing modern societies are moral problems caused by the rejec-
tion of standards of right and wrong. The social sciences such as eco-
nomics and political science cannot comprehend or respond to moral
decline because their pretense of value-neutrality and emphasis on quan-
titative technique blind them to moral issues. In Strauss's words, social
scientists are "fiddling while Rome burns."
Strauss wanted government to be more than a neutral referee; it should
act as a moral force in society by purposefully sustaining such values as
patriotism, respect, and a sense of duty. Despite his qualms about democ-
racy, Strauss remained sensitive to the dangers of totalitarianism. While his
ideal form of government would entail rule by society's wisest and most vir-
tuous leaders, he acknowledged that such a government was unlikely to
appear in modern societies. Eventually, he accepted democracy, proposing
only that popular participation in government be limited so that leaders
would not be subjected to the pressures of popular demands.

Michael Oakeshott (1901-1990)

A professor of political science at the London School of Economics,
Michael Oakeshott sought to make Conservatism appealing to the modern
mind. Rejecting any reliance on religion or natural law, he simply claimed
that existing customs and institutions, having slowly evolved in response to
the accumulated wisdom of many generations, are superior to experiments
in social reform.
In Rationalism in Politics (1962), Oakeshott blamed the expansion of
government intervention on the rationalistic mentality that is the legacy of
Enlightenment figures such as Descartes and Bacon. He criticized rational-
ism for seeking to impose an abstract, theoretical ideal on society to make
it more fair and efficient. Rationalism is an unreliable guide because human
reason can never fully comprehend the complexity of society and is usually
critical of traditional authority, custom, prejudice, and habit. Therefore,
government efforts to rationalize society will inevitably disrupt the institu-
tions guiding individual lives. Moreover, this breakdown of traditional
The Conservative Perspective 79

institutions leads to additional government intervention as individualism

breeds envy, jealously, and resentment, which cause citizens to demand
greater security and equality.
Oakeshott valued tradition not only because it has withstood the test
of time, but also because it makes social restraints on individual choice
seem natural and therefore largely invisible. Without tradition to guide
the impulses of citizens toward socially useful goals, individuals resent
any limitations on the gratification of their desires. In the absence of tra-
dition, social conflicts cannot be resolved in a manner that is acceptable
to opposing parties.
Despite his strong defense of tradition and authority, Oakeshott sup-
ported considerable individual freedom because he believed that humans
form their personal identity by internalizing the culture in which they live.
As a result of this socialization process, the range of choices that individu-
als actually make will usually be compatible with an orderly society. What
Oakeshott opposed was the freedom of citizens to act collectively through
government to restructure their society. In On Human Conduct (1975), he
argued that society is not an "enterprise" with concrete goals such as full
employment, the elimination of poverty, or social justice; instead, society is
a "moral association" having no concrete goals but existing merely to pro-
vide a stable environment within which individuals discover meaning, pur-
pose, and a personal identity as they pursue their private goals.
According to Oakeshott, government should not be involved in eco-
nomic affairs, and economic interests should not be permitted to influence
government. If politics is permitted to degenerate into an arena of clashing
private interests, then government, lacking a rational basis for resolving
conflicting desires, will inevitably become coercive and arbitrary.
Government should remain peripheral to the economy, acting merely to
protect property and enforce the law. Oakeshott's commitment to laissez-
faire was not motivated by concerns about the inefficiency of government
intervention. Rather, he believed that government intervention disrupts the
process by which traditional institutions make individual freedom compat-
ible with social order.

PRINCIPLES OF CONSERVATISM
The essential tenets of Conservatism are summarized in the following
definitions:
Human Nature. Humans are driven by strong passions that can be
directed toward either evil or good. The human capacity for reason is lim-
ited, with some persons having greater rational powers than others. The
manner in which instincts and desires are molded into a unique
personality is a function of the roles played and associations formed with
80 Political Economy

others. In fact, humans cannot develop as persons without the bonds of

social organization.
Society. Society is an organic structure based on a natural hierarchical
order. The quality of society is a fundamental determinant of the interests
and behavior of individuals. The good society sustains a stable hierarchy of
social relations that enables individuals to discover a unique role and iden-
tity for themselves. Without hierarchy, all persons become homogeneous
and the formation of individual personality is blocked.
Government. The purpose of government is to maintain the natural
order of society. During periods of social stability, government can simply
uphold tradition and preserve existing institutions by serving as a visible
symbol of the unity of the nation and by creating a moral climate con-
ducive to the development of virtuous citizens. Government should not
only enforce laws protecting property rights, but should actively nurture
those institutions such as the family and neighborhood that provide a
social context within which individuals develop.
Morality. Morality exists independently of individual opinions of right
and wrong, and therefore moral persons must give higher priority to the
pursuit of virtue than to the satisfaction oi personal desires. Individual rea-
son is an unreliable guide to morality because reason alone is not suffi-
ciently powerful to override human passions. Only the emotional
attachments and prejudices that arise from living within a stable and sup-
portive community can guide humans toward virtue. Moral values include
civility, loyalty, patriotism, chivalry, obedience, courage, faithfulness, def-
erence to authority, graciousness, and honor.
Freedom. Freedom exists when individuals are subject neither to arbi-
trary power nor their own passions. Freedom does not mean license to do
whatever the individual desires. Since isolated individuals cannot gain con-
trol of their passions, freedom requires the authority, traditions, and order
provided by a stable community.
Authority. Authority is legitimate when it resides with persons who fill
traditional roles of leadership in society and who have knowledge of truth
and virtue. Authority is essential for maintaining order and tradition in any
social organization from the family to the nation.
Equality. People are equal only in their formal status as citizens of the
community. This equality requires an impartial administration of justice in
the protection of their rights and punishment of their crimes.
Justice. Justice is fulfilled when order is maintained and the law is
administered impartially.
Efficiency. Efficiency means that society functions smoothly in achiev-
ing not only material production, but also in attaining nonmaterial goals
such as the maintenance of order, culture, cohesive communities, and
individual virtue.
The Conservative Perspective 81

CONSERVATISM TODAY
Conservatism's inability to gain widespread popularity in the United
States has been attributed to the country's revolutionary origins, to the
absence of a feudal aristocracy, and to the emphasis on freedom of indi-
vidual choice. During the nineteenth and early twentieth centuries,
American Conservatism was found almost exclusively in the South, where
the plantation system and slavery were ideally suited for an ideology that
emphasized the importance of hierarchical community.
However, Conservatism was revitalized by the devastation wrought by
World War I and the Great Depression. These events served to undermine
the faith in reason and progress that had characterized Western societies
since the Enlightenment. As skeptics toward reason and science,
Conservatives often expressed their ideas in poetry and literature. T. S. Eliot
(1888-1965) and Ezra Pound (1885-1972) claimed that societies commit-
ted to individualism and technological progress were increasingly charac-
terized by mindless conformity, cultural degeneracy, and a loss of purpose.
They blamed both capitalism and democracy for degrading human spiritu-
ality and creativity. Capitalism's mass production breeds mediocrity, moral
decay, and insipid consumerism. Citizens of a "mass society" lose the capac-
ity for independent thought and seek only passive forms of entertainment
that make no demands on their intellectual or artistic capacities.
Conservatives have largely ignored neoclassical economic theory, claim-
ing that it reflects the worst aspects of modern society—the alienation of
the individual from social bonds and community values, the focus on mate-
rial gratification of sensual appetites, and the elevation of profitmaking and
efficiency as the guiding values for society. Economics, according to
Conservatives, serves to justify acquisitive and selfish behavior, thereby
undermining the cohesiveness and stability of society. The ethic of utility-
maximization legitimizes a materialistic lifestyle in which the consumption
of commodities is the primary source of pleasure.
However, in contrast to traditional economic theory, political economy
can accommodate a vision of society as a community bearing responsibil-
ity for the quality of life of its citizens. Conservative writers who find eco-
nomic matters too important to be left to liberal economists, are now
devoting considerable attention to political economy. Conservative politi-
cal economy currently appears in a variety of forms including neo-fascist
theory, corporatism, and neoconservatism.

Neo-fascist Theory

As liberalism and democracy gained ascendancy in the West,

Conservatives could no longer simply defend the status quo. They needed
82 Political Economy

a strategy for restoring the ideals that had been vanquished by a century of
industrialization and modernization. As practiced in Germany and Italy
during the 1930s and 1940s, traditional fascism relied on a charismatic
leader to mobilize society, renew national and racial unity, and conduct vio-
lence and war against threats to the nation.
The roots of fascism lie in the romantic and nationalist beliefs that
Western civilization has been in a state of moral and cultural decline ever
since the Enlightenment unleashed the corrosive forces of individualism,
rationalism, atheism, and materialism. As traditional values, institutions,
and communities are destroyed, humans become alienated, culture degen-
erates, and society slowly crumbles.
Although World War II was fought to defeat fascism, considerable evi-
dence appears today of "neo-fascist" sentiments in both Europe and the
United States. During the 1980s, groups such as the Order, Aryan Nations,
White Aryan Resistance, and the Posse Comitatus proliferated. The eco-
nomic prosperity of the 1990s has undermined the growth of such organi-
zations, but numerous unofficial state militias have formed and young
"skinheads" give Nazi salutes and desecrate Jewish synagogues and ceme-
teries. Neo-fascism appeals to subordinate groups experiencing alienation
and a sense of powerlessness. It promises to restore both economic pros-
perity and national or racial pride.
Neo-fascism condemns liberals for making individual freedom the
supreme value, thereby denigrating the importance of community.
Liberalism breeds an abstract, universal mentality that mocks parochial,
local, or even national values as narrow and prejudiced and therefore
inappropriate for society as a whole. Only abstract values, such as free-
dom and tolerance, are acceptable to liberalism. However, these values
fail to reinforce people's emotional commitments to particular ethnic,
racial, or national communities. Liberalism wants to replace the
parochial community with "the brotherhood of man," but a global com-
munity remains merely an abstraction and cannot meet the emotional
needs of humans for a sense of belonging and attachment. If humans
attempt to identify with all mankind, they end up identifying with noth-
ing concrete and become alienated.
The linkage of liberal ideas with the quest for a global community
explains why neo-fascists regard communism and "one-world govern-
ment" as the logical culmination of liberalism and democracy. Communists
exploit the human need for community by promising a new society based
on equality and collective ownership of the means of production. But com-
munism suppresses the human need for private property and for member-
ship in a specific community based on race, ethnicity, or nationality. Only
neo-fascism can speak to these needs while simultaneously combating the
torpor and decadence generated by liberal democracy. Neo-fascism, there-
fore, represents a battle against both communism and capitalism. It relies
The Conservative Perspective 83

on racism and nationalism to promote community while preserving private

property in recognition of the human need for emotional attachments to
particular objects and places.

Corporatism
Corporatism proposes to reduce conflict and resentment in society by
establishing organizations for each particular occupation or industry. These
groups would provide individuals with communities in which to overcome
the isolation and alienation of modern society. The various organizations
would be integrated into a cooperative framework, with government serv-
ing as the ultimate authority and mediator. By consolidating individual
interests into large groups, corporatists intend to place decisionmaking in
the hands of group leaders who can resolve conflicts without resorting to
strikes or other forms of civil unrest.
Like fascism, corporatism has roots in romanticism and nationalism, but
it also grew out of the Roman Catholic church's vision of creating new
communities to replace those destroyed by industrialization and urbaniza-
tion. Early corporatist thinkers hoped that organizing capitalist society into
groups would reduce class conflict and social unrest. By the twentieth cen-
tury, corporatism was gaining increasing favor among capitalists as a solu-
tion to "cut-throat competition" in which all businesses were hurt. The
success of business-government cooperation during World War I per-
suaded many industrialists that corporatism was the wave of the future.
Indeed, corporatism was the basis for the National Industrial Recovery Act
(NIRA) of 1933, which was designed to combat the Great Depression by
giving labor the right to collectively bargain and by permitting corpora-
tions to cooperate with one another in establishing plans for production
and pricing.
Ironically, had the Supreme Court not declared the NIRA unconstitu-
tional in 1935, the United States would have embarked on a course bear-
ing similarities to the institutional framework of Nazi Germany. After the
NIRA was abolished, collective bargaining was reestablished through the
Wagner Act of 1935. Not until the late 1930s, when the United States
began preparing for war, did the Depression fade in response to the stimu-
lus of government spending. After World War II, corporatism was largely
discredited in the United States due to its similarity to fascism. However,
some business leaders continue to be attracted by the prospect of a coordi-
nated economy with no strikes and stable profits. During the economic tur-
moil of the 1970s, corporatist proposals were formulated by David
Rockefeller's Trilateral Commission, Henry Ford's Initiative Committee on
Economic Planning, and by the editors of Business Week magazine. Since
the Reagan years, corporatism has been largely dormant as business lead-
ers are generally satisfied with the performance of the economy.
a

With its emphasis on groups and a sense of community, corporatism also

holds some appeal for those on the political left. The nineteenth-century
concepts of guild socialism and social democracy had links to corporatist
ideals. However, whereas Conservative corporatism (also called authori-
tarian corporatism or state corporatism) preserves hierarchy and stability
by enforcing a consensus reached by leaders of large groups, leftist corpo-
ratism (also called liberal corporatism, social corporatism, or neocorpo-
ratism) encourages democratic participation and the inclusion of all group
interests as a means of promoting greater equality. The economies of
Sweden and Austria are the best examples of neocorporatism.

Neoconservatism
A relatively new variant of Conservatism was formulated during the
1970s and 1980s by writers including Irving Kristol, Nathan Glazer,
Michael Novak, Peter Berger, Norman Podhoretz, Robert Nisbet,
Seymour Martin Lipset, and George Will. Neoconservative ideas can be
found in journals such as The Public Interest and Commentary. Many of
the neoconservatives were Radicals during their youth, but were pushed
toward Conservatism by their disgust with the student counterculture of
the 1960s, their dissatisfaction with the conciliatory nature of U.S. foreign
policy, and their disillusionment with the welfare state as a solution to
poverty and crime.
Neoconservatives present themselves as not much different from
Classical Liberals in their support for democracy, markets, and individual
liberty. However, while neoconservatives may appreciate the market's
vitality and efficiency, they also fear its potential for undermining tradi-
tional values and culture. The market stimulates and unleashes individual
desires for sensual gratification that conflict with the respect for authority,
the work ethic, and the sense of moral responsibility required for an
orderly society. Also, neoconservatives reject the ethical relativism of
Classical Liberalism, claiming that some values and lifestyles are better
than others. Finally, while neoconservatives oppose many current govern-
ment programs, they do defend a significant role for government in sus-
taining a social climate conducive to individual moral development and
social cohesion.
Neoconservatives claim that an "adversary culture" or "new class"
composed of professors, journalists, entertainers, social workers, health-
care professionals, and government bureaucrats has effectively captured
control of public opinion by virtue of its visibility and influence on the
media. These groups are assumed to be significantly more liberal than the
general population, and they use their power to build support for govern-
ment spending on social programs from which they directly benefit as
providers of health, education, and other human services.
The Conservative Perspective 85

Neoconservatives support a capitalist economy, constitutional democ-

racy, and government efforts to cultivate civic virtue by nurturing tradi-
tional institutions such as the nuclear family, religion, and the local
community. They share the fear of traditional Conservatives that unbridled
capitalism undermines the social bonds holding individuals together in
community, leaving them isolated and prone to cynicism and nihilism.

AN ASSESSMENT OF CONSERVATISM
Conservatism has evolved over the past two centuries not so much
because of changes in its fundamental principles, but rather because of the
evolving nature of the problems confronting modern societies. Early
Conservatives blamed social disintegration and rootlessness on industrial-
ization and opposed both liberal democracy and laissez-faire capitalism. By
the end of the nineteenth century, however, a greater threat loomed on the
horizon as socialism became an influential political ideal soon to material-
ize in Russia. The prospect of socialism gaining a foothold in Western
nations caused Conservatives to suppress their concerns about capitalism.
After witnessing socialism in Russia and fascism in Germany and Italy,
most Conservatives conceded that capitalist democracy was the least evil of
all feasible systems. Since World War II, Conservatism has been wedded to
Classical Liberalism as the two formed a unified opposition to most forms
of government intervention.
However, Conservatives continue to believe that social order ultimately
rests on tradition and authority, and the market, with its emphasis on social
mobility and "getting ahead," undermines both. Conservatives are respect-
ful of government for its role as the visible representation of social unity,
while Classical Liberals often express contempt for government.
Conservatives also believe that social order requires some repression of
desires either by the individual's own commitment to virtue, by the social
conditioning provided by community values and institutions, or, ultimately,
by the threat of punishment from government. A capitalist market econ-
omy, on the other hand, fosters an ethic legitimizing the unbridled pursuit
of pleasure. Conservatives seek to maintain the integrity of national cul-
tures, while the market breeds cosmopolitan attitudes and lifestyles.
Finally, Conservatives uphold a morality based on objective values, but the
market makes the individual consumer the sole arbiter of values. This ten-
sion between the market and Conservative ideals explains why
Conservatives and Classical Liberals, despite their common interest in pro-
tecting private property and hierarchy, will never be entirely compatible.
With the dissolution of communism as a major threat to Western nations,
the alliance between Conservatives and Classical Liberals can be expected
to loosen, and the two perspectives will once again clash over their funda-
mentally different views of the market and government.
86 Political Economy

The Conservative critique of modern society highlights some of the

failures of capitalist democracies. High-material standards of living are
accompanied by individual alienation, declining civic virtue, and dimin-
ished legitimacy of public institutions. Conservatives point to the preva-
lence of anti-social behavior and the number of young people who reject
mainstream culture as evidence of an increasingly difficult struggle to
find meaning and purpose in an amoral, commercialized society. The fact
that many Conservative themes such as loss of meaning, alienation, and
spiritual emptiness are also found in Radical critiques of capitalism illus-
trates the commitment shared by both perspectives to a strong and
vibrant community life.
However, two major obstacles confront any significant renewal of
Conservative influence. First, Conservatism resists the two major trends in
modern civilization: egalitarianism and individualism. These societal val-
ues, deeply embedded in Western culture, will assure widespread resistance
to any proposals for strengthening hierarchical authority. Only an eco-
nomic collapse or the threat of impending social chaos would open politi-
cal space for the reassertion of authority.
Second, Conservatives have, for the most part, been unable to offer con-
crete proposals for generating cultural renewal without resorting to racism
or national chauvinism. These values conflict with another powerful ideal
in modern life: the brotherhood of mankind. At a time when barriers
between East and West are crumbling and global economic integration is
proceeding, appeals to parochial values and local culture seem antiquated.
Yet this difficulty may point the way for the future of Conservatism. Rather
than seeking to shape national or global policy, Conservatives might effec-
tively pursue their ideals by focusing on family, neighborhood, and com-
munity revitalization.

ADDITIONAL READING
Allison, Lincoln. Right Principles: A Conservative Philosophy of Politics. Oxfor
Basil Blackwell, 1984.
Buckley, William R, ed. Conservative Thought in the Twentieth Century. New
York: Bobbs-Merrill, 1970.
Drury, Shadia B. Leo Strauss and the American Right. New York: St. Martin's, 199
Holmes, Stephen. The Anatomy of Antiliberalism. Cambridge: Harvard University
Press, 1993.
Kirk, Russell. The Conservative Mind: From Burke to Eliot. Washington, DC:
Henry Regnery, 1995.
Kristol, Irving. Neoconservatism: The Autobiography of an Ideal. New York: Th
Free Press, 1995.
Lakoff, George. Moral Politics: What Conservatives Know That Liberals Don't
Chicago: University of Chicago Press, 1996.
Muller, Jerry Z., ed. Conservatism. Princeton: Princeton University Press, 1997.
The Conservative Perspective 87

Nash, George. The Conservative Intellectual Movement in the U.S. since 1945.
New York: Basic Books, 1979.
Nisbet, Robert. Conservatism: Dream and Reality. Minneapolis: University of
Minnesota Press, 1986.
O'Sullivan, Noel. Conservatism. New York: St. Martin's, 1976.
Rossiter, Clinton. Conservatism in America, 2nd ed. Cambridge: Harvard
University Press, 1982.
Scruton, Roger. Conservative Texts: An Anthology. New York: St. Martin's, 1991.
Steinfels, Peter. The Neoconservatives: The Men Who Are Changing America's
Politics. New York: Simon & Schuster, 1979.
White, R. J., ed. The Conservative Tradition. New York: New York University
Press, 1957.
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Chapter 6

The Modern Liberal

Perspective

The roots of Modern Liberalism lie deep in the tradition of Classical

Liberalism. Although early Classical Liberal theorists such as John Locke
and Adam Smith expressed reservations about the wisdom of sole reliance
on the market to organize society, their commitment to individual liberty
and private property precluded any significant action by government. With
the emergence of Radical and Conservative challenges to capitalism, how-
ever, came a growing perception that laissez-faire policies were incapable
of generating widespread political support. In response to this problem,
Modern Liberalism emerged as a combination of appealing elements from
the existing ideological perspectives. This eclectic and hybrid nature con-
tributed greatly to its flexibility and resilience. As a result, Modern Liberals
dominated for much of the twentieth century as they sought to promote
social justice while preserving both private property and democracy.

ARCHITECTS OF MODERN LIBERALISM

Jeremy Bentham (1748-1832)
The critique of Classical Liberalism began with efforts to discredit the
Lockean notions of natural law and natural rights. English philosopher
and legal theorist Jeremy Bentham argued that Classical Liberal theorists
90 Political Economy

used the term "natural" simply to defend their own particular vision of
the good society. Bentham sought instead to develop a scientific basis for
social theory. He based his theories on a system of ethics known as utili-
tarianism. In An Introduction to the Principles of Morals and Legislation
(1789), he claimed that pain and pleasure were the sole determinants of
human behavior and the sole criteria of right and wrong. For an individ-
ual or for society as a whole, the best course of action is that which max-
imizes pleasure and minimizes pain. Although Bentham acknowledged
the impossibility of measuring the pleasures of different persons and pre-
cisely calculating the social consequences of a particular policy, he sug-
gested that politicians should proceed as if such calculations could be
made. Only then would political decisions be based on an objective
assessment of their consequences.
To understand Bentham's motive for replacing natural law with utilitar-
ianism, we must focus on the changing political environment of late
eighteenth-century England. Classical Liberals had relied on the doctrines
of natural law and natural rights to support their arguments against the
arbitrary power of church and state. As that battle was being won, how-
ever, a new struggle between workers and owners of property began to
develop. With the grounds of political conflict shifting, the doctrine of nat-
ural rights became unacceptable to defenders of private property for two
reasons. First, Radicals such as Tom Paine had used the concept of natural
rights to defend workers' rights to participate in the political process.
Among property owners, the prospect of extending the vote to workers
raised fears of "mob rule" and a "tyranny of the majority" that might
eventually result in confiscation of property. Second, the doctrine of nat~
ural rights offered such firm protection for property that it precluded gov-
ernment reforms aimed at ameliorating the conflict between workers and
property owners. If property rights were absolutely inviolable, then gov-
ernment could not legitimately tax, regulate, or redistribute property. In
short, natural rights served to protect the status quo.
In contrast to the doctrine of natural rights, utilitarianism provided a
flexible and pragmatic basis for government intervention. Any reform
resulting in favorable consequences for society as a whole was considered
legitimate. Bentham claimed that rights were established by society's laws,
not by the laws of nature. With new laws, government could legitimately
create or eliminate certain property rights as long as the laws served the
public interest. Cutting all ties to natural law and natural rights enabled
Modern Liberalism to assure a wide latitude for government action.
On the controversial issue of whether government should engage in
redistribution of income and wealth, Bentham equivocated. On one hand,
utilitarianism provides a strong argument in favor of redistribution. The
law of diminishing marginal utility suggests that rich people get less plea-
sure from a dollar than do poor people, and therefore society's total utility
The Modern Liberal Perspective 91

can be increased by taking money from the rich and giving it to the poor.
Bentham stated that "the more nearly the actual proportion [of wealth]
approaches equality, the greater will be the total mass of happiness." On
the other hand, Bentham feared that redistribution would undermine the
security of property rights and reduce incentives, thereby contributing to
stagnation of the economy. He concluded that "when security and equality
are in opposition, there should be no hesitation: equality should give way."
Thus, while Bentham opened the door for extensive government activity, he
tended to support laissez-faire policies in economic affairs. His proposals
for reform were largely confined to the judiciary and penal systems, edu-
cation, and the electoral process.

John Stuart Mill (1806-1873)

John Stuart Mill was one of the major intellectual figures of the nine-
teenth century. His father, James Mill, was also a prominent economist
and, along with Jeremy Bentham, he decided to use his son as an experi-
ment in rearing the ideal human being. The young boy was taught Greek
and calculus before he was ten and authored scholarly books while still a
teenager. However, this rigorous intellectual training left John Stuart Mill
emotionally unfulfilled and, as a young man, he began reading the roman-
tic writings of Coleridge and Carlyle to explore the nonintellectual side of
life. From that point on, Mill's work reflects an effort to steer a middle
course between the calculating rationality of Bentham's utilitarianism and
the romantic themes of spiritual introspection and emotional expression.
Mill affirmed the utilitarian guideline for organizing society in a manner
that produces the greatest amount of pleasure. However, in contrast to
Bentham, Mill introduced the idea of qualitative differences in pleasures.
He believed that the pleasures associated with intellectual and artistic
expression were superior to the pleasures of ownership or consumption. In
his words, it is "better to be Socrates dissatisfied than a fool satisfied." Mill
based his arguments for the superiority of certain types of pleasure on
Aristotle's claim that the ultimate purpose of human life is to develop and
exercise those capacities unique to the human species. For both Aristotle
and Mill, these capacities include the ability to reason and to act con-
sciously. Other activities such as eating, drinking, and procreating are func-
tions common to all animals and therefore cannot be sources of ultimate
human fulfillment.
This notion of a hierarchy of pleasures represents a challenge to the eth-
ical relativism of Classical Liberalism. Modern Liberals had a basis for mak-
ing judgments concerning the lifestyles that society ought to promote and
hence a rationale for government intervention. However, Mill himself gen-
erally opposed legislative efforts to cultivate individual virtue. In On Liberty
(1859), he argued that government should interfere with individual freedom
92 Political Economy

only to prevent citizens from harming one another. Despite this dictum, Mill
did support three specific forms of intervention: public funding for educa-
tion, government encouragement of birth control, and an inheritance tax to
offset the tendency for property holdings to become concentrated.
Mill's efforts to synthesize the best of Classical Liberal, Conservative, and
Radical ideas set the tone for the subsequent development of Modern
Liberalism. Mill championed the cause of individual liberty and yet valued
the role of "superior minds" in providing guidance and leadership for the
rest of society. He supported universal suffrage, but only with the provision
that educated citizens would have multiple votes so that their impact on the
political process would be greater. In Principles of Political Economy (1848),
Mill emphasized the importance of secure property rights in fostering eco-
nomic prosperity, yet he also favored experiments with cooperatives in hopes
that they might eventually lead to a decentralized form of socialism.
Mill believed that both capitalism and democracy, while flawed, served
essential functions. Capitalism facilitated the accumulation of wealth that
would free humans from the drudgery of menial labor and permit them to
focus on the higher pleasures of intellectual and artistic expression. Full
democracy, by permitting all citizens to participate in society's collective
decisionmaking, would give citizens a sense of self-worth and dignity that
would, in turn, arouse their desire for more fulfilling lifestyles. Mill
acknowledged that social change would take time, but government could
hasten the process by providing public education and by promoting greater
social equality.

T h o m a s Hill Green ( 1 8 3 6 - 1 8 8 2 )
T. H. Green, an Oxford philosopher, sought to strike a balance between
the individualism of Classical Liberalism and the romantic notion of
organic community that had stimulated both Conservative and Radical
thought. Green was concerned that Classical Liberalism, with its emphasis
on protection of property rights and laissez-faire, would not appeal to
workers. The English Reform Bill of 1867 extended suffrage rights to a
broad spectrum of the working class, and if these new voters were to be
peacefully integrated into the political process, government action to
improve their living conditions would be necessary.
Green supported many of the tenets of Classical Liberalism, including
individual freedom, property rights, individual initiative, and self-reliance.
However, he redefined certain principles to challenge the commitment to
laissez-faire. Whereas Classical Liberals viewed humans as rationally pursu-
ing maximum pleasure, Green claimed that humans do not seek pleasure
directly, but rather strive to fulfill images of the kind of person they want to
be. In Lectures on the Principles of Political Obligation (1879), he argued
that because these self-images are formed in a social environment, they reflect
The Modern Liberal Perspective 93

the shared values of a particular culture. Thus individuals will possess a

moral sensibility encompassing certain duties and obligations to others.
Green also revised the meaning of freedom. Whereas Classical Liberals
focused exclusively on the absence of external constraint, Green defined
freedom in a positive sense as the ability to develop a lifeplan and to pur-
sue it effectively. Positive freedom requires that individuals possess ade-
quate economic resources to carry out a lifeplan, so workers living on
subsistence wages may need government assistance to achieve freedom.
Finally, Green revised the basis of property rights. Classical Liberals
claimed a natural right to whatever holdings are acquired without violat-
ing the legal rights of others. In contrast, Green claimed that property
rights depend on society's recognition of their usefulness in promoting the
public interest. In other words, rather than accepting the Classical Liberal
view that the public interest is synonymous with the protection of property
rights, Green argued that the public interest has an independent status
prior to, and determinative of, property rights.
Although Green accepted the concept of private property in principle, he
criticized the existing degree of inequality in property holdings. Excessive
inequality interfered with the freedom of many workers who did not pos-
sess adequate resources to effectively pursue a lifeplan. Since lack of free-
dom is contrary to the public interest, the existing concentration of wealth
was unacceptable. In determining the proper extent of government efforts
to redistribute wealth, Green proposed that property rights should be
judged for their contribution to positive freedom. Property that enables
individuals to carry out a lifeplan contributes to initiative, self-reliance, and
innovation and thus deserves society's protection. However, property that
merely confers privilege and power over other persons is advantageous
only to the individual property owner and conflicts with the public inter-
est. Such property rights may be legitimately limited by government.
Green condoned government intervention only to assure that each citi-
zen has positive freedom. By releasing the initiative and energy that is sup-
pressed by poverty, government can create a dynamic economy in which
every citizen has dignity and a decent standard of living.

Alfred Marshall ( 1 8 4 2 - 1 9 2 4 )
An economics professor at Cambridge University in England, Alfred
Marshall developed much of the microeconomic theory that is taught in
undergraduate courses today. Although Stanley Jevons was the first to sug-
gest substituting the word "economics" for "political economy," the title
of Marshall's textbook, Principles of Economics (1890), confirmed that the
change in labels had been accomplished. By rejecting the term "political
economy," Marshall did not intend to exclude political or ethical consider-
ations from public debate. Prior to becoming an economist, he studied
94 Political Economy

ethics and was familiar with the writings of Hegel and Kant. Marshall was
deeply concerned about the plight of the poor and believed that economics
could provide guidance in public efforts to improve the quality of human
existence. He was motivated to adopt the term "economics" instead of
"political economy" by his desire to create a more scientific understanding
of society. Limiting the scope of analysis to "that part of individual and
social action which is most closely connected with the attainment and with
the use of the material requisites of well-being," Marshall anticipated a
narrower focus on measurable phenomena that could be expressed in
mathematical form. However, this definition meant that Marshall
acknowledged the existence of noneconomic dimensions of life and
noneconomic values that might also affect government policymaking.
For many of Marshall's successors at Cambridge, the distinction between
economics and political economy allowed economics to share the objectiv-
ity and rigor of the physical sciences, while political economy incorporated
ethical considerations and permitted consideration of both economic and
noneconomic goals. In sharp contrast, the Classical Liberalism of the
Austrian school portrayed economics as covering the allocation of scarce
resources to any goal, thereby making economics the "science of rational
choice" and denying the existence of noneconomic values.
Marshall was not a strong advocate of government intervention. In
fact, he was quite cautious about any proposals that would restrict eco-
nomic freedom or violate property rights, claiming that freedom and secu-
rity of property were essential to stimulate innovation, entrepreneurship,
and economic growth. As a first line of attack against the problems of
poverty and human suffering, Marshall hoped that individual citizens and
businesses would engage in "economic chivalry" through public service
and charitable contributions. However, he did recognize certain failings of
the market economy, including unequal power in labor-management rela-
tions, the presence of negative externalities such as pollution, and the
inability of the market to provide public goods such as universal educa-
tion. His receptiveness to some government intervention is exemplified by
his claim that "the human will, guided by careful thought, can so modify
circumstances as to [improve] the economic, as well as the moral, well-
being of the masses of people."

J o h n Maynard K e y n e s ( 1 8 8 3 - 1 9 4 6 )
As an economist from Cambridge University, John Maynard Keynes was
fully aware of the various flaws in the market uncovered by Marshall and
Pigou. However, his condemnation of laissez-faire capitalism went far
beyond previous criticisms. He blamed the "economic anarchy" of free
markets for causing high unemployment and excessive inequality in the dis-
tribution of income.
The Modern Liberal Perspective 95

In The General Theory of Employment, Interest, and Money (1936),

Keynes attributed recessions to inadequate spending. This claim challenged
the traditional wisdom of most economists who assumed that the main obsta-
cle to growth was a lack of saving. Keynes argued that saving is beneficial
only if the money is channeled back into the economy through borrowing and
investment. When investors become pessimistic about the future, they hesitate
to commit money to new projects. This reluctance to invest triggers a "multi-
plier effect" as the economy slows, workers are laid off, and businesses close.
Prior to Keynes, most economists believed that recessions were self-cor-
recting; they regarded any slowdown in the economy as a temporary aber-
ration requiring no government remedies. Keynes, on the other hand,
pointed to the Great Depression as evidence that the economy could sink
into seemingly permanent stagnation. To the economists who argued that
the economy would bounce back in the long run, Keynes replied: "In the
long run we are all dead." The cure for recession was increased government
spending to supplement inadequate spending by consumers and businesses.
Moreover, this government spending would be more effective when
financed by borrowing rather than taxes, since taxes tend to depress private
spending. In calling for "deficit spending," Keynes challenged the wisdom
of generations of economists committed to balanced government budgets.
The Keynesian explanation of recessions also served to justify govern-
ment efforts to redistribute income. Since low-income families spend a
larger percentage of any additional income than do high-income families,
government can increase total private spending by taxing the rich and giv-
ing to the poor. Whereas Bentham and Mill had been fearful that redistri-
bution would adversely affect incentives and capital accumulation, Keynes
argued that greater equality was essential to promoting full employment
and growth. This commitment to a more equal distribution of income
explains why Keynesianism justifies government support for labor unions
in their quest for higher wages.
Keynes attempted, without much success, to persuade Franklin Roosevelt
to experiment with the new economics. However, World War II forced the
Western nations to engage in massive deficit spending, and the results
seemed to confirm the Keynesian message. Factories quickly reopened, peo-
ple went back to work, and the economy was operating at full employment
within a short time. This success persuaded many economists and policy-
makers to change their view of the proper role of government. In 1946, the
U.S. Congress passed the Employment Act, committing government to pur-
sue all practical means to maintain full employment.

John Rawls ( 1 9 2 1 - )
John Rawls is a Harvard philosopher whose book A Theory of Justice
(1971) touched off an intensive reexamination of the ethical foundations of
96 Political Economy

political economy. Rawls was responding to an emerging dilemma within

Modern Liberalism. Although Modern Liberals had successfully challenged
the inviolability of property rights and the supremacy of the free market,
they lacked criteria for determining which property rights should be
restrained and how much redistribution should occur. Without a theory of
the public interest or a theory of justice, Modern Liberal governments
operated without principles, making them vulnerable to the pressures of
special-interest groups. The political process was in danger of degenerating
into a free-for-all in which more aggressive and powerful groups gain ben-
efits from government at the expense of less powerful groups.
Faced with this dilemma, Rawls sought to determine theoretically the
particular distribution of wealth that would be viewed as fair by all mem-
bers of society. He claimed that the human tendency to give priority to self-
interest impedes any effort to achieve consensus on questions of justice.
This problem can be avoided theoretically, however, by conceiving a situa-
tion in which individuals formulate principles of justice without any
knowledge of their own particular interests. If several people want to
divide a cake fairly, the person cutting the cake chooses his portion last to
assure that self-interest will not affect the size of the slices.
In a hypothetical situation in which people are ignorant of their own par-
ticular interests, Rawls argues that two principles of justice would be for-
mulated. First, each person would be granted the same basic liberties; and
second, wealth would be redistributed so as to maximize the well-being of
the poorest members of society. The second principle is more controversial,
but Rawls claims that people truly ignorant of their own position in society
would choose to protect the poorest group since they might be a member of
that group. Rawls does not condemn self-interest; he simply argues that
people can be objective in formulating principles of justice only when they
ignore the interests attached to their particular role in society.
Maximizing the well-being of the poorest groups in society will prob-
ably not require perfect equality. Rawls recognizes the role of inequality in
providing incentives and fostering capital accumulation that ultimately
benefits everyone. However, redistribution of wealth should proceed until
any further transfers so dampen incentives and growth that the poor would
be harmed. Rawls does not claim to know at what point redistribution
should be halted, and it is possible that some nations may already be at or
beyond the optimal degree of equality.
At first glance, Rawls's image of people suspending awareness of their
own economic status seems highly implausible. However, he supports his
theory by claiming that humans progress through stages of moral develop-
ment. In the highest stage, actions are based on universal principles rather
than narrow self-interest. If the Rawlsian concept of justice would indeed
be chosen by truly moral persons, then government redistribution could be
justified despite protests by those adversely affected. Rawls anticipates that
The Modern LiberalPerspective 97

the experience of living in a fair society will minimize such protests as indi-
viduals develop a moral sensibility enabling them to value justice above
their own material gains.
Rawls is the first Modern Liberal to offer a criterion of distributive jus-
tice. If accepted, the Rawlsian principles would put an end to many of the
political struggles that have threatened to destroy the cohesiveness of mod-
ern societies. However, despite the widespread attention given to Rawls's
ideas, his theory of justice has not been widely embraced by Modern
Liberals because it potentially mandates massive redistribution of wealth.

PRINCIPLES OF MODERN LIBERALISM

Because of its synthetic nature, Modern Liberalism is not easily
expressed in concise terms. However, the following definitions convey the
essential character of this perspective.
Human Nature. Humans are capable of rational choice, but their social
environment significantly shapes their goals. To develop fully, humans need
social relations based on mutual respect, and this need creates moral senti-
ments that restrain pure selfishness except in situations where deprivation
creates pathological behavior.
Society. Society is an aggregation of individuals with both private and
collective interests. To fulfill both sets of interests, the institutions of mar-
kets and government are essential to society.
Government. The purpose of government is to impartially protect rights
and to serve as a means by which citizens can collectively pursue goals that
they cannot attain as individuals. However, these goals must promote the
public interest; government should not favor any particular conception of
the good society.
Morality. For the most part, values are subjective and therefore relative.
However, certain values should appeal to all rational persons, thus form-
ing the basis for an objective morality. Values considered to be universally
valid include respect for the rights and dignity of all persons, concern for
the environment, and respect for the autonomy of other nations. More con-
troversial values include rights to occupational safety, health care, and old-
age income security.
Authority. Legitimate authority exists when power is exercised in the
public interest. However, since Modern Liberalism offers no clear
definition of the public interest, the distinction between legitimate and
illegitimate authority is subject to interpretation. Modern Liberalism lacks
a coherent theory of political obligation that specifies the condition under
which citizens have a duty to obey laws.
Freedom. Freedom has two meanings. In a negative sense, freedom is the
absence of coercion or constraints imposed by other people or by govern-
ment. In a positive sense, freedom is the ability to effectively pursue one's
98 Political Economy

goals. These two freedoms may conflict with each other when the negative
freedom of some persons poses an obstacle to the positive freedom of others.
Equality. "Equality of opportunity" and "equality under the law" are
two important components of social equality. However, both are jeopar-
dized by inequality of wealth and income, so greater "equality of result" is
essential to achieving social equality.
Justice. Justice is achieved when both human rights and property rights
are upheld. When these rights conflict, society, acting through government,
must find a balance that best serves the public interest.
Efficiency. Efficiency means maximizing the value of goods and services
produced. However, efficiency is only one criterion of a good society and
may be superseded by considerations of freedom, equality, or justice.

MODERN LIBERALISM TODAY

World War II forced a dramatic expansion of the economic role of gov-
ernments in most nations. The success of the war effort largely dispelled
whatever doubts had lingered about the power of government to stimulate
the economy. Economies that had been languishing in depression for a
decade suddenly sprang to life, providing full employment and astonishing
levels of output. When the war ended, there was no guarantee that depres-
sion would not return, and most governments took strong measures to
guarantee continued prosperity. With Radicalism and Conservatism seem-
ingly discredited by the horrors of Stalinist Russia and Nazi Germany and
with Classical Liberalism blamed for the Great Depression, a consensus
formed around Modern Liberalism that would dominate Western politics
for the next three decades. Currently, Modern Liberal ideas appear in var-
ious forms including new Keynesian economics, neocorporatism, and post-
Keynesian economics.

New K e y n e s i a n E c o n o m i c s
Despite the Keynesian revolution of the 1930s and 1940s, most U.S.
Keynesian economists, led by Paul Samuelson, affirmed the complementar-
ity of Keynesian macroeconomics and neoclassical microeconomics. The
former offered an understanding of the economy as a whole, while the lat-
ter was useful in explaining the behavior of individual consumers and
firms. Samuelson proposed a "neoclassical synthesis" in which both doc-
trines would coexist peacefully.
By the 1960s, the neoclassical synthesis had become so influential that
economists were formally installed at the highest levels of government
power. In addition to Samuelson, the leading economists of that period
included Robert Solow, Walter Heller (1915-1987), James Tobin, Gardner
Ackley, and Arthur Okun (1928-1980). Operating as members of or
The Modern Liberal Perspective 99

consultants to the President's Council of Economic Advisors, they popu-

larized the notion of "fine-tuning," in which fiscal and monetary policy
would be used to adjust the level of aggregate spending until a full-
employment, noninflationary economy was achieved. The proponents of
the neoclassical synthesis largely opposed government intervention in the
internal functioning of the economy. Using a mechanical analogy, fiscal and
monetary policy can be viewed as the accelerator of an automobile.
Changing speed requires no tinkering with the engine, but merely pressing
or easing of the accelerator.
The economic turmoil of the 1970s and 1980s seriously discredited the
neoclassical synthesis. Some Modern Liberals defected to Classical
Liberalism and others to Radicalism. However, many sought to construct
a "new Keynesian" economics responsive to the criticisms being launched
by new classical economists. Whereas Keynes relied on macro variables
such as consumption, saving, and investment to demonstrate the inherent
instability of the market, the new Keynesians seek to explain the macro
economy by analyzing its micro foundations. Like neoclassical economists,
they assume that individuals and firms rationally seek to maximize utility
or profit. The macro performance of the economy is viewed as the aggre-
gated micro behavior of individuals and firms.
However, new Keynesians part ways with new classical economists in
explaining unemployment, recession, and inflation. While new classicals
attribute instability to government intervention, new Keynesians blame
imperfections in markets such as lack of information, monopoly elements,
and resource immobility. The policy implications of new Keynesian eco-
nomics differ from both Keynesian and new classical economics. Unlike
traditional Keynesianism, new Keynesians have little confidence in mone-
tary and fiscal policy to boost or stabilize aggregate demand. In contrast to
new classical economists, new Keynesians call for active government poli-
cies to remedy the structural imperfections preventing markets from oper-
ating efficiently. Examples of such policies include dissemination of
employment information through computerized job networks, government
funds for training and certifying young and unemployed workers, and
portable pensions and benefits to increase labor mobility.
Prominent new Keynesians include Lawrence Summers, Alan Blinder,
and Joseph Stiglitz, all of whom have been appointed to high offices in gov-
ernment and hold professorships at prestigious universities. New
Keynesian ideas are disseminated in the Journal of Economic Perspectives.

Neocorporatism
Although corporatism has a Conservative lineage, the Scandinavian coun-
tries and Austria practice a Modern Liberal version of corporatism empha-
sizing social equality and democratic participation. This "neocorporatism"
100 Political Economy

was proposed in the United States during the 1980s under the label of
industrial policy. Government would provide leadership in fostering coop-
eration among corporations, labor unions, and other powerful interest
groups. The logic behind neocorporatism is that the modern economy is so
dominated by interest groups that laissez-faire policies simply permit more
powerful groups to prey on unorganized entities such as small businesses,
farmers, non-unionized workers, and the poor. Breaking up the clusters of
power is deemed both politically infeasible and inefficient, so the only
alternative is government coordination of conflicting interests in an effort
to promote stability and prosperity.
In addition to mediating conflict, government would reduce uncertainty
by providing guidelines for economic development. Government would
also become more active in stimulating the economy through funding for
education, transportation, job training, and research and development.
Neocorporatists favor government aid to industries with significant poten-
tial for growth. Strategic trade policy, including subsidies and tariffs, might
be used to propel selected industries to international dominance.
Underlying these proposals is the belief that government must have a
coherent vision of the future and take steps to realize that vision if the econ-
omy is to be competitive in the global market.
Leading proponents of neocorporatism in the United States include
Lester Thurow, Robert Kuttner, and ex-Secretary of Labor Robert Reich.
Neocorporatism has failed to gain widespread acceptance because the pro-
posals for enlarging government's authority run counter to the political tides
of the late twentieth century. When the idea of industrial policy was first
presented in the 1980s, the Japanese and European economies were held up
as shining examples of what neocorporatism could achieve. Today, with
European unemployment exceeding ten percent and Japan in a lengthy
recession, critics of neocorporatism can turn the tables, using Europe and
Japan as arguments against government coordination of the economy.

Post-Keynesian Economics
The declining prestige of Keynesian economics in the 1970s was symp-
tomatic of the general disarray afflicting Modern Liberalism. Some
economists sought to rescue Keynesian ideas by arguing that American
economists such as Paul Samuelson had misinterpreted Keynes's ideas.
Early figures in post-Keynesian economics include Joan Robinson, a col-
league of Keynes at Cambridge University, and Michal Kalecki
(1899-1970), a Polish economist who independently arrived at many of the
same ideas as Keynes. Other important early contributors include Piero
Sraffa (1898-1983), Maurice Dobb (1900-1976), and Nicholas Kaldor
(1908-1986). In the United States, post-Keynesian economics was
advanced by Sidney Weintraub (1914-1983), Alfred Eichner (1937-1988),
The Modern Liberal Perspective 101

and Hyman Minsky (1919-1996). Contemporary post-Keynesians include

Paul Davidson, Geoff Harcourt, Victoria Chick, and John Eatwell. Post-
Keynesian writings are featured in the Journal of Post Keynesian
Economics, the Cambridge Journal of Economics, and the Review of
Political Economy.
Keynes called for two major reforms: government action to regulate
aggregate spending and government control or "socialization" of invest-
ment. United States policymakers adopted the first reform but ignored the
second because it requires more extensive government management of the
economy. Yet without control over investment, post-Keynesians believe
that government cannot maintain both price stability and low unemploy-
ment for extended periods.
Post-Keynesians attribute the failure of "demand management" to the
increasing concentration of production in the advanced capitalist
economies. In the absence of effective competition, firms possess "market
power" and utilize "mark-up pricing" by simply adding a desired profit
margin to their costs to determine the price of their product. In this con-
text, governmental efforts to control inflation are stymied. When govern-
ment cuts spending or tightens the money supply, businesses simply lay off
workers and reduce output rather than lower their prices. The result is
stagflation—simultaneous inflation and unemployment.
From the post-Keynesian perspective, stagflation can be resolved by
government efforts to control wages and prices, to become directly
involved in directing investment to particular industries, and perhaps to
operate such key industries as energy and communications. Post-Keynesians
believe that the free-market economy is not only prone to stagflation, but
cannot generate the growth in productivity required to remain competitive
in international markets.

AN ASSESSMENT OF MODERN LIBERALISM

Modern Liberalism was the dominant ideology in Western nations from
the end of World War II until the early-1970s. Its appeal stemmed not only
from the success of Keynesian economics in maintaining prosperity during
that period, but also from the postwar revulsion toward any pure form of
ideology. Modern Liberalism offered a flexible and pragmatic approach
well-suited to the public's increasingly nondogmatic attitude toward social
and political issues.
The declining influence of Modern Liberalism in recent years can be
explained by three factors. First, the emergence of stagflation in the early
1970s rendered impotent the Keynesian tools of demand management. The
economy could not be simultaneously stimulated to reduce unemployment
and slowed to control inflation. Moreover, stagflation meant that Modern
Liberal efforts to promote disadvantaged groups came increasingly at the
102 Political Economy

expense of other citizens. Economist Lester Thurow coined the term "zero-
sum society" to describe a no-growth economy in which one group's gain
is another group's loss. In a zero-sum society, redistributive policies are
likely to create resentment and anger, thereby eroding public support for
Modern Liberalism.
Second, Modern Liberalism's emphasis on universal values such as jus-
tice and human rights often conflicts with citizens' attachments to particu-
lar values and cultures. On issues ranging from welfare to criminal justice,
Modern Liberalism is widely perceived as defending abstract rights while
remaining insensitive to the wishes and interests of particular individuals or
groups. For this reason, critics blame Modern Liberalism for a decline of
moral standards and disintegration of traditional culture.
Finally, the flexibility of Modern Liberalism has created problems.
Because it encompasses values taken from conflicting ideologies, Modern
Liberalism lacks a clear and coherent vision of the public interest and there-
fore possesses no firm criteria by which to assess the performance of either
the market or government. The Modern Liberal commitment to individu-
alism means that individual preferences must be the ultimate source of
social values, yet Modern Liberalism is also committed to greater equality,
even if this goal requires manipulation of the market economy by govern-
ment. Once the beneficence of the market has been questioned, some crite-
rion of justice or the public interest is essential to give coherence to
government activities. Modern Liberal economists have relied on the con-
cept of economic efficiency as the criterion for government intervention;
government should improve the efficiency of the market by correcting cer-
tain failures, thereby promoting the well-being of society. However, devel-
opments in economic theory have demonstrated that efficiency is not
synonymous with maximum social welfare, leaving Modern Liberals with-
out clear guidelines for policymaking.
In attempting to resolve this dilemma, Modern Liberals face a choice.
They can simply accept the absence of a theory of justice, leaving both the
market and government without firm moral legitimacy, or they can formu-
late specific principles of justice to clearly define the public interest. To
choose the latter route, however, would commit Modern Liberals to gov-
ernment action aimed at bringing society into conformance with the prin-
ciples of justice. Most Modern Liberals remain too firmly committed to the
notions of ethical relativism, pluralism, diversity, and tolerance to support
any precise definition of justice that would legitimize such a powerful role
for government.
Despite these difficulties, Modern Liberalism is likely to remain a pow-
erful ideology. For those who find Conservatism, Classical Liberalism, and
Radicalism to be unacceptable, the synthetic and compromising nature of
Modern Liberalism will continue to hold appeal. Proponents of Modern
Liberalism offer no ultimate resolution of the conflicts between human
The Modern Liberal Perspective 103

rights and property rights, between freedom and equality, or between indi-
vidualism and community, claiming that these tensions between opposing
ideals are essential features of h u m a n existence.

ADDITIONAL READING
Anderson, Walter Truett, ed. Rethinking Liberalism. New York: Avon, 1983.
Arestis, Philip, and Thanes Skouras, eds. Post-Keynesian Economic Theory.
Armonk, NY: M. E. Sharpe, 1985.
Eichner, Alfred, ed. A Guide to Post-Keynesian Economics. White Plains, NY:
M. E. Sharpe, 1979.
Gutman, Amy. Liberal Equality. New York: Cambridge University Press, 1980.
Kuttner, Robert. The End of Laissez-Faire: National Purpose and the Global
Economy After the Cold War. New York: Alfred Knopf, 1991.
MacLean, Douglas, and Claudia Mills, eds. Liberalism Reconsidered. Totowa, NJ:
Rowman & Allanheld, 1983.
Reich, Robert B. The Resurgent Liberal. New York: Times Books, 1989.
Rosenblum, Nancy L., ed. Liberalism and the Moral Life. Cambridge, MA:
Harvard University Press, 1989.
Rothenberg, Randall. The Neoliberals. New York: Simon 8c Schuster, 1984.
Shapiro, Ian. The Evolution of Rights in Liberal Theory. Cambridge: Cambridge
University Press, 1986.
Spitz, David. The Real World of Liberalism. Chicago: University of Chicago
Press, 1982.
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PART III

CONTEMPORARY
ISSUES IN POLITICAL
ECONOMY
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Chapter 7

Government and
the Market

During the first half of the twentieth century, the combination of two world
wars and the Great Depression served as a catalyst for expanding the role
of government. Public reaction was generally favorable up to the 1960s.
However, the political and economic upheavals of the past three decades
have fostered a pervasive cynicism and hostility toward government.
Politicians now frequently campaign for office as "outsiders" promising to
repair the damage caused by previous policies. Public apathy is reflected in
low voter turnouts and a relative lack of interest in political affairs.
In this chapter, we confront some of the basic questions about democ-
racy and capitalism: What is government's proper role in a market econ-
omy? What aspects of modern society prevent government from serving its
proper role and what changes in the economy and society might remedy
political shortcomings? Different answers to these questions come from
each of the four ideological perspectives.

THE CLASSICAL LIBERAL PERSPECTIVE

The Proper Role of G o v e r n m e n t
The Classical Liberal view of government is succinctly expressed by
Thomas Jefferson's famous dictum: "that government is best which governs
108 Political Economy

least." The defense of a laissez-faire policy derives from the view that gov-
ernment represents a social contract among rational, self-interested persons
who would agree only to policies promoting their own interests. As a result,
government should be prohibited from engaging in any activities conferring
benefits upon some citizens at the expense of others. The proper role of gov-
ernment is reduced to that of a "referee" or "night-watchman," enforcing
laws protecting private property and the civil rights shared by all citizens.
Virtually all Classical Liberals accept government's role in establishing
and enforcing a system of laws to protect individual rights. Beyond that
function, consensus has been difficult to achieve. Adam Smith proposed
that government should print and regulate the money supply, provide cer-
tain "public goods" such as national defense, harbors, and roads, and levy
taxes to finance its functions. However, other Classical Liberals, particu-
larly those who are inclined toward libertarianism or even anarchism,
argue that these activities are both unnecessary and counterproductive.
Friedrich Hayek claimed that a government monopoly on the printing of
currency leads to excessive creation of money and a consequent devalua-
tion of its worth. He proposed a system in which several private firms
would be commissioned to issue different currencies. Competition to pro-
mote the use of each currency would provide a strong incentive for each
firm to limit printing because citizens would be attracted to a currency that
maintains its value over time.
Classical Liberals also challenge the argument that provision of public
goods establishes a rationale for government action. They argue that most
of the goods and services currently provided by government could be sup-
plied by private firms. In fact, government provision of goods and services
may explain why the private sector has not entered these markets. For
example, the availability of public education reduces demand for private
schools, expectations of social security benefits reduce private saving for
retirement, and the existence of welfare programs diminishes contributions
to private charities.
Even the authority of government to tax is controversial among
Classical Liberals. At the time of the American Revolution, representative
democracy was envisioned as the best method for keeping taxes low. If
elected representatives approved a tax, then citizens had implicitly con-
sented to be taxed. If large numbers of citizens opposed the tax, they could
vote for different representatives in the next election. However, the growth
of government power has led many Classical Liberals to describe taxation
as looting, plunder, or theft, in which citizens are deprived of their legiti-
mate earnings by the coercive power of government.
Classical Liberals challenge the very concept of "market failure," argu-
ing that many so-called failures actually result from government interven-
tion and would not occur if government were restricted to its proper role.
For example, the market power of large corporations is attributed to
Government and the Market 109

government-imposed barriers to competition such as regulations and tariffs

on foreign goods. The power of labor unions is based on legislation pro-
tecting the right to organize and bargain collectively. Similarly, the insta-
bility of the market is blamed on government's efforts to manipulate the
level of economic activity with monetary and fiscal policy.
Even if the market contains imperfections, Classical Liberals argue that
government action to correct these flaws is likely to make matters worse. 1
Since government lacks the specific information known by private deci-
sionmakers, policies designed to correct market failures will inevitably be
misguided and lead to unintended consequences. Classical Liberals use the
term "government failure" to describe a variety of processes by which gov-
ernment action reduces the efficiency of the market. In addition to disrupt-
ing efficiency, government intervention violates individual freedom.
Citizens are the best judges of their own well-being and should be able to
express their choices freely in the market.
To ensure that government is restricted to its proper role, Classical
Liberals insist on the necessity of a constitution to establish the scope of
government authority. 2 Classical Liberals not only distrust politicians,
they believe that voters will pressure government to expand its functions
unless a constitution forbids such expansion. Any government that is free
to exercise its power, or any democracy in which all laws and rights are
subject to the whims of the majority, will inevitably oppress individual lib-
erty. The U.S. Constitution places some constraints on government by sep-
arating power among the executive, legislative, and judicial branches, and
by establishing certain rights of citizenship. However, Classical Liberals
would like to prohibit any governmental action not specifically condoned
by the Constitution.

The A c t u a l Role of G o v e r n m e n t
From the Classical Liberal perspective, government in modern societies
neither promotes the public interest nor serves as benevolent guardian pro-
tecting the property and rights of all citizens. Just the opposite is true; gov-
ernment is a predatory oppressor, extorting money from citizens and
limiting their freedom. Moreover, government is the primary tool by which
powerful groups secure their privileges and oppress their fellow citizens. At
best, government is an inefficient bureaucracy, squandering resources while
providing services that, for the most part, are either unnecessary or could
have been produced in the private sector at lower cost.
The Classical Liberal analysis of government is called "public choice
theory." Pioneered during the 1960s by Anthony Downs, James Buchanan,
and Gordon Tullock, this body of ideas reflects the application of neoclas-
sical economic analysis to the political process. 3 The theory assumes that
the self-interested, maximizing behavior attributed to individuals in the
110 Political Economy

market applies as well to political activity. Unless constitutional constraints

on the boundaries of political choice are strictly maintained, the pressures
created by individuals and groups seeking to advance their self-interest via
the political process will result in continual growth of government and a
corresponding threat to both liberty and efficiency. Public choice theorists
do not blame individuals and groups for utilizing whatever means are
available to attain their goals; rather, they blame the judiciary branch of
government, particularly the Supreme Court, for failing to adhere to the
"original intent" of the framers of the Constitution to minimize the role of
government. From the Classical Liberal perspective, the proliferation of
new laws, regulations, and public policies in recent decades goes far
beyond constitutional limitations on government activity.
Public choice theory focuses on three aspects of the political process: the
behavior of interest groups, the behavior of politicians and bureaucrats,
and the behavior of voters.
Behavior of interest groups. Public choice theorists use the term "rent-
seeking" to describe efforts by individuals or groups to increase their
income by using the regulatory power of government. 4 In economic theory,
"rent" is broadly defined as income accruing to a factor of production in
excess of what that factor could earn in its best alternative use in a com-
petitive market. Rent arises when the supply of a particular resource is lim-
ited so that a higher price does not elicit an increase in the quantity of the
resource supplied. An example of economic rent is the high salaries earned
by professional athletes because of their rare physical skills.
Businesses and individuals seek rent when they use the power of gov-
ernment to artificially restrict the supply or increase the demand for the
resources they own. Economist George Stigler (1911—1991) claimed that
much government regulation is initiated by businesses seeking protection
from competition. If this is true, then regulations are likely to serve the
interests of the affected industries rather than the general public.
Government agencies with responsibility for regulation have been "cap-
tured" by the very industries they are intended to regulate.5
Regulations benefit business when they mandate the purchase of a par-
ticular product or reduce competition by blocking entry into an industry.
For example, licensing in occupations such as medicine and dentistry lim-
its entry and therefore protects the income of those already in that occu-
pation. Government protection of certain rights for labor unions promotes
the interests of union members. Zoning laws protect property values in
particular neighborhoods. By increasing the cost of doing business, regula-
tions may actually benefit large corporations by driving marginal firms out
of an industry and discouraging the entry of new firms.
The expansion of rent-seeking behavior undermines the performance of
modern economies. First, government is confronted with ever-increasing
demands for benefits as people look to the political process for economic
Government and the Market 111

benefits that should be attainable only through market activity. Second, the
high tax rates required to meet the demands of rent-seekers discourage pro-
ductive activity and thus reduce the tax base from which government
derives its revenue. Third, tax avoidance and evasion become pervasive as
citizens try to protect themselves against the power of government to seize
their income for the benefit of special-interest groups. Fourth, the growing
perception that lobbying and political organizing are more rewarding than
market activity causes a diversion of resources away from production and
a resulting erosion of efficiency in the private sector. The combination of
more government spending and a declining tax base has created the mas-
sive deficits in the government's budget.6
To explain why interest groups proliferate in a democratic political sys-
tem not firmly constrained by a constitution, public choice theorists argue
that the benefits of any particular government program are often concen-
trated on a small segment of the population while the costs are dispersed
among all taxpayers. This imbalance gives interest groups a strong incen-
tive to organize and lobby in favor of particular programs, while taxpayers
are less motivated to resist since the cost to the individual citizen of any
single program is usually quite small.
Behavior of bureaucrats and politicians. The expansion of government's
role is also attributed to the self-interest of government employees.
Bureaucrats become "empire builders" since a larger agency offers greater
opportunities for career advancement, more funding, more recognition, and
more power. After a bureaucratic agency reaches a certain size, it can essen-
tially perpetuate itself by creating a large constituency of employees, clients,
and other beneficiaries who will resist any efforts to reduce funding.7
As for elected politicians, public choice theory portrays them as "political
entrepreneurs" who have entered politics anticipating high rewards in terms
of money and power. To explain why legislation benefitting only a narrow-
interest group is often approved, public choice theorists claim that politicians
have learned the art of "logrolling," forming coalitions in which they agree
to vote for the favored legislation of other politicians in return for the
promise of reciprocal support. As a result, many bills are passed that would
not otherwise gain a majority vote and government continues to expand.
Politicians are also portrayed as suffering from "rational myopia."
Because their primary goal is reelection, politicians focus only on the cur-
rent impact of public policy while ignoring long-term consequences. This
mindset contributes to budget deficits as politicians seeking reelection are
anxious to provide the immediate benefits associated with government
spending while shifting the costs onto future generations.
Behavior of voters. By interpreting political behavior as purely self-
interested, public choice theorists encounter difficulty in explaining why peo-
ple bother to vote. Voting requires time and effort, yet individuals realize that
their single votes will, in all likelihood, have no impact on the outcome of
112 Political Economy

any election. Therefore, the rational person, after comparing the costs and
benefits of a trip to the voting booth, would seemingly choose not to vote.
Similarly, citizens can be expected to remain "rationally ignorant" about pol-
itics.8 Becoming an informed citizen takes time and effort, and since this
knowledge is unlikely to benefit the individual in terms of influencing the
outcome of an election, voters seem to have no incentive to acquire sufficient
knowledge to vote wisely.
These arguments lead public choice theorists to worry about the out-
comes of democratic elections. The people willing to incur the costs of
becoming informed and voting are likely to be those who have a strong
interest in some particular issue or program, creating a bias in favor of gov-
ernment expansion. Other concerns about democracy include the claim
that voting is an imprecise method for registering individual preferences
since elections are infrequent, citizens are not permitted to vote separately
on each policy, and citizens have little discretion over the quantity or qual-
ity of public goods. Indeed, public choice theorists argue that government
will normally provide too many public goods since a majority of voters can
force the minority to share the burden of financing any particular public
good. In summary, public choice theorists fear that democracy breeds inter-
est groups seeking to manipulate government for private purposes. 9

Proposals for Political Reform

Since Classical Liberals attribute most government problems to a failure
of the judiciary branch to abide by the original intent of the framers of the
Constitution, their most basic proposal entails the appointment of Supreme
Court justices who will declare unconstitutional the vast array of govern-
ment programs that currently regulate economic activity and redistribute
income. Unless constitutional constraints on the role of government are
enforced by the judiciary, the self-interested behavior found in the market
will spill over into the political arena where mechanisms for resolving
opposing interests are much less reliable. Classical Liberals fear that if the
political process degenerates into a competitive struggle for material bene-
fits, government may be forced to increase its power to successfully domi-
nate the various interest groups in society. This "new Leviathan" might be
successful in maintaining order, but it would curtail individual freedom.
If Supreme Court justices are unable or unwilling to tighten the reins on
government, some Classical Liberals suggest amending the Constitution to
define more explicitly the limitations on governmental authority. Examples
of proposed amendments include requirements that the government balance
its budget every year, that all appropriations of public funds be subject to a
two-thirds voting rule to make coalition-formation more difficult, that the
Federal Reserve Board maintain a fixed rate of monetary growth, that the
progressive income tax be replaced with a flat-rate tax, and that government
Government and the Market 113

spending be limited to no more than twenty-five percent of the Gross

Domestic Product (GDP).
Classical Liberals also support deregulation of business and "privatiza-
tion" of much of the activity now undertaken by government. Recent
experiments with privatization include the use of private jails, private
courts and judges, private education, and private police forces. Those gov-
ernment programs dealing with income maintenance and social security
could be privatized by initiating mandatory private pensions or insurance
policies to protect citizens against the loss of income that may accompany
unemployment, illness, disability, or old age.10
Another Classical Liberal approach to government reform has been
developed under the label "law and economics." Led by Richard Posner
and Richard Epstein, both associated with the University of Chicago law
school, law and economics applies neoclassical economic analysis to the
legal system. According to Posner and Epstein, the overriding purpose of
law should be to promote economic efficiency and maximize the creation
of wealth. High on their list of proposed changes is tort reform to reduce
the penalties paid by corporations found guilty of negligent behavior. Large
payments to plaintiffs transfer money away from corporations that could
have used it more productively. Posner and Epstein also claim that many
government regulations and taxes violate the Constitution and should
therefore be declared illegal. To facilitate the elimination of laws restricting
business activity, they propose that government be required to compensate
businesses for any costs imposed by regulations. Similarly, the redistribu-
tive function of government could be abolished by revising tax laws to
assure that each citizen pays no taxes in excess of the value of government
services and benefits received.11
In general, Classical Liberals favor all policies that result in a reduced role
for government. Several state governments have experimented with so-called
"sunset laws" that require new legislative approval each year for every
governmental program. The reasoning behind such laws is that legislators
will vote more responsibly if their actions are subject to frequent public
scrutiny. Another Classical Liberal strategy is to cut off the "lifeblood" of
government by reducing taxes. Given the difficulty in persuading politicians
to reduce popular spending programs, some Classical Liberals conclude that
tax cuts are more effective at shrinking the size of the government.
The potential danger of tax cuts is that deficits may swell due to dwindling
tax revenue and continued spending. Those Classical Liberals calling them-
selves "supply-siders" have sought to allay fears of rising deficits by arguing
that reduced tax rates will stimulate economic activity sufficiently to gener-
ate even greater tax revenue. Milton Friedman, on the other hand, claims
that the budget deficit cannot be lowered by increasing tax revenue because
government will always spend any additional revenue. He favors direct cuts
in spending as the most effective way to reduce the role of government.
114 Political Economy

THE RADICAL PERSPECTIVE

The Proper Role of G o v e r n m e n t
To analyze the Radical view of government requires a distinction
between Marxian and non-Marxian forms of Radicalism. From the tradi-
tional Marxian perspective, the very notion of a "proper" role for govern-
ment is meaningless. Marxists argue that government reflects the
conditions of production in any given society and that changing conditions
will lead to new roles for government. In a capitalist society, government
primarily serves the interests of the bourgeoisie by facilitating the accumu-
lation of capital. In socialism, government administers production in the
interests of society as a whole. Marx labeled socialist government a "dic-
tatorship of the proletariat," although he felt confident it would be more
reflective of the will of the people than capitalist democracy because no
single class could manipulate government for its own narrow purposes.
The functions of a socialist government include solidifying socialism by
suppressing bourgeois efforts to restore capitalism, promoting material
prosperity by planning and coordinating the economy, and promoting
unity among citizens. Marxists anticipate a transformation from the bour-
geois focus on wealth and consumption to the public-spiritedness of a new
"socialist man."
According to traditional Marxism, socialism will eventually evolve into
communism in which there will be a "withering away of the state."
Communism will be characterized by material abundance and social coop-
eration, so most laws, regulations, police, courts, and prisons will no
longer be necessary. Government's role will consist of "the administration
of things" as it coordinates production.
Turning to non-Marxian forms of Radicalism, we find certain functions
that government ought to perform in any society. The proper role of gov-
ernment is to serve as representative of the collective interests of all citizens.
Government should be fully accountable to the public for its actions, and
this ideal can be achieved only when most or all citizens actively participate
in the political process. Government in a capitalist society falls short of the
democratic ideal because unequal class power distorts politics in favor of
the owners of capital. Capitalism's inability to provide genuine democracy
provides one of the chief arguments in favor of socialism. Only by ending
or restraining the power of capitalists can society establish a government
that truly serves the public interest rather than powerful private interests.

The A c t u a l Role of G o v e r n m e n t
Radicals engage in an ongoing debate about the functions of govern-
ment in a capitalist society. This debate involves three distinct theories of
the state.
Government and the Market 115

Instrumentalism. In The Communist Manifesto, Marx claimed that "the

executive of the modern state is but a committee for managing the common
affairs of the whole bourgeoisie." This perspective treats government as an
instrument used by the ruling class to promote its own interests, 12 For
example, foreign policy is oriented toward opening markets and assuring
the availability of cheap resources from around the world. Immigration
policy assures an inflow of cheap foreign labor to hold down wages.
Import quotas and tariffs protect businesses from foreign competition.
Government regulations eliminate smaller competitors and smooth fluctu-
ations in prices and profits. Ironically, the Radical instrumentalist view
resembles the Classical Liberal claim that government in modern society
has become the tool of powerful interest groups.
Instrumentalists believe that government supports businesses by social-
izing costs and privatizing benefits. For example, infrastructure such as
transportation and communication systems, waste disposal, education, and
crime prevention is essential to business, but government provision means
that taxpayers bear the cost of maintaining such services. Another social-
ization of costs is the tax deductibility of business expenses such as meals,
entertainment, and depreciation of capital. To privatize benefits, govern-
ment leaves actual production of most public goods to the private sector.
For example, supplying military weapons and equipment to government
yields profits for many corporations. Private firms have gained access to
the most profitable components of mail delivery, leaving the post office
with the less lucrative service of carrying letters. Various public services,
ranging from incarceration of prisoners to custodial services for public
buildings, are increasingly provided by private firms.
In summary, instrumentalism portrays government's actual role as serv-
ing the interests of the capitalist class. Capitalists exert control over gov-
ernment through the selection of political candidates and the formation of
public policy through funding of "think tanks," lobbying efforts, and polit-
ical campaigns. Any apparent benefits accruing to the middle and lower
classes represent token gestures designed to maintain order and stability.
Since the capitalist class uses government to protect its own interests while
other classes are left to fend for themselves in the market, Radicals claim
that modern societies operate on the principle of "socialism for the rich,
capitalism for the poor."
Structuralism. Structuralist theorists agree with the instrumentalist view
that government functions primarily to serve the interests of the capitalist
class, but they claim that this role is dictated by the structure of the econ-
omy rather than direct control by the ruling class.13 Different industries
have conflicting interests, so they cannot exert uniform control over gov-
ernment. However, government can still promote the general process of
capital accumulation. Structuralist theorists use phrases such as "structural
imperatives," "the dictates of accumulation," "systemic constraints," or
116 Political Economy

"laws of motion" to describe the forces emanating from the economy that
largely determine the scope and content of government policy.
The impact of structural imperatives on public policy is transmitted
through two channels. First, because prosperity in a capitalist economy
hinges on healthy rates of capital accumulation, citizens tend to identify
their own interests with those of capitalists. For example, employees of a
steel mill may oppose regulations to limit air pollution because they fear
that reduced profitability for the mill may cost them their jobs. Second, the
threat of a "capital strike" poses a continual constraint on public policy.
Government actions that undermine profitability may discourage capital-
ists from investing in the domestic economy. To avoid the recession that
would surely follow a strike by capitalists, government must maintain
"business confidence" by creating conditions conducive to high profits and
continuing investment.
The content of government policy will change in response to evolving
economic conditions. In the seventeenth and eighteenth centuries, the inter-
ventionist policies associated with mercantilism were appropriate for
reducing risk and expanding markets. Once the capitalist economy was
established, laissez-faire policies removed the remnants of feudal and mer-
cantilist strictures on production and exchange. By the late nineteenth cen-
tury, the transition to monopoly capitalism required that government
protect businesses against the perils of cut-throat competition. Government
codified and enforced business ethics, passed antitrust laws, and initiated
quality controls on various products. The Great Depression of the 1930s
mandated a vastly enlarged role for government in providing sufficient
liquidity and spending to maintain profitability and accumulation. These
goals were accomplished by establishing high levels of military spending,
by consciously pursuing expansionary monetary and fiscal policies, and by
equalizing income through progressive taxation, labor unions, and welfare
programs. These latter policies also function to maintain social order by
assuaging the anger of low-income families. Most recently, the develop-
ment of supply-side constraints on accumulation has led to tax cuts, dereg-
ulation, and privatization.
Class struggle theory. A third Radical theory of the state portrays politics
as an arena in which conflicting class interests vie with one another for dom-
inance. Government is a "contested instrument," potentially able to serve
either bourgeois or proletarian interests depending on the balance of class
power at any given time.14 Thus government in capitalist society will seek
to promote not only accumulation, but also legitimation of the system of
private ownership. 15 Accumulation is essential for economic prosperity, but
the viability of capitalism also requires that a broad spectrum of the popu-
lation perceive the system as legitimate. Government efforts to promote
legitimation may conflict with the narrow interests of capitalists in maxi-
mizing profits in the short run. For example, welfare programs, minimum-
Government and the Market 117

wage laws, and protection of the environment are likely to reduce profits for
some businesses, but without such policies, social unrest might threaten the
entire capitalist system.

P r o p o s a l s for P o l i t i c a l Reform
Radicals who adhere to either instrumentalist or structuralist theories of
government tend to be pessimistic about the prospects for political reform
within capitalism. Whether government is controlled by the ruling class or
by the structural imperatives of the economy, policies that directly advance
the interests of workers are unlikely except during periodic crises in capi-
talism when the very survival of the system is at stake.
However, the class struggle theory in which government is viewed as a
"contested instrument" raises the possibility that working-class efforts to
influence and even gain control of government may be effective. A well-
organized working class can achieve political victories aimed at challenging
capitalist control of the economy. Reform-minded Radicals concede that
the capitalist chss will strongly resist these challenges, but they are opti-
mistic that a combination of legal reforms, government policies, and per-
haps compensation for lost property rights may soften the opposition.
When opposing class interests are sufficiently balanced that government
can neither impose austerity measures to restore profitability nor grant
more favorable conditions to workers, the solution will likely be some form
of corporatism to break the political stalemate. While corporatism has
appeared in both Conservative and Modern Liberal versions, the overrid-
ing theme has been stronger government action to forge a consensus on the
distribution of society's benefits and burdens.
If, as happened in Germany and Italy in the 1920s, large numbers of
citizens conclude that foreigners, minorities, cultural change, and liberal
individualism are responsible for the nation's economic woes, then Conserv-
ative corporatism is likely to be the outcome. However, the more likely
event is that corporatism will appear in its Modern Liberal form as an effort
by government to promote cooperation, increased productivity, industrial
peace, and improved conditions for the working class. Yet Radicals warn
that Modern Liberal corporatism is still committed to preserving capitalism
and the privileges of private property and may therefore take on fascist
overtones. This "friendly fascism" will appear benign and committed to the
public interest, but the "iron fist in the velvet glove" will be used when
necessary to enforce austerity measures, silence political dissent, and restore
conditions for rapid capital accumulation. Only socialism can combine
genuine popular democracy with economic prosperity.16
Some Radicals propose to facilitate the transition from capitalism to
socialism by amending the Constitution. In addition to the protection of
civil rights, Radicals want the Constitution to define and protect economic
118 Political Economy

rights such as jobs with a livable wage, a clean environment, occupational

safety, and health care. Other Radicals warn that tampering with the
Constitution might open doors to Conservative efforts to curtail existing
civil rights such as free speech.
In light of the collapse of Soviet-style socialism, many Radicals have
abandoned the goal of complete nationalization of the means of produc-
tion. Instead, they propose to make authority in both the private sector and
government open to popular input and democratically accountable. This
vision of "participatory democracy" entails decentralization of authority
throughout society, increased worker and community control of industry,
and direct citizen involvement in government. 17 The economy would have
a mixture of publicly and privately owned property, reliance on both the
market and government to allocate resources, and sufficient inequality in
wealth and income to provide incentives for production.

THE CONSERVATIVE PERSPECTIVE

The Proper Role of G o v e r n m e n t
Conservatives want a government powerful enough to suppress the
aggression of any particular person or group, but, in an orderly and stable
society, they envision little need for the exercise of government authority.
While Classical Liberals oppose government because of its potential for
restricting individual freedom and causing inefficiency, Conservatives
believe that the greatest evil of government is its tendency to undermine
hierarchy, authority, and virtue by destroying individual responsibility and
the "intermediate institutions" of society such as family, church, and neigh-
borhood, which serve as buffers against both market forces and govern-
ment power. Government is most dangerous when dominated by either
technocrats seeking to impose rational policies for social improvement or
by the masses who lack sufficient wisdom to govern well.
The ideal Conservative government would be administered by highly
experienced and talented individuals motivated neither by self-interest nor
by a strong desire to use government as an instrument for social change.
The proper role of government consists primarily of maintaining a moral
and cultural climate conducive to the development of stable communities
and well-adjusted individuals. In a healthy society in which hierarchical
authority pervades all institutions, government would be required to do
very little. Hierarchical communities remain largely self-governing because
they generate the dispositions conducive to social order and the mainte-
nance of tradition.
The informal relations between dominant and subordinate persons,
arising spontaneously out of acknowledged differences in ability, provide
the basis for habitual deference to authority and socially responsible
Government and the Market 119

behavior. Loyalty to friends, duty to family, piety toward church, patriot-

ism toward country, and, in general, respect for authority are the true
bonds that unite society and regulate individual behavior. When social
relations are naturally self-regulating, little need arises for political inter-
vention in the form of laws and public policy. Communities will sponta-
neously develop systems of rules to promote order, which need not be
perceived as restraints on individual freedom since they arise from the
moral beliefs of community members.
During the nineteenth century, a dominant theme of Conservatism was
suspicion of, if not hostility toward, democracy. Conservatives believed that
the masses could not vote wisely and would be motivated by envy and
resentment to confiscate the property of the rich. Democracy would bring a
"tyranny of the majority" and "rule by the mob." Alexis de Tocqueville
(1805-1859), a Frenchman who traveled through America in 1836, feared
that democracy would encourage political leaders to pursue egalitarian poli-
cies in hopes of winning votes.18 Two Italian social theorists, Vilfredo Pareto
and Gaetano Mosca (1858-1941), were also skeptical about democracy,
claiming that hierarchy is the only type of social structure in accordance
with the natural differences in human nature. 19 Politicians claiming to be
democrats were merely disguising their ambition for power.
Early in the twentieth century, Conservative writers developed theories
of mass behavior, arguing that the dislocations caused by industrialization
had uprooted people from the traditional constraints of stable communities
and created a working class prone to irrational and violent behavior.20
However, after witnessing fascism and communism during the 1920s and
1930s, most Conservatives accepted democracy as the least evil political
system. To make democracy less threatening to the preservation of hier-
archical authority, Conservatives imposed restrictions on participation in
the political process. The economist Joseph Schumpeter, for example, por-
trayed democracy as simply a struggle among elites to gain votes. Popular
participation in politics should be limited to periodic elections to choose
which elites would govern.21

The A c t u a l Role of G o v e r n m e n t
Conservatives link the deterioration of government with the industrial-
ization and modernization accompanying the rise of capitalism. In a cap-
italist society, wealth and liberty replace virtue and order as primary
values. An oligarchy based on ownership of capital supersedes the tradi-
tional aristocracy. The polarization of classes causes conflict in the rela-
tions between rich and poor. Demagogues arise to exploit the resentment
of the poor and to persecute the rich. Moreover, the trend toward urban-
ization and geographic mobility undermines the stability of traditional
communities and the legitimacy of traditional authority. 22 As market
120 Political Economy

forces wrench individuals from their customary social contexts, family,

community, and religion lose much of their significance in people's lives.
The market fosters a critical and skeptical attitude because it offers only
impersonal social relations lacking the sense of belonging and attachment
found in traditional communities.
As society is destabilized by the market, government responds with pro-
grams intended to protect individuals. Yet efforts by government to provide
welfare, employment, housing, and health care actually erode the viability
of local communities and other intermediate institutions. The authority of
parents, clergy, and local officials is replaced by social workers, job coun-
selors, bureaucrats, and technical experts. A self-perpetuating cycle arises
whereby social disintegration leads to more government intervention,
which leads to further social disintegration.
As traditional communities are undermined, isolated individuals lose the
virtues of civility, deference to authority, and self-restraint. Lacking a sense
of connectedness with others or with past traditions to give meaning to
their lives, they focus on immediate gratification. Ironically, the extreme
individualism resulting from the erosion of authority paves the way for
totalitarianism in the form of fascism and communism. When individuals
refuse to recognize authority in their families, workplaces, and communi-
ties, government must become sufficiently powerful to prevent the pursuit
of individual self-interest from degenerating into chaos. Citizens may even
welcome totalitarianism as a solution to social decay.23

Proposals for Political Reform

From the Conservative perspective, the powerful forces unleashed by
capitalism and democracy constantly push modern societies in the direc-
tion of increased governmental power and a corresponding diminution of
the role of intermediate institutions. Believing that this drift toward total-
itarianism is caused by individual demands for unconditional freedom and
unlimited pleasure, Conservatives would restrain popular demands and
insulate government from democratic pressures. For example,
Conservative corporatists propose an alliance between business and gov-
ernment to ease the dislocations created by the market and to reduce
uncertainty and risk for business.24 To supplement the intermediate insti-
tutions damaged by capitalism and democracy, corporatists propose occu-
pational groupings that provide workers with a sense of belonging and
restrain worker demands for higher wages and increased benefits. Social
groups would be hierarchical, with demands from below being filtered
and amended by officials at every level of the hierarchy. Government
would be effectively insulated from what the Trilateral Commission called
an "excess of democracy" because popular demands would never be
Government and the Market 121

channeled directly to government. 25 Corporatism attempts to harness the

dynamism of capitalism while minimizing its disruptive aspects.
For many Conservatives, however, corporatist proposals are danger-
ous insofar as they open the door for abuse of government power. These
Conservatives attempt instead to reinvigorate society's intermediate
institutions to restore the traditional constraints on individual behavior
found in close-knit communities. For example, Conservatives have pro-
posed a decentralization of governmental authority to increase the
responsibilities and status of local officials. Decentralization also would
permit states and local communities to develop policies best suited to
their own particular situations.
Conservative writer George Will proposes that government should
actively mold the "manners and morals" of citizens.26 Government should
be more than a neutral referee in the struggle among self-interested indi-
viduals. It also bears responsibility for creating proper sentiments, opin-
ions, and behavior. Government must be a tutor as well as a servant to
"help persons want what they ought to want." George Will rejects the lib-
eral effort to keep morality out of public life. A government that fails to
promote values will foster citizens devoid of patriotism, loyalty, or any
sense of obligation. In Will's words, "a completely and permanently open
mind will be an empty mind." Another Conservative, Robert Nisbet, sug-
gests that a society without hierarchical authority leaves man "free in all
his solitary misery."27
Not only should government create a sense of unity and common vision
among citizens, it should directly nurture intermediate institutions. For
example, tax breaks might be granted to families in which a parent
remains at home to raise children; to parents who send their children to
private schools; or to employers who contribute to community activities.
Some Conservatives even support a modified version of the welfare state
that would encourage stable families, self-reliance, and local initiative.
Instead of giving welfare checks directly to needy people, the money might
be given to churches that reach out to the poor and draw them into a sup-
portive group where community contact and mentoring can guide them
toward employment.
Because Conservatives believe in objective values, they favor efforts by
government to discourage "immoral" activities such as the sale of pornog-
raphy, gambling, drug abuse, and prostitution. They favor greater censor-
ship of material presented in the media, particularly if children might view
it. Finally, Conservatives want government to become more involved in the
process by which traditional values are transmitted to the next generation.
To accomplish this goal, they propose that public schools place increased
emphasis on teaching values such as patriotism, duty, honor, hard work,
and self-discipline.
122 PoliticalEconomy

THE MODERN LIBERAL PERSPECTIVE

The Proper Role of G o v e r n m e n t
Modern Liberals have been the chief proponents of the dramatic expan-
sion of government during the past century. From their perspective, a mixed
economy, combining capitalism and an active democratic government,
offers a middle path between the disruptive forces of unbridled capitalism
and the totalitarianism of fascism or communism. Modern Liberals want to
utilize the dynamic potential of capitalism for creating wealth while relying
on government to maintain security and fairness for all citizens.
Modern Liberal economists have developed sophisticated theoretical
arguments to reveal flaws in the operation of the market that reduce its
potential for achieving society's goals. These "market failures" fall into six
broad categories: lack of perfect competition, externalities, public goods,
instability, inequity, and socially undesirable outcomes. 28

1. Lack of perfect competition. Markets will fail to achieve economic

efficiency if the conditions of perfect competition are violated. Economists
define perfect competition as a situation in which many buyers and sellers
of a homogeneous product interact with one another, resources are per-
fectly mobile, and all agents possess full knowledge of all information rel-
evant to making rational decisions. Rarely is any one of these assumptions
met, let alone all of them simultaneously. Thus actual markets will nor-
mally fail to achieve efficiency. Possible examples of government remedies
for imperfect competition include publicizing knowledge when information
is lacking and subsidizing relocation when resources are immobile.
Competition is also reduced by what economists call "economies of
scale." These occur when the cost of producing a unit of output decreases
as the size of the firm increases. The typical effect of economies of scale is
that smaller firms, operating with higher unit costs, cannot compete with
their larger rivals, eventually leading to oligopoly and possibly even
monopoly. To remedy this tendency for competition to eliminate itself,
Modern Liberals propose either antitrust laws to block corporate mergers
and acquisitions or, in the case of "natural monopolies" such as utilities,
regulation by a public agency.
The growth of the consumer electronics and computer industries has
raised new concerns about the viability of competition in unregulated mar-
kets. Modern Liberals claim that products such as electronic equipment
and computer software are susceptible to monopolization by the first pro-
ducer to attain dominance in the industry. That company's technology
becomes the industry standard, and various complementary products are
designed by firms in other industries to be compatible with the standard.
With virtually the entire market committed to a particular standard, com-
petitors have little chance of successfully challenging the dominant firm,
Government and the Market 123

and monopoly power is secured. This phenomenon requires even stricter

scrutiny of industry structures, vigorous enforcement of existing antitrust
laws, and perhaps even the passage of new laws.

2. Externalities. An externality arises when a market transaction results

in benefits or damages to "third parties" not directly involved in the trans-
action. Externalities arise because of missing markets; parties are unable to
negotiate certain exchanges due to high transaction costs of gathering
information, specifying contracts, and monitoring compliance. Because the
market registers only the private costs and benefits of a good or activity, the
market will produce less than the optimal amount of products with posi-
tive externalities and more than the optimal amount of products with neg-
ative externalities. One solution to this problem is to tax those products
creating negative externalities and to subsidize products generating positive
externalities. Alternatively, prohibitions may be placed on activities with
negative externalities such as under-age drinking, and participation may be
required for activities with positive externalities such as education.

3. Public goods. An extreme case of a positive externality arises when

nearly every person in society would benefit from a good or service but,
because the benefits are external to the market, consumers cannot be
charged and no private firm can profitably produce the good. These "pub-
lic goods"—such as national defense, highways, and police protection—
have two characteristics: they are nonexclusive, meaning that nonpayers
cannot be excluded from enjoying the benefits, and they are nonrival in the
sense that one person's enjoyment of the benefits does not diminish the
availability of the good for others. Public goods are not produced by the
private sector because of the problem posed by "free riders." Knowing they
cannot be excluded from the benefits, individuals have no incentive to pay
for the good and will instead take a free ride.
Since public goods will not be produced through the market, govern-
ment must finance them with tax revenues. Modern Liberals geiferally
believe that government provides inadequate amounts of public goods, as
reflected in the deteriorating condition of many parks, schools, roads, and
bridges. The exception to this claim is national defense. Modern Liberals
charge that corporate lobbying by the defense industry has resulted in too
much spending on the military. As the threat of foreign aggression recedes,
Modern Liberals are confident that national security can be maintained
with much smaller defense budgets and that the "peace dividend" can be
used for social programs.

4. Instability. The Great Depression persuaded Modern Liberals that a

market economy is inherently prone to cycles of boom and bust and that
government intervention in the form of fiscal and monetary policy tends to
124 Political Economy

decrease this instability. By softening recessions, government promotes a

more efficient allocation of resources and a higher rate of long-term growth.

5. Inequity. The market-determined distribution of income is only as

fair as the distribution of "initial assets" held by individuals as they enter
the market. Modern Liberals view the current ownership of wealth as so
unequal that it violates any reasonable standard of fairness. Although
attempts to redistribute income may impede efficiency by distorting incen-
tives, most Modern Liberals value justice sufficiently to accept small losses
of efficiency. They also claim that redistribution may actually enhance effi-
ciency by increasing spending on goods and services, by contributing to the
development of labor resources and citizenship skills of the poor, and by
satisfying the desire of most citizens to end hunger and suffering in an afflu-
ent society. The desired redistribution can be accomplished through trans-
fer payments and progressive taxation.

6. Socially undesirable outcomes. In certain instances, the market will

generate results widely regarded as violating the values of a society. While
Modern Liberals defend individual autonomy and choice, they also support
some government efforts to encourage or discourage certain behaviors and
values. In the case of drug laws or bans on smoking in public areas, the
intervention may be justified in terms of correcting an externality, but an
alternative justification is that society simply wants to discourage these
activities. Also, government may designate certain "merit goods" such as
food, clothing, and shelter that every citizen should have regardless of abil-
ity to pay.29 Programs such as affirmative action and comparable worth,
designed to redress past discrimination, are based on notions of fairness
that Modern Liberals believe to be morally correct despite lack of support
from many citizens. In this case, Modern Liberals claim that government
can legitimately educate and change the preferences of citizens rather than
simply respond to existing desires. Paternalistic action by government also
may be justified in cases where citizens do not act rationally due to "cog-
nitive dissonance." 30 For example, young people may not save for their
retirement because doing so means acknowledging the unpleasant fact of
their own mortality. The social security system forces people to put money
into a government fund for public pensions.

Modern Liberals envision government as staffed by highly trained pro-

fessionals who formulate and administer rational policies using scientific
techniques such as cost-benefit analysis and environmental impact state-
ments. 31 Modern Liberals fully expect government to grow as society
matures because rising incomes tend to increase the demand for public
goods such as crime prevention, public safety, and a cleaner environment.
The expansion of government budgets is also attributable to the fact that
Government and the Market 125

government provides mostly labor-intensive services. In recent decades,

labor costs have risen faster than capital costs, and technological progress
in services has not matched progress in manufacturing goods. 32

The A c t u a l Role of G o v e r n m e n t
The concentration of wealth and power in the industrialized nations
poses a challenge to the Modern Liberal view of government as a benevo-
lent administrator and impartial defender of the public interest. Increas-
ingly, government is subjected to the demands of large, well-organized
interest groups. In recognition of the changing political landscape,
political scientists such as Robert Dahl, David Easton, and David Truman
have revised the Modern Liberal theory of the state by introducing the
notion of interest-group pluralism. 33 While acknowledging that groups
have replaced individuals as the primary actors in politics, pluralists seek
to preserve the image of democratic government as representative of the
interests of society as a whole.
Pluralist theorists treat political power as separate from economic
power, arguing that political power is widely dispersed among a variety of
interest groups. Corporations, labor unions, environmentalists, senior citi-
zens, and other groups attempt to influence legislation, with the resulting
government policies reflecting the balance of these competing interests. The
most controversial aspect of pluralism is the claim that groups wield influ-
ence in direct proportion to the size of their membership. Critics argue that
pluralists overlook the effect of concentrated wealth in giving some groups
significantly greater impact on the political process.
While the doctrine of interest-group pluralism reflects the changing
nature of politics in industrialized countries, it has consequences reaching
far beyond the realm of academic theory. By encouraging competition
among interest groups, pluralism effectively legitimizes the transformation
of politics into a battle between conflicting interests with no common
ground on which to reach consensus. The worst fears of Conservatives and
Classical Liberals have been realized as politics has degenerated into a
Hobbesian "war of all against all." The result has been a rapid expansion
of government programs aimed at satisfying various interest groups, large
budget deficits, and a widespread loss of public confidence in government.
Unlike Conservatives and Classical Liberals, Modern Liberals have been
reluctant to rely on constitutional constraints to guide public policy. In the
early twentieth century, Modern Liberal jurists such as Oliver Wendell
Holmes, Jr. (1841-1935), Louis Brandeis (1856-1941), and Roscoe Pound
(1870-1964) initiated a loose interpretation of the Constitution to permit
an expanding role for government. Furthermore, Modern Liberals have
been largely unwilling to resolve political conflict by appealing to a well-
defined vision of the public interest or the good society. To do so would
126 Political Economy

jeopardize their commitment to individual autonomy and freedom of pri-

vate choice. By the 1970s, Modern Liberals had reached an impasse; they
were unable to restrain the political disorder unleashed by opening gov-
ernment to the intense pressures of interest groups. 34
Conservatives, Classical Liberals, and Radicals all agree that Modern
Liberalism's difficulties stem from attempting to combine a capitalist econ-
omy with government efforts to achieve a more egalitarian society, thereby
subverting the virtues of each. Government suppresses the disciplining
restraints of the competitive market, and the market undermines the power
of government to achieve its egalitarian goals. Conservatives would go fur-
ther to argue that an active government combined with a relatively free
market undermines the cultural and moral constraints on the pursuit of pri-
vate interests, thus diminishing the organizing capacity of both government
and market. Without cultural, moral, economic, or political discipline,
society is left adrift in a sea of conflicting interests.

P r o p o s a l s for Political Reform

As a result of these dilemmas, Modern Liberals have been forced to
reassess their political agenda. Although a consensus has not yet been
reached, the following three strands of Modern Liberal reform policies
have emerged in recent years:

1. Neoliberalism. This body of ideas would move Modern Liberalism

closer to Classical Liberalism by reducing the role of government in eco-
nomic affairs.35 Instead of focusing on equity and the redistribution of
income, government would concentrate on efficiency and growth.
Neoliberals argue that equity cannot be achieved unless the economy is
thriving, and past efforts to achieve equity through transfer payments and
regulations have actually impeded the dynamism of the market.
Neoliberals largely accept the Classical Liberal argument that government
has become a tool of special interests, so that policies intended to promote
equity often simply cater to interest groups. Therefore, reducing or elimi-
nating many facets of government activity may actually benefit less advan-
taged groups in society.

2. Neocorporatism. Modern Liberal economists Lester Thurow and

Robert Reich have popularized the notion of using the power of government
to actively promote both social justice and economic growth. 36 The vision
of a vigorous government working hand-in-hand with corporations, labor
unions, and other interest groups to coordinate economic activity is remi-
niscent of the corporatism proposed by Conservatives in the early twentieth
century. However, Conservative corporatism is intended to preserve politi-
cal stability by channeling dissent and conflict through organized channels
Government and the Market 127

of hierarchy. In contrast, neocorporatism seeks cooperation between groups

for the purpose of increasing participation and equality. For example, rep-
resentatives of unions and local communities might be given seats on the
boards of directors of corporations. In addition to promoting equality, how-
ever, neocorporatism would stimulate investment and productivity to
enhance the competitiveness of the economy. Advocates of neocorporatism
have admired the Japanese Ministry of International Trade and Industry
(MITI) as an example of government targeting investment funds to specific
industries, facilitating international trade, and closing down industries that
are no longer competitive.37

3. Democratic planning. Some Modern Liberals have moved closer to

the Radical perspective, expressing skepticism that neocorporatism can
restrain corporate dominance over government. They note that business
and government have been working together since the early twentieth cen-
tury, and business has been largely successful in using government to
advance its own interests.38 Economist John Kenneth Galbraith and politi-
cal scientist Robert Dahl propose greater government control over business
and increased democratization of government and the economy. 39
Galbraith supports nationalization of key industries such as energy and
communications and increased public control over investment decisions in
other sectors of the economy. To assure that this expanded authority of
government is democratically accountable, planning advocates propose
fundamental revisions in the political system, including greater public
financing of political campaigns, stricter rules on lobbying and outside
income for politicians, and voter registration drives to increase participa-
tion in elections.

NOTES
1. See Tyler Cowen, ed., The Theory of Market Failure: A Critical
Examination, Fairfax, VA: George Mason University Press, 1988.
2. Classical Liberal arguments for a constitution as the basis for viable democ-
racy are found in Friedrich A. Hayek, The Constitution of Liberty, Chicago:
University of Chicago Press, 1960; James M. Buchanan and Gordon Tullock,
Calculus of Consent: The Logical Foundations of Constitutional Democracy, A
Arbor: University of Michigan Press, 1965; James M. Buchanan, Constitutional
Economics, Cambridge, MA: Blackwell, 1991; Dwight R. Lee and Richard
McKenzie, Regulating Government: A Preface to Constitutional Economics,
Lexington, MA: Lexington Books, 1987; and Gerald W. Scully, Constitutional
Economics: The Framework for Economic Growth and Social Progress,
Washington, DC: The Heritage Foundation, 1991.
3. Major works in public choice theory include Anthony Downs, An Economic
Theory of Democracy, New York: Harper 8t Row, 1957; James M. Buchanan and
Robert D. Tollison, Theory of Public Choice: Political Applications of Economic
128 Political Economy

Ann Arbor: University of Michigan Press, 1972; Gordon Tullock, Private Wants,
Public Means, New York: Basic Books, 1970; Mancur Olson, The Logic of
Collective Action: Public Goals and the Theory of Groups, Cambridge, MA:
Harvard University Press, 1965; and Charles K. Rowley, ed., Public Choice Theory,
Brookfield, VT: Edward Elgar, 1993. For critiques of public choice theory, see Lars
Udehn, The Limits of Public Choice, New York: Routledge, 1996; Donald P. Green
and Ian Shapiro, Pathologies of Rational Choice Theory, New Haven: Yale
University Press, 1994; Kristen R. Monroe, ed., The Economic Approach to
Politics: A Critical Reassessment of the Theory of Rational Action, New York:
HarperCollins, 1991; and Jeffrey Friedman, ed., The Rational Choice Controversy,
New Haven, CT: Yale University Press, 1996.
4. On the theory of rent-seeking, see David C. Colander, ed., Neoclassical
Political Economy: The Analysis of Rent-seeking and DUP Activities, Cambridge,
MA: Ballinger, 1984. See also Robert D. Tollison and Roger D. Congleton, eds.,
The Economic Analysis of Rent-Seeking, Brookfield, VT: Edward Elgar, 1995;
Charles K. Rowley, Robert D. Tollison, and Gordon Tullock, The Political
Economy of Rent-Seeking, Boston: Martinus Nijhoff, 1988; and Gordon Tullock,
Rent Seeking, Brookfield, VT: Edward Elgar, 1993.
5. See George J. Stigler, "The Theory of Economic Regulation," Bell Journal
of Economics & Management Science 2, no. 1 (Spring 1971): 3 - 2 1 . For addi-
tional analysis of the politics of regulation, see Barry Mitnick, The Political
Economy of Regulation, New York: Columbia University Press, 1980; James Q.
Wilson, ed., The Politics of Regulation, New York: Basic Books, 1980; and
Kenneth J. Meier, Regulation: Politics, Bureaucracy and Economics, New York:
St. Martin's Press, 1985.
6. The Classical Liberal explanation of budget deficits is elaborated in James M.
Buchanan and Richard M. Wagner, Democracy in Deficit: The Political Legacy of
Lord Keynes, New York: Academic Press, 1977; Phillip Cagan, ed., The Economy
in Deficit, Washington, DC: American Enterprise Institute, 1985; James M.
Buchanan, Charles K. Rowley, and Robert D. Tollison, eds., Deficits, New York:
Basil Blackwell, 1987; and Joseph White and Aaron Wildavsky, The Deficit and the
Public Interest, Berkeley, CA: University of California Press, 1989.
7. The functioning of bureaucracy is examined in Anthony Downs, Inside
Bureaucracy, Boston: Little, Brown, 1967; Aaron Wildavsky, The Politics of the
Budgetary Process, 4th ed., Boston: Little, Brown, 1984; William A. Niskanen,
Bureaucracy and Public Economics, Brookfield, VT: Edward Elgar, 1994; William
C. Mitchell and Randy T. Simmons, Beyond Politics: Markets, Welfare and the
Failure of Bureaucracy, Boulder, CO: Westview Press, 1994; and James P.
Pinkerton, What Comes Next: The End of Big Government—and the New
Paradigm Ahead, New York: Hyperion, 1995.
8. See Anthony Downs, An Economic Theory of Democracy, New York:
Harper and Row, 1957.
9. For Classical Liberal analyses of the problems associated with democracy, see
Samuel Brittan, The Economic Consequences of Democracy, London: Temple
Smith, 1977. See also Dan Usher, The Economic Prerequisite to Democracy, New
York: Columbia University Press, 1981.
10. Privatization is discussed in Richard Hula, ed., Market Based Public Policy,
New York: Macmillan, 1987; Edward H. Crane and David Boaz, An American
Government and the Market 129

Vision: Policies for the '90s, Washington, DC: Cato Institute, 1988; John D.
Donahue, The Privatization Decision: Public Ends, Private Means, New York:
Basic Books, 1989; Michael E. Beesley, Privatization, Regulation and Deregulation,
New York: Routledge, 1992; Dexter Whitfield, The Welfare State: Privatization,
Deregulation, Commercialization of Public Services, Boulder, CO: Westview Press,
1992; Fred E. Foldvary, Public Goods and Private Communities: The Market
Provision of Social Services, Brookfield, VT: Edward Elgar, 1994; Stephen Edgell,
Sandin Walklate, and Gareth Williams, Debating the Future of the Public Sphere:
Transforming the Public and Private Domains in Free Market Societies, Brookfield,
VT: Avebury, 1995; Elizabeth I. Bailey and Janet Rothenberg Pack, eds., The
Political Economy of Privatization and Deregulation, Brookfield, VT: Edward
Elgar, 1995; and Philip Morgan, ed., Privatization and the Welfare State:
Implications for Consumers and the Workforce, Brookfield, VT: Dartmouth
Publishing Company, 1995.
11. See Richard A. Posner, The Economics of Justice, Cambridge, MA: Harvard
University Press, 1981; Richard A. Posner, Overcoming Law, Cambridge, MA:
Harvard University Press, 1995; and Richard Epstein, Simple Rules for a Complex
World, Cambridge, MA: Harvard University Press, 1995.
12. Instrumentalist interpretations of government are found in C. Wright Mills, The
Power Elite, New York: Oxford University Press, 1956; G. William Domhoff, State
Autonomy or Class Dominance, New York: Aldine de Gruyter, 1996; and G. William
Domhoff, The Power Elite and the State, New York: Aldine de Gruyter, 1990.
13. For a structuralist interpretation of government, see Nicos Poulantzas,
Political Power and Social Classes, London: New Left Books, 1975.
14. The Radical view of the state as a "contested instrument" is presented in Bob
Jessop, The Capitalist State, New York: New York University Press, 1982; Ralph
Miliband, The State in Capitalist Society, New York: Basic Books, 1969; and Ian
Gough, The Political Economy of the Welfare State, London: Macmillan, 1979.
15. See James O'Connor, The Fiscal Crisis of the State, New York: St. Martin's,
1973.
16. See Bertram Gross, Friendly Fascism: The Neiv Face of Power in America,
New York: M. Evans, 1980.
17. See Benjamin R. Barber, Strong Democracy, Berkeley: University of
California Press, 1984; Philip Green, Retrieving Democracy: In Search of Civic
Equality, Totowa, NJ: Rowman 6c Allanheld, 1985; Carol Could, Rethinking
Democracy: Freedom and Social Cooperation in Politics, Economics and Society,
New York: Cambridge University Press, 1988; Jane J. Mansbridge, Beyond
Adversarial Democracy, New York: Basic Books, 1980; and Peter Bachrach and
Aryeh Botwinick, Power and Empowerment: A Radical Theory of Participatory
Democracy, Philadelphia: Temple University Press, 1992; Paul Hirst, Associational
Democracy: New Forms of Economic and Social Governance, Cambridge, UK:
Polity, 1994; Chantal Mouffe, ed., Dimensions of Radical Democracy: Pluralism,
Citizenship, Community, London: Verso, 1992; C. Douglas Lummis, Radical
Democracy, Ithaca, NY: Cornell University Press, 1996; and David Copp, Jean
Hampton, and John Roemer, eds., The Idea of Democracy, Cambridge, UK:
Cambridge University Press, 1993.
18. Alexis de Tocqueville, Democracy in America, edited by J. P. Mayer and M.
Lerner, New York: Harper &c Row, 1966.
130 Political Economy

19. The origins of modern elite theory are found in Vilfredo Pareto, Sociological
Writings, edited by S. E. Finer, New York: Praeger, 1966; and Gaetano Mosca, The
Ruling Class, edited by A. Livingston, New York: McGraw-Hill, 1939.
20. See Jose Ortega y Gasset, The Revolt of the Masses [1932], Notre Dame, IN:
University of Notre Dame Press, 1985.
21. Joseph Schumpeter, Capitalism, Socialism and Democracy, New York:
Harper 6c Brothers, 1950.
22. See Robert A. Nisbet, The Twilight of Authority, New York: Oxford
University Press, 1975.
23. See Jacob Talmon, The Origins of Totalitarian Democracy, New York:
Praeger, 1960. See also Lionel Trilling, The Liberal Imagination, New York: Viking
Press, 1950.
24. Recent works on corporatism include Colin Crouch, ed., State and Economy
in Contemporary Capitalism, New York: St. Martin's 1979; Philippe Schmitter and
Gerhard Lehmbruch, eds., Trends Toward Corporatist Intermediation, Beverly
Hills, CA: Sage, 1979; James M. Simmie, Power, Property, and Corporatism,
London: Macmillan, 1982; Peter J. Williamson, Varieties of Corporatism, New
York: Cambridge University Press, 1986; Wyn Grant, ed., The Political Economy
of Corporatism, New York: St. Martin's, 1985; Louis Galambos and Joseph Pratt,
The Rise of the Corporate Commonwealth, New York: Basic Books, 1989; and
Martin J. Sklar, The Corporate Reconstruction of American Capitalism, New York:
Cambridge University Press, 1988.
25. See Michael Crozier, Samuel P. Huntington, and Joji Watanuki, eds., The
Crisis of Democracy, New York: New York University Press, 1975.
26. George Will, Statecraft As Soulcraft, New York: Simon 6c Schuster, 1983.
27. Robert A. Nisbet, Community and Power, New York: Oxford University
Press, 1962.
28. The classic article on market failure is F. M. Bator, "The Anatomy of Market
Failure," Quarterly Journal of Economics 72, no. 288 (1958): 351-79.
29. The concept of merit goods was introduced in Richard A. Musgrave, The
Theory of Public Finance, New York: McGraw-Hill, 1959.
30. This argument is developed in G. A. Akerlof and W. T. Dickens, "The
Economic Consequences of Cognitive Dissonance," American Economic Review
72, no. 3 (June 1982): 307-19.
31. For a Modern Liberal critique of the concept of government failure, see
Donald A. Wittman, The Myth of Democratic Failure: Why Political Institutions
are Efficient, Chicago: University of Chicago Press, 1995.
32. See Harold G. Vatter and John F. Walker, The Inevitability of Government
Growth, New York: Columbia University Press, 1990. See also John F. Walker and
Harold G. Vatter, The Rise of Big Government in the United States, Armonk, NY:
M. E. Sharpe, 1997.
33. See Robert A. Dahl, Pluralist Democracy in the United States, Chicago: Rand
McNally, 1967; David Easton, The Political System, New York: Alfred A. Knopf,
1981; and David Truman, The Governing Process, New York: Alfred A. Knopf,
1951.
34. See Robert A. Dahl, Dilemmas of Pluralist Democracy, New Haven, CT:
Yale University Press, 1982. See also Theodore Lowi, The End of Liberalism: The
Second Republic of the U.S., 2nd ed., New York: W W. Norton, 1979.
Government and the Market 131

35. For an overview of neoliberalism, see Randall Rothenberg, The Neoliberals:

Creating the New American Politics, New York: Simon &c Schuster, 1984.
Important works include Mickey Kaus, The End of Equality, New York: Basic
Books, 1995; and Paul Krugman, The Age of Diminished Expectations, 3rd ed.,
Cambridge, MA: MIT Press, 1997.
36. Lester Thurow, The Zero-Sum Society, New York: Basic Books, 1980; Lester
Thurow, The Zero-Sum Solution: Building a World-Class American Economy, a
New York: Simon &c Schuster, 1985; Lester Thurow, The Future of Capitalism
How Today's Economic Forces Shape Tomorrow's World, New York: W. Morrow
&C Co., 1996; Robert B. Reich, The Next American Frontier, New York: Time
Books, 1983; Robert B. Reich, Tales of A New America, New York: Times Books,
1987; Robert B. Reich, The Resurgent Liberal, New York: Times Books, 1989;
Robert B. Reich, The Work of Nations: Preparing Ourselves for 21st Century
Capitalism, New York: Vintage Books, 1992.
37. For Classical Liberal critiques of industrial policy, see Richard B. McKenzie,
Competing Visions: The Political Conflict Over America's Economic Future,
Washington, DC: Cato Institute, 1985; and Chalmers Johnson, ed., The Industrial
Policy Debate, San Francisco: Institute for Contemporary Studies Press, 1984.
38. For critical accounts of the history of business and government cooperation
in the United States, see Gabriel Kolko, The Triumph of Conservatism: A
Reinterpretation of American History, 1900-1916, New York: Free Press, 1963;
James Weinstein, The Corporate Ideal in the Liberal State 1900-1918, Boston:
Beacon Press, 1969; Donald Stabile, Prophets of Order: Class, Technocracy, and
Socialism in America, Boston: South End Press, 1985; and R. Jeffrey Lustig,
Corporate Liberalism: The Origins of Modern American Political Theory
1880-1920, Berkeley: University of California Press, 1982.
39. John Kenneth Galbraith, Economics and the Public Purpose, Boston:
Houghton Mifflin, 1973; and Robert A. Dahl, Democracy, Liberty, and Equality,
New York: Oxford University Press, 1986.

ADDITIONAL READING
Bowles, Samuel, and Herbert Gintis. Democracy and Capitalism. New York: Basic
Books, 1986.
Brittan, Samuel. The Role and Limits of Government. Minneapolis: University of
Minnesota Press, 1983.
Buchanan, James M. The Limits of Liberty: Between Anarchy and Leviathan.
Chicago: University of Chicago Press, 1975.
Carnoy, Martin. The State and Political Theory. Princeton, NJ: Princeton
University Press, 1984.
Clarke, Simon. Keynesianism, Monetarism, and the Crisis of the State. Brookfield,
VT: Edward Elgar, 1988.
Cohen, Jeffrey E. Politics and Economic Policy in the United States. Boston:
Houghton Mifflin, 1997.
David, Wilfred L. Political Economy of Economic Policy. New York: Praeger,
1988.
Dolbeare, Kenneth. Democracy at Risk: The Politics of Economic Renewal.
Chatham, NJ: Chatham House, 1984.
132 Political Economy

Dugger, William M., and William T. Waller, Jr., eds., The Stratified State: Radical
Institutionalist Theories of Participation and Duality. Armonk, NY: M. E.
Sharpe, 1992.
Duncan, Graeme, ed. Democracy and the Capitalist State. New York: Cambridge
University Press, 1989.
Esping-Anderson, Gosta. Politics Against Markets. Princeton, NJ: Princeton
University Press, 1985.
Ferguson, Thomas, and Joel Rogers, eds. The Political Economy. Armonk, NY:
M. E. Sharpe, 1984.
Freeman, John R. Democracy and Markets: The Politics of Mixed Economies.
Ithaca, NY: Cornell University Press.
Glazer, Nathan. The Limits of Social Policy. Cambridge, MA: Harvard University
Press, 1988.
Greenberg, Edward S. Capitalism and the American Political Ideal. Armonk, NY:
M. E. Sharpe, 1985.
Hibbs, Douglas A. The American Political Economy. Cambridge, MA: Harvard
University Press, 1987.
Jordon, Bill. The State: Authority and Autonomy. New York: Basil Blackwell, 1985.
Kristol, Irving. On the Democratic Ideal in America. New York: Harper &c
Row, 1972.
Levinson, Marc. Beyond Free Markets: The Revival of Activist Economics.
Lexington, MA: Lexington Books, 1988.
Mills, Edwin S. The Burden of Government. Stanford: Hoover Institution Press, 1986.
Nell, Edward. Prosperity and Public Spending. New York: Unwin 6c Hyman, 1988.
Peretz, Paul, ed. The Politics of American Economic Policy Making. Armonk, NY:
M. E. Sharpe, 1987.
Stiglitz, Joseph. The Role of the State. Oxford: Basil Blackwell, 1989.
Stone, Alan, and E. J. Harpham, eds. The Political Economy of Public Policy.
Beverly Hills, CA: Sage, 1982.
Suleiman, Ezra N., and John Water bury, eds. The Political Economy of Public
Sector Reform and Privatization. Boulder, CO: Westview Press, 1990.
Chapter 8

Inflation and
Unemployment

Macroeconomic instability, also known as the business cycle, has plagued

Western nations since the beginning of industrialization. Inflationary periods
lead to economic and political dislocations that jeopardize prosperity and
social order. Recessions impose severe hardship in terms of unemployment,
crime, and a plethora of unmet human needs. To protect themselves against the
insecurity caused by economic instability, individuals, unions, corporations,
and government have sought to suppress the forces of market competition and,
in so doing, have transformed the institutional structure of modern societies.
Although the relative prosperity of the decades following World War II
persuaded some economists that the business cycle had been conquered, the
turmoil of recent decades has demonstrated the elusive nature of economic
stability. Contemporary political economists are locked in profound
debates concerning the underlying causes of instability and the merits of
alternative policies for combating inflation and unemployment.

THE CLASSICAL LIBERAL PERSPECTIVE

E x p l a n a t i o n s of I n s t a b i l i t y
Classical Liberals assume that a competitive market economy contains
built-in stabilizing mechanisms. This viewpoint was originally articulated
134 Political Economy

in the early nineteenth century by a French economist, Jean Baptiste Say

(1767-1832). His theory, known as Say's Law, states that supply creates
its own demand. Production of output generates an identical amount of
income. Any portion of income not spent on consumer goods and services
will be spent on capital goods because interest rates adjust until the
amount of saving is matched by an equal amount of borrowing for invest-
ment purposes. Say's Law does not imply that every commodity is guar-
anteed to sell, but it assures that the total amount of spending on
consumption and investment will, ignoring government and international
trade, match the value of output. That some goods remain unsold is
merely a temporary phenomenon as production shifts to more desired
goods. Furthermore, market incentives are ideally suited to facilitate the
rapid movement of resources into more profitable lines of production.
These transitions normally occur so smoothly that the economy as a
whole experiences little or no disruption. Any employment will be "fric-
tional" or "structural" as workers move from declining to expanding
industries and occupations.
Classical Liberals of the nineteenth century were so certain of the inher-
ent stability of a market economy that they attributed the actual ups and
downs of the economy to external forces. For example, W. Stanley Jevons
(1835-1882) claimed that sunspots affected agriculture and thereby
caused the entire economy to slump. Other economists attributed business
cycles to periodic discoveries of gold, waves of emigration from Europe to
the United States, or wars. These explanations of instability remained
dominant until the Great Depression when the apparent failure of the
market resulted in a loss of status for Classical Liberalism lasting for the
next forty years.
The Classical Liberal resistance to Keynesian macro theory came pri-
marily from Austrian economists such as Ludwig von Mises and Friedrich
A. Hayek who insisted that government mismanagement of the money sup-
ply caused business cycles. According to the Austrians, central banks such
as the Federal Reserve drive interest rates artificially low by issuing too
much money. Low interest rates result in too much borrowing and spend-
ing which, in turn, cause inflation. Eventually, the central bank must
tighten the money supply, driving interest rates upward and causing a
recession as the economy falls back to a sustainable rate of growth. Since
the Austrians believed that overstimulation of the economy by the central
bank creates the conditions leading to recession, they viewed the Keynesian
remedy of more government spending as worsening the problem. 1
Another Classical Liberal economist who fought against the Keynesian
revolution was Milton Friedman of the University of Chicago. Friedman
claims that the Depression was caused by the Federal Reserve System and
trade protectionism. The Federal Reserve Act of 1913 established the
Federal Reserve System, a central bank in control of the money supply.
Inflation and Unemployment 135

During the 1920s, the U.S. economy experienced deflation and high inter-
est rates as the Fed kept a tight grip on the money supply. By 1929, these
conditions finally spoiled the optimism fueling speculation in the stock
market. The ensuing crash triggered an economic downturn that might
have been short-lived had Congress not passed the Smoot-Hawley Act of
1930, imposing high tariffs on imported goods. When other countries retal-
iated with similar tariffs, international trade collapsed and a full-blown
depression followed. From Friedman's perspective, these instances of gov-
ernment intervention, first the Fed's inept handling of the money supply
and later the Smoot-Hawley tariffs, prevented the natural equilibrating
forces o( the market from quickly restoring prosperity.2
The Austrian economists and Friedman gained little attention until the
Western economies encountered serious difficulties in the 1970s. The
inability of Keynesian policies to cope with simultaneous inflation and
recession opened the door for a resurgence of Classical Liberalism. Under
the labels of supply-side economics, monetarism, and new classical eco-
nomics, Classical Liberal political economy returned to center-stage nearly
as quickly as it had exited in the 1930s. These theories purport to demon-
strate that government causes both inflation and unemployment.
However, some disagreement remains over the connection between gov-
ernment and instability.
Supply-side economics, as popularized by Arthur Laffer, Jack Kemp,
and Jude Wanniski, blames inflation and unemployment on the rising costs
associated with government regulations, taxes, and the inefficiency of gov-
ernment programs. 3 Rising costs of production lead to reduced output and
employment as well as higher prices.
Monetarist economists, led by Milton Friedman, focus on the Federal
Reserve System as the cause of instability.4 By assuming that the economy
naturally operates at or near full employment and that the velocity of
money is fairly constant, monetarists conclude that any increase in the
money supply exceeding the real growth rate of the economy will cause
inflation. This "demand-pull" inflation results from "too many dollars
chasing too few goods."
New classical economists such as Robert Lucas, Thomas Sargent, Neil
Wallace, and Robert Barro propose a slightly different version of govern-
ment's role in destabilizing the economy.5 They argue that individuals
quickly learn from experience to anticipate the effects of government
action. These "rational expectations" enable individuals to effectively
block government efforts to stimulate the economy. For example, if the Fed
increases the money supply, workers may demand higher wages in antici-
pation of higher prices, and businesses, anticipating higher costs, will raise
prices to maintain their profits. New classical economists conclude that a
monetary stimulus causes only inflation, without any lasting impact on the
level of employment or output.
136 Political Economy

All Classical Liberals view deficit spending by government as a primary

cause of inflation. Besides adding to aggregate demand and pulling prices
upward, deficits force the government to compete with the private sector
to borrow money. As government bonds are sold in credit markets, bond
prices drop and interest rates rise. Higher interest rates "crowd out" bor-
rowing for private investment, ultimately leading to slower growth rates in
productivity and output.
Government also causes unemployment by interfering with the market's
efficient allocation of resources. Minimum-wage laws, federal protection of
labor unions, and regulations all discourage businesses from hiring more
employees, while welfare programs cause some people to shun work.
Classical Liberals believe a "natural rate of unemployment" is attributable to
the combined interventions and market rigidities imposed by government.
Government also indirectly contributes to unemployment by causing infla-
tion. Once inflation begins, it feeds on itself. An "inflationary psychology"
causes individuals to spend rather than save and to use their market power
to raise prices. Also, inflation impairs the market's capacity to allocate
resources efficiently, thereby reducing output and contributing to further
price increases. Unchecked inflation will eventually cause the economy to
collapse into depression, as happened in Germany in the 1920s. Thus gov-
ernment must intervene to intentionally engineer a recession by applying the
monetary and fiscal brakes. Again, unemployment results from government's
futile efforts to stimulate the economy beyond its productive capacity.
While supply-side, monetarist, and new classical economists blame gov-
ernment for initiating inflation and unemployment, they offer little expla-
nation for such irresponsible policies. Another body of ideas called public
choice theory fills this gap. The actions of government are attributed to the
self-interest of politicians, bureaucrats, and voters. Since voters are attracted
by government benefits but not by taxes, politicians provide more benefits
and lower taxes. Deficit spending financed by government borrowing places
the burden of present benefits onto future generations not yet able to vote.
Similarly, increasing the money supply may create the illusion of prosperity
because voters focus on the short-run stimulus to employment and income
despite the eventual erosion of these gains by inflation.
Classical Liberals also believe that politicians cause economic instability
in their quest for reelection. During the year or so prior to an election, gov-
ernment policies are manipulated to stimulate the economy so that citizens
will be content when they enter the voting booth. After the election, the
economy must be slowed to counteract inflationary pressures resulting
from the stimulation. Classical Liberals call this process the "political busi-
ness cycle" and argue that it constitutes a significant component of the eco-
nomic instability of Western nations. 6
Finally, economist Mancur Olson (1932-1998) claimed that govern-
ment's past success in preventing recessions contributed to the solidification
Inflation and Unemployment 137

of rent-seeking coalitions and interest groups that obstruct the efficiency

and flexibility of the market. Without the periodic discipline of recessions
forcing firms and workers to renew their commitments to efficiency, the
economy is gradually shackled by "social rigidities" consisting of interest
groups with power to suppress competition. Once these groups capture the
authority of government to advance their interests, the vitality of the mar-
ket is drained and economic decline is inevitable.7

Stabilization Policies
The guiding principle behind Classical Liberal stabilization policies is the
belief in the inherent stability of a market economy free from the restraints
of government intervention. Once the barriers to profitability, saving, and
investment are removed by lowering taxes, reducing regulations, stabilizing
the money supply, and eliminating the budget deficit, the market economy
will naturally generate noninflationary growth. Classical Liberals also view
inflation as a more serious problem than unemployment since inflationary
pressures disrupt the market and are ultimately responsible for subsequent
recessions. They discount the severity of unemployment, arguing that offi-
cial statistics overstate the problem since many people considered unem-
ployed by the government actually work in the "underground economy."
Despite a consensus among Classical Liberals that the size of govern-
ment must be reduced to stabilize the economy, they disagree on the strate-
gies for accomplishing this goal. Some Classical Liberals want the Fed to
maintain a fixed rate of money growth equal to the two to three percent
long-run trend in real growth of the economy. They propose increased
independence of the Fed from political influence by Congress and the
President or even an amendment to the Constitution requiring a fixed rate
of monetary expansion. 8
Friedrich Hayek developed the idea of ending the Fed's monopoly on
money creation by allowing several privately-issued currencies to circulate.
Since the public would gravitate toward currencies that maintain their
value, competitive pressures would force each issuer to limit the amount of
money created.9 Another Classical Liberal strategy to restrain the growth
of money calls for a return to the gold standard. Money creation would be
limited by the size of a nation's official holdings of gold.
Classical Liberals also favor deregulation and privatization as methods
for reducing the scope of governmental activity. These policies would reduce
government spending, lower business costs, encourage more competition,
and improve efficiency. Classical Liberals argue that most of the activities
currently performed by government originated from the pressures of special-
interest groups, including the various bureaucracies that administer govern-
ment programs. A vast array of government programs can be eliminated or
transferred to the private sector without damaging the public interest.
138 Political Economy

Most Classical Liberals call for cuts in government spending to reduce the
size of government and stabilize the economy. The unprecedented expansion
of federal budget deficits during the 1980s and early 1990s heightened con-
cerns about government spending. Some Classical Liberals favor an amend-
ment to the Constitution requiring a balanced budget or establishing a ceiling
for government spending as a percentage of GDR Other Classical Liberals,
particularly supply-side economists, favor lower tax rates instead, arguing
that the incentive of higher after-tax earnings will lead to increased produc-
tive activity and therefore a broader tax base. With more to tax, government
revenues may actually increase despite lower tax rates. In short, supply-siders
claim that we can "grow our way out of the deficit."
However, not all Classical Liberals accept supply-side theories. While
relishing the idea that tax reductions serve to cut off the "lifeblood" of gov-
ernment, Milton Friedman argues that insufficient tax revenue has not
restrained government spending in the past. Friedman doubts that lower
tax rates can actually lead to increased tax revenue; instead, tax cuts may
simply result in larger deficits unless matched by similar or greater reduc-
tions in government spending.
Classical Liberals challenge the notion of a trade-off between inflation
and unemployment; they insist that only unanticipated inflation reduces
unemployment. As soon as people become accustomed to any particular
rate of inflation, the economy returns to the "natural rate" of unemploy-
ment, which can be lowered only by restoring competition to the market
through institutional reforms such as breaking up unions, deregulation,
and elimination of the welfare state.
When recessions occur, Classical Liberals oppose government efforts to
alleviate the hardship associated with unemployment and bankruptcy.
They believe that recessions restore discipline and efficiency to the econ-
omy. If government cushions the impact, the market's self-correcting mech-
anisms are thwarted. Conversely, if government resists the political
pressures to intervene, recessions will be short-lived and the economy will
resume stable growth.

THE RADICAL PERSPECTIVE

E x p l a n a t i o n s of I n s t a b i l i t y
Radicals believe that instability is an unavoidable condition of a capi-
talist economy, but they offer a variety of different and sometimes con-
flicting explanations for the business cycle.10 Radical "crisis theory"
views inflation as a manifestation of the struggle between opposing
classes to enlarge their respective shares of income. Recessions and unem-
ployment, on the other hand, serve two purposes. They discipline the
labor force by enlarging the "reserve army of the unemployed," thereby
Inflation and Unemployment 139

creating insecurity among all workers. Also, recessions eliminate the

excess productive capacity caused by overly optimistic investments dur-
ing the preceding boom period. Once a recession lowers the costs of labor
and capital, another expansion can begin.
In 1925, the Soviet economist Nikolai Kondratiev (1892-1938)
observed that capitalism experiences long-term cycles lasting fifty to sixty
years. For each cycle, unique conditions contribute to expansion and spe-
cific obstacles eventually impede capital accumulation, leading to reces-
sion. After a period of stagnation, the impediments are resolved, clearing
the way for further accumulation. However, another recession inevitably
follows; the successful resolution of one set of impediments creates condi-
tions posing new and different obstacles.11
Kondratiev described a sixty-year cycle, dating from the 1780s to the
1840s, in which the invention of labor-saving technology such as the steam
engine fueled expansion. However, this technology caused political resis-
tance by both workers who feared the factories and aristocrats seeking to
preserve their power and status. Political and social conflict interfered with
capital accumulation until the advocates of laissez-faire triumphed and
capitalism entered its next phase of expansion.
A fifty-year cycle lasting from the 1840s to the 1890s was based on fur-
ther development of labor-saving technology and the success of laissez-faire
policies in abolishing the remnants of feudal and mercantilist restrictions
on production and trade. By the 1870s, corporations had established capi-
tal-intensive production processes requiring huge, uninterrupted flows of
revenue to remain profitable. However, cut-throat competition and the
growing militancy of labor unions prevented firms from generating ade-
quate profit, and the economy entered a prolonged stagnation until 1896.
This era illustrates what Radicals call the falling rate of profit. As produc-
tion becomes more capital-intensive, the rate of profit tends to fall because
businesses have less labor to exploit in proportion to the amount of capi-
tal being used.
The problem of inadequate profits in the late nineteenth century was
eventually resolved. Large corporations successfully monopolized their
industries, gaining greater control over product prices and resource costs.
In addition, imperialism opened new markets and provided cheaper raw
materials. Until World War I, capitalism thrived under these conditions.
However, the very success of monopolization and imperialism in bolstering
profits eventually resulted in such concentrated wealth and income that the
economy began to suffer from inadequate spending or "underconsump-
tion." 12 Because wealthy individuals often save substantial portions of their
income, increasing concentration of income meant that saving was rising
more rapidly than business investment, resulting in inadequate demand for
products and eventual cutbacks in production. Radicals attribute the Great
Depression to underconsumption.
140 Political Economy

The solution to the Depression was a vastly enlarged role for govern-
ment in the form of military spending, the welfare state, government regu-
lation, and collective bargaining for unions. By the 1970s, however, these
solutions for underconsumption had become obstacles to healthy rates of
capital accumulation. In this respect, Radicals concur with Classical
Liberals in viewing government intervention as a factor in economic stag-
nation. 13 Although welfare programs increase aggregate demand by plac-
ing money in the hands of people likely to spend it, welfare also results in
what Radicals call "decommodification of labor." Welfare establishes a
"social wage" received by workers even if they are unemployed, so labor is
no longer a commodity whose value is determined by supply and demand.
A capitalist economy cannot function well once labor has been decom-
modified; most jobs are so alienating that people will avoid work if gov-
ernment provides a social wage as an alternative.
Government involvement in the economy also leads to the "politiciza-
tion of accumulation." This phenomenon results from the success of work-
ers in using the democratic political process to secure rights such as
occupational health and safety, collective bargaining, nondiscrimination,
and protection against arbitrary layoffs. These rights diminish the prerog-
atives of capitalists and may pose barriers to profitability and accumula-
tion. While Radicals strongly support workers' rights, they claim that
capitalism will falter when the power of workers threatens to override the
power of capitalists.
Once the economy has been politicized, the allocation of resources no
longer appears natural and inevitable, and the distribution of income
becomes subject to bitter struggles between interest groups. Capitalism is
revealed as a system of power rather than a natural mechanism for accom-
modating individual preferences. As government and the economic system
lose legitimacy in the eyes of citizens, the political battle to gain control of
government undermines the accumulation process.14
The Keynesian solution to instability poses yet another problem for cap-
italism. The prosperity accomplished through Keynesian policies during the
1960s effectively suppressed the discipline of the market. Corporations
became more powerful and resistant to competitive forces. Organized labor
secured market power through collective bargaining and the threat of
strikes. The economy grew increasingly segmented, dividing into a "pri-
mary sector" consisting of large corporations and unionized workers, and
a "secondary sector" composed of small businesses and unorganized work-
ers. The firms and unions in the primary sector remain relatively insulated
from competitive pressures and therefore possess the power to raise prices
and wages. This phenomenon gives modern capitalism a built-in
inflationary tendency controllable only by maintaining slack in the econ-
omy through unemployment and slow growth.
Inflation and Unemployment 141

The increased power of labor unions forms the basis for another Radical
explanation of the business cycle—the "profit squeeze" theory.15 During
periods of expansion, unemployment declines and workers demand and
receive higher wages. As the expansion continues, rising wage costs squeeze
corporate profits, causing government to intentionally slow the economy as
a means of disciplining workers and restraining wage demands. This
Radical version of the "political business cycle" views government as using
monetary and fiscal policy to assist businesses in holding down labor costs
by periodically cooling the economy.16
Radicals view the federal budget deficit as a significant problem, but
they do not blame politicians or voters. The "fiscal crisis of the state" sim-
ply manifests deeper structural problems in contemporary capitalism.17 To
bolster corporate profits, government initiates vast spending programs
aimed at both stimulating demand and socializing many business costs. At
the same time, corporate taxes are kept low to reduce business costs even
further. The net effect of increased spending and insufficient taxes is a bud-
get deficit. Radicals attribute recent reductions in the size of the deficit to
cyclical prosperity. However, another recession will eventually trigger
renewed expansion of the deficit.
Radicals argue that the demise of Keynesianism was sealed by the glob-
alization of the economy. When national economies were relatively
autonomous, policies designed to stimulate growth through government
programs aimed at raising wages and aggregate demand were relatively
effective. However, in a global economy, these same policies create perverse
effects. Higher wages lead to higher business costs and reduced ability to
export. The combination of higher wages and government regulations
encourages "capital flight" as businesses relocate to countries with lower
cost structures. Finally, the earlier success of Keynesianism in assuring ade-
quate demand, stable profits, and economic growth undermines the pres-
sure on businesses to innovate. With only modest gains in productivity,
countries relying on Keynesian policies fall behind in international compe-
tition. Under these conditions, even the supporters of Keynesianism have
begun to search for different solutions.

Stabilization Policies
According to Radicals, the traditional policy of slowing the economy to
stop inflation is no longer viable.18 Personal, corporate, government, and
international debt is so immense that any significant downturn in the econ-
omy could trigger a chain-reaction of bankruptcies, leading to economic dis-
aster. Also, in a segmented or dual economy, the secondary sector serves as
a buffer for the primary sector. A recession that devastates small-business
owners, farmers, and unorganized workers may have little impact in
142 Political Economy

quelling the inflationary pressures emanating from corporations and unions

in the primary sector. Finally, rights won through political struggles by
workers, minorities, women, and other groups have tilted the balance of
class power, creating political gridlock in Western economies. When no class
or group has sufficient power to impose its agenda on society, government
policy drifts aimlessly.
Radicals attribute the relative health of the U.S. economy during the
1990s to several factors. First, the effects of "Reaganomics" during the
1980s in eroding union power, cutting taxes, and deregulating businesses
have substantially reduced business costs and increased profits, thereby
restoring business confidence.19 Second, the increasing globalization of
trade has reduced business costs for labor and raw materials and slowed
inflation by undermining market power. Third, huge budget deficits have
provided a Keynesian stimulus to aggregate demand.
However, Radicals caution that these favorable conditions may impede
future growth. The same policies that restored profitability have also pro-
duced a growing gap between rich and poor, a condition that preceded the
Great Depression. Globalization also has negative consequences. Free trade
with low-wage nations may pull down U.S. wages, further exacerbating
income inequality. Some Radicals foresee the next major downturn being
triggered by deflation as falling wages and commodity prices lead to com-
petitive price cuts for manufactured goods. Corporations and nations strug-
gling for market share in the global economy will be forced to accept lower
profits which, in turn, will depress investment and growth. The last experi-
ence with deflation occurred during the Great Depression, when govern-
ments were finally able to revive their nations' economies with spending on
World War II. However, now that domestic competition has been super-
seded by global competition, national governments have lost the ability to
control their economies, and no international governing body exists with
sufficient authority to pull the world market out of a deflationary spiral.20
From the Radical perspective, the ultimate solution to instability is a
greater degree of public control and/or ownership of the major means of
production. As steps toward achieving this goal, Radicals propose various
combinations of the following policies.

1. Partial Nationalization. Government control of key industries such

as energy, communications, transportation, and banking might take the
form of buyouts of private shareholders, with existing management retain-
ing its role. Alternatively, government might install its own managerial
bureaucracy to administer public industries.

2. Economic Planning. Planning could consist of government forecasts

or guideposts designed to aid private decisionmakers, or it might entail
mandatory directives to industries and firms. To the extent that private
Inflation and Unemployment 143

production remains a significant part of a socialist economy, government

should have some control over the allocation of credit, the location of new
businesses, and the mobility of existing businesses.21

3. Democratization. Radicals believe that government in a genuine

socialist society should represent the public interest and be fully account-
able to citizens. In both the political and economic spheres, Radicals call
for decentralization of power and popular input into decisionmaking.
Businesses should be democratized by establishing worker participation in
decisionmaking or even direct ownership of productive assets. Radicals
believe that democratized firms can improve efficiency through reduced
waste and enhanced productivity.22

4. Greater Equality. A more equal distribution of wealth and income

would improve stability by maintaining sufficient consumption spending
and by reducing the dependency of the economy on the psychological
moods of wealthy investors. This goal can be achieved by taxes on prop-
erty income and policies to secure employment at good wages for all able-
bodied citizens. Radicals also favor a guaranteed minimum standard of
living for those persons unable to participate in the labor force.

Radicals acknowledge that these policies will not be enacted as long as

government is controlled by the capitalist class. Therefore, the immediate
strategy to deal with inflation and unemployment is to organize a broad-
based political party representing the interests of all workers. Radicals are
confident that a socialist political movement encompassing a large major-
ity of the population can generate public policies leading to a stable and
prosperous economy.

THE CONSERVATIVE PERSPECTIVE

E x p l a n a t i o n s of I n s t a b i l i t y
With the notable exception of Joseph Schumpeter, Conservatives have
not offered economic theories to explain instability. Schumpeter attributed
business cycles to waves of technological innovation periodically sweeping
through the economy.23 For example, the development of both the railroad
and automobile industries required huge investments that stimulated eco-
nomic growth. Schumpeter claimed that innovation tended to occur in
spurts during periods of tranquility and optimism. Eventually, however, the
ideas of the original "innovator" are copied by legions of less competent
"imitators" who saturate the market and reduce profitability. As pessimism
sets in, innovations dry up, investment is reduced, and the economy
slumps. Schumpeter viewed recessions as unavoidable and useful; they
144 Political Economy

served as "rubbish disposal" by forcing the liquidation of excess capacity

and closure of inefficient firms. Renewed innovation would eventually ini-
tiate a new round of expansion and prosperity.
For most Conservative theorists, the explanation of instability encom-
passes a broader analysis than that offered by standard economic theory.
Conservatives believe that markets function well only in the context of a
society based on traditional values and hierarchical authority. Even in this
setting, however, the market fosters self-interest, materialism, and moral
relativism, all of which threaten hierarchical authority and thus stability.
This linkage between markets and instability has a long history dating
to the origins of capitalism. The industrial revolution established not only
new methods of production, but also new attitudes and lifestyles that dis-
rupted the traditional patterns of feudal society. People became more
mobile and calculating in their behavior, and new tastes and expectations
developed. As capitalists gained power, traditional sources of authority
such as the church, the state, and local elites declined in significance.
Individuals began to view themselves as independent entities capable of
defining and pursuing their own interests. The ensuing diversity of values
and lifestyles undermined the stability and order of communities.
With the social fabric disintegrating, self-interested individuals
became skeptical of the authority of aristocrats and capitalists alike, and
bitter conflict over individual rights and rewards ensued. To gain advan-
tage in this conflict, individuals formed interest groups such as labor
unions, professional associations, and manufacturing groups. On one
hand, Conservatives applaud the formation of groups to shelter individ-
uals from the impersonal forces of the market and to promote a sense of
identity, belonging, and purpose. But to function smoothly, these groups
must operate within the context of a broad social consensus that
restrains self-interest to preserve a stable and orderly society. Because
this condition has not been met in modern societies, Conservatives argue
that individuals exploit their group membership to gain more income for
less work. In summary, while Conservatives welcome occupational
groups as a means to sustain individual virtue and high productivity, the
actual role of interest groups in modern societies is simply to advance the
material interests of their members by protecting them from the disci-
plining forces of competition.
The market power of interest groups enables them to raise prices
above competitive levels. The resulting inflation is perhaps more damag-
ing for its social and psychological effects than for its direct influence on
the economy. Inflation breeds insecurity and anxiety by creating
uncertainty and by revaluing the worth of assets. Conflict between
inflation's winners and losers contributes to social disorder. The virtues
of hard work, thrift, and planning for the future are discredited as
debtors and spenders are rewarded for their profligacy. The work ethic is
Inflation and Unemployment 145

undermined as individuals increasingly look for ways to profit from infla-

tion through speculative activities.
Interest groups also place demands on government to provide benefits
while resisting additional taxes. As a result, government spends more than
it taxes, budget deficits grow, and government borrowing absorbs private
savings that should be funding private investment. Inflation and sluggish
growth inevitably result.
In addition to fostering the emergence of interest groups, the market also
contributes to instability by eroding traditional values and culture. The
Great Depression was preceded by a decade of cultural transformation
including changing roles for women, the loss of millions of single-family
farms, and new forms of music, art, and literature that challenged tradi-
tional tastes. From the Conservative perspective, the Depression was linked
to greed, speculation, and cultural disintegration. Conservatives lament the
fact that Western nations responded to the Depression with the liberal wel-
fare state rather than a government-business alliance to restore hierarchical
authority and stability. The welfare state effectively destroyed the
dynamism of modern societies by fostering laziness, dependency, and a vast
government bureaucracy. As the role of government grew, it undermined
the broad array of "intermediate institutions" such as family, church, and
neighborhood that provide individuals with identity and self-discipline. For
Conservatives, the problem of economic instability is simply one more
symptom of the cultural transformations that have produced women's lib-
eration, the decline of religion, high divorce rates, lack of discipline in
schools, and deterioration of the work ethic.24
While Conservatives implicate government as contributing to economic
instability, the root causes lie much deeper. Government is controlled by
citizens who have been transformed into isolated pleasure-seekers by the
disruptive forces of industrialization and modernization. The inability of
government to balance its budget mirrors the modern insistence on imme-
diate gratification. Citizens and corporations focus more intently on short-
term gains for themselves rather than the long-term health of society.

Stabilization Policies
Because Conservatives believe that economic problems such as inflation
and unemployment reflect the erosion of traditional values and institutions,
any viable solution must address issues seemingly unrelated to economics.
Conservatives believe that economic stability can be improved by policies
such as allowing prayer in public schools, banning pornography, and
restoring authority in the family, the workplace, and the school. Efforts to
directly confront economic problems, such as price controls or government
job creation, simply place more power in the hands of government and fur-
ther erode local communities.
a

However, some Conservatives envision a positive role for government

in stabilizing the economy. Proposals for corporatism entail increased
government involvement in coordinating and even planning economic
activity. 25 For example, during the 1970s, Henry Ford II established the
Initiative Committee for Economic Planning to explore strategies for
cooperation among government, business, and labor in developing broad
goals for the future of the economy. Similarly, in 1971, David
Rockefeller organized the Trilateral Commission consisting of 180 mem-
bers from North America, Western Europe, and Eastern Asia. 26
Although the membership of the commission was diverse, the general
thrust of its publications favored a government-business coalition to
restore economic prosperity. The Conservative nature of the Trilateral
Commission was reflected in its concern that government be insulated
from the political pressures of interest groups. Condemning what they
called an "excess of democracy," the Trilateralists proposed greater
autonomy for the executive branch of government in initiating public
policy. They even suggested that the President's term of office be length-
ened from four to eight years.
Corporatism was presented to the American public by the editors of
Business Week magazine in a special issue in 1981. 27 Claiming that the
most pressing problems confronting the U.S. economy were insufficient
saving and a consequent shortage of capital, the editors warned that
Americans would have to make sacrifices in their standards of living so that
more resources could be directed toward investment and capital accumula-
tion. Corporatism seeks to secure these sacrifices by reducing popular input
into the democratic political process and promoting harmonious relations
among labor, business, and government, thus minimizing adversarial and
confrontational demands for higher wages and more benefits.
The most extreme Conservative proposal for stabilizing the economy is
fascism, which controls inflation and unemployment by eliminating labor
unions, freezing prices, planning the economy, suspending democracy and
civil rights, and using whatever force is necessary to ensure high levels of
production. The German and Italian economies experienced remarkable
recoveries during the 1930s under fascism.

THE MODERN LIBERAL PERSPECTIVE

E x p l a n a t i o n s of I n s t a b i l i t y
A distinctly Modern Liberal explanation of instability first appeared
during the 1930s when John Maynard Keynes challenged the laissez-faire
policies of Classical Liberalism by suggesting that the level of investment
would fluctuate in response to business sentiments concerning future prof-
itability.28 Widespread pessimism would cause investment to fall, despite
Inflation and Unemployment 147

availability of funds and low interest rates, and declining investment would
result in a multiplied drop in national income.
Implicit in Keynes's theory is the Modern Liberal belief that increasing
concentration of business power during the half century prior to the
Depression enabled corporations to divert a larger share of national income
to wealthy shareholders. Since wealthy families often save a considerable
portion of their income, this increasing inequality caused total spending to
lag behind production. Lacking sufficient demand for their products, cor-
porations reduced investment and laid off workers, contributing to further
declines in income and spending. The economy fell into an "underemploy-
ment equilibrium" with the prospect of permanent depression.
American Keynesians argued that business cycles could be managed by
the appropriate combination of monetary and fiscal policy to adjust aggre-
gate demand and restore investors' confidence. As a recession looms, gov-
ernment should increase its spending and/or reduce taxes. Conversely, the
beginning of an inflationary boom should be met with cuts in government
spending and/or tax increases. Government policymakers should be able to
"fine-tune" the economy and maintain stable growth indefinitely. The first
real test of Keynesian theory came with preparations for World War II. As
governments around the world initiated massive spending on weapons and
manpower, the Depression quickly faded. Within six months after the
bombing of Pearl Harbor, the unemployment rate in the United States fell
to virtually zero.
Keynesian policies attracted Modern Liberals because, in addition to
stabilizing the economy, they promoted greater equality. If inadequate
spending was the cause of recessions, then money should be placed in the
hands of those people most likely to spend it—the poor. By attacking the
Classical Liberal argument that growth and efficiency require significant
inequality so that wealthy people can save and provide funds for invest-
ment, Keynesianism provided Modern Liberalism with an economic theory
appealing to a broad spectrum of middle- and lower-class voters. Even
many wealthy voters finally agreed that Keynesian policies produced
growth and were therefore good for business.
Once World War II ended, Modern Liberals sought to maintain much
of the wartime planning apparatus that had steered the economy to
unprecedented levels of output. However, the political opposition of
Classical Liberals and Conservatives was sufficiently powerful to force the
dismantling of most wartime government agencies. Modern Liberals won
a minor victory with the passage of the 1946 Employment Act, which
established the President's Council of Economic Advisors and committed
the federal government to pursuing all practical methods to maintain high
levels of employment. In practice, the Employment Act had little impact
on government policy. Fortunately for the Modern Liberal agenda, the
Cold War with the Soviet Union quickly provided a new rationale for
148 Political Economy

large-scale military spending that would sustain economic growth and

high levels of employment.
Confidence in Keynesian economics peaked in the mid-1960s as a com-
bination of tax cuts and increases in government spending resulted in full
employment and prosperity. However, bv the end of that decade, both
inflation and unemployment were rising, and Modern Liberals were hard-
pressed to offer explanations. Traditional Keynesian policy is capable of
handling either unemployment or inflation but helpless when confronted
with both simultaneously.
While some Modern Liberal economists insist that the turmoil of the
1970s was a temporary disruption caused by "external shocks" such as
OPEC price hikes, currency devaluations, natural disasters, changing
demographics, and global realignments of power, post-Keynesian econo-
mists conclude that the increasing concentration of wealth and power since
World War II has rendered Keynesian "demand management" obsolete. 29
Traditional Keynesian policies remained effective until the 1970s because
the economy was sufficiently competitive and unified to suppress inflation
with moderate levels of unemployment. However, as large corporations
and labor unions began to exercise their market power to raise prices even
during periods of slack demand, a new, more insidious, "cost-push" infla-
tion appeared. 30 If government reduced aggregate demand through mone-
tary and fiscal policies, powerful corporations simply laid off workers and
cut back production rather than lowering their prices. The resulting reces-
sion would bankrupt many small businesses and lead to further concentra-
tion of power. On the other hand, if government prevented recession by
increasing aggregate demand, corporations and labor unions took advan-
tage of the stimulus by initiating additional wage and price increases.
These corporate and union efforts to secure higher profits and wages
have established a strong inflationary tendency in the economy. Yet because
the upward pressure on prices is caused by the power of suppliers rather
than by excess demand, restrictive fiscal and monetary policy no longer
restrain inflation without causing rising levels of unemployment.
Conversely, unemployment cannot be reduced simply by stimulating aggre-
gate demand because a portion of the labor force is barred from work by
structural rigidities such as racial and sexual discrimination and the dual
labor market.

Stabilization Policies
Modern Liberals acknowledge that supply-side factors now bear much
of the responsibility for inflation and unemployment, but they reject the
policy agenda of supply-side economics. Tax cuts and deregulation may
reduce business costs, but Modern Liberals doubt that the resulting
increases in profits will be directed toward new investment. Corporations
Inflation and Unemployment 149

prefer to acquire additional assets through mergers and acquisitions rather

than investing in new capital and creating additional jobs. According to
Modern Liberals, tax cuts for corporations and wealthy individuals are not
only unfair but lead to larger deficits, more government borrowing, and
higher interest rates.
Modern Liberals also reject monetarist proposals for tight monetary
policy. The resulting high interest rates are most injurious to small busi-
nesses and capital-intensive industries such as farming. Since these sectors
are not the primary source of rising prices, tight money will be ineffective
in combating inflation. More generally, Modern Liberals reject all propos-
als to fight inflation by slowing the pace of the economy. The large corpo-
rations and labor unions that initiate wage and price increases possess
sufficient market power to weather a slowdown in the economy without
rolling back prices. Furthermore, the people who suffer the most during
recession—minorities, women, immigrants, unorganized workers, and
small businesses—are not responsible for inflation. Therefore, slowing the
economy to control inflation is not only ineffective but also unfair.
Given the obsolescence of monetary and fiscal policy, some Modern
Liberals propose a fundamentally different type of intervention consisting
of more direct government involvement in the private sector. Lester
Thurow of MIT and Robert Reich of Harvard are two of the leading advo-
cates of "industrial policy" for combating sluggish growth and inflationary
pressures. 31 Government would consciously exert greater control over the
direction and composition of economic activity through a variety of meth-
ods. Frequently mentioned components of Modern Liberal stabilization
policy include:

1. Cuts in military spending. Modern Liberals argue that the United

States has implicitly had an industrial policy since World War II, and that
policy has stimulated the defense industry at the expense of more socially
useful industries. Although Modern Liberals were strong advocates of mil-
itary spending during the 1950s and 1960s, they now believe that military
spending contributes to inflation and unemployment by diverting
resources and manpower away from industries in which the United States
must advance to remain competitive in international markets. In the
absence of any significant external threats to U.S. national security,
Modern Liberals believe that large reductions in military spending are
both feasible and desirable.

2. Incomes policy. Some Modern Liberals propose that government

should establish wage and price guidelines to dampen inflation. Seeking to
avoid the mandatory nature of price controls, economists Sidney
Weintraub and Henry Wallich (1914-1988) proposed a "tax-based
incomes policy" (TIP) to impose tax penalties on those businesses raising
150 Political Economy

wages or prices in excess of government guidelines. Businesses holding

wage and price increases below the guidelines would receive tax rebates
from the government. A similar proposal by economist Abba Lerner
(1903-1982), labeled "market anti-inflation plan"(MAP), would require
firms to bid for government licenses to increase their prices and wages
faster than the average rate of growth in productivity.

3. Consumption tax. Acknowledging the problem posed by low rates of

saving and huge federal budget deficits, some Modern Liberals propose a
tax on consumption in the form of a national sales tax or a value-added tax
(VAT). While income taxes tend to discourage productive activity, a con-
sumption tax would discourage spending and encourage saving. The
regressivity normally associated with a sales tax could be minimized by giv-
ing all families a tax deduction equal to the value of standard necessities or
by refunding taxes paid by low-income families.

4. Incentives for saving. In addition to a consumption tax, Modern

Liberals seek to increase the incentives to save, particularly among low-
income families, by exempting a specified amount of interest income from
taxation or by making saving tax deductible.

5. Mild protectionism. As the U.S. economy experiences wrenching tran-

sitions due to foreign competition, Modern Liberals want to provide firms
with sufficient time to adjust to new market conditions. Protectionism in the
form of temporary quotas or tariffs on imports would allow U.S. firms to
make changes without losing markets.

6. Greater equality. Noting the parallels between the concentration of

wealth that occurred in the 1920s and the 1990s, Modern Liberals claim
that dispersion of wealth is essential to a healthy economy. They propose
higher income-tax rates on wealthy families, higher estate taxes, greater
funding for programs benefitting low-income families, and a commitment
to full employment.

7. Investment in people. In an age of increasing technological sophisti-

cation, a highly trained labor force is essential in staying competitive. Yet
corporations are reluctant to provide training in general skills because of
the potential loss of workers to other employers. From the corporation's
viewpoint, replacing existing employees with more highly skilled workers
may make sense. However, for society as a whole, the costs of layoffs in
terms of community dislocations, crime, welfare, and family distress make
retraining of current employees the more efficient option. 32 Modern
Liberals propose to upgrade the quality of the labor force with increased
funding for public education, tax credits for educational expenses, closer
Inflation and Unemployment 151

links between academic and vocational studies, and tax breaks or subsidies
to corporations for retraining employees.

8. Credit allocation. Some Modern Liberals want government to

increase its involvement in making low-interest loans or subsidies to par-
ticular industries and regions. Critics have charged that the stock
market, not government, is best suited to determine which industries are
likely to be "winners" and which will be "losers." In response, Modern
Liberals propose that government should provide matching loans or
grants to firms and industries attracting private capital. The selection of
"winners" is left to the private sector, with government adding its
support to growth industries.

9. Deficit reduction. Although Keynesian economics condones deficit

spending, the immense size of deficits during the 1980s and early 1990s
persuaded most Modern Liberals that deficits now absorb savings that
could otherwise be used for private investment and impose an immense
burden on future generations to pay interest on the national debt. An
exception is economist Robert Eisner who argues that a significant portion
of government spending represents investments in both human and physi-
cal capital. Since these investments will yield benefits for future genera-
tions, the current generation should not be expected to pay the full cost.
Eisner claims that the size of the deficit is less important than the compo-
sition of government spending. The more government spends on human
and physical capital, the less worrisome is the deficit.33

10. Neocorporatism. Some Modern Liberals envision a "new social

contract" in which government would coordinate the interaction of
major interest groups and all parties would agree to act in a socially
responsible manner. Labor unions would be less aggressive in their wage
demands if they believed that corporations would exercise similar
restraint in raising the prices of consumer goods. Conversely, corpora-
tions would feel less compelled to raise prices if they could be assured
that wage costs would remain relatively stable. One proposal for increas-
ing cooperation is to place representatives of government, unions, con-
sumers, and local communities on the boards of directors of
corporations. Because each of these groups is ultimately affected by the
corporation, they become "stakeholders" with a strong interest in assur-
ing that corporate decisions are socially responsible.

In summary, Modern Liberals are relatively optimistic that the U.S.

economy can perform admirably in the coming decades if the right gov-
ernment policies are adopted. Adding to this optimism is their belief that
certain favorable trends are apparent. The aging of the U.S. population
152 Political Economy

should increase savings, and global competition has resulted in greater effi-
ciency and productivity for U.S. businesses.34 The opening of trade and
investment opportunities around the world also holds promise for renewed
growth and prosperity. The Keynesian dream of conquering the business
cycle may yet become reality.

NOTES
1. See Friedrich A. Hayek, Unemployment and Monetary Policy: Government
as Generator of the "Business Cycle," Washington, DC: Cato Institute, 1979.
2. Milton Friedman and Anna J. Schwartz, A Monetary History of the United
States 1867-1960, Princeton, NJ: Princeton University Press, 1963. For other
Classical Liberal interpretations of the Great Depression, see Lionel Robbins, The
Great Depression, London: Macmillan, 1934; Murray Rothbard, America's
Great Depression, Kansas City, KS: Sheed 6c Ward, 1975; and Thomas E. Hall
and J. David Ferguson, The Great Depression, Ann Arbor: University of
Michigan Press, 1998.
3. Key works in supply-side economics include Jack Kemp, An American
Renaissance: A Strategy for the 80s, New York: Harper &c Row, 1979; Victor A
Canto, Marc A. Miles, and Arthur B. Laffer, Foundations of Supply-side
Economics: Theory and Evidence, New York: Academic Press, 1983; Paul Craig
Roberts, The Supply-Side Revolution: An Insider's Account of Policymaking in
Washington, Cambridge, MA: Harvard University Press, 1984; and Jude Wanniski,
The Way the World Works, New York: Basic Books, 1978.
4. See George Macesich, The Politics of Monetarism: Its Historical and
Institutional Development, Totowa, NJ: Rowman &c Allanheld, 1984; G. R. Steele
Monetarism and the Demise of Keynesian Economics, New York: St. Martin's
Press, 1989; and Thomas Mayer, Monetarism and Macroeconomic Policy,
Brookfield, VT: Edward Elgar Publishers, 1990.
5. See G. K. Shaw, Rational Expectations: An Elementary Exposition, New
York: St. Martin's, 1984; and Jerome Stein, Monetarist, Keynesian and New
Classical Economics, Oxford: Basil Blackwell, 1982.
6. See Thomas D. Willett, ed., Political Business Cycles: The Political Economy
of Money, Inflation, and Unemployment, Durham, NC: Duke University Press,
1988; and Alberto Alesina and Nouriel Roubini, Political Cycles and the
Macroeconomy, Cambridge, MA: MIT Press, 1998.
7. Mancur Olson, The Rise and Decline of Nations: Economic Growth,
Stagflation, and Social Rigidities, New Haven, CT: Yale University Press, 1982.
8. See H. G. Brennen and James M. Buchanan, Monopoly in Money and
Inflation: The Case for a Constitution to Discipline Government, London: Institute
of Economic Affairs, 1981.
9. See Friedrich A. Hayek, Denationalization of Money, London: Institute of
Economic Affairs, 1976. For a more recent treatment of this subject, see
Lawrence H. White, Competition and Currency, New York: New York University
Press, 1989.
10. Radical interpretations of inflation and unemployment are presented in
James O'Connor, Accumulation Crisis, New York: Basil Blackwell, 1984; Michael
Inflation and Unemployment 153

Bernstein and David Adler, eds., Understanding American Economic Decline, New
York: Cambridge University Press, 1994; David Kotz, Terence McDonough, and
Michael Reich, eds., Social Structures of Accumulation: The Political Economy of
Growth and Crisis, Cambridge: Cambridge University Press, 1994; and Kenneth
Hoover and Raymond Plant, Conservative Capitalism in Britain and the United
States: A Critical Appraisal, New York: Routledge, 1989.
11. For a summary of the Radical view of the historical evolution of business
cycles, see Chapter 3 of Erik Olin Wright, Class, Crisis, and the State, London: New
Left Books, 1978.
12. The theory of underconsumption is fully elaborated in Paul Baran and Paul
Sweezy, Monopoly Capital: An Essay on the American Economic and Social Order,
New York: Monthly Review Press, 1966.
13. See Samuel Bowles, David M. Gordon, and Thomas E. Weisskopf, After the
Wasteland: A Democratic Economics for the Year 2000. New York: M. E. Sharpe,
1990.
14. Problems surrounding legitimacy are analyzed in William Connolly, ed.,
Legitimacy and the State, New York: New York University Press, 1984, and Jiirgen
Habermas, Legitimation Crisis, Boston: Beacon Press, 1975.
15. See Howard Sherman, Stagflation: A Radical Theory of Unemployment and
Inflation, New York: Harper &C Row, 1976.
16. See Michal Kalecki, "Political Aspects of Full Employment," Political
Quarterly 14, no. 4 (1943): 322-30. For a more recent account, see Raford Boddy
and James Crotty, "Class Conflict and Macro Policy: The Political Business Cycle,"
Review of Radical Political Economics 7, (Spring 1975): 1-19.
17. See James O'Connor, The Fiscal Crisis of the State, New York: St. Martin's,
1973. See also Robert L. Heilbroner and Peter Bernstein, The Debt and the Deficit:
False Alarms, Real Possibilities, New York: W. W. Norton, 1989.
18. Radical critiques of the economic policies of the 1980s are presented in Frank
Ackerman, Reaganomics: Rhetoric vs. Reality, Boston: South End Press, 1982;
Stephen Rousseas, The Political Economy of Reaganomics: A Critique, Armonk,
NY: M. E. Sharpe, 1982; Robert Lekachman, Greed Is Not Enough: Reaganomics,
New York: Pantheon, 1982; and Charles K. Wilbur and Kenneth P. Jameson,
Beyond Reaganomics, University of Notre Dame Press, 1990.
19. See Stephen A. Marglin and Juliet B. Schor, eds., The Golden Age of
Capitalism: Reinterpreting the Postwar Experience, Oxford: Clarendon Press,
1990.
20. See Robert Heilbroner, 21st Century Capitalism, New York: W W Norton,
1993.
21. Proposals for controls on capital mobility are presented in Barry Bluestone
and Bennett Harrison, The Deindustrialization of America, New York: Basic
Books, 1982. See also Bennett Harrison and Barry Bluestone, The Great U-Turn:
Corporate Restructuring and the Polarizing of America, New /ork: Basic Books,
1988. A Classical Liberal response to the Radical proposal for controls on capital
is presented in Richard B. McKenzie, Fugitive Industry: The Economics and Politics
of Deindustrialization, San Francisco: Pacific Institute, 1984.
22. See Samuel Bowles and Herbert Gintis, "Efficient Redistribution: New Rules
for Markets, States, and Communities," Politics & Society 24:4, December, 1996,
307-342.
154 Political Economy

23. Joseph Schumpeter, The Theory of Economic Development, 3rd ed.,

Cambridge, MA: Harvard University Press, 1951. See also Joseph Schumpeter,
Business Cycles, New York: McGraw-Hill, 1939.
24. See George Gilder, Wealth and Poverty, New York: Basic Books, 1981.
25. Descriptions of corporatism are presented in Gerhard Lehmbruch and
Phillippe Schmitter, eds., Patterns of Corporatist Policy-making, Beverly Hills, CA:
Sage, 1982; and Louis Galambos and Joseph Pratt, The Rise of the Corporate
Commonwealth, New York: Basic Books, 1989.
26. See Michael Crozier, Samuel P. Huntington, and Joji Watanuki, eds., The
Crisis of Democracy, New York: New York University Press, 1975. For a Radical
critique of the Trilateral Commission, see Holly Sklar, ed., TrHateralism: The
Trilateral Commission and Elite Planning for World Management, Boston: South
End Press, 1980.
27. The material in Business Week magazine was subsequently published in book
form. See Seymour Zucker and The Business Week Team, The Reindustrialization
of America, Boston: Houghton Mifflin, 1982.
28. John Maynard Keynes, The General Theory of Employment, Interest, and
Money, New York: Harcourt, Brace Sc World, 1964.
29. See Alfred Eichner, ed., A Guide to Post-Keynesian Economics, White Plains,
NY: M. E. Sharpe, 1979; Philip Arestis and Thanes Skouras, eds., Post-Keynesian
Economic Theory, Armonk, NY: M. E. Sharpe, 1985; Paul Davidson,
Controversies In Post-Keynesian Economics, Brookfield, VT: Edward Elgar, 1991;
John Pheby, ed., New Directions in Post-Keynesian Economics, Brookfield, VT:
Edward Elgar, 1989; and Philip Arestis and Victoria Chick, Recent Developments
in Post-Keynesian Economics, Brookfield, VT: Edward Elgar, 1992.
30. On the emergence of market power, see Wallace C. Peterson, ed., Market
Power and the Economy, Boston: Kluwer Academic Publishers, 1988; John
Munkirs, The Transformation of American Capitalism, Armonk, NY: M. E.
Sharpe, 1985; and William Dugger, Corporate Hegemony, Westport, CT:
Greenwood Press, 1989.
31. See Ira C. Magaziner and Robert B. Reich, Minding America's Business: The
Decline and Rise of the American Economy, New York: Harcourt Brace
Jovanovich, 1982; Robert B. Reich, The Work of Nations: Preparing Ourselves for
21st Century Capitalism, New York: Vintage Books, 1992; Lester Thurow, The
Zero-Sum Solution, New York: Basic Books, 1984; and Lester Thurow, The Future
Of Capitalism: How Today's Economic Forces Shape Tomorrow's World, New
York: W. Morrow 8c Co., 1996.
32. See Thomas S. Moore, The Disposable Work Force, New York: Aldine de
Gruyter, 1996.
33. Robert Eisner, The Great Deficit Scares: The Federal Budget, Trade, and
Social Security, Washington, DC: Brookings Institution, 1997.
34. See John Rutledge and Deborah Allen, Rust to Riches: The Coming of the
Second Industrial Revolution, New York: Harper &C Row, 1989.
Inflation and Unemployment 155

ADDITIONAL READING
Adams, Gerald R, and Lawrence R. Klein, eds. Industrial Politics for Growth
and Competitiveness: An Economic Perspective. Lexington, MA: D. C.
Heath, 1983.
Arestis, Philip, and Mike Marshall, eds. The Political Economy of Full
Employment. Brookfield, VT: Edward Elgar, 1995.
Clarke, Simon. Keynesianism, Monetarism and the Crisis of the State. Brookfield,
VT: Edward Elgar, 1988.
Epstein, Gerald A., and Herbert M. Gintis, eds. Macroeconomic Policy After The
Conservative Era. New York: Cambridge University Press, 1995.
Heilbroner, Robert L. Beyond Boom and Crash. New York: W. W. Norton, 1978.
Higgs, Robert. Crisis and Leviathan: Critical Issues in the Emergence of the Mixed
Economy. New York: Oxford University Press, 1986.
Hillier, Brian. Macroeconomics: Models, Debates and Development. New York:
Basil Blackwell, 1986.
Hirsch, Fred, and John H. Goldthorpe, eds. The Political Economy of Inflation.
Cambridge, MA: Harvard University Press, 1978.
Lindberg, Leon N., and Charles S. Maier, eds. The Politics of Inflation and
Economic Stagnation. Washington, DC: Brookings Institution, 1985.
Offe, Claus. Disorganized Capitalism. Cambridge: MIT Press, 1985.
Peterson, Wallace C. The Silent Depression. New York: W. W. Norton, 1994.
Rowthorn, Bob. Capitalism, Conflict and Inflation: Essays in Political Economy.
London: Lawrence and Wishart, 1980.
Shafer, Todd, and Jeff Faux. Reclaiming Prosperity: A Blueprint for Progressive
Economic Reform. Armonk, NY: M. E. Sharpe, 1996.
Sherman, Howard J., and Gary R. Evans. Macroeconomics: Keynesian, Monetarist
and Marxist Views. New York: Harper &c Row, 1984.
Weidenbaum, Murray. Rendezvous with Reality: The American Economy After
Reagan. New York: Basic Books, 1988.
Weintraub, Sidney. Capitalism's Inflation and Unemployment Crisis: Beyond
Monetarism and Keynesianism. Reading, MA: Addison-Wesley, 1978.
Wilson, Thomas. Inflation, Unemployment, and the Market. Oxford: Oxford
University Press, 1984.
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Chapter 9

Poverty and Inequality

The persistence of poverty amidst affluence is one of the most troubling

aspects of modern societies. Even in the nineteenth century, the concentra-
tion of wealth and power led to public hostility toward big business, paving
the way for increased regulation of the economy. In the early twentieth cen-
tury, Congress legislated progressive income and inheritance taxes. After
the Great Depression, even stronger efforts were made to address the prob-
lems of poverty and inequality. Yet despite the growth of the welfare state,
no significant change in the distribution of income has been accomplished.
In fact, during the last two decades, income inequality increased signifi-
cantly both within and among countries. 1 This chapter addresses some of
the central questions concerning poverty and inequality. What causes
inequality? How much inequality is healthy for the economy? Should gov-
ernment seek to change the distribution of wealth and income?
158 Political Economy

THE CLASSICAL LIBERAL PERSPECTIVE

E x p l a n a t i o n s of I n e q u a l i t y
Classical Liberals offer the following explanations of inequality:

1. Individual productivity. In the late nineteenth century, American

economist John Bates Clark (1847-1938) developed the "marginal pro-
ductivity theory" of income distribution to demonstrate that a perfectly
competitive market rewards each factor of production in accordance with
its contribution to output. 2 Employers will use and pay for factors of pro-
duction as long as the value of the marginal product is greater than the
cost. The law of diminishing returns assures a declining marginal product
for every factor, so there is a specific level of utilization of both labor and
capital at which remuneration is equal to the value of the marginal prod-
uct. Employers maximize profit when they operate at this level, causing
income to be distributed according to the quantity and quality of the fac-
tors of production made available by each person.
Building on Clark's marginal productivity theory, neoclassical econo-
mists have developed the concept of "human capital" to describe the tal-
ents and knowledge possessed by individuals. 3 Human capital enhances
the value of labor, thereby increasing the potential income of the owner.
As long as markets remain perfectly competitive, the rate of return to
human capital will be identical for all persons. Any difference would cause
a shift of labor away from occupations with lower rates of return and
toward occupations with higher rates of return. When all such shifts have
been accomplished, the rate of return to human capital equalizes through-
out the economy. Any inequality of income is explained by the fact that
some people possess more valuable human capital or other resources than
other people do.

2. Individual preferences. Although Classical Liberals acknowledge that

differences in abilities and preferences may be genetically determined, they
prefer to emphasize individuals' freedom to shape their own destiny. Adam
Smith, for example, doubted that innate abilities accounted for the differ-
ences between "a philosopher and a common street porter." Avoiding argu-
ments based on genetically determined traits, Classical Liberals focus on
the role of individual choice in determining the distribution of income.
Even if people's abilities are similar, they achieve different degrees of suc-
cess by choosing to develop and use those abilities. People who invest in
themselves through education and training will increase their earning
capacity, while those who prefer leisure will fall behind.
From this perspective, even poverty becomes a matter of individual
choice. Some people place such high value on leisure and current pleasure
PovertyandInequality 159

that they are unwilling to make sacrifices or plan for the future. In the ter-
minology of neoclassical economists, these people have a "short time-
horizon," making them unwilling to delay gratification and thus unable to
accumulate savings or invest in human capital. 4 Poverty may simply be the
result of choices by people who value leisure more than the material rewards
of work. In summary, Classical Liberals portray inequality as arising largely
from individual choice—both the choices of individuals to acquire and sup-
ply productive resources and the choices of individuals to demand the
resources possessed by others. In the words of philosopher Robert Nozick,
the market operates according to the distributive rule: "from each as he
chooses, to each as he is chosen."

3. Technology. Classical Liberals attribute much of the current gap

between rich and poor to changing technology. For example, the computer
revolution has created intense demand for people with advanced technical
knowledge while eliminating many routine jobs. As a result, salaries for
professional and technical employees have been rising while less-skilled
workers experience wage stagnation. Technology also concentrates the
rewards of certain occupations among fewer people. In fields such as
music, film, sports, and publishing, the development of global communica-
tions systems tends to create a single world market in which only a few
superstars succeed. Before radio and television, every city had local talents
who prospered by practicing their craft. Now, with mass media connecting
all corners of the globe, a handful of actors, athletes, writers, and musicians
earn millions of dollars each year while the rest gain little public attention.
The same trend is observable in other industries such as computer soft-
ware, banking, and retail sales. This "winner-take-all" economy is the
result of technological change. 5

4. Government intervention. Classical Liberals acknowledge that mar-

kets are never perfectly competitive. If information is lacking or resources
are immobile, the distribution of income is partially a matter of being in the
right place at the right time. Also, concentrations of market power may
cause greater inequality by restricting entry into desirable industries and
occupations. However, Classical Liberals view many market imperfections
as symptoms of government interference. For example, minimum-wage
laws discourage the hiring of unskilled workers, while welfare programs
erode self-reliance, initiative, and family unity. Government enables inter-
est groups to restrict competition and block the advancement of less privi-
leged groups. Classical Liberals claim that market power could not survive
the pressures of potential competition without legal protection and favor-
able treatment from government. Therefore, they ultimately blame govern-
ment for inequality arising from lack of competition.
160 Political Economy

A r g u m e n t s for I n e q u a l i t y
During the transition from feudalism to capitalism, Classical Liberals
stood in the forefront of efforts to demolish privilege and hierarchy. The
Enlightenment offered a vision of society in which distinctions of class,
race, creed, or nationality would not affect social mobility. Enlightenment
thinkers defended the basic natural equality of all persons and assumed
that the destruction of traditional customs and institutions would result in
much greater equality in income and wealth. However, this strong egali-
tarianism was most evident among French thinkers. English social theo-
rists, in contrast, expressed doubts about the natural equality of persons.
John Locke, for example, suggested that workers had less capacity for
rational thought. 6 The early Classical Liberals were unwilling to allow peo-
ple without property to vote. Thus, despite its roots in the egalitarian spirit
of the Enlightenment, Classical Liberalism began to justify inequality at an
early stage in its evolution.7 The Classical Liberal defense of inequality is
based on the following arguments:

1. Freedom. According to Classical Liberals, if individuals are free to

choose, inequality will inevitably arise among persons with different abili-
ties and different preferences for work, saving, and risk-taking. Inequality
is inextricably linked with freedom, and efforts to suppress natural inequal-
ity require expansion of governmental power and a corresponding reduc-
tion of freedom. Government would have to restrict what Robert Nozick
calls "capitalist acts between consenting adults" or redistribute the income
that results from free contracting and exchange. In either case, individual
freedom has been curtailed.
Milton Friedman argues that inequality provides a bulwark against gov-
ernment repression. The accumulation of wealth in private hands creates
"foci of power" throughout society that offset the political power of gov-
ernment and contribute to a freer society. For example, ideas or innova-
tions unpopular with the government can still gain financial support when
some individuals have substantial wealth at their disposal.

2. Justice. Classical Liberals view inequality resulting from competitive

market transactions as fair and just.8 Some individuals receive more money
than others, but they may also have incurred substantial costs in terms of
advanced education, stress, and sacrificed leisure. Neoclassical economists
use the term "compensating wage differentials" to describe the greater
rewards for jobs with higher training costs, greater levels of responsibility,
and greater risk of failure. If one considers all the advantages and disad-
vantages of different occupations, individuals are more equal in their well-
being than their relative wage levels would indicate.
Echoing J. B. Clark's marginal productivity theory, Milton Friedman
claims that a market society is fair because each person is rewarded
Poverty and Inequality 161

"according to what he and the instruments he owns produces." However,

Friedrich Hayek claimed that ethical arguments about the justice of the
market are futile because chance, in both the randomness of genetic endow-
ment and the discovery of profitable opportunities, plays such a large role
in determining individual success.9 Moreover, reliance on the marginal pro-
ductivity theory to demonstrate the justice of markets assumes a "produc-
tivity ethic" that views rewards in accordance with productive contribution
as morally correct. While productivity would probably be high on any list
of criteria of justice, alternative criteria such as individual needs or rights
do exist, and society has no objective method for choosing among compet-
ing criteria of justice. For these reasons, Hayek made no claim for the fair-
ness of markets, focusing instead on their capacity to protect individual
freedom and promote economic efficiency.
Another problem with Classical Liberal efforts to claim fairness for
rewards based on productivity is that the marginal product of any factor of
production depends on both the supply of and demand for that factor. Since
the pattern of ownership of economic resources affects supply and demand,
the distribution of income is dependent on the distribution of wealth. Those
who own wealth in the form of land, physical capital, or human abilities
derive income from that wealth by making it available for the production of
valued commodities. Yet without a prior justification of the distribution of
wealth, the marginal productivity theory offers no moral defense of the dis-
tribution of income. If, as Robert Nozick acknowledges, coercion and theft
have affected past accumulations of wealth, then the market-determined dis-
tribution of income cannot be fair since it reflects these past injustices.10

3. Efficiency. Classical Liberals rely on three distinct arguments to link

inequality with efficiency. First, inequality establishes powerful incentives
for productive behavior. The knowledge that effort, risk-taking, and inno-
vation can result in material gains and upward social mobility serves to
motivate human activity. Opportunities to "get ahead" and the visible pres-
ence of luxurious lifestyles stimulate desires and unleash human energy.
Adam Smith referred to this admiration of wealth as a "deception which
rouses and keeps in continual motion the industry of mankind."
Second, inequality generates saving from which investment is financed.
Only relatively wealthy people can be expected to save substantial portions
of their income, so attempts to reduce inequality will lower saving and
investment, cause a decline in economic growth, and eventually harm both
rich and poor. Classical Liberals reject the Keynesian concern that too
much saving harms the economy, claiming that more saving will simply
increase the supply of funds available for lending, drive down interest rates,
and stimulate more borrowing and investment.
Finally, economic efficiency is enhanced by a complex division of labor
which, in turn, requires a hierarchical chain of command to effectively
162 Political Economy

coordinate production within the firm. Inequality of wealth and income

inevitably results from hierarchy.

Responses to Poverty
Early Classical Liberal theorists such as Thomas Malthus claimed that
poverty was the unfortunate consequence of the human propensity to over-
populate a world with limited fertile soil. Malthus urged that poverty be
ignored because any efforts to assist the poor would only encourage addi-
tional population growth and further misery. Although some Classical
Liberals favored private charity as a solution to poverty, they warned that
any assistance should be minimal so as to retain incentives to work.
Welfare not only rewards irresponsible behavior, it demoralizes all citizens
by breaking the link between effort and reward.
By the 1960s, however, the dramatic expansion of government's role in
the economy persuaded some Classical Liberals to adopt a more activist
stance toward poverty. Since they viewed government as a major cause of
poverty, they could no longer attribute poverty solely to the choices of poor
persons. These Classical Liberals acknowledged a public responsibility to
aid citizens damaged by misguided government policies. The most notable
proposal, often associated with Milton Friedman, is a negative income tax.
This policy would establish a break-even level of income; any person earn-
ing more would pay taxes, and any person earning less would receive
money from the government. With a negative income tax, each citizen
would be assured of receiving at least a specified minimum income.
Friedman claims that such a program redistributes income most efficiently.
All other welfare programs could be abolished, and the money could go
directly to needy recipients. Paperwork and bureaucracy would be reduced
since determining the level of a family's benefits would require only a tax
form. The negative income tax also would promote the dignity and self-
esteem of recipients by eliminating trips to the welfare office and giving
them control over their purchases. Finally, a negative income tax would
eliminate differences in levels of support among states, thereby ending the
phenomenon of the "welfare magnet" in which states or cities with more
generous welfare programs attract additional clients.
Although the Nixon administration seriously considered the negative
income tax, its popularity has declined in recent years. Most Classical
Liberals now favor economic growth as the optimal solution to poverty.
Using the slogan "a rising tide lifts all boats," they claim that policies to
increase the rate of investment and stimulate growth are the only reliable
methods to reduce poverty. Growth increases the incentives for productive
behavior by offering greater opportunities for individual advancement.
Classical Liberals prefer growth to welfare because they believe that wel-
fare programs actually create poverty by fostering dependency, causing the
Poverty and Inequality 163

breakup of families, and encouraging teen pregnancy. Less government aid

would motivate low-income people to become more self-reliant and to
develop the initiative to lift themselves out of poverty.11
Some Classical Liberals acknowledge that eliminating welfare is not a
politically viable option and instead seek to discourage applications for
welfare and motivate current recipients to find work by making eligibility
requirements more stringent. Proposals include requiring recipients to be
married, enrolled in educational or vocational training programs, or
engaged in public jobs such as sweeping sidewalks and cleaning parks. The
rationale behind these proposals is that participation in welfare programs
should change individual behavior toward increased self-reliance, responsi-
bility, and ambition.

THE RADICAL PERSPECTIVE

E x p l a n a t i o n s of I n e q u a l i t y
Radicals claim that income derived from the ownership of property
often represents exploitation and creates conflict within society. Therefore,
while Radicals condone unequal rewards for different types of labor, they
condemn most property income in societies with highly unequal ownership
of the means of production. They believe that concentrated private owner-
ship creates oppression of the working class by the owning class. This
oppression begins in the production process, where employees have little
control over their work, and ultimately affects all social institutions includ-
ing the family, schools, and government.
According to Radicals, poverty and inequality persist in capitalism
because they function to promote profitability and capital accumulation. 12
In explaining inequality, Radicals rely on four broad arguments.

1. Primitive accumulation. The unequal pattern of ownership in capi-

talism reflects a historical struggle for wealth and status, with the victors
gaining power and dominance over the rest of the population. The history
of class struggle encompasses not only the exploitation of industrial work-
ers, but also slavery and the expropriation of land occupied by native
Americans. Radicals view the concentration of property ownership as a
prerequisite for the development of capitalism. In Europe, between the six-
teenth and eighteenth centuries, the process of "primitive accumulation"
accomplished the initial concentration of wealth required for large-scale
investment and production. In addition to piracy, plunder, and looting, a
major component of primitive accumulation was the "enclosure move-
ment" in England that resulted in the eviction of many small farmers so
that land could be used for grazing sheep to supply wool for the emerging
textile industry.
164 Political Economy

Once wealth was sufficiently concentrated, capitalists could establish

profitable enterprises. However, this profit arose because capitalists con-
trolled access to the means of production. Most citizens, stripped of any
alternative means of support, had no choice but to enter the factories.
Faced with plentiful supplies of labor, capitalists paid only subsistence
wages and reaped the surplus produced by workers.

2. The reserve army. Marx called unemployed workers a "reserve

army" that functions to keep employed workers in a constant state of inse-
curity. The reserve army disciplines workers to accept low wages and main-
tain high productivity. If a period of rapid growth and job creation depletes
the reserve army, wages begin to rise and employers gradually replace
workers with labor-saving machinery. The resulting layoffs replenish the
reserve army and renew downward pressure on wages. The reserve army
also serves as a buffer to absorb the shocks and dislocations of economic
change. As firms expand and contract, they can change the size of their
labor force without disturbing permanent employees. The notion of a
reserve army offers a rebuttal to the Classical Liberal claim that the devel-
opment of technology increases labor productivity and results in higher
wages. If the supply of labor increases along with labor productivity, wages
may stay constant or even fall. Government strategies to increase the sup-
ply of labor include lax enforcement of immigration laws, free-trade poli-
cies, and cuts in welfare benefits.

3. The law of uneven development. Radicals believe that both internal

and external economies cause concentrations of capital in particular areas
and leave other areas underdeveloped. Internal economies, often called
economies of scale, occur when large-scale production results in lower
average costs. Internal economies may drive smaller firms out of business,
causing further concentration of capital. In contrast, external economies
arise when the operation of one firm provides benefits for other firms.
External economies explain why some areas experience sudden bursts of
growth; once development has passed a certain threshold, the presence of
local infrastructure, suppliers, and subsidiary industries reduces business
costs and new firms are attracted to the area. The law of uneven devel-
opment demonstrates that poverty and inequality may reflect regional
patterns of capital accumulation rather than the abilities and preferences
of individuals.

4. Dual labor markets. Radicals claim that labor markets in modern

capitalist economies are divided into a "primary" sector, consisting of
workers with appropriate credentials and personal attributes who compete
for high-paying corporate positions, and a "secondary" sector, consisting
of workers lacking credentials and personal attributes who compete for
Poverty and Inequality 165

jobs with smaller firms offering lower wages and less fulfilling work envi-
ronments. 13 While barriers such as racial and sexual discrimination rein-
force dual labor markets, Radicals argue that the fundamental cause of
labor market segmentation is the difference in "market power" between
large, monopolistic firms and small, competitive firms. Workers in the pri-
mary sector earn a higher rate of return on their human capital than do
workers in the secondary sector because large corporations can pay higher
wages while still maintaining a satisfactory rate of profit.
From the Radical perspective, dual labor markets benefit capitalists by
maintaining labor force stability. The skilled employees in the primary sec-
tor are offered attractive wages and working conditions to secure their alle-
giance and dedication. Less desirable employees can then be hired for
menial jobs at low wages. With little mobility between the two labor mar-
kets, workers in the primary sector receive wages in excess of the compet-
itive level, while workers in the secondary sector receive lower wages than
if the entire labor market were unified. Workers in the secondary sector are,
in effect, subsidizing the high wages of workers in the primary sector.
Dual labor markets also maintain divisions and disharmony among
workers, thereby undermining their bargaining power. By pitting lower-
paid workers against higher-paid workers, capitalists "divide and conquer"
the labor force. Radicals deny that low wages in the secondary sector are
caused by low levels of human capital and productivity among workers,
claiming instead that workers' behaviors and attitudes are largely condi-
tioned by their wage level and work experience. Those who have endured
low wages and unpleasant working conditions may develop a record of low
productivity, absenteeism, and frequent job turnover. In contrast, primary
sector workers tend to be highly dependable and committed to their firm
because they are paid well and enjoy job security and pleasant working
conditions. In summary, Radicals argue that attributing low wages to low
levels of human capital puts the cart before the horse; low wages and mea-
ger job prospects cause low levels of productivity among workers in the
secondary sector.

A r g u m e n t s for E q u a l i t y
Radicals embrace the Enlightenment claim that "all men are created
equal." For Radicals, this statement does not mean that individuals have
identical abilities, but rather that humans are, by virtue of being citizens,
entitled to participate in political and economic decisionmaking and to
enjoy a standard of living sufficient to fully develop their personal abili-
ties.14 Three arguments underlie this strong commitment to equality.

1. Efficiency. Radicals believe that economic efficiency is promoted by

greater equality. While inequality may be functional in maintaining
166 Political Economy

profitability within capitalism, it ultimately reduces society's well-being. By

keeping a portion of the population subordinate, inequality wastes much
human talent and energy. Poverty not only prevents some people from
gaining the resources to develop their capacities, but lowers their self-
esteem and motivation to excel. At the other end of the social hierarchy, the
rich may squander their personal abilities in lifestyles of leisure and frivo-
lous consumption. Even technological development may be slowed by an
incompatibility between hierarchical social structures and those technolo-
gies dependent on cooperative, group-oriented work relations.

2. Social order. A society with extensive poverty and inequality will be

forced to devote substantial resources to repress citizens' anger and frus-
tration resulting from deprivation and hopelessness. Police protection,
courts and prisons, and elaborate insurance and security measures become
necessary in a class-divided society. Extreme concentrations of wealth also
lead to displays of affluence and contemptuous attitudes toward the poor,
fostering tension and social conflict. The pursuit of wealth and status
spurred by sharp inequalities will result in deterioration of the restraints on
self-aggrandizement. The tendency to overstep the bounds of legal and eth-
ical behavior erodes basic values and leads to social disorder.

3. Human rights. Radicals support equality because they believe oppres-

sion and suffering diminish the dignity of all persons. Marx labeled
humans as "species beings" united by common interests that overshadow
their individual differences. He condemned capitalism for alienating people
from their social existence and causing them, instead, to focus on the pur-
suit of private, material gain. Radicals believe that every person deserves a
decent standard of living.

To summarize, Radicals object not to differences in income, but to the

division of society into an owning class whose income derives primarily
from capital, and a working class whose major source of income is wages
for labor. If classes were eliminated, Radicals would accept inequality that
reflected different contributions by individuals to society. In fact, Marx
strenuously argued against equality in socialism, claiming that justice
would be fulfilled when society's tasks and rewards were allocated accord-
ing to the dictum: "from each according to his abilities, to each according
to his contribution." Even Marx's vision of communism upheld unequal
distribution based on people's different needs.

R e s p o n s e s to P o v e r t y
Because poverty and inequality are functionally necessary to capitalism,
Radicals doubt the viability of redistributive policies that stop short of a
Poverty and Inequality 167

major restructuring of the economy. In fact, they claim that many govern-
mental efforts aimed at helping the poor actually perpetuate inequality. The
social programs associated with the modern welfare state often function to
pacify low-income people and prevent social disorder. The major expan-
sions in the role of the welfare state occurred during periods when wide-
spread discontent threatened to overturn the existing power structure.
Capitalist welfare programs are not designed to reduce poverty and unem-
ployment, since depletion of the reserve army would increase the bargain-
ing power of workers. Radicals conclude that the primary purpose of
welfare programs is to maintain a pool of cheap labor and control over a
potentially rebellious lower class.15
In the past, Radicals were likely to favor a guaranteed minimum income
as a means of assuring that the basic needs of all citizens were met.16
However, the growing public disillusion with welfare has raised doubts
about the political viability of income transfers to able-bodied persons. The
notion of an entitlement or right to a decent standard of living has fostered
antagonism toward the poor resembling the resentment against wealthy
aristocrats in previous centuries. In an ironic twist, the poor are viewed by
many as the new privileged elite who have the luxury of living without
working. The Classical Liberal linkage between productive contribution
and reward is deeply embedded in modern ethics and is even mirrored in
Marx's insistence that reward correspond to labor. For these reasons,
Radicals tend to focus more on full employment and public provision of
basic necessities such as health care and transportation. Full employment
might be achieved either through government incentives to private employ-
ers or reliance on government as the employer of last resort. Also, appro-
priate fiscal and monetary policies might be used to push the economy
toward high levels of employment.
A recent Radical proposal for reducing inequality is called "asset-based
redistribution." Samuel Bowles and Herbert Gintis argue that giving all cit-
izens ownership rights to assets such as workplaces and residences would
result in increased productivity and efficiency as individuals assume the
rights and responsibilities of property ownership. Admittedly, some indi-
viduals would use their property more wisely than others, but Bowles and
Gintis believe that the resulting inequality would be substantially less than
in most existing societies where the bulk of assets are owned by a small
minority of the population. This proposal reflects a growing disenchant-
ment among Radicals with the traditional vision of socialism as consisting
of public ownership of property and central planning of production.
According to Bowles and Gintis, the socialist goal of a more egalitarian
society is achievable through a market economy in which an equitable pat-
tern of property ownership has been established and government provides
various regulations and insurance programs as buffers against the vagaries
of the market. 17
168 Political Economy

THE CONSERVATIVE PERSPECTIVE

E x p l a n a t i o n s of I n e q u a l i t y
Conservatives offer the following explanations of inequality.

1. Innate differences in ability. Conservatism arose in opposition to

the Enlightenment belief in the basic equality of all people. Conserv-
atives emphasize innate differences in individual abilities, claiming that
people naturally seek to occupy those social roles compatible with their
strengths and weaknesses. For example, the Italian economist and soci-
ologist Vilfredo Pareto attributed inequality to different psychological
characteristics of individuals. Some people are forceful and bold, others
are clever and innovative, and still others are passive and dull. 18 Pareto
concluded that these universal and fixed traits of human nature dictate
hierarchical social relations and a relatively constant degree of inequal-
ity in every society. In recent years, the Conservative appeal to innate dif-
ferences in individual abilities has been most prominently articulated by
William Shockley, Arthur Jensen, Richard Herrnstein (1930-1994), and
Charles Murray. 19

2. Functionality of hierarchy. Talcott Parsons (1902-1979), one of the

most eminent American sociologists, sought to understand social institu-
tions by analyzing their purpose or function in promoting the well-being of
society. During the 1940s, two of Parsons's students, Kingsley Davis
(1908-1997) and Wilbert Moore, proposed that inequality of wealth,
power, and status is "functional" in achieving society's goals of increased
production and social order.20 Every society requires that individuals adopt
values, goals, and patterns of behavior conducive to social order. Without
clear lines of authority and hierarchical social relations, this socialization
process breaks down, individuals lose their sense of personal identity, and
apathy and hedonism become pervasive. Hierarchy also establishes author-
ity in the workplace to permit effective coordination of production.
Hierarchy minimizes conflict by establishing rights and duties attached to
particular social roles, enabling individuals to form reasonable expecta-
tions of others. Finally, the incentives provided by hierarchy and inequality
are essential to recruit talented persons to fill the most important and dif-
ficult roles in society. Without substantial differences in financial remuner-
ation and social status, few people would accept positions requiring
substantial effort and sacrifice to acquire skills and knowledge.
Since hierarchy and inequality are functional to achieving society's goals,
they will arise even if personal abilities are quite similar. If individuals with
exceptional ability don't actually exist, then society will invent them; some
persons will, perhaps arbitrarily, be designated as leaders and authority fig-
ures. In such circumstances, a high income doesn't necessarily reflect the
PovertyandInequality 169

personal attributes of the recipient, but it attests to society's need to legit-

imize leadership roles by attaching money, status, and prestige to them.

3. Capitalism. During the nineteenth century, Conservatives expressed

contempt for the profit-seeking activities of businessmen and worried that
the dynamism of the market would upset the natural order of society. By
mobilizing resources and focusing attention on money-making and con-
sumption, capitalism pulls people out of their traditional social networks
and transforms them into autonomous and calculating maximizers of util-
ity. These isolated individuals seek immediate gratification rather than
engaging in long-term, constructive efforts to build meaningful lives through
education, marriage, work, and involvement in the community. Thus, the
narrow pursuit of pleasure actually contributes to poverty and misery.
During the early stages of capitalism, Conservatives frequently clashed
with Classical Liberals by advocating political control to curb the excesses
of capitalism. Although Conservatives are now generally hostile toward
government, they still fear that unregulated markets will disrupt the natural
hierarchy and jeopardize stability and order.21 Of particular concern is free
trade between countries. Some Conservatives claim that competition with
low-wage countries is pulling down wages and destroying industries in the
United States and western Europe.

4. Government. Conservatives vacillate about the effect of government on

society. During the early nineteenth century, they looked to wise political lead-
ers to restrain market competition. Government also bore responsibility for
fostering a social and cultural environment conducive to individual virtue and
self-restraint. However, with the extension of democracy in the late nineteenth
century, Conservatives feared that politicians would engage in expedient
efforts to woo voters with short-term benefits and that government would
become an instrument used by various factions to advance narrow interests.
After witnessing the Russian Revolution, fascism in Europe, and the New Deal
in the United States, many Conservatives concluded that government poses a
greater danger to society than does capitalism. When the masses (or tyrants
claiming to represent the masses) hold the reins of governmental authority,
subversion of the natural order is inevitable. New inequalities of wealth and
status will be forged by interest groups using government as their weapon.

5. Culture. Conservatives argue that culture is a key determinant of

individual behavior and that some cultures generate more poverty than
others. From the perspective of many Conservatives, non-Eurocentric cul-
tures are viewed as promoting idleness, irresponsibility, and a focus on
immediate pleasure. These values conflict with the behaviors required for
success in a capitalist economy and, therefore, people from these cultures
are disproportionately poor. 22
170 Political Economy

A r g u m e n t s for I n e q u a l i t y
The Conservative case for inequality includes the following arguments:

1. Cultural diversity. Inequality in wealth and social status encourages

a variety of talents and cultures. Excessive equality would create a uniform
and homogeneous society lacking varieties of tastes and lifestyles that make
life interesting. Without concentrated wealth, cultural institutions such as
art museums, opera, and symphony orchestras might disappear. 23

2. Preservation of intermediate institutions. Conservatives value those

intermediate institutions such as family, church, and neighborhood that
shelter the individual from the isolation of a market economy and the power
of government. Intermediate institutions socialize the individual and pro-
vide a sense of security, belonging, and identity. Since these institutions are
based on the hierarchical authority of parents, ministers, and local officials,
the preservation of inequality is essential. When government, in its pursuit
of equality, takes responsibility for individual security, the intermediate
institutions lose much of their purpose and consequently begin to wither.24

3. Prevention of totalitarianism. According to Conservatives, inequality

is hardly noticed when it appears natural and inevitable. However, when
egalitarian policies raise the prospect of increased income for the lower
classes, people become increasingly dissatisfied with their present status
and envious of those who have more. A flood of "rising expectations"
overwhelms any actual benefits received from government. Therefore,
rather than reducing resentment and class antagonisms, egalitarian policies
raise the public's awareness of and irritation with any remaining social dis-
tinctions. Because humans innately need to distinguish themselves from
others, the leveling of social status will impede the search for meaning and
purpose. The pursuit of equality not only undermines authority and tradi-
tional values, it causes the disintegration of individual personalities as man-
ifested in apathy and malaise throughout society. Ultimately, the
combination of apathetic citizens and social disorder will open the door to
totalitarianism and the loss of individual freedom.

4. Preservation of elites. The incentives provided by inequality of

income and social status are essential to motivate talented people to con-
tribute to the well-being of society. Without adequate incentives, elite indi-
viduals will not share their talents and knowledge. These elites provide
essential governing and managerial skills, but they also serve as visible role
models. Standards of conduct and ethics are transmitted throughout soci-
ety by the behavior of natural leaders in government, business, the church,
and the community.
Poverty and Inequality 171

5. Restraining democracy. In addition to favoring inequality of wealth

and social status, Conservatives support inequality in political participa-
tion. If the masses fully participate in the political process, politicians will
pander to resentment and envy with confiscatory taxation of property
income, deficit spending, and excessive money creation. Such policies will
satisfy voters in the short run but ultimately lead to economic ruin and
moral decay.

R e s p o n s e s to P o v e r t y
Conservative proposals for dealing with poverty include the follow-
ing policies:

1. Eugenics. Conservatives who adhere to genetic interpretations of

inequality have proposed selective forms of population control such as ster-
ilization of impoverished persons. They would reduce poverty by prevent-
ing the birth of children with deficient genetic endowments. Such thinking
was not uncommon during the early twentieth century when an active
"eugenics" movement appeared, culminating in Nazi efforts in Germany to
breed a super-race. More recently, American physicist William Shockley
became so concerned about deterioration of the human gene pool that he
established a sperm bank for Nobel prize winners.

2. Tracking. Some Conservatives propose a more rigorous system of

tracking in public schools to steer children toward appropriate adult roles.
Tracking improves the match between individuals and the social roles they
occupy and functions to lower the expectations of those who will occupy
the bottom rungs of the socioeconomic ladder. Conservatives believe that
poverty in affluent societies is more a matter of perception than actual
material deprivation. If individuals recognize their limited possibilities at
an early age, less anger and resentment and, consequently, less crime and
social disorder will occur.

3. Mild welfare. Neoconservatives such as Irving Kristol and George

Will accept the need for government involvement in enlarging opportuni-
ties for the poor. Claiming that defects in both the market and govern-
mental policy have disrupted the natural order of society, neoconservatives
acknowledge that poverty is not always the fault of the poor and that pri-
vate charity is inadequate. Since poverty contributes to crime and class hos-
tility, neoconservatives justify some welfare programs as enabling the poor
to retain their virtue and self-respect so they eventually will be integrated
into mainstream society.
Neoconservatives struggle to devise poverty programs that foster virtue
and social order without destabilizing the intermediate institutions of family,
172 Political Economy

church, and neighborhood. While government is an obvious source of funds

and leadership for making social improvements, neoconservatives remain
skeptical of "social engineering" and "top-down" programs. Therefore, if
government is to help solve poverty, neoconservatives urge that programs be
designed to restore the functioning of intermediate institutions.25 Once fam-
ily, church, and neighborhood regain their significance, individuals will once
again make long-term commitments and lead productive lives. Some
Conservatives support changes in tax laws to encourage the formation and
maintenance of families, "workfare" to provide welfare recipients with job
experience and self-respect, and community-based programs that respond to
the unique situations of different clients.26 With the restoration of healthy
communities, many individuals unable to support themselves due to disabil-
ities can be cared for by families, neighbors, or churches. Conservatives
anticipate that well-designed poverty programs will eventually eliminate
much of the need for intervention by government.

THE MODERN LIBERAL PERSPECTIVE

E x p l a n a t i o n s of I n e q u a l i t y
Modern Liberals seek to promote greater equality while protecting indi-
vidual freedom and private property. The following explanations of
inequality can be found in the writings of Modern Liberal theorists.

1. Imperfect competition. Because the market never meets all the con-
ditions for perfect competition, the distribution of income will be unfair
even by the standards of neoclassical economic theory.27 To the extent that
monopolies and oligopolies exist, that information is lacking, that
resources are immobile, and that competing products are not homoge-
neous, the marginal productivity criterion for distribution will be violated.
In other words, those individuals and groups with market power, better
information, and more mobile resources will "exploit" less advantaged
groups. 28 Imperfect competition also means that the market will fail to
adjust instantaneously to changes in technology, resource availability, or
consumer preferences. While gradual adjustments occur, some individuals
will lose income and others will profit enormously from the temporary dis-
equilibrium. For example, the development of computer technology has
displaced thousands of bookkeepers while making Bill Gates the wealthiest
person in the world.

2. Past injustice. Even if perfect competition did exist, the highly

unequal ownership of capital and land would create excessive inequality in
the distribution of income. Modern Liberals criticize the prevailing distri-
bution of property by tracing it back to the forcible seizure of land and
Poverty and Inequality 173

wealth prior to the strict enforcement of property rights and contracts.

Even after property rights became legally protected, much wealth was
gained through unethical and illegal tactics. The present distribution of
wealth and income reflects the fact that members of previous generations
were dispossessed by slavery, by expropriation of land, and by exploitation
in the labor market. The market perpetuates these past injustices by recog-
nizing all property rights regardless of their origin.

3. Cycle of poverty. Children who grow up in disadvantaged families

often fail to develop the personal attributes required for success in the mar-
ket. During the 1950s, Modern Liberals appealed to the notion of a "cul-
ture of poverty" to describe the transmission from one generation to the
next of certain psychological and behavioral characteristics commonly
associated with poverty. For example, apathy, poor work habits, an inabil-
ity to focus on long-term goals, and a lack of social skills were attributed
to environmental causes. By the 1970s, however, many Modern Liberals
viewed the "culture of poverty" explanation as placing the blame for
poverty on the values and lifestyles of the poor. Instead, they developed a
"situational" theory of poverty, portraying the behavior of the poor as a
pragmatic response to circumstances. Tendencies to avoid marriage, edu-
cation, or saving derive from a lack of money.

4. Discrimination. The market permits the expression of all preferences

backed by money, even if those preferences include bigotry. When prejudice
is combined with market power due to concentrated wealth, discrimination
can flourish. Those individuals whose race, gender, ethnic background,
age, or appearance does not match societal norms for people in better-paid
positions may encounter difficulty in achieving economic success.

5. Inadequate educational system. Modern Liberals believe that public

education is underfunded and offers unequal qualities of education to chil-
dren of different classes and races. As a result, some people enter the labor
force lacking basic skills required for success in the modern economy.

A r g u m e n t s for E q u a l i t y
Unlike Radicals, Modern Liberals are confident that substantially
greater equality can be achieved within the confines of capitalism. To jus-
tify redistribution, they have developed a wide variety of arguments in
favor of increased equality.

1. Maximization of utility. The utilitarian philosophy developed by

Jeremy Bentham and John Stuart Mill in the mid-nineteenth century pro-
vided the first Modern Liberal argument for greater equality. If individuals
174 Political Economy

possess equal capacities for pleasure, then, according to the law of dimin-
ishing marginal utility, a rich person gets less satisfaction from a dollar than
does a poor person. Redistributing money from rich to poor increases total
satisfaction because the loss of utility by the rich would be less than the
gain in utility experienced by the poor. Bentham and Mill did not push for
redistribution, however, fearing that property owners would feel insecure
and stop investing.

2. Freedom. Later in the nineteenth century, Thomas Hill Green argued

that freedom requires access to certain basic necessities such as food, cloth-
ing, shelter, education, and health care. Society can promote freedom by
establishing a set of "human rights" or "citizenship rights" including not
only civil rights such as freedom of speech, but also economic rights to a
job, a basic standard of living, and other essentials to lead a dignified
human existence. To the extent that the market fails to recognize human
rights, government should supplement the market.

3. Growth. During the 1930s, John Maynard Keynes added another

powerful argument for pursuing greater equality. Claiming that poor peo-
ple are more likely than rich people to spend any additional income they
receive, Keynes proposed that a redistribution of income from rich to poor
would increase total spending which would, in turn, create more jobs and
raise output. The appeal of the Keynesian argument is that everyone bene-
fits from greater equality. Even the rich, who will likely pay higher taxes to
finance redistribution, benefit from a growing economy.

4. Political stability. Keynes also argued that greater equality was essen-
tial to preserve popular support for capitalism and democracy. He believed
that both fascism and communism had been fueled by widespread anger
and resentment over excessive inequality, poverty, and unemployment.

5. Maximization of social welfare. Welfare economics is the branch of

economics that analyzes the conditions under which society's well-being
would be maximized. Whereas earlier economists such as Jevons assumed
that free markets yielded maximum welfare, the discovery of market fail-
ures such as externalities and public goods provided strong arguments for
government intervention. By the 1930s, economists such as Abram
Bergson, John Hicks (1904-1989), Nicholas Kaldor, and Abba Lerner had
uncovered a more serious problem with markets. They demonstrated that
even a perfectly competitive market with no market failures cannot be
expected to produce maximum social welfare. While the market may yield
an efficient allocation of resources, efficiency means only that individuals
have gained maximum utility from the "initial endowment" of assets with
which they enter into market exchanges. However, a different distribution
Poverty and Inequality 175

of these assets might result in greater social welfare. Welfare economists

reached the dramatic conclusion that markets will maximize social welfare
only if an optimal distribution of assets has first been established.
Welfare economists don't claim to know this optimal distribution, but
they place responsibility for establishing it with government. This theoret-
ical development gives government priority over the market in promoting
society's well-being and, therefore, represents a direct challenge to the
Classical Liberal faith in the capacity of the market to promote both justice
and prosperity. Welfare economics represents the logical culmination of
utilitarianism. If society's goal is the maximization of utility or welfare,
then only those property rights contributing to that goal can be defended.
Although Modern Liberals aren't specific about which property rights are
legitimate, they often presume that redistribution in favor of the poor
would improve society's well-being.

6. Efficiency. To the extent that social solidarity exists in society, more

affluent citizens will experience pangs of anxiety and perhaps guilt over the
presence of poverty in their midst. Due to this emotional discomfort, not
to mention fear of crime and civil disorder, wealthy people might actually
be willing to sacrifice some of their income to reduce poverty. Yet as indi-
viduals, they can have no significant impact on poverty and therefore have
little incentive to contribute to charity. This dilemma reveals that the dis-
tribution of income has the characteristics of a "public good." Many citi-
zens might desire a more equal distribution of income, but they remain
"free riders," hoping to benefit from someone else's efforts to reduce
poverty. Economists Harold Hochman and James Rodgers have demon-
strated that if the distribution of income is a public good, then the market
is unlikely to yield an efficient allocation of resources.29 In this case, some
government efforts to redistribute income can be justified purely on the
grounds of improved efficiency, because some people can be made better
off without necessarily making others worse off.
The technical efficiency of the economy might also be enhanced by
greater equality. With less poverty, fewer resources would be diverted to
crime control, welfare programs, drug abuse, property insurance, and
health care. Conversely, less extreme concentrations of wealth would mean
fewer resources for conspicuous consumption and waste. To support this
argument, Modern Liberals note that international comparisons reveal lit-
tle correlation between inequality and economic growth. Countries such as
Japan and Germany have more equal distributions of income and yet have
experienced periods of rapid economic growth.

7. Justice. Because excessive inequality of property easily translates into

unequal power and social status, any society that values equal opportunity
for every individual to compete fairly should also favor greater equality of
176 Political Economy

wealth and income. Without justice and social solidarity, citizens are likely
to experience despair, insecurity, envy, and hostility. Too much inequality
challenges the legitimacy of property holdings because rewards no longer
appear to correspond to individual effort and ability. People with large
property holdings often appear to be richly rewarded for leading lives of
leisure. The aspirations of the poor decline as they perceive the market to
be merely a power struggle in which those who already own property
always win.
The most recent case for a link between equality and justice comes from
philosopher John Rawls, who claims that even a distribution of income in
accordance with personal ability would not be fair because ability is
affected by randomly distributed genetic endowments. According to Rawls,
justice requires that income and wealth be distributed in a manner that
maximizes the well-being of the poorest members of society. In other
words, rich people are entitled to their wealth only if it contributes to cap-
ital accumulation, job creation, and rising standards of living for the poor.
Greater equality should be pursued until any further redistribution would
so damage incentives and capital accumulation that the poor would actu-
ally be harmed.
Despite a strong commitment to greater equality, Modern Liberals, with
the exception of Rawls, have been reluctant to specify an optimal distribu-
tion. In fact, many Modern Liberals remain skeptical and cautious about
redistributive efforts. Bentham and Mill opposed significant redistribution,
fearing that property owners would feel threatened and would cease to
engage their assets in productive ventures. Modern Liberal economists have
also expressed concern that, beyond a certain level, equality is incompatible
with economic efficiency.30 Efforts to promote too much equality will
dampen the incentives for work and investment by both those from whom
money is taken and those to whom money is given. With lowered incen-
tives, the level of economic activity will decline due to inefficiency. This
"big tradeoff" between equality and efficiency has been the primary reason
for caution about any significant redistribution.

Responses to Poverty
Modern Liberalism currently stands at a historic watershed in its
approach to poverty. In the past, the market was condemned for permitting
and even exacerbating poverty, and government programs to redistribute
wealth and income were favored. The progressive income tax, the inheri-
tance tax, welfare programs, labor unions, agricultural price supports, rent
controls, minimum-wage laws, and social security were all intended to
reduce poverty and inequality. Modern Liberal economists acknowledged
that regulated prices caused inefficiency, but they argued that such policies
were more politically feasible than outright redistribution of income. For
Poverty and Inequality 177

example, the public would be more likely to favor milk price supports than
direct cash transfers to dairy farmers. However, by the 1960s, the results
of previous government efforts were so disappointing that Lyndon Johnson
launched a "War on Poverty" consisting of various welfare programs and
civil-rights laws. Unfortunately, the rising costs of the Vietnam war and the
onset of stagflation in the early 1970s effectively ended Modern Liberal
hopes for a quick solution to poverty.
In redesigning poverty programs, Modern Liberals have had to confront
two related constraints. First, concerns about budget deficits make any sig-
nificant expansion of funds to combat poverty unlikely. Second, the current
political climate is characterized by widespread resentment and insensitiv-
ity toward the poor.31 Recognizing the unpopularity of traditional welfare
programs, Modern Liberals now urge that public policy be reoriented from
dealing directly with the victims of poverty to challenging the market forces
and government policies causing poverty.32 The variety of Modern Liberal
proposals currently being considered include:

1. Means-tested benefits to restrict government benefits to only those

persons falling below a designated level of income or wealth. This
strategy could be implemented with social security, student loans,
farm subsidies, and Medicare.
2. Tax incentives for employers who hire and train people previously
unemployed or receiving public assistance.
3. "Workfare" programs that require welfare recipients to engage in
public jobs—such as cleaning parks or sweeping sidewalks—in
exchange for aid. While such programs are intended to maintain self-
esteem and provide experience with the daily routine of working,
some Modern Liberals are critical, claiming that the menial jobs pro-
vided by workfare teach no employable skills.
4. Federally funded day-care centers and training programs to provide
parents and young workers with increased opportunities to enter the
labor force.
5. Affirmative action programs to promote the hiring of women and
minorities, as well as comparable worth programs to secure pay equity.
6. Busing programs to establish racial balance throughout school dis-
tricts to provide all children with an opportunity for equal education.
7. Labor market policies to train unemployed workers, improve the
flow of information between employers and job seekers, and assist
workers with job-search procedures and interviewing techniques.
8. Industrial policy to involve government in coordinating the allocation
of resources by targeting credit toward specific industries and gener-
ally attempting to increase the efficiency and fairness of the economy.
9. The dispersion of profit and stock-ownership through profit-sharing
schemes and employee stock-ownership plans (ESOPs).33
178 Political Economy

10. A high minimum wage. M o d e r n Liberals claim t h a t raising the mini-

m u m wage will provide employers with increased incentives to
improve labor productivity by upgrading the skills of the workforce.
They also claim that a higher m i n i m u m wage can actually increase
employment by increasing worker satisfaction and effort. 34

NOTES
1. For recent analyses of income and wealth distribution in the United States,
see Edward N. Wolff, Top Heavy: A Study of the Increasing Inequality of Wealth
in America, New York: Twentieth Century Fund Press, 1995; Anthony B. Atkinson,
Lee Rainwater, and Timothy M. Smeeding, Income Distribution in OECD
Countries, Paris: OECD, 1995; Jeffrey H. Bergstrand, et al., eds., The Changing
Distribution of Income in an Open U.S. Economy, New York: North-Holland,
1994; Denny Braun, The Rich Get Richer: The Rise of Income Inequality in the
United States and the World, Chicago: Nelson-Hall, 1991; and Sheldon Danziger
and Peter Gottschalk, Uneven Tides: Rising Inequality in America, New York:
Russell Sage, 1992.
2. See John Bates Clark, The Distribution of Wealth, New York: Macmillan,
1899. For an introduction to and critique of the marginal productivity theory of
distribution, see David Schweickart, Against Capitalism, New York: Cambridge
University Press, 1993.
3. Human capital theory is described in detail in Gary Becker, Human Capital,
2nd ed., New York: National Bureau of Economic Research, 1975. For a Radical
critique, see Samuel Bowles and Herbert Gintis, "The Problem with Human
Capital Theory, A Marxian Critique," American Economic Review 65, no. 2 (May
1975): 74-82.
4. The concept of a short time-horizon is utilized in Edward C. Banfield, The
Unheavenly City: The Nature and Future of Our Urban Crisis, Boston: Little,
Brown, 1968.
5. See Robert H. Frank and Philip J. Cook, The Winner-take-all Society,
New York: Free Press, 1995. The authors of this book do not condone the
growing inequality attributable to technology, and propose public policies to
address the problem.
6. For a detailed analysis of Locke's argument for differences in rationality
between the classes, see C. B. Macpherson, The Political Theory of Possessive
Individualism, Oxford: Clarendon, 1962.
7. The evolution of the concept of equality in Classical Liberal thought is pre-
sented in Amy Gutman, Liberal Equality, New York: Cambridge University Press,
1980. See also Ian Shapiro, The Evolution of Rights in Liberal Theory, New York:
Cambridge University Press, 1986.
8. For a Classical Liberal treatment of the issue of fairness and markets, see
Richard B. McKenzie, The Fairness of Markets, Lexington, MA: D. C. Heath,
1987. See also Gordon Tullock, Economics of Income Redistribution, Boston:
Kluwer-Nijhoff, 1983.
9. Hayek's critique of justice is developed in The Mirage of Social Justice,
Vol. 2, of Law, Legislation, and Liberty, London: Routledge St Kegan Paul, 1982.
Poverty and Inequality 179

10. Robert Nozick, Anarchy, State, and Utopia, New York: Basic Books, 1974.
11. See Charles Murray, Losing Ground: American Social Policy 1950-1980,
New York: Basic Books, 1984.
12. For a fuller account of the functionality of poverty, see Herbert Gans, "The
Positive Functions of Poverty," American Journal of Sociology 78, no. 2 (1972):
275-89. See also Charles Sackrey, The Political Economy of Urban Poverty, New
York: W. W. Norton, 1973.
13. Radical analysis of dual labor markets is presented in David M. Gordon,
Richard C. Edwards, and Michael Reich, Segmented Work, Divided Workers, New
York: Cambridge University Press, 1982; Richard C. Edwards, David M. Gordon,
and Michael Reich, eds., Labor Market Segmentation, Lexington, MA: D. C.
Heath, 1975; and David M. Gordon, Theories of Poverty and Unemployment:
Orthodox, Radical and Dual Labor Market Perspectives, Lexington, MA: D. C.
Heath, 1972.
14. See R. H. Tawney, Equality, London: George Allen and Unwin, 1931.
15. See Francis Fox Piven and Richard Cloward, Regulating the Poor, New
York: Pantheon, 1971.
16. Arguments for a guaranteed annual income are presented in Michael L.
Murray, ". . .And Economic Justice for All": Welfare Reform for the 21st Century,
Armonk, NY: M. E. Sharpe, 1997.
17. Samuel Bowles and Herbert Gintis, "Efficient Redistribution: New Rules for
Markets, States, and Communities," Politics & Society, Vol. 24, No. 4, December,
1996.
18. Vilfredo Pareto, The Mind and Society: A Treatise of General Sociology,
New York: Dover, 1935.
19. See Arthur R. Jensen, "How Much Can We Boost IQ and Scholastic
Achievement?," Harvard Educational Review 39, no. 1 (Winter 1969): 1-123;
Richard Herrnstein, IQ and the Meritocracy, Boston: Little, Brown, 1973; and
Richard J. Herrnstein and Charles Murray, The Bell Curve: Intelligence and Class
Structure in American Life, New York: Free Press, 1994. Excellent surveys of the
debate over intelligence are presented in Daniel Seligman, A Question of Intelli-
gence: The IQ Debate in America, New York: Carol Publishing Group, 1992; and
Russell Jacoby and Naomi Glauberman, The Bell Curve Debate: History,
Documents, Opinions, New York: Times Books, 1995.
20. Kingsley Davis and Wilbert Moore, "Some Principles of Stratification,"
American Sociological Review 10 (April 1945): 242-49. For a fuller treatment of
the functional nature of hierarchy and inequality, see Talcott Parsons, The Social
System, Glencoe, IL: Free Press, 1951.
21. See Kevin Phillips, The Politics of Rich and Poor: Wealth and the American
Electorate in the Reagan Aftermath, New York: Harper Collins, 1990.
22. These arguments are developed in Lawrence Mead, The New Politics of
Poverty, New York: Basic Books, 1992.
23. See Bertrand de Jouvenel, The Ethics of Redistribution (1951), Indianapoli
Liberty Press, 1990; and William A. Henry III, In Defense of Elitism, New York:
Doubleday, 1994.
24. The erosion of community in modern society is detailed in Robert A. Nisbet,
The Quest for Community: A Study in the Ethics of Order and Freedom, New
York: Oxford University Press, 1953.
180 Political Economy

25. On the importance of intermediate institutions in poverty programs, see

Peter L. Berger and Richard J. Neuhaus, To Empower People: The Role of
Mediating Structures in Public Policy, 2nd ed., Washington, DC: American
Enterprise Institute, 1996; Michael Novak, ed., Democracy and Mediating
Structures: A Theological Inquiry, Washington, DC: American Enterprise Institute,
1980; and Michael Novak, The Catholic Ethic and the Spirit of Capitalism, New
York: Free Press, 1993.
26. For a fuller account of Conservative policies for reducing poverty, see Stuart
Butler and Anna Kondratas, Out of the Poverty Trap: A Conservative Strategy for
Welfare Reform, New York: Free Press, 1987.
27. For a Modern Liberal critique of the inability of labor markets in modern
capitalist economies to sustain full employment and create fairness, see Lester
Thurow, Generating Inequality: Mechanisms of Distribution in the U.S. Economy,
New York: Basic Books, 1975.
28. The neoclassical theory of exploitation is developed in chapters 25 and 26
of Joan Robinson, The Economics of Imperfect Competition, London:
Macmillan, 1933.
29. Harold M. Hochman and James D. Rodgers, "Pareto Optimal Redistribution,"
American Economic Review 59, no. 4 (1969): 542-57.
30. See Arthur M. Okun, Equality and Efficiency: The Big Trade-off,
Washington, DC: Brookings Institution, 1975.
31. Lester Thurow, The Zero-Sum Society: Distribution and the Possibilities for
Economic Change, New York: Basic Books, 1980.
32. A summary of Modern Liberal policies for combatting poverty and inequal-
ity is presented in Herbert Gans, More Equality, New York: Vintage Books, 1974.
For more recent assessments of the accomplishments and failures of poverty pro-
grams, see Sheldon Danziger and Daniel H. Weinberg, eds., Fighting Poverty: What
Works and What Doesn't, Cambridge, MA: Harvard University Press, 1986; and
Sheldon Danziger, Gary D. Sandefur, and Daniel H. Weinberg, eds., Confronting
Poverty: Prescriptions for Change, Cambridge: Harvard University Press, 1994.
33. See Martin L. Weitzman, The Share Economy: Conquering Stagflation,
Cambridge, MA: Harvard University Press, 1984; Louis O. Kelso and Patricia
Hetter Kelso, Democracy and Economic Power: Extending the ESOP Revolution,
Cambridge, MA: Ballinger, 1986; and Glenville Jenkins and Michael Poole, The
Impact of Economic Democracy: Profit Sharing and Employee Sharing Schemes,
New York: Routledge, 1990.
34. See David Card and Alan B. Krueger, Myth and Measurement: The New
Economics of the Minimum Wage. Princeton, NJ: Princeton University Press, 1995.

ADDITIONAL READING
Atkinson, A. B. The Economics of Inequality. Oxford: Clarendon, 1983.
Baker, John. Arguing for Equality. New York: Verso, 1987.
Bonner, John. Economic Efficiency and Social Justice. Brookfield, VT: Edward
Elgar, 1995.
Brown, Henry Phelps. Egalitarianism and the Generation of Inequality. Oxford:
Clarendon, 1988.
Poverty and Inequality 181

Combee, Jerry, and Edgar Norton. Economic Justice in Perspective: A Book of

Readings. Englewood Cliffs, NJ: Prentice Hall, 1991.
Dovring, Folke. Inequality: The Political Economy of Income Distribution. New
York: Praeger, 1991.
Edsall, Thomas. The New Politics of Inequality: How Political Power Shapes
Economic Policy. New York: W. W. Norton, 1984.
Green, Phillip. The Pursuit of Inequality. New York: Pantheon, 1981.
Hochschild, Jennifer. What's Fair: American Beliefs about Distributive Justice.
Cambridge, MA: Harvard University Press, 1981.
Jencks, Christopher, and Paul Peterson, eds. The Urban Underclass. Washington,
DC: Brookings Institute, 1991.
Kelso, William A. Poverty and the Underclass. New York: New York University
Press, 1994.
Kuttner, Robert. The Economic Illusion: False Choices Between Prosperity and
Social Justice. Boston: Houghton-Mifflin, 1984.
Nelson, Joel I. Post-Industrial Capitalism: Exploring Economic Inequality in
America. Thousand Oaks, CA: Sage Publications, 1995.
Phillips, Derek. Equality, Justice, and Rectification. London: Academic Press, 1979.
Pierson, Christopher. The New Political Economy of Welfare. State College, PA:
Pennsylvania State University Press, 1991.
Ratcliff, Richard E., Melvin L. Oliver, and Thomas M. Shapiro. The Politics of
Wealth and Inequality. Greenwich, CT: JAI Press, 1995.
Sen, Amartya. On Economic Inequality. New York: Oxford University Press, 1997.
Sunstein, Cass R. Free Markets and Social Justice. New York: Oxford University
Press, 1997.
Temkin, Larry S. Inequality. Oxford: Oxford University Press, 1993.
Wadden, Alex. The Politics of Social Welfare. Brookfield, VT: Edward Elgar, 1997.
Winfield, Richard Dien. The Just Economy. New York: Routledge, 1988.
Zajac, Edward E. Political Economy of Fairness. Cambridge: MIT Press, 1995.
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Chapter 10

Labor and Industry

Work occupies a central role in the lives of most people, and the nature of
work affects nearly all dimensions of human existence. Political economists
have long debated the question of how best to organize society's produc-
tive activities. How should labor be divided, industries organized, and
authority delegated? Is the market of government better suited to arrange
work that is efficient, yet satisfying for the people involved? In this chap-
ter, we shall investigate sharply contrasting interpretations of the role of
work in human life, the structure of authority in production, and the effect
of labor unions on the economy.

THE CLASSICAL LIBERAL PERSPECTIVE

The Nature of Work
The early stages of the development of Classical Liberalism corre-
sponded with the rise of the factory system and large-scale production.
Formerly independent farmers and craftsmen turned to wage-labor for
their livelihoods. The early Classical Liberal theorists assumed that work-
ers disliked the monotony and submissiveness of factory work. Adam
Smith worried that industrial jobs would cause workers to become "as stu-
pid and ignorant as it is possible for a human creature to become." 1 To
184 Political Economy

assure that workers would enter the factories, Classical Liberals sought to
abolish all forms of public welfare and increase the penalties for vagrancy
and theft.
Although Classical Liberals no longer believe that work is inherently
harmful, they do assume that most people would prefer not to work. The
incentive of monetary rewards is the primary enticement into the labor
force. Individuals choose to work because the anticipated utility of their
earnings exceeds the costs in terms of sacrificed leisure and the unpleas-
antness of work. Individuals decide when, where, and how much to work
by assessing the relative benefits and sacrifices associated with different
jobs and choosing the type of work offering the greatest net advantage. 2
Although a few talented individuals will be able to support themselves
through personally fulfilling work, Classical Liberals assume that most
people view work as a "disutility." A job is merely a means to earn money
so that leisure time can be enjoyed more fully. Unstimulating work may
actually be appealing to those seeking to support themselves with the least
possible use of mental and physical energies. If some people want fulfilling
work, Classical Liberals defend the market as the best guarantee that such
preferences can be met. For example, artists may devote themselves to their
crafts if they are willing to accept a lower standard of living. People who
value a more personalized work environment may seek employment in
small businesses, with awareness that they may sacrifice higher wages and
greater job security. The market allows people to balance their desire for
satisfying work against the value of higher wages.

Explanations of Hierarchy
Classical Liberals claim that existing institutional arrangements have
proven their worth by surviving in a competitive market. The history of
market-oriented societies consists of a continual elimination of inefficient
institutions as superior practices evolve over time. Applying this logic to
the structure of authority within the workplace, Classical Liberals conclude
that competition forces firms to adopt the most efficient organization of
work. If owners or managers adopt an inefficient structure of authority,
they will be penalized by the market as the firm experiences higher costs
and reduced profits.
Early in the twentieth century, management theorists such as Frederick
W. Taylor (1856-1915) and Frank Gilbreth (1868-1924) initiated "time-
and-motion studies" to reduce skilled jobs to simple, routine motions
quickly mastered by any worker. 3 Taylor's "scientific management" was
based on the Classical Liberal view of work as intrinsically unpleasant.
Workers are motivated solely by financial incentives. Taylor assumed that
workers derive little satisfaction from their jobs and therefore would not
object to routinization. Scientific management would actually relieve
Labor and Industry 185

workers from all responsibilities for planning and coordinating the pro-
duction process. Workers would simply engage in repetitive physical
motions. This more efficient division of labor also permitted management
to monitor work performance more effectively by establishing quantity,
quality, and time standards for each specific task.
In arguing that the market dictates an efficient organization of the firm,
Classical Liberals encounter an apparent contradiction. While defending
individual choice coordinated by the market as the best institutional arrange-
ment for achieving efficiency, Classical Liberals recognize the obvious effi-
ciency of large corporations in which thousands of people are "governed" by
hierarchical, centralized authority. The success of the modern corporation
seems to indicate that efficiency can be enhanced by suppressing individual
choice and market forces over a significant range of the production process.
To resolve this contradiction, Classical Liberal economists have formu-
lated "new institutional economics" and "property rights theory" to
demonstrate that corporate hierarchies and other seemingly nonmarket
institutions are efficient and arise from the rational choices of self-interested
individuals.4 Both of these theoretical approaches view society as a market
in which individuals engage in mutually beneficial exchanges. If the benefits
of an exchange are not immediately realized, both parties will seek to nego-
tiate a contract specifying future rights and obligations. Yet contracting is
often made difficult by the presence of "transaction costs." Economists
define a transaction cost as any cost not directly related to the production
of a commodity. Examples of transaction costs include the expense of gath-
ering information and specifying and enforcing contracts.
In the case of labor contracts, employers are often unwilling to fully
specify the obligations of both labor and management in a contract. Their
reluctance stems from imperfect information about the potential produc-
tivity of workers as well as a desire for flexibility in assigning tasks.
According to Classical Liberal economists, a hierarchical "governance
structure" within the firm solves these difficulties in labor contracting by
establishing a pyramid of command through which employers may assign
tasks and monitor work performance. Hierarchy permits corporations to
economize on transaction costs that would result from drawing up a fully
specified contract with each worker. The corporation will expand hierar-
chical control as long as the benefits gained by reducing transaction costs
and increasing output exceed the cost of additional supervision.
New institutional economics also offers an explanation for differences in
governance structures affecting white-collar and blue-collar workers.
Because employers assume manual labor is unpleasant and unfulfilling, they
conclude that workers will "shirk" their duties unless faced with the prospect
of detection and penalties. Therefore, rigid hierarchies and overt authority
prevail in industries such as mining and manufacturing. White-collar work-
ers, on the other hand, are more likely to resent close supervision, and they
186 Political Economy

perform tasks that are more difficult to monitor. Also, white-collar workers
often acquire skills on the job, so firing a worker and training a replacement
is costly. In such circumstances, direct supervision may be less efficient than
instilling in workers a sense of dedication to the job and loyalty to the firm.
This strategy is accomplished by establishing promotion ladders and pay
raises unrelated to productivity. Higher salaries can be economical if they
sufficiently reduce the need for supervision.
Classical liberals argue that a cooperative or egalitarian system whereby
workers monitor one another and share in the benefits of increased pro-
ductivity is infeasible. With so many people sharing the benefits, the
amount received by any single worker would be insufficient to provide an
incentive for monitoring co-workers. Only when the benefits of enhanced
efficiency accrue to a small number of owners and supervisory personnel
will incentive be adequate to elicit effective management of the firm.
According to Classical Liberals, hierarchy within the firm is entirely con-
sistent with workers' freedom. If hierarchy is efficient, and efficiency is
essential to the long-term viability of the firm, then even employees of
worker-owned firms would appoint or hire supervisory personnel and
encourage effective supervision by granting them the benefits accruing
from increased productivity. Thus, the structure of authority is independent
of who owns the firm. In the words of economist Paul Samuelson, "it
makes no difference whether capital hires labor or the other way around." 5
In a capitalist economy, workers may seek employment in a less hierar-
chical firm if they so desire. However, the large number of workers in
traditionally-structured jobs suggests that they value high wages more than
satisfying work. If people wanted more egalitarian work, they would seek
employment at lower wages with firms offering less structured environ-
ments. Employers should willingly dismantle hierarchy in exchange for
lower wages as long as reduced wage costs offset any loss of productivity.
If employers resist change, groups of workers could obtain loans to start
their own firms. If egalitarian work relations are truly more efficient, these
worker-owned firms would gradually drive capitalist firms out of business.
However, the virtual absence of large worker-controlled firms in capitalist
societies persuades Classical Liberals that hierarchy is the most efficient
form of work organization. 6

The Role of U n i o n s
Classical Liberals oppose labor unions, viewing them as groups seeking
to promote their own interests by suppressing competition in labor mar-
kets. To the extent that unions are successful in their goal of raising wages,
they cause the following problems:
1. Higher wages cause employers to substitute capital for labor, result-
ing in loss of jobs.
Labor and Industry 187

2. Employers whose production processes are necessarily labor-intensive

and who operate in competitive markets will experience lower profits,
forcing them either to relocate or shut down. In either case, the region
or nation in which unions are strong will suffer loss of industry.
3. Employers with sufficient market power to pass on increased wage
costs in the form of higher prices will be able to avoid falling profits,
but consumers will bear the burden of a rising cost of living.
4. By forcing consumers to pay higher prices for union-produced goods,
labor unions divert demand from nonunion industries. Firms in those
industries will be forced to either cut wages or reduce production and
lay off workers. Therefore, the gains made by unionized workers
come largely at the expense of other workers.
5. To the extent that union demands for higher wages cause inflation,
government will be forced to implement contractionary fiscal and
monetary policies resulting in unemployment.
In addition to raising wages, unions also lower productivity. Union
demands for seniority and job security protect workers from the disciplin-
ing forces of market competition. Unions also practice "featherbedding";
they retain jobs that have been rendered obsolete by changing technology.
As unions usurp managerial authority, they interfere with efficient produc-
tion. Finally, by focusing on the conflicting interests of labor and manage-
ment, unions contribute to animosity and resentment. Classical Liberals
insist that both management and workers share a common interest in high
profits so that firms can expand, create new jobs, and pay higher wages in
the future.
Historically, mass unionization did not succeed until unions were
exempted from antitrust laws and protected by favorable legislation. Thus,
some Classical Liberals propose the application of existing antitrust laws
to unions and the passage of "right to work" laws abolishing the manda-
tory hiring of union workers in particular firms. Another proposal to
reduce union power is to place legal restrictions on the right to strike.

THE RADICAL PERSPECTIVE

The Nature of Work
Radicals believe that work can be one of the most valuable aspects of
human existence. The active engagement of one's physical and mental capac-
ities in purposeful activity designed to change the external world is intrinsi-
cally fulfilling. Work provides a context for becoming fully human through
the exercise and development of abilities, the formation of meaningful social
relations, and the transformation of ideas into material form. The products
of work represent material expressions of the self. By viewing and appreci-
ating the fruits of their labor, workers attain greater self-awareness.
188 Political Economy

In contrast to this positive account of work's potentiality, Radicals

depict most work in capitalist societies as degrading and alienating. 7 Profit-
driven employers divide work into mere repetitive motions requiring little
skill, thought, or creativity. Hence, workers have few opportunities to
develop new abilities. In addition, capitalist bosses monitor the work
process, suppressing workers' sense of autonomy and dignity. Finally, since
capitalists own the output of businesses, workers are denied the gratifica-
tion that comes from viewing their products as extensions of themselves.
As a result, jobs in a capitalist economy offer little personal satisfaction to
the worker.
Radicals condemn capitalism because it permits one group of people—
the capitalists—to control the organization of work and the products of
other people's labor. Work cannot provide an outlet for self-expression and
creativity when workers simply perform motions to carry out the capital-
ists' plans. Marx portrayed work in capitalism as so alienating that people
actually lose essential aspects of their humanity. Never having experienced
fulfilling jobs, workers center their lives around biological functions such
as eating, drinking, and procreating rather than developing their uniquely
human capacities for creative thought and expression. Modern Radicals
have extended this argument to claim that alienated workers will encounter
difficulty in finding fulfillment during their leisure time.8 Dissatisfaction
with work permeates nonworking hours and results in problems such as
divorce, drug abuse, and family violence. Workers who endure boring jobs
will inevitably be frustrated with the overall quality of their lives.
Yet if work is so oppressive, why is there so little active resistance to
capitalist control of production? Radicals explain that most people have
no access to alternative means of production and therefore are at the
mercy of capitalists. Moreover, workers are subject to psychological dis-
tortions called "false consciousness." Because capitalists treat workers as
factors of production rather than as human beings, workers develop cor-
responding low self-esteem and come to believe that they deserve their
powerless position in society. Workers also may exhibit what psycholo-
gists call a "hostage syndrome." Case studies demonstrate that hostages
tend to identify with and develop sympathy for their captors. Since the
captor has complete power, the captor's viewpoint dominates that of the
hostage. Workers, who are essentially captive to the power of capital, may
cease to resist their plight and actually seek approval from their employ-
ers as a means of self-validation.
Although Radicals condemn the alienating nature of work in capital-
ism, they express ambivalence about the nature of work in a socialist or
communist society. Marx envisioned a future society without authority
or a division of labor in which a person could "hunt in the morning, fish
in the afternoon, rear cattle in the evening, [and] criticize after dinner." 9
Yet Marx also rejected Utopian socialists who envisioned communities
Labor and Industry 189

without divisions of labor and modern technology. In his most explicit

writings on this point, Marx predicted that industrial labor would be
unfulfilling even in a communist society. To maximize freedom and
human satisfaction, he favored technological advances to shorten the
workday, leaving people with as much free time as possible for personal
development. 10 This strategy is echoed in the works of Radical theorists
such as Herbert Marcuse (1898-1979) and Andre Gorz. 11
In contrast to the Marxian view, significant numbers of Radicals today
insist that industrial labor can be made fulfilling by establishing worker
control over the production process. 12 Workers would actively participate
in the conception, implementation, and execution of all phases of pro-
duction. Worker control does not preclude delegating authority to demo-
cratically elected managers accountable to workers. Workers would
retain sufficient power to assure that the work experience fosters per-
sonal development.

E x p l a n a t i o n s of Hierarchy
Radical explanations of hierarchy are based on Marx's distinction
between labor-power and labor. Labor-power is the ability to work; it is the
commodity sold by workers to capitalists in exchange for wages. In con-
trast, labor is the actual productive activity of workers. The purchase of
labor-power by capitalists does not guarantee that a specific amount of
labor will be performed, so capitalists confront the ongoing task of extract-
ing as much labor as possible from their employees. Workers, knowing that
capitalists reap most of the benefits of increased productivity, have little
incentive to exert themselves. Faced with this resistance, capitalists establish
hierarchical structures of control to increase the amount of labor performed.
Hierarchy also serves to reduce wage costs. Gradations of authority cre-
ate social distance and artificial barriers among workers occupying differ-
ent strata within the firm. By creating competition between workers for
promotions, capitalist employers fragment the workforce into antagonistic
groups, ensuring the maintenance of control over workers and suppressing
wage costs.
Although capitalists establish hierarchical control to secure high pro-
ductivity and low wages, Radicals argue that hierarchy actually reduces
efficiency. The inefficiency of hierarchy manifests itself in unmotivated
workers, extra layers of supervisory personnel, increased conflict within
the workplace, and an inability to utilize technology relying on a coopera-
tive and knowledgeable workforce. Understanding this argument requires
a brief excursion into the Radical interpretation of labor history and
changes in the organization of work. 13
According to Radicals, early capitalists introduced labor-saving tech-
nology to improve labor productivity and to reduce their reliance on
190 Political Economy

skilled artisans and craftworkers who, because they fully understood the
production process, could potentially leave and start their own competing
firms. Breaking down skilled work into numerous routine tasks enabled
capitalists to reduce the majority of jobs to physical motions requiring no
particular skill. As the increasingly limited tasks of workers narrowed
their understanding of the business, capitalists gained a monopoly over
knowledge of the production process and were able to exercise arbitrary
control over the organization and pace of work. As an added benefit for
capitalists, wages were held down by the virtually limitless supply of
unskilled labor.
However, this strategy of "deskilling" the labor force created a new set
of problems. The increasing homogeneity of workers led to an awareness
of their common interest in organizing to defend themselves. In response,
capitalists launched a new strategy of intentionally stratifying or seg-
menting the labor force. Hierarchical distinctions based on race, sex, level
of education, and credentials were utilized to "divide and conquer" the
labor force. For white-collar workers, hierarchical control was gradually
bureaucratized in order to minimize the arbitrary exercise of power so
offensive to professionals.
Radicals claim that technology and the internal structure of the firm
have been influenced more by capitalist concerns about maintaining con-
trol over the labor force than by concerns about efficiency. Capitalists are
only indirectly concerned about efficiency to the extent that it coincides
with profit maximization. While Classical Liberals argue that competitive
market forces make the capitalists' interest in maximizing profit synony-
mous with society's interest in efficiency, Radicals claim that profit-
maximization and efficiency will normally diverge. Although hierarchy
may be advantageous to the capitalist, it is inefficient and therefore con-
trary to the public interest.14
The debate between Radicals and Classical Liberals on the efficiency
of the capitalist firm has been difficult to resolve. First, empirical testing
of the efficiency of different forms of work organization is likely to be
inconclusive; no two firms are identical in every respect except for hier-
archical versus egalitarian structures of work. Second, efficiency ulti-
mately hinges on the motivation of workers. Classical Liberals, who
believe that most work is dissatisfying, anticipate that workers will
"shirk" unless placed within a hierarchical structure of command and
supervision. In contrast, Radicals believe that humans want and need to
perform meaningful work and that the implementation of more egalitar-
ian and participatory forms of work would unleash the repressed talents
and energies of workers who presently merely endure their jobs. These
conflicting beliefs cannot be scientifically proven or disproven because
human motivation results from historical, cultural, and economic factors
that vary over time and between societies.
Labor and Industry 191

The third difficulty in resolving this debate lies in disagreement over the
meaning of efficiency. Classical Liberals define efficiency in production as
cost-minimization and therefore feel confident that the same competitive
market forces driving firms to minimize costs will simultaneously enforce
efficiency. Radicals, by contrast, define efficiency as input-minimization; a
business is efficient if it produces a particular good with the fewest eco-
nomic resources. Competition may enforce cost-minimization relative to
other capitalist firms, but Radicals argue that capitalist firms actually use
more resources than would similar worker-controlled firms relying on
more egalitarian methods of production.
To demonstrate the inefficiency of capitalism, Radicals point out that
firms can potentially increase output without a corresponding increase in
cost by hiring additional supervisory personnel to extract greater amounts
of labor from workers. Although this achievement appears to be efficient
in terms of cost-minimization, the additional supervisors raise the amount
of labor being used to produce a particular product. Costs do not rise
because employees are working harder without an increase in pay. Radicals
conclude that hierarchy is inefficient because it fails to minimize the hours
of labor used to produce society's output.
Even if hierarchy failed to minimize costs, Radicals believe that capi-
talists would maintain authoritarian structures to secure profitability.
The Classical Liberal argument that competitive forces will subvert any
inefficient hierarchy rests on the assumption that at least one capitalist
will initiate the process by converting to an egalitarian organization of
work. However, the maverick capitalist would simply succeed in demon-
strating the superiority of worker control, thereby hastening the demise
of capitalism. Capitalists realize that even if worker control increases
productivity and profits, it will foster new forms of employee relations
and consciousness threatening to capitalist ownership. Radicals conclude
that capitalists will suppress egalitarian structures of work even if they
are more efficient.
Classical Liberal economists respond to the foregoing argument by
pointing out that if worker control were efficient, then groups of workers
would obtain loans either to start their own businesses or to buy out their
employers. Radicals, in turn, suggest two major obstacles to the establish-
ment of worker-owned firms. First, banks and other lending institutions
generally require significant collateral on large loans, effectively barring
groups of workers from obtaining the financing to start or buy out busi-
nesses. Second, the alienating nature of most jobs in capitalism has condi-
tioned workers to doubt their own entrepreneurial and organizational
abilities. In spite of these obstacles, Radicals remain confident that the
superiority of worker control will eventually prove itself, although the tran-
sition will require struggles for political power both within the firm and
throughout society.
192 Political Economy

The Role of U n i o n s
Radicals claim that unions have evolved from their original purpose of
challenging capitalist power to actually serving the interests of capitalists
by assuring predictable labor costs so long-term investment decisions can
be made. In return for union cooperation, capitalists grant substantial wage
increases, knowing that higher costs can be passed on to consumers
through higher prices. Radicals use the term "embourgeoisement" to
describe the process by which portions of the working class have managed
to secure for themselves a comfortable standard of living while ignoring the
plight of women, minorities, and nonunionized workers.
However, Radicals do not blame workers for the actions of labor
unions. As the U.S. labor movement developed in the late nineteenth cen-
tury, both moderate and Radical factions competed for dominance. Those
farsighted capitalists who recognized the inevitability of unionization took
measures to assure victory for the moderates. The American Federation of
Labor came to prominence partly because of support from capitalists who
viewed it as a lesser evil than the more militant Knights of Labor and
International Workers of the World. By backing the moderates, capitalists
undermined demands for greater control of the workplace and steered
workers toward "bread-and-butter" issues such as higher wages and better
working conditions.
Despite these criticisms, Radicals support labor unions as essential to
organizing the working class. As the industrialized sectors of the economy
deteriorate, Radicals predict that unions will become increasingly politi-
cized. Union demands will extend beyond wage increases to issues involv-
ing participation and control. As unionized workers suffer the effects of
industrial decline, they will become more interested in broadening their
membership by actively organizing minorities, women, government
employees, professional workers, and even members of the armed ser-
vices. Eventually, Radicals hope, unions will evolve from special-interest
groups to become representatives of the broad interests of the entire
working class.

THE CONSERVATIVE PERSPECTIVE

The Nature of Work
Conservatives exhibit conflicting attitudes toward work. Some religious
Conservatives appeal to the notion of "original sin" to argue that work is
mankind's punishment for defying God's will and therefore is necessarily
unpleasant. Freud's conception of work as repression of pleasure reinforced
this view.15 However, most Conservatives find work honorable and fulfill-
ing when it accords with a "natural order" in which a social hierarchy
meshes with the varying natural abilities of different individuals. In a society
Labor and Industry 193

uncorrupted by rampant individualism and materialism, citizens will accept

occupations appropriate to their abilities and social status. Even the most
menial tasks offer opportunities for personal satisfaction because all jobs
contribute to the effective functioning of society.
The "natural order" is also based on a strong sense of community.
Conservatives believe that people develop their talents and find purpose
in their lives only in the context of closely knit social structures such as
families, churches, and neighborhoods. By offering an opportunity to
participate in community life, work enables individuals to achieve per-
sonal identity and self-esteem. Conservatives blame the aversion to work
in modern societies on industrialization and the accompanying emphasis
on egalitarianism, material wealth, and social mobility. As individuals
focus on income and status, work loses its intrinsic worth and becomes
merely a means to an end. Because the pursuit of wealth has no limits,
even successful people may be dissatisfied with their standard of living.
The competition for status leads to conflict, hostility, and personal inse-
curity. This discontent erodes the traditional bonds essential to social
order and stability.
Most Conservatives want to restore the intrinsic value of work with-
out sacrificing the prosperity made possible by industrialization.
Proposals for accomplishing this goal include the formation of occupa-
tional groups to provide workers with a sense of belonging and commu-
nity, restrictions on free trade to protect workers from global market
forces, and strengthening of families, churches, and neighborhoods so
that workers can approach their jobs well-sustained by their nonwork-
ing lives. Some Conservatives also anticipate that advancing technology
will eliminate much of the routine drudgery in society. Sociologist Daniel
Bell envisions a "post-industrial society" in which all citizens will have
opportunities for stimulating work as well as increased leisure. 16 With
the end of material deprivation and insecurity, Conservatives anticipate
a fading of the competitive struggle for wealth and renewed interest in
community life.

E x p l a n a t i o n s of Hierarchy
Conservatives believe that hierarchical structures of authority are essen-
tial within businesses and throughout society. They offer the following
explanations for the emergence and persistence of hierarchy.17

1. Utilization of differences in ability. Humans are innately endowed

with a wide range of temperaments, motivations, and strengths. To func-
tion smoothly, society's production processes must be structured to provide
appropriate roles for these differing abilities. Conservatives believe that
leadership skills, including wisdom, virtue, and charisma, exist in only a
194 Political Economy

minority of the population, and therefore most individuals must be moti-

vated by top-down authority.

2. Smooth social interaction. Humans have psychological needs for

hierarchical social structures. Authority is essential to human relations
because it provides predictability and stability. Without a clear chain of
command, individuals become confused about their rights and duties.
Human interaction can degenerate into mass deference in which everyone
looks to someone else for leadership. Alternatively, social relations may
become a struggle for dominance, with each person refusing to acknowl-
edge the authority of anyone else. In a well-organized hierarchy, leaders
know the extent of their authority and subordinates know their responsi-
bilities. Humans need the external standards provided by social structures
to guide their actions and define the boundaries of proper conduct.

3. Role models. Hierarchy places elites in visible positions where they

serve as role models. Human development depends on social mimicry, so
all people benefit from prominent displays of talent and virtue by those at
the top of the social hierarchy.

4. Identity formation. Humans need clear distinctions in social status to

enable them to define themselves and their purposes according to their
position in the social hierarchy. If everyone has the same status and is
treated equally, people will be unable to form unique images of themselves.

The Conservative support for hierarchy does not necessarily extend to

all forms of stratification found in modern societies. Conservatives con-
demn hierarchy when it represents a deviation from the "natural order."
The massive dislocations wrought by industrialization and liberalism have
generated both illegitimate concentrations of power and a loss of integrity,
pride, and skill among workers. By unleashing the acquisitive instinct and
making the pursuit of pleasure the paramount value, liberalism has bol-
stered the belief that work is inherently unpleasant. Aversion to work, in
turn, forces employers to routinize tasks so that work performance can be
more effectively monitored. As jobs become more routine, workers find
fulfillment even more elusive and their distaste for work increases.
To escape this cycle, some Conservatives have proposed experiments
with worker participation and cooperation to restore the "natural order."
Early Conservatives such as Thomas Carlyle shared with Radicals a strong
opposition to capitalist production and its rigid division of labor. They per-
ceived that the anonymity of urban, industrial society threatened tradi-
tional authority and community. However, unlike Radicals, Conservatives
favor worker participation only insofar as increased cooperation will gen-
erate a new sense of respect for management. The degree of hierarchy
Labor and Industry 195

should be sufficient to make use of different individual abilities yet not so

great as to diminish workers' pride and motivation.

The Role of U n i o n s
Conservatives are critical of labor unions for disrupting the natural hier-
archy of authority by usurping the prerogatives of owners and their
appointed managers. 18 However, Conservatives do not oppose the forma-
tion of occupational groupings. 19 Indeed, one of the recurring Conservative
critiques of modern society focuses on fragmentation and individualism.
Industrialization erodes community life, leaving anonymous individuals
with few social bonds. Labor unions, like other "intermediate institutions"
such as the family and the church, can integrate individuals into social net-
works, thereby fostering a sense of loyalty and belonging.
The unions envisioned by Conservatives would not function as special-
interest groups seeking maximum income and benefits for their members.
Instead, unions should join with neighborhood associations, businesses,
and government to promote a unified vision of society's goals and the
desire to cooperate and make sacrifices to achieve those goals. The labor
union should also function as a social group, providing a community in
which personal development is enhanced and members are socialized to
accept traditional values.

THE MODERN LIBERAL PERSPECTIVE

The Nature of Work
In the nineteenth century, Modern Liberals largely accepted the Classical
Liberal view that work is unpleasant and that monetary incentives and the
threat of discipline are necessary to stimulate production. However, this
view changed dramatically during the twentieth century. Modern Liberals
now claim that technology has created conditions in which most menial
tasks can be performed by machines so that jobs can be sources of personal
satisfaction and fulfillment.
The rising standard of living brought about by technological progress has
permitted most citizens in industrialized nations to meet their physiological
needs easily. Increasingly, people seek personal development through exer-
cising their human capacities to the fullest. Social psychologist Abraham
Maslow (1908-1970) described this historical transformation in terms of a
"hierarchy of needs."20 Once basic needs for nourishment and safety are met,
humans shift their energies to fulfilling higher needs such as love, self-esteem,
high-quality social relations, and, ultimately, "self-actualization," or the
achievement of one's full potential. For Maslow, meaningful work that stim-
ulates workers to engage their capacities is essential for self-actualization.
196 Political Economy

E x p l a n a t i o n s of Hierarchy
Modern Liberals note that F. W. Taylor's principles of "scientific man-
agement" were developed during a time when widespread poverty caused
many workers to view their jobs primarily as a means of providing food
and shelter for their families. However, as standards of living rose, work-
ers began to resist routinization and tight supervision, creating difficulties
for businesses relying on the techniques of scientific management. As a
result, a new "human relations" approach to management was popularized
during the 1920s by Elton Mayo (1880-1949) and extended during the
1940s by Kurt Lewin (1890-1947). 21 These theorists reflected the Modern
Liberal belief that people want to work if their jobs offer intrinsic satisfac-
tion. The key to eliciting high productivity from workers is to organize pro-
duction to satisfy the needs of workers for respect, autonomy, a sense of
belonging, and the opportunity to advance. Given a positive environment,
workers will cooperate with management in achieving the firm's goals.
When people view work as an opportunity for personal development,
wages become only one factor among many determining employee satis-
faction. The social needs of employees for companionship, for the respect
and approval of colleagues, and for self-direction can be met by reorganiz-
ing work to enlarge the range of tasks performed by each individual, to
reduce close supervision, and to encourage participation in decisionmak-
ing. Reliance on employee initiative is advantageous to the firm because it
eliminates layers of supervisory personnel and results in more satisfied and
productive employees.
Modern Liberals conclude that "enlightened management" can reduce
hierarchy and "humanize" the workplace without necessarily sacrificing
profitability. Workers become more productive when they feel trusted and
valued; building trust requires that managers relinquish tight control of the
production process. Paradoxically, by empowering workers, management
will actually become more effective. The "synergy" of ideas emanating
from teams of workers will increase the wealth of the firm. However,
humanization of work does have limits. Economist Kenneth Arrow claims
that under conditions of uncertainty and imperfect information, some hier-
archy is essential to economic efficiency.22 Even highly motivated workers
require clear lines of authority for processing information and communi-
cating decisions. Hierarchy gives workers knowledge of the location of
authority and responsibility.
Despite these limitations on worker control, many Modern Liberals
believe that greater equality and participation in the workplace are possi-
ble. The present need for hierarchical authority derives in part from
poverty and discrimination that have iert many workers inadequately pre-
pared for self-directed work. The "human relations" approach to manage-
ment is typically confined to large corporations whose employees are
highly educated and well paid. Smaller firms often must rely on employees
Labor and Industry 197

whose social background and lack of satisfying work experience makes

hierarchical authority essential. Modern Liberals conclude that hierarchy
can be reduced by attacking the poverty and discrimination that prevent
many employees from developing work skills.
A second Modern Liberal rationale for greater humanization of work
entails challenging efficiency and profitability as sole determinants of the
organization of work. Efficiency is only one standard by which to assess
the performance of the economy. Other values such as liberty, justice, and
human development may conflict with efficiency, and some sacrifice of effi-
ciency may be warranted if the overall quality of human existence can be
enhanced. One strategy for overriding efficiency is to establish certain
human rights essential to society. Since the market responds only to prop-
erty rights, the protection of human rights typically requires various forms
of government intervention such as occupational health and safety laws,
minimum-wage laws, and anti-discrimination laws. By redirecting market
forces, government can create a society that emphasizes the personal devel-
opment of workers as well as the accumulation of capital. Modern Liberals
are willing to sacrifice some efficiency in the pursuit of other social goals,
but they are also optimistic that workplace humanization may pay off in
terms of increased productivity and profitability.23

The Role of U n i o n s

Traditionally, Modern Liberals have supported labor unions as a neces-

sary balance to the concentration of business power. Prior to unionization,
businesses could easily hire workers at low wages and fire them at will.
Bosses held arbitrary power over workers who were rendered defenseless
by fierce competition for jobs. Modern Liberals anticipated that labor
unions would provide "countervailing power" for workers in their negoti-
ations with corporations over wages and working conditions. 24
The Modern Liberal defense of labor unions received a tremendous
boost from Keynesian economics. Keynes viewed insufficient spending as
the cause of depression and unemployment. Higher wages for workers
would benefit the economy by establishing additional purchasing power so
that businesses could sell their products. From the Keynesian perspective,
labor unions' strength in forcing a more equal distribution of income ben-
efits the entire economy.
In supporting unions, Modern Liberals claim that unions benefit all
workers because even nonunionized firms are motivated to pay close atten-
tion to union wages to maintain employee morale and to discourage the
spread of unions. In addition, unions support a higher minimum wage for
all workers to reduce the incentive for employers to substitute nonunion
labor in jobs presently held by union members. 25 Unions also lobby for gov-
ernment efforts to create jobs because unemployment provides employers
198 Political Economy

with cheap sources of labor and reduces the bargaining power of unions.
Finally, in response to the Classical Liberal charge that unions cause infla-
tion, Modern Liberals argue that corporate efforts to raise profits are the
primary cause of "cost-push" inflation. Real wages in the United States have
been stagnant since the 1970s, so union demands for higher wages are typ-
ically an effort to catch up to rising costs of living initiated by corporate
price increases.
As international competition has become a growing concern in recent
years, some Modern Liberals have tempered their support for labor unions.
The Keynesian advocacy of high wages has been challenged by the increas-
ing mobility of resources and products throughout the global economy.
Competitive pressures from abroad force corporations to negotiate more
aggressively with unions, sometimes to the point of demanding concessions
of previous gains. Modern Liberals now expect unions to be prudent and
responsible in their wage demands and to cooperate with management in
the adoption of labor-saving technology.
Despite these concerns, Modern Liberals continue to defend unions as
essential to the economic security of workers. This security consists of more
than high wages; workers have rights to fringe benefits, safe working con-
ditions, and protection against arbitrary power. Because the market does
not recognize these human rights, they would remain unprotected without
labor unions and government regulation.

NOTES
1. Adam Smith, The Wealth of Nations, London: Dent, 1910, vol. 2: 265.
2. For a rigorous presentation of the neoclassical view of work, see Ugo
Pagano, Work and Welfare in Economic Theory, New York: Basil Blackwell, 1985
3. Two major works on scientific management are Frederick W. Taylor, The
Principles of Scientific Management, 1911, New York: W. W. Norton, 1967; an
Frank Gilbreth, Motion Study, 1911, Easton, PA: Hive, 1972.
4. The pioneering work in "new institutional economics" is Ronald H. Coase,
"The Nature of the Firm," Economica, 4, (November 1937): 386-405. More recen
works include Armen Alchian and Harold Demsetz, "Production, Information
Costs, and Economic Organization," American Economic Review 62 (December
1972): 777-95; and Oliver E. Williamson, "The Economics of Organizations: The
Transaction Approach," American Journal of Sociology 87, no. 3 (1981): 548-77.
All three of these articles, along with other seminal works in the theory of the orga-
nization of the firm, are included in Louis Putterman, ed., The Economic Nature of
the Firm: A Reader, New York: Cambridge University Press, 1986. See also Richar
N. Langlois, ed., Economics as a Process: Essays in the New Institutional
Economics, New York: Cambridge University Press, 1986; and Oliver E.
Williamson, The Economic Institutions of Capitalism, New York: Free Press, 1985
Jack J. Vromen, Economic Evolution: An Enquiry Into The Foundations of New
Institutional Economics, New York: Routledge, 1995; and Oliver E. Williamson,
The Mechanisms of Governance, New York: Oxford University Press, 1996.
Labor and Industry 199

5. Paul Samuelson, "Wage and Interest: A Modern Discussion of the Marxian

Theory of Discrimination," Bell Journal of Economics 10 (Autumn 1979): 695-705.
6. A Classical Liberal critique of worker participation is presented in Friedrich
A. Hayek, Studies in Philosophy, Politics and Economics, New York: Simon 8c
Schuster, 1967, chapter 22.
7. For more detail on the Radical view of alienation, see Bertell Oilman,
Alienation: Marx's Conception of Man in Capitalist Society, New York: Cambridge
University Press, 1971. See also Richard Schacht, The Future of Alienation, Urbana,
IL: University of Illinois Press, 1994; and Andrew Oldenquist and Menachem
Rosner, Alienation, Community, and Work, New York: Greenwood Press, 1991.
8. The effect of the work experience on leisure time is described and docu-
mented in Robert Blauner, Alienation and Freedom: The Factory Worker and His
Industry, Chicago: University of Chicago Press, 1964; Georges Friedman,
Anatomy of Work, Glencoe, IL: Free Press, 1961; and Martin Meisner, "The Long
Arm of the Job: A Study of Work and Leisure," Industrial Relations 10 (October
1971): 239-60.
9. Karl Marx and Friedrich Engels, The German Ideology, New York:
International Publishers, 1947.
10. See Karl Marx, Capital, Vol. 3, New York: International Publishers, 1961,
799-800.
11. Herbert Marcuse, Eros and Civilization, Boston: Beacon Press, 1966; Andr
Gorz, Paths to Paradise: On the Liberation from Work, London: Pluto Press, 1985;
and Andre Gorz, Critique of Economic Reason, London: Verso, 1989.
12. The literature on worker control includes Robert A. Dahl, A Preface to
Economic Democracy, Berkeley: University of California Press, 1985; Edward
Greenberg, Workplace Democracy: The Political Effect of Participation, Ithaca,
NY: Cornell University Press, 1987; Martin Carnoy and Derek Shearer,
Economic Democracy: The Challenge of the 1980s, White Plains, NY: M. E.
Sharpe, 1980; Ronald M. Mason, Participatory and Workplace Democracy: A
Theoretical Development in Critique of Liberalism, Carbondale, IL: Southern
Illinois University Press, 1982; David P. Ellerman, Property and Contract in
Economics: A Case For Economic Democracy, Cambridge, MA: Blackwell,
1992; Donald A. R. George, Economic Democracy: The Political Economy of
Self ^Management and Participation, Basingstoke: Macmillan, 1993; and Robin
Archer, Economic Democracy: The Politics of Feasible Socialism, New York:
Oxford University Press, 1995.
13. See Stephen Marglin, "What Do Bosses Do: The Origins and Functions of
Hierarchy in Capitalist Production," Review of Radical Political Economics 6
(Spring 1974): 60-112; Stanley Aronowitz, False Promises: The Shaping of
American Working-Class Consciousness, New York: McGraw-Hill, 1973; Harry
Braverman, Labor and Monopoly Capital: The Degradation of Work in the
Twentieth Century, New York: Monthly Review Press, 1974; Richard C.
Edwards, Contested Terrain: The Transformation of the Workplace in the
Twentieth Century, New York: Basic Books, 1979; Michael Burawoy,
Manufacturing Consent: Changes in the Labor Process under Monopoly
Capitalism, Chicago: University of Chicago Press, 1979; and William Lazonick,
Business Organization and the Myth of the Market Economy, Cambridge:
Cambridge University Press, 1991.
200 Political Economy

14. These claims are developed in Samuel Bowles and Herbert Gintis,
"Contested Exchange: New Microfoundations for the Political Economy of
Capitalism," Politics & Society 18, no. 2 (June 1990): 165-222; Samuel Bowles
and Herbert Gintis, "The Revenge of Homo Economicus: Contested Exchange and
the Revival of Political Economy," Journal of Economic Perspectives, 7:1 (Winter
1993): 83-102; and Samuel Bowles, Herbert Gintis, and Bo Gustafsson, eds.,
Markets and Democracy: Participation, Accountability and Efficiency, New York:
Cambridge University Press, 1993.
15. Sigmund Freud, Civilization and Its Discontents, translated by James
Strachey, New York: W. W. Norton, 1961.
16. See Daniel Bell, The Coming of Post-Industrial Society: A Venture in Social
Forecasting, New York: Basic Books, 1973.
17. The role of hierarchy in society was a central theme of sociologist Talcott
Parsons. For an accessible account of Parson's ideas, see Robert J. Holton and Bryan
S. Turner, Talcott Parsons on Economy and Society, New York: Routledge, 1989.
18. See Seymour Martin Lipset, ed., Unions in Transition, San Francisco:
Institute for Contemporary Studies Press, 1986.
19. See Emile Durkheim, The Division of Labor in Society, New York: Free
Press, 1933.
20. Abraham H. Maslow, Motivation and Personality, 3rd ed., New York:
Harper & Row, 1987.
21. Elton Mayo, The Human Problems of an Industrial Civilization, New York:
Macmillan, 1933; and Kurt Lewin, Resolving Social Conflicts, New York: Harper
& Row, 1948.
22. Kenneth J. Arrow, The Limits of Organization, New York: W. W. Norton,
1974.
23. On methods for increasing worker participation, see William G. Ouchi,
Theory Z: How American Business Can Meet the Japanese Challenge, New York:
Avon, 1982; and Donald L. Dewar, The Quality Circle Guide to Participation
Management, Englewood Cliffs, NJ: Prentice-Hall, 1980.
24. See John Kenneth Galbraith, The New Industrial State, Boston: Houghton
Mifflin, 1967.
25. See Richard B. Freeman and James L. Medoff, What Do Unions Do?, New
York: Basic Books, 1988.

ADDITIONAL READING
Aoki, Masahiko, Bo Gustafsson, and Oliver Williamson, eds. The Firm as a Nexus
of Treaties. New York: Russell Sage, 1990.
Burawoy, Michael. The Politics of Production. London: Verso, 1985.
Farkas, George, and Paula England, eds. Industries, Firms, and Jobs: Sociological
and Economic Approaches. New York: Plenum Press, 1988.
Gordon, David M., Richard Edwards and Michael Reich. Segmented Work,
Divided Workers: The Historical Transformation of Labor in the United
States. New York: Cambridge University Press, 1982.
Habermesh, Daniel S., and Albert Rees. The Economics of Work and Pay, 4th ed.
New York: Harper & Row, 1988.
Labor and Industry 201

Harrison, Bennett. Lean and Mean: Why Large Corporations Will Continue to
Dominate the Global Economy. New York, Guilford Publications, 1997.
Kalleberg, Arne L., and Ivar Berg. Work and Industry: Structures, Markets, and
Processes. New York: Plenum, 1987.
Kochan, Thomas A., Harry C. Katz, and Robert B. McKersie. The Transformation
of American Industrial Relations. New York: Basic Books, 1986.
Marshall, Ray. Unheard Voices: Labor and Economic Policy in a Competitive
World. New York: Basic Books, 1987.
Mishel, Lawrence and Paula B. Voos, eds. Unions and Economic Competitiveness.
Armonk, NY: M. E. Sharpe, 1992.
Noble, David. America By Design: Science, Technology, and the Rise of Corporate
Capitalism. New York: Alfred A. Knopf, 1977.
Pahl, R. E., ed. On Work: Historical, Comparative and Theoretical Approaches.
New York: Basil Blackwell, 1988.
Piore, Michael J., and Charles F. Sabel. The Second Industrial Divide: Possibilities
for Prosperity. New York: Basic Books, 1984.
Pitelis, Christos, ed. Transaction Costs, Markets and Hierarchies. Cambridge, MA:
Blackwell, 1993.
Sabel, Charles F. Work and Politics: The Division of Labor in Industry. New York:
Cambridge University Press, 1982.
Turner, Lowell. Democracy at Work, Changing World Markets and the Future of
Labor Unions. Ithaca, NY: Cornell University Press, 1991.
Witte, John F. Democracy, Authority, and Alienation in Work. Chicago: University
of Chicago Press, 1980.
Zieger, Robert H. American Workers, American Unions, 2nd ed. Baltimore: Johns
Hopkins University Press, 1994.
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Chapter 11

Minorities and
Discrimination

Political economists disagree on the definition of discrimination. Should

discrimination encompass only those hiring and promotion decisions in
which equally productive people are paid unequal wages, or should the
concept of discrimination be broadened to include the cultural and institu-
tional forces affecting both employees and employers prior to labor-market
activities? The broader conception of discrimination is more difficult to
assess because family backgrounds, quality of schools, neighborhood envi-
ronments, and societal attitudes toward minority groups must be consid-
ered. Even the narrow conception of discrimination requires a method for
measuring individual productivity. Economists typically rely on number of
years in school as a proxy for productivity, with discrimination assessed by
comparing the relation between average adult wages and average number
of years in school for different racial and ethnic groups. However, numer-
ous other variables affect productivity, including such unmeasurable fac-
tors as individual initiative and motivation. Empirical efforts to verify the
existence or absence of discrimination are limited by the inadequacy of sta-
tistics in capturing all components of productivity.
At the center of much controversy surrounding the issue of discrimina-
tion is the government program called "affirmative action." This program
encourages employers to establish goals for minority employment and to
204 Political Economy

vigorously search for qualified minority candidates. Each of the four per-
spectives has a different view of affirmative action and a different interpre-
tation of the role of minority groups in society.

THE CLASSICAL LIBERAL PERSPECTIVE

E x p l a n a t i o n s of D i s c r i m i n a t i o n
As an ideology originating in conjunction with the struggle of merchants
and manufacturers to free themselves from control by church and state,
Classical Liberalism upholds the right of all individuals to compete freely
in the market. Classical Liberals affirm civil rights as protection against
harm by the government or by other citizens; however, they do not view
discrimination as a violation of civil rights unless it occurs within a public
institution or facility. So, while they opposed laws prohibiting minorities
from riding city buses or attending public schools, Classical Liberals defend
the right of private individuals and firms to choose their associates. This
freedom to choose includes the freedom to exclude; therefore, laws forcing
individuals or firms to transact with minorities are regarded as violations
of freedom and the rights of private property.
Although Classical Liberals defend the right to discriminate, they claim
that a free market is the best antidote to discrimination because it distrib-
utes income in accordance with productive contribution and penalizes big-
otry.1 For example, a bigoted employer with a "taste for discrimination"
may refuse to hire minority workers despite their willingness to work for
lower wages. Yet, if markets are competitive and minority workers are as
productive as other workers, this discriminating employer will sacrifice
some profit by paying higher wages than necessary. Other nondiscriminat-
ing employers will hire minority workers at lower wages, earning more
profit or selling the product at a lower price. Over time, the cost advantage
gained by nondiscriminating firms will cause discriminating employers to
lose market share and perhaps face bankruptcy. Eventually, competition
among nondiscriminating employers will bid up wages for minority work-
ers and discrimination will disappear. Classical Liberals conclude that prof-
its speak louder than prejudice in motivating human behavior.
To measure the extent of discrimination, economists attempt to assess
the "rate of return" for investments in education among different racial
and ethnic groups. The rate of return is simply a measure of the additional
future income attributable to increased years of schooling. Empirical data
do reveal lower rates of return for minority persons, but Classical Liberals
discount this evidence by arguing that years of schooling is only one of
many variables affecting a person's productivity and income. The "pay
gap" between workers from different groups drops significantly when the
measurement of productivity includes other variables such as quality of
Minorities and Discrimination 205

schooling, age, geographic location, and job experience. In addition, the

effect of intangible factors such as family background, motivation, and self-
discipline is nearly impossible to measure, so statistical evidence of a racial
pay gap cannot be taken as proof of discrimination.
Classical Liberals believe that the free market will not sustain discrimi-
nation and, therefore, suggest that the lower economic status of minority
groups may be due to lower productivity which, in turn, reflects either
lower ability or a preference for leisure and immediate gratification.
However, this conclusion creates a dilemma for Classical Liberals. Any
claim that inferior abilities and preferences are innate among minorities is
tantamount to racism, a doctrine that is abhorrent to Classical Liberals. On
the other hand, if abilities and preferences result from social conditioning,
then individuals cannot be the autonomous, rational utility-maximizers
portrayed in neoclassical economic theory. To avoid this dilemma and still
explain the racial pay gap, Classical Liberals attribute persistent discrimi-
nation to imperfect competition. Employers with market power may dis-
criminate without penalty because they can pass higher wage costs on to
consumers in the form of higher prices. Because Classical Liberals believe
that government regulations create and perpetuate monopolistic elements
in the economy, they conclude that government is ultimately responsible
for discrimination.
Three Classical Liberal economists, Thomas Sowell, Walter Williams,
and Glenn Loury, have separately posited that government intervention,
not bigotry and discrimination, has caused the lower economic status of
minority groups in the United States. Sowell claims that government poli-
cies aimed at combating the effects of discrimination are unnecessary and
actually detrimental to minorities.2 As a result of antidiscrimination
statutes and affirmative action programs, employers hire only the most
highly qualified minority workers to minimize the likelihood of subsequent
layoffs and resulting legal entanglements. Thus, government pressure to
hire minorities creates a dual labor market: the gains of more educated per-
sons come at the expense of those with fewer credentials. Segmentation of
the minority labor market is evidenced by the fact that black female pro-
fessionals earn more than their white counterparts, while black high-school
dropouts earn considerably less than their white counterparts.
Walter Williams claims that legislation requiring equal pay for black and
white workers in the same job actually closes off opportunities for minority
workers because employers no longer face the penalty of paying higher
wages to hire only white workers. As an example of a government-imposed
barrier to minority advancement, Williams cites New York City's expensive
license to own a taxi. The cost of the license effectively prohibits most
minority persons from entering that line of business. In addition, municipal
zoning laws and housing codes raise property values and effectively prevent
low-income minority persons from moving into certain neighborhoods. If
206 Political Economy

government would let the market operate freely, the talents and ingenuity of
minority persons would enable them to rise from poverty.3
While Glenn Loury places much of the responsibility for minority prob-
lems on the attitudes, values, and behavior found within minority families
and communities, he ultimately blames government welfare programs for
undermining the initiative of minorities and creating a sense of dependency
passed on from one generation to the next. Loury is particularly concerned
about the decline of the traditional nuclear family in the black community,
and he blames welfare programs that are more accessible for single moth-
ers than for families headed by males.4
To summarize, Classical Liberals largely deny the existence of discrimi-
nation, arguing that most of the pay differential between majority and
minority wages results from differences in productivity. These differences
may be due to genetic inheritance or cultural norms, but Classical Liberals
prefer to emphasize the role of individual attitudes and values. Those who
are unable or unwilling to make productive contributions in the market are
treated fairly when their rewards are correspondingly small. If discrimina-
tion does occur, government bears the blame because it perpetuates racism
by providing welfare programs that reward irresponsible behavior, posing
legal obstacles to the advancement of minority persons and facilitating
monopolistic concentrations of power that shield discriminators from the
disciplining force of competition.

Responses to Discrimination
Viewing competitive markets as the best defense against discrimination,
Classical Liberals want government to eliminate nearly all regulations on
business activity. Government aid to minority groups is also condemned
because majority citizens should not be coerced through taxation to assist
minority persons. Any person wishing to offer assistance may contribute to
private charities. Furthermore, with less assistance from government, minor-
ity persons will be motivated to acquire more skills and work more diligently.
For Classical Liberals, equal opportunity exists when no individual or
group is either advantaged or disadvantaged by government policies. Laws
and public policies should be "color-blind," affecting members of all
groups equally. Any reference to race, religion, gender, or ethnic back-
ground in the formation of public policy is discriminatory. In particular,
affirmative action is simply "reverse discrimination" against nonminority
members of society.5 Besides unfairly penalizing nonminorities, affirmative
action creates inefficiency by disrupting the market's allocation of persons
to jobs for which they are qualified. Whenever employment is based on cri-
teria other than productivity, efficiency will be lost.
Classical Liberals support publicly funded education to assure equal oppor-
tunity for all persons. Not only should government assure equal education for
Minorities and Discrimination 207

all children, but students should have equal access to borrowing money for
higher education. When markets are free and the avenues for acquiring human
capital are open to all, Classical Liberals assume that prejudice and bigotry
cannot persist. They point to increasing opportunities for minorities in profes-
sional and managerial positions as evidence that discrimination is fading.6
Eventually, equality of opportunity will create a society in which individuals
are rewarded solely on the basis of productive contribution of their resources.

THE RADICAL PERSPECTIVE

E x p l a n a t i o n s of D i s c r i m i n a t i o n
Radical explanations of discrimination are based on a particular interpre-
tation of the historical transformation from feudalism to capitalism. In the
medieval period, most individuals lived in relatively homogeneous commu-
nities where they filled a variety of overlapping roles. The rise of industry and
commerce, however, ripped apart the social fabric of medieval society by
turning labor into a mobile economic resource whose function and location
were determined by profitability. Increasingly, people found themselves per-
forming very routine tasks, surrounded by others with whom they shared no
sense of tradition or community. Social relations became more impersonal as
self-interested motives began to dominate all human interactions. Society
became simply an aggregation of isolated individuals pursuing private goals.
Other persons were no longer viewed as fellow citizens but as rivals and
potential threats in the competitive struggle for survival.7
While Radicals claim that capitalism bears much of the responsibility for
racial and ethnic conflict, paradoxically they also defend capitalism as a
progressive force in integrating diverse groups. Profitability requires that
barriers between nations, ethnic groups, and races be broken down so that
commerce can proceed smoothly in a unified global market. Radicals half-
jokingly claim that the leading proponents of "one-world government" are
not communists but instead the chairpersons of multinational corporations
who seek to end nationalist, racial, and religious hostilities impeding the
free flow of capital. Capitalism breeds civility toward strangers by bringing
diverse cultures into contact with one another and by making each person's
livelihood dependent on peaceful exchange with others.
Radicals may be inconsistent in both praising and condemning capitalism,
but they appeal to the dialectical logic developed by Hegel in which apparent
opposites are actually parts of a larger unity. Because the primary force under-
lying capitalism is the accumulation of capital, racial and ethnic distinctions
will diminish when they obstruct capital accumulation. For example, during
the half century after the Civil War, the U.S. economy successfully absorbed
millions of foreign immigrants who kept wages low and contributed to capi-
tal accumulation. Similarly, the Civil Rights movement in the United States
208 Political Economy

was aided by the perception among influential members of the ruling class
that continued segregation would jeopardize profitability and social order.
On the other hand, racial and ethnic distinctions provide an easy method
to segregate the labor force and maintain hierarchy in the division of labor.
Although capitalism has accomplished significant integration of the global
population, the annexation of new sources of labor typically occurs under
extremely inequitable conditions. Minority groups often find themselves
ushered into the capitalist economy either as cheap labor or because they
possess natural resources attractive to capitalists. Therefore, despite capital-
ism's potential for integration, the accumulation process often subordinates,
exploits, and discriminates against newly assimilated groups. 8
Even within the industrialized nations, capitalists manipulate hostility
between racial and ethnic groups to undermine worker solidarity, thereby
weakening the power of the working class. This "divide and conquer"
strategy is exemplified by the practice of using black workers as "scabs"
during strikes to motivate whites to return to work. In addition, minorities
are easily relegated either to the most menial occupations or to the "reserve
army of the unemployed" because their lack of power impedes their ability
to exert political resistance.9
Racial hostility also legitimizes the inequality associated with capitalism.
Race and ethnicity create distinct and identifiable groups in society, legit-
imizing poverty as the natural fate of people with personal deficiencies. If
poor and unemployed persons are perceived as "outsiders" who are not
part of the community, their presence is more easily tolerated. The frustra-
tions of lower-class white workers are diffused by knowledge that they are
relatively successful compared to unemployed minority persons.
In blaming discrimination on capitalism, Radicals do not deny the exis-
tence of racism. Yet this hostility has been formed by perceptions of self-
interest created by the capitalist economy. For example, the belief that
minorities pose a threat to wages and job security fuels racism. However,
Radicals claim that antagonism toward minorities is misdirected. Economist
Michael Reich assembled statistics showing that cities in which black wages
lagged farthest behind white wages also tended to have the lowest wages for
unskilled white workers, the highest profit rates, and the least amount of
unionization.10 Reich found capitalist employers to be the primary benefi-
ciaries of discrimination, giving them an economic interest in its perpetua-
tion. White workers, on the other hand, benefit from increased solidarity
and bargaining power provided by greater racial equality and unionization.
Radicals attribute much of the persistence of discrimination to segmented
labor markets. During the late nineteenth century, as capitalism annexed and
assimilated new populations, profitability demanded the de-skilling and
homogenization of labor. Tasks formerly requiring substantial skill and
training were broken down into series of routine movements easily learned
by any worker. The resulting gains in efficiency provided a stimulus to
MinoritiesandDiscrimination 209

profits, but the homogenization of labor also fostered a growing solidarity

among workers, resulting in demands for higher wages and better working
conditions. In response to this militancy, capitalists stratified the workforce
by imposing job ladders and segmenting various occupations within the firm,
resulting in a dual labor market consisting of a primary sector with high-
paying jobs and a secondary sector with low-paying, unskilled jobs.11
This historical change in the structure of the labor market substantially
affected the economic status of minority persons. Since they typically begin
their work-lives in the secondary sector, the experience of low wages, bad
working conditions, and lack of opportunity for advancement is so dis-
couraging that many develop records of absenteeism, frequent job changes,
and poor productivity. In other words, the productivity of workers is based
on more than ability or effort; it is conditioned by their job experience. The
very nature of work in the secondary sector causes workers to become unfit
for employment in the primary sector.
To summarize, capitalism's need for a hierarchical division of labor and
a reserve army of the unemployed assures that many minority workers will
lack productive skills. They become the victims of a systemic and institu-
tional pattern of power requiring a powerless and subordinate group in
society. Because profitability is enhanced by institutional discrimination,
the competitive forces of the market will not secure equal opportunities for
minority persons.

R e s p o n s e s to D i s c r i m i n a t i o n
Within the context of capitalism, Radicals propose two strategies for
combating discrimination and elevating the economic status of minorities.
First, they encourage the formation of interracial coalitions to pressure
employers and the government for programs to overcome the effects of dis-
crimination. Radicals argue that both majority and minority persons have
much to gain through cooperation. For example, the Congress of Industrial
Organizations (CIO) made a concerted effort during the 1930s to include
black workers in its unionization drives. As a result, the CIO achieved sig-
nificant bargaining power and dramatic success in raising wages and
improving working conditions for millions of workers. The Civil Rights
movement of the 1960s provides another example of an interracial coali-
tion yielding gains for both black and white citizens.
The second component of a Radical program to combat discrimination
consists of government policies to promote full employment and economic
growth. Without growth, the economy becomes a zero-sum game with the
gains of one group coming at the expense of another. Similarly, unemploy-
ment exacerbates the tensions between marginally employed workers and
those eager to take their jobs. With growth and full employment, the for-
mation of interracial coalitions should proceed more rapidly.
210 Political Economy

Radicals acknowledge that these proposals challenge the interests of

employers in maintaining cheap labor. If strategies for coalition-formation
and full employment are successful, they may erode profitability and either
trigger a recession or force employers to pursue new sources of cheap labor
by relocating overseas or by hiring illegal aliens. If employers cannot annex
new supplies of labor, Radicals expect a slowing of capital accumulation
and renewed efforts by employers to regain control over wages and other
production costs.
Recognizing these obstacles to eliminating discrimination within the con-
fines of capitalism, Radicals call for greater public control over the means
of production as a method for enabling citizens to collectively implement
social justice. For most Radicals, including black activists such as Angela
Davis, Jesse Jackson, and Manning Marable, coalition-building and full
employment are viewed as essential to achieving the long-term goal of social
justice. However, other black Radicals such as Malcolm X (1925-1965) and
Louis Farrakhan have urged minorities to separate from white society by
establishing their own political parties and economic structures.12
By appealing to socialism as the ultimate solution to discrimination,
Radicals raise a thorny issue. Many of those nations experimenting with
socialism have not treated minority groups particularly well. If socialism
consists of eliminating markets in favor of government planning, the
absence of competition may reinforce existing racial or ethnic hostilities.
Managers and bureaucrats would be free of the restraint of market forces if
they chose to exercise prejudice. On the other hand, if socialism consists of
eliminating private ownership of the means of production while retaining
markets, worker-controlled firms could continue to discriminate against
minority groups. Prior to its disintegration, Yugoslavia had a market-
socialist economy, yet intense ethnic hostilities consistently excluded certain
groups from top positions in both industry and government.
Radicals respond to these criticisms by pointing out that socialism has
evolved only in relatively undeveloped countries lacking industrialization
and modernization under capitalism. As a result, the social structures and
cultural practices of these countries remained linked to their recent past as
quasi-feudal societies. Radicals conclude that socialism's potential for fos-
tering cooperation and solidarity among diverse groups has not yet been
given a genuine opportunity to develop.

THE CONSERVATIVE PERSPECTIVE

Explanations of Discrimination
The Conservative vision of a hierarchical community provides an
appealing perspective for those who favor a racially and ethnically segre-
gated society. Yet, while racists are often Conservative, Conservatism does
MinoritiesandDiscrimination 211

not logically imply any particular attitude toward minority groups. Some
Conservative theorists presume the innate inferiority of minority popula-
tions, and others do not.
Racism implies that race should be a relevant factor in determining a per-
son's political, economic, or social status. Racists typically buttress their
views by claiming that specific groups of people are genetically inferior and
represent a lower stage in the evolution of the human species. Because of
their diminished capacities, minority groups should be denied equal rights.13
Several prominent Conservative theorists have proposed that some minor-
ity groups are intellectually inferior to whites. William Shockley (the inven-
tor of the transistor and winner of a Nobel prize in 1955), Arthur Jensen,
Richard Herrnstein, and Charles Murray point to the fact that African-
American students in the United States perform less well on IQ tests than do
whites.14 While the differences in test scores are indisputable, Modern
Liberals and Radicals dismiss IQ tests as "culturally biased" measures of
those aptitudes nurtured by the white middle class. More generally, the crit-
ics challenge the very notion of innate or objectively measurable intelli-
gence.15 Since intelligence denotes the ability to manipulate symbols in a
manner judged to be correct by a specific culture, aptitudes associated with
intelligence in one culture may be insignificant in another culture. Therefore
no single test can objectively measure intelligence across cultures.
Those Conservatives who regard minority persons as innately inferior
offer several explanations for discrimination. They claim that discrimina-
tion selects the superior over the inferior and is therefore neither immoral
nor unjust. Also, discrimination and segregation discourage interracial
marriages, which would result in "deterioration" of the gene pool. Finally,
segregation protects the cultural achievements of the dominant society.
Nonracist Conservatives offer different explanations of discrimination.
Because many minority groups originated in parts of the world with less
exposure to capitalism, their cultures may not emphasize behaviors such as
initiative, punctuality, and delayed gratification that contribute to success in
a market economy. If cultural differences create barriers to social interaction,
employers may be reluctant to hire minorities because an individual's pro-
ductivity depends on the ability to function well within the dominant culture.
Conservatives also emphasize the importance of maintaining the integrity
of various cultural heritages within a pluralistic society. Race and ethnicity,
together with family, neighborhood, and nation, create meaning and identity
for individuals. In addition, shared values and customs forge strong social
bonds preserving traditional cultures and communities. Segregation may be
necessary to protect minority cultures as well as the dominant culture.
Conservative opposition to integration is ultimately based on rejection
of the Enlightenment ideal of a universal community, the "brotherhood of
mankind," in which equally free and rational individuals pursue their inter-
ests in peace and harmony. By treating all persons equally, the universal
212 Political Economy

community fails to sustain a sense of uniqueness, rootedness, and belong-

ing needed for full human development. Conservatives fear that modern
society will absorb minority cultures into a homogeneous mainstream rep-
resenting no particular culture. The individualism and mobility of mass
society rob everyone of a sense of community. Only close-knit, local com-
munities, with all their prejudices, parochialism, and traditions, can pro-
vide socially defined roles through which individuals find meaning and
purpose in their lives. Being cut off from one's "roots" causes isolation and
alienation, leading to either a frustrated and potentially violent populace or
a nation of passive pleasure-seekers.
From the Conservative perspective, efforts to integrate society are par-
ticularly damaging to minorities. Those who attempt to assimilate into
mainstream culture are likely to face a dilemma. Failure to assimilate
results in loss of self-esteem, while success breeds alienation as minority
persons lose the security of their own culture but are unable to completely
identify with the dominant culture. Some Conservatives urge minorities to
develop separate community structures and business enterprises to sustain
their cultural heritage. The separate social groupings established by racial
and ethnic pluralism function as "intermediate institutions" to provide a
sense of belonging and maintain social order.
As final evidence that segregation is natural, some Conservatives point out
that different racial and ethnic groups were originally located in separate
geographical areas. Also, humans seem inclined to associate with others who
share their culture, experiences, and values. This instinct is claimed to be
essential to social harmony because it keeps people in separate communities
which, by providing local meaning and purpose, restrain the unbridled pur-
suit of self-interest. Edmund Burke praised the role of "prejudices" in estab-
lishing instinctive loyalty to particular institutions and values so that
individuals need not rationally assess every judgment they make.

R e s p o n s e s to D i s c r i m i n a t i o n
Conservatives are less concerned with alleviating discrimination than
with reestablishing segregation to minimize interaction between different
racial and ethnic groups. Those Conservatives who appeal to the innate
inferiority of minorities may favor the practice of eugenics, which
involves social control of human reproduction through sterilization of
"deficient" persons and selection of "superior" persons for breeding. For
example, government might require sterilization for individuals applying
for welfare assistance. The Nobel prize-winning physicist William
Shockley sought to promote selective breeding by establishing a sperm
bank for Nobel prize winners.
Most Conservatives would like to end all government efforts to promote
integration. Groups sharing sufficiently common cultural heritages will
Minorities and Discrimination 213

assimilate spontaneously, so if government coercion is required, Conservatives

conclude that integration is unnatural. Government should act only to protect
the rights of minorities against the "tyranny of the majority" as exemplified
by the former South African government's policy of apartheid, which main-
tained racial segregation to preserve the culture and privileges of the white
minority. When government forces integration, it creates a backlash of resent-
ment from members of the majority and a flood of "rising expectations" from
minority persons who feel they deserve a better quality of life.
Conservatives also oppose programs to benefit minorities because any
perception that one group is being favored at the expense of others serves
to undermine respect for governmental authority. This opposition to pub-
lic assistance for minorities also extends to affirmative action policies. Like
Classical Liberals, Conservatives view affirmative action as "reverse dis-
crimination" and warn that it will generate animosity among whites
toward minority groups. In addition, Conservatives claim that affirmative
action damages the psyches of minority persons by tainting their accom-
plishments; they can never know whether their achievements are attribut-
able to ability and effort or are simply the result of preferential treatment. 16
Some Conservatives have proposed a strategy for government to aid
minorities with minimal intervention. Inner-city neighborhoods would be
designated as "enterprise zones," and businesses would be given tax breaks
or other financial incentives to invest in these areas. 17 Conservatives claim
that this policy restores the viability of minority neighborhoods by foster-
ing local initiative and entrepreneurial energy. Conservatives have bor-
rowed the leftist phrase "empowerment" to describe policies encouraging
initiative and entrepreneurship in minority neighborhoods.
In defending segregation, Conservatives are fighting against strong his-
torical currents. Since the Englightenment, ethnically and racially pure
communities have been criticized as stultifying, repressive, and intolerant.
However, Conservatives claim that a cohesive, homogeneous community
enables individuals to form attachments to particular persons and places
which are necessary for establishing personal identity. Freedom,
Conservatives argue, is worthless unless people have purpose in their lives,
and genuine freedom flourishes when individuals are enmeshed in a web of
mutually supportive social relationships provided by racial and ethnic iden-
tity and other intermediate institutions.

THE MODERN LIBERAL PERSPECTIVE

E x p l a n a t i o n s of D i s c r i m i n a t i o n
Modern Liberals trace the origins of racial and ethnic conflict in industrial
societies to the inequitable conditions under which most minority groups
entered. Having begun in a disadvantaged position, minority persons are
214 Political Economy

caught in a debilitating cycle; a deprived background restricts opportunity

for acquiring skills which, in turn, results in menial jobs, low income, and
perpetuation of poverty. Blending Classical Liberal and Radical themes,
Modern Liberals acknowledge that the plight of minority groups is partially
attributable to choices concerning education and employment, but they
argue that these decisions are made within a social system structured around
the subordination of minority groups.
Modern Liberals doubt the market's ability to end discrimination. They
view the market as an arena in which powerful groups seek to control com-
petition to advance their own interests. Minority groups, having been sys-
tematically excluded from power, are therefore disadvantaged in the
market. Although competitive forces may push for integration, the market
is not the only institution shaping society. Economic activity is embedded
in cultural practices and power relations, and competition is too imperfect
to override deeply entrenched cultural biases and unequal power.
The mechanisms by which power circumscribes and limits the integrat-
ing forces of market competition are largely invisible. Discrimination may
persist because the traditional values shaping human behavior reflect fear,
ignorance, and the need to maintain social harmony within a community.
For example, a nonracist employer may discriminate against minority job
applicants, fearing that employees, customers, or other members of the
community might react negatively to the presence of minority workers.
Similarly, a nonracist homeowner may oppose the sale of a neighbor's
house to a minority person based on knowledge that housing values often
drop when a neighborhood is initially integrated. In both cases, discrimi-
nation results not from personal hostility toward minority persons, but
from assessments of the economic realities of a racist society.
Even employers committed to hiring the best workers often lack infor-
mation about the productivity of job applicants and, therefore, may rely on
race or ethnicity as criteria for screening candidates. The employer could
conduct extensive interviews and research to determine each person's qual-
ifications, but this process would be efficient only if the benefits of hiring
better employees exceed the costs of obtaining information. In many cases,
employers rely on their personal opinions about the "typical behaviors" of
different groups. Lacking perfect information about the productivity of
each individual, this screening by race or ethnicity is consistent with profit-
maximization and therefore can persist even in a competitive market.
Economists call this practice "statistical discrimination." 18
Modern Liberals also claim that discrimination occurs outside the labor
market. Society's institutions reflect and perpetuate power relations and the
subordinate status of minority groups. This "institutional discrimination"
is sustained through both its material and psychological impacts. Many
minority persons live in neighborhoods with inferior schools, high unem-
ployment, high rates of crime, dilapidated housing, and broken families.
Minorities and Discrimination 215

Segregation and discrimination adversely affect the aspirations of minority

persons because one's social environment shapes one's self-image. People
who consistently experience negative reactions from others are likely to
develop low self-esteem and may even conclude that they are undeserving
of equal rights. Low self-esteem is also perpetuated by a lack of minority
persons in prominent social positions who might serve as role models for
raising the aspirations of minorities. Finally, even those minority persons
who maintain their self-esteem may be subject to a "feedback effect," caus-
ing them to invest less time and money in acquiring productive skills
because they correctly perceive that members of their group earn lower
financial returns on such investments.19

Responses to Discrimination
The Modern Liberal belief that discrimination is embedded in society's
institutions means that viable solutions must involve legal and structural
changes as well as changes in individual values. Modern Liberals were
instrumental in the Civil Rights movement during the 1960s, pushing for
legal reforms such as the Civil Rights Act, the Voting Rights Act, the Equal
Opportunity Act, and desegregation of schools.
However, equal schooling and equal opportunity cannot fully compen-
sate for the deprived family environments affecting many minority children
trapped in a "cycle of poverty." During the 1970s, Modern Liberals focused
on achieving greater "equality of result." Minority persons cannot take full
advantage of the opportunities opened by legal reforms unless their income
is sufficient to sustain normal human development. The most direct strategy
for improving the material well-being of minority groups is redistribution of
income and wealth. Although theoretical justification for such a policy has
been provided by Keynes and Rawls, most Modern Liberals oppose large-
scale redistribution as politically infeasible and damaging to incentives.
Instead, they opt for less ambitious financial assistance and government
intervention. Proposals include raising the minimum wage, providing
greater public assistance, and enforcing legal safeguards against discrimina-
tion. Some Modern Liberals also join with Radicals in supporting full
employment as a method for increasing minority opportunities.
As economic stagnation eroded support for direct government assistance
to minority groups in the early 1970s, Modern Liberals turned to affirma-
tive action to encourage employers to vigorously search for qualified
minority candidates. 20 Critics claim that affirmative action sets hiring quo-
tas, forcing employers to hire less-qualified job applicants, and that it con-
stitutes "reverse discrimination" against whites. However, Modern
Liberals defend affirmative action by arguing that whites, as a group, have
benefitted from past injustices inflicted on minority groups. Had discrimi-
nation not occurred, many whites would not have attained their present
216 Political Economy

income and status. Therefore, affirmative action simply counterbalances

the injustices of the past.
Modern Liberals also think affirmative action provides minority chil-
dren with adult role models in professional and managerial positions.
They anticipate that racial stereotyping will diminish as people of all
racial and ethnic backgrounds appear in high-status positions. Another
justification of affirmative action is based on the concept of human
rights, which entitle people to certain protections and benefits even if they
cannot afford them. Because the market recognizes only property rights,
the government must defend the human rights of those individuals disad-
vantaged in the market. Affirmative action protects the right of minority
groups to be free from discrimination. Modern Liberals reject the criti-
cism that affirmative action impedes efficiency by placing people in posi-
tions for which they are unqualified. Many job skills are acquired after a
person is employed, so people become qualified by virtue of having a job.
Affirmative action simply assures that minority persons have greater
opportunities for access to good jobs.
In spite of these arguments in favor of affirmative action, Modern
Liberals acknowledge the anger and resentment felt by many whites. Some
Modern Liberals have withdrawn their support, claiming that affirmative
action has already accomplished much of its original purpose to open
doors for minority groups. Given the eroding support for affirmative
action, Modern Liberals have recently adopted a new approach called
"multiculturalism." Instead of redistributing income or jobs, multicultural-
ism entails public sharing and celebration of the uniqueness and worth of
different cultures within society. As citizens learn to value and respect a
wide variety of cultural practices, the fear and ignorance that fuel discrim-
ination should subside. Multiculturalism also restores pride among minor-
ity groups by illuminating their contributions and achievements.

NOTES
1. See Gary Becker, The Economics of Discrimination, 2nd ed., Chicago;
University of Chicago Press, 1971.
2. See Thomas Sowell, Markets and Minorities, New York: Basic Books,
1981. Other relevant works by Sowell include Ethnic America: A History, New
York: Basic Books, 1981; Race and Economics, New York: David McKay, 1975;
The Economics and Politics of Race, New York: William Morrow, 1983; Race
and Cultures: A World View, New York: Basic Books, 1994; and Migration and
Cultures: A World View, New York: Basic Books, 1996.
3. Walter Williams, The State Against Blacks, New York: McGraw-Hill, 1982.
4. Glenn C. Loury, "The Moral Quandary of the Black Community," Public
Interest 79 (Spring 1985): 9-22.
5. See Alan H. Goldman, Justice and Reverse Discrimination, Princeton, NJ:
Princeton University Press, 1979; Frederick R. Lynch, Invisible Victims: White
Minorities and Discrimination 217

Males and The Crisis of Affirmative Action, New York: Greenwood Press, 1989;
and Richard Epstein, Forbidden Grounds: The Case Against Employment nt
Discrimination Laws, Cambridge: Harvard University Press, 1992.
6. See Dinesh D'Souza, The End of Racism, New York: The Free Press, 1995.
7. A Radical account of the effect of early capitalism on the lives of common
people is presented in E. P. Thompson, The Making of the English Working Class,
New York: Pantheon, 1963.
8. See Eric Williams, Capitalism and Slavery, New York: Putnam, 1966.
9. See William Tabb, The Political Economy of the Black Ghetto, New York:
W. W. Norton, 1970; Manning Marable, How Capitalism Underdeveloped Black
America, Boston: South End Press, 1983; and Lloyd Hogan, Principles of Black
Political Economy, Boston: Routledge St Kegan Paul, 1984.
10. Michael Reich, Racial Inequality: A Political Economic Analysis, Princeton,
NJ: Princeton University Press, 1981.
11. See David M. Gordon, Richard C. Edwards, and Michael Reich, Segmented
Work, Divided Workers: The Historical Transformation of Labor in the United
States, New York: Cambridge University Press, 1982.
12. The integrationist perspective is presented in Manning Marable, Beyond
Black and White, New York: Verso, 1995. The separatist perspective is presented
in John T. McCartney, Black Power Ideologies, Philadelphia: Temple University
Press, 1992.
13. See Carleton Putnam, Race and Reason, Washington, DC: Public Affairs Press,
1961. For a critical analysis of the history of racist ideas, see Thomas F. Gossett, Race:
The History of an Idea in America, New York: Schocken Books, 1963.
14. William Shockley, "Dysgenics, Geneticity, Raceology: A Challenge to the
Intellectual Responsibility of Educators," Phi Delta Kappan 53, no. 5 (January
1972): 297-307; Arthur R. Jensen, Genetics and Education, New York: Harper &
Row, 1972; and Richard Herrnstein, Educability and Group Differences, New
York: Harper & Row, 1973. More recently, the idea of hereditary IQ has been
defended in Richard J. Herrnstein and Charles Murray, The Bell Curve:
Intelligence and Class Structure in American Life, New York: Free Press, 1994.
Excellent summaries of these ideas and the debates surrounding them are found in
Steven Fraser, ed., The Bell Curve Wars: Race, Intelligence, and the Future of
America, New York: Basic Books, 1995; Russell Jacoby and Naomi Glauberman,
The Bell Curve Debate: History, Document, Opinions, New York: Times Books,
1995; and Joe L. Kinchloe, Shirley R. Steinberg, and Aaron D. Gresson III,
Measured Lies: The Bell Curve Examined, New York: St. Martin's Press, 1996.
The history of efforts to scientifically establish racial differences in intelligence is
detailed in Allan Chase, The Legacy of Malthus: The Social Costs of the New
Scientific Racism, New York: Alfred A. Knopf, 1977; Pat Shipman, The Evolution
of Racism: Human Differences and the Use and Abuse of Science, New York:
Simon &c Schuster, 1994; and Edward J. Larson, Sex, Race and Science: Eugenics
in the Deep South, Baltimore: Johns Hopkins University Press, 1995. For a
response by Arthur Jensen to his critics, see Arthur Jensen, Straight Talk About
Mental Tests, New York: Free Press, 1981.
15. See Ashley Montague, ed., Race and IQ, New York: Oxford University
Press, 1975; N. J. Block and Gerald Dworkin, eds., The IQ Controversy, New
York: Pantheon, 1976; Carl Senna, ed., Race and IQ, New York: Third Press,
218 Political Economy

1973; James M. Lawler, IQ, Heritability, and Racism, New York: International
Publishers, 1978; and Elaine Mensh and Harry Mensh, The IQ Mythology: :
Race, Class, Gender, and Inequality, Carbondale, IL: Southern Illinois University y
Press, 1991.
16. See Nathan Glazer, Affirmative Discrimination: Ethnic Inequality and Public
Policy, New York: Basic Books, 1975. See also Nathan Glazer and Daniel Patrick
Moynihan, Ethnicity, Cambridge, MA: Harvard University Press, 1975.
17. See Stuart Butler, Enterprise Zones: Greenlining the Inner Cities, New York:
Universe Books, 1981; and Deborah K. Belasich, Enterprise Zones: Policy
Perspectives of Economic Development, New York: Garland Publishers, 1993.
18. See Edmund S. Phelps, "The Statistical Theory of Racism and Sexism,"
American Economic Review 62, no. 4 (September 1972): 659-61.
19. See Kenneth J. Arrow, Some Models of Racial Discrimination in the Labor
Market, Santa Monica, CA: Rand Corporation, 1971. See also Ray Marshall, "The
Economics of Racial Discrimination: A Survey," Journal of Economic Literature
12, no. 3 (September 1974): 849-71.
20. For additional information on affirmative action, see Margaret C. Simms,
ed., Economics Perspectives on Affirmative Action, Washington, DC: Joint Center
for Political and Economic Studies, 1995; Nicolaus Mills, Debating Affirmative
Action, New York: Delta, 1994; and Francis J. Beckwith and Todd E. Jones, eds.,
Social Justice or Reverse Discrimination, Amherst, NY: Prometheus Books, 1997.

ADDITIONAL READING
Boston, Thomas D. Race, Class, and Conservatism. Boston: Unwin & Hyman,
1988.
Carnoy, Martin. Faded Dreams: The Politics and Economics of Race in America.
New York: Cambridge University Press, 1994.
Cherry, Robert. Discrimination. Lexington, MA: Lexington Books, 1989.
Franklin, Raymond, and Solomon Resnick. The Political Economy of Racism. New
York: Holt, Rinehart and Winston, 1973.
Gabriel, John. Racism, Culture, Markets. New York: Routledge, 1994.
Hacker, Andrew. Two Nations. New York: Ballantine Books, 1992.
Jennett, Christine, and Randal G. Steward. Three Worlds of Discrimination: Race,
Class, and Gender. South Melbourne, Australia: Macmillan, 1987.
Lauren, Paul Gordon. Power and Prejudice: The Politics and Diplomacy of Racial
Discrimination, 2nd ed. Boulder, CO: Westview Press, 1996.
Leiman, Melvin M. Political Economy of Racism. Boulder, CO: Pluto Press, 1993.
Marable, Manning. Beyond Black And White: Transforming African-American n
Politics. New York: Verso, 1995.
Oliver, Melvin L., and Thomas M. Shapiro. Black Wealth/White Wealth: A New
Perspective on Racial Inequality. New York: Routledge, 1995.
Reuter, Theodore, ed. The Politics of Race. Armonk, NY: M. E. Sharpe, 1995.
Schiller, Bradley. The Economics of Poverty and Discrimination, 5 th ed. Englewood
Cliffs, NJ: Prentice-Hall, 1989.
Van Dyke, Vernon. Human Rights, Ethnicity, and Discrimination. Westport, CT:
Greenwood, 1985.
Chapter 12

The Political Economy

of Gender

Traditionally, both political and economic theory have ignored the divi-
sion of humans into two sexes. This oversight reflects one of two
approaches to issues of gender. Either women and men are so equal in sta-
tus and role designation that theory need not distinguish between them, or
women's roles in the political and economic realm are so insignificant that
theory may safely ignore them. Neither of these approaches is appropriate
for modern industrial societies in which women are active participants in
public life yet remain relegated to jobs with lower status and income. Even
allowing for differences between men and women in educational back-
ground and number of hours worked, a gender wage gap of twenty-five to
thirty percent remains.
Gender discrimination poses additional issues besides those associated
with racial or ethnic discrimination. The anatomical differences between men
and women are undeniable. Some theorists go further to claim that women's
and men's behavior suggests different interests and values. The question
remains whether women are economically and politically disadvantaged by
these differences. Economists distinguish between "in-market" discrimina-
tion, which involves unequal treatment of equally productive persons, and
"pre-market" discrimination, which arises from social institutions including
schools, family structure, and traditional values. Pre-market discrimination
220 Political Economy

may render women less productive, in which case their lower wages do not
necessarily indicate in-market discrimination. Yet efforts to precisely assess
the extent of in-market discrimination are hampered by the porous bound-
aries separating public life and private life. When employers discriminate
against women, they often rely on prevailing stereotypes about women's
productivity. These same stereotypes affect child-rearing practices, educa-
tional programs, and training opportunities for women. Thus in-market dis-
crimination and pre-market discrimination may reinforce each other,
making separate statistical analysis of discrimination in the labor market
haphazard at best.

THE CLASSICAL LIBERAL PERSPECTIVE

E x p l a n a t i o n s of Gender R o l e s
Early Classical Liberals built their theories around the view of all per-
sons as equally autonomous and self-interested; thus, no analysis of gender
roles was offered. When Classical Liberals spoke of the "rights of man,"
they may have been referring only to males because women were largely
excluded from public life.1 However, early American feminists such as
Sarah Grimke (1792-1873), Elizabeth Cady Stanton (1815-1902),
Lucretia Mott (1793-1880), and Susan B. Anthony (1820-1906) inter-
preted these rights as applying to all persons and thus were attracted to
Classical Liberalism.2 Seeking the same legal rights to choice and self-
determination as were held by men, they envisioned a society in which all
individuals, regardless of sex, would be free to compete in the market for
rewards distributed according to productivity.
Today, Classical Liberals are optimistic that the abolition of legal and
political barriers will result in fair treatment of both sexes. The market
economy, with its freedom of choice and opportunity, is the best guarantee
that women's efforts and abilities will be fairly rewarded. 3 If women's pro-
ductivity parallels that of men, then employers should prefer to hire women
because past discrimination has suppressed women's wages. Any employer
who continues to discriminate will experience higher wage costs, resulting
in lower profit and inability to compete effectively. Competitive market
forces will eventually establish "equal pay for equal work" regardless of
who is performing the job.
Classical Liberals claim that even sexist attitudes among male workers
cannot prevent the market from eliminating discrimination. Neoclassical
economic theory suggests that if men resent working alongside women,
they will demand higher wages for undergoing the "disutility" of an inte-
grated workplace. However, the market will not permit an employer to pay
higher wages to men without a corresponding loss of profit. Therefore,
employers will seek to persuade male workers to accept women or, failing
The Political EconomyojGender 221

in that, they will establish segregated worksites where men and women
earn equal wages but work separately. In either case, wage discrimination
against women will end.
Classical Liberals rely on the following explanations for the differences
between male and female social roles and earnings:

1. Women's abilities. While Classical Liberals prefer to deemphasize

genetic differences between persons, they don't deny the existence of male
and female aptitudes leading to differences in market success. They view the
relative stability of gender roles over time as evidence that men and women
have different aptitudes and tend to specialize in those roles for which they
are best suited. Economist Gary Becker suggests that if women are better
than men at homemaking, then economic efficiency dictates that women
specialize in domestic labor and trade these services for a share of their hus-
band's earnings.4 The theory of comparative advantage demonstrates the
inefficiency of husbands and wives sharing household tasks if men are more
productive than women in the labor market. The husband can better utilize
his time earning money outside the home. By contributing to efficiency, the
sexual division of labor is beneficial to both men and women.
Extending Becker's analysis, economists Richard McKenzie and Gordon
Tullock describe the family as a "producing unit" that operates like a profit-
maximizing firm in seeking to establish the most efficient division of labor.5
This analysis applies not only to the structure of the family, but also to occu-
pational segregation. Competitive market forces will effectively preclude
women from types of work for which they are unsuited. To the extent that
occupational segregation and a gender wage gap reflect differences in abili-
ties between men and women, Classical Liberals claim that no injustice
occurs. They note that advancing technology is enhancing women's relative
status in the workplace by reducing the value of physical strength. Some
Classical Liberals even predict that women will increasingly fill managerial
positions as communication and organizational skills become more impor-
tant than physical prowess and use of intimidation in motivating employees.

2. Women's preferences. Classical Liberals attribute much of the differ-

ence between male and female roles and wages to the rational choices of self-
interested individuals. All persons, whether male or female, choose social
roles in accordance with their preferences. Classical Liberals note that many
women are strongly oriented toward home and family and that this com-
mitment often limits their acquisition of education and training, their choice
of occupation, and their mobility. If women choose to marry and raise chil-
dren rather than obtain education, job skills, and work experience, then their
productivity in the market will be lower. If women's earning capacity is less
than men's, efficiency dictates that women specialize in unpaid household
labor while their more productive husbands work for wages.
222 Political Economy

For those women who do work outside the home, their child-bearing
and child-rearing commitments may cause them to choose jobs such as
retail sales or clerical work which permit intermittent employment and
require skills that do not depreciate rapidly over time. Such jobs typically
offer lower wages and few opportunities for advancement, leaving women
with less experience and seniority than their male counterparts. Statis-
tically, a significant portion of the gender wage gap is attributable to the
concentration of women in these occupations. However, Classical Liberals
argue that this occupational segregation and the resulting wage gap arise
from women's preferences. They are willing to work in low-paying jobs
because they value time to spend with their families.

3. Market disequilibrium. As the number of women entering the labor

market has risen in recent years, the market has been unable to absorb quickly
all persons seeking work. Moreover, the excess supply of women crowding
into entry-level positions has depressed wages for such jobs even lower than
usual. Classical Liberals offer several explanations for rising female participa-
tion rates in the labor force. Improvements in household technology have
reduced the time necessary for housekeeping, freeing women to pursue
employment outside the home. Moreover, the tendency for family size to
decrease as standards of living rise has further reduced the domestic respon-
sibilities of women. Finally, as women have gained equality in education, their
increased earning potential makes working more attractive.
Classical Liberals remain confident that the concentration of women in
low-paid occupations will dissipate as the market adjusts to increased sup-
plies of female labor and steers women toward jobs corresponding to their
abilities and preferences. More productive women will be rewarded with
higher wages and promotions to better jobs. As evidence that the market is
making these adjustments, Classical Liberals note that the gender wage gap
is substantially smaller for young women than for older women.

4. Government intervention. Classical Liberals argue that efforts by

government to protect or assist women are demeaning because they imply
that women are less capable than men. In fact, these policies often repre-
sent attempts by men to protect their own privileges. Men can effectively
reduce competition for their jobs by securing legislation aimed at restrict-
ing women's opportunities, thereby forcing women to crowd into "female
occupations" and driving down wages for those jobs. Examples of such
policies include laws prohibiting women from lifting heavy objects or
working in hazardous conditions. Also, laws requiring equal pay for men
and women discourage employers from hiring women since a man can be
hired for the same cost. In general, Classical Liberals claim that all gov-
ernment restrictions on competition have distributive effects; some groups
are advantaged and other groups are harmed.
The Political Economy of Gender 223

Policy Proposals
Classical Liberals propose that discrimination against women can be
eliminated by establishing a free market. Virtually all government interven-
tion should be abolished, and public life should be made "gender-blind" by
removing all references to gender in laws and public policies. While the pro-
posed Equal Rights Amendment to the U.S. Constitution seems to promise
equal treatment for men and women, most Classical Liberals oppose it,
arguing that existing laws already protect the civil rights of women and that
the ERA would lead to increased government regulation of business and a
resulting loss of efficiency and freedom. This same argument has been
extended by some Classical Liberals to criticize the entire feminist move-
ment for seeking to use government to promote equality between the sexes
through quota systems and other forms of government intervention.6
Classical Liberals also oppose "comparable worth" laws, which would
establish fair wages for different occupations by evaluating jobs according
to such criteria as skills required, level of responsibility, and working con-
ditions. While Classical Liberals support "equal pay for equal work," they
claim that only the market can determine the value of a job. The Classical
Liberal case against comparable worth focuses on three arguments. 7 First,
the assessed worth of any job depends on which criteria are used in its eval-
uation, but no objective method exists for selecting the criteria. Given this
lack of objectivity, a bureaucratic evaluation of a job's worth would be no
fairer than the market's assessment. Second, to the extent that comparable
worth would raise wages in traditionally female occupations, it would
reduce the incentives for women to enter male-dominated professions and
therefore would perpetuate the current occupational segregation of women.
Third, since male workers would resist efforts to reduce their wages, the
effect of comparable worth would be to increase overall labor costs for
employers, reduce profitability, eliminate jobs, and slow economic growth.
Some Classical Liberal economists have proposed policies to extend the
logic of the market into the private realm of the family. In response to con-
cerns about overpopulation, Classical Liberals have suggested that the
most efficient way to limit population growth is to establish a market for
the right to bear children. Adults would be granted a voucher for the right
to produce one child, and then, depending on their preferences, they could
buy or sell vouchers to reach their desired family size. Unlike China's
efforts to control population growth by restricting the number of children
in a family, this policy would retain the freedom to choose one's family size.
The development of artificial insemination and fetal transplants has
already transformed child-bearing itself into a marketable service as some
women contract to bear children in exchange for money. In the absence of
legal obstacles, supply and demand will determine the appropriate price for
"renting the womb" of a surrogate mother. Extending this logic, economist
Richard Posner, who is also a federal judge, proposes that markets be
224 Political Economy

established for babies so that couples can buy and sell to achieve their
desired family size. This policy is consistent with economic efficiency,
which dictates that any commodity be allocated to those who are most
willing and able to pay for it.

THE RADICAL PERSPECTIVE

E x p l a n a t i o n s of Gender R o l e s
Some early feminists sought more than equal rights, arguing that women
would remain oppressed until fundamental changes occurred in the institu-
tions of marriage, family, and religion. Perhaps the most Radical of the early
feminists was Mary Wollstonecraft (1759-1797), who claimed that women
were socialized to be servants of men, preventing them from achieving full
personal development. Mere legal reforms would not be sufficient to liber-
ate women; genuine freedom would be attained only wrhen women held
equal power and were no longer dependent on men for financial support.
For the most part, however, Radicalism offered little analysis of gender
roles until the late 1960s. At that time, three Radical versions of feminism
emerged: Marxist feminism, radical feminism, and socialist feminism.
During the 1970s and 1980s, intense and sometimes bitter debates
occurred among proponents of these schools of thought. The debates were
not so much resolved as transcended, so that contemporary feminist theo-
rists working in the Radical tradition are less concerned about labels than
about advancing the understanding of women's oppression and developing
policies to end it. Today, the terms "Marxist," "radical," and "socialist"
feminism are sometimes used interchangeably, but to review the debates of
the past three decades, we shall examine each separately.

1. Marxist feminism. Karl Marx and Friedrich Engels claimed that the
social roles available to both men and women are conditioned by society's
production process. The earliest communal societies were sometimes matri-
archal, but as soon as technological progress yielded production of a surplus
beyond what was immediately consumed, men instituted private property to
establish rights to the surplus. With the emergence of private property came
male dominance over women, motivated partly by men's desire to control
women's reproductive activities to assure transmission of property to legiti-
mate heirs. Women became essentially the property of men, sometimes to the
point of being bought and sold between different families and communities.
In the early years of capitalism, the sexual division of labor and the
nuclear family were strengthened because they contributed to the accumu-
lation of capital. By performing unpaid tasks such as childbearing and
housekeeping, women enabled employers to, in effect, hire two workers for
the price of one. Women also indirectly aided employers by providing a
The Political Economy of Gender 225

supportive home life so that their husbands were physically and emotion-
ally prepared to face another day in the factory. For men, home and fam-
ily became havens from the alienating experience of work. 8
However, as capitalism matured and the demand for labor increased,
market forces pulled women out of the home and into the workplace as a
source of cheap labor. Yet the entry of women into the labor force had an
unanticipated consequence: employers replaced a "family wage" with a
wage adequate to support only a single person. The nuclear family became
endangered as men could no longer earn enough to support their families,
and women became increasingly capable of financial independence. From
the Radical perspective, rising divorce rates, disintegration of families, and
the blurring of gender roles are not symptoms of moral decline, but instead
are consequences of capitalism. The accumulation process penetrates every
sphere of human existence, breaking down bonds and obligations between
people and replacing personal relations with a "cash nexus."
According to Marxists, the capitalist system is the enemy of both men
and women. As long as capitalism continues, all members of the working
class will lack control over their lives. Hostility between the sexes arises
as capitalists seek to fragment and divide the working class to assure a
steady supply of cheap labor. As long as men and women blame each
other for bad relationships and financial problems, their attention is
diverted from the real source of their frustration, which is the dominant
power of capital over people.
In the late 1960s, a resurgence of interest in both Marxism and feminism
led to "Marxist feminism," which holds that women's oppression is attrib-
utable to capitalism and that issues raised by feminists are best analyzed and
understood using the Marxist critique of capitalism. Among the most promi-
nent Marxist feminist theorists are Sheila Rowbotham and Michele Barrett.9

2. Radical feminism. Radical feminists find the Marxist explanation of

women's roles to be implausible, claiming that the root of women's oppres-
sion is not economic but biological. Men are violent, aggressive, and dom-
ineering, and have always sought to oppress women. Women are made
vulnerable to oppression by their childbearing function, which makes them
dependent on men. Noting that women were oppressed long before capi-
talism appeared, radical feminists point to patriarchy, or male dominance,
as the fundamental problem and argue that fighting against patriarchy
must take precedence over any political struggle against capitalism.
Capitalism is simply the most highly developed form of the various eco-
nomic systems that have accompanied patriarchy, and any revolution that
overthrows capitalism without simultaneously demolishing patriarchy will
fail to liberate women. Radical feminists point to the former Soviet Union
as evidence that abolishing private property and including women in the
labor force are insufficient to secure women's liberation. 10
226 Political Economy

Unlike Marxists, radical feminists view women rather than workers as

the oppressed class in a patriarchal society. Men dominate women not for
profit, they insist, but for ego gratification and a sense of power.
Overthrowing patriarchy is justified not only because male aggression
oppresses women, but because women's values, including nurturance, coop-
eration, and empathy are superior to the values emphasized by patriarchal
societies. Radical feminists propose that major social problems such as war,
hunger, and unemployment would not exist in a matriarchal society.
Theorists who founded Radical feminism, including Kate Millett and
Mary Daly, focused on family life and religion as key sites in which
women's subordination is experienced and reproduced in the attitudes of
young children.11 Whereas liberals strive to maintain separation between
private and public life, radical feminists draw attention to family violence,
marital rape, incest, and psychological abuse. These issues are not simply
personal problems or isolated incidents, they claim, but symptoms of soci-
ety's attitude toward women. In the words of French philosopher Simone
de Beauvoir (1908-1986), "the personal is the political." The problems
experienced by women as individuals are socially created and therefore
require political solutions.
The power of patriarchy manifests itself not only in violence against
women and job discrimination, but in the subtle conditioning of women's
own self-image. The very concept of femininity is a "social construction"
created largely by men to perpetuate male dominance. Femininity is asso-
ciated with weakness, passivity, and self-denial. Because female identity is
defined by men, the social roles available to women in a patriarchal soci-
ety are inherently oppressive.

3. Socialist feminism. In an effort to synthesize Marxist feminism and

radical feminism, socialist feminists propose that capitalism and patriarchy
reinforce each other and thus constitute inseparable forms of female
oppression. Socialist feminist theorists such as Juliet Mitchell, Zillah
Eisenstein, and Nancy Hartsock affirm the critical insights provided by
Marxism, particularly its emphasis on the social nature of human con-
sciousness.12 However, they join with radical feminists in criticizing
Marxism for being tainted by a male perspective. By reducing all oppres-
sion in capitalist society to exploitation of workers by capitalists, Marxism
fails to offer an analysis of the unique oppression faced by women.
Socialist feminists propose to augment Marxism by treating household
production as an integral component of society's production process.
Although not directly salaried, women's production in the home is essential
for profitability and capital accumulation. The family is also the site of ideo-
logical and behavioral reproduction. Child-rearing practices serve to produce
children who are suited for capitalism. In working-class families, women and
children are traditionally taught to obey orders from male authority figures,
The Political Economy of Gender 227

while upper-class parents are more likely to stress creativity and self-direction
for their children. As a result, the children of each class are socialized to fill
their respective future roles in the hierarchy of capitalist production.

Policy Proposals
Because the Radical perspective encompasses three distinct types of fem-
inism, Radicals offer a wide variety of proposals related to gender issues.
Marxist feminists believe that the oppression of women can be solved only
by ending capitalism and making the transition to a socialist society. Yet,
in addition to the socialization of the means of production envisioned by
Marx, they call for socialization of household production. Communal
households would be able to take advantage of economies of scale and
modern technology to accomplish such tasks as cleaning, shopping, food
preparation, and child care. All adults would be expected to share in these
responsibilities, and women would participate equally with men in the paid
labor force. Marxist feminists believe that only when women and men have
similar economic roles in society will male domination end. Women can be
most effective in bringing about social change by joining with men in a
working-class movement to end capitalism.
In contrast, radical feminists propose that the only viable strategy for the
liberation of women is to develop separate "women-centered" institutions
and communities that exclude patriarchal culture and male domination.
Because Radical feminists view the nuclear family as a key institution in
perpetuating patriarchy, some have suggested that the technology for pro-
ducing "test-tube babies" offers an unprecedented opportunity for women
to escape their biological dependence on men and to become autonomous,
self-directing persons. 13
Socialist feminists share much of the Marxist feminist skepticism con-
cerning the possibility of reform within a capitalist society. Not only is gov-
ernment an instrument in the hands of the ruling class, but legal reforms
cannot effectively end the institutionalized sexism shaping women's aspira-
tions. The liberation of women and men requires a broad-based socialist
movement to abolish both capitalism and patriarchy. While socialist femi-
nists reject the separatist strategy of radical feminists, they also insist that
feminist issues not be submerged in the struggle to end capitalism.
According to socialist feminists, capitalism is currently contributing to its
own demise. As women enter the labor market, they are disillusioned by the
alienating conditions of work and often face "double duty"—performing
household labor in addition to wage labor. The hours devoted to housework
are kept from declining by corporate marketing campaigns that create ever-
higher standards of housekeeping and parenting.14 Women's frustration
with the roles available to them in capitalist society will foster growing sup-
port for socialism. In the meantime, some socialist feminists advocate wages
228 Political Economy

for housework in recognition of the proHuciive activities performed by peo-

ple outside the formal labor market. These wages could be paid by spouses,
by government, or by the spouse's employer. Other gender-related reforms
supported by socialist feminists include public provision of child-care facil-
ities, nationalized health care, increased public housing, government pro-
grams such as comparable worth to assure pay equity, and government
efforts to expand job opportunities for women.

THE CONSERVATIVE PERSPECTIVE

E x p l a n a t i o n s of Gender Roles
While sexism is not logically implied by Conservatism, the Conservative
emphasis on hierarchical authority often extends to encompass the roles of
men and women. In describing women's roles in the social hierarchy,
Conservatives emphasize the following characteristics:

1. Sensitivity. Women are "other-oriented"; they derive personal fulfill-

ment through meeting the needs of other people. This sensitivity makes
women ideally suited for roles requiring an ability to care, nurture, and
mediate conflict (e.g., parenting, homemaking, teaching, and nursing).
Conservative writer George Gilder describes the positive effect women
have on men. Outside of marriage, he claims, men are "barbarians" who
lack responsibility and purpose in their lives and therefore aimlessly pursue
immediate pleasure. Women are able to channel the aggressive and poten-
tially violent nature of men into productive work and parenting. 15

2. Irrationality. Sigmund Freud (1856-1939) claimed that women have

weak superegos, making them incapable of objective, dispassionate rea-
soning and, therefore, unfit for positions of responsibility and authority.
Freud went so far as to portray women as subversive to civilization because
they act on instinct and emotional impulse rather than making rational cal-
culations of consequences. Women's irrationality is innate and cannot be
changed by expanding educational or employment opportunities. In
Freud's words, "anatomy is destiny."16

3. Passivity. Women are claimed to be physically weaker and more pas-

sive than men due to differences in hormonal balances. Specifically, a lower
level of testosterone in women explains reduced aggressiveness and muscu-
lar development. To the extent that certain social roles require strength and
forcefulness, women are disadvantaged in performing these tasks.

The differing temperaments and abilities of men and women dictate well-
defined gender roles. Just as the human body requires different cells to
The Political Economy of Gender 229

function (such as bone, muscle, and skin), society needs differentiated gen-
der roles to remain healthy. The sociologist Talcott Parsons claimed that
women are best suited for "expressive" roles while men have greater apti-
tude for "instrumental" roles. Social harmony requires that women fill roles
as wives, mothers, and members of the "helping professions" while men
engage in physical or intellectual work manipulating the external world.
Conservatives insist that gender differences are naturally complemen-
tary. They view men as strong, aggressive, and inclined toward rational
analysis, while women are nurturing and emotionally expressive. Men need
women to raise children and provide a fulfilling home life, while women
need men as sources of authority and financial support. So long as men and
women accept one another's relative strengths and weaknesses, harmony
will prevail. Indeed, the different capacities of men and women constitute
the basis for sexual attraction and are therefore essential to reproducing the
human species.
In analyzing the breakdown of traditional gender roles and gender iden-
tities, Conservatives place much of the blame on the deterioration of the
nuclear family.17 The family, as the basic unit of society and the primary
site of socialization processes, prepares children for adulthood. Conserv-
atives reject the Classical Liberal notion that humans develop through
rational choice. The role models and socialization to which people are
exposed as children shape individual preferences and behavior. For both
children and adults, personal development requires involvement in a web
of hierarchical social relations. The authority of parents conditions the
child to later accept the authority of teachers, employers, and government.
In addition, children's observation of the relation between their parents
provides the basis for gender identity. When adult gender roles are vague
or ambiguous, Conservatives fear that children will become confused and
thwarted in the development of their own personalities.
Conservatives claim that blurring of gender roles and deterioration of
the nuclear family contribute to immorality and economic stagnation. They
blame this process on the following factors:

1. Government. When government intrudes into the everyday existence

of citizens, traditional authority figures in the family, church, and community
become less significant in people's lives. For example, the standardization of
public-school curricula reduces the influence of parents and local authorities
in determining the content of education. Mandatory sex education in schools
diminishes parental discretion over childrearing. Welfare benefits and other
publicly funded social services reduce women's dependence on men for finan-
cial support, thereby undermining male authority within the family. Finally,
Conservatives blame government for the combination of inflation, high
taxes, and foreign competition eroding male wages and forcing women to
enter the labor market.
230 Political Economy

2. The market. Although most Conservatives accept the market as a

lesser evil than government control of the economy, their long-held suspi-
cions about the corrupting and disintegrating effects of competitive forces
have resurfaced in their analysis of the family. From the Conservative per-
spective, the family and the market operate on diametrically opposed prin-
ciples. The market fosters the individual pursuit of material self-interest,
while the family depends on cooperation, sacrifice, and a sense of collective
purpose and identity. The family should offer a haven of security and com-
mitment in an otherwise fragmented, competitive, and individualistic soci-
ety. The experience of growing up in a family with strong parental authority
teaches children to place their duties above the pursuit of self-interest.
However, the market has become the dominant institution in modern
societies, and its principles have penetrated and overwhelmed the virtues of
family life. Once the market mentality pervades the home, calculations of
self-interest displace the commitment and altruism essential to maintaining
a stable family. Women and children adopt the autonomous and self-
interested behavior previously reserved for men in the market, undermin-
ing the father's authority. In short, families cannot function as cohesive
social units if all members are purely self-interested.
High divorce rates, single-parent households, runaway children, and
juvenile delinquency provide testimony to the deterioration of commitment
and obligation in the family. From the Conservative perspective, the
Classical Liberal portrayal of marriage and childrearing as self-interested
exchanges and contracts between individuals reveals the shortcomings of
modern family life. In the absence of stable traditions and gender roles,
individuals become calculators of self-interest in even the most personal
aspects of their lives. Without the influence of closely knit families on child-
hood development, society will eventually degenerate into a chaotic battle
among individuals unable and unwilling to control their selfish impulses.

3. Feminism. Both government and the market have contributed to fem-

inism by undermining the ability of men to financially support their fami-
lies and by offering women alternative sources of financial support.
Conservatives find numerous faults with feminism, viewing it as sympto-
matic of the general trend toward narcissism and selfishness in modern
societies.18 Feminists are accused of shirking responsibility and commit-
ment as they pursue "self-fulfillment" and seek to "find themselves." The
basic error underlying feminism is a failure to perceive that the commit-
ments and responsibilities accompanying family life result in personal ful-
fillment. What feminists call liberation is actually selfishness, and a society
of selfish individuals cannot sustain itself.
Conservatives also claim that feminism undermines men's identity as
providers, protectors, and authority figures within the family. Faced with
the challenge of feminism, men lose self-esteem and become confused about
The Political Economy of Gender 231

their purpose in life. George Gilder argues that men's economic productiv-
ity has been adversely affected by feminism because when women are
actively involved in the labor force, men no longer feel as compelled to
work. 19 Not only are women bringing their earnings into the household,
but their employment erodes men's attachment to work as a uniquely male
source of self-esteem. Moreover, having lost authority over their own fam-
ilies, men feel inadequate to assert themselves in the business world. To the
extent that feminism contributes to divorce, men are freed from most of
their domestic responsibilities, causing further deterioration of their identi-
ties as providers and hence diminishing their productivity in the workplace.
Finally, Conservative women such as Phyllis Schlafly and Anita Bryant
have claimed that the women's liberation movement consistently
degrades women who choose the role of housewife and mother. 20 Women
in traditional roles are made to feel inadequate in comparison with
women who pursue careers. The resulting confusion and loss of confi-
dence contributes to the blurring of gender roles as women feel compelled
to prove their worth outside the home. Conservatives claim to be the true
defenders of women's rights to keep the status and privileges attached to
their traditional roles.

Policy Proposals
Because they blame both government and the market for undermining
gender roles and threatening the family, Conservatives will not rely exclu-
sively on either institution to solve the problem. Their goal in reforming
government policies is to revitalize the market's potential for producing
wealth while protecting women and families from the corrosive impact of
market forces. Conservatives call on government to consciously promote
traditional values and gender roles. For example, they support a Family
Protection Act to reduce the pressures on women to work outside the home
by granting tax breaks to families with nonworking wives. This law would
also prohibit publicly funded lawyers from handling cases involving
divorce, abortion, or homosexuality.
Conservative policy proposals also include making divorce more diffi-
cult, prohibiting abortion, and making welfare less accessible for single
women. Public schools would be prohibited from using textbooks featuring
nontraditional roles for women. Some Conservatives, concerned that femi-
nism and narcissism have caused many young adults to shun the responsi-
bilities of parenthood, want government to pursue pronatal policies to
combat a "birth dearth." Such policies might include larger tax deductions
for families with children and public financial assistance with childrearing.
Conservatives have consistently opposed the Equal Rights Amendment,
claiming that it would further erode the differentiation between gender roles
and would abolish the legal requirement that men provide financial support
232 Political Economy

to their wives. The ERA, they claim, would actually result in men's libera-
tion from traditional responsibilities to their families.
Conservatives tend to be pessimistic about the future of gender roles and
the family. The economy's increasing inability to provide a "family wage"
for male workers contributes to the breakdown of the family, and, recip-
rocally, the breakdown of the family undermines the economy by produc-
ing self-centered, poorly socialized children who are ill-equipped to work
effectively and to handle the responsibilities of adult life. This circular path
of causation means that any effective Conservative strategy must simulta-
neously deal with misguided government policies, powerful economic
forces, and the influence of feminism.

THE MODERN LIBERAL PERSPECTIVE

E x p l a n a t i o n s of Gender R o l e s
The Modern Liberal approach to gender issues has evolved through
three distinct historical phases. In the early years of the feminist movement,
some leaders doubted whether men and women should be treated equally.
Both Margaret Fuller (1810-1850) and Charlotte Perkins Gilman
(1860-1935) claimed that women are innately less aggressive and individ-
ualistic than men. These feminine traits contribute to a decent society by
promoting nonviolence, cooperation, and civic virtue. Since women occupy
a "separate sphere," female values should be protected by government
from the competitive forces of the market. Early Modern Liberal feminists
supported legal restrictions on women's working hours and on women's
entry into certain occupations. Their rejection of equal treatment is illus-
trated by the fact that Eleanor Roosevelt, the National Women's Trade
Union League, and the League of Women Voters opposed the Equal Rights
Amendment when it was first proposed in the 1920s, fearing that it would
abolish all legislative protection for women.
By the 1960s, a second phase of Modern Liberal feminism was articulated
by Betty Friedan and was institutionalized with the founding of the National
Organization for Women (NOW) in 1966.21 Arguing that protective legisla-
tion perpetuates occupational segregation by forcing employers to treat
women differently, Modern Liberals sought to eliminate all discriminatory
laws and to dismantle the stereotype of women as uniquely suited for the roles
of care-giver and homemaker. During this second phase, Modern Liberals
attributed women's lower salaries and status to gender stereotypes and igno-
rance. They believed that employers should welcome equal rights for women
since sexism effectively denies more than half the population a full opportu-
nity to contribute to economic activity. However, to prevent unenlightened
employers from continuing to discriminate, Modern Liberals advocated new
laws and government regulation to make capitalism more efficient and fair.
The Political Economy of Gender 233

By the end of the 1970s, many Modern Liberals became concerned that
their commitment to equal rights and equal treatment was imposing
unforeseen burdens on women. A third phase of Modern Liberal feminism
reintroduced notions of difference between the sexes. For example, social
psychologist Carol Gilligan claims that women view the social world as
one of relationships, commitments, and responsibilities, whereas men view
society as composed of separate individuals whose interaction is based on
rules and rights. 22 If, in their quest for occupational success, women adopt
the competitive individualism of men, they risk compromising their own
valuable qualities. Gilligan does not propose that women remain at home,
but suggests that institutional changes are necessary to accommodate the
different needs and interests of women in the workplace.
Similarly, Nancy Chodorow claims that differences in male and female
gender identity are determined at a very early stage of childhood develop-
ment. 23 Boys develop more "rigid ego boundaries" because they must dif-
ferentiate themselves from their mother. In the process, they form identities
as separate individuals in competition with others. Girls, on the other
hand, share the gender of their mother and, therefore, develop a more fluid
sense of self that emphasizes interpersonal connections and sympathy with
the needs of others. As a result, girls are prepared for the role of mother,
while boys, with their sense of separateness and independence, are pre-
pared to participate in the impersonal world of work and business.
Chodorow denies that gender differences are purely biological. If men
were to become more involved in the early stages of childrearing, tradi-
tional distinctions between the psychosocial development of boys and girls
might fade. In addition, if marriages provided greater emotional gratifica-
tion, women would not feel compelled to focus their energies primarily on
their children and would expect greater sharing of responsibilities between
husband and wife. However, for the foreseeable future, the differences
between adult gender roles are likely to be "reproduced" in children, and
feminists should recognize these differences when proposing public policies
related to gender issues.
While Modern Liberals acknowledge that competitive market forces
create pressures to integrate women into the labor force, they challenge
the Classical Liberal portrayal of the market as an adequate deterrent to
discrimination. Discrimination is resistant to market forces for the fol-
lowing reasons:

1. Social conditioning of preferences. Modern Liberals emphasize the

powerful forces of parental, peer, and societal influences that affect young
women's aspirations and achievements. This socialization process is insti-
tutionalized in such practices as educational "tracking" that steers girls
toward coursework preparing them for traditional female roles. Even more
pervasive is the perception of particular occupations as "men's work" and
234 Political Economy

the corresponding stigma attached to women who aspire to those occupa-

tions. The choices of young women are also affected by "demonstration
effects" whereby the occupational segregation of adult women in lower-
status jobs creates an absence of role models for stimulating the aspirations
of young women. Similarly, a "feedback effect" operates when young
women rationally choose to bypass higher education because they observe
that the financial rate of return to education is less for women than for
men. Even women who attain professional positions may be deterred from
further success by their isolation and visibility as challengers of traditional
gender roles.

2. Imperfect competition. Market imperfections posed by labor unions,

corporations, and government intervention establish various barriers to
entry into certain occupations. An example of this "structural discrimina-
tion" is the informal practice by some firms of hiring only within an "old
boy network." Information about job openings may not be widely publi-
cized and job qualifications may include unnecessary education or experi-
ence, effectively screening out many female applicants. While Classical
Liberals insist that such practices cannot survive in a market economy,
Modern Liberals believe that market competition is sufficiently imperfect
to permit discrimination and stereotypes to persist. The same self-interested
motivation underlying market behavior also leads men to construct formal
and informal barriers to female competition.

3. Domestic responsibilities. The division of labor within the family

often leaves women with the majority of childrearing and homemaking
responsibilities, and their choice of occupation is affected by these duties.
Because so many women are faced with the same predicament of trying to
balance family responsibilities and careers, they tend to crowd into those
occupations offering flexible or part-time hours, ease of exit and reentry,
and durable skills. This crowding results in lower wages and fewer oppor-
tunities for career development.24 The occupational segregation of women
does not necessarily reflect lower productivity or the individual preferences
of women, but rather results from a social environment in which the bur-
den of homemaking falls on women due to men's noncooperation and the
lack of government-funded day care.

4. Sexist attitudes. When sexism is prevalent, discrimination against

women may be practiced by all employers. Neoclassical economic theory
suggests that at least one employer would break ranks to hire women in the
pursuit of greater profit and that lower labor costs enjoyed by this
employer would exert competitive pressure on other firms to cease dis-
crimination. However, Modern Liberals question this analysis, pointing to
the psychological impact of societal norms in restraining economizing
The Political Economy of Gender 235

behavior. The employer who violates these norms by hiring women to per-
form "men's work" may be ostracized within the community or may feel
guilt for having exploited women for the sake of greater profit.
Discrimination can be disguised as protecting the dignity and virtue of
women, and this attitude may be sufficiently strong to withstand competi-
tive market forces.
Employers may also be reluctant to hire women due to concern about
the morale of male workers. Employers may worry that the presence of
women will distract men, disrupt their camaraderie, and create tensions
between co-workers. Male employees engaged in strenuous or risky jobs
are likely to feel particularly threatened by female co-workers whose pres-
ence undermines their enjoyment of work as a source of masculine pride.
Employers must be sensitive to these reactions since time and money have
been invested in training male workers. Hiring female workers will be
unappealing if it lowers male workers' productivity.

5. Statistical discrimination. Even employers committed to hiring the best

candidate for a job may lack information about the productivity of individ-
ual candidates, causing them to rely on preconceived notions about women
as a group. For example, an employer may believe that female employees are
likely to leave their jobs due to marriage or pregnancy and may therefore cat-
egorically reject all female applicants. Some highly qualified women may be
bypassed, but if the costs of gathering complete information about candi-
dates exceed the benefits of hiring more productive workers, then this "sta-
tistical discrimination" is efficient from the employer's viewpoint.25

In summary, Modern Liberals claim that nonmarket forces and imperfec-

tions in the market are sufficiently powerful to make competitive pressures
resist putting an end to sex discrimination. Even when women's lower wages
do reflect lower productivity or less permanent attachments to the labor
market, Modern Liberals argue that these characteristics are themselves
conditioned by the values and institutional structure of society. Women's
choices are made in response to limited opportunities and incentives. Whereas
Classical Liberals attribute lower female wages to lower productivity, Modern
Liberals are more inclined to reverse the causal sequence and view lower
productivity as a consequence of occupational structures and wage levels.

Policy Proposals
The initial orientation of Modern Liberal groups such as the National
Organization for Women was to make all laws gender-neutral, and they
were quite successful in accomplishing that goal. In the mid-1970s, how-
ever, Modern Liberals began to doubt the wisdom of perfectly gender-
neutral public policy. This reorientation evolved from the realization that if
236 Political Economy

women and men are treated equally in the job market, women may be
penalized due to their unique status as childbearers and, in many cases, pri-
mary homemakers. The pitfalls of a purely "equal rights" strategy were
highlighted in 1976 when the Supreme Court ruled that a proposed law
requiring employers to grant paid leaves of absence to pregnant women
was discriminatory because it treated women differently than men.
To move beyond formal equality under the law, affirmative action pro-
grams require employers to make concerted efforts to locate qualified
female and minority applicants for jobs. Another proposal for addressing
pay inequities is "comparable worth." While the wages attached to various
jobs are theoretically determined by supply and demand, Modern Liberals
claim that market-determined wages can be unfair due to discrimination
and gender stereotyping. In addition, women's family responsibilities force
them to crowd into occupations offering flexible hours, but this over-
crowding keeps wages for these occupations permanently depressed.
Therefore, if the financial burden of childrearing is to be shared equi-
tably by men and women, the market's determination of wages must be
overridden. Comparable worth provides an alternative to the market in
assessing the relative worth of different jobs. Each job would be evaluated
according to criteria such as level of responsibility, physical difficulty, and
amount of training required. By assigning points in each category, a
numerical rating would be established for each job, and pay would corre-
spond with that rating. The goal of comparable worth is to formulate an
objective measurement of the value of different jobs independently of the
market's valuation. 26
Those Modern Liberals who support comparable worth claim that it
would contribute to women's financial independence and enhance their self-
esteem and power. By paying women more than their market-determined
wages, society is acknowledging not only the unfairness of traditional wage
structures, but also the value of women's productive contributions in the
home. Modern Liberals claim that comparable worth can actually increase
efficiency because women's child-rearing activities create positive externali-
ties; the social benefits of good parenting exceed the private benefits to the
individual child or family. Adults who grew up in nurturing families are
more likely to work productively, vote intelligently, and contribute to the
good of society. When an activity produces positive externalities, the mar-
ket allocates insufficient resources to that activity, resulting in inefficiency.
To correct this market failure, government should compensate women for
their productive efforts in the home by setting their wages above the level
determined by supply and demand.
Other Modern Liberal proposals related to gender include marital prop-
erty reform to secure for married persons a legal right to half of any
property acquired during the marriage, even if only one spouse was in
the labor force. Such a law would recognize the productive contribution
The Political Economy of Gender 237 7

m a d e by h o m e m a k e r s . A second p r o p o s a l seeks reform of social security

a n d u n e m p l o y m e n t c o m p e n s a t i o n so t h a t u n p a i d w o r k outside the labor
m a r k e t w o u l d entitle persons to protections a n d benefits similar t o those
enjoyed by employed w o r k e r s . A third p r o p o s a l calls for g o v e r n m e n t to
improve the "social infrastructure" of health care, social services, day
care, a n d facilities for y o u t h and the elderly. These areas n o w a b s o r b
vast a m o u n t s of u n p a i d labor by w o m e n . Finally, some M o d e r n Liberals
w a n t employers to offer m o r e flexible w o r k schedules, paid leaves of
absence for parenting, fringe benefits for part-time w o r k , and the o p t i o n
of job sharing between t w o or m o r e persons.

NOTES
1. See Jean Bethke Elshtain, Public Man, Private Woman: Women in Social and
Political Thought, Princeton, NJ: Princeton University Press, 1981; and Susan
Moller Okin, Women in Western Political Thought, Princeton, NJ: Princeton
University Press, 1979.
2. See Mari Jo Buhle and Paul Buhle, The Concise History of Woman Suffrage,
Urbana, IL: University of Illinois Press, 1978; Judith Hole and Ellen Levine, Rebirth
of Feminism, New York: Quadrangle Books, 1971; Richard J. Evans, The
Feminists, Totowa, NJ: Rowman &c Littlefield, 1979; Sara M. Evans, Born for
Liberty: A History of Women in America, New York: Free Press, 1989; and Lois W.
Banner, Women in Modern America: A Brief History, 3rd ed., Fort Worth:
Harcourt Brace College Publishers, 1995.
3. Classical Liberal feminism is presented in Wendy McElroy, ed., Freedom,
Feminism, and the State, Washington, DC: Cato Institute, 1982; Ellen Frankel Paul,
Equity and Gender, Washington, DC: Cato Institute, 1988; and Joan Kennedy
Taylor, Women s Issues: Feminism, Classical Liberalism, and the Future, Stanford,
CA: Hoover Institution, 1993.
4. See Gary Becker, A Treatise on the Family, Cambridge, MA: Harvard
University Press, 1981. See also Gary Becker, The Economic Approach to Human
Behavior, Chicago: University of Chicago Press, 1976.
5. See Richard B. McKenzie and Gordon Tullock, The Best of the New World of
Economics, 5th ed., Homewood, IL: Richard D. Irwin, 1989. See also Gary S. Becker
and Guity Nashat Becker, The Economics of Life, New York: McGraw-Hill, 1997.
6. The Classical Liberal case against feminism is presented in Michael Levin,
Feminism and Freedom, New Brunswick, NJ: Transaction Books, 1987.
7. For a Classical Liberal critique of comparable worth, see Richard E. Burr,
Are Comparable Worth Systems Truly Comparable}, St. Louis: Center for the Study
of American Business, Washington University, 1986. See also Jennifer Roback, A
Matter of Choice: A Critique of Comparable Worth by A Skeptical Feminist, New
York: Priority Press, 1986.
8. See Eli Zaretsky, Capitalism, The Family and Personal Life, New York:
Harper 6c Row, 1976.
9. Sheila Rowbotham, Woman's Consciousness, Man's World, Baltimore:
Penguin, 1973, and Michele Barrett, Women's Oppression Today: The e
Marxist/Feminist Encounter, rev. ed., New York: Verso, 1988. See also Edith Hoshino
238 Political Economy

Altbach, ed., From Feminism to Liberation, Cambridge, MA: Schenkman, 1971, and
Evelyn Reed, Problems of Women's Liberation: A Marxist Approach, New York:
Pathfinder Press, 1971.
10. See Hilde Scott, Does Socialism Liberate Women}, Boston: Beacon Press,
1974.
11. Kate Millett, Sexual Politics, New York: Avon, 1971, and Mary Daly,
Gyn/Ecology: The Metaethics of Radical Feminism, Boston: Beacon Press, 1978.
A retrospective assessment of radical feminism is presented in Alice Echols,
Daring To Be Bad: Radical Feminism in America 1967-1975, Minneapolis:
University of Minnesota Press, 1989. See also the collection of articles in Anne
Koedt, Ellen Levine, and Anita Rapone, eds., Radical Feminism, New York:
Quadrangle Books, 1973.
12. Juliet Mitchell, Woman's Estate, Baltimore, MD: Penguin, 1975; Zillah R.
Eisenstein, ed., Capitalist Patriarchy and the Case for Socialist Feminism, New
York: Monthly Review Press, 1979; and Nancy Hartsock, Money, Sex and Power:
Toward a Feminist Historical Materialism, New York: Longman, 1983. See also
Linda Jenness, ed., Feminism and Socialism, New York: Pathfinder Press, 1972;
Batya Weinbaum, The Curious Courtship of Women's Liberation and Socialism,
Boston: South End Press, 1978; and Lise Vogel, Woman Questions: Essays for A
Materialist Feminism, New York: Routledge, 1995.
13. See Shulamith Firestone, The Dialectic of Sex: The Case for Feminist Revo-
lution, New York: William Morrow, 1970.
14. See Arlie Hochschild, The Second Shift, New York: Viking, 1989; Juliet B.
Schor, The Overworked American: The Unexpected Decline of Leisure, New York:
Basic Books, 1991; and Lydia Morris, The Workings of the Household, Cambridge:
Polity, 1990.
15. George Gilder, Naked Nomads: Unmarried Men in America, New York:
Quadrangle Books, 1974. See also George Gilder, Men and Marriage, Gretna, LA:
Pelican, 1986.
16. See Eli Sagan, Freud, Women, and Morality, New York: Basic Books, 1988.
17. See Ronald Fletcher, The Abolitionists: The Family and Marriage under
Attack, New York: Routledge, 1988; Ronald Fletcher, The Shaking of the
Foundations: Family and Society, New York: Routledge, 1988; and Ferdinand
Mount, The Subversive Family: An Alternative History of Love and Marriage, e
London: Jonathan Cape, 1982. A historical account of the development of
Conservative opposition to feminism is presented in Michele A. Pujol, Feminism
and Anti-feminism in Early Economic Thought, Brookfield, VT: Edward Elgar,
1992. For a critique of the Conservative perspective, see Pamela Johnston Conover
and Virginia Gray, Feminism and the New Right: Conflict Over the American
Family, New York: Praeger, 1983.
18. Conservative critiques of feminism can be found in Nicholas Davidson,
The Failure of Feminism, Buffalo, NY: Prometheus, 1988; Steven Goldberg, The
Inevitability of Patriarchy, New York: William Morrow, 1973; Midge Decter,
The New Chastity and Other Arguments against Women's Liberation, New
York: Coward, McGann and Geoghegan, 1972; Arianna Stassinopoulos, The
Female Woman, New York: Random House, 1973; and Elaine Storkey, What's
Right with Feminism, Grand Rapids, MI: William B. Erdman, 1985.
19. George Gilder, Wealth and Poverty, New York: Basic Books, 1981.
The Political Economy oj Gender 239

20. Phyllis Schlafly, The Power of the Positive Woman, New Rochelle, NY:
Arlington House, 1977.
21. Betty Friedan, The Feminine Mystique, New York: W. W. Norton, 1963. See
also Betty Friedan, The Second Stage, New York: Summit Books, 1981.
22. Carol Gilligan, In A Different Voice: Psychological Theory and Women's
Development, Cambridge, MA: Harvard University Press, 1982.
23. Nancy Chodorow, The Reproduction of Mothering: Psychoanalysis and the
Sociology of Gender, Berkeley: University of California Press, 1978.
24. See Barbara Bergman, "The Economics of Women's Liberation," Challenge
21, no. 5, (May/June 1973): 11-17.
25. See Isabel V. Sawhill, "The Economics of Discrimination Against Women:
Some New Findings," Journal of Human Resources 8, no. 3 (Summer 1973): 383-96.
26. See Elaine Johansen, Comparable Worth: The Myth and the Movement,
Boulder, CO: Westview Press, 1984; Rita Mae Kelly and Jane Bayes, eds.,
Comparable Worth, Pay Equity, and Public Policy, Westport, CT: Greenwood,
1988; Steven L. Wilborn, A Comparable Worth Primer, Lexington, MA: Lexington
Books, 1986; Henry J. Aaron and Cameron M. Lougy, The Comparable Worth
Controversy, Washington, DC: Brookings Institution, 1986; Joan Acker, Doing
Comparable Worth, Philadelphia: Temple University Press, 1989; Linda M. Blum,
Between Feminism and Labor: The Significance of the Comparable Worth h
Movement, Berkeley: University of California Press, 1991; Paula England,
Comparable Worth: Theories and Evidence, New York: Aldine de Gruyter, 1992;
and Sara M. Evans and Barbara J. Nelson, Wage Justice: Comparable Worth and
The Paradox of Technical Reform, Chicago, University of Chicago Press, 1989.

ADDITIONAL READING
Amott, Teresa. Caught in the Crisis: Women and the U.S. Economy Today. New
York: Monthly Review Press, 1993.
Bartlett, Robin L., ed. Introducing Race and Gender into Economics. New York:
Routledge, 1997.
Beneria, Lourdes, and Shelly Feldman, eds. Unequal Burden: Economic Crises,
Persistent Poverty, and Women's Work. Boulder, CO: Westview Press, 1992.
Birch, Bettina. The Endless Day: The Political Economy of Women and Work. New
York: Harcourt Brace Jovanovich, 1982.
Blau, Francine D., and Mariann A. Ferber. The Economics of Women, Men, and
Work, 2nd ed. Englewood Cliffs, NJ: Prentice-Hall, 1992.
Burggraf, Shirley P. The Feminine Economy and Economic Man. Reading, MA:
Addison-Wesley, 1997.
Chavetz, Janet Saltzman. Gender Equity. Newbury Park, CA: Sage, 1990.
Clayton, Susan D., and Faye J. Crosby. Justice, Gender and Affirmative Action.
Ann Arbor: University of Michigan Press, 1992.
Donovan, Josephine. Feminist Theory: The Intellectual Tradition of American
Feminism. New York: Frederick Ungar, 1985.
Eisenstein, Zillah. The Color of Gender: Reimaging Democracy. Berkeley: University
of California Press, 1994.
Farganis, Sondra. Situating Feminism: From Thought to Action. Thousand Oaks,
CA: Sage, 1994.
240 Political Economy

Ferber, Marianne A., and Julie A. Nelson, eds. Beyond Economic Man: Feminist
Theory and Economics. Chicago: University of Chicago Press, 1993.
Ferguson, Kathy. Self, Society and Womankind. Westport, CT: Greenwood Press,
1980.
Folbre, Nancy. Who Pays for the Kids? Gender and the Structures of Constraint.
London: Routledge, 1994.
Fuchs, Victor. Women's Quest for Economic Equality. Cambridge, MA: Harvard
University Press, 1988.
Goldin, Claudia. Understanding the Gender Gap: An Economic History of
American Women. New York: Oxford University Press, 1990.
Gordon, Linda, ed. Women, the State and Welfare. Madison: University of Wisconsin
Press, 1990.
Humphries, Jane, ed. Gender and Economics. Brookfield, VT: Edward Elgar, 1995.
Jacobson, Joyce P. The Economics of Gender. Cambridge, MA: Blackwell, 1994.
Jenson, Jane, Elizabeth Hagen, and Ceallaigh Reddy. Feminization of the Labor
Force: Paradoxes and Promises. New York: Oxford University Press, 1988.
Kelly, Rita Mae. The Gendered Economy. Newbury Park, CA: Sage Publications,
1991.
Martin, Susan Ehrlich. Doing Justice, Doing Gender. Thousand Oaks, CA: Sage
Publications, 1996.
Mutari, Ellen, Heather Boushey, and William Fraher IV. Gender and Political
Economy: Incorporating Diversity into Theory and Policy. Armonk, NY:
M. E. Sharpe, 1997.
Nelson, Julie A. Feminism, Objectivity and Economics. New York: Routledge, 1996.
Okin, Susan Mollar. Justice, Gender, and the Family. New York: Basic Books, 1989.
Peattie, Lisa, and Martin Rein. Women*s Claims: A Study in Political Economy.
New York: Oxford University Press, 1983.
Peterson, Janice, and Doug Brown, eds. The Economic Status of Women under
Capitalism: Institutional Economics and Feminist Theory. Brookfield, VT:
Edward Elgar, 1994.
Phillips, Ann, ed. Feminism and Equality. New York: New York University Press,
1987.
Chapter 13

Education and Culture

Culture encompasses the values, beliefs, customs, and habits that guide
human behavior. In the past, traditional divisions within social science
relegated the study of culture to sociology and anthropology, placing it
outside the proper scope of political economy. Furthermore, because
education functions, in part, to transmit culture over time, political econ-
omists also devoted little attention to education. With the exceptions of
school financing and the effect of education on individual earnings, econ-
omists were content to leave the study of society's educational process to
other disciplines.
The problem with this restricted vision is that if education and culture
play major roles in affecting human behavior, and if the economy and gov-
ernment are shaped by individual choices, then political economy is left
with incomplete understandings of the very institutions it claims to analyze.
Recognizing this deficiency, some political economists have recently sought
to include education and culture within their purview to illuminate the
effects of both institutions on the market and government. To examine
these issues, the viewpoints of each of the four ideological perspectives are
presented in this chapter.
242 Political Economy

THE CLASSICAL LIBERAL PERSPECTIVE

The P u r p o s e of E d u c a t i o n
Classical Liberals designate two groups as incapable of making rational
decisions—children and "lunatics." So despite their commitment to free
choice, Classical Liberals favor subjecting children to the authority and wis-
dom of parents and teachers. For this reason, education represents an anom-
aly within the Classical Liberal vision, functioning as an enclave of authority
in a society otherwise committed to individual autonomy and choice.
Classical Liberals favor compulsory, publicly funded education as an
exception to the general rule of laissez-faire. The explanation for this
apparent violation of liberty lies in nineteenth-century history. As voting
rights were extended to propertyless workers, Classical Liberals feared
political turmoil unless all citizens were taught literacy, citizenship skills,
and respect for society's basic values and institutions. Public schools and
compulsory education were deemed to be the best solutions to the prob-
lems raised by democracy.
More recently, Classical Liberals have added an economic rationale for
compulsory public education, claiming that private education based on
ability to pay is undesirable because parents may not make rational choices
about their children's education. This problem arises because parents
would decide how much education to purchase, while the benefits accrue
primarily to their children. To the extent that parents do not identify their
children's interests with their own, they are likely to underinvest in educa-
tion. This underinvestment leads to dynamic inefficiency in the economy
because education is a form of capital accumulation yielding future bene-
fits due to the increased productivity of the next generation. From this per-
spective, publicly funded education is justified by the resulting increases in
earnings and tax revenue attributable to higher productivity. A final eco-
nomic argument for public education rests on the role of schools in improv-
ing labor market efficiency by sorting and matching students with the types
of training and employment for which they are best suited.1
Public education also offers an ideological attraction to Classical
Liberals. The highly unequal distributions of income and wealth generated
by free markets would appear to jeopardize the equal opportunity of all
individuals to compete fairly because family background often plays a sig-
nificant role in determining the educational and employment prospects of
children. Classical Liberals view public education as the least intrusive
method by which government can attempt to reconcile equal opportunity
with unequal income and wealth. By providing the same basic education to
all children, public schools promote equality of opportunity without any
significant governmental redistribution of wealth or interference with labor
markets. Government simply sets the stage for open and fair competition
in which individual abilities and preferences determine future economic
Education and Culture 243

success. The Classical Liberal goal is a meritocratic society in which indi-

vidual status and income are linked to productivity rather than race, eth-
nicity, sex, or religion.

E d u c a t i o n a l Policy
Despite their advocacy of public funding for education, Classical
Liberals fear that government's monopoly over education results in high
costs, low quality, and indifference toward students and parents. As long as
public education remains monopolistic, administrators and teachers know
that their salaries are not directly affected by the quality of education they
offer or by the number of students they instruct. Conversely, if a student
fails or drops out, the system does not penalize the school or teachers. As
a result, teachers and administrators have little incentive to provide high-
quality education. Public schools may become mere youth repositories
where unmotivated teachers stand guard over bored pupils.
Classical Liberals also claim that problems with public schools reveal a
serious flaw in democracy, which, because it is based on majority rule, may
be insensitive to local or minority interests. In formulating educational pol-
icy, democratic governments typically rely on bureaucracy to formulate a
standardized curriculum, but this centralized process limits the discretion
of local school officials, teachers, and parents. As a result, innovation is sti-
fled and local cultures and values may be suppressed.
In response to these concerns, Classical Liberals propose a method for
providing education to all children without direct government involve-
ment. Government can issue to parents a "voucher" redeemable for edu-
cation at any public or private school. 2 This proposal eliminates
government's monopoly over the provision of education while retaining
public financing. Schools compete with one another, and those schools
attracting more students receive additional government funding. The best
teachers will presumably move to successful schools because, by attracting
more students and redeeming more vouchers, these schools can offer higher
salaries. Conversely, students will shun schools offering inferior education,
and teachers' salaries at those schools will fall accordingly. To ensure main-
tenance of educational standards, vouchers should be redeemable only at
accredited schools.
By removing the financial barrier to attending private schools, the
voucher system permits families of all income levels to choose a school pro-
viding an education best suited to their children's needs. Vouchers eliminate
the penalty currently imposed on parents who choose private education for
their children and are forced to "pay twice"—once for taxes to fund pub-
lic schools and again for tuition at a private school. If public schools face
a large-scale exodus of students, administrators and teachers will presum-
ably reassess their methods and offer a more effective program. Those
244 Political Economy

schools unable to improve will gradually disappear as their best teachers

are hired by successful schools, while ineffective teachers are forced to seek
employment in other occupations. To summarize, the voucher system pro-
motes competition, diversity of educational opportunities, efficiency,
accountability, freedom of choice, and improved learning for students. All
this is accomplished by bringing the competitive forces of the market into
a previously monopolized industry.
Classical Liberals also advocate merit pay for teachers. By linking
salaries with teaching effectiveness, they hope to elicit greater effort and to
attract and retain the most skilled teachers. At the university level, Classical
Liberals propose full and equal access to educational loans at market rates
of interest. They are concerned that outright financial aid to students will
distort the market and result in too many students pursuing too much edu-
cation. Economic efficiency dictates that students should pursue additional
education only if the present value of additional lifetime earnings exceeds
the opportunity cost of education in terms of tuition, related expenses, and
the value of foregone income or leisure. The best method to determine who
should pursue higher education is to let individual students decide whether
their education will result in sufficient additional earnings to justify its cost.
A Classical Liberal curriculum would be organized around the skills and
knowledge deemed essential to good citizenship and productive employ-
ment. Because Classical Liberals reject the medieval notion of knowledge
as certain, unchanging, and absolute, they demand that education be prac-
tical and useful. The natural and social sciences, history, mathematics, and
communication skills are given priority, with less emphasis placed on train-
ing in literature and the arts. Horace Mann (1796-1859), who led the
effort to reform U.S. education along Classical Liberal lines, sought to cre-
ate a common curriculum for all students that emphasized practical knowl-
edge and citizenship skills.

The Role of Culture

According to Classical Liberals, individuals should be free to pursue their
interests and express their preferences so long as they do not harm others. 3
All social practices and cultural expressions arising from this free interplay
of individual interests are considered equally legitimate. This libertarian
stance is justified by the claim that humans possess no objective norms of
"good taste" by which culture can be judged. What is vulgar to one person
may be sublime to another. Humans have diverse tastes, and a free society
will tolerate all behaviors and expressions that are harmless to others.
The difficulty posed by the Classical Liberal position lies with the defi-
nition of "harm." While merely offending another person's values or tastes
is usually not considered harmful, such "victimless" practices as drug
abuse, prostitution, and sale of pornography raise the question of whether
Education and Culture 245

harm occurs indirectly in the form of highway fatalities, increases in sexual

assaults, and exploitation of powerless persons. To the extent that Classical
Liberals acknowledge this indirect harm, they may support laws prohibit-
ing such practices. However, they are philosophically predisposed to "live
and let live," assuming that individuals are sufficiently rational to judge the
benefits or harms of any particular act. For example, Milton Friedman and
former Secretary of State George Schultz, both former members of the
University of Chicago economics department, support the legalization of
all drugs. They claim that by restricting supply, prohibition drives up prices
and creates huge profits that attract organized crime and contribute to ran-
dom violence affecting innocent citizens.
As a corollary of the principle of tolerance, Classical Liberals express lit-
tle concern about either adverse or beneficial effects of culture on the indi-
vidual. This indifference stems from a view of the individual as an
autonomous entity whose preferences are internally generated and there-
fore independent of the social environment. As rational actors, individuals
will gravitate toward those cultural forms meeting their preferences and
self-interest and will shun cultural expressions perceived as irrelevant or
detrimental. In short, people are the best judges of their own interests and
therefore should be in control of their actions.

THE RADICAL PERSPECTIVE

The P u r p o s e of E d u c a t i o n
Radicals believe that capitalism periodically experiences difficulty in sus-
taining the conditions necessary for its survival. The conflict between
classes poses the continual threat of a breakdown in the cooperation and
consensus required for social stability. One possible strategy for the capi-
talist class would be to exert repressive force, but this would be costly and
probably ineffective. A preferred method is to mask and defuse the tensions
emanating from class conflict by structuring social institutions and ideol-
ogy that promote the appearance of harmony. Schools, according to
Radicals, are essential to maintaining and legitimizing the dominance of the
capitalist class.
Although schools seem to provide children with equal opportunities to
develop and display their abilities, Radicals argue that schools in capitalist
societies actually perpetuate hierarchy by shaping students' personalities
and consciousness in a manner that facilitates social control by one class
over another. The two leading Radical economists in the field of education,
Samuel Bowles and Herbert Gintis, challenge the Classical Liberal view of
education as a vehicle by which talented and hardworking individuals rise
to success regardless of their class background. 4 They claim that class back-
ground is the primary determinant of individual success, and that schools
246 Political Economy

function to transmit the class status of families from one generation to the
next. To support this argument, Bowles and Gintis offer statistical evidence
that despite a significant trend toward equalization in years of schooling
across social classes, there has been little change in income inequality dur-
ing the past half-century.
The key to the intergenerational transmission of status is the close cor-
respondence between the social relations of the classroom and the social
relations of adult worksites. Like workers, most students are trained to fol-
low rules, to accept authority, and to compete for external rewards such as
grades. However, not all students are trained to respond passively to
authority. The hierarchical division of labor also requires managerial and
creative talent. To meet this need, public schools typically offer different
forms of education to children depending on their class background and
expected adult status. This strategy is feasible because the residential seg-
regation of families according to income means that particular schools tend
to reflect the economic status of the neighborhood in which they are
located. Moreover, the financing of schools by the property tax assures that
affluent areas are able to offer superior education. Finally, schools may use
tracking to provide different educations for students with different demon-
strated abilities, but these abilities are often linked to family status.
Radicals claim that schools in more affluent neighborhoods tend to
stress creativity, independence, achievement, and leadership skills, while
schools in lower-income neighborhoods emphasize conformity and obedi-
ence. This dual educational system reflects parental expectations for their
children. White-collar parents have learned from their own work experi-
ence that leadership skills and innovative thinking are rewarded, whereas
blue-collar parents know that their jobs often require perseverance at rou-
tine tasks and submission to authority. Parents typically want schools to
instill in their children those personality traits that the parents have found
to be important in their own lives.
Besides its role in legitimizing and reproducing hierarchy, education is
functional to capitalism in several other ways. According to Radicals, a
major force behind public education has always been the demands of
employers that children be schooled in both the basic skills required for
productive labor and an ideology supportive of capitalism. Employers want
publicly financed education because the mobility of labor makes it unprof-
itable for individual firms to teach basic skills to workers who are then free
to move to other firms. With public education, taxpayers bear the expense
of much of the training of the labor force, thereby reducing business costs.
Radicals also emphasize the potentially disruptive and even revolution-
ary aspects of education. Schools may fail to reproduce the hierarchical
social relations of capitalism because capitalism itself is internally contra-
dictory. As a system of production, capitalism is characterized by hierarchy
and dominance as owners exercise power over workers for the purpose of
Education and Culture 247

extracting profits. However, as a system of exchange, capitalism emphasizes

the freedom of autonomous individuals to seek mutually beneficial transac-
tions. The presence of both authoritarian and egalitarian social relations in
capitalist society places conflicting demands on education to perform both
a liberating/developmental function and a repressive/integrative function.
In preparing for the realm of exchange, children are taught respect for
the rights and opinions of others and a sense of fair play. However, these
messages conflict with training given in preparation for the realm of pro-
duction, which teaches most children to submit to hierarchy and authority.
To the extent that schools teach doctrines of equality and fairness, they
undermine the reproduction of hierarchical social relations. Therefore,
according to Radicals, education ultimately creates obstacles to capital
accumulation by introducing students to ethical ideals and forms of human
interaction inconsistent with capitalist production. 5

E d u c a t i o n a l Policy
In proposing educational reforms, Radicals acknowledge that the func-
tional role of education in sustaining hierarchy and privilege assures that
most schools in a capitalist society are likely to remain repressive. Yet some
Radicals are sufficiently optimistic to formulate proposals for educational
reform within capitalist society. Education can be liberating if the author-
ity of teachers and curricular requirements are minimized to enable stu-
dents to pursue their own interests, to learn at their own pace, and to
integrate their formal knowledge with practical aspects of their lives.6 In
"free schools," there is little emphasis on grades, routine memorization, or
rule-following. Rather, students acquire a variety of skills, enabling them
to function effectively in many different social roles as they apply their
intelligence and creativity to learning, recreation, and work.
Radicals favor reliance on work-study programs to break down barriers
between knowing and doing. The physical and creative abilities of students
should be stimulated at the same time that intellectual capacities are
expanding. Education should also be a life-long process; adults should con-
tinue to learn and develop, with paid work being merely one outlet for their
productive energies.
Specific Radical proposals include Ivan Illich's idea of "deschooling soci-
ety."7 Illich believes that experts, including educators, scientists, bureau-
crats, and administrators, have gained such total control over social
institutions that most people no longer think or act independently.
Freedom has been suppressed by the very institutions that were designed to
create a rational and stable society. The only solution is to deschool soci-
ety by challenging and ultimately overturning the authority of experts and
the institutions they represent. Illich would have children work at least two
hours a day, with access to factories, offices, laboratories, and farms where
248 Political Economy

they could learn through experience. For Illich, even free schools are too
institutionalized because they continue to rely on teachers and classrooms
and therefore provide only the illusion of freedom. Genuine education can-
not be confined to a particular building with particular authority figures,
but rather must occur within the entire community as an ongoing process
for children and adults alike.
Not all Radicals share Illich's antiauthoritarian perspective.8 Some have
criticized free schools and "schools without walls" as being both naively
Utopian and counterproductive in the sense that they produce not libera-
tion, but maladjustment and confusion as students must inevitably face the
demands of adult work in a capitalist society. Indeed, the free-school move-
ment and other experiments with unstructured education peaked during
the 1970s and have been under considerable attack since then. Radicals
debate among themselves whether the collapse of free schools was due to
inherent internal problems or to the fact that students were simply ill-
prepared for life in capitalist society.
Surprisingly, some Radicals join with Classical Liberals in supporting
educational vouchers.9 In fact, the campaign for school choice has histori-
cal roots in the Black Power movement and alternative schools of the late
1960s. Radicals argue that if children from low-income families received
larger vouchers and financial support for transportation, their mobility
would challenge the monopoly of public schools, giving parents and local
communities greater control over the content of education. Moreover, if
parents and students chose to remain in local schools, the larger vouchers
could fund excellent schools in low-income neighborhoods and the preser-
vation of community values. From this perspective, educational vouchers
could redistribute opportunity and future earnings in favor of children
from low-income families and promote cultural diversity.

The Role of Culture

Much of the Radical analysis of culture stems not from Marx, who
focused primarily on the process of capitalist production and exchange, but
from a group of German theorists known collectively as "the Frankfurt
school." The leading members of this group were Max Horkheimer
(1895-1973), Theodor Adorno (1903-1969), and Walter Benjamin
(1892-1940). Their works form the heart of much of the Radical interpre-
tation of capitalist culture.10 Radicals regard culture in a capitalist society7
as a component of society's "superstructure" and thus subject to contra-
dictory forces emanating from the accumulation of capital. On one hand,
culture perpetuates the hierarchy of capitalist production by offering
shared traditions and values that reduce social conflict. On the other hand,
culture contains disruptive forces that challenge capital accumulation and
contribute to social disorder.
Education and Culture 249

As an integrative and functional component of capitalism, culture

encourages passive consumption and nondisruptive forms of emotional
gratification. Radicals claim that the banal and insipid quality of much of
television, film, literature, and music serves to pacify people and distract
their attention from personal discontents. Culture is largely under corpo-
rate control and, like other commodities, is marketed through the use of
advertising. Corporate dominance prevents culture from serving its legiti-
mate purpose of creatively expressing the emotions and ideas emanating
from the personal lives of citizens.
However, culture is not solely an instrument of the capitalist class. Culture
also expresses working-class interests and aspirations. Capitalists may
attempt to make these aspirations compatible with the status quo, but their
success will never be complete. Television may be the modern "opiate of the
masses," but writers and producers need high viewer ratings and therefore
will cater to working-class interests, as demonstrated by the frequent por-
trayal of bosses as either tyrants or buffoons. A variety of popular films have
sympathetically featured union organizers, factory workers, secretaries, or
students as victims of incompetent or malevolent authority figures.
The capitalist class may condone subversive forms of culture that encour-
age people to assuage their frustration in theaters or living rooms rather
than venting it at the workplace or the voting booth. Radical theorist
Herbert Marcuse argued that capitalism's tolerance for nearly all forms of
cultural expression is actually a form of repression because it focuses atten-
tion on apparent freedom of choice while disguising the powerlessness expe-
rienced by most people in work and politics.11 Capitalism's enormous
capability for absorbing and diverting anticapitalist sentiment is, however,
not without limits. Beyond a certain point, subversive culture can jeopardize
the stability of capitalist society. For example, songs calling for revolution
and the murder of policemen are sold by the corporate giants of the enter-
tainment industry, a practice confirming Lenin's claim that capitalists will
sell the rope with which they are to be hanged.
If capitalist culture is so repressive, then why is it so popular in the United
States and around the world? Radicals explain this paradox by appealing to
Marx's concept of alienation. Alienated individuals do not desire to express
themselves through society's institutions. Art, music, and literature become
simply commodities manufactured by distant producers and consumed in a
quest for status or emotional gratification. Culture is "reified"; it appears to
exist independently of citizens who do not conceive of themselves as pro-
ducers of culture, but only as consumers who choose whether to buy a par-
ticular cultural product. Radicals label this process "commodification";
culture is reduced to marketable objects sold at a profit.12
Citizens accept a reified culture because of "false consciousness." In the
absence of genuine community and meaningful work, people no longer
seek to realize their potential as emotional, intellectual, and physical
250 Political Economy

beings. Instead, driven by alienation and unmet needs, they opt for a life of
instant gratification through consumption and entertainment. Having
adopted this orientation toward life, they view traditional social structures
such as family and community as obstacles to the free pursuit of pleasure,
resulting in further disintegration of social bonds. In the absence of fulfill-
ing social relations, consumption is indeed the quickest and most direct
form of pleasure. Ironically, this distorted form of human existence con-
forms with the Classical Liberal portrayal of humans as autonomous,
pleasure-seeking creatures. Radicals, however, claim that such behavior is
not intrinsic to human nature, but is instead a response to the isolation and
alienation fostered by capitalism.
One of the hallmarks of capitalist culture is mass conformity, which
Radicals attribute to the need by alienated individuals to latch onto any
cultural expression seeming to offer solidarity with fellow citizens. At the
same time, fads and changing fashion prevail as individuals try to escape
the traditional hierarchy to establish a sense of autonomy and dignity.
Ultimately, though, the novelty and variety offered by capitalism may
prove dangerous to the system. Because profitability thrives on sales gen-
erated by continual changes in culture, people are conditioned to believe
that the past and present are never satisfactory; novelty becomes desired
purely for its own sake. In such a world, the very notion of a stable per-
sonal identity is undermined as continuity and tradition slip from memory.
On this point, Radicals agree with Conservatives; a focus on consumptive
pleasure makes satisfaction elusive. In the unceasing pursuit of pleasure,
individuals neglect social bonds and institutions essential to genuine fulfill-
ment. Moreover, pleasure-seeking individuals will resent the demands for
routinization and delayed gratification placed on them by bosses and other
authority figures. Capitalism therefore creates a culture that ultimately cre-
ates frustration with and even rejection of the system.13
Radicals affirm the worth of cultural expression that contributes to sub-
verting capitalist hierarchy and control. Conversely, cultural expressions
are condemned if they seem to reinforce and perpetuate the privileges of
dominant groups. Some Radicals have proposed that free speech should be
restricted to prevent language deemed offensive to subordinate groups such
as women and minorities.14 Several colleges and universities in the United
States have established sanctions against "hate speech," including possible
expulsion. Radicals have disrupted public lectures by speakers with whom
they disagree and have defaced art that is deemed oppressive. All of these
actions can be explained by the Radical belief in objective standards of
value that supersede individual preferences. Like Conservatives, some
Radicals feel morally obliged to defend the good and suppress the bad. In
practice, however, many Radicals, particularly in the United States, are so
wedded to the liberal principle of tolerance that they condemn cultural
repression of any sort.
Education and Culture 251

THE CONSERVATIVE PERSPECTIVE

The P u r p o s e of E d u c a t i o n
The Conservative view of education is shaped by a belief that most
humans have limited capacity for autonomously exercising reason and
virtue. In the absence of tutelage and guidance by authority figures, the
flaws of human nature may overwhelm mankind's potential for construct-
ing a stable and orderly society. Education represents the transmission from
generation to generation of the wisdom and cultural achievements of the
past. Formal education shapes youth into responsible adults prepared to fill
appropriate positions in the social hierarchy.
Education should impart knowledge of the timeless, objective values
guiding society toward virtue and order. Knowledge consists not simply of
skills and techniques, but encompasses morality, discipline, and culture. By
teaching traditional values such as patriotism, obedience, respect, honor,
reverence, civility, and loyalty, education serves to preserve and legitimize
the hierarchical society.
The Conservative view of education has been clearly articulated by Allan
Bloom (1930-1992), who was a Classics professor at the University of
Chicago. Bloom claimed that higher education in the United States was badly
damaged by egalitarian attacks on authority launched during the 1960s.15 As
students demanded and were granted greater participation in university gov-
ernance and design of the curriculum, they proceeded to dismantle the hier-
archical structure that made genuine education possible. Universities seeking
to become more "relevant" abandoned the study of the classic texts forming
the core of Western civilization. The knowledge held by professors was
devalued as the classroom became an open forum in which everybody's opin-
ion was considered equally valid. Bloom extended his criticism to include
many professors, themselves products of the 1960s, who encourage students
to rely on their own opinions and judgment. As a Conservative, Bloom
believed that young minds must be carefully cultivated by skilled educators.
Students should have little input in determining the nature of their education
because they have not yet attained sufficient wisdom to discern truth and
virtue. Therefore, the university curriculum and classroom must remain
under the control of scholars and professional administrators.

E d u c a t i o n a l Policy
The Conservative educational agenda focuses on three issues. First, true
knowledge and absolute values must be protected from the corrosive effects
of individualism, materialism, and the liberal notion that pleasure is the
sole criterion of value. Second, the unequal capacities of students for learn-
ing must be fully acknowledged in structuring the educational system.
Third, control over education must be placed securely in the hands of
252 Political Economy

proper authorities. We shall examine each of these principles and the spe-
cific policies flowing from them.

1. Preservation of knowledge. Conservatives favor a curriculum built

around the literary classics, including the works of Plato, Aristotle, Cicero,
Homer, Augustine, and Aquinas. These thinkers presented enduring truths,
and Conservatives view them as essential to education. This commitment
to the classics has been labeled "perennialism" because it insists on the
unchanging nature of true knowledge and opposes curricular reforms
reflecting the latest trends.
Conservatives also emphasize instruction in values as integral to the edu-
cation process. Students need moral education because their untutored
instincts are not reliable guides to virtue. Conservatives worry that inde-
pendent, critical thinking will lead to ethical relativism. To facilitate the
teaching of values, many Conservatives favor prayer and at least the option
for religious instruction in public schools. In addition, they support tax
credits for tuition paid to private schools where religious education can be
integrated into the entire curriculum. Some Conservatives, particularly
those with a fundamentalist religious orientation, have sought to control the
selection of textbooks in the public schools, claiming that most current texts
present the viewpoints of only ethical relativism and secular humanism.
Conservatives also want schools to promote patriotism, claiming that loy-
alty to one's country is essential to political unity and strength. Conservatives
typically oppose bilingual education in public schools, fearing that a multi-
language society would lack the cohesiveness and common purpose required
for both internal order and defense against external threats.

2. Unequal education. Conservatives seek to provide different forms of

education for students of different ability.16 They rely on IQ tests as mea-
sures of innate intelligence and advocate assigning young students to edu-
cational tracks designed to prepare them for adult roles which best suit
them. University education for future elites should consist of rigorous intel-
lectual training in the arts, humanities, and sciences, while deemphasizing
vocational training and extracurricular activities. Less capable students
should be placed in tracks leading to professional training in business or
industry, while the least able students should be steered toward vocational
training and manual skills.
Equal education not only fails to provide the best students with chal-
lenges suited to their abilities, but overwhelms and discourages less able
students. According to Allan Bloom, the commitment to equal educational
opportunity has ruined the modern university. He claimed that only a select
number of students are suited to a genuinely scholarly education. By
accepting most high-school graduates, universities have transformed them-
selves from institutions of higher learning into glorified vocational schools
Education and Culture 253

preparing students to earn a living. The ideal of the university as a com-

munity of scholars in search of truth has been sacrificed to the egalitarian-
ism of mass society.
Even more objectionable than equal education is compensatory educa-
tion, with its attempt to assist underperforming students. Compensatory
education is regarded by Conservatives as a waste of resources because
some students are incapable of learning more than routine vocational skills.
Moreover, both equal and compensatory education result in too many
people graduating with degrees and correspondingly high expectations for
future earnings. The jobs requiring a college or university education are
limited, and students will become frustrated and resentful as they discover
that their newly acquired knowledge and skills are not in demand by soci-
ety. Large numbers of underemployed persons threaten social stability. To
prevent excess education, Conservatives would limit the number of stu-
dents accepted by universities and increase enrollments in vocational and
technical schools.

3. Hierarchical control. Control over the structure and content of edu-

cation at the university level should rest in the hands of professional admin-
istrators and senior faculty members because only they have the knowledge
and experience to educate the elite students who will lead the next genera-
tion. The issue of control over public grade schools, on the other hand,
poses a dilemma for Conservatives. With religion and family life in decline,
elementary schools play a significant role in socializing children. Yet
Conservatives are uncertain who should determine the curriculum and
teaching methods of public schools. Teachers and administrators, often
unionized, may exhibit the same narrow materialism that infects society as
a whole. Government control results in a mandated curriculum that is
insensitive to the cultural heritages of communities. Parents and commu-
nity leaders lack the professional expertise to design curriculum. Therefore,
Conservatives appeal to administrators to work with teachers and parents
to assure that schools reinforce the moral instruction received by children
at home.

The Role of Culture

Conservatives view culture as essential to creating social bonds between
individuals and preserving the wisdom and achievements of past genera-
tions. Culture is based on shared meanings and therefore provides a con-
text within which individuals develop their values and interests. Without
culture, individuals are isolated and removed from the sustenance of soci-
ety's collective wisdom and traditions. While schools represent one mecha-
nism for transmitting culture, the process of acculturation is lifelong and
occurs in all dimensions of existence. Any society's culture will reflect the
254 Political Economy

diversity of groups, but a healthy society should manifest sufficient cultural

homogeneity to generate the allegiance of all citizens.
Conservatives have always expressed deep concern about the quality of
culture. In the nineteenth century, critics such as Matthew Arnold
(1822-1888) and Henry Adams (1838-1918) decried the banality and
crassness of modern culture. In the twentieth century, Conservative writers
have developed the notion of "mass society" to describe the conformity
and mindiessness in modern life. Spanish writer Jose Ortega y Gasset
(1883-1955) attributed the rise of totalitarianism to the loss of meaning
and personal identity that accompanies mass society,17 while T. S. Eliot
(1888-1965) referred to modern culture as "the waste land."
Conservatives view culture as the visible expression of the state of mind
of the populace. A crude and decadent culture reveals more than just bad
taste; if culture is in decline, then people's inner lives are in turmoil and the
economic and political strength of the nation is jeopardized. Nineteenth-
century Conservatives blamed both democracy and capitalism for the dete-
rioration of culture. Democracy places crude and ignorant citizens on an
equal footing with wise and virtuous citizens. Similarly, capitalists, with
their insatiable drive for profits, inundate society with commodities and
"inflame the appetites" of consumers through advertising. Both democracy
and capitalism lower the quality of culture by permitting the values and
tastes of the masses to establish norms for society.
Most Conservatives in the twentieth century, after witnessing both
communism and fascism, have suppressed their qualms about democracy
and capitalism. Instead, they now join with Classical Liberals in blaming
government for many social problems. 18 With political power concen-
trated at the national level, government programs to provide welfare and
security have the unintended consequence of undermining the intermedi-
ate institutions of family, church, and neighborhood. As the authority of
these institutions declines, isolated individuals face the intimidating task
of fashioning personal identities and meaningful lives in a world offering
few guidelines. Conservatives attribute obscene language, sexual promis-
cuity, and drug use to the anxiety arising from individuals who cannot find
purpose in life.
Conservatives look to the classics of literature, music, and art as stan-
dards of eternal excellence. Culture should express shared values and tra-
ditions, but when society is increasingly fragmented and devoid of
standards, culture instead reflects anger, resentment, cynicism, skepticism,
and a sense of the absurd. Lacking traditional forms to honor and develop,
artists, musicians, and writers produce abstract, surreal, dissonant, and
shocking expressions. Conservatives criticize rock music for its pulsing beat
and suggestive lyrics designed to arouse the passions and alleviate the anx-
ieties of alienated youth. Conservatives regard movies as inferior to books
because the picture overwhelms the mind and suppresses creative thought.
Education and Culture 255

The drug culture pervading modern societies is, for Conservatives, the logi-
cal culmination of liberal utilitarianism in which pleasure is the sole criterion
of value. Conservatives regard many contemporary intellectuals, writers,
musicians, and artists as members of a "new class" or "adversary culture"
consciously seeking to subvert traditional society. Sociologist Daniel Bell
describes an inherent conflict between a capitalist economy and the culture
it spawns. The market demands workers who are self-disciplined, stable,
and able to delay gratification, while capitalist culture emphasizes hedonism
and rejection of authority.19
Conservatives are not simply cultural snobs who insist on the superior-
ity of classical music, art, and literature. They acknowledge the value of
popular culture if it emerges from traditional communities. For example,
folk music is treated as a genuine expression of rural culture. Quilting and
woodworking are legitimate art forms. Storytelling is crucial in transmit-
ting society's cultural heritage. Conservatives ultimately judge culture by its
contribution to maintaining social order; both high culture and popular
culture are valuable if they serve that task.

THE MODERN LIBERAL PERSPECTIVE

The P u r p o s e of E d u c a t i o n
The Modern Liberal view of education owes much to the American
philosopher John Dewey.20 Dewey's educational philosophy, which came to
be known as "progressivism," expresses confidence in the natural intelli-
gence of each child. What concerned Dewey was the evolution of society
from the rugged individualism of the nineteenth century to the corporate
capitalism of the twentieth century. He sought to prepare children for this
new society by cultivating the capacity for critical and independent think-
ing. This emphasis on critical thinking reflects the Modern Liberal skepti-
cism toward the notion of eternal truths and values. Students are
encouraged to objectively assess the facts of any situation and the potential
consequences of any action.
Extending Dewey's ideas, Modern Liberals currently emphasize the fol-
lowing three purposes of education:

1. Personal development. Modern Liberals believe that education can n

awaken talents and aspirations that might otherwise remain dormant.
Education encourages individuals to reach beyond their current interests
and social status. In addition, education teaches respect for other persons
and cultures, fostering social relationships based on mutual esteem and rec-
iprocity. Personal development has been the focus of three developmental
psychologists: Jean Piaget (1896-1980), Lawrence Kohlberg (1927-1987),
and Abraham Maslow.21 Their research led them to conclude that humans
256 Political Economy

pass through stages of moral and emotional maturation, potentially culmi-

nating in a full and stimulating life that Maslow called "self-actualization."
However, this evolution can be blocked by poverty, ignorance, and repres-
sion. Therefore, equal access to high-quality education is considered essen-
tial to enabling both children and adults to achieve their full potential.

2. Social equality. Modern Liberals assume that human abilities are

more nearly equal than the present distribution of income would suggest.
If every child is given equal education and equal access to jobs, then abil-
ity and effort, rather than family background, will become the key deter-
minants of economic success, and the distribution of income should
become more equal over time. Education can help break the generational
cycle that causes many children to remain bound by the impoverished cir-
cumstances of their parents. Public education also fosters a sense of shared
culture among children from widely divergent family backgrounds, thereby
contributing to the cohesiveness and stability of society.

3. Efficiency. Using the metaphor of America as "the great melting

pot," Modern Liberals view education as the flame that keeps the broth
bubbling so talented individuals can rise to make their greatest possible
contribution to society. Modern Liberals do not perceive any conflict
between this economic role of education and its developmental and egali-
tarian roles because more highly developed citizens and greater social
equality are deemed to promote economic growth. Public funding for edu-
cation promotes efficiency by correcting a positive externality. In addition
to the benefits conferred on individual students in the form of higher future
earnings and enhanced personal development, education creates benefits
for society as a whole such as lower crime rates, less need for welfare,
increased tax revenue from the higher earnings of educated citizens, and
improved democracy due to widespread literacy and involvement in public
affairs. Because the social benefits of education exceed the private benefits,
the market will fail to produce an efficient amount of education.
Government funding is essential to achieve economic efficiency.

Educational Policy
Modern Liberals want education to be both compulsory and compen-
satory. Because formal education is only one component of children's
socialization, providing identical educational experiences to children from
vastly different family backgrounds will not secure genuine equality of
opportunity. The purpose of compensatory education is to provide instruc-
tion designed to overcome the disadvantages facing children from deprived
backgrounds. These disadvantages may include not only low academic
skills, poor health, and inadequate nutrition, but also lack of motivation
Education and Culture 257

due to the absence of role models or prospects for success. Modern Liberals
stress that education cannot bear the entire burden of ending poverty, and
therefore compensatory programs must be accompanied by a broader
attack on the causes of poverty.
With regard to curriculum, Modern Liberals emphasize the importance
of extracurricular activities such as student government and clubs. They
also propose that democratic ideals can be taught by democratizing the
classroom, giving students a greater voice in determining the structure and
content of their curriculum. Modern Liberals were instrumental in intro-
ducing the "open classroom," allowing students to pursue their strongest
interests and to advance at their own pace. 22
Modern Liberals are strongly committed to the public school system and
have been critical of proposals for either a voucher system or tuition tax
credits. 23 Both policies, they claim, would encourage increased racial seg-
regation of students, reduce governmental control over the quality of edu-
cation, and violate the Constitution's separation of church and state. If the
government offered to pay for education at any school selected by the fam-
ily, children of affluent families would flock to suburban and private
schools. In contrast, children of low-income families, unable to afford
transportation, would be forced to attend their neighborhood school, and
inner-city public schools would become the repositories for those unable to
afford an alternative. The best teachers would relocate to the more attrac-
tive suburban and private schools, and the goal of equal education for all
students would be sacrificed.
Modern Liberals also typically oppose merit pay for teachers, citing the
difficulty in measuring teacher productivity. The use of any particular cri-
terion of productivity, such as student scores on standardized tests, might
cause teachers to orient their efforts toward preparing students to perform
well on the tests while neglecting other areas of instruction. Merit pay is
also accused of having a divisive and demoralizing effect on teachers.
Many Modern Liberals have favored busing students to achieve racial bal-
ance throughout a school district.24 They argue that neighborhood schools
cannot possibly provide equal education for all students when neighbor-
hoods are segregated and funding for public schools is dependent on prop-
erty taxes. Also, integrated classrooms expose children to members of other
racial groups, diminishing the likelihood of racial conflict in the future.
Conservative and Classical Liberal critics of busing claim that children
cannot learn effectively in a hostile and foreign environment and that bus-
ing often contributes to increased residential segregation as some parents
choose to move rather than comply with the new regulations. They also
claim busing causes an exodus of students from public schools as parents
enroll their children in private schools. Another concern is the disruption
of neighborhood unity as children are relocated to distant schools. Modern
Liberals acknowledge these concerns and have recently softened their advo-
258 Political Economy

cacy of busing. Even if busing achieves the goal of providing equal educa-
tion for all children, it provides no ultimate solution to poverty and
inequality. Formal education is only one component of the socialization
process leading to acquisition of skills and personality traits essential to
future success. The family and the neighborhood often overshadow the
impact of the school on children's maturation.
Modern Liberals have recently begun to share with Conservatives the
desire to introduce moral education into the public school curriculum.
However, while Conservatives typically link moral education with religious
education, Modern Liberals simply want to provide students with a forum
in which they can clarify their own values through discussion of hypothet-
ical situations. This process of "values clarification" assumes that with
increased awareness developed through classroom discussions, children
will learn the Modern Liberal values of tolerance, sensitivity, honesty, and
respect for the rights of others.
In the face of growing concern about the United States' ability to com-
pete in global markets, Modern Liberals are shifting their focus from the
developmental and egalitarian roles of education to the economic role of
education in enhancing efficiency and growth. To assess the efficiency of
education, Modern Liberal economists rely on cost-benefit analysis to
compare the financial benefits of education with other forms of public
investment. They also compare the financial payback to dollars spent on
different departments within universities and on university education as
opposed to vocational education. Faced with intensifying competition from
abroad, government should reallocate public funding to those forms of
education yielding the largest gains in future productivity. However, some
Modern Liberals warn that by focusing on measurable changes in individ-
ual earnings and GDP, cost-benefit analysis of education can easily over-
look the intangible benefits of social equality, political stability, and
personal growth.

The Role of Culture

Ambiguity in the Modern Liberal approach to culture can be traced
back to John Stuart Mill. On one hand, Mill expressed the Classical Liberal
view that cultural diversity is a sign of a vital society and that individuals
are obliged to tolerate even the most distasteful of cultural expressions so
long as nobody is harmed. On the other hand, Mill appealed to the notion
of a hierarchy of pleasures based on "the permanent interests of man as a
progressive being." According to Mill, although humans are capable of
experiencing pleasure from a variety of sources, some pleasures are
demeaning and ultimately destructive while other pleasures are uplifting
and contribute to the full realization of human potential. Mill claimed that
Education and Culture 259

superior pleasures are to be found in intellectual and artistic expression

that exercise the uniquely human capacities for reason and creativity.
Today, Modern Liberals waver between Mill's tolerance of nearly all
forms of cultural expression and his tendency to establish moral criteria for
distinguishing between "good" and "bad" culture. The instinct for toler-
ance prevails unless some aspect of culture is viewed as potentially danger-
ous to the well-being of uninvolved persons. Modern Liberals defend
tolerance for two reasons. First, they value the experience of choosing
among diverse alternatives. Cultural alternatives enable individuals to
develop their capacity for judgment and choice. Even if the choice is
unwise, the experience of choosing is educational and enhances personal
growth. Only through experimentation with alternatives will individuals
come to know and value that which is good. Second, Modern Liberals are
concerned that efforts to regulate culture may lead to abuse of government
power. In the absence of a social consensus on criteria of good culture, the
government would inevitably repress some valuable forms of expression.
While Mill's notion of a hierarchy of pleasures gives Modern Liberalism a
rough criterion on which censorship might be based, the commitment to
tolerance leaves most Modern Liberals with little inclination to suppress
any form of culture.
However, Modern Liberals believe that government does play an impor-
tant role in promoting culture. Government should financially support a
variety of artistic forms ranging from public television to symphony orches-
tras. This support is justified by the positive externalities associated with
exposing a broad spectrum of the population to the arts. Public funding for
the arts contributes to the personal development of most citizens. Modern
Liberals also believe that government can indirectly affect culture by rem-
edying the unemployment and poverty that contribute to frustration and
nihilism in modern societies. When economic security is out of reach,
people vent their anger in various distorted forms of cultural expression.
Rather than attacking the symptoms of alienation through repression or
censorship, Modern Liberals propose economic revitalization as the only
viable solution to cultural decline.

NOTES
1. The Classical Liberal perspective on the economic benefits of education is
presented in Fritz Machlup, Education and Economic Growth, Lincoln: University
of Nebraska Press, 1970; Richard B. McKenzie, The Political Economy of the
Educational Process, Boston: Martinus Nijhoff, 1979; and Martin O'Doe,noghue,
Economic Dimensions in Education, Chicago: Aldine-Atherton, 1971.
2. The original proposal for school choice appeared in Milton Friedman, "The
Role oi Government in Education," in Robert A. Solo, ed., Economics and the
Public Interest, New Brunswick, NJ: Rutgers University Press, 1955. For additional
260 Political Economy

details on proposed educational voucher systems and school choice, see Myron
Lieberman, Privatization and Educational Choice, New York: St. Martin's, 1989;
David R. Henderson, The Case For School Choice, Stanford: Hoover Institution,
1993; and John E. Chubb and Terry M. Moe, Politics, Markets and America's
Schools, Washington, DC: The Brookings Institution, 1990.
3. See John Stuart Mill, On Liberty, New York: Liberal Arts Press, 1956.
4. Samuel Bowles and Herbert Gintis, Schooling in Capitalist America, New
York: Basic Books, 1976.
5. Radical interpretations and critiques of education are presented in Martin
Carnoy, Schooling in a Corporate Society, New York: McKay, 1972; Madan Sarup,
Marxism and Education, Boston: Routledge & Kegan Paul, 1978; and Kenneth A.
Strike, Liberal Justice and the Marxist Critique of Education, New York:
Routledge, 1989.
6. See Allen Graubard, Free the Children: Radical Reforms and the Free School
Movement, New York: Random House, 1972. See also Peter Marin, Vincent
Stanley, and Kathryn Marin, The Limits of Schooling, Englewood Cliffs, NJ:
Prentice-Hall, 1975.
7. Ivan Illich, Deschooling Society, New York: Harper 6c Row, 1971.
8. See Robin Barrow, Radical Education: A Critique of Freeschooling and
Deschooling, New York: John Wiley 6c Sons, 1978. See also Herbert Gintis, "Towards
a Political Economy of Education: A Radical Critique of Ivan Illich's Deschooling
Society," Harvard Educational Review 42, no. 1 (February 1972): 70-96.
9. See Herbert Gintis, "The Political Economy of School Choice," Teachers
College Record, 96, no. 3 (Spring 1995): 492-511; and Christopher Jencks,
Rethinking Social Policy: Race, Poverty and the Underclass, Cambridge, MA:
Harvard University Press, 1992.
10. Important works on culture by members of the Frankfurt school include
Walter Benjamin, Illumination, New York: Harcourt Brace &; World, 1968;
Theodor W. Adorno, Aesthetic Theory, Boston: Routledge & Kegan Paul, 1983;
and Herbert Marcuse, The Aesthetic Dimension: Toward a Critique of Marxist
Aesthetics, Boston: Beacon Press, 1978. For a collection of writings from the
Frankfurt school, see Andrew Arato and Eixe Gebhardt, eds., The Essential
Frankfurt School Reader, New York: Continuum, 1982. For a review and assess-
ment of the Frankfurt school, see Ronald J. Schindler, The Frankfurt School
Critique of Capitalist Culture, Aldershot: Avebury Publishers, 1996.
11. Herbert Marcuse, One Dimensional Man, Boston: Beacon Press, 1964. See
also Robert Paul Wolff, Barrington Moore, Jr., and Herbert Marcuse, A Critique of
Pure Tolerance, Boston: Beacon Press, 1969.
12. For greater detail on the Radical analysis of culture, see Cary Nelson and
Lawrence Grossberg, eds., Marxism and the Interpretation of Culture, Urbana, IL:
University of Illinois Press, 1988. See also Louis Dupre, Marx's Social Critique of
Culture, New Haven, CT: Yale University Press, 1983.
13. This argument is elaborated in Christopher Lasch, The Culture of
Narcissism: American Life in an Age of Diminishing Expectations, New York:
W. W. Norton, 1978.
14. See Catherine MacKinnon, Only Words, Cambridge, MA: Harvard
University Press, 1993, and Cass R. Sunstein, Democracy and the Problem of Free
Speech, New York: The Free Press, 1993.
Education and Culture 261

15. Allan Bloom, The Closing of the American Mind, New York: Simon &
Schuster, 1987.
16. See Arthur R. Jensen, Educability and Group Difference, New York: Harper
6c Row, 1973.
17. Jose Ortega y Gasset, The Revolt of the Masses [1932], Notre Dame, IN:
University of Notre Dame Press, 1985. For more recent analyses of the phenome-
non of mass society, see William Kornhauser, The Politics of Mass Society, Glencoe,
IL: Free Press, 1959; Salvador Giner, Mass Society, London: Martin Robertson,
1976; and Peter Davison, Rolf Meyersohn, and Edward Shils, eds., Culture and
Mass Culture, Teaneck, NJ: Somerset House, 1978.
18. Conservative critiques of contemporary U.S. culture are presented in William
J. Bennett, The De-valuing of America: The Fight for Our Culture and Our
Children, New York: Summit Books, 1992; Robert Hughes, The Culture of
Complaint: The Fraying of America, New York: Oxford University Press, 1993;
and Robert H. Bork, Slouching Towards Gomorrah: Modern Liberalism and
American Decline, New York: Regan Books, 1996.
19. See Daniel Bell, The Cultural Contradictions of Capitalism, rev. ed., New
York: Basic Books, 1996. Bell's thesis that capitalism tends to generate opposition
from intellectuals was also an important theme in Joseph Schumpeter, Capitalism,
Socialism, and Democracy, New York: Harper &c Row, 1950.
20. For an assessment of Dewey's impact on American education, see Reginald
D. Archambault, ed., Dewey on Education, New York: Random House, 1966.
21. Jean Piaget, The Essential Piaget, edited by H. E. Gruber and J. J. Voneche,
New York: Basic Books, 1977; Lawrence Kohlberg, Essays on Moral Development,
San Francisco: Harper &c Row, 1981; and Abraham H. Maslow, Motivation and
Personality, 3rd ed., New York: Harper & Row, 1987.
22. See Terrence E. Deal and Robert R. Nolan, eds., Alternative Schools:
Ideologies, Realities, Guidelines, Chicago: Nelson-Hall, 1978.
23. The Modern Liberal opposition to school choice is presented in Bruce Fuller
and Richard F. Elmore, Who Chooses? Who Loses?, New York: Teachers College
Press, 1995; Peter W. Cookson, Jr., School Choice: The Struggle for the Soul of
American Education, New Haven: Yale University Press, 1994; Jeffrey R. Henig,
Rethinking School Choice: Limits of the Market Metaphor, Princeton: Princeton
University Press, 1994; and Kevin B. Smith and Kenneth J. Meier, The Case Against
School Choice: Politics, Markets, and Fools, Armonk, NY: M. E. Sharpe, 1995.
24. On the issue of school busing, see Gary Orfield, Must We Bus?: Segregated
Schools and National Policy, Washington, DC: Brookings Institution, 1978;
Emmett H. Buell, Jr., School Desegregation and Defended Neighborhoods,
Lexington, MA: Lexington Books, 1982; and Edward J. Hayes, Busing and
Desegregation: The Real Truth, Springfield, IL: Charles C. Thomas, 1981.

ADDITIONAL READING
Aronowitz, Stanley, and Henry Giroux. Education Under Siege: The Conservative,
Liberal and Radical Debate over Schooling. South Hadley, MA: Bergin &c
Garvey, 1985.
Bernier, Norman R., and Jack E. Williams. Beyond Beliefs: Ideological Foundations
of American Education. Englewood Cliffs, NJ: Prentice-Hall, 1973.
262 Political Economy

Carnoy, Martin, and Henry M. Levin. Schooling and Work in the Democratic State.
Stanford, CA: Stanford University Press, 1985.
DeYoung, Alan J. Economics and American Education. New York: Longman,
1989.
Edel, Abraham. Interpreting Education: Science, Ideology, and Value. New Bruns-
wick, NJ: Transaction Books, 1985.
Feinberg, Walter, and Jonas S. Soltis. School and Society. New York: Teachers
College Press, 1985.
Freire, Paulo. The Politics of Education. South Hadley, MA: Bergin & Garvey, 1985.
Giroux, Henry. Ideology, Culture, and the Process of Schooling. Philadelphia:
Temple University Press, 1981.
Gutman, Amy. Democratic Education. Princeton, NJ: Princeton University Press,
1987.
Karabel, Jerome, and A. H. Halsey, eds. Power and Ideology in Education. New
York: Oxford University Press, 1977.
Katz, Michael B. Reconstructing American Education. Cambridge, MA: Harvard
University Press, 1987.
Persell, Caroline H. Education and Inequality. New York: Free Press, 1977.
Shaw, G. K., ed. Economics, Culture and Education. Brookfield, VT: Edward
Elgar, 1991.
Sowell, Thomas. Inside American Education. New York: Free Press, 1993.
Spring, Joel. American Education: An Introduction to Social and Political Aspects.
New York: Longman, 1982.
Webb, Rodman B. Schooling and Society, 2nd ed. New York: Macmillan, 1989.
Chapter 14

Pollution and the

Environment

Economists have traditionally viewed the environment as a source of raw

materials and energy for producing goods and services. Kenneth Boulding
(1910-1993) coined the term "cowboy economy" to describe a situation of
limitless resources and unproblematic waste disposal. However, the mod-
ern economy, according to Boulding, is more aptly viewed as "spaceship
earth" whose resources are finite and whose waste must be managed. In
light of past and potential damages posed by global warming, acid rain,
deforestation, destruction of the ozone layer, desertification, air and water
pollution, and the accumulation of toxins in the food chain, environmen-
tal issues have come to the forefront of political economy.
As the global economy expands, pressures on the environment will
increase. Popular support for protecting nature will be partially deter-
mined by the extent to which citizens perceive environmental policies as
threats to their jobs and income. However, ignoring pollution and
resource depletion might pose even more serious consequences for stan-
dards of living. In 1972, a group of scientists at the Massachusetts
Institute of Technology ran computer simulations using variables such as
population, food supply, industrial production, pollution, and resource
depletion. 1 They concluded that economic growth will be halted by a
series of ecological catastrophes during the twenty-first century unless
264 Political Economy

current trends are changed dramatically. This dire prediction has been
challenged by other researchers, and political economists continue to
debate the causes of and appropriate policies for coping with environ-
mental degradation.

THE CLASSICAL LIBERAL PERSPECTIVE

C a u s e s of Pollution
Classical Liberalism reflects the Enlightenment view of nature as phys-
ical matter to be controlled and manipulated for the purpose of serving
human interests. Despite the scarcity of natural resources, Classical
Liberals remain optimistic that standards of living can continue to rise if
the market economy is left essentially free of government regulation.
When pollution and resource depletion occur, Classical Liberals focus on
the following causes:

1. Consumer preferences. Consumers are free to choose between

goods kept less expensive by the free disposal of waste into the environ-
ment or more expensive goods whose higher costs result from pollution
controls. When pollution occurs, consumers are partly to blame because
corporations must cater to consumer preferences. Consumers vote with
their dollars, and if they value lower-priced goods more than a clean envi-
ronment, then pollution will occur. Classical Liberals defend the right of
individuals to place a higher value on consumption of material goods
than on environmental purity.

2. Public property. In the absence of government regulation, the lack of

well-defined private property rights over certain domains such as rivers,
lakes, and atmosphere permits them to be used as free disposal sites. Firms
seeking to minimize costs will take advantage of the opportunity to dispose
of wastes by dumping them into the public domain. However, if disposal
sites were privately owned, polluters would have to negotiate with owners
over payment for damages. Classical Liberal economist Ronald Coase has
argued that, under certain restrictive assumptions, the bargaining between
polluters and owners of disposal sites would result in an "optimal level of
pollution" regardless of who owns the site.2 For example, if government
granted ownership of a lake to a polluting corporation, then local citizens
who want clean water could "bribe" the corporation to reduce its use of
the lake for waste disposal. Citizens would pay to reduce pollution until the
cost of further pollution abatement is equal to the additional benefits of a
cleaner lake. Any further reduction in pollution would be economically
inefficient because the additional cost would exceed the additional benefit.
Alternatively, a citizen could be given the property right over this same lake
Pollution and the Environment 265

and the corporation could "bribe" the citizen for the use of the lake as a
waste disposal site. Again, Coase argues, the optimal level of pollution
would result since the corporation would pay for the right to pollute until
the cost to the firm of additional pollution equals the additional benefit.
Thus, the assignment of private property rights over common resources
creates a market for the right to pollute, resulting in an efficient allocation
of resources without the need for environmental regulations.

3. Transaction costs. Transaction costs are the expenses associated with

gathering information, specifying contracts, and enforcing the terms of
contracts. In the case of pollution, citizens willing to pay for a cleaner envi-
ronment may incur substantial transaction costs in organizing themselves
to collectively express their preferences and to monitor compliance with
any contract between citizens and corporations to reduce pollution. Coase
acknowledges that in the presence of transaction costs, markets fail to
establish an optimal level of pollution.

4. Public goods. Most Classical Liberals acknowledge that some natural

resources are public goods with significant external benefits. For example,
a river flows downstream, dispersing the benefits of clean water among
large numbers of people. To the extent that natural resources remain in the
public domain, Classical Liberals usually concede that pollution and
resource depletion are partially attributable to the market's inability to
achieve efficiency when public goods are present.

5. Lack of development. Classical Liberals reject the argument that eco-

nomic growth is the principal cause of pollution. Instead, they claim that
environmental destruction is more closely linked to lack of economic devel-
opment. Less developed countries (LDCs) typically have higher rates of
population growth, less education, less efficient use of raw materials, fewer
synthetic materials, and lower technical capacity for protecting the envi-
ronment. The pressures of subsistence living often force citizens in LDCs to
engage in practices harmful to the environment. Development should there-
fore reduce pollution, and the free market is the optimal institution for
achieving prosperity.

Environmental Policy
Classical Liberals defend the ability of the market to protect the envi-
ronment. 3 If a particular resource is being depleted, its price will rise not
only in response to its current scarcity, but also to the anticipated higher
costs of extracting that resource in the future. This "scarcity pricing"
causes consumers and producers to search for cheaper alternatives and pro-
vides strong incentives to develop new technology for producing synthetic
266 Political Economy

substitutes, locating additional reserves of resources, and using resources

more efficiently. Classical Liberals find much of the public concern over
resource depletion unwarranted because market incentives will spur entre-
preneurs to respond to the problem.
The market's propensity to foster rising standards of living provides
both the resources and incentives to respond to pollution. Consumers with
high levels of disposable income have met their basic needs and are there-
fore more likely to value a clean environment. Corporations cater to these
consumer preferences, making environmentalism a profitable corporate
strategy. In a robust economy, high corporate profits will permit the adop-
tion of cleaner, more efficient technologies. Finally, the historical record
demonstrates that rising standards of living are associated with lower birth
rates, thus reducing population pressures.
Recently, Classical Liberals have argued that private entrepreneurs can
solve many environmental problems by negotiating contracts between pol-
luters and those affected by pollution. The benefits of reducing pollution
often exceed the direct costs, but the presence of transaction costs discour-
age citizens from organizing to take action. However, an "enviro-capitalist"
can act as a middle man, locating opportunities in which the willingness to
pay for reduced pollution is sufficient to compensate firms for switching to
cleaner production methods and to provide a profit margin for the enviro-
capitalist. Obviously, this strategy is most feasible when dealing with a few
large organizations. For example, an association of commercial salmon
fishers might pay a lumber mill to reduce effluents harmful to fish.4
Another environmental strategy favored by Classical Liberals is the sale
of public property to private owners. Once a resource is privately owned,
individuals have a strong interest in protecting the value of their property
and will either charge for its use or rely on the legal system to sue for dam-
ages. However, the conversion of public property to private ownership can-
not entirely resolve the problem of pollution due to transaction costs and
the "public good" aspect of rivers, lakes, oceans, and the atmosphere.
If government regulations are imposed, Classical Liberals insist that
government should simply alter the financial incentives facing private
decisionmakers rather than dictate standards. By relying on incentives,
individuals remain free to act in their own self-interest, with government
merely changing the signals to which they respond. For example, govern-
ment could impose "effluent fees" as a tax on waste disposal to reflect the
cost imposed on society. The fee enables businesses to freely choose what
method of waste disposal and what level of production would maximize
their profits.
Classical Liberals also favor auctioning licenses to pollute as an alterna-
tive to existing environmental regulations. Once the government has deter-
mined an acceptable level of pollution, a limited number of licenses would
be sold to the highest bidders. Those firms for whom pollution is most
Pollution and the Environment 267

costly to control would presumably bid highest for licenses, forcing other
firms to eliminate lower-cost forms of pollution. After licenses are auctioned
by government, firms could resell them, creating a market for the right to
pollute and enabling firms to adjust waste disposal in response to changing
patterns of technology, resource availability, or consumer demand.
Classical Liberals have generally been critical of the notion of market
failures, but they buttress their faith in the market by appealing to the con-
cept of "government failure."5 Bureaucrats, they claim, lack detailed infor-
mation with which to formulate efficient policies. Moreover, without
personal responsibility for the consequences of their policies, bureaucrats
lack incentive to formulate optimal policies. Bureaucrats favor uniform
pollution standards applicable to all industries because of the relative ease
of enforcement. However, economic efficiency is more likely to be attained
through different standards for different industries, a goal that can be
achieved by auctioning pollution licenses.
Government is also susceptible to manipulation by special-interest
groups. The firms most affected by environmental regulations have a
strong incentive to influence legislation. Certain industries may even be
successful in capturing control of a governmental agency by contributing
money, lobbying, and promising lucrative jobs to bureaucrats when they
leave government. Classical Liberals believe that government is unduly
influenced by the lobbying of environmental organizations such as the
Sierra Club and the Wilderness Society. Environmentalists, they claim, seek
to increase donations to their organizations by frightening the public with
exaggerated warnings of impending environmental disaster. When envi-
ronmental lists are successful in using government to coerce everyone to
comply with their values, they cripple the economy with restrictive regula-
tions and create a disadvantage in international competition.
Another Classical Liberal strategy for reducing environmental regula-
tions is based on the Fifth Amendment to the U.S. Constitution, which
states: "nor shall private property be taken for public use without just com-
pensation." This "takings clause" is interpreted to mean that any govern-
ment regulation reducing the value or profitability of property requires
payment to the owner for financial losses.6 Classical Liberals assume that
forcing government to pay for losses imposed by every regulation would
result in considerably less regulation. For example, zoning laws, laws to
protect endangered species, and laws to protect wetlands would become
prohibitively expensive for government. A related strategy for minimizing
regulation comes from Classical Liberals calling for "wise use" of the envi-
ronment. 7 They propose that every regulation should be examined to deter-
mine whether its benefits exceed its costs. For example, the government
would have to demonstrate that the dollar value of a protected species
exceeds the dollar value of the resources that could be removed from a nat-
ural area. Any regulation failing to meet this standard would be scrapped.
268 Political Economy

In response to those who defend government intervention on the

grounds that future generations have a right to adequate resources and a
sound environment, Classical Liberals claim that individual liberty and free
markets are the best guarantee of well-being for our descendants. The
incentives and efficiency associated with free markets propel economic
growth, which facilitates efforts to protect and restore the environment.
Not only will firms be hard-pressed to deal with ecological problems when
the economy is stagnant, but public support for environmental protection
will weaken as citizens focus on defending their current levels of consump-
tion. Ultimately, then, there is no trade-off between economic growth and
environmental integrity.8

THE RADICAL PERSPECTIVE

Causes of Pollution
Two distinct forms of Radical environmentalism can be identified—
"traditional Marxism" and "deep ecology." Traditional Marxists uphold
the Enlightenment view of mankind's domination over nature. Marx
himself explicitly supported continued economic expansion and the use
of large-scale technology to gain mastery over the environment.
Considering that Marx was writing in the middle of the nineteenth cen-
tury, it would be surprising if he had not supported the notion of unlim-
ited material progress.
According to traditional Marxists, the cause of pollution is not eco-
nomic growth, but rather capitalism.9 The structure of capitalism encour-
ages waste and abuse of resources in the following ways:

1. Private property. Marxists believe that private property narrows

human consciousness so that people focus only on matters directly affect-
ing them. Rather than expressing social concern for the environment in
which all humans must live, individuals in capitalist society concentrate on
protecting their personal property while remaining indifferent to the cir-
cumstances of others.

2. Competition. When firms operate in a market, competitive pressures

force them to adopt the lowest cost production method, including the free
disposal of waste into the environment. A particular capitalist might value
clean air and water, but reducing pollution raises the firm's costs and
erodes its competitive position in the market. If the owner persists, the
firm, lacking financial resources for research and innovation, could even-
tually be driven out of business. Competition also manifests itself in the
drive to create new desires for commodities through advertising.
Production to meet these "false needs" contributes to deterioration of the
Pollution and the Environment 269

environment. Another corporate strategy for increasing sales and profits is

planned obsolescence, which forces consumers to replace products more
frequently and contributes to waste in the system.

3. Class conflict. Capitalism generates conflicting interests between cap-

italists and workers. In the twentieth century, the preferred solution to class
conflict has been "buying off" worker discontent with higher wages to
maintain comfortable standards of living. However, this strategy places
immense burdens on the ecosystem to sustain high levels of production.
Households are filled with frivolous commodities as workers seek to relieve
their job frustrations through the pride of ownership.

4. Lack of political control. Because capitalism fails to recognize

preferences that can't be satisfied with profitable commodities, individ-
uals remain powerless to express their desire for a clean environment in
the market. Even when voters elect representatives who favor pollution
control, politicians lack sufficient power to regulate large corporations
effectively. Moreover, because capitalism is oriented toward providing
commodities for private consumption, individuals learn to structure
their lives around consumption as the primary source of satisfaction.
Conversely, because capitalism is ill-suited to provide public goods such
as a clean environment and mass-transit systems, individuals tend to
devalue those goods and rely instead on commodities such as water puri-
fiers and automobiles.

5. Alienation. Capitalism erodes traditional communities and social

bonds, leaving individuals isolated and insecure. One response to this inse-
curity is the quest for ownership and consumption of commodities. When
the worth of individuals is measured by their wealth and consumption,
people seeking recognition and social acceptance will engage in "conspicu-
ous consumption." However, this consumption does not reflect genuine
human needs because it is a response to the powerlessness created by cap-
italism. In a better society, the pleasures associated with consumption
would rank below fulfillment gained through developing and exercising the
human capacities for creativity, artistic expression, athleticism, apprecia-
tion of nature, and cultivation of friendships. Furthermore, since these
expressive activities require relatively few natural resources, they need not
impose significant burdens on the environment.

The term "deep ecology" was coined in 1972 by Swedish ecologist Arne
Naess, who views nature as a highly complex system of diverse yet inter-
dependent species and elements.10 Nature seeks equilibrium between all
subsystems, so any disruptive force in one area may have extensive and
unforeseen repercussions. Deep ecologists seek to grasp the functioning of
270 Political Economy

nature as a holistic system. They blame environmental degradation on the

anthropocentric worldview inherited from the Enlightenment, which treats
nature as matter to be manipulated for human purposes. Instead, deep
ecologists offer an ecocentric view of nature; humans are simply one part
of a larger ecosystem. From this perspective, humans have a duty to treat
nature with reverence and humility, valuing environmental protection
above additional consumption.
The implications of deep ecology can be startling. If all species are
equally privileged, then animals, insects, and perhaps plants possess the
same rights as humans. Painful experiments on animals to test products for
human use are condemned, and some deep ecologists even include soil and
water as components of a "moral community." 11 The world is a living
organism, and all species and elements are simply parts of the whole.
British ecologist James Lovelock has named this organism "Gaia" and sug-
gests that any species damaging the environment will be eliminated by Gaia
just as the human body destroys a virus. 12
The defining difference between deep ecologists and liberal environ-
mentalists is their conflicting rationale for protecting nature. Envi-
ronmentalists believe in preserving nature to make the world more useful
for humans. For example, humans can enjoy wilderness experiences, recre-
ation, inspiration, healthful food, clean water and air, and continued
availability of resources. Deep ecologists, in contrast, claim that the spiri-
tual value of the planet demands protection of the environment even if
doing so requires sacrifices. Deep ecologists might restrict human access to
wilderness areas to preserve the integrity of the environment. As an
extreme example, some deep ecologists have suggested that protecting
nature from overpopulation might require "harvesting" humans to reduce
pressures on the environment. From this perspective, AIDS might be
viewed as one of Gaia's harvesting methods.
To illustrate the weaknesses of Marxism, deep ecologists point to the
poor environmental record of countries purportedly based on Marxist
ideals. Marxists respond by noting that socialism has typically existed in
less developed countries where rapid industrialization was essential to win
political support for new revolutionary governments. Marxists assume that
socialism can be more sensitive to the environment once a moderate level
of affluence and political stability has been achieved.
Deep ecologists make the more serious charge that capitalism and com-
munism are simply two alternative strategies for achieving the same
Enlightenment goal of mastery over nature and expanding levels of con-
sumption. Some Marxists refute this claim, arguing that Marx's view of
reality was "relational" in the sense that objects and people are shaped and
defined by their relation to other objects or persons. 13 Marx, they claim,
did not view nature as inert matter to be manipulated by humans, but
instead viewed man and nature as dialectically intertwined. If this inter-
Pollution and the Environment 271

pretation is valid, the effort to completely dominate nature was not con-
doned by Marx and is another symptom of alienation in capitalist society.

E n v i r o n m e n t a l Policy
Marxists and deep ecologists agree on the necessity of transcending cap-
italism, but they offer quite different visions of socialism. Marxists empha-
size socialism's capacity for attainment of collective goals through
conscious planning of society's production. Unlike the market, a planned
economy can recognize noncommodity preferences such as the desire for a
clean environment and can translate such preferences into social policy.
With production guided by planning rather than profitability, resources can
be allocated to protect and restore the environment. By acting collectively,
citizens empower themselves to shape their society and their natural envi-
ronment in a manner most conducive to human development.
Collective planning could even extend across national borders. To pro-
tect countries from the pressures of global competition, international gov-
erning bodies might establish environmental standards to which all
countries must comply. Within each country, environmentalism might
require stringent controls on population growth, immigration, and con-
sumption. Even at the local level, the imperative of environmental integrity
may lead governments to narrowly circumscribe the freedom of individu-
als to use and dispose of resources.14
Deep ecologists, in contrast, reject a planned economy. They envision a
future society consisting of decentralized and largely self-sufficient com-
munities free from the coercive pressures of market and state. These com-
munities might consist of fewer than ten thousand people with communal
ownership of land and highly egalitarian and participatory social rela-
tions. The experience of living in close-knit communities should steer indi-
viduals away from material consumption, reducing pressures on the
natural environment. 15
Marxists point to the similarities between deep ecology and Conserv-
atism. Both are wary of technology and materialism, both appeal to objec-
tive values found in a spiritualized nature, and both envision a society
composed of relatively autonomous communities. Marxists are concerned
that small communities offer limited opportunities for personal develop-
ment, mobility, and creativity. Moreover, independent communities might
compete against one another, reviving the market conditions of capitalism.
Finally, Marxists criticize deep ecologists for diverting attention from the
class origins of environmental problems. According to Marxists, the ulti-
mate cause of pollution and exhaustion of resources is not the flawed
values of mankind but the division of society into owning and working
classes, with individual survival dependent on producing commodities for
sale in the market.
272 Political Economy

Marxists and deep ecologists also disagree on short-term strategies and

policies. Marxists may hesitate to join forces with environmental groups
seeking to limit economic expansion without challenging the class structure
of capitalism. According to Marxists, capitalism without growth is not fea-
sible. Capitalism must expand to maintain profitability and avoid collapse.
Any effort to halt growth within the context of capitalism would, at best,
freeze the current class structure and condemn the working class to per-
manent deprivation. Deep ecologists, on the other hand, are more likely to
participate in political action and civil disobedience to protect the environ-
ment by curtailing industrialization and growth. They view the groups coa-
lescing around environmental issues as embryonic communities planting
seeds of the future society.
All Radicals support government regulations and standards to protect
the environment. However, they simultaneously express skepticism about
the viability of such regulations when private corporations wield more
power than the governmental agencies responsible for enforcing public pol-
icy. Corporations can resist regulation by exerting influence over govern-
ment agencies, the media, and employees. To challenge corporate power,
some Radicals call for a comprehensive national policy to make environ-
mental quality rather than private profit the guiding force in determining
the use of natural resources.16 A key component of such a policy would be
the nationalization of energy companies to reduce the conflict between pri-
vate profitability and the public interest.

THE CONSERVATIVE PERSPECTIVE

C a u s e s of Pollution
Conservatives believe that nature provides guidance in structuring
human institutions and relations. In nature, they observe diversity of
species, survival of the fittest, the importance of instinct, hierarchical rela-
tions between members of the same species, and homeostasis—movement
toward stable equilibria. Because humans are ultimately part of nature,
these same characteristics are appropriate for society. Conservatives reject
"secular humanism," which makes human purposes the only source of val-
ues. Instead, they locate objective values in nature and view humans as
morally obliged to conform to these values.
The degradation of nature is linked to the Enlightenment claim that
human reason is capable of restructuring nature to serve human interests.
This "arrogance of humanism" leads to a disregard for the sanctity of
nature and the proper place of humans within it. Conservatives prefer the
notion of "stewardship," which places on humans a custodial responsibil-
ity to live in harmony with nature and to minimize abuse.
Pollution and the Environment 273

Conservatives view environmental problems as symptoms of more funda-

mental disorders associated with seeking social perfection and mastery over
nature. 17 Modern society generates excessive pollution for several reasons:

1. Decline of hierarchy. Industrialization and modernization have

undermined traditional authority and hierarchy. When hierarchy is no
longer accepted as natural, humans become dissatisfied with their status,
leading to widespread envy and resentment. The homogeneity of "mass
society" strips individuals of their identities, compelling them to compete
for status and recognition in the quest for self-esteem. However, self-esteem
will remain elusive because the standards by which people assess individ-
ual worth rise along with their wealth and status. Moreover, the apparent
pleasure associated with consumption derives more from the easing of anx-
ieties created by modern society than from any practical usefulness of com-
modities. Ultimately, the environment is being sacrificed to high levels of
consumption that bring little joy and would be considered frivolous in a
well-ordered society.18

2. Decline of community. As individualism and materialism erode tra-

ditional communities, humans become isolated pleasure-seekers, losing all
capacities for satisfaction except accumulating commodities and gratifying
sensual appetites. The values of cooperation, loyalty, and friendship are
replaced by the pursuit of material gain and individual achievement. The
modern obsession with ownership and consumption of material goods rep-
resents a futile effort to compensate for loss of community by possessing as
much of the world as possible.

3. Capitalism. Although Conservatives defend private property and a

market economy, they fear that competitive individualism contributes to
pollution. Profit-seeking corporations create new needs and persuade con-
sumers that happiness comes primarily from consumption. This strategy
may be good for business but conflicts with the finite capacity of nature to
sustain human life. Modern societies are destroying the environment while
consumers and capitalists remain absorbed in their private pursuit of plea-
sure and profit.

4. Democracy. Conservatives argue that democracy has degenerated

into struggles among interest groups, each pursuing its own narrow goals
with little consideration for the public good. Policies to protect the envi-
ronment are likely to entail some sacrifices in consumption, yet in a society
oriented toward immediate gratification of desires, politicians calling for
sacrifice endanger their careers. Therefore, democratic governments con-
sistently favor economic expansion over environmental protection.
274 Political Economy

E n v i r o n m e n t a l Policy
In their optimistic moments, Conservatives retain a confidence that
nature, including the human species, is ultimately a self-equilibrating sys-
tem. As environmental degradation worsens, humans can be expected to
respond with new values upholding moral obligations to adopt ecologically
sound lifestyles. Signs of such a shift are apparent in growing public sup-
port for recycling and controls on pollution.
However, Conservatives are typically less optimistic and, when proposing
environmental policy, they often favor political rather than economic solu-
tions to pollution.19 Economic analysis focuses only on the preferences of
individuals and ignores society's interest in a healthy and sustainable natural
environment. Only the political process can promote such collective interests.
In advocating political action, Conservatives envision a different type of
politics from that of today's Western democracies.20 To remedy the short-
comings of democracy, political authority must be insulated from the pres-
sures of interest groups, and positions of leadership must be filled by
charismatic, wise, and virtuous persons. With political authority in the hands
of natural leaders, government can maintain a well-ordered society, reducing
alienation, the desire for consumption, and pressures on the environment.
In addition to reforming the political process, Conservatives would pro-
tect the environment by improving the socialization process shaping indi-
vidual desires. This strategy requires that schools, families, neighborhoods,
and churches be restored to their former roles as sources of authority and
meaning in the lives of individuals. A strong sense of identity and belong-
ing will dramatically reduce consumption and status-seeking. The pursuit
of wealth will become less important than the self-esteem and respect of
others gained through performing duties attached to one's social role. With
artificial desires for consumption suppressed, humans can reestablish a har-
monious relationship with nature.

THE MODERN LIBERAL PERSPECTIVE

C a u s e s of Pollution
Modern Liberals claim that rapid growth cannot continue indefinitely.
The first law of thermodynamics states that matter can be neither created
nor destroyed. Therefore, unless humans colonize other planets or make
dramatic strides in the development of solar or nuclear technology, limits
to growth are inevitable. Moreover, the effectiveness of recycling is called
into question by the second law of thermodynamics, which states that rear-
ranging matter continually reduces its potential for further use.21 Modern
Liberals conclude that the long-term viability of human society hinges on
protecting the environment, and they attribute pollution and resource
Pollution and the Environment 275

depletion to the following failures of the market to allocate resources in a

socially optimal manner:

1. Externalities. The market generates "externalities" in which the

price of a commodity does not reflect all the costs and benefits associ-
ated with its production and consumption. Cambridge economists of the
late nineteenth century originally developed the analysis of externalities.
Henry Sidgwick (1838-1900) noted that the market would fail to pro-
vide lighthouses because a private owner would be unable to charge
ships for the benefits provided by the lighthouse. A. C. Pigou generalized
Sidgwick's observation to conclude that markets are inefficient whenever
externalities are present. In the case of pollution, the use of air and water
as waste disposal sites creates negative externalities because polluting
firms are not charged and affected citizens are not compensated.

2. Absence of future generations. Future generations cannot express

their interests, and therefore the market consistently devalues future con-
sumption in favor of present consumption. If people of the future could
hypothetically bid on environmental preservation, the price of using nature
as a source of raw materials and as a disposal site would presumably rise
substantially. In other words, the absence of future persons leads to
overutilization of resources by the current generation. 22

3. Lack of information. Consumers may not be aware of environmen-

tal damage caused by consumption of certain products or disposal of
waste. Without full information concerning all costs and benefits, con-
sumers cannot make rational decisions. Even when consumers do recognize
potential damage associated with certain activities, they may be ignorant of
thresholds beyond which pollution triggers unanticipated and irreversible
ecological reactions. Also, when government lacks full information about
the harmful effects of industrial waste, legal restrictions on pollution may
be inadequate.

4. Lack of competition. If the market contains oligopolistic and monop-

olistic elements, resources are diverted from their optimal use. For exam-
ple, corporations may devote resources to lobby against environmental
regulations rather than install pollution-control devices. Resources may be
used for advertising to create an image that corporations are environmen-
tally sensitive. Moreover, monopoly power can contribute to unemploy-
ment and inflation, causing workers to focus on immediate survival rather
than environmental protection. Finally, limited competition places less
pressure on corporations to respond to the demands of citizens seeking
environmentally sound products.
276 Political Economy

5. Transaction costs. If citizens negotiate directly with corporations to

reduce pollution, they face huge costs of organizing themselves, gathering
information, preparing legal documents, and monitoring compliance.
Rather than endure this lengthy and expensive process, most people will
simply move to a less polluted area. Economist Albert O. Hirschman sug-
gests that individuals facing an undesirable situation have the options of
"exit, voice, or loyalty."23 In the case of pollution, exiting means moving
away from environmental damage, and the market encourages exiting by
fostering a society in which community bonds are weak, political action is
difficult, and mobility is highly valued. The ease of exiting makes people
less likely to voice their grievances by becoming politically involved or to
remain loyal to their neighborhood, town, or region.

E n v i r o n m e n t a l Policy
Modern Liberals view government intervention as essential to environ-
mental protection. Citizens and firms have little incentive to make private
sacrifices to control pollution because their individual actions have little
impact on the level of pollution. Government, on the other hand, can
gather information, assess damages, collect fees or taxes, and monitor the
enforcement of environmental laws more effectively and efficiently than
private citizens.
A. C. Pigou, who originally developed the theory of externalities, pro-
posed that government should respond to pollution with a tax on the pol-
luting firm equal to the value of environmental damage. The revenue from
the tax could be used to repair the damage or to subsidize citizens harmed
by pollution. However, this strategy assumes that government has perfect
information about the extent of pollution and its source. In the real world
of imperfect information, Modern Liberals advocate the establishment of
legal pollution standards to which industry must conform. They worry that
proposals to sell pollution licenses will give pollution the same ethical sta-
tus as hunting, fishing, driving a car, or getting married. To maintain a
strong social stigma against polluting, they want to keep it illegal beyond
specified levels.24 Modern Liberals also defend standards as essential to
maintaining equity; all regions or neighborhoods must meet the same stan-
dards, so pollution cannot be concentrated in a few sites.
Modern Liberals insist that environmental protection can be compat-
ible with economic growth and rising standards of living. This optimism
is based partially on the Keynesian view that additional spending—in
this case, on pollution control—serves to stimulate the economy by
creating greater demand for goods, more jobs, and higher incomes.
Unemployed workers might be hired to construct pollution-control
devices or repair environmental damage. Growth and environmental
protection are also compatible because countries pioneering in pollution
Pollution and the Environment 277

control can export ecologically sound or "green" technology and prod-

ucts to other countries.
However, Modern Liberals also share Conservative and Radical con-
cerns that too much growth may harm the environment. In 1987, the
United Nations' World Commission on Environment and Development
formulated the notion of "sustainable development." 25 Growth should not
exceed levels consistent with the health and well-being of future genera-
tions. In other words, sustainable development would not diminish the
planet's capacity for supporting human life. This highly influential concept
has gained support from governments, corporations, and environmental
groups around the world. However, the widespread appeal of sustainable
development may lie in its ambiguity. How many resources should be left
to sustain future generations? How many future generations should be sus-
tained? What standard of living should future generations attain? Can cap-
ital and technology substitute for depleted natural resources? The notion of
sustainable development offers few guidelines to answer these questions
and hence can be interpreted to support either growth or preservation.
In proposing environmental policies, Modern Liberals value both equity
and efficiency. Equity could be promoted by treating a clean environment
as a human right to which all persons are entitled regardless of their abil-
ity to pay. Alternatively, a larger share of the financial burden of pollution
control could be placed on the more affluent members of society.26 To pro-
mote efficiency, Modern Liberals favor policies designed to correct market
failures such as missing markets, externalities, or lack of information. The
major method for formulating efficient policies is cost-benefit analysis.27
Modern Liberals portray cost-benefit analysis as an objective, scientific
method for designing efficient public policies. This procedure gives priority
to policies offering maximum benefits per dollar of cost or, alternatively,
achieving specified goals with the least cost. In practice, cost-benefit analy-
sis faces the problem of establishing dollar values for costs or benefits
external to the market. 28 In the case of pollution, policy analysts measure
the value of a cleaner environment by assessing the price citizens would be
willing to pay for lower levels of pollution. Such a procedure, however, has
two major shortcomings.
First, citizens may not reveal their true preferences, anticipating the pos-
sibility of being a "free rider" by enjoying the benefits of a cleaner envi-
ronment without paying. Second, the current distribution of wealth affects
the willingness of individuals to pay. Low-income families may appear
indifferent to a clean environment simply because their lack of money and
education causes them to concentrate on more immediate concerns such as
food and clothing. However, a different distribution of wealth might dra-
matically alter demands for environmental quality. So the quest for efficient
policies is necessarily linked to considerations of fairness in the distribution
of income and wealth.
278 Political Economy

Because many costs and benefits of government policies occur in the

future, the analyst must choose a "social discount rate" to determine
the present value of future effects. If the goal of cost-benefit analysis is
to replicate the allocation of resources occurring in a perfectly func-
tioning market, then the social discount rate should reflect the private
discount rates of citizens. However, the future is likely to be valued
more highly by society as a whole than by individuals. Individuals do
not survive to experience the distant future, but society presumably
will. Also, individuals may shirk responsibility for the well-being of
subsequent generations. Society as a whole cannot ignore this duty
without jeopardizing the survival of the species. For these reasons, the
policy analyst justifiably assigns a lower discount rate to future costs
and benefits than would individual citizens. However, the method of
cost-benefit analysis offers no guidance as to how low the social dis-
count rate should be set. Only the morality of intergenerational justice
can shed light on this difficulty.
A final problem with cost-benefit analysis is the unavoidably arbitrary
decision by the policy analyst to circumscribe the length of time, the geo-
graphical area, and the types of benefits and costs to be considered. If all
the costs of pollution to all future generations were counted, then today's
optimal level of pollution would probably be quite low. If intangible costs
and benefits associated with beauty, serenity, and spiritual uplift are
included in cost-benefit analysis, then dollar values must be assigned to
these sensations. By attaching sufficient value to intangible costs or bene-
fits, analysts can justify any policy they choose. This latitude, along with
the ethical considerations involved in choosing a social discount rate, casts
doubt on the proclaimed objectivity of cost-benefit analysis.

NOTES
1. Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William W.
Behrens, The Limits to Growth, New York: University Books, 1972. For a rebuttal
to the pessimistic predictions of Meadows et al., see Edward Pestel, Beyond the
Limits to Growth, New York: University Books, 1989. The sequel to Limits to
Growth is Donella H. Meadows, Dennis L. Meadows, and Jorgen Randers, Beyond
the Limits: Confronting Global Collapse; Envisioning A Sustainable Future, Post
Mills, Vermont: Chelsea Green Publishing Company, 1992.
2. Ronald H. Coase, "The Problem of Social Cost," Journal of Law and
Economics 3 (October 1960): 1-44. For more accessible accounts, see William F.
Baxter, People or Penguins: The Case for Optimal Pollution, New York: Columbia
University Press, 1974, and Wilfred Beckerman, Pricing For Pollution, 2nd ed.,
London: Institute for Economic Affairs, 1990.
3. See Doug Bandow, ed., Protecting The Environment: A Free Market Strategy,
Washington: Heritage Foundation, 1986; David Glasner, Politics, Prices and
Petroleum: The Political Economy of Energy, Cambridge, MA: Ballinger, 1985;
Pollution and the Environment 279

and Terry L. Anderson and Donald R. Leal, Free Market Environmentalism,

Boulder, CO: Westview Press, 1991.
4. See Terry L. Anderson and Donald R. Leal, Enviro-Capitalists: Doing Good
While Doing Well, Savage, MD: Rowman St Littlefield, 1997.
5. A Classical Liberal critique of the concept of market failure is presented in
Tyler Cowen, ed., The Theory of Market Failure, Fairfax, VA: George Mason
University Press, 1988.
6. See Richard Epstein, Takings: Private Property and the Power of Eminent
Domain, Cambridge: Harvard University Press, 1985; Richard Epstein, Bargaining
with the State, Princeton: Princeton University Press, 1993; and Richard Epstein,
Simple Rules for A Complex World, Cambridge, MA: Harvard University Press, 1995.
7. See John Echeverria and Raymond Booth Eby, eds., Let the People Judge:
Wise Use and the Private Property Rights Movement, Washington, DC: Island
Press, 1995.
8. See Wilfred Beckerman, Two Cheers for the Affluent Society: A Spirited
Defense of Economic Growth, New York: St. Martin's, 1974.
9. A traditional Marxist account of environmental problems can be found in
Barry Weisberg, Beyond Repair: The Ecology of Capitalism, Boston: Beacon Press,
1971. See also Reiner Grundmann, Marxism and Ecology, New York: Oxford
University Press, 1991.
10. See Arne Naess, Ecology, Community and Lifestyle, Cambridge: Cambridge
University Press, 1989; Bill Bevall and George Sessions, Deep Ecology: Living As If
Nature Mattered, Layton, UT: G. M. Smith, 1985; Murray Bookchin, Deep
Ecology and Anarchism: A Polemic, London: Freedom Press, 1993; David Pepper,
Eco-Socialism: From Deep Ecology to Social justice, New York: Routledge, 1993;
and Alan S. Miller, Gaia Connections: An Introduction to Ecology, Ecoethics and
Economics, Savage, MD: Rowman &c Littlefield, 1991.
11. See Peter Singer, Animal Liberation, New York: Random House, 1975, and
Aldo Leopold, The Land Ethic, Oxford: Oxford University Press, 1949.
12. James Lovelock, Gaia, Oxford: Oxford University Press, 1979.
13. See Bertell Oilman, Alienation: Marx's Conception of Man in Capitalist
Society, New York: Cambridge University Press, 1971.
14. Proposals for government control of production and consumption to protect
the environment are found in Barbara Ward and Rene Dubos, Only One Earth: The
Care and Maintenance of a Small Planet, London: Andre Deutsch, 1972; William
Ophuls, "The Politics of a Sustainable Society," in Dennis Pirages, ed., The
Sustainable Society, New York: Praeger, 1977; Fritjof Capra, The Turning Point,
London: Flamingo, 1985; and Robert Heilbroner, An Inquiry into the Human
Prospect, New York: W. W. Norton, 1980.
15. The Radical portrayal of socialism as a system of decentralized communities
is presented in Ernest Callenbach, Ecotopia, Berkeley, CA: Banyan Tree Press,
1975. See also Murray Bookchin, Remaking Society: Pathways To A Green Future,
Boston: South End Press, 1990; Rudolph Barro, Building the Green Movement,
London: Green Movement Press, 1986; and Kirkpatrick Sale, Dwellers in the Land:
The Bioregional Vision, San Francisco: Sierra Club, 1985.
16. See Barry Commoner, The Politics of Energy, New York: Alfred A. Knopf,
1979, and Robert Engler, The Brotherhood of Oil: Energy Policy and the Public
Interest, Chicago: University of Chicago Press, 1977.
280 Political Economy

17. A Conservative analysis of pollution is presented in Francis A. Schaeffer,

Pollution and the Death of Man: The Christian View of Ecology, Wheaton, IL:
Tyndale House, 1970.
18. A fuller account of the shortcomings of material consumption can be found
in Tibor Scitovsky, The Joyless Economy: An Inquiry into Human Satisfaction and
Consumer Dissatisfaction, New York: Oxford University Press, 1976.
19. See John Gray, Beyond the New Right, New York: Routledge, 1993.
20. See Anna Bramwell, The Fading of the Greens: The Decline of Environmental
Politics in the West, New Haven: Yale University Press, 1994.
21. See Nicholas Georgescu-Roegen, The Entropy Law and the Economic
Process, Cambridge, MA: Harvard University Press, 1971.
22. See Brian Barry and Richard Sikora, eds., Obligations to Future Generations,
Philadelphia: Temple University Press, 1978. See also Ernest Partridge, ed., Respon-
sibilities to Future Generations, New York: Prometheus Books, 1981.
23. Albert O. Hirschman, Exit, Voice, and Loyalty: Response to Declines in
Firms, Organizations, and States, Cambridge, MA: Harvard University Press, 1970.
24. The argument against market-oriented solutions to pollution is presented in
Steven J. Kelman, What Price Incentives?: Economists and the Environment,
Boston: Auburn House, 1981.
25. World Commission on Environment and Development, Our Common
Future, Oxford: Oxford University Press, 1987. See also Michael Jacobs, The
Green Economy: Environment, Sustainable Development and the Politics of the
Future, Concord, MA: Pluto Press, 1991; Edward Barbier, ed., Economics and
Ecology: New Frontiers and Sustainable Development, New York: Chapman 6c
Hall, 1993; Jeroen van den Bergh, Ecological Economics and Sustainable
Development, Brookfield, VT: Edward Elgar, 1995; Johan Holmberg, Making
Development Sustainable: Redefining Institutions, Policy and Economics,
Washington, DC: Island Press, 1992; R. Kerry Turner, ed., Sustainable Environ-
mental Economics and Management: Principles and Practice, London: Belhaven,
1993; Dennis C. Pirages, ed., Building Sustainable Societies: A Blueprint for a
Post-Industrial World, Armonk, NY: M. E. Sharpe, 1996; and Herman E. Daly,
Beyond Growth: The Economics of Sustainable Development, Boston: Beacon
Press, 1996.
26. See Daniel R. Mandeiker, Environment and Equity: A Regulatory Challenge,
New York: McGraw-Hill, 1981.
27. The basics of cost-benefit analysis are presented in E. J. Mishan,
Cost-Benefit Analysis: An Introduction, 3rd ed., Boston: Allen & Unwin, 1982.
28. For more detailed critiques of cost-benefit analysis, see James T. Campen,
Benefit, Cost, and Beyond: The Political Economy of Benefit-Cost Analysis,
Cambridge, MA: Ballinger, 1986, and A. Allan Schmid, Benefit-Cost Analysis: A
Political Economy Approach, Boulder, CO: Westview Press, 1989.

ADDITIONAL READING
Ash worth, William. The Economy of Nature: Rethinking the Connections Between
Ecology and Economics. Boston: Houghton Mifflin, 1995.
Baumol, William J., and Wallace E. Oates. The Theory of Environmental Policy,
2nd ed. New York: Cambridge University Press, 1988.
Pollution and the Environment 281

Bromley, Daniel. Environment and Economy. Cambridge, MA: Blackwell, 1991.

Caldwell, Lynton K. Between Two Worlds: Science, the Environmental Movement,
and Policy Choice. New York: Cambridge University Press, 1990.
Daly, Herman E., and Kenneth Townsend, eds. Valuing the Earth: Economics,
Ecology, Ethics. Cambridge, MA: MIT Press, 1993.
Dobson, Andrew. Green Political Thought, 2nd ed. Winchester, MA: Unwin
Hyman, 1996.
Foster, John, ed. Valuing Nature: Economics, Ethics and Environment. New York:
Routledge, 1997.
Goodin, Robert E., ed. The Politics of the Environment. Brookfield, VT: Edward
Elgar, 1994.
Hardin, Garrett. Living Within Limits: Ecology, Economics and Population
Taboos. New York: Oxford University Press, 1993.
Hirsch, Fred. Social Limits to Growth. Cambridge, MA: Harvard University
Press, 1976.
Johnston, Ronald J. Nature, State and Economy: A Political Economy of the
Environment, 2nd ed. New York: John Wiley, 1996.
Kapp, K. William. The Social Costs of Private Enterprise. New York: Schocken, 1971.
Krishnan, Rajaram, Jonathan M. Harris, and Neva R. Goodwin. A Survey of
Ecological Economics. Washington, DC: Island Press, 1995.
Kula, E. History of Environmental Economic Thought. New York: Routledge, 1998.
O'Neil, John. Ecology, Pollution and Politics. New York: Routledge, 1993.
Power, Thomas M. Environmental Protection and Economic Weil-Being: The
Economic Pursuit of Quality. Armonk, NY: M. E. Sharpe, 1996.
Sagoff, Mark. The Economy of the Earth: Philosophy, Law and the Environment.
New York: Oxford University Press, 1988.
Simpson, David. The Political Economy of Growth. New York: St. Martin's, 1983.
Wenz, Peter S. Environmental Justice. Albany: SUNY Press, 1988.
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Chapter 15

International Trade
and Development

The increasing interdependence of nations has brought issues of interna-

tional trade and development to the forefront of political economy.
Modern transportation and communication systems facilitate the rapid
flow of resources, products, and information across national borders,
resulting in a highly integrated global economy. With increased trade has
come concerns about diminished national sovereignty. International
flows of capital and commodities make government efforts to fine-tune
domestic economies using fiscal and monetary policies less reliable due
to their effects on international trade, capital flows, and the value of a
country's currency.
The trade problems facing industrialized countries are overshadowed by
the developmental challenges confronting Asia, Africa, Latin America, and
the Middle East. For the less developed countries (LDCs), the 1980s were a
"lost decade." Higher oil prices and global recession caused declining com-
modity prices, high interest rates, and shrinking export markets. Unable to
earn sufficient foreign exchange to service their debts, many LDCs were
forced to accept dramatically lower growth rates. The 1990s have witnessed
impressive comebacks by some countries and continued stagnation by oth-
ers. Political economy is particularly well-suited for analyzing issues sur-
rounding international trade and development because markets in LDCs
tend to be deeply embedded in cultural and political contexts.
284 Political Economy

THE CLASSICAL LIBERAL PERSPECTIVE

E x p l a n a t i o n s of U n d e r d e v e l o p m e n t
Classical Liberals attribute underdevelopment to a combination of the
following four factors:

1. Inadequate resources. Classical Liberals view the economy as a tech-

nical production process in which output is a function of the quantity and
quality of productive inputs. From this perspective, the LDCs are poor
because they have insufficient skilled labor, natural resources, capital, and
entrepreneurial ability. Any one of these four categories can, by its
absence, create a bottleneck in the development process. A country may be
unable to tap abundant natural resources if it lacks capital or entrepre-
neurship. In what is called "geographical determinism," a country's eco-
nomic fate may be sealed by the quality of its climate, topography, and
natural resources.

2. Inadequate saving and investment. In many LDCs, incomes are so

low that people are unable to save. Because saving is the source of funds
for investment in capital, inadequate saving dooms a country to contin-
ual poverty. LDCs are caught in a "vicious circle." Saving is low because
incomes are low, and incomes cannot grow without more saving and
investment. This dilemma forces LDCs to rely on foreign investment as
a source of capital in the early stages of development. Once growth has
begun, internal saving will increase due to rising incomes. However,
even if adequate saving occurs, the small size of internal markets pro-
vides few outlets for investors. Therefore, in addition to infusions of
foreign capital, LDCs need to broaden their markets by producing for
export.

3. Lack of international trade. Some countries seek to preserve national

autonomy and protect domestic markets by restricting trade with other
nations. Classical Liberals argue that protectionism retards the develop-
ment process. They defend free trade for industrialized nations and LDCs
by appealing to the theory of comparative advantage formulated by English
economist David Ricardo in the early nineteenth century. Ricardo encour-
aged each country to specialize in producing commodities for which it is
best suited and then trade with other countries to obtain a wide variety of
goods. The increased efficiency of production within each country makes
greater worldwide consumption possible. This theory suggests that all
nations have an interest in opposing restraints on trade. If LDCs remain
isolated and closed to foreign trade and investment, they lose opportunities
to benefit from the technology, capital, and consumer goods offered by
industrialized nations.
International Trade and Development 285

4. Government intervention. Classical Liberals believe that govern-

ment efforts to promote development do greater harm than good. Govern-
ment, they claim, cannot possess sufficient knowledge to efficiently
allocate resources; therefore, intervention inevitably results in waste and
slower growth.
Classical Liberals rely on the theory of rent-seeking to demonstrate the
shortcomings of government action. Wealthy elites in the LDCs use gov-
ernment to protect their status and to advance private interests. Corruption
is endemic in many LDCs as people seek to buy government-protected priv-
ileges. Urban residents, who tend to be most visible and organized in
national politics, pressure government for lower food prices at the expense
of rural farmers. "Monument-building" for personal and national glorifi-
cation diverts resources that could have been channeled by the market into
profitable and productive use. Government officials funnel money from the
public treasury to private estates, personal investments abroad, and pur-
chases of imported luxury goods.
Rent-seeking is prevalent in LDCs because politicians must curry favor
with powerful groups to remain in office. Yet, as individuals successfully
obtain money and privileges through the political process, they steer more
resources away from private production and toward additional rent-seek-
ing. More seriously, successful rent-seeking delegitimizes the government
and jeopardizes political stability. If citizens come to believe that control of
government is the key to economic advancement, they will wage violent
battles for political supremacy. Classical Liberals attribute most of the con-
flict in LDCs to struggles for control of a "transfer state" that redistributes
income. If government were confined to its proper role of protecting prop-
erty and enforcing contracts, there would be no motive to fight for control
of the state. Corruption would virtually cease because politicians would
have no favors or privileges to sell and the amount of revenue collected by
government would be minimal.
The mistrust of politics places Classical Liberals in an awkward position
with regard to democracy in LDCs. During much of the twentieth century,
they remained silent about abuses of civil rights by authoritarian govern-
ments in noncommunist nations. In the mid-1970s, Milton Friedman and
other Chicago economists served as advisors for the military junta that
overthrew a democratically elected president in Chile. Authoritarianism
was rationalized as a distasteful but necessary stage to suppress conflict,
forge a national consensus, create investor confidence, and pave the way
for development. Classical Liberals proudly note that Chile is now one of
the most prosperous and democratic countries in Latin America. As LDCs
mature and communism continues to recede, Classical Liberals expect con-
stitutional democracy to be accepted throughout the world.
LDCs can also be harmed by the policies of governments in the indus-
trialized countries. 1 For example, government efforts to preserve jobs may
286 Political Economy

include tariffs on goods imported from LDCs. The use of fiscal or mone-
tary policy to stimulate demand may inadvertently trigger inflation, result-
ing in higher prices for exports to LDCs. Finally, governments responding
to hunger and misery in LDCs may send aid in the form of capital or food.
According to Classical Liberals, this aid has the same effect on the global
economy as welfare programs have on domestic growth. Redistribution
from rich to poor undermines incentives and causes inefficiency by moving
resources away from their most productive use. Foreign aid effectively
slows the engines of the global economy and makes LDCs dependent on
industrialized nations.

D e v e l o p m e n t Policy
Classical Liberal policies on trade and development have been articu-
lated by neoclassical economists such as Jacob Viner (1892-1970), Harry
Johnson (1923-1977), Gottfried Haberler, and Sir Peter Bauer.2 From their
perspective, the same economic principles apply to both developed and
developing countries, so free trade and competitive markets are the optimal
strategies for raising standards of living anywhere in the world.
Development proceeds as the quantity and quality of economic resources
increase, and the market, with its strong incentives for providing produc-
tive resources, is the best mechanism to mobilize a nation for economic
growth. Policymakers should oppose social, cultural, and political forces
impeding the market's operation.
Classical Liberals are so confident of the benefits of free trade that they
urge countries to drop all trade barriers even if trading partners continue
to practice protection. Free trade permits a country to obtain cheaper
goods; the fact that other countries have restrictions on trade does not alter
the positive effects of lower-priced imports in restraining inflation, stimu-
lating innovation, and enabling citizens to enjoy higher standards of living.
Since all trade is voluntary, a country cannot possibly harm itself by
expanding its opportunities to buy from foreigners.
Classical Liberals acknowledge that the transformation from a tradi-
tional, agrarian society to a market economy is inevitably a wrenching
experience, but the trauma can be eased by free trade with the industrial-
ized nations. Foreign trade serves to strengthen the merchant and manu-
facturing classes within LDCs, breaking the grip of traditional elites on the
economy. Market forces also shift peasants out of subsistence farming and
into factories where, through enhanced productivity, their standard of liv-
ing can rise. Agricultural production should be performed by more effi-
cient, large-scale farmers. Finally, untapped natural resources will be
transformed into productive inputs once the incentive of profit and the
availability of capital make their extraction both attractive and feasible.
Classical Liberals are so certain of the ability of free markets to spur
International Trade and Development 287

development that they reject all policies relying on planned strategies by

government. The theory of free trade is their theory of development. 3
The Classical Liberal view of development, sometimes referred to as
"diffusion," envisions the gradual spread of capitalism throughout the
world. Only political barriers such as trade restrictions or nationalization
of property can halt capital diffusion to LDCs. Classical Liberals claim that
capitalism is the only "natural" economic system, and they are confident
that LDCs will follow a development path similar to that of the West.
Experiments with socialism are interpreted by Classical Liberals as analo-
gous to England's reliance on mercantilism in the seventeenth and eigh-
teenth centuries. LDCs initially fear the destabilizing effects of free markets
and enact policies to protect themselves. However, the demonstrated power
of the market to provide rising standards of living will inevitably lead to
disillusionment with socialist policies.
Classical Liberals oppose foreign aid, claiming that the most efficient
form of assistance is investment by multinational corporations to provide
jobs, capital, vocational training, tax revenue, and, in some cases, roads
and other infrastructure. The presence of multinational corporations in
LDCs also imparts Western values and lifestyles, promoting entrepreneur-
ial energy and individual achievement.
In response to concerns that open borders and the mobility of multina-
tional corporations will harm workers in the industrialized nations,
Classical Liberals offer the following defenses of free trade:

1. Efficiency. Free trade and capital mobility permit global resources to

flow to their most valued uses. The resulting gains in output permit all
countries to enjoy higher standards of living.4 Although a textile worker in
the United States may temporarily be hurt by free trade, all consumers ben-
efit from cheaper textiles, and the stimulus of free trade will create job
opportunities in other industries. The primary obstacle to free trade is
posed by politicians. The benefits of trade are long-term and dispersed
across the entire population, while the losses are immediately visible and
concentrated in particular industries or occupations. Therefore, groups
temporarily harmed by free trade will organize to demand protective legis-
lation, while the majority of citizens are likely to remain passive in defend-
ing free trade. Classical Liberals seek to educate both politicians and
citizens about the virtues of free trade to thwart the political tendency
toward protectionism.
Protection causes inefficiency by preventing resources from reaching
their most productive uses and by shielding firms from the discipline of
market competition. If a few seemingly justifiable tariffs or quotas are
allowed, other interest groups will pressure politicians for additional pro-
tection, eventually sealing the nation from both access to low-priced
imports and competitive pressures to innovate. Protectionist policies simply
288 PoliticalEconomy

perpetuate inefficiency by maintaining the high costs and low productivity

responsible for trade problems in the first place.5

2. Reduced inflation. Free trade restrains inflation by providing con-

sumers and firms with low-priced alternatives to domestic products and
resources. The ability of labor unions and oligopolistic firms to raise wages
and prices is undercut by free trade.

3. Peace. Free trade contributes to global interdependence, fostering

shared interests among nations and reducing the risk of war. Conversely,
protective trade barriers may cause retaliation by other nations and
increased international tensions.

4. International stability. The growing indebtedness of LDCs increases

the importance of free trade. If the United States were to increase trade
barriers, LDCs would lose export markets and be unable to earn suffi-
cient foreign currency to pay interest on their debts. The ensuing
defaults might trigger financial chaos in credit markets and possibly a
global depression. Free trade remains essential for the long-term stability
of all countries.
Classical Liberals acknowledge that problems arise if some countries
renege on contracts or confiscate foreign property within their borders.
Friedrich Hayek proposed the establishment of an international governing
body to assure that countries don't harm one another.6 Although this pro-
posal for world government seems inconsistent with Classical Liberalism,
the authority of the governing body would be limited to enforcing con-
tracts and settling disputes. According to Hayek, a minimal international
state is necessary to prevent anarchy.

THE RADICAL PERSPECTIVE

E x p l a n a t i o n s of U n d e r d e v e l o p m e n t

Within the Radical perspective, two distinct views on underdevelopment

coexist. Both can be traced to the writings of Marx.
Diffusion theory. In The Communist Manifesto^ Marx and Engels
praised capitalism for accomplishing the historically necessary task of
mobilizing resources and destroying traditional social and political struc-
tures to pave the way for modernization. Marx had little sympathy for
romantic visions of traditional culture, claiming that capitalism had res-
cued "a considerable part of the population from the idiocy of rural life."
He anticipated that capitalism, by stimulating innovation and cost-cutting,
would promote capital accumulation and economic development.
Increased availability of resources, coupled with new attitudes toward
International Trade and Development 289

profitmaking and individual initiative, would set the stage for a dynamic
and efficient system for lifting society out of poverty.
This version of the Radical theory of development is remarkably similar
to the Classical Liberal view and hence is also called "diffusion theory." The
relationship between the industrialized nations and the LDCs is claimed to
be mutually beneficial. Capitalism spreads outward from the industrialized
countries to the LDCs, eventually incorporating the latter into a global eco-
nomic system promoting the development of all countries. The industrial-
ized nations can export surplus goods and import cheap raw materials to
maintain profits, while the LDCs gain both markets for their raw materials
and the capital essential for modernization. Increased exposure to capital-
ism will eventually ensure worldwide industrial development.
Marx did observe that certain countries were more resistant than others
to capitalist penetration. In particular, he attributed the lack of industrial-
ization in Asia to the need for large-scale irrigation projects requiring
extensive political authority to mobilize resources. The power of the state
suppressed the entrepreneurial and commercial activity essential to the for-
mation of capitalism. Marx labeled such systems "oriental despotism" or
the "Asiatic mode of production."
The view that capitalism is ultimately beneficial to LDCs does not deny
that competitive international markets often wreak havoc on traditional
economies and social structures, but this disruption is necessary for the
transition to a modern capitalist society. Standards of living in the LDCs
will rise as industrial development and trade with other countries create
employment opportunities.
Dependency theory. In Marx's later writings, he argued that the con-
tinued accumulation of capital in the developed countries requires an
underdeveloped "periphery" of nations to serve as markets for excess
goods, sources of cheap resources, and profitable investment outlets.
Therefore, capitalism in one region requires the presence of a precapitalist
region, giving the developed countries a strong interest in keeping parts of
the world dependent and backward. Marx illustrated this point with the
British tactic of smashing handlooms and cutting off the thumbs of weavers
in India to assure that country's continued reliance on British textiles.
Historical roots of dependency theory are also found in the writings of
Lenin.7 Seeking to justify revolution, Lenin argued that Russia was being
damaged by its subordinate status among the European nations. He
claimed that western European firms had entered Russia in search of new
markets for their products and cheap labor. Whereas Marx originally pre-
dicted revolutions in the most industrialized capitalist nations, Lenin
argued that exploitation of foreign labor enabled capitalist firms to pay
higher wages in Europe and North America. These high wages served to
quell revolutionary discontent, turning North American and European
workers into an "aristocracy of labor" whose privileged position explained
290 Political Economy

their political passivity. Lenin proposed that revolution must begin in

Russia, the "weakest link" in the chain of capitalist nations.
The assertion that development in the industrialized countries retards
development elsewhere has gained increasing acceptance among
Radicals. In the 1950s, American economist Paul Baran argued that
development of Africa, Asia, and Latin America was blocked by the
trade and investment practices of developed capitalist countries. 8
Foreign capitalists seeking security for their assets in LDCs form politi-
cal alliances with feudal landowners, resulting in authoritarian govern-
ments opposed to labor unions, civil rights, and democracy. Baran also
claimed that economic interaction with capitalist nations drains wealth
from the LDCs. Goods previously manufactured in the LDCs are
replaced by imports, and self-sufficient agriculture is replaced by com-
mercial crops grown for export.
The argument that Western capitalism is responsible for the plight of
LDCs forms the core of "dependency theory" developed during the 1970s
by Andre Gunder Frank, Celso Furtado, Osvaldo Sunkel, and Theotonio
dos Santos. 9 Variants of the same theme are found in the theory of
"unequal exchange" formulated by Samir Amin and Arghiri Emmanuel
and the "world systems theory" of Immanuel Wallerstein.10 These theorists
agree that the primary problem confronting LDCs is not lack of capitalist
trade and development, but exposure to global capitalism.
Dependency theorists trace the origins of underdevelopment to the fif-
teenth and sixteenth centuries, claiming that the development of Europe,
and later North America, was achieved with wealth appropriated from
Africa, Asia, and Latin America. Colonialism destabilized indigenous social
and economic structures, subverting the normal development process.
Europeans installed or protected local rulers who were receptive to foreign
interests, and Europeans themselves populated the LDCs as plantation
managers, factory bosses, and government officials. This dominance by
foreigners concentrated development in specific industries such as mining,
timber, or rubber, making the LDCs vulnerable to changing patterns of
international demand. Moreover, profits were often either repatriated to
Europe or used for consumption of imported luxury goods. This system of
"peripheral capitalism" stalled the development process as both foreign
and domestic elites, largely free from competitive pressures, used profits to
insulate themselves from challenges to their power and privilege.
To verify the claims of dependency theory, Argentinean economist Andre
Gunder Frank examined the historical relation between rates of growth in
LDCs and the degree of economic interaction among those nations and
developed capitalist countries. He found that LDCs experienced some of
their highest growth rates during periods when the capitalist countries were
absorbed in war or depression. Conversely, during times of peace, when
trade and investment activities were greatest, LDCs fared relatively poorly.11
International Trade and Development 291

These findings challenge both the Classical Liberal and Radical views that
capitalism results in a diffusion of development throughout the world.

D e v e l o p m e n t Policy
Radical policies for promoting economic development reflect the schism
between diffusion theory and dependency theory. Diffusion theory views
capitalism as a progressive force in global development, so the business class
in LDCs should be supported in its efforts to overthrow feudal oligarchies.
Insurgent movements by peasants and workers are not encouraged because
LDCs will not be ready for socialist revolution until capitalism has per-
formed its historical task of accumulating capital and preparing people for
industrial society. An illustration of policies emanating from diffusion
theory is presented by the former Soviet Union's initial reluctance to support
Fidel Castro's efforts to overthrow the Batista regime in Cuba. Soviet policy
also approved of multinational corporations for performing the necessary
task of injecting capital and technology into the LDCs.
In sharp contrast, dependency theorists encourage LDCs to minimize con-
tact with the mature capitalist countries to develop internal economic struc-
tures consistent with their specific needs. Dependency theorists favor national
autonomy or "collective self-reliance" among groups of LDCs to foster eco-
nomic development and national pride. This focus on psychological liberation
reflects a belief that LDCs have suffered from cultural as well as economic
imperialism. Exposure to Western lifestyles and consumption patterns has
alienated people in LDCs from their own cultures and has created a deep
sense of inferiority. Restoring national pride will release the productive ener-
gies of people who are presently crippled by a sense of powerlessness.
Other policy proposals from dependency theorists include a reorienta-
tion of agriculture away from production for export and toward meeting
the needs of local citizens, the use of labor-intensive or small-scale technol-
ogy to increase employment, public investment in infrastructure, and the
substitution of domestically manufactured goods for foreign imports.
During the 1980s, a coalition of Radicals and Modern Liberals pro-
posed a dramatic realignment of international relations called the New
International Economic Order (NIEO). 12 This strategy emerged from the
perception that domestic development policies are futile without major
revisions of the international political economy. The NIEO would entail
greater political control over multinational corporations, an enlarged role
for LDCs in international institutions such as the World Bank and the
International Monetary Fund, easier credit terms for LDCs, reduced trade
barriers for exports, increased foreign aid and technical assistance, and
taxes on the extraction of nonrenewable resources.
Radicals exhibit ambiguity in their position on free trade. They view it as
potentially damaging to LDCs, but they also condemn many protectionist
292 Political Economy

policies in the industrialized nations as preserving privilege against compet-

itive pressures from abroad. Radicals will support protection when it facil-
itates development of LDCs by sheltering them from global competition,
but they claim that protection cannot solve the trade problems of the indus-
trialized nations caused by failure to innovate and lagging productivity. This
ambiguity on trade policy reflects an unresolved issue of whether workers
in capitalist nations share common interests with workers in LDCs. To the
extent that Radicals view workers in the United States and Western Europe
as an "aristocracy of labor," they are likely to support trade policies bene-
ficial to LDCs even at the expense of workers in the industrialized nations.
On the other hand, those Radicals who view industrial workers in the West
as the primary constituency for an eventual transition to socialism will favor
trade policies to protect mature industries in the advanced capitalist nations.

THE CONSERVATIVE PERSPECTIVE

E x p l a n a t i o n s of U n d e r d e v e l o p m e n t
Conservatives have not devoted much attention to issues of international
development and trade. Historically, Conservatism focused on preserving
Western culture by resisting industrialization and democracy. Given their
dissatisfaction with the course of development in the West, Conservatives
remain skeptical about efforts to move LDCs along a similar route that fos-
ters disintegration of traditional social structures, decline of authority, and
the emergence of a rootless, mobile population focused primarily on the
pleasures of consumption. Conservatives trace these changes to the
Enlightenment view that human reason can restructure society.
Development should instead follow a natural path unique to each culture. 13
To avoid the excesses of modern society, some aspects of precapitalist
cultures should be preserved. A low level of production need not imply
underdevelopment. Cultural, religious, and social institutions may provide
a secure and stable existence for most citizens. Efforts to stimulate indus-
trialization may actually ruin the existing culture by undermining tradi-
tional economic structures and practices.
However, recognizing that some countries have not yet achieved an ade-
quate standard of living for the general populace, Conservatives offer the
following explanations of underdevelopment:

1. Environmental factors. Climate affects the physical resources of a coun-

try as well as human behavior. Some Conservatives claim that people living in
warm climates lack ambition because they can attain subsistence living so eas-
ily. Whereas the harsher climate of Europe and North America spurs people
to work and innovate, people in the LDCs may devote more of their time to
other aspects of life such as leisure, ritual, and community social life.
International Trade and Development 293

2. Psychological traits. Conservatives point to certain psychological

predispositions causing people in LDCs to resist development. A lack of
"achievement orientation" explains why individuals make little effort to
distinguish themselves from their social group. 14 Conservatives point out
that countries with warmer climates tend to be less developed. With a hos-
pitable environment, people from tropical countries were never forced to
plan for the future and organize themselves to conquer nature. 15 Also,
when people are content simply to fulfill their biological and social needs,
material incentives are less effective in changing behavior. Workers may
respond to higher wages by working less because they can meet their basic
needs with fewer hours of work. This response leads to a backward-bend-
ing supply curve of labor, suggesting that higher wages fail to spur addi-
tional productive activity.
People in LDCs also purportedly lack initiative and willingness to take
risks. Life in traditional societies tends to be unchanging over time as indi-
viduals seek harmony with nature rather than mastery over it. Conservatives
attribute this attitude to the prevalence of close-knit tribal communities and
extended families in which responsibilities and rewards are dispersed over
large numbers of people so that no individual has an incentive to change the
pattern of living.
Psychological attachment to ritual and mysticism impedes the
rational, calculating mentality essential to a market economy. High
birth rates can be attributed to an unwillingness or inability to consider
future consequences of actions. Finally, Conservatives note that people
in LDCs often exhibit a preindustrial attitude toward time, making
them unable to conform to schedules and therefore ill-suited to work in
a market economy.

3. Imperialism. During the early nineteenth century, Conservatives sup-

ported cultural and religious excursions into Africa, Asia, and Latin
America. The "white man's burden" obligated Europeans and North
Americans to introduce Christianity and civilization to native cultures.
However, as missionary work evolved into imperialism, Conservatives
became concerned that corrosive market forces were being imposed on
LDCs by corporations seeking cheap raw materials and outlets for their
products. These concerns were undoubtedly amplified because the eco-
nomic benefits of imperialism accrued primarily to manufacturers and mer-
chants who Conservatives viewed as the enemy of traditional society both
at home and abroad. Some Conservatives also condemned the military
expenditures required to defend a global empire as a waste of resources.
From their perspective, imperialism was responsible for decline in the West
as well as destruction of traditional cultures throughout the world. By the
early twentieth century, this opposition to imperialism led Conservatives to
adopt an isolationist stance toward foreign involvements.
294 Political Economy

4. Democracy. After gaining independence from colonialism, many

LDCs were confronted with arbitrarily drawn borders encompassing his-
torically separate and sometimes hostile groups. Conservatives claim that
if newly established governments are open to democratic participation, the
variety of conflicting interests results in political stalemate at best, and pos-
sibly violence and anarchy. In short, while conservatives have come to
terms with democracy in the industrialized world, they view political par-
ticipation as a luxury that LDCs cannot yet afford.
Democracy fosters demagogy, as politicians pander to the masses, and
instability when no coalition can gain a sufficient majority to rule effec-
tively. Democracy also discourages political leaders from taking economi-
cally necessary but unpopular actions. Democratic governments focus on
short-term measures to win the next election rather than the long-term per-
formance of the economy. India is commonly used as an example of a
democratic country with political instability, corruption, and relatively
poor economic performance. In contrast, Conservatives point to Brazil,
Chile, and South Korea as countries successfully combining authoritarian
government with economic development.

D e v e l o p m e n t Policy
Conservatives remained largely isolationist until the 1950s, opposing
nearly all commitments to and interventions in foreign countries. They con-
sidered foreign aid to developing countries as counterproductive because,
by increasing food supplies and promoting public health, it could lead to
explosive population growth, which might impede development. More
generally, foreign aid would cause a flood of rising expectations, resulting
in social disorder.
During the 1950s, however, Conservatives began to reassess their isola-
tionist policies in light of the growing threat of communist expansion.
Indeed, Conservatives became leading proponents of internationalism, call-
ing on the United States to assert its strength as leader of the "Free World."
According to Conservatives, global peace and security require that one
country gain "hegemony" with sufficient power to establish and enforce
the rules of international relations. 16 Without hegemony, the struggle
among nations for dominance leads to international tensions and conflict.
Despite this new "internationalist" orientation, Conservatives reject shared
international governance through representative organizations such as the
United Nations because LDCs outnumber the industrialized countries and
could therefore effectively wield power.
Conservatives want the United States to ally itself with those foreign gov-
ernments protecting private property and promoting trade with the West.17
These governments need not be democratic because the LDCs need strong
governmental authority to control ethnic and religious strife, to protect
International Trade and Development 295

domestic and foreign investment from excessive risk, and to actively resist
insurgent political movements. In determining which governments deserve
U.S. support, Conservatives distinguish between "authoritarian" and "totali-
tarian" regimes.18 Totalitarian governments pursue egalitarian or socialist
ends, but authoritarian governments promote favorable investment climates
and capitalist development while restricting free elections and democratic par-
ticipation. Conservatives oppose totalitarian regimes but tolerate the abuses
of civil liberties in authoritarian countries, hoping that economic development
will eventually create sufficient political stability to permit free elections.
The Conservative attitude toward foreign aid has changed along with
the transition from isolationism to internationalism during the 1950s. To
halt the spread of communism, Conservatives have supported military and
economic aid to vulnerable countries. However, as the threat of commu-
nism recedes, Conservatives are retreating to their former isolationism,
opposing virtually all government involvement with foreign countries.
Instead, they encourage churches, civic groups, and other private organiza-
tions to provide humanitarian aid to the citizens of LDCs.
Conservatives condemn free trade for subjecting countries to competi-
tive pressures over which they have little control. In the nineteenth century,
the German economist Friedrich List argued that less industrialized coun-
tries should place tariffs on goods from more advanced countries to give
"infant industries" time to mature and eventually become competitive in
international markets. Even when Conservatives acknowledge the potential
economic gains from free trade, they claim that the preservation of tradi-
tional culture, standards of living, and national security may require pro-
tectionist policies. Conservatives note that both the United States and
Germany practiced extensive protectionism during the late nineteenth and
early twentieth centuries while rapidly surpassing England, the country
most devoted to free trade at the time. 19
To summarize, Conservatives welcome trade when it contributes to the
vitality of both trading partners and does not undermine traditional cul-
ture, but they favor protectionist policies to prevent standards of living in
the industrialized countries from being undermined by competition with
low-wage manufacturers in the LDCs.

THE MODERN LIBERAL PERSPECTIVE

E x p l a n a t i o n s of Underdevelopment
In the aftermath of World War II, Modern Liberals were concerned that
the rapid transformation of the Soviet Union into a global power might
provide an appealing model to LDCs. This concern increased when com-
munists gained control of China in 1949. For post-war Modern Liberals,
the best protection against the spread of communism was rapid growth in
296 Political Economy

the LDCs to end hunger and misery that drive people to political eaxtremes.
During the 1950s and 1960s, economists such as Gunnar Myrdal
(1898-1987), Ragnar Nurkse (1907-1959), Raul Prebisch (1901-1985),
Paul Rosenstein-Rodan (1902-1985), William Arthur Lewis (1911-1991),
and Albert O. Hirschman constructed the new field of development eco-
nomics. These theorists sought to develop a synthesis of Classical Liberal
and Radical views. Like Classical Liberals, Modern Liberals accept the
need to mobilize resources and instill Western values of individual initiative
and achievement. However, Modern Liberals also validate the Radical view
that imperialism has been a major factor in blocking development, and
they propose that governments in both the industrialized countries and the
LDCs should pursue active policies to correct past injustices and hasten the
development process.
Modern Liberals attribute underdevelopment to the following causes:

1. Market failures. Because markets have been suppressed in LDCs, the

typical shortcomings of markets are magnified. Resources are relatively
immobile, information is limited, and competitors are sometimes few.
Moreover, capitalist notions of individual initiative, risk-taking, and entre-
preneurship lie dormant.

2. Extreme inequality. Modern Liberals argue that excessive inequality

in the distribution of wealth and income results in a structure of demand
favoring imports. Even domestic production is geared toward luxury goods
for the wealthy elite rather than food, clothing, and shelter for the bulk of
the population. The low demand for basic necessities means that markets
for these products remain small and undeveloped, with resulting ineffi-
ciency. To make matters worse, the concentration of wealth and income
often fails to generate high levels of saving and investment because elites
are prone to a "demonstration effect" as they emulate consumption pat-
terns in the developed countries. Money that could have been channeled
into capital formation goes instead for imported luxury goods serving pri-
marily as status symbols.
Inequality retards development in other ways. Poverty prevents many
farmers from experimenting with new agricultural techniques because a
single crop failure could mean starvation. Poverty also causes overpopulation
as families seek to increase the number of hands available to provide imme-
diate subsistence. Finally, the development of human resources is hindered
by inability to afford adequate nutrition, health care, and education.

3. Free trade. While Modern Liberals acknowledge that international

trade between similarly developed nations can be mutually beneficial, they
believe that free trade may harm LDCs. Swedish economist Gunnar Myrdal
claimed that free international trade operates to the advantage of the
International Trade and Development 297

developed countries and perpetuates stagnation in the LDCs. 20 This

hypothesis, elaborated by Raul Prebisch and Hans Singer, states that the
terms of trade between developed countries and LDCs will shift over time
in favor of the developed countries. Prebisch and Singer based their claim
on Engel's Law, a well-established economic principle stating that the per-
centage of income spent on food becomes smaller as GDP rises. Since many
of LDCs' exports are agricultural products, Prebisch and Singer concluded
that demand for these products would fail to keep pace with rising incomes
in the industrialized countries, suppressing the prices of LDCs' exports rel-
ative to the prices of manufactured goods from Europe and North America.
In addition, the market power of corporations and labor unions in the
developed countries pushes the prices of their exports up. Conversely, the
largely nonunionized workers and small businesses of the LDCs have little
control over the prices of their exports.

4. Ineffective government. As imperialist powers colonized Africa, Asia,

and Latin America, they often installed puppet governments to give the
appearance of local rule. Not only were these governments subservient to
the mother country, they were closely aligned with a relatively small num-
ber of wealthy families who actually benefited from imperialist control of
their country. As increasing numbers of LDCs gained independence after
World War II, the new governments reflected the legacy of imperialism.
Instead of providing social infrastructure including adequate health care,
education, transportation, and communication systems, governments in
LDCs blocked economic reforms threatening the status quo. They also
diverted resources toward the military, glorification of the state, and dis-
plays of wealth and status. The industrialized nations overlooked this
waste and corruption because they relied on LDC governments to maintain
a secure investment climate and to repress guerrilla forces.

D e v e l o p m e n t Policy
During the past half-century, Modern Liberals have formulated vari-
ous strategies for government to supplement the market in promoting
economic development. Although early European industrialization was
based on exports, economist Ragnar Nurkse claimed that export-led
growth was inappropriate for LDCs because of competition from more
advanced industries in the West. LDCs should instead pursue a policy of
import-substitution by promoting the domestic manufacture of formerly
imported goods. 21
To break the cycle of poverty, Paul Rosenstein-Rodan advocated a "big
push" with widespread investment by government and development of an
infrastructure of schools, highways, and communications systems.22 This
initiative is designed to take advantage of the positive and reinforcing
298 Political Economy

interactions of simultaneous development throughout the country. The

"external economies" generated by developments in each industry would
enhance development of other industries. However, Albert Hirschman ques-
tions the viability of a big push. Such a policy requires significant government
planning as well as large infusions of capital through foreign investment and
aid from the industrialized nations. Arguing that sufficient capital will not be
available, Hirschman advises that LDCs target their scarce capital on a few
select projects with linkages to other industries throughout the economy.23
Modern Liberals criticize Classical Liberals for equating economic
growth with development. As noted by Simon Kuznets (1901-1985), the
early stages of growth are typically accompanied by increasing inequality
and a worsening of conditions for the poorest members of society as the
agricultural sector declines relative to the manufacturing sector.24 To coun-
teract this trend, Modern Liberals call for "growth with equity," focusing
on the achievement of social goals such as reducing infant mortality, rais-
ing the literacy rate, and meeting the basic needs of the population. 25
Modern Liberals propose to focus assistance on the development of human
resources through provision of adequate food, clothing, shelter, health
care, and education. This "bottom-up" approach to development relies
heavily on participatory efforts by local citizens. For Modern Liberals, pro-
jects using local resources and producing goods intended for local markets
are essential to the development process. English economist E. F.
Schumacher (1911-1977) insisted that investment projects should utilize
"intermediate technology" lying somewhere between the capital-intensive
techniques of the West and the traditional labor-intensive techniques of the
LDCs. 26 Otherwise, new investments are likely to exacerbate unemploy-
ment by reducing the amount of labor required for production.
Another facet of "growth with equity" is land reform. In many LDCs,
ownership of land is concentrated in the hands of a few wealthy families
and is used primarily for export crops. As a result, peasants are often
denied access to land and must migrate to urban areas where poverty and
disease are rampant. Modern Liberals advocate government efforts to dis-
perse the ownership of land by breaking up large estates into small peasant
holdings. Because wealthy families exert considerable political pressure on
local governments to block land reform, Modern Liberals have suggested
that foreign aid be contingent on significant progress in land reform.
Although Modern Liberals advocate foreign aid to LDCs, they have criti-
cized the method of delivery. Typically, much of the money and food ends up
in the hands of ruling elites. In some instances, foreign aid actually disrupts
viable production processes. For example, food shipments might be distrib-
uted from a central location, requiring people from remote areas to travel for
several weeks to obtain the food. This journey disrupts farming efforts, cre-
ating greater dependence. Even if aid is granted in the form of technology
transfers, traditional production processes may be eliminated, causing
International Trade and Development 299

unemployment and the disintegration of stable communities and families.

Modern Liberals favor aid in the form of technical assistance and resources to
initiate local projects leading toward self-sustaining agriculture and industry.
As for trade policy, Modern Liberals seek a middle course between free
trade and protectionism. They are skeptical about the effects of free trade
on both LDCs and industrialized nations. Keynes proposed that mature
capitalist economies should strive for "national self-sufficiency" by pro-
tecting themselves from foreign competition to encourage a diversity of
industries. 27 He feared that competition from cheap foreign labor would
jeopardize efforts to maintain high levels of employment and high wages in
the developed countries. Whereas Classical Liberals applaud free trade's
disciplining effect on wages in the industrialized countries, Keynes viewed
high wages as essential to maintaining sufficient aggregate demand. Any
increased international competitiveness gained through low wages would
be offset by domestic stagnation due to inadequate demand from con-
sumers in the developed countries.
During the 1980s, Modern Liberal economists such as Paul Krugman, John
Culbertson, and Robert Kuttner formulated "strategic trade theory" to pro-
vide rationales for limited trade protection.28 Refuting the Classical Liberal
claim that any losses from trade will be more than offset by gains elsewhere in
the economy, Modern Liberals argue that the theory of comparative advantage
rests on the unrealistic assumption of a perfectly competitive economy with no
externalities, full information, and perfect mobility of resources. In the real
world, adjustment to dislocations caused by free trade can be painful and pro-
longed. Entire industries may stagnate for decades. Moreover, certain high-
tech industries generate positive externalities by stimulating product
development in other industries. The country with comparative advantage in
those industries is likely to experience higher growth rates, so government
action is justified to assure comparative advantage in selected industries.
A related argument favoring subsidies is that firms relying on extensive
research and development are typically unable to reap the full social bene-
fits of their efforts due to the dissemination of information. As a result,
they will engage in less than the optimal amount of R&D. To encourage
firms and industries to extend their research efforts, government may offer
subsidies, tax breaks, or other forms of protection against competition.
Strategic trade theorists claim that comparative advantage can be created
through public policy. As production becomes less dependent on climate and
natural resources, and as capital and technology become increasingly mobile,
the key determinant of comparative advantage is the quality of human
resources. Government can exert considerable influence on human resource
development through subsidies for education and job training. The country
with a highly skilled labor force and innovative entrepreneurs will reap
higher profits from production because these factors are the most scarce and
least mobile in the global economy. Stated differently, countries with more
300 Political Economy

skilled labor will specialize in higher "value-added" production, which gen-

erates greater profits and economic growth. As a result, all of society bene-
fits from government efforts to create a more productive labor force.
Another Modern Liberal argument for government assistance to indus-
tries harmed by free trade is based on considerations of equity. If society as
a whole benefits from the lower prices, increased efficiency, and innovation
fostered by free trade, then society as a whole should share the burden of
unemployment and business failures in industries suffering a loss of com-
parative advantage. This social assistance might take the form of subsidies
for job training or relocation, low-interest loans, or temporary trade restric-
tions to give industries more time to adjust to changing market conditions.
Modern Liberals also warn that unfettered trade creates the dangerous
potential for a "race to the bottom" as each nation is pressured to reduce
wages and benefits in the quest for international competitiveness. Instead,
Modern Liberals encourage government to take the "high road"; protec-
tion of high wages can actually improve competitiveness by providing cor-
porations with strong incentives to invest in productivity-enhancing
technology and by motivating employees to upgrade their skills and to
increase the intensity of their work efforts. Modern Liberals claim that
wage-cutting, union-busting, and deregulation lead to greater income
inequality without improving international competitiveness.
A final argument for trade protection is based on the size of modern cor-
porations. Firms engaged in large-scale production require stable costs and
prices to plan long-term investments. By increasing uncertainty, free trade
discourages investment and contributes to industrial decline. Even when an
industry is in decline, trade protection may provide time to innovate, rene-
gotiate contracts, modernize facilities, and return to competitive status.
However, the Modern Liberal case against free trade is not an unquali-
fied endorsement of protection. Modern Liberals accept much of the
Classical Liberal argument that protection encourages inefficiency and
retards innovation. Paul Krugman, the leading theorist of strategic trade
policy, became so concerned that his ideas were being used by advocates of
widespread protection that he declared his support for free trade with only
minor exceptions of limited duration and scope.29 Modern Liberals
acknowledge that a substantial portion of existing protection reflects lob-
bying efforts by special-interest groups. Government should carefully con-
sider all such requests to determine which forms of protection serve the
national interest in maintaining a healthy and diversified economy.
In attempting to move toward freer trade, Modern Liberals seek multi-
lateral or reciprocal agreements between nations to lower trade barriers.
Even if the economic arguments for free trade are valid, politicians cannot
ignore the reality of closed factories and unemployed workers. To create
popular support for lower trade barriers, each country must secure similar
concessions from trading partners. Public acceptance of free trade can also
International Trade and Development 301

be cultivated by government policies to deal with unemployment and wage

depression created by international trade and by negotiating trade agree-
ments containing stipulations about environmental protection, human
rights, and labor unions in other countries. If trading partners refuse to
negotiate, politicians may choose to retain domestic protection, pursuing
"fair trade" rather than free trade. However, to prevent protectionism from
degenerating into trade wars and "beggar thy neighbor" policies, Modern
Liberals seek cooperative strategies among nations to develop rules gov-
erning international trade. 30
The North American Free Trade Agreement (NAFTA) has been a deeply
divisive issue for Modern Liberals. Proponents view the creation of a free
trade zone between Canada, Mexico, and the United States as a necessary
response to emerging free trade zones in Europe and Asia, while opponents
worry that lower wages and less restrictive environmental, health, and
safety standards in Mexico will give Mexican firms an unfair advantage
and cause U.S. firms to move south or to cut wages and benefits.31

NOTES
1. See Anne O. Krueger, Economic Policies at Cross-Purposes: The United
States and Developing Countries, Washington, DC: Brookings Institution, 1993;
Ryan C. Amacher, Gottfried Haberler, and Thomas D. Willett, eds., Challenges to
a Liberal Economic Order, Washington, DC: American Enterprise Institute, 1979;
and Deepak Lai, Against Dirigisme: The Case for Unshackling Economic Markets,
San Francisco, ICS Press, 1994.
2. For a collection of essays representing the Classical Liberal perspective on eco-
nomic development, see David Wall, ed., Chicago Essays in Economic Development,
Chicago: University of Chicago Press, 1972.
3. See Deepak Lai, The Poverty of Development Economics, Cambridge, MA:
Harvard University Press, 1985; Peter T. Bauer, Dissent on Development, London:
Weidenfeld &c Nicolson, 1971; and Peter T. Bauer, Reality and Rhetoric: Studies in
the Economics of Development, Cambridge, MA: Harvard University Press, 1984.
For a critique of Classical Liberal development theory, see John Toye, Dilemmas of
Development: Reflections on the Counter-revolution in Development Theory and
Policy, Oxford: Blackwell, 1987.
4. A Classical Liberal response to concern about plant closings and job loss due
to international competition is presented in Richard B. McKenzie, Fugitive
Industry: The Economics and Politics of Deindustrialization, Cambridge, MA:
Ballinger, 1984.
5. See Meivyn B. Krauss, How Nations Grow Rich: The Case for Free Trade,
New York: Oxford University Press, 1997; Anne O. Krueger, The Political
Economy of Protection, Chicago: University of Chicago Press, 1996; and Charles
K. Rowley, Willem Thorbecke, and Richard E. Wagner, Trade Protection in the
United States, Brookfield, VT: Edward Elgar, 1995.
6. Friedrich A. Hayek, The Road to Serfdom, London: Routledge &c Kegan
Paul, 1979.
302 Political Economy

7. V. I. Lenin, Imperialism: The Highest Stage of Capitalism, New York:

International Publishers, 1969. For more recent Radical analyses of imperialism,
see Anthony Brewer, Marxist Theories of Imperialism: A Critical Survey, 2nd ed.,
New York: Routledge, 1992, and Chronis Polychroniou, Marxist Perspectives on
Imperialism, New York: Praeger, 1991.
8. Paul Baran, The Political Economy of Growth, New York: Monthly Review
Press, 1967.
9. For surveys of dependency theory, see Vincent A. Mahler, Dependency y
Approaches to International Political Economy, New York: Columbia University
Press, 1980; Mary Ann Tetreault and Charles Frederic Abel, eds., Dependency Theory
and the Return of High Politics, Westport, CT: Greenwood, 1986; and Dudley Seers,
ed., Dependency Theory: A Critical Reassessment, London: Pinter, 1981.
10. Samir Amin, Accumulation on a World Scale, New York: Monthly Review
Press, 1974; Arghiri Emanuel, Unequal Exchange: A Study of the Imperialism of
Trade, New York: Monthly Review Press, 1972; Immanuel Wallerstein and Terence
K. Hopkins, World-systems Analysis: Theory and Methodology, Beverly Hills, CA:
Sage, 1982; and Andre Gunder Frank and Barry K. Gills, eds., The World System,
New York: Routledge, 1993.
11. Andre Gunder Frank, Capitalism and Underdevelopment in Latin America,
New York: Monthly Review Press, 1969. See also Andre Gunder Frank, Crisis in
the Third World, New York: Holmes & Meier, 1981.
12. For more detail on proposals for an NIEO, see Jagdish Bhagwati, ed., The
New International Economic Order, Cambridge: MIT Press, 1977; William R.
Cline, Policy Alternatives for a New International Economic Order: An Economic
Analysis, New York: Praeger, 1979; Pradip K. Ghosh, NIEO: A Third World
Perspective, Westport, CT: Greenwood, 1984; and Prakash N. Agarwala, The New
International Economic Order: An Overview, New York: Pergamen, 1983.
13. See J. H. Boeke, Economics and Economic Policy in Dual Societies, New
York: Institute for Pacific Relations, 1953. See also S. H. Frankel, The Economic
Impact on Underdeveloped Societies, Oxford: Basil Blackwell, 1953.
14. See David McClelland, The Achieving Society, Princeton, NJ: Van Nostrand,
1961.
15. See Ellsworth Huntington, Civilization and Climate, New York: Arno Press,
1977. See also, Edward C. Banfield, The Moral Basis of a Backward Society.
Glencoe, IL: The Free Press, 1958.
16. The argument for a single hegemonic leader in the global economy is exam-
ined in Robert Gilpin, War and Change in World Politics, Cambridge: Cambridge
University Press, 1981. The claim that cooperation and coordination between a few
great powers can serve as a substitute for hegemonic leadership is made in Robert
O. Keohane, After Hegemony: Cooperation and Discord in the World Political
Economy, Princeton, NJ: Princeton University Press, 1984.
17. See Norman Podhoretz, The Present Danger, New York: Simon &c Schuster,
1980. See also Jeane J. Kirkpatrick, Legitimacy and Force, New Brunswick, NJ:
Transaction Books, 1988.
18. See Jeane J. Kirkpatrick, Dictatorships and Double Standards, New York:
Simon St Schuster, 1982.
19. See Alfred E. Eckes, Opening America's Markets, Chapel Hill, NC:
University of North Carolina Press, 1995. See also Clyde V. Prestowitz, Jr., Trading
Places, New York: Basic Books, 1988.
InternationalTrade andDevelopment 303

20. Gunnar Myrdal, Development and Underdevelopment, Cairo: National

Bank of Egypt, 1956. See also Gunnar Myrdal, The International Economy, New
York: Harper, 1956.
21. Ragnar Nurkse, Problems of Capital Formation in Underdeveloped d
Countries, Oxford: Basil Blackwell, 1953.
22. Paul Rosenstein-Rodan, Philosophy and Practice in Latin American n
Development, Cambridge: MIT Press, 1972.
23. Albert O. Hirschman, The Strategy of Economic Development, New Haven,
CT: Yale University Press, 1959.
24. Simon Kuznets, "Economic Growth and Income Inequality," American n
Economic Review 45 (1955): 1-28.
25. See Irma Adelman and Cynthia Taft Morris, Economic Growth and Social
Equity in Developing Countries, Stanford, CA: Stanford University Press, 1973,
and Martin Neil Baily, Gary Burtless, and Robert Litan, Growth with Equity,
Washington, DC: Brookings Institution, 1993.
26. E. F. Schumacher, Small Is Beautiful: Economics As If People Mattered, New
York: Harper & Row, 1973.
27. John Maynard Keynes, "National Self-sufficiency," The Yale Review 22,
no. 4 (June 1933): 155-69.
28. See Paul Krugman, ed., Strategic Trade Policy and the New International
Economics, Cambridge: MIT Press, 1986; John M. Culbertson, "The Folly of Free
Trade," Harvard Business Review (Sept./Oct. 1986): 122-28; and Robert Kuttner,
Managed Trade and Economic Sovereignty, Washington, DC: Economic Policy
Institute, 1989.
29. Paul Krugman, "Is Free Trade Passe," Journal of Economic Perspectives
1987, 131-44. See also Paul Krugman, Pop Internationalism, Cambridge: MIT
Press, 1996.
30. The Modern Liberal debate over free trade and protectionism is presented in
Alex Oxiey, The Challenge of Free Trade, New York: Harvester Wheatsheaf, 1990;
H. Peter Gray, Free Trade or Protection?: A Pragmatic Analysis, New York: St.
Martin's, 1985; and Gunnar Sjostedt and Bengt Sundelius, eds., Free Trade-
Managed Trade?: Perspectives on a Realistic International Trade Order, Boulder,
CO: Westview Press, 1986. For a Classical Liberal critique of the concept of fair
trade, see James Bovard, The Fair Trade Fraud, New York: St. Martin's, 1991.
31. See Ricardo Grinspun and Maxwell A. Cameron, eds., The Political
Economy of North American Free Trade, New York: St. Martin's, 1993; M. Delal
Baer and Sidney Weintraub, eds., The NAFTA Debate, Boulder, CO: Lynne Rienner
Publishers, 1994; A. R. Riggs and Tom Valk, eds., Beyond NAFTA: An Economic,
Political and Sociological Perspective, Vancouver: The Fraser Institute, 1993; and
William J. Orme, Jr., Understanding NAFTA: Mexico, Free Trade and the New
North America, Austin: University of Texas Press, 1996.

ADDITIONAL READING

Arndt, H. W. Economic Development: The History of an Idea. Chicago: University

of Chicago Press, 1987.
Axford, Barrie. The Global System: Politics, Economics, and Culture. New York:
St. Martin's, 1995.
304 Political Economy

Balaam, David N., and Michael Veseth. Introduction to International Political

Economy. Upper Saddle River, NJ: Prentice Hall, 1996.
Balassa, Bela. New Directions in the World Economy. New York: New York
University Press, 1989.
Bates, Robert H., ed. Toward a Political Economy of Development. Berkeley:
University of California Press, 1988.
Blecker, Robert A., ed. U.S. Trade Policy and Global Growth: New Directions in
The International Economy. Armonk, NY: M. E. Sharpe, 1996.
Chilcoate, Ronald. Theories of Development and Underdevelopment. Boulder, CO:
Westview Press, 1984.
Cowan, Michael P., and Robert W. Shenton. Doctrines of Development. New York:
Routledge, 1996.
Cowling, Keith, and Roger Sugden. Transnational Monopoly Capitalism. New
York: St. Martin's, 1987.
Crane, George T., and Abla Amawi, eds. The Theoretical Evolution of International
Political Economy, 2nd ed. New York: Oxford University Press, 1997.
Dell, Edmund. The Politics of Economic Interdependence. New York: St. Martin's,
1987.
Frey, Bruno. International Political Economy. Oxford: Basil Blackwell, 1984.
Frieden, Jeffrey A., and David A. Lake, eds. International Political Economy:
Perspectives on Global Power and Wealth. New York: St. Martin's, 1987.
Gill, Stephen, and David Law. The Global Political Economy. New York: Harvester
Wheatsheaf, 1988.
Gilpin, Robert. The Political Economy of International Relations. Princeton, NJ:
Princeton University Press, 1987.
Godard, C. Roe, John T. Passe-Smith, and John G. Conklin, eds. International
Political Economy: State-Market Relations in the Changing Global Order.
Boulder: Lynne Rienner, 1996.
Hunt, Diana. Economic Theories of Development. Totowa, NJ: Rowman St
Littlefield, 1987.
Kapstein, Ethan B. Governing the Global Economy: International Finance and the
State. Cambridge, MA: Harvard University Press, 1994.
Long, David. Towards A New Liberal Internationalism. New York: Cambridge
University Press, 1996.
Mander, Jerry, and Edward Goldsmith, eds. The Case Against the Global
Economy. San Francisco: Sierra Club Books, 1996.
Martinussen, John. Society, State and Market: A Guide to Competing Theories of
Development. London: Zed Books, 1997.
Mason, Mike. Development and Disorder: A History of the Third World Since
1945. Hanover, NH: University Press of New England, 1997.
Pirages, Dennis C , and Christine Sylvester, eds. Transformations in the Global
Political Economy. New York: St. Martin's, 1990.
Sears, Dudley. The Political Economy of Nationalism. Oxford: Oxford University
Press, 1983.
Smith, David A., and Jozsef Borocz. A New World Order?: Global Transformation
in The Late 20th Century. Westport, CT: Greenwood Press, 1995.
International Trade and Development 305 5

Spero, Joan E. The Politics of International Economic Relations, 4th ed. New York:
St. Martin's, 1990.
Strange, Susan. States and Markets: An Introduction to International Political
Economy, 2nd. ed. New York: Pinter Publishers, 1994.
Thurow, Lester. Head to Head: The Coming Battle Among Japan, Europe and
America. New York: William Morrow, 1992.
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Chapter 16

Science, Ideology, and

Political Economy

Every human being has ideological, moral and political views.

To pretend to have none and to be purely objective must nec-
essarily be either self-deception or a device to deceive others.
Joan Robinson

The way we see things can hardly be distinguished from the

way we wish to see them.
Joseph Schumpeter

In the decades following World War II, it became intellectually fashionable

to proclaim "the end of ideology."1 Ideology was blamed for raising visions
of heaven on earth, which fueled fanaticism and ultimately contributed to
the rise of totalitarian systems on both the political left and right. At the
time, fascism had been defeated and communism was presumed to be geo-
graphically contained until it would exhaust itself in a morass of economic
inefficiency and political brutality. The divisive issues facing modern soci-
eties had seemingly been resolved in favor of democratic capitalism, and
politics would subsequently consist of the administration of public func-
tions by elected officials and appointed bureaucrats.
This vision proved to be premature. While international relations have
been relatively peaceful and communism has indeed collapsed as predicted,
308 Political Economy

ideological debate over economics, politics, and culture continues

unabated. Most people profess to dislike ideology, viewing it as an intel-
lectual strait jacket obscuring clear thinking. However, no person can
escape ideology because humans are interpretive creatures struggling to
make sense of what William James called the "buzzing, blooming confu-
sion" of the external world. Ideology is simply a name for the mental con-
structs used by humans to guide their thinking and behavior. In premodern
times, religion served this purpose, but with the advent of science and
democracy, ideas about the world had to be legitimized in secular and
rational terms to gain serious consideration by scholars, policymakers, and
the public.
The distaste for ideology can be traced back to the scientific revolutions
of the sixteenth through eighteenth centuries. The medieval era had pro-
vided humans with certainty that reality was a well-ordered system operat-
ing in accordance with natural laws of divine origin. The only prerequisite
for correctly interpreting the external world was religious faith and open-
ness to revelation. However, the cumulative impact of the Renaissance, the
Protestant Reformation, commerce, and technology shattered medieval
knowledge. Out of the ruins emerged a growing confidence that human rea-
son was sufficiently acute to interpret the world without the aid of estab-
lished religious authority. The French philosopher Rene Descartes
(1596-1650) and the English physicist Isaac Newton (1642-1727) affirmed
the existence of God and an orderly universe operating in accordance with
natural laws, but their determination to combat dogma and superstition
compelled them to seek a method for uncovering truth that was verifiable
and therefore persuasive to all reasonable persons.
Descartes was haunted by the suspicion that his ideas were the work of
a demon intent on deceiving him. Trust in sensory perception had been
shaken by Copernicus's discovery that a world appearing to be flat and
motionless was actually round and spinning. Mistrusting his senses,
Descartes advocated doubt and skepticism as essential to scientific inquiry.
In an effort to penetrate to a deeper level of reality than the senses could
reach, he expressed physical dimensions such as mass and speed with math-
ematics and then applied logic to discover the laws of nature. Since only
quantifiable aspects of the world could be captured by mathematics,
Descartes's method created a distinction between an abstract, theoretical
conception of reality and the actual world of objects and persons.
Nonquantifiable aspects of reality were considered superficial and irrele-
vant for scientific knowledge. Thus, the Cartesian method, called "ratio-
nalism," relies on the logic of human reason to discover truth.
Although Newton shared many of Descartes's assumptions and meth-
ods, he insisted that verification of theories must ultimately entail testing
against observed reality. The Newtonian method, known as "empiricism,"
recognizes that mathematics and reason may lead to a logical theory, but
Science, Ideology,andPoliticalEconomy 309

that theory may not be valid in its correspondence to reality. Newton

accepted the role of reason in forming ideas, hypotheses, and theories, but
demanded that these mental constructs be tested against facts to verify their
status as scientific knowledge.
Scientists utilize both rational and empirical methods. The former relies
on deductive reasoning to derive specific conclusions from general laws or
principles. In contrast, empiricism uses inductive reasoning to construct
general rules on the basis of accumulated observations of facts. Both math-
ematical proofs and controlled experimentation are components of the
process of scientific verification, and ideally each can be used to confirm
the results of the other. This scientific method instilled confidence that
humans could understand the external world and, working within the laws
of nature, improve the conditions of life.
Early political economists were tremendously impressed by achieve-
ments in the natural sciences. However, the complexity of human society
made empiricism, inductive reasoning, and controlled experimentation
problematic. The social world contains so many interacting variables that
efforts to isolate cause and effect in a verifiable fashion are exceedingly dif-
ficult. As a result, political economists were attracted to rationalism. They
formed an abstract conception of humans by focusing on the most consis-
tent and easily measurable aspect of behavior—the pursuit of wealth. This
image of man as homo economicus was the starting point of classical polit-
ical economy. Yet John Stuart Mill acknowledged the fiction of homo eco-
nomicus when he wrote:

Political economy does not treat of the whole of man's nature as modified by the
social state, nor the whole conduct of man in society. It is concerned with him solely
as a being who desires to possess wealth, and who is capable of judging of the com-
parative efficiency of means for obtaining that end.2

Having made this concession, Mill defended continued reliance on the con-
cept of homo economicus "not (because) any political economist was ever
so absurd as to suppose that mankind are really thus constituted; but
because this is the mode in which science must necessarily proceed." 3 This
statement is revealing, for it demonstrates that a commitment to the scien-
tific method has dictated the scope and content of political economy by
effectively precluding consideration of those dimensions of life unsuitable
for quantification and measurement.
If ideology is defined as reliance on values to interpret reality, then
despite its aspirations to scientific status, political economy has been ideo-
logical from the beginning. Early political economists were clearly engaged
in efforts to promote the interests of an emerging business class in its strug-
gle against government control and remnants of feudal authority. Most
modern economists might agree that every political economist prior to
310 Political Economy

1870, or perhaps even 1930, was an ideologue. Yet even modern econo-
mists cannot avoid ideology. Theorizing necessarily entails abstraction, and
science offers no certain guidelines as to which aspects of reality are most
relevant. Facts have significance in proportion to their usefulness in achiev-
ing human goals, and those goals are based on values. Therefore, the deci-
sion to focus on particular aspects of reality for the purpose of constructing
theories is a value judgment. Even in empirical research, values influence
which aspects of reality will be observed and what will be considered a
"fact." In the social sciences, researchers deal with issues about which all
humans have value-laden preconceptions, and these commitments cannot
be kept separate from scientific inquiry.
Criticism of the scientific method in political economy has a long his-
tory. Nineteenth-century French and German writers claimed that British
political economy was based on faulty assumptions and fallacious reason-
ing. In fact, the field of sociology was established, in large part, as a reac-
tion to political economy by French and German theorists such as Emile
Durkheim (1858-1917), Max Weber (1864-1920), and Ferdinand Tonnies
(1855-1936). Many, if not most, U.S. economists in the nineteenth century
favored the empiricist and historical method developed in Germany over
the rationalist and deductive reasoning of English economists. Even in
England, prominent economists such as Philip Wicksteed (1844-1927), F.
Y. Edgeworth (1845-1926), and John A. Hobson (1858-1940) argued that
economics was too abstract and narrowly defined to provide practical
guidance in public policymaking. The most renowned English economist of
the late nineteenth century, Alfred Marshall, was praised by A. C. Pigou for
realizing that:

excessive reliance on (mathematics) might lead us astray in pursuit of intellectual

toys, imaginary problems not conforming to the conditions of real life: and further,
might distort our sense of proportion by causing us to neglect factors that could not
easily be worked up in the mathematical machine.4

Despite these reservations, economics subsequently became even more

abstract and mathematical. During the 1930s and 1940s, the spread of
fascism and communism motivated neoclassical economists to renew their
commitment to the scientific method. The atrocities occurring within
totalitarian systems created widespread disillusionment with all collec-
tivist schemes, so increasing numbers of economists rejected the use of
economics as a tool for fashioning activist public policies aimed at improv-
ing society. Intent on keeping ideology out of scientific research and analy-
sis, these economists were attracted to a philosophy called logical
positivism developed in Vienna during the 1920s. This approach is based
on the notion of a clear distinction between is and ought, between fact and
value, between description and prescription. Only positive statements
Science, Ideology, and Political Economy 311

dealing with the world as it is can potentially be proved wrong (falsified)

by comparison with facts. In contrast, normative statements, or judgments
concerning what ought to be, are based on individual opinion and can
therefore be neither confirmed nor falsified. Neoclassical economists wel-
comed logical positivism as a philosophical defense against totalitarian
ideologies because it treats normative claims about how society ought to
be structured as "meaningless" and therefore unworthy of serious consid-
eration by economists.
This opposition to values applied only to the realm of science.
Individuals would still be free to express personal tastes or preferences in
the market or in their social activity. Logical positivists were determined to
keep values out of science so that science could not be used to legitimize
government policies conflicting with the private values of individuals. Led
by Lionel Robbins in England, neoclassical economists sought to purge
economics of all remnants of normative thinking; the world would be ana-
lyzed as it is, not as it should be.5 By restricting their analysis to logic and
facts, they intended to distinguish themselves from mere ideologues seeking
to impose unsubstantiated opinions and arbitrary values on the general
public. By the 1950s, neoclassical economists had incorporated
Keynesianism into their theoretical framework and effectively captured
control of the economics profession.
The legacy of this turning point in the evolution of economics is appar-
ent today. Economic theory has become an almost completely mathemati-
cal exercise in logic, insulated from many of the forces shaping actual
economic processes. In 1991, a group of economists commissioned by the
American Economic Association to assess the conditions of graduate eco-
nomic education in the United States concluded that "graduate programs
may be turning out a generation with too many idiot savants, skilled in
technique but innocent of real economic issues."6 In modern economics,
the influence of new ideas often depends more on their internal logic and
the sophistication of their mathematical expression than on their relevance
to resolving real-world problems. Even the most prominent of mainstream
economists are occasionally frustrated with the current state of affairs in
their profession. Nobel laureate Ronald Coase recently wrote: "In my
youth it was said that what was too silly to be said may be sung. In mod-
ern economics it may be put into mathematics." 7

ECONOMICS AS IDEOLOGY
Despite the concerted efforts of several generations of economists to cre-
ate a pure science of economics, values remain implicit in economic theory.
(Note: the terms "economics," "economist," and "economic theory" shall
hereafter refer to the neoclassical variants of these terms.) Examples of
these values include the following:
312 Political Economy

1. Humans should be free to pursue their individual interests as long

as they do not violate the rights of others. In addition to being obviously
normative, this statement contains two hidden values. First, the term
"individual interests" is interpreted to mean desires for private goods,
services, and experiences; it does not include desires for the type of insti-
tutional context or societal values within which private activity occurs.
Second, economists interpret "rights" to mean only property rights and
those civil rights such as free speech that bestow no entitlement to eco-
nomic resources. However, if rights were defined more broadly to
include rights to economic benefits such as health care, a job, or a clean
environment, then the individual pursuit of self-interest would fail to
protect the rights of citizens.

2. Humans are rational maximizers of utility. Economists have strug-

gled for two centuries to decide exactly what homo economicus is seeking.
The original claim that humans seek to maximize wealth was contradicted
by everyday observations that many people do not direct their lives toward
this goal. Beginning in the mid-nineteenth century, economists used the
word "utility" to describe the goal of economic behavior, but even this
concept was criticized for portraying humans as pleasure-seeking hedo-
nists. In the twentieth century, economists tried to free themselves from any
association with hedonism by developing the concept of "revealed prefer-
ence." People's choices reveal their wants; if they had wanted something
else, they would have made different choices. By resorting to revealed pref-
erence, economists implicitly acknowledge the circular meaning of utility.
If utility is whatever people seek, then the claim that people maximize util-
ity is tautological; it cannot be contradicted by fact because utility is
defined to cover all possible behaviors. The same criticism can be made of
the term "rational." For an economist, behavior is rational if it is directed
toward the attainment of maximum utility. But because individuals are
assumed to be the only judges of their own utility, no behavior can be
called irrational. Like utility maximization, the claim that humans are
rational is a tautology. Since tautologies are immune to falsification, they
function as ideology.

3. Individual preferences are independent of the social environment.

Economic theory treats preferences as originating within the biological and
psychological drives of the individual. This view contrasts sharply with the
perspective of most sociologists and psychologists who emphasize the role
of social conditioning and acculturation in shaping individual preferences.
Why do economists adamantly defend such an implausible argument?
Again, the desire to emulate natural science dictates this assumption. If
preferences were treated as dependent variables, economists could no
longer analyze the economy as a closed system separate from the political
Science, Ideology, and Political Economy 313

and sociocultural systems, and much of the precision and logic of econom-
ics would be lost. For example, economist Tibor Scitovsky demonstrated
that if preferences are dependent on the social environment, individuals in
situation A might prefer situation B, but if situation B were attained, the
different environment might cause the same individuals to prefer situation
A.8 Economists could no longer claim that markets generate a unique and
stable equilibrium reflecting individual preferences, resource availability,
and technology.

4. All preferences for private goods or services are equally valid but
deserve fulfillment only to the extent that they are backed by money. The
equal validity of preferences assumes that individuals are the best judges of
their own interests. This claim appeals to our sense of human dignity by
recognizing the capacity of individuals to direct their own lives. However,
it is ideological because it cannot be tested or even potentially falsified
using standard scientific methods. Any action can be interpreted as serving
a person's best interests because no method exists for assessing private
interests. Moreover, this assumption blinds economists to both the private
and social processes through which preferences arise. Individuals often
struggle with their own preferences, experiencing conflict between imme-
diate desires and prior commitments to other persons or moral principles.
In addition to their preferences, individuals have "metapreferences" guid-
ing them in choosing which of their desires to express and which to sup-
press. These metapreferences reflect the type of person the individual
aspires to become. Treating all preferences as equally valid is thus unscien-
tific because it fails to grasp essential aspects of preference formation. The
claim that preferences deserve fulfillment only to the extent that they are
backed by money is a corollary of economists' definition of rights as
including only property rights and those civil rights making no demands on
economic resources. This claim is unscientific because the definition of
rights is a value judgment.

5. A perfectly competitive market yields an efficient allocation of

resources. This statement, which constitutes the core proposition of neo-
classical economic theory, is nonscientific because the definition of effi-
ciency is itself value-laden. Markets may be inefficient if efficiency is
defined as maximizing the total level of human satisfaction, as maximiz-
ing the attainment of societal goals, as maximizing the development of
human capacities, or even as maximizing the expansion of output over
time. Markets are only efficient in meeting economists' definition of effi-
ciency: a situation in which all individuals have completed all mutually
beneficial transactions. Based on this definition, the claim that markets
generate efficiency is another tautology. To grasp this point, consider the
following reasoning:
314 Political Economy

Assumption 1: A perfectly competitive market permits individuals

to engage in all mutually beneficial transactions.
Assumption 2: Efficiency is a situation in which all mutually ben-
eficial transactions have been completed.
Conclusion: A perfectly competitive market is efficient.
Since the conclusion is implied by the premises, the claim that markets are
efficient is tautologous. Economists rely on this empty definition of effi-
ciency due to scientific and ideological problems encountered in the late
nineteenth century. At that time, efficiency was hazily linked with the max-
imization of social utility. The claim that markets maximize the overall level
of well-being in society provided a powerful argument in support of mar-
kets. However, economists soon recognized that the notion of maximizing
social utility presupposed the summing up of individual utilities, which
would require interpersonal comparisons of utility. Since utility cannot be
measured in any absolute sense, they rejected social utility as an unscientific
concept. A second objection to maximizing social utility was created by
applying the law of diminishing marginal utility to money. If wealthy peo-
ple get less satisfaction from an additional dollar of income than do poor
people, maximization of social utility would seemingly require massive
redistribution of income from rich to poor. Most economists were unwilling
to validate this conclusion and, led by Vilfredo Pareto, they proceeded in the
early twentieth century to redefine efficiency as a situation in which all
mutually beneficial transactions have been completed so that no person can
be made better off without making someone else worse off.
Economists defend their concept of efficiency as value-free and scien-
tific, yet considerations of efficiency form the basis for virtually all their
policy recommendations. How can a science with no values shed light on
what government ought to do without violating logical positivism's sepa-
ration of is and ought} The answer is twofold. First, efficiency is not a
value-free concept; it presupposes the values previously discussed in this
section. Second, economists commit an ideological sleight of hand when
they use words like "optimal" and "rational" as synonyms for efficient. If
citizens were told that a particular policy would create an "optimal alloca-
tion of resources," they would understandably interpret that phrase to
mean the best possible allocation. However, an efficient economy is con-
sistent with conditions that would offend most people. For example, those
individuals who, because of age or infirmity, are incapable of supporting
themselves or securing private charity would be left to die.
The assumption that perfect competition generates efficiency leads to a
general presumption that society is better off if markets are more compet-
itive. Yet in 1956, economists Richard Lipsey and Kelvin Lancaster demon-
strated that when the conditions of perfect competition are violated in two
Science, Ideology, and Political Economy 315

or more parts of the economy, restoring competition to only one part may
decrease efficiency. For example, if a labor union faces a monopolistic
employer, then breaking up the labor union to improve competition may
reduce efficiency. This "theory of the second best" makes any policy rec-
ommendations concerning market structure more difficult to justify.9

6. Unanimous consent should be required for any political changes to

the economic status quo. This value is explicitly stated by only a minority
of economists known as property rights theorists. However, the definition
of efficiency makes unanimous consent an implicit value in economic
analysis. Any policy that increases efficiency would presumably receive
unanimous support because at least one person is made better off and
nobody is made worse off. However, any policy that decreases efficiency
will make at least one person worse off, and that person would presumably
withhold consent. Because virtually all policies have redistributive effects
harmful to at least one person, the unanimity rule effectively bars govern-
ment action. However, John Hicks and Nicholas Kaldor attempted to
loosen the criterion for efficient public policies by proposing a "compensa-
tion principle." If those who benefit from a public policy could hypotheti-
cally compensate the losers and still be better off, the policy would be
considered efficient. This idea provides the theoretical basis for cost-benefit
analysis used by economists to assess the effectiveness of decisions and poli-
cies. However, cost-benefit analysis entails the inevitable introduction of
values as economists must make judgments about which costs and benefits
to consider and how to measure them.

REJOINDERS FROM ECONOMISTS

If the foregoing critique of economics is valid, why do economists continue
to defend the assumptions and scientific status of their discipline so aggres-
sively? Consider the following arguments made by prominent economists:

1. English economist John Neville Keynes (1852-1949) admitted that

economics held unrealistic assumptions and that economists had limited
ability to predict specific occurrences. However, he defended the power of
economists to forecast long-run tendencies because, over time, the random
effects of unknown variables would offset each other. However, any theory
can be defended with the claim that its predictions will eventually be con-
firmed in the future. The ultimate response to this line of reasoning came
from Neville Keynes's son, Maynard: "in the long run we are all dead."

2. English economist Sir Dennis Robertson (1890-1963) defended the

assumption of self-interest by arguing that while love, empathy, and altruism
exist, they are too scarce to serve as a basis for social organization. This
316 Political Economy

judgment is most likely accurate, but Robertson concluded that markets

are the ideal coordinating institution because they economize on love by
relying solely on self-interest. Compassion and good will can then be
reserved for personal relationships. The problem with this argument is that
economizing on altruism to create a good society is a bit like refraining
from exercise to maintain bodily strength. The structures and opportunities
available to humans shape their capacities for particular sentiments and
behaviors. A society organized solely around the principle of self-interest
will generate strongly self-interested citizens. This phenomenon occurs
because individuals in markets acting as isolated agents are relatively pow-
erless to counteract market forces with noneconomic values. For example,
employers who pay generous wages because of loyalty to their workers
may lose customers due to higher costs.

3. Economists' assumptions about human behavior have also been

defended as protecting the freedom and dignity of the individual. The self-
interested pursuit of material well-being is a necessary and universal aspect
of human existence. Any fuller account of human behavior, economists
claim, might not be universally valid and would therefore bias economics
in favor of certain lifestyles or values. This argument fails to recognize that
ignoring nonmaterial values creates a bias in favor of acquisitive, material-
istic lifestyles. A more objective description of human behavior would
include other universal traits such as self-reflection, compassion, playful-
ness, creativity, and the search for meaning, purpose, and identity.

4. Economists may admit that the nineteenth century image of homo

economicus was indeed an ideological construct, but simultaneously
defend modern economic theory's portrayal of human behavior. The goal
of wealth maximization has been replaced by utility maximization, and
utility can be derived from any pursuit of human interests. Therefore, they
claim, economic theory is relevant to any situation in which individuals
pursue their interests under conditions of scarcity. This argument consti-
tutes the most widely used defense of economics, but taken to its logical
conclusion it leads to tautology. As previously noted, if utility is defined as
the goal of all possible choices and behaviors, then a person could never act
in a nonutilitarian manner. Tautologies are useless for practical applica-
tion, so when economists apply theory to analyze real-world situations,
they invariably narrow the concept of utility to focus on material interests
most amenable to monetary quantification.
Economists are confronted with a dilemma. A broader concept of utility
is attractive because it provides a quick defense against critics of homo eco-
nomicus and legitimizes economic theory as a valid method of inquiry into
all dimensions of human existence. However, this definition of utility is tau-
tologous and therefore useless in practice. On the other hand, a narrower
Science, Ideology, and Political Economy 317

conception of utility linked primarily with material gain provides economists

with a "set of tools" for advising corporations and governments in making
efficient decisions. However, to explicitly acknowledge a limited scope for
utility would make economics vulnerable to charges of narrowness and irrel-
evance to nonmaterial realms of social life. Since neither of these choices is
appealing, economists simply live with the dilemma, paying lip service to a
broadly defined utility while practicing with a narrower concept.

5. Milton Friedman acknowledges that many of the assumptions of eco-

nomics are unrealistic but claims that predictive capability rather than real-
ism of assumptions is the hallmark of good science.10 In other words, if
economic theory generates predictions confirmed by observation, then the
realism of its assumptions should not matter. Using Friedman's criteria, the
field of macroeconomics has been a dismal failure. Economists have been
unable to forecast future economic conditions accurately. In fact, different
economists offer such divergent forecasts that one consulting firm has
developed a thriving business gathering and averaging the various forecasts
to arrive at a consensus. Many corporations have reduced or eliminated
their economic research departments due to unreliable forecasts of chang-
ing market trends.
In microeconomics, the relatively new field of experimental economics rep-
resents an effort to confirm the predictions of economic theory. Small groups
of people are given instructions for participating in a competitive, interactive
situation designed to simulate a market. These experiments usually yield
results consistent with economic theory, but by placing people in a 'labora-
tory' with instructions about their goals and methods for achieving those
goals, economists create the ceteris paribus conditions that make microeco-
nomic theory largely an exercise in logic rather than a description of how
humans produce, distribute, and consume goods and services. Experimental
economics often simply demonstrates the obvious and therefore fails to
address the deeper criticisms of neoclassical microeconomic theory.11

6. A final defense of the assumptions and implicit values underlying

economics is based on appeals to the necessity of science. When the human
mind attempts to grasp reality, the overwhelming complexity of the world
dictates reliance on the methods of abstraction, simplification, logical
analysis, and controlled experimentation. Simplifying assumptions may
entail human judgments of the relative significance of different aspects of
reality, but without them, knowledge would be at a standstill. Moreover,
without science, there would be no ultimate authority for distinguishing
between knowledge and mere opinion. To openly allow values into eco-
nomics would, in the words of Nobel laureate James Buchanan, remove
"all scientific content from the discipline and (reduce) discussion to a babel
of voices making noise." 12
318 Political Economy

The persuasive power of the foregoing argument derives from the

implicit assumption that the method of the natural sciences is the only reli-
able avenue for expanding knowledge. The scientific method demands
that researchers and theorists be skeptical, willing to reject established
truths in light of new evidence, and continually open to consider new
hypotheses and research findings. However, the scientific method also cre-
ates its own form of dogmatism. New ideas are given a hearing only when
they are presented in a form amenable to logical analysis and empirical
verification. While these processes may be useful for developing knowl-
edge, they do not exhaust the sources of human understanding. The objec-
tivity and detachment so prized by natural scientists actually pose a barrier
to inquiries into the human condition. The natural scientific method was
originally designed to yield knowledge of causes and effects among natural
phenomena so that humans could better manipulate the environment to
meet their needs. When this same method is applied to human activities,
people are viewed as objects responding to external forces, and knowledge
is geared toward prediction and control. The social scientist adhering to
the method of natural science cannot generate knowledge of the requisites
for a good life.
The dogmatism generated by an unwavering commitment to the natural
scientific method is exemplified by Stanford economist Robert Hall, who
informed an interviewer that he immediately stops reading any article in
which he encounters the words "social" or "society" because he knows it
will be unscientific. Perhaps the most insightful explanation for this dog-
matism comes from economist Charles Schultze:

When you dig deep down, economists are scared to death of being sociologists. The
one great thing we have going for us is the premise that individuals act rationally
in trying to satisfy their preferences.13

Like all scientists, economists pride themselves on being rational, analyti-

cal, and objective. They accept an intellectual obligation to act as guardians
of the economy, trying to defend the market from "irrational exuberance,"
ideological enthusiasm, and the machinations of politicians. Yet, no matter
how well-intentioned, economists rely on a distorted vision of human
behavior and social structure and therefore their analysis inevitably consti-
tutes only a partial perspective on any situation.

THE SCIENCE OF POLITICAL ECONOMY

If economics is ultimately based on values, then it cannot be defended as
a purely scientific approach to understanding social, political, and eco-
nomic institutions. In contrast to the value-free stance of economics, polit-
ical economy recognizes the inevitable presence of values in all social
Science, Ideology, and Political Economy 319

inquiry and therefore acknowledges the legitimacy of diverse approaches

for gaining knowledge. Political economy does not reject science, but rather
defines it more broadly as a disciplined, communicable, and nondogmatic
effort to expand the knowledge base with which humans are able, both
individually and collectively, to improve the conditions of their existence.
Using this definition, many alternative approaches to understanding the
economy can be recognized as scientific. Accepting diversity creates a hos-
pitable climate in which adherents of different viewpoints can exchange
ideas. In the words of economist Frank Hahn:

We do not possess much certain knowledge about the economic world and . . . our
best chance of gaining more is to try in all sorts of directions and by all sorts of
means. This will not be furthered by strident commitments of faith.14

Traditional social scientists have divided society into separate realms

over which they claim exclusive domain. Economists deal with the econ-
omy, that portion of society characterized by voluntary exchanges among
rational, self-interested individuals. Political scientists examine the polity,
in which individuals and groups pursue common goals and resolve con-
flicting interests through laws enforceable by government. Sociologists
focus on society, in which the cultural practices and behavioral norms of
communities function to harmonize individual behavior and social order.
These distinctions among economy, polity, and society are important but
also misleading without additional attention to their interdependence. The
three realms are more accurately described as different facets of an
immense network of systems. No scientific guidelines exist for dividing
this network into neat compartments. The boundaries of economy, polity,
and society are porous and shifting because they ultimately depend on val-
ues emanating from each realm. Commercial or market values formed in
the economy, political values developed through the governing process,
and cultural values within community life interact with one another to
determine the proper extent of economic activity, political authority, and
social control.
Economy, polity, and society each contain a "governance structure" that
serves as both a control mechanism and an arena for the exercise of popu-
lar sovereignty. Hence each realm is both master and servant; each contains
the potential for both oppression and liberation. A governance structure
aggregates individual choices, coordinates these choices in an orderly pat-
tern, and, based on this pattern, authoritatively circumscribes future indi-
vidual choices. In performing these functions, each of the three governance
structures has unique capabilities and deficiencies.
The economy's governance structure is the market. Through the price
mechanism, markets allocate resources in a pattern responsive to individual
choices and property rights. Market outcomes limit future choices by placing
320 Political Economy

budget constraints on individuals and firms. The capabilities of markets

include providing a broad range of individual freedom, facilitating personal
development through choice and competition, and promoting higher stan-
dards of living. On the other hand, markets have exhibited notable deficien-
cies including instability, an inability to provide public goods, the creation of
politically unacceptable levels of inequality, and an expansionist tendency to
weaken and marginalize the political and social realms, thereby undermining
potential remedies for the market's deficiencies.
The polity's governance structure is the state or government. Individual
values and preferences are transmitted to government through the voting
process, with additional reliance on opinion polls, focus groups, town
meetings, and issue forums. These values are processed by elected repre-
sentatives who then formulate laws posing constraints on individual choice
that are backed by the coercive authority of the state. Government's capac-
ities include pursuing goals incapable of expression in the market, protect-
ing individual rights, addressing failures of the market, and serving as a
symbol and agent of national unity and purpose. Some notable deficiencies
of democratic government include its susceptibility to manipulation by
powerful private interests, its weak mechanisms for enforcing internal effi-
ciency and accountability, and its potential for abusing public authority.
The sociocultural system, or society, has its governance structure dis-
persed throughout numerous communities. A community consists of
people sharing sufficiently similar values, traditions, and culture to create
a sense of belonging and group identity. Communities materialize gradually
as individual actions coalesce into cultural practices that are affirmed and
nurtured because they are perceived as valuable to the community.
Communities enforce these practices through institutions including parent-
ing and schooling of young members, cultural rituals and ceremonies,
expressions of approbation, and ostracism of deviants. Because communi-
ties are so closely involved in the character formation of young persons,
they exert considerable influence on the development of values.
Communities are stabilizing institutions because they integrate individuals
into larger social units and thereby reduce the potential for conflict among
members. Communities also provide a context within which individuals
develop a sense of personal identity. However, community life contains sev-
eral potential deficiencies. Community identities are based on a distinction
between members and nonmembers that can degenerate into discrimina-
tion, hostility, and even warfare. Communities may be narrowly parochial
and stifling, leading to suppression of creativity, innovation, and diversity.
Communities may not be democratic since nongovernmental leaders typi-
cally emerge without formal selection procedures and exercise power with-
out formal constraints. Finally, communities have little control over the
larger environment in which they function and are therefore fragile and
vulnerable to disruptive economic and political forces.
Science, Ideology, and Political Economy 321

The interaction among market, government, and community may be

destructive, but the three governance structures can also be mutually sup-
portive. This support appears in two forms—discipline to suppress the defi-
ciencies of other structures and enabling to enhance the capacities of other
structures. Discipline places restraints on self-aggrandizing behaviors such
as greed, power-seeking, and opportunistic strategies to benefit oneself at
others' expense. Enabling facilitates the realization of capacities contribut-
ing to individual and societal well-being. Some highlights of the positive
interactions among governance structures can be briefly described.
Markets discipline governments by facilitating movement of resources
away from jurisdictions with unfavorable business climates, by generating
concentrations of private wealth which can finance opposition candidates
or dissenting ideas, and by strengthening popular support for individual
rights. On the other hand, markets enable governments by generating tax
revenue, by performing a substantial portion of social coordination, and by
generating rising standards of living that contribute to public satisfaction
with government.
Markets discipline communities by facilitating movement of resources
away from communities with unfavorable business climates, providing
alternatives and choices to individuals, and encouraging self-directed, self-
reliant behavior. Yet markets also enable communities by providing oppor-
tunities for employment and entrepreneurship, by allowing communities to
remain economically viable through specialization and exchange, and by
creating economic interdependence among individuals.
Governments discipline markets by establishing and enforcing laws pro-
hibiting or requiring certain types of market transactions, business prac-
tices, and industry structures, and by using macro policy tools to regulate
the level of economic activity. On the other hand, governments enable mar-
kets by defining and protecting property rights, enforcing contracts, and
providing infrastructure within which economic activity occurs.
Governments discipline communities by establishing and enforcing laws
prohibiting certain behaviors and cultural practices, by imposing curricu-
lum and standards in education, and by protecting individual and property
rights. At the same time, governments enable communities by serving as
symbols of unity and shared purpose, by providing public goods such as
roads and schools, and by limiting the encroachment of market forces
through regulations on business activity.
Communities discipline markets by generating organized movements
aimed at halting certain business practices, by shaping values that affect
patterns of consumption and production, and by exerting peer pressure on
members whose business practices violate community norms. On the other
hand, communities enable markets by sustaining ethical standards that
reduce opportunistic behavior such as shirking or fraud, by creating a cli-
mate of trust and loyalty that reduces business costs related to employee
322 Political Economy

turnover, conflict resolution, and litigation, and by fostering a sense of per-

sonal identity to compensate for the impersonal nature of market activities.
Communities discipline governments by generating grassroots move-
ments aimed at political reform and by affecting members' political opin-
ions and voting behavior. Yet communities also enable governments by
reducing crime, by fostering patriotism and loyalty, and by teaching respect
for authority and laws.
The potential synergies of market, government, and community become
manifest only when each governance structure is sufficiently strong to exer-
cise its capacities. This condition, in turn, requires that no governance
structure becomes so dominant that other structures are rendered ineffec-
tive. Allowing either market, government, or community to be marginal-
ized is like building a table with only two legs. No matter how the legs are
arranged, the table cannot function. A healthy society requires three mutu-
ally supportive institutional bases because humans have three essential
modes of behavior. Economically, they act as autonomous individuals
choosing between different actions based on calculations of personal
advantage. Politically, they act as citizens to secure the kinds of laws and
institutional structures they want governing their collective existence.
Socially, they derive meaning and purpose by fulfilling the functions of
roles defined by their relations to others. If any one of these modes of
behavior is denied expression by an inadequate institutional base, individ-
ual frustration and social disorder are inevitable.

CONCLUSION
Each of the four ideological perspectives examined in this book may be
faulted for neglecting one or more of the three governance structures.
Classical Liberalism, in its quest to shatter the organic unity of medieval
society, elevated the market at the expense of government and community.
This ideology proposed that the market would assure rational individual
behavior by making material self-interest consistent with the well-being of
society. Government would be reduced to the role of referee, protecting
property rights and enforcing contracts. What Classical Liberals fail to per-
ceive is that strong governments and vibrant communities are essential to
maintain smoothly operating markets. Without regulations and ethical
norms, self-interested behavior destroys markets. When government is
weak, mafias and militias arise as citizens attempt to secure through col-
lective action what they cannot obtain individually. When community is
weak, an amoral society breeds conflict, crime, and litigation, making busi-
ness activities increasingly costly and difficult.
Radicals and Conservatives emphasize the role of community, but in the
past, they viewed markets as divisive and disruptive to both community
and government. Since World War II, Conservatives have moved closer to
Science, Ideology, and Political Economy 323

Classical Liberalism by accepting markets and criticizing government.

Radicals have also evolved, expressing interest in markets but remaining
suspicious of governments in capitalist societies. However, both ideological
perspectives have remained marginal in Western societies because of their
opposition to markets and government.
Modern Liberalism became the dominant ideology in the West by
proposing to balance government and market, relying on each governance
structure to suppress the deficiencies of the other and anticipating the full
benefits of the capacities of both structures. However, Modern Liberalism
ignores community, and much of its current disarray is attributable to this
oversight. In the absence of healthy communities, government and market
cannot function synergistically to resolve each other's deficiencies. For
example, government efforts to promote equality are undermined by
fraud, abuse, and opportunism as isolated individuals seek relief from
competitive market forces.
The current ideological gridlock is largely explained by the widespread
presumption that only two choices are available: stronger markets or
stronger governments. The deficiencies of each institution are sufficiently
well-known that democratic societies are unable to move boldly in either
direction. To permit markets to dominate raises fears of instability, unem-
ployment, externalities, monopolization, lack of public goods, concentra-
tion of wealth, erosion of democratic rights, and loss of national
sovereignty. Efforts to strengthen government are met with concerns
about waste, inefficiency, abuse of power, manipulation by special inter-
ests, and undermining of personal freedom. This stalemate has a positive
effect since a victory for either side would be self-defeating. When mar-
kets are permitted to dominate, they so weaken trust, loyalty, and hon-
esty that government, unable to rely on individual virtue to maintain
social order, necessarily becomes coercive.15 Conversely, recent history
provides plentiful evidence that overly dominant governments are even-
tually toppled by market forces.
A plausible resolution to this dilemma does exist. If liberalism were to
explicitly incorporate community into its theorizing and policy proposals,
many of the seemingly irresolvable issues confronting modern societies
could be managed. However, since its inception in the political struggles
against papal, royal, and aristocratic power, liberalism has been committed
to individualism, viewing community as the source of parochial prejudices
interfering with markets and government. Community is associated with
emotional attachments, narrow-mindedness, and intolerance. Because lib-
eralism, with its open disdain for community, has been the dominant ideol-
ogy for the past two centuries, the unraveling of community life should
come as no surprise. The fact that communities have managed to sustain
themselves at all provides testimony to the deep human need for fellowship
and shared purpose.
324 Political Economy

In 1982, Harvard political theorist Michael Sandel wrote a book enti-

tled Liberalism and the Limits of Justice. His effort to introduce a com-
munitarian perspective into liberalism gave rise to a new ideological
perspective called "communitarian liberalism" or simply "communitari-
anism." 16 This approach seeks to balance the individualistic focus on
rights, autonomy, and choice against the communitarian emphasis on
duties, participation, and commitment. Liberals react strongly against any
proposals that might limit individual freedom, but communitarians are
confident that commitments to and participation in communities will
enlarge freedom by creating greater civility, trust, and a sense of purpose
to guide individuals as they function in the market and practice politics.
Markets and governments, according to communitarians, actually erode
freedom by reducing all values to commercial values or laws imposed by
impersonal market forces and government. Individuals are free only in the
sense that their property rights and civil rights are protected and they may
select which transactions to make. But without a sense of purpose to give
meaning to their desires, this freedom leaves individuals unsatisfied, seek-
ing ever-elusive fulfillment through novelty and possessions. Isolated,
amoral individuals manifest their frustration in low productivity, violence,
opportunism, and self-destructive behavior. Liberalism is blind to this phe-
nomenon because it views all behavior as resulting from the choices of
rational individuals.
Communitarian liberalism suggests that government must take the initia-
tive in reinvigorating communities. While markets can contribute to rising
standards of living, they are also corrosive of the values and commitments
essential to community life. Communities, by themselves, are relatively pow-
erless to defend against the encroachments of markets and governments and
therefore cannot be the primary source of their own renewal. However, to
place responsibility for rebuilding communities with government does not
imply the need for bigger or more intrusive government. Instead of acting
primarily as an external authority regulating the actions of individuals and
businesses with threats of coercion, government can become the partner of
communities in creating "free spaces" protected from both market and gov-
ernment within which participatory institutions foster communication, inter-
action, and a renewal of civic virtue.17
The most appropriate balance between markets, governments, and com-
munities is not a fixed ideal toward which nations move. The desired bal-
ance may differ from nation to nation depending on resource bases,
cultures, and existing institutional arrangements. The balance may also
evolve over time in response to changes in technology, the environment,
and values. Looking ahead to the twenty-first century, serious problems
will surely arise due to deterioration of the environment, overpopulation,
and global inequality. Another fundamental challenge is posed by the
increasing globalization of markets. Despite the capacities of markets for
Science, Ideology, and Political Economy 325

advancing human purposes, free international markets will steadily erode

the sovereignty of governments and communities within their jurisdictions.
The political struggles of the past two centuries to place boundaries on
national markets and to make their functioning consistent with the public
interest must now be refought in the international arena. The available
alternatives are not free international markets versus regulated interna-
tional markets. If international governing bodies do not coordinate eco-
nomic policies, nations will take separate measures to protect themselves
because unregulated global markets make it impossible to achieve a desired
balance among market, government, and community. Contributing to the
formation of structures for international governance will be a major prior-
ity for twenty-first century political economy.

NOTES

1. See Daniel Bell, The End of Ideology, Glencoe, IL: Free Press, 1960; Chaim
Waxman, The End of Ideology Debate, New York: Funk & Wagnalls, 1968; and
Job L. Dittberner, The End of Ideology and American Social Thought, Ann Arbor,
MI: UMI Institute Press, 1979.
2. John Stuart Mill, Essays On Some Unsettled Questions of Political Economy
(1844), New York: Augustus M. Kelley, 1968, p. 137.
3. Ibid, p. 139.
4. A. C. Pigou, ed., Memorials of Alfred Marshall (1925), New York: Augustus
M. Kelley, 1966.
5. See Lionel Robbins, An Essay on the Nature and Significance of Economic
Science (1932), New York: New York University Press, 1984.
6. Anne O. Krueger, et al.y "Report of the Commission on Graduate Education
in Economics," journal of Economic Literature, 29:3 (1991), 1044-45. For addi-
tional assessment of graduate economic education in the United States, see Arjo
Klamer and David Colander, The Making of An Economist, Boulder, CO:
Westview Publishing, 1990.
7. Ronald H. Coase, The Firm, the Market, and the Law, Chicago: University
of Chicago Press, 1988, p. 185.
8. Tibor Scitovsky, "A Note on Welfare Propositions in Economics," Review of
Economic Studies, 9 (1941), 77-88.
9. Richard G. Lipsey and Kelvin Lancaster, "The General Theory of the Second
Best," Review of Economic Studies, 24:1 (October, 1956), pp. 11-32.
10. Milton Friedman, Essays in Positive Economics, Chicago: University of
Chicago Press, 1953.
11. Prominent works in experimental economics include Vernon L. Smith, ed.,
Experimental Economics, Brookfield, VT: Edward Elgar, 1990, and Douglas D.
Davis, Experimental Economics, Princeton, NJ: Princeton University Press, 1993.
12. James Buchanan, "Economics and Its Scientific Neighbors," in Buchanan,
What Should Economists Do?, Indianapolis, IN: Liberty Press, 1979.
13. Charles Schultze, quoted in Robert Kuttner, Everything for Sale: The Virtues
and Limits of Markets, New York: Alfred A. Knopf, 1997, p. 4 1 .
326 Political Economy

14. Frank Hahn, quoted in Warren J. Samuels, "The Case for Methodological
Pluralism," in Andrea Salanti and Ernesto Screpanti, eds., Pluralism in Economics,
Brookfield, VT: Edward Elgar, 1997.
15. William Leach, Land of Desire: Merchants, Power, and the Rise of a New
American Culture, New York: Pantheon Books, 1993; Andrew B. Schmookler, The
Illusion of Choice: How the Market Economy Shapes Our Destiny, Ithaca, NY:
State University of New York Press, 1993; Andrew B. Schmookler, Fools Gold: The
Fate of Values in a World of Goods, New York: HarperCollins, 1993; and Barry
Schwartz, The Costs of Living: How Market Freedom Erodes the Best Things in
Life, New York: W W. Norton, 1994.
16. Michael Sandel, Liberalism and the Limits of Justice, New York: Cambridge
University Press, 1982. Other prominent works in communitarianism include
William A. Galston, Liberal Purposes: Goods, Virtues, and Diversity in the Liberal
State, New York: Cambridge University Press, 1991; and Robert Bellah, et al.,
Habits of the Heart: Individualism and Commitment in American Life, Berkeley:
University of California Press, 1985. For comprehensive assessments of communi-
tarianism see Robert Booth Fowler, The Dance with Community: The e
Contemporary Debate in American Political Thought, Lawrence: University Press
of Kansas, 1991; Amitai Etzioni, The Spirit of Community: Rights, Responsibilities,
and the Communitarian Agenda, New York: Crown, 1991; Stephen Mulhall and
Adam Swift, Liberals and Communitarians, Cambridge, MA: Blackwell, 1996;
Derek L. Phillips, Looking Backward: A Critical Appraisal of Communitarian
Thought, Princeton, NJ: Princeton University Press, 1993; and Cornelius Delaney,
ed., The Liberalism-Communitarianism Debate, Totowa, NJ: Rowman &
Littlefield, 1993.
17. See Sara M. Evans and Harry C. Boyte, Free Spaces: The Sources of
Democratic Change in America, Chicago: University of Chicago Press, 1992, and
Robert Putnam, Making Democracy Work: Civic Traditions in Modern Italy,
Princeton, NJ: Princeton University Press, 1993.

ADDITIONAL READING
Audretsch, David B. The Market and the State. New York: Harvester Wheatsheaf,
1989.
Boswell, Jonathan. Community and the Economy: The Theory of Public Co-oper-
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Bowles, Samuel, and Herbert Gintis. Democracy and Capitalism. New York: Basic
Books, 1986.
Daley, Herman E., and John B. Cobb, Jr. For the Common Good: Redirecting the
Economy Toward Community, the Environment, and A Sustainable Future.
Boston: Beacon Press, 1989.
Davidson, Greg, and Paul Davidson. Economics for A Civilized Society. Armonk,
NY: M. E. Sharpe, 1996.
Foldvary, Fred E., ed. Beyond Neoclassical Economics. Brookfield, VT: Edward
Elgar, 1996.
Friedland, Roger, and A. F. Robertson, eds. Beyond the Marketplace: Rethinking
Economy and Society. Hawthorne, NY: Aldine de Gruyter, 1990.
Haslett, D. W. Capitalism With Morality. Oxford: Clarendon Press, 1994.
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Hodgson, Geoffrey M. Economics and Evolution: Bringing Life Back Into

Economics. Cambridge, UK: Polity Press, 1993.
HoUingsworth, J. Rogers, and Robert Boyer, eds. Contemporary Capitalism: The
Embeddedness of Institutions. Cambridge, UK: Cambridge University
Press, 1997.
Miller, David. Market, State, and Community. New York: Oxford University Press,
1990.
Ormerud, Paul. The Death of Economics. New York: J. Wiley & Sons, 1997.
Ostrom, Elinor. Governing the Commons. Cambridge, UK: Cambridge University
Press, 1990.
Sen, Amartya. On Ethics and Economics. New York: Basil Blackwell, 1987.
Vickers, Douglas. Economics and Ethics. New York: Praeger, 1997.
Walzer, Michael. Spheres of justice. New York: Basic Books, 1983.
Whalen, Charles J., ed. Political Economy for the 21st Century. Armonk, NY:
M. E. Sharpe, 1996.
Young, James P. Reconsidering American Liberalism. Boulder, CO: Westview
Press, 1996.
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Index

achievement orientation, 293 backward-bending supply curve, 293

Ackley, Gardner, 98 Bacon, Francis, 42
Adams, Henry, 254 Baran, Paul, 67, 290
Adorno, Theodor, 248 Barrett, Michele, 225
adversary culture, 84, 255 Barro, Robert, 51, 135
affirmative action, 177, 203-204, Bauer, Peter, 286
213,215-216 Beauvoir, Simone de, 226
Amariglio, Jack, 67 Becker, Gary, 221
American Economic Association, 65, Bell, Daniel, 193, 255
66,311 Benjamin, Walter, 248
American Federation of Labor, 192 Bentham, Jeremy, 89-91, 95, 173-174,
Amin, Samir, 290 176
analytical Marxism, 67 Berger, Peter, 84
Anthony, Susan B., 220 Bergson, Abram, 174
aristocracy of labor, 6 1 , 289, 292 Bernstein, Edward, 27, 59
Aristotle, 5, 91 Blake, William, 30
Arnold Matthew, 254 Blinder, Alan, 99
Arrow, Kenneth, 196 Bloom, Allan, 251,252-253
Asiatic mode of production, 289 Bohm-Bawerk, Eugen von, 32, 76
asset-based redistribution, 167 Boulding, Kenneth, 263
Austrian economics, 24, 32, 41, 49, Bowles, Samuel, 67, 167, 245-246
94, 134 Brandeis, Louis, 125
Ayres, Clarence, 65 Bryant, Anita, 231
354 Index

Buchanan, James, 51, 109, 317 Davis, Kingsley, 168

Buckley, William E, Jr., 72 Debs, Eugene, 27
Burke, Edmund, 24, 28-29, 72-73, 212 decommodification of labor, 140
busing, 177, 257-258 deep ecology, 268-272
democratic planning, 127
Cambridge economics, 24, 32-33, 94, demonstration effect, 234, 296
275 dependency theory, 289-291
capital flight, 141 Descartes, Rene, 42, 308
Carlyle, Thomas, 73-75, 91, 194 Dewey, John, 64, 255
Castro, Fidel, 291 dictatorship of the proletariat, 58,
Catholic Economic Association, 66 114
Chick, Victoria, 101 diffusion theory, 287, 289, 291
Chodorow, Nancy, 233 Dobb, Maurice, 100
circulation of elites, 75 Dowd, Douglas, 66
Clark, John Bates, 158, 160 Downs, Anthony, 5 1 , 109
Clark, John Maurice, 66 dual economy, 141-142, 148,
class struggle theory, 116-117 164-165, 205, 209
classical political economy, 24, 25 Dugger, William, 66
Coase, Ronald, 264-265, 311 Durkheim, Emile, 310
cognitive dissonance, 124
Coleridge, Samuel Taylor, 30, 91 Easton, David, 125
collective self-reliance, 291 Eatwell, John, 101
Commons, John R., 65 economic chivalry, 94
communitarianism, 324 Edgeworth, F. Y., 310
comparable worth, 177, 223, 236 Edwards, Richard, 67
comparative advantage, 284, 299-300 effluent fees, 266
compensating wage differentials, 160 Eichner, Alfred, 101
compensation principle, 315 Eisenstein, Zillah, 226
compensatory education, 253 Eisner, Robert, 151
Condorcet, Marquis de, 26 Eliot, T.S., 81,254
Congress of Industrial Organizations, Elster, Jon, 67
209 Ely, Richard T., 65
conspicuous consumption, 61, 269 Emmanuel, Arghiri, 290
constitutional economics, 41 empiricism, 309
consumption tax, 150 employee stock-ownership plans, 177
corporatism, 24, 83-84, 120, 126, Employment Act, 95, 147
146 enclosure movement, 163
cost-benefit analysis, 258, 277-278, Engel's Law, 297
315 Engels, Friedrich, 57, 59, 224, 288
countervailing power, 197 enterprise zones, 213
crowding out, 136 Epstein, Richard, 113
cycle of poverty, 173, 215 Equal Rights Amendment, 223,
231-232
Dahl, Robert, 125, 127 Etzioni, Amitai, 66
Daley, Mary, 226 eugenics, 171, 212
Darwin, Charles, 45 experimental economics, 317
Davidson, Paul, 101 externalities, 7, 16, 33, 52, 122, 123,
Davis, Angela, 210 236, 256, 275, 276, 277
Index 355

Fabian society, 59 Hartsock, Nancy, 226

falling rate of profit, 58, 139 Hayek, Friedrich A., 4 6 - 4 7 , 49, 72,
false consciousness, 188, 249 108, 134, 137, 161, 288
Farrakhan, Louis, 210 Hegel, G. W. E, 27, 57, 94, 207
fascism, 82, 83, 117, 146 hegemony, 294
feedback effect, 215, 234 Heller, Walter, 98
Fichte, Johann, 29 Herder, Johann, 29
fiscal crisis of the state, 141 Herrnstein, Richard, 168, 211
Foley, Duncan, 67 Hicks, John, 174, 315
Ford, Henry II, S3, 146 Hirschman, Albert O., 276, 296, 298
foreign aid, 287, 295, 299 historical school, 65
Foundation for Economic Education, 72 Hitler, Adolf, 31
Fourier, Charles, 26, 57 Hobbes, Thomas, 41-42, 43, 55, 77
Frank, Andre Gunder, 290 Hobson, John A., 310
Frankfurt school, 248 Hochman, Harold, 175
free schools, 247-248 Holmes, Oliver Wendell, Jr., 125
Freud, Sigmund, 192, 228 Horkheimer, Max, 248
Friedan, Betty, 232 human capital, 158-159
Friedman, Milton, 3, 51, 72, 113, 134, human rights, 11, 13, 14, 166, 174,
135,160,162,245,285,317 216
Fuller, Margaret, 232
Furtado, Celso, 290 Illich, Ivan, 247-248
Fusfeld, Daniel, 66 imperialism, 61, 139, 293-294
incomes policy, 149-150
Gaia, 270 industrial policy, 100, 149, 177
Galbraith, John Kenneth, 3, 127 infant industries, 295
Garrison, Roger, 49 inflationary psychology, 136
Gates, Bill, 172 Initiative Committee on Economic
geographical determinism, 284 Planning, 83, 146
Gilbreth, Frank, 184 instinct for workmanship, 60
Gilder, George, 228, 231 institutional discrimination, 214-215
Gilligan, Carol, 233 institutional economics, 24, 6 1 , 64-66
Gilman, Charlotte Perkins, 232 instrumentalism, 115, 117
Gintis, Herbert, 67, 167, 245-246 interest-group pluralism, 125
Glazer, Nathan, 84 intermediate institutions, 118, 120,
Godwin, William, 26 121,145,170,171-172,212
Gordon David, 67 International Workers of the World,
Gorz, Andre, 189 192
government failure, 109, 267 IQ tests, 211,252
Green, Thomas Hill, 92-93, 174
Grimke, Sarah, 220 Jackson, Jesse, 210
growth with equity, 298 James William, 65, 308
Jaures, Jean, 27
Haberler, Gottfried, 49, 286 Jefferson, Thomas, 107
Habermas, Jurgen, 62-63 Jensen, Arthur, 168, 211
Hahn, Frank, 319 Jevons, William Stanley, 31-32, 93,
Hall, Robert, 318 134
Harcourt, Geoff, 101 Johnson, Harry, 286
356 Index

Kaldor, Nicholas, 100, 174, 315 market failure, 33, 122, 296
Kalecki, Michal, 100 market power, 101, 144, 148, 149,
Kant, Immanuel, 59, 94 165, 175
Kautsky, Karl, 27 mark-up pricing, 101
Kemp, Jack, 135 Marshall, Alfred, 33, 93-94, 310
Keynes, John Maynard, 2 1 , 33, 36, Marx, Karl, 24, 27, 57-59, 115, 164,
94-95, 99, 146, 174, 197, 299, 166, 1 8 8 - 1 8 9 , 2 2 4 , 2 6 8 , 2 8 8 ,
315 289
Keynes, John Neville, 315 Marxist feminism, 224-225, 227
Kirzner, Israel, 49 Maslow, Abraham, 195, 255-256
Knights of Labor, 192 mass society, 81, 254
Kohlberg, Lawrence, 255 Mayo, Elton, 196
Kondratiev, Nikolai, 139 McKenzie, Richard, 51, 221
Kristol, Irving, 84, 171 means-tested benefits, 177
Krugman, Paul, 300 Menger, Carl, 31, 32
Kuttner, Robert, 100 mercantilism, 23, 116
Kuznets, Simon, 298 merit goods, 124
merit pay, 244, 257
Laffer, Arthur, 135 metapreferences, 313
Laibman, David, 67 Mill, James, 91
Lancaster, Kelvin, 314 Mill, John Stuart, 2 1 , 91-92, 95,
land reform, 298 173-174,176,258-259,309
law and economics, 4 1 , 113 Millett, Kate, 226
League of Women Voters, 232 minimum wage, 178
Lenin, V. I., 27, 61-62, 249, 289 Minsky, Hyman, 101
Lerner, Abba, 150, 174 Mises, Ludwig von, 32, 49, 134
Lewin, Kurt, 196 Mitchell, Juliet, 226
Lewis, William Arthur, 296 Mitchell, Wesley C , 65
libertarianism, 41 monetarism, 42, 52, 135, 136
Liebknecht, Karl, 27 Mont Pelerin Society, 72
Lindblom, Charles, 3 Montchretien, Antoyne de, 23
Lipset, Seymour Martin, 84 monument-building, 285
Lipsey, Richard, 314 Moore, Wilbert, 168
List, Friedrich, 295 Morgenstern, Oskar, 49
Locke, John, 42-43, 55, 77, 160 M c x a , Gaetano, 119
logical positivism, 310-311, 314 Mott, Lucretia, 220
logrolling, 111 multiculturalism, 216
Loury, Glenn, 205, 206 Murray, Charles, 168, 211
Lucas, Robert, 51, 135 Mussolini, Benito, 75
Myrdal, Gunnar, 296, 297
Machlup, Fritz, 49
Malcolm X, 210 Naess, Arne, 269
Malthus, Thomas, 25, 45, 162 National Bureau of Economic
Mann, Horace, 244 Research, 65
Marable, Manning, 210 National Industrial Recovery Act, 83
Marcuse, Herbert, 189, 249 National Organization for Women,
marginal productivity theory, 158, 232
161 national self-sufficiency, 299
Index 357

National Women's Trade Union peripheral capitalism, 290

League, 232 Piaget, Jean, 255
nationalism, 24, 30-31, 84 Pigou, Arthur C , 33, 94, 275, 276, 310
natural monopoly, 122 planned obsolescence, 60, 269
natural rate of unemployment, 136, Plekhanov, Georgi, 27
138 Podhoretz, Norman, 84
negative income tax, 162 political business cycle, 17, 136, 141
neo-Austrian economics, 24, 4 1 , politicization of accumulation, 140
49-50 pollution license, 266-267, 276
neoclassical economics, 24, 31-32, 99 Posner, Richard, 113, 223
neoclassical synthesis, 98 post-industrial society, 193
neoconservatism, 24, 84-85 post-Keynesian economics, 24, 98,
neocorporatism, 24, 84, 98, 99-100, 100-101
126-127 post-Marxian theory, 24, 64, 66-68
neofascist theory, 24, 81-83 Pound, Ezra, 81
neoliberalism, 126 Pound, Roscoe, 125
new class, 84, 255 pragmatism, 64-65
new classical economics, 24, 4 1 , 49, Prebisch, Raul, 296, 297
51-52, 99, 135, 136 primitive accumulation, 163
new institutional economics, 4 1 , 185 privatization, 113, 137
New International Economic Order, profit squeeze theory, 141
291 property rights theory, 4 1 , 185, 315
new Keynesian economics, 24, 98-99 Przeworski, Adam, 67
new social contract, 151 public choice theory, 24, 4 1 , 49,
Newton, Isaac, 22, 308-309 50-51, 109-112, 136
Nisbet, Robert, 84, 121 public goods, 7, 122, 123, 175, 265,
North American Free Trade 266
Agreement, 301
Novak, Michael, 84 radical feminism, 224, 225-226, 227
Nozick, Robert, 4 7 - 4 8 , 159, 160, 161 rational expectations, 51, 135
Nurkse, Ragnar, 296, 298 rational ignorance, 112
rational myopia, 111
Oakeshott, Michael, 78-79 rationalism, 308-309
Okun, Arthur, 98 Rawls, John, 95-97, 176
Olson, Mancur, 136 Reich, Michael, 208
optimal level of pollution, 264 Reich, Robert, 100, 126, 149
oriental despotism, 289 rent-seeking, 110-111, 285
Ortega y Gasset, Jose, 254 reserve army, 138, 164, 208
Owen, Robert, 26 Resnick, Stephen, 67
revisionism, 59
Paine, Thomas, 26, 90 Ricardo, David, 25, 284
Pareto optimality, 6, 75 Riker, William, 51
Pareto, Vilfredo, 75-76, 119, 168, 314 rising expectations, 170
Pareto's law, 75 Robbins, Lionel, 49, 311
Parsons, Talcott, 168, 229 Robertson, Dennis, 315, 216
participatory democracy, 118 Robinson, Joan, 33, 100, 307
Peirce, Charles Sanders, 65 Rockefeller, David, 83, 146
perennialism, 252 Rodgers, James, 175
358 Index

Roemer, John, 67 social wage, 140

romanticism, 24, 29-30, 84, 92 socialist feminism, 224, 226-228
Roosevelt, Eleanor, 232 Socrates, 91
Roosevelt, Franklin, 65, 95 Solow, Robert, 98
Roscher, Wilhelm, 65 Sowell, Thomas, 205
Rosenstein-Rodan, Paul, 296, 297 Spencer, Herbert, 45
Rothbard, Murray, 49 Sraffa, Piero, 100
Rousseau, Jean-Jacques, 55-57 stagflation, 101
Rowbotham, Sheila, 225 Stanfield, Ron, 66
Stanton, Elizabeth Cady, 220
Saint-Simon, Henri de, 26, 57 statistical discrimination, 214, 235
Samuels, Warren, 66 Steuart, Sir James, 23
Samuelson, Paul, 65, 98, 100, 186 stewardship, 272
Sandel, Michael, 324 Stigler, George, 110
Santos, Theotonio dos, 290 Stiglitz, Joseph, 99
Sargent, Thomas, 51, 135 strategic trade policy, 100, 299-300
Say, Jean Baptiste, 23, 134 Strauss, Leo, 77-78
Say's Law, 134 structural discrimination, 234
secular humanism, 272 structuralism, 115-116, 117
scarcity pricing, 265 Summers, Lawrence, 99
Schelling, Friedrich von, 29 Sumner, William Graham, 45
Schlafly, Phyllis, 231 Sunkel, Osvaldo, 290
Schlegel, August von, 29 sunset laws, 113
Schmoller, Gustav, 65 supply-side economics, 4 1 , 51-52,
Schultz, George, 245 113, 135, 136, 138
Schultze, Charles, 318 sustainable development, 277
Schumacher, E. E, 298 Sweezy, Paul, 67
Schumpeter, Joseph, 76-77, 119,
143-144, 307 takings clause, 267
scientific management, 184-185, 196 taste for discrimination, 204
Scitovsky, Tibor, 313 Taylor, Frederick W , 184, 196
segmented markets, 140, 141-142, 209 Thomas, Norman, 27
self-actualization, 195, 256 Thurow, Lester, 100, 102, 126, 149
Senior, Nassau, 25 Tobin, James, 98
Sherman, Howard, 67 Tocqueville, Alexis de, 119
Shockley, William, 168, 171, 211, 212 Tonnies, Ferdinand, 310
short time-horizon, 159 Tool, Marc, 66
Sidgwick, Henry, 275 transaction costs, 7, 185, 265, 276
Sierra Club, 267 transfer state, 285
Singer, Hans, 297 Treitschke, Heinrich von, 31
Smith, Adam, 25, 43, 45, 161, 183 Trilateral Commission, 83, 120, 146
Smoot-Hawley Act, 135 Trotsky, Leon, 27
social Darwinism, 45 Truman, David, 125
social democratic theory, 24, 27 Tullock, Gordon, 51, 109, 221
social discount rate, 278
social economics, 24, 64, 66 underconsumption, 139
social efficiency, 7 underground economy, 137
social rigidities, 137 unequal exchange, 290
Index 359

uneven development, 164 Webb, Sidney and Beatrice, 27, 59

Union for Radical Political Economics, Weber, Max, 309
67 Weintraub, Sidney, 100, 149
United Nations, 295 Weisskopf, Thomas, 67
utilitarianism, 90, 91, 173-174, 175 welfare economics, 174-175
Utopian socialism, 26, 27 Wicksteed, Philip, 310
Wieser, Friedrich von, 32, 76
value-added tax, 150 Wilderness Society, 267
values clarification, 258 Will, George, 84, 121, 171
vanguard party, 49 Williams, Walter, 205
Veblen, Thorstein, 28, 6 0 - 6 1 , 64 wise use, 267
Viner, Jacob, 286 Wolff, Richard, 67
voucher system, 243-244, 248, 257 Wollstonecraft, Mary, 224
Wordsworth, William, 30
Wallace, Neal, 51, 135 workfare, 172, 177
Wallerstein, Immanuel, 290 Worland, Stephen, 66
Wallich, Henry, 149 world systems theory, 290
Walras, Leon, 31
Wanniski, Jude, 135 zero-sum society, 102
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ABOUT THE AUTHOR
BARRY CLARK is Professor of Economics and former Department Chair-
person at the University of Wisconsin-La Crosse. He has also taught at
Pennsylvania State University, Tufts University, and Ripon College.
Dr. Clark holds a BA degree from Ohio University, an MS in Economics
from the University of Wisconsin, and a Ph.D. in Economics from the
University of Massachusetts-Amherst. His research and publications have
focused on the ethical dimensions of public policy.