LONG: Heterodox response on Government Intervention

[mcclintockbrent%faculty%Carthage@xxxxxxxxxxxxxxxx]

Eric Nilsson asked what explicit or implicit theory of the state do heterodox
economists have who argue for government guidance of the economy. Rather than
provide a soundbite, I submit an extract from a piece I recently wrote for a
volume that addresses Eric's question from an institutionalist perspective.
The piece is pitched to an upper division undergrad audience.

On rent-seeking: admit the charge, intervention will redistribute income
between interests. The task is to discern the impacts of intervention on
private and public interests. Public choice conflates the two interests,
arguing that there is no such thing as a public interest. Herb Gintis is
absolutely right: heterodox people should be the severest critics of
government performance in order to root out the waste of government failures
by requiring greater state accountability.

Since the following represents a slice of my research in progress, I'd
welcome any comments by direct e-mail to me at btm@xxxxxxxxxxxxxxxxx Anyone
who's tired by now, can head for the DELETE key!


Excerpt from Brent McClintock, "International Trade and the
Governance of Global Markets," in Charles Whalen and Robert
Heilbroner, ed, _Political Economy for the Next Century_, (M.E.
Sharpe, forthcoming).

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An Institutionalist Theory of the State and the International
Economy

     The institutionalist theory of the state is captured in
Stanfield's concept of "the dichotomized state." The state may
perform both repressive and socially-integrative functions. The
coercive powers of the state may be used to further or suppress the
conflicts between individuals, classes, and societies in such a way
as to redistribute income and wealth to further the ends of vested
interests. Yet the state may also be used to further the
provisioning or reproduction of society as a going concern. The
integrative state may act as a counterbalance to private interests
that jeopardize social reproduction. Thus under market capitalism,
the state may act as a check to the excesses of the market system
illustrated by fluctuations in macroeconomic activity, the
degradation and alienation of labor, instability in the financial
system, and environmental damage.
     This integrative function of the state is encapsulated in Karl
Polanyi's concept of "the double movement" generated by market
capitalism. As the market system encroached upon greater areas of
social life it was met by a socially-protective response aimed at
limiting the social disruption caused by market shocks.  The
source of this disruption, in Polanyi's view, was the market's
treatment of labor, natural resources, and productive organization
as fictitious commodities. The significance of these elements to
society is their ability to promote the life process, not the
fiction that their ultimate role is to be produced for sale in
markets.
     Social protection or the integrative function of the state
also occurs in response to dislocation generated by international
markets. Although acknowledging the efforts of rent-seeking
interests to gain protection from international competition,
Polanyi identified the greater motivation for protection as the
desire to stabilize social provisioning:

     No purely monetary definition of interests can leave room
     for that vital need for social protection, the
     representation of which commonly falls to...the
     governments of the day.

This social protection goes beyond mere self-interested rent-
seeking to encompass the promotion of the social and economic
stability of society. Evaluating the protectionist repercussions of
the excesses of laissez faire capitalism, Polanyi noted:

     Customs tariffs which implied profits for capitalists and
     wages for workers meant, ultimately, security against
     unemployment, stabilization of regional conditions,
     assurance against liquidation of industries, and perhaps
     most of all, the avoidance of that painful loss of status
     which inevitably accompanies transference to a job at
     which a man is less skilled and experienced than at his
     own.

     What this suggests is that there is some greater social or
public interest to be met by intervention in markets, namely
assuring at a minimum that social provisioning will not be
disrupted. Additionally, the reference to both monetary and non-
monetary costs and benefits indicates these must all be
incorporated in any comprehensive analysis of proposals for
protection and adjustment policies.
     Drawing upon his model of the "double movement," Polanyi saw
the two-edged nature of change which he characterized as a struggle
over "habitation versus improvement." The need to protect the
social fabric very often conflicts with the need to bring about
economic improvement. While neoclassical economics assumes the two
objectives coincide, there is no guarantee that this will happen
except by chance. In the event of conflict, social intervention may
be expected to occur in an attempt to preserve the social fabric.
The guiding principle for this interventionist policy, Polanyi
held, ought to be whether or not:

     . . . the dispossessed could adjust themselves to changed
     conditions without fatally damaging their substance,
     human and economic, physical and moral; [and] whether
     they would find new employment in the fields of
     opportunity indirectly connected with the change.

     To Polanyi then, as to many other institutionalists, the
smooth, rapid adjustment of society and its citizens to significant
changes in markets, whether domestic or international, is not a
given. Rather, in the absence of managed adjustment, dislocation
generated by markets is likely to initiate resistance which may
impede economic improvement. The solution is to realize that
although society may not always be able to determine the direction
of economic change it does very often have the ability to alter the
pace at which change takes place. This integrative task need not be
reactive but may be by conscious design, i.e. intervention to
correct the excesses of the economic system may be planned and
implemented prior to social reproduction being threatened.
     The welfare state emerged in the twentieth century as one
institutional form of the socially-protective response. It is
something of a social and economic hybrid, often summed up under
the heading "mixed economy" which reflects the mix of private and
public involvement in the economic process. Because it evolved from
the spontaneous, non-ideological protective response of the double
movement, the welfare state has lacked a clear theoretical purpose
for responding to market excesses and has exhibited only weak
policy coordination. Yet it has intervened under a wide variety of
circumstances to counter social costs associated with unemployment,
safety and health risks, environmental degradation, instability of
the banking system, and international competition.
     An institutionalist theory of the welfare state should clarify
both the repressive and integrative functions of the state. It
must, in essence, make the case for the social benefits of
collective action when the state performs the integrative task. On
this point there are strong differences between institutionalist
and public choice theorists. Public choice contends rent-seeking
is deleterious to society because the high social costs of
protective measures on third parties outweigh the private benefits
to producers and workers. The institutionalist perspective is less
emphatic. Most certainly it concedes the presence of the motive of
self-interested gain in protective action, but it also introduces
the social benefits of collective action to the analysis. The
social desirability of a protective measure depends upon the
weighing of the expected private and social benefits against the
expected private and social costs. Furthermore there must be an
assessment of the ability of those gaining from the measure to
actually compensate the losers. Since social costs and benefits may
not always be expressed appropriately in terms of market values or,
more importantly, be related to market efficiency because they are
extra-market phenomena, it is necessary to assess protective
measures not in terms of market efficiency but in terms of a wider
set of social values.
     Identification of social costs and benefits calls for
scientific determination of "social minima" or "basic needs," which
might include minimum environmental, health, education, nutrition,
housing, transportation, and employment standards. These social
minima would reflect certain value minima or value floors of
society. This suggests supplementing market valuations in cost-
benefit analyses of trade policies with social indicator analyses
and environmental impact statements. Where social minima are not
met society might be expected to intervene either to reduce social
costs or increase social benefits.
     The willingness of society to intervene where the market fails
indicates that market valuations are not the only values of
importance to society. A number of investigators of the welfare
state have identified a well-defined, representative set of welfare
values: equality, security, freedom, democracy, efficiency, and
solidarity or community. These values reflect the attempt of the
welfare state to move beyond the market mentality's overemphasis on
the motive of self-interested gain and the value of market
efficiency to a broader interpretation of the ends of human
endeavor. A further value, a land ethic, may be added to this set
of values to underscore the importance to human life of conserving
the ecological system.
     The importance of the state in institutional analysis derives
from society's need for an institution that can represent and help
form social values, resulting in a sum of valuations greater than
the parts. This contrasts sharply with the role of the state in the
public choice approach as a broker state of vested interests giving
expression to individualistic values, a mere summing of the parts.

*************************************************
And some more on the critique of public choice from an
institutionalist perspective:

     The task of explaining the motives for protectionism has
largely fallen to public choice theory. Its interpretation focuses
on how utility-maximizing individuals or "rent seekers" form
special interest groups to extract rents by lobbying politicians to
impose tariffs or quotas. Politicians, who are assumed to be
self-interested and thus wish to improve their chances of re-
election, allocate protection according to how their electoral
benefits may be maximized.
     According to James Buchanan, this rent-seeking does nothing to
add to social product since it merely alters the way the economic
pie is sliced, i.e. it redistributes current income between
interest groups, rather than making the economic pie any larger.
How adequate an explanation of intervention in trade is the public
choice approach? The available evidence suggests that rent seeking
is not simply motivated by short run, self-interested gain. Robert
Baldwin, himself a public choice theorist, concludes from an
extensive econometric study of trade protection that in addition to
self interest, "interpersonal effects and broad social concerns are
also needed to explain trade policies."
     It is to these broader social concerns that institutionalist
critics of public choice turn when they seek to explain
intervention in the market system. Major objections advanced by
these critics center on public choice's narrow conception of the
individual as a maximizer of consumer satisfaction to the exclusion
of her role as a creator of productive capacities; its rejection of
the existence of a public interest above and beyond individual
interest; and its neglect of values other than market efficiency,
such as security, democracy, and equity. In these alternative
conceptions of society and economy the center of attention shifts
away from economic and political exchange to the working rules of
society that give expression to collective action. The policy
issues become not so much ones of determining the institutions
necessary for market efficiency but ones of establishing the
working rules for the administration of international trade,
finance, and the environment that will foster the mix of values
society deems vital to social provisioning.