Public Virtues – 6 (Rules-Making Authority)

In Economic Planning, Economics, Financial Crisis, History and Politics, New Deal, Political Ideology, Politics, Politics of Policy, Progressivism, Public Policy, Public Sector, Regulation, Social Democracy, Social Policy on October 20, 2009 at 1:10 pm

Introduction:

(For previous installments in this series, see here)

So far in the Public Virtues series, I’ve focused on the characteristics that make the public sector different from the private sector. However, I’ve yet to discuss the interplay between the two, the fundamental dependent on the private for the public. And it’s in this dependency that we can see one of the public sector’s greatest strengths.

Is the Private Sector Private?

Karl Polayni’s The Great Transformation is perhaps one of the greatest progressive works of the 20th century, and it’s one that every progressive should read at one point in their lives, if only as a valuable antidote to Hayek’s Road to Serfdom. Among the many points that Polayni makes, one of the most intellectually critical was that the market, both in its embedded and unembedded forms, is fundamentally created by public action. In the beginning, we can look to the formal chartering of markets and fairs as places where commerce was allowed to happen under the auspices of a neutral party who could adjudicate disputes (i.e, the local lord), and the establishment of coinage as a replacement for barter (see previous case).

But more importantly, and as an example of how the public involvement did not end at the advent of the so-called free market, is the law. As Polayni points out, the “capitalist revolution” that swept away feudalism required a fundamental change in law and  power, such that land, labor, and capital were transformed from resources whose primary nature was defined by social obligations (hereditary fiefdoms and hereditary usage rights for land, vassalage and serfdom for labor, and bans on usury for capital) into resources whose primary nature was that of commodities, freely traded in a market.

In this sense, one can’t really separate the functioning of the market from the rules that give it life – just as you can’t get 18th century capitalism without the necessary legislation, you can”t get corporate capitalism without the establishment of general incorporation statutes, you can’t get mid-century American capitalism without the New Deal, and (this part is important), you don’t get our current system of capitalism without thirty years of “deregulatory” legislation, regulatory decision-making, legal decisions, and political work.

Rules-Making Authority:

Which brings us to the point: the great and irreproducable power of the public is to make rules and enforce them. It’s rather basic, but the economic connotations are less well remembered.

And this is the one power that the private sector has never been able to acquire for its own. Even back in the day when firms were family-owned and ownership was so concentrated that a Lowell/Cabot family reunion could do double service as a meeting of the New England Textile Manufacturing Association, private firms have been unable to set rules for themselves and enforce them. The history of economic organization in the 19th century from the earliest development of pools and cartels to the advent of the trusts and the great merger and incorporation movements of the late 19th century to the peak of private sector rule-making with the advent of “associationalism” during the 1920s, show the same basic inability to set and enforce even the loosest  gentleman’s agreement. The temptation to win advantage by breaking one’s word was too strong – and many of the great “robber barons” of the 19th century, Andrew Carnegie and John D. Rockefeller chief among them, made much of their fortunes and their market share by repeatedly making and breaking industrial agreements on pricing or market share.

However much it is downplayed, hidden, or subverted, the power to create and define the market itself is bound up with the power to make and uphold the law. Naturally, this has become the locus of conflict between those who favor the market and those who favor the state – whether you want to look at it as Hobbes vs. Locke vs. Rousseau, the liberal tradition versus the republican tradition, or what have you. The great innovation of the liberal turn in the 18th century was to argue that the natural state of humanity was an order in which property and the market were unregulated, and that state intervention was therefore unnatural – and thus in Enlightenment terms, irrational, inefficient, and oppressive. The burden of proof was thrown onto the state for the next hundred to two hundred years.

But what Polayni and others have pointed out is that the free market doesn’t involve any less government intervention – it just involves government intervention directed in particular ways. In order to protect the burgeoning textiles industry in the 18th century in England, the state chose to prohibit unions, “unauthorized” public gatherings, “out-doors” relief, chose not to regulate how long people worked or for what wages, or the safety and working conditions of factories, or the effects of those factories on the air or water, or the quality of merchandise sold. The tax system was designed to fall on the poor and not the rich, and the police powers of the state were expanded to come down with violence on political, economic, and social radicals. In the United States, the only example of military airpower ever used on the mainland was when the U.S Army Airforce bombed striking workers in the Battle of Blair Mountain – and a more vivid example of government intervention limiting people’s freedom can hardly be thought of.

Even de-regulation is ultimately a regulatory choice, and requires the active and constant activism of the state. Which means the real question is whether the public should make rules, but which rules we should make.

The Potential of Rules:

By the turn of the 20th century, the lack of capacity to establish rules was beginning to tell. Rampant child labor, industrial accidents claiming more than 15,000 lives a year, massive food safety and quality problems, and recurrent economic recessions began to rub off the shine on the virtues of laissez-faire competition. One of the architects of this intellectual turn, Henry Carter Adams, described the flaws of industrial laissez faire as one in which the moral plane of competition – the invisible rules of market activity – was set by the lowest moral common denominator. As long as the man who would stoop to putting children to work in mines and mills could achieve a lower operating cost than the man who would not, even the most moral employer would be compelled by market forces to employ child labor. Put another way, there was no rule that the private sector could establish that might interfere with profitability that could survive the pressure of competition.

However, Adams argued, “it is the task of government to determine the [moral] plane of competition.” By imposing the cost of decent conduct on all participants, and preventing undercutters from gaining advantage, the government would free employers to act morally. In other words, the moral plane of competition can be understood as the form of capitalism that is permitted by the public sector. By setting the guidelines of what is and isn’t acceptable conduct, regulation would ultimately shape how strenuous competition would be, and thus what the levels of price and profit could be, and the relative power of employers and employees and producers and consumers.

And we can think of the rest of the 20th century as a series of attempts to move the moral plane of competition in one direction or another. The New Deal, as imperfectly executed as it was, did establish a form of capitalism that lasted, in one form or another, for forty years – a form of capitalism in which corporations would be tightly regulated, especially in regards to wages, hours, industrial relations, and prices (especially for electricity and water), and in return, a high-wage/high-price economy based around large, oligopolistic corporations, a highly-unionized blue collar workforce, and abundant consumer demand was established. The project that is loosely defined as neoliberalism can also be thought of as another level of moral competition, in which certain industries (especially the financial) are deregulated, others are increasingly regulated (anything involving intellectual property), and a particular “bar-bell,” low-wage/high credit economy results.

And what is often hardest to grasp is the idea that, despite the bank bailouts, despite the failure of cramdown or credit card reform, and despite the tenuous position of financial regulation, we still have the option to decide what form of capitalism we want, what level of moral competition is acceptable to our society. What is even harder is to understand that we have this power at every moment in time.

Conclusion:

So despite arguments that regulation is always inefficient, ineffective, and unwarranted, there is a reason why corporates seek to capture even the weakest of regulators. There is still a dormant power therein, a power that can decide what is and isn’t property, what is and what isn’t normal economic behavior, what the market is and isn’t.

And that power belongs to us.

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  4. […] the public sector should be a yardstick for the private labor market.  As I’ve discussed in the past, one of the subtler powers of the government is that it can set the “moral plane […]

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