Mainstream economics and the political process

Published: August 21, 2008, 6:32 pm

Updated: June 3, 2011, 11:38 am

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When two theories in science describe the same range of phenomena and make disparate predictions about the outcomes of observations or experiments, the theory which accurately predicts these outcomes is accepted as scientifically valid while the other is not. But since the predictions of disparate theories in neoclassical economics cannot be confirmed by observation or experiment, the primary determinant of which theory is used to coordinate economic activities in particular market economies is the political process. In countries with functional democracies, large-scale changes in the organization of market systems typically occur after a political party that closely identifies with a particular understanding of the character of economic reality wins a general election during a period of economic crisis and manages to implement an alternate economic program.

In the vast majority of cases, the economic crisis can be directly attributed to, or has been massively aggravated by, what mainstream economists call non-market variables, or events that are presumably not subject to the lawful mechanisms of the closed market system. The alternate economic program is normally based on the views of economists that are most consistent with the ideological commitments of the victorious candidate for president or prime minister, with the ideological agenda that distinguishes the party of this candidate from that of other parties, and with the ideologically driven solutions to economic problems that appeal to large numbers of dissatisfied voters.

John Maynard Keynes

This can be illustrated by examining the large role played by the competition between Keynesian and anti-Keynesian economic theory in the electoral process in Great Britain and the United States. In the aftermath of WW II, there was no private sector capable of mobilizing the investment, capital goods, and skills required to rebuild economies devastated by this conflict and international trade was massively disrupted. Only governments seemed capable of marshaling the resources needed to deal with these large problems, and the economic model used in most industrial nations in the West and in large parts of the developing world was based on Keynes’ vision of a reformed and managed national economy. In these so-called “mixed economies,” state ownership, industrial policy, and fiscal management were used in various combinations in an effort to protect capitalism from its own excesses and to save capitalism from the lure of socialism.

Until the late 1970s, Keynesian “new economics,” with its emphasis on managing the overall economy with the fiscal tools of taxation and spending, appeared, for the most part, to have fulfilled its promise of sustained economic growth and full employment. Many economists during this period challenged Keynes’ vision, but the most fervent anti-Keynesians, whose names would become household words during the Thatcher-Reagan era, were F. A. Hayek and Milton Friedman. The work of Hayek and Friedman is narrowly predicated on assumptions about the lawful or law-like dynamics of free market systems that the creators of neoclassical economic theory embedded in the mathematical formalism borrowed from mid-nineteenth century physics. And their understanding of the lawful dynamics of the economic process closely resembles that of Jevons, Walrus, Edgeworth, and Pareto, and it is premised on the same metaphysical assumptions.

The legacy of Hayek, the most influential proponent of the Austrian free-market school of economics, is encapsulated in the response of Larry Summers, former secretary of the treasury in the second Clinton administration and currently president of Harvard University, to the question, “What’s the single most important thing to learn from an economics course today?” Summers replied, “What I leave my students with is the view that the invisible hand is more powerful than the hidden hand. Things will happen in well-organized efforts without direction, control, plans. That’s the consensus among economists.” This view is everywhere present in a book that became the “bible of economics” for Margaret Thatcher and the blueprint and rationale for the changes in the structure of the British economy that occurred during her tenure as prime minister—Hayek’s Road to Serfdom.

Originally published in 1944, this extremely conservative rendering of the truths of neoclassical economics denounces the welfare state, the mixed economy, and all forms of collectivism. The book was published in the United States by The University of Chicago Press and achieved much wider fame in this country after a condensed version appeared in The Reader’s Digest. Keith Joseph, who had been elected to Parliament as a member of the Conservative Party in 1956 and who served as minister in charge of social services after Edward Heath become prime minister in 1970, read The Road to Serfdom and experienced what he later described as a “conversion to conservatism.” This conversion took place during a period in which the British economy was severely disrupted by the Yom Kippur War, the 1973 oil crisis, and a prolonged coal miners’ strike.

Margaret Thatcher

Following this conversion experience, Joseph joined a right-of-center think tank called the Institute of Economic Affairs that would, under his leadership, promote Hayek’s views and popularize the economic agenda that eventually became the basis for the “Thatcherite revolution.” Always impatient with the pace of change, Joseph established the Centre for Policy Studies with the professed aim of converting the members of the Conservative Party to believe in the “more pristine” understanding of the lawful workings of the market system championed by Hayek. He recruited Margaret Thatcher, an MP who had previously served as Minister of Education in the Heath government, to serve as his vice chairman, and the Centre began to promote its understanding of the lawful or law-like dynamics of the free market system by sponsoring a flood of books, pamphlets, seminars, dinners and luncheons.

F. A. Hayek

At the top of the reading list Joseph distributed to his vice chairman and to other Tory politicians was Hayek’s The Road to Serfdom, which Thatcher had first read as an undergraduate student at Oxford. After rereading the book, she had her own conversion experience and became a true believer in the notion that the unimpeded operations of the invisible hand could resolve virtually all economic and social problems. During the two years before Thatcher became prime minister, the British economy had performed badly and alternate economic solutions were high on the political agenda. The British government was forced to borrow money from the International Monetary Fund to prevent a further devaluation of its currency and the conditions of the loans required sizable cuts in public expenditures.

These cuts sparked a rebellion within the ranks of the Labour Party, and Labour Prime Minister Callaghan added more fuel to this flame by supporting plant closures and a reduction in the labor force at state-owned companies. The economic situation reached crisis proportions after a strike by public-sector employees resulted in the rationing of medical care in hospitals and mounds of uncollected garbage in city streets. To make matters even worse, another strike by truck drivers brought the entire British economy to the point of virtual collapse. On a day when even the catering staff at the House of Commons was on strike, the Labour government lost a vote of no confidence and Callaghan was obliged to call the general election that made Thatcher prime minister in 1979.

Thatcher made it quite clear that she wished to chart a future for the British economy based on a distinctly un-Keynesian view of the market system in which the “Nanny State” would be replaced by the risks and rewards of “enterprise culture.” But during her first three years in office, Thatcher was not successful in translating this vision into reality and the planned Thatcherite revolution was a failure or, more accurately, a non-event. Interest rates rose to 16 percent, inflation was anticipated to reach 20 percent, and government deficits continued to climb.

Keith Joseph, who remained Thatcher’s unofficial minister of thought and who served officially as secretary of state for industry in her government, was eager to privatize state-owned industries and to confront the politically powerful trade unions. To prepare for this struggle, he presented senior civil servants in his ministry with a reading list containing Hayek’s Road to Serfdom, Adam Smith’s The Wealth of Nations and The Theory of Moral Sentiments, and eight pamphlets that he wrote himself. Meanwhile, the Tory government was embroiled in an effort to displace Keynesian monetary policy with monetarism by attempting to ensure that increases in the money supply would be commensurate with economic growth. When economic conditions failed to improve and political unrest increased, Thatcher’s support in the poles dropped to 23 percent, making her the most unpopular prime minister since the advent of modern polling in Britain.

War in Falklands

What saved the Thatcher government from almost certain defeat in the 1983 general election was the decision to respond to what economists term an exogenous or non-market event. The event was the invasion by Argentine troops of islands 8000 miles from the isle of Britain and the decision was to counter this action with an impressive display of military force. After several naval battles, a full-scale landing, and three weeks of fierce fighting, Britain emerged victorious in the Falklands War and the nationalistic fervor that accompanied this victory changed Thatcher’s political fortunes dramatically. She won the general election with a 144 seat majority and her government suddenly had the political clout to implement a legislative agenda designed to create a market system in Britain consistent with that envisioned by Hayek.

The other confrontation that enhanced Thatcher’s standing in the polls took the form of a standoff with the National Union of Coal Miners, led by Marxist Arthur Scargill, which began 1984. When Scargill and other union leaders refused to allow some mine pits to be closed, the Thatcher government anticipated a strike and asked the Central Electricity Generating Board to stockpile enough coal inventories to prevent the blackouts and power cuts that had crippled the British economy during the 1974 strike. After a year, the strike was broken and the terms of the relationship between labor, management and government in Great Britain changed dramatically. This new relationship allowed the Thatcher government to privatize state-owned industries, such as British Gas, British Airways, British Steel, British Coal, and British Rail, and to sell off government shares in North Sea Oil and British Petroleum. By 1992, two thirds of the state-owned industries, 46 businesses employing roughly 900,000 employees, were privately owned.

Tony Blair

These changes did not occur without a great deal of social unrest and political opposition, and this accounted in large part for the overwhelming 179 seat majority won by Tony Blair’s “New Labour Party” in the 1997 general election. Although Blair rejected the emphasis in the “Old Labour Party” on government intervention and state ownership, his vision of the free market, which was premised on compassion, social democracy, and inclusiveness, was more Keynesian and quite different from that of Thatcher and her mentor Hayek. A devout Christian since his undergraduate years at Oxford, Blair is committed to what he terms an “ethical socialism” that is more rooted in the ideals of Christian community and personal responsibility and that places less emphasis on the class struggle and dependence on the state. Nevertheless, Blair is a firm believer in the telos of the market or Washington consensus, and this partially explains why he will willing to support the decision of President Bush to topple the regime of Saddam Hussein by invading Iraq (Energy profile of Iraq).

Mainstream Economics and the Political Process in the United States

The intimate connection between the competition between Keynesian and anti-Keynesian economics and the political process is also apparent in the more market oriented United States during the post WW II era. The U.S., in contrast with most other highly industrialized countries, has consistently favored a regulatory approach to solving economic problems with the use of a web of regulatory agencies and antitrust legislation enforced by a powerful judiciary. Because America emerged from WW II with an intact and greatly strengthened economic system, it was not necessary, as it was in Europe, for government to play a large and central role in the management of the postwar economy.

Economic planners in Washington first began to apply Keynesian fiscal policies in 1938, and subsequent planners were heavily influenced by the work of Keynesian “new economists” at Harvard through the Johnson and Kennedy administrations. Richard Nixon, who attributed his 1960 defeat by John Kennedy to the recession of that year, declared, “Now, I am a Keynesian” shortly after winning the presidency in 1968. He then proceeded to implement a Keynesian full employment budget in which deficit spending was used to reduce unemployment and the tradeoffs between inflation and unemployment were addressed with an income policy in which government intervention was used to control wages.

Arthur Burns

Against the advice of Federal Reserve Chairman Arthur Burns, a conservative anti-Keynesian economist, Nixon took the nation off the gold standard and this weakened the dollar against other currencies and added to inflation by driving up the costs of imported goods. This action created a situation in which mainstream economists at central banks were obliged to take on the role of seeking to protect the stability of international commerce in the currency markets by buying or selling national currencies in response to sudden swings in their relative values. The Nixon administration also extended government regulation into new areas with the creation of the Environmental Protection Agency, the Occupational Safety andHealth Administration, and the Equal Opportunity Commission. What is remarkable here is that the influence of Keynesian economics explains, in large part, why the administration of one of America’s most conservative politicians instituted more liberal economic reforms than any other administration with the exception of that of Franklin Roosevelt.

1973 oil boycott

During the 1970s, the American economy did not perform well due to the large-scale impacts of the 1973 oil boycott. In 1974, inflation was at its highest level since WW I and unemployment reached 9.2 percent, or two points greater than any time in the years since that war. This situation became much worse after the Shah of Iran was toppled from power in 1979 and a second major drop in the supply of oil raised the price from thirteen to thirty four dollars a barrel. As lines at gas stations grew progressively longer and inflation hit 13.2 percent, President Carter was desperate for ways in which to slay the inflationary dragon and remain in office. Several of his advisers told him that economist Paul Volcker, who was exposed in graduate school at Princeton to professors from the Austrian School where Hayek did his doctoral work, might be able to deal with the problem of inflation as Chairman of the Federal Reserve.

Paul Volker (Source:AP Photo/Gregory Bull)

After Carter appointed Volcker to this office, the Chairman chose to fight inflation with a blunt instrument that produced dramatic results. Rather than merely set the prime rates that impacted the price of money, Volcker also elected to control the actual supply, or quantity of money, by managing bank reserves. As the Fed restricted the money supply, interest rates climbed to 20 percent, unemployment hit 10 percent, and the American economy entered the worst recession since the Great Depression. The sad state of the economy and the Iran hostage crisis were the major factors contributing to the defeat of Carter by Ronald Reagan in the 1980 election.

F.A. Hayek’s more direct influence on the American political process and on an economist who would serve as the minister of economic thought for Ronald Reagan, Milton Friedman, began in 1950. In that year, Hayek left the London School of Economics and accepted an appointment at the University of Chicago. By the end of the 1950s, economists in the “Chicago School” had distinguished themselves as the most vocal opponents of Keynesian new economics and its influential proponents at Harvard. Their central argument was that government intervention disturbs the lawful mechanisms of closed market systems and that these mechanisms, if left along, could resolve both social and economic problems more effectively and efficiently. The Chicago economists also believed that a small number of mathematical theorems could predict the manner in which decision makers would allocate resources and how these allocations would result in prices.

Milton Friedman, who did his graduate work at the University of Chicago and became a professor there in 1946, launched a direct assault on virtually every aspect of Keynesian economics in the late 1950s. In response to charges that the Chicago School was dogmatic, rigid, and given to a simple minded reductionism, Friedman set out to demonstrate that there was a direct and explicit connection between free-market capitalism and democracy. In Capitalism and Freedom, published in 1962, he argued that the mechanisms of the market system cannot function properly in the absence of economic freedom and that this freedom cannot exist in the absence of political liberty.

This marked the beginning of Friedman’s celebrity status among conservatives, and that status was considerably enhanced when he served as the principal economic advisor to Republican presidential candidate Barry Goldwater in 1964. After receiving the Bank of Sweden Prize in Economic Sciences in 1976, Friedman further popularized his views in a mass-market bestseller, Free to Choose, which became the basis for a series of programs on public television. He soon retired from teaching, joined the Hoover Institution at Stanford, and established direct contact with Ronald Reagan and his advisors.

When Reagan defeated Carter in the 1980 presidential election, economic problems during the 1970s caused many to question the efficacy of Keynesian new economics, and this greatly enhanced the influence of the Chicago economists who claimed that government intervention was the primary source of these problems. In this climate, a group of economists known as “supply-siders” became very influential. These economists firmly believed that the best way to fight inflation was to control the money supply and that the value of international currency should be based upon fixed rates, preferably that of gold. However, the concept of the supply-siders that had the largest impact on the Reagan Administration was the notion that revenues lost as a result of tax cuts would be more than made up by the additional tax revenues resulting from higher growth rates.

Based on the claim of the Chicago economists that the market system would perform better with less interference by government and the argument of the supply-siders that economic growth would be enhanced by cutting taxes, the Reagan Administration cut the top marginal rates for federal incomes taxes from 70 percent to 28 percent. After the increases in tax revenues predicted by the supply-siders failed to materialize and the large tax cut was accompanied by massive increases in defense expenditures, the gross national debt during the Reagan presidency rose from $995 billion to $2.9 trillion and the annual deficit tripled.

When the senior George Bush took office in 1989, his “read my lips, no new taxes” campaign slogan made tax increases politically undesirable, and his administration elected to confront the problem of the ballooning deficits by containing government spending. Fortunately for this administration, two “exogenous” events, the fall of the Berlin wall and the collapse of the Soviet Union, made it politically feasible to reduce defense spending. But after the Reagan tax cuts for affluent Americans failed to generate the anticipated additional tax revenues and overall revenues fell during the recession of the early 1990s, the annual deficit by the end of Bush’s term in 1992 had climbed to $290 billion.

The successful campaign against big government and excessive government spending during the late 1990s coincided with a heady period of economic growth fueled by lower interest rates, cheap oil, expanding global markets, high tech innovations, and dot-com mania. These developments largely explain why fiscal conservatives gained ground in both parties and why the anti-Keynesian pro-market “New Democrats” became power brokers after Bill Clinton was elected president in 1993. They also made it possible for Newt Gingrich and his “Contract With America” to take center stage in American domestic politics after the Republicans captured both houses of Congress in 1994.

200px-Gingrich Contract with America.jpg

Newt Gingrich's Contract with America

The goal of the Gingrich Republicans was to enact a budget that would eliminate federal deficits in seven years by curbing the growth of Medicare, Medicaid, and welfare programs, and by turning over the administration of most of these programs to the states. This group also called for very large tax cuts for high income Americans based on the assumption that this would encourage investment and stimulate the economy. When Clinton vetoed this budget, the Gingrich Republicans refused to pass the continuing resolution that would provide the temporary funds to keep the federal government going, and this resulted in shutdowns in November and December of 1995. As it turned out, the American public was more frightened than pleased by this action, Gingrich and his followers fell out of favor, and the primary source of this conflict, the federal deficit, ceased to be a burning issue in 1997.

The remarkable decrease in federal deficit, from 5 percent of Gross Domestic Product in 1992 to less than 1 percent in 1997, was not anticipated by any economists and those who attempted to explain it have done so after the fact. In 1993, economists working for the Clinton Administration and at Congressional Budget Office predicted that the 1997 deficit would be over $200 billion, and there were absolutely no indications that the actual deficit in that year could be about a tenth of that figure, $22.6 billion. The economists who proffered the after-the-fact explanations said that the turnaround resulted from reductions in government spending, particularly on defense, slightly higher taxes, and a dramatic increase in the flow of additional tax revenues generated by a strong economy.

The tensions between the vestiges of Keynesian new economics, which allows for prudent government spending to sustain a safety net of social services and programs, and the anti-Keynesian economics of the sort promulgated by the Chicago School, which calls for displacing or augmenting government activities with the mechanisms of the closed market system, were quite apparent in the 2000 presidential campaign. While Democrat Al Gore argued for increased federal spending to sustain the Social Security Retirement System and the Medicare and Medicaid programs, Republican George W. Bush claimed that market mechanisms could reduce government spending and provide more beneficial outcomes for already overburdened taxpayers. And while Gore made the case that increased governmental regulations and more government spending were required to deal with problems in the global environment, Bush took the position that these measures would adversely impact the U.S. economy and that market mechanisms would resolve the problems in the absence of such impacts.

Ralph Nader

In the American two party system, the outcomes of presidential elections in which the Democratic and Republican candidates endorse disparate solutions to economic and social problems have often been determined by very narrow margins. These margins were so close in the 2000 election that most analysts concluded that the result would have been different if a third party candidate, Ralph Nader, had withdrawn and thrown his support to Gore. The outcome was finally determined by a Supreme Court ruling that gave Bush a majority of votes in the Electoral College even though Gore had won the popular vote by a margin of roughly 500,000.

Poles taken during and after this election indicated the American public was deeply divided on virtually every issue, including that of the environment. Because Gore had systematically studied the linkage between global economic activities and the crisis in the global environment and had even published a best selling book on the subject, Earth in the Balance, in 1993, he was clearly more informed on this issue than Bush. In one of the televised debates, Bush even suggested that there was no valid scientific evidence indicating that global warming is a problem.

Environmental Policies of President George W. Bush

Virtually everything that candidate Bush said about global warming and other environmental problems was based on the assumption that the mechanisms of market systems will resolve these problems. This assumption was also very much in evidence during the first Bush administration in the refusal to cooperate with other industrialized countries in the effort to reduce global emissions of greenhouse gases and in an environmental policy, if one can call it that, which was little more than a thinly veiled attempt to serve the economic interests of corporate America.

In July of 2003, a report was issued by the U.S. Environmental Protection Agency that was originally intended to provide a comprehensive review of what was known about environmental problems and areas in which additional research was needed. But after some heavy-handed censorship by the White House Council on Environmental Quality and the Office of Management and Budget, a long section on the risks of global warming was replaced by a noncommittal note on the problem. The censors also deleted statements indicating that the decade of the 1990s was the warmest in the Northern Hemisphere in the last thousand years, that human activities are contributing to global warming, and that global climate change has environmental and health impacts (Global climate change: federal research on possible human health effects).

Union of Concerned Scientists

The systematic attempts by the Bush administration to suppress scientific knowledge about the environmental crisis have been so flagrant that members of the scientific community have recently been willing to overcome their usual reluctance to engage in partisan politics. For example, the Union of Concerned Scientists issued a report in February of 2004 which made a very convincing case that the Bush administration has displayed “a well-established pattern of suppression and distortion of scientific findings by high-ranking political appointees across numerous federal agencies.” This document, signed by sixty prominent scientists, including twenty Nobel laureates and former science advisors to both Republican and Democratic administrations, also accused the administration of consistently abusing scientific knowledge in the service of an ideological agenda.

During the months prior to the presidential election of 2004, the Bush administration continued to pursue its ideological agenda by preventing a 144-page study called the Arctic Climate Impact Assessment from becoming public. This study was sponsored by a council of eight nations with territories in the File:Arctic, the United States, Canada, Russia, and several Nordic countries, and the research was done over a four year period by a group of over 300 internationally known scientists. The scientists determined that global warming is melting the Artic ice sheet at an alarming rate and that this phenomenon can be directly attributed to increased global emissions of greenhouse gases. If nothing is done to dramatically decrease these emissions, the scientists warned that abrupt large-scale changes in the global climate system could occur.

All members of the council, with the exception of those from the United States, concluded that there was only one way to obviate the prospect that massive changes in the globalclimate system could imperil the lives of billions of people—the international community must establish mandatory limits on the global emissions of carbon dioxide and other greenhouse gases with all deliberate speed. But the American delegation, operating under direct orders from the Bush White House, argued that the study was not sufficiently detailed to justify the formulation of any concrete proposals and refused to endorse any recommendations that called for mandatory curbs on the greenhouse gas emissions.

The Washington Consensus

The work of F. A. Hayek and Milton Friedman provided the conceptual framework for the Washington consensus. The fundamental assumption in this consensus is that forces associated with the natural laws of economics will necessarily result in a new geopolitical reality in which the following conditions will exist—all national economies will be seamlessly wed to the global market system and all governments will operate in accordance with the principles of democratic capitalism. After the fall of the Soviet Union, this alleged consensus served to legitimate a program for economic globalization that can fairly be described as a recipe for ecological disaster.

During this period, New York Times columnist Thomas Friedman argued in numerous articles and a best-selling book that the mechanisms of free market systems are inextricably connected with and inseparable from the dynamics of democratic systems of government. In one of these articles, Friedman concluded that although people once thought that human affairs could be ordered in the absence of free [[market]s], this was no longer the case in the new era of globalization: “I don’t think there will be any an alternative ideology this time around. There are none.” The central theme in his best selling book, The Lexus and the Olive Tree, is that the forces of free market capitalism will necessarily transform the governments of all sovereign nation-states into functional democracies.

These forces are responsible, claims Friedman, for the “democratization of technology,” the “democratization of finance,” and the “democratization of information.” Countries that resist this inexorable movement toward the new global order will be severely punished for their lack of faith because the “Electronic Herd,” or the traders in the global financial system in which securities and currencies are exchanged at the speed of light, will “stampede away.” If this occurs, says Friedman, the investment capital required to grow economies in the resisting countries will no longer be available, currencies will be greatly devalued, stock markets could easily crash, and the prospects of improving economic conditions and enhancing individual freedoms will be greatly diminished.

The obvious question here is why does Friedman assume that the process of economic globalization will necessarily result in a new global order in which all national economies will be free market systems and all governments will be based on the principles of democratic capitalism. The answer to this question is implicit on virtually every page of Lexus and the Olive Tree. In this popular book, Friedman suggests that this outcome is preordained by the lawful or law-like dynamics of the free market system, and he occasionally alludes to the prospect that these dynamics are associated with the willful purpose and design of a benevolent Creator. For example, Friedman wonders in the last chapter of this book how a “visionary geo-architect,” or God, would design an ideal nation-state, and concludes that this state would undoubtedly be the “most flexible market in the world.”

Francis Fukuyama in another best seller, The End of History, does not openly declare that the process of economic globalization is proceeding in accordance with a sacredly ordained plan. But he does argue that this process is inexorably moving the global community toward the “end point of mankind’s ideological development and the final form of human government.” Fukuyama claims that human history is “coherent and directional” because the mechanisms of the “free market” and the dynamics of democratic systems of government operate in concert. According to Fukuyama, this explains why the forces of democratic capitalism have “conquered rival ideologies like hereditary monarchy, fascism, and most recently communism.” He also claims that when this process is complete, history will end in the sense that a “single coherent, evolution process” will have resulted in a global order in which all governments are “liberal democracies” and all economies are linked to the global market system.

In other best selling books, the metaphysically-based assumptions which are foundational to the Washington consensus are virtually impossible to ignore. George Gilder, the author of numerous popular books on business, states in The Sprit of Enterprise that, “It is the entrepreneur who knows the rules of the world and the laws of God.” In Wealth and Poverty, Gilder declares that virtually all societal problems in the United States can be resolved by the unfettered operation of the natural laws of economics. He attempts to reinforce this conclusion by arguing that the greatest source of poverty in this country is lack of family values, the primary cause of economic problems are the liberals and socialists in government and the academy, and the greatest threat to the security and peace of America is the hedonism associated with the surviving remnants of the counterculture revolution of the 1960s. The clear suggestion here is that the natural laws of economics and the moral laws of the Judeo-Christian tradition are dictated by God and a failure to recognize that this is the case is the principal cause of virtually all economic and social problems in the United States and, by implication, in all other countries.

Similarly, Kevin Kelly in another best seller, Out of Control: The New Biology of Machines, Social Systems and the Economic World, consistently conflates God’s providential design for the universe with technological innovation and refers to his own list of allegedly lawful dynamics in the global market system as “The Nine Laws of God.” Robert Samuelson, an economist who writes a column for Newsweek, suggests that the existence of this providential design is particularly obvious in the United States. In an article on the stock market entitled “The Market ‘R’ Us,” Samuelson says that the dynamics of the free market system always act in the best national interests of the United States, whether we know it or not, and against the interests of countries that do not embrace this system. Robert Bartley, the editor of the Wall Street Journal, has embraced a similar view. According to Bartley, the “world is not ruled by politicians but by markets,” and national governments “will evolve toward something like state governments today. Each will have its own industrial development program to show why it has the best business and investment climate.”

Walter Wriston, then president of Citibank, argued in The Twilight of Sovereignty that market forces “will flee from manipulation or onerous regulation of its value or use, and no government can restrain it for long.” In this book, the presumption that the mechanisms of free markets are virtually indistinguishable from the dynamics of democratic governance is particularly obvious. “Markets,” writes Wriston, are “voting machines” and “general plebiscites” that “conduct a running tally on what the world thinks of a government’s diplomatic, fiscal, and monetary polices.” He claims that markets are giving “power to the people” and anticipates a time when the entire global population will “fight to reduce government power over the corporations for which they work, organizations far more democratic, collegian, and tolerant than distant state bureaucracies.”

Also consider how the word “market” is used in virtually all commentaries on the Washington consensus—the market moves, responds, determines, directs, resolves, points, and creates. This language clearly suggests that the dynamics of free market systems are both mindful and purposeful, and the assumption that presumably justifies this belief is that these dynamics are associated with the operations of transcendent, universal and teleological natural laws. What the believers in the Washington consensus have apparently failed to recognize is that the agency that creates incredible complex economic systems and manages them in ways that allow for a fairly high level of coherence and stability is entirely human. This coherence and stability result from stochastic processes in human cognition that inform economic decisions, and it exists because large numbers of economic actors have assimilated narratives that describe roles, habits, and ritualized behavior within institutional frameworks and processes that deal in units of money. The fact that the institutional rules that govern monetary transactions are fairly stable and resistant to change also contributes to the relative stability of markets.

Any unbiased examination of the dynamics of an actual or real economic process reveals that the only regularities involved are emergent from the cognitive processes of individuals who base their economic decisions on widely known and shared economic narratives. The monetary value of property, stocks, bonds, contracts, commodities, and services as it is represented in these narratives becomes real by mutual consent, and the withdrawal of consent as a result of what mainstream economists call a lack of “belief” or “confidence” in the “market” has major economic impacts. The narratives that inform economic decisions may feature numerically-based analyzes that can be quite staggering in their complexity and very daunting in their abundance of details. But any order that emerges from an economic process has nothing to do with a transcendent god-like agency with a hand to spare. It results from cognitive processes in the minds of individuals that manifest as decisions to use available capital resources in ways that are consistent with their perceptions of potential monetary gains or losses.

One can, of course, employ sophisticated mathematical techniques to describe emergent regularities in economic behavior within a range of probabilities, and these descriptions can be useful in coordinating experience with market economies. But this does not mean that the mathematical description discloses lawful dynamics in this behavior that point to the existence of natural laws that govern this behavior. It simply means that mathematical language is an effective tool for modeling tendencies to occur in stochastic processes in which patterns of behavior are a function of widely shared and mutually reinforced economic narratives. This becomes quite obvious when the conduct of normal or everyday life is disrupted by disturbing events, and people express their fear, uncertainty, and confusion by deviating from scripts in the economic narratives.

If environmental resources were unlimited, environmental sinks inexhaustible, and environmental impacts of global economic activities generally benign, the usefulness of neoclassical economic theory as a heuristic in managing market economies could be regarded as sufficient justification for its widespread application. But since none of these conditions apply, the theory can no longer be regarded as useful even in utterly pragmatic, utilitarian terms because it fails to meet what must now be considered the fundamental criterion for the usefulness of any economic theory—the extent to which the theory allows us to coordinate large-scale economic activities in environmentally responsible ways on a global or planetary scale.

Mainstream economics and the political process

Contents

Mainstream Economics and the Political Process in the United States

Environmental Policies of President George W. Bush

The Washington Consensus

Further Reading

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