A Crisis of Vision

Daniel O'Connor  |  Integral Ventures, LLC

At the close of the 20th century, the market economy in America and elsewhere was in the midst of a veritable renaissance.  Twenty years of privatization, deregulation, and liberalization had rendered the “stagflation” of the early 1980s a distant memory.  During one of the greatest expansions in American economic history, productivity rose to record highs, unemployment fell to record lows, and inflation remained under control.  Corporations realigned their strategies and restructured their operations to compete in the new era of globalization.  Entrepreneurship flourished through the convergence of innovative new technologies, free-flowing venture capital, and relentless marketing.  The mainstream media regaled us with a continuous stream of economic notions, from the iconic CEO to the free-agent worker to the once-and-for-all transcendence of the dreaded business cycle.  For the first time ever, it was actually “cool” to be in business and everybody was following the stock market.  The market, both as a system and as an idea, stood vindicated.(1) 

The economists, politicians, and executives behind this renaissance are united by a well-schooled preference for individual and corporate freedom in a relatively unfettered market economy.  They proclaim themselves economic liberals and pay homage to the classical economic philosophy that favors free markets and limited government as essential to both economic growth and social liberty.  For reasons that will become clear in a moment, I call them economic libertarians.(2) 

The best of these economic libertarians seem to think that in pursuing market opportunities they are contributing to the development of a civilization.  They are indeed.  Their record of entrepreneurship and innovation is unparalleled in history and the simple fact that they create so many of the jobs that fund our way of life confirms their value to society.  As for the millions of economic libertarians who have never started a company or invented a new technology, the verdict is still positive.  With each new market exchange they are creating some small incremental addition to the overall wealth and well-being of our society.  Though some struggle just to survive in the market, they staunchly defend its very real virtues, preferring to lift themselves up by their own bootstraps rather than being, as they see it, hoisted by a social safety net.

Despite the recent recession and the spate of high-profile corporate failures—from the forgettable “dot-bombs” to the not-so-forgettable Enron, WorldCom, and Arthur Andersen—economic libertarians remain relatively sanguine about the market system and its future.  While making no excuses for the decline in professional standards that led to these corporate failures, they hail the market’s success in eventually fostering the transparency and accountability necessary to right the system.  As they see it, the market’s swift justice is driving wasteful and unethical firms right out of business before the government and the outraged public can even begin to make sense of what happened.  They’ve seen this before, they assure themselves, and it too shall pass.

Nevertheless, their critics contend, too many economic libertarians harbor a fundamentalist belief in the virtue of the market—a blind faith in this all-knowing, ever-present force for human liberation that borders on a secular religious fervor.  Their faith blinds them to the very real problems with the market, while absolving them of any responsibility for its results.  When confronted with evidence of the market’s apparent mistakes, they tend to recite some version of the self-justifying libertarian credo:

If there is a problem, the market will correct it.
If the market does not correct it, then it is not really a problem.

In other words, the market solves its own problems.  Everything else is commentary.

::

But this is not the only renaissance that began to take shape at the close of the last century.  In what looks like a revival of a movement we first saw toward the end of the 19th century, a multi-faceted counter-revolution has emerged worldwide and coalesced around a critique of the very economic philosophy credited with producing the booming American economy.  An unlikely coalition of activists and intellectuals—from labor unionists and environmentalists to journalists and economists—has begun to voice a common concern over a very different economic story.(3) 

As they see it, the closing decades of the 20th century were less a vindication and more an indictment of the market.  Financial markets, once considered the servants of free enterprise, revealed themselves to be the masters of that enterprise, allocating technological, human, and natural capital according to the speculative imperatives of global financial capital.  Politicians, once considered the servants of a democratic populace, gradually subordinated themselves to these same speculative imperatives, deregulating markets, subsidizing corporations, and bailing out the wealthy losers in one financial disaster after the next.  While domestic corporations outsourced high-wage jobs to low-wage economies in order to enhance their profitability, these same corporations managed to reduce their income taxes to a mere fraction of what households were paying.  Thus, despite the apparent strength in employment, productivity, and growth, most Americans saw their real incomes stagnate, their debt levels swell, and their prospects for retirement undermined by a Social Security fund that defied all credibility and a stock market bubble that defied all rationale.  As if believing its own “new economy” hype, the mainstream media failed to acknowledge the harsh new realities of this economy, from the overpaid CEO to the redundant worker to the systematic impoverishment of society and nature by unregulated market forces.(4) 

The diverse authors of this provocative story share a common adversary in the economic libertarians as much as any particular ideology.  While some maintain their faith in the contemporary economic philosophy favoring interventionist governments and managed markets, an increasing number seem to be channeling their energies into social activism via global civil society, a self-organizing network of non-governmental, non-commercial organizations.  Their various criticisms of the market and its institutions are typically framed within the overarching themes of social responsibility, environmental sustainability, and economic democracy.  Although they are derided as an “anti-liberal backlash” by the libertarian orthodoxy, these increasingly vocal critics have a decidedly liberal agenda of their own.  In fact, they’re challenging the seats of economic power with the same conviction that the libertarians have always reserved for their assaults on the seats of political power.  Lacking a name, I call them the economic egalitarians.(5) 

The more thoughtful members of this economic culture perform a great service to all market participants by raising our awareness of the unfortunate and often unintended consequences of market-based economic development.  Beneath the surface of what may sound like alarmist rhetoric often lies a sound assessment of the specific ways in which economic growth is misaligned with genuine economic welfare.  By focusing on difficult issues like wealth inequality, corporate corruption, technological redundancy, ecological degradation, currency speculation, and all manner of economic injustice, these highly vocal critics of the status quo can actually serve the libertarian cause by fostering more informed consumers, investors, employees, and entrepreneurs.

However, from the perspective of their libertarian critics, many economic egalitarians display a rather pretentious skepticism about the economy.  They insist that market logic somehow undermines social values, both at home and abroad, and that they should be allowed to correct the market’s mistakes, if not through government intervention then through social activism.(6)  They seem to think that the market is the biggest zero-sum game in the world, rewarding those in positions of power at the expense of everyone else.  However true this may be, it is also a convenient assessment that appears to justify their own zero-sum resistance movements.(7)  For the egalitarians, the recent recession and the spate of high-profile corporate failures represent prima facie evidence of market failure and the need to enforce greater transparency and accountability from outside the market.  They’ve seen this before too, they remind us, and this time something has to change.

Unfortunately, a few angry souls among them, like the brick-throwers at recent economic summits, seem to have regressed into an anti-market fundamentalism that threatens not only the market economy, but also the social stage on which their self-righteous dramas play out.  When drawing attention to the world’s many problems, they are quick with their own self-justifying credo:

If there is a problem, the market must have caused it.
If the market caused it, then the market cannot correct it.

In other words, the market is the problem and society is the solution.  Resistance is futile.

::

These admittedly rough portraits nevertheless portray the two primary economic cultures vying for control of economic policies and corporate strategies across America and throughout much of the world.  Their ideological differences might constitute little more than an esoteric academic debate were it not for the fact that both economic philosophies have been politicized by economic authoritarians of the Left and the Right, whose aim is to engineer the economic results they failed to achieve through the market.  By extending their mandate well beyond the realm of legitimate market regulation, many politicians, bureaucrats, and lobbyists use the egalitarian credo to justify or the libertarian credo to obscure their efforts to control the market.  Without necessarily realizing it, they seem to be enacting a pre-classical economic philosophy that endorses arbitrary market manipulation for narrow political ends—a corrosive political economics that bears little resemblance to the great classical tradition of political economy.(8)

Despite the irony of the situation, many self-proclaimed corporate libertarians are continuously lobbying the government for more taxpayer subsidies for capital spending, no-bid contracts from government agencies, special tariffs against less expensive imports, industry-specific loopholes in the tax code and regulatory regime, and strict limitations on any regulations that might require greater transparency and accountability with their own customers, employees, and investors.  Hiding behind their libertarian rhetoric, many Republicans will do everything in their power to satisfy these constituents and maintain the illusion of genuinely free markets.(9)(10)

Not to be outdone, the Democrats will charge the Republicans with promoting corporate welfare, while they continue to promote the welfare of their traditional egalitarian constituents, like the environmental lobby, unionized labor, and the current beneficiaries of Social Security and other welfare programs.  Moreover, when it suits them, they will even justify on purely egalitarian grounds some of the same corporate welfare that the Republicans promote under the guise of their libertarian rhetoric.  But at least Democrats aren’t contradicting themselves when they intervene in the market.  That’s been their stock-in-trade since the New Deal.

In their combined efforts to systematically subordinate market forces to political forces, even while claiming to do so for entirely different reasons, the Republicans and Democrats have been successful in precisely one thing: increasing the size of the government.  Regardless of how we slice and dice the numbers, at the federal, state, and local levels, during economic expansions and recessions, in absolute terms and as a share of the total economy, the government’s role in the American economy has increased in nearly every single year since the beginning of the 20th century.  In fact, the government-controlled portion of the national income has increased from less than 13 percent in 1900 to about 58 percent in recent years—a statistic that would undoubtedly shock most Americans who imagine their economy to be of the market variety.(11)  And regardless of whether the unrelenting growth in government expenditures was financed through immediate tax increases or additional borrowing, it always was and always will be paid for by taxpayers, past and future.

It is therefore no surprise that the only economic policy on which both parties consistently agree is that the Federal Reserve must continuously inflate the money supply via the credit markets.  Through a combination of highly refined open market operations and deliberately ambiguous open mouth operations, the Federal Reserve ensures a seemingly endless supply of new credit to the federal Treasury and, via the banking system, to highly-leveraged corporations and homeowners—a policy evidently designed to support asset prices, workers’ wages, and tax revenues against significant declines to reflect the economic reality we’re actually experiencing.(12) 

Thus, by increasing government expenditures as if there was no tomorrow, handing out tailor-made benefits to their favorite special interests, and inflating the largest debt bubble in history, the economic authoritarians create the impression of actually addressing the market’s problems and strengthening the economy.(13)  Unfortunately, the only thing they accomplish with any certainty is the further consolidation of economic power in the government.

The mainstream media play into this canard by framing most economic stories as if they were political stories, with the only relevant storyline being the debate between the Left and the Right over how (not whether) to govern the market economy.  But instead of a principled debate between libertarian and egalitarian economists, the mainstream media present political pundits just barely Left and Right of the political Center who debate the minutiae of government economic policies—ad hominem, ad populum, ad nauseam—while demonstrating what appears to be an ignorance of any economic theory that did not originate with one of the major political parties.

Over the years, the media’s obsession with politics and politicians’ ignorance of economics has created the false impression among many of us that the government is, and should be, managing the market.  Given that misunderstanding, the only relevant consideration for most of us is whether our politicians are managing it for our exclusive benefit.  Any suggestion that this Right-Left tug-of-war over managing the market might be part of the problem is evidently beyond the pale in today’s media environment.  To contend that presidents and central bankers simply cannot control the market is, it would seem, an academic argument not worthy of current news coverage.  Even the slightest implication that we the people might bear some responsibility for the unfortunate market decisions we’ve made is apparently too insensitive for us to handle—politically incorrect, in more ways than one.  And we wonder why the government has so much power over our lives.

For the economic authoritarians, the recent recession and the spate of high-profile corporate failures represented a political opportunity of the first order.  With their own legitimacy as the market’s self-appointed managers in question, the economic authoritarians deftly cast suspicion over the market’s legitimacy, while re-positioning themselves to manage the market’s recovery.  A chorus of blind faith in the market’s virtue during the boom years, they sounded more like the preachers of pretentious skepticism during the bust.  To follow their line of reasoning, the unmatched wonders of free enterprise had been tragically twisted into the unmatched horrors of crony capitalism, all in a span of just a few years, without any outside influence from the market’s managers.(14)  And having located the cause of the economic recession in a corrupted market full of crony capitalists, the authoritarians engineered the appearance of an economic recovery through an impressive array of what was allegedly lacking before the recession: indictments, regulations, deficit spending, and monetary inflation.

With each new revelation of corporate misconduct, we saw moral grandstanding from both sides of the aisle, preaching to the choir about the need for greater transparency and accountability in business, while ignoring their absence in the government’s own business.  Yet careful scrutiny of this business, from pro-forma budget surpluses that vanish overnight to off-balance sheet liabilities that threaten to destroy the currency, should convince libertarians and egalitarians alike that the authoritarians cannot lead anyone toward a deeper resolution to our economic problems.(15)  Implicit in their policies, we find yet another self-justifying credo:

If there is a market, the government must have created it.
If the government created it, then the government can control it.

In other words, government will take care of everything.  We have nothing to fear.

::

This brief survey depicts the dire state of the economic dialogue across America and throughout much of the world.  It is a dialogue in which we are all, whether we like it or not, captive participants, struggling to make sense of the dissonant stories and statistics according to our own personal economic philosophies.  Being a fellow captive, I must admit to experiencing more than my fair share of dissonance over the years, as this economic dialogue is both context and content for all my work in the world.  To study and practice among uncompromising libertarians and egalitarians, as I have done, is to encounter first-hand that tragic juxtaposition of liberal ideals and lingering fundamentalism that somehow manifests in each opposing, yet strangely complementary, ideology.  And to see the way these complementary cultures have politicized their philosophies, reducing them to little more than rationalized coercion, is all the more tragic and alarming.  But I trust that I am not alone in the desire to come to terms with this strange and alarming tragedy—to find that elusive route between the Scylla of libertarian faith and the Charybdis of egalitarian skepticism.

I suspect that upon careful reflection many readers will, like me, find within their own personal economic philosophies some blend of libertarian, egalitarian, and, yes, even authoritarian sentiments.  Who among us has not developed an appreciation for the market’s many contributions to the wealth and well-being of our society?  Likewise, who would not concede that the market does, albeit inadvertently, leave some people behind in its quest for value?  And despite the many perverse effects of political economics, who would really want to live in a market society without a state to protect our basic rights to own property, work in a job of our choosing, and remain secure from those who would take advantage of our weaknesses?  As will become clear in due course, this entire book is a testament to the valid contributions of all three economic philosophies, at least as I regard them.(16) 

That said, the greater task is surely that of clarifying the fundamentalisms—illuminating the shadows, if you will—that lurk within each economic philosophy.  If we hope to elevate the economic dialogue, we’ll have to challenge those economic libertarians who, at their worst, deny responsibility for innovation while hiding behind rhetoric about how the market will automatically do it for us.  Likewise, we’ll have to engage those economic egalitarians who, at their worst, may weaken society in a misguided effort to save it from the market.  Perhaps most importantly, we’ll have to confront those economic authoritarians who, in the name of economic development, systematically distort the market process while systematically stifling even peaceful dissent.  And to whatever extent these fundamentalist sentiments are not just out there, motivating the actions of others, but in here, motivating our own actions, we’ll have to engage in some critical self-reflection.

We are the market, just as we are society.  We bring all our libertarian and egalitarian values into the market with us, to frame our perceptions, guide our decisions, and manifest in the very economic problems we struggle to resolve.  But if we do nothing more than politicize our economic philosophies, demanding ends without regard to justifiable means, then we will continue to legitimate those policies of the state that undermine both market and society.  This is why the economic dialogue is so very important and so completely unavoidable.

What we evidently need is an economic philosophy that makes sense of both the good news and the bad news in the market, while offering something more than either blind faith or pretentious skepticism.  Without it, we seem to have no alternative but to entrust politicians to forge compromises between special interests that, despite their claims, really do not represent the general interests so many of us share.  But what sort of economic philosophy would embrace the valid contributions of the libertarians and egalitarians, while avoiding their negative baggage?  What role would it provide for the authoritarians?  And even if we could envision such an economics as some sort of academic exercise, how would we actually create the economy that it reflects?  What would we have to do to break through the ideological gridlock between libertarian, egalitarian, and authoritarian economics?  After all, the last thing we need right now is yet another vision of a better world, curiously devoid of any actionable advice about how it can be realized.

In my own efforts to come to terms with the economic dialogue, the good news and the bad news, I discovered an interesting pattern.  It seems that if we look beneath the surface of the contradictory stories and statistics, they tend to organize around three economic dilemmas: freedom vs. fairness, efficiency vs. effectiveness, and growth vs. sustainability.

Think about it.  If we look beneath the surface of any economic problem, such as wealth inequality or global warming, we will find at least one of these dilemmas at work, fragmenting perceptions and undermining solutions.  After all, what is wealth inequality, if not a lightening rod for debate about economic freedom and fairness in a variety of economic policy issues, from trade to taxation to welfare?  And hasn’t the debate about global warming been plagued from its inception by the popular belief that the pursuit of ecological sustainability is inevitably at the expense of economic growth?  In fact, these dilemmas are what everyone’s arguing about, at economic summits and in on-line discussions.

However, if we look again, we’ll see the same dilemmas underlying such economic innovations as social entrepreneurship and clean technology.  Social entrepreneurship may be thought of as a conscious attempt to infuse a commercial enterprise with a social mission—evidently one way to more fairly distribute the benefits of free markets.  And the development of clean technology industries, like solar power and hypercars, represents a form of economic growth that may be more sustainable from an ecological as well as an economic perspective.  It’s as if the people behind these innovations were deliberately trying to create solutions that bridged freedom and fairness, efficiency and effectiveness, growth and sustainability.(17) 

So, what are we to make of these economic dilemmas?  I submit that they are the economic manifestations of some rather fundamental dilemmas, rooted in the modern/postmodern mind, whose resolution through learning defines the proper function of the market.  Moreover, these dilemmas frame a three-fold crisis of vision between libertarian economics—which generally promotes the values of economic freedom, efficiency, and growth—and egalitarian economics—which reliably counters with the need for more fairness, effectiveness, and sustainability.(18)  This really is what everyone’s arguing about these days.  And it is also the basis of authoritarian economics, which derives its legitimacy from the widespread belief that only centralized power can forge lasting resolutions to these economic dilemmas.  But even while framing the current crisis of vision, these dilemmas epitomize the economic dialogue of the past 250 years and frame a more Integral Economics for a 21st century economy centered on knowledge and values.

© 2002 by Daniel J. O'Connor.  All Rights Reserved.

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(1)  The purpose of this paragraph is to sketch the broad contours of an economic story that has been crafted by a particular economic sub-culture, which I refer to as the economic libertarians. While it is not my intent to defend the empirical validity of the story (that is properly the task of those who espouse the story), there are nevertheless some economic statistics that appear to establish its validity. For exemple, from 1981-2000, Real Gross Domestic Product increased by an average of 3.2% per year, with a strong average of 4.0% per year during the five years from 1996-2000. Source: Bureau of Economic Analysis. From 1981-2000, Industrial Production increased by an average of 3.1% per year, with a very strong average of 5.0% per year during the five years from 1996-2000—one of the highest 5-year averages in history. Source: Federal Reserve Board. From 1981-2000, Manufacturing Productivity increased by an average of 3.3% per year, with a very strong average of 4.4% per year during the five years from 1996-2000—the highest 5-year average in at least 50 years. From 1981-2000, the Unemployment Rate averaged 6.4%, with a very low rate of 4.0% in 2000—the lowest rate in 30 years. Source: Bureau of Labor Statistics. From 1981-2000, the GDP Price Deflator averaged 3.2%, with a very low average of 1.7% during the five years from 1996-2000—the lowest 5-year average in over 30 years. Source: Bureau of Economic Analysis. From 1981-2000, the Misery Index, defined as the Unemployment Rate plus the Inflation Rate, averaged 9.6%, with a very low average of 6.3% during the five years from 1996-2000—the lowest rate in over 20 years. From 1981-2000, the S&P 500 Stock Market Index increased by an average of 12.0% per year, with a very strong average of 16.5% per year during the five years from 1996-2000. Source: Standard & Poors.

(2)  Research institutes and other organizations emphasizing what I call libertarian economics include Cato Institute, Competitive Enterprise Institute, Foundation for Economic Education, Fraser Institute, Institute of Economic Affairs, Ludwig von Mises Institute, and World Economic Forum. Popular books that address libertarian economic themes include: Blundell (2001), Friedman and Friedman (1980), Hayek (1994), Henderson, D. (2000), Henderson, D. (2002), Lindsey (2002), Micklethwait and Wooldridge (2000), and Yergin and Stanislaw (1998). Of course, I do not imply that these books or the publications from these institutes are entirely libertarian in orientation, nor that they are guilty of any unwarranted “faith” in the market.

(3)  For more on the 19th century social movement against the proponents of free markets, see Polanyi (1957). Chapter 2 will address some of Polanyi’s views on the market.

(4)  The purpose of this paragraph is to sketch the broad contours of an economic story that has been crafted by a particular economic sub-culture, which I refer to as the economic egalitarians. While it is not my intent to defend the empirical validity of the story (that is properly the task of those who espouse the story), there are nevertheless some economic statistics that appear to establish its validity. For example, see Weller (2004) for a report on the trends in corporate profits and taxes. According to Henderson, Lickerman, and Flynn (2000) p. 203, “The breadth of recent wage problems is clear from the fact that real wages fell for the bottom 60 percent of wage earners over the 1979-1989 period, while wages fell among the bottom 80 percent over the 1989-1995 period. That is, only workers in the upper 20 percent of the wage scale obtained real wage growth.” According to Hodges (2004), household debt levels rose from approximately 60 percent of national income in 1980 to over 80 percent in 2000 and over 100 percent in 2003. Personal saving as a percentage of disposable personal income also declined markedly from approximately 10 percent in the early 1980s to approximately 2 percent in 2000 and 0.2 percent at the close of 2004. Although supporting data are difficult to assemble, it would not be unreasonable to hypothesize that the increases in personal indebtedness and the decreases in personal saving since 1980 were most concentrated in those households whose personal income was in the lower 80 percent of all households, a condition which would clearly exacerbate the decline in real wages experienced by most of these households. See Note 13 for more data on public and private sector debt. See Note 15 for more information on the financial condition of the Social Security program. See Shiller (2000) for an analysis of the stock market bubble that peaked in March 2000.

(5)  Research institutes and other organizations emphasizing what I call egalitarian economics, at least in part, include the AFL-CIO, Anti-Capitalist Convergence, Business for Social Responsibility, Center for Popular Economics, CorpWatch, Direct Action Network, Foundation on Economic Trends, Friends of the Earth, Global Exchange, Institute for Policy Studies, International Forum on Globalization, International Institute for Sustainable Development, International Society for Ecological Economics, Mobilization for Global Justice, Public Citizen, Redefining Progress, Socialist International, United for a Fair Economy, World Social Forum, and WorldWatch Institute. Popular books that address egalitarian economic themes include: Callinicos (2003), Douthwaite (1999), Dyer-Withford (1999), Mander and Goldsmith (1996), Hutton and Giddens (2000), Hutton (2002), Kelly (2001), Klein (2000), Korten (1995), Korten (1999), Reich (2002), Rifkin (1995), Greider (1997), Henderson, H. (1995), Henderson, H. (1996), and Henderson, H. (1999). Again, I do not imply that these books or the publications from these institutes are entirely egalitarian in orientation, nor that they are guilty of any unwarranted “skepticism” of the market.

For some background on the attribution of an “anti-liberal backlash” see Henderson, D. (2001a), Henderson, D. (2001b), and Blundell (2001).

(6)  See for example Hendersen, D. (2001a) and Hendersen, D. (2001b).

(7)  The assessment of the economy in terms of power relations is a standard of sociological analysis. The “resistance movements” against the “institutions of capitalism” are typically motivated by the belief that the social order that seems to cut against those in the movement is the result of coercion from some other collective. This assessment then justifies, at least to some people, the use of coercion by the resistance movement. For more on this theme, see: Dyer-Withford (1999), Castells (1997), Mittelman (2000), Polanyi (1957), and Gray (1999).

(8)  I do not mean to imply that politicians, bureaucrats, and lobbyists are simply authoritarians, but rather to convey the essential truth that the state’s only means of pursuing its own economic ends is to coerce otherwise free people to do something other than what they would have done voluntarily within the market—e.g. taxation, tariffs, and even monetary policy are enforced upon, rather than voluntarily chosen by, market participants. As Chapter 1 will describe, regulation intended to establish the “rules of the game” and intervention intended to alter the “outcome of the game” are always imposed by the state on the otherwise self-organizing market participants. In this sense, authoritarian economics is the true economic philosophy of the state and those who lobby the state for special economic favors, despite the fact that politicians typically espouse libertarian and egalitarian philosophies.

(9)  At this point, some readers may be wondering why I am using so many references to the American economy and now even the American political parties. The simple answer: it is the easiest way to establish a concise and coherent context for the ideas to be presented in this book—ideas that are being expressed by an American author for what is expected to be a primarily American audience. A comparably concise narrative simply could not be written for the entire global economy because of the very great diversity in economic and political history over these last several decades. So please consider these many references to economic events and statistics as merely illustrative, but certainly not determinative, of the deeper dialogue that is the subject of this article.

(10)  Slivinski (2001) details the $87 billion of federal subsidies to private corporations in 2001, noting that “if corporate welfare were eliminated tomorrow, the federal government could provide taxpayers with an annual tax cut more than twice as large as the tax rebate checks mailed out in 2001.” It certainly makes one think for a moment. If that one-time prepayment of expected tax refunds was the economic stimulus that Republicans claim it was, imagine the stimulus that would result from a permanent tax cut of twice the size for every taxpayer in the country. And unlike other recent tax cuts, this one would be the result of a corresponding cut in spending.

(11)  The explicit public sector (federal, state, and local) share of U.S. national income was 12 percent in 1929, and we can reasonably assume that it was lower in 1900, before there was a national income tax. This share increased to 43 percent as of 2003, a 258 percent increase attributable to the growth of the welfare state (e.g. New Deal, Great Society) and the warfare state (e.g. World War I, World War II, Cold War, War on Terror). Furthermore, in 2003, the government-mandated regulatory compliance costs, which are typically hidden in the private sector share of national income, amounted to another 15 percent of national income, thereby bringing the total share of the economy controlled by government to a surprisingly high 58 percent. In 1947, this regulatory share was just 4 percent of national income and in 1930 it was just 1 percent. We can reasonably surmise that it was even lower in 1900. Data source: Hodges (2004).

Based on this information, we can confidently estimate the government’s share of the economy in 1900 at less than 13 percent, with 12 percent being the overt public sector share and 1 percent being the covert public sector regulatory share of national income. We can then see that the growth in the government’s share of the economy has increased from less than 13 percent in 1900 to a well documented 58 percent in 2003. The market’s share of the national economy has therefore decreased from at least 87 percent in 1900 to a mere 42 percent in 2003, including a modest decrease since 1980, the beginning of the alleged “free market renaissance” against excessive government control of the economy. Data source: Hodges (2004).

Therefore, the American economy at the beginning of the 21st century is less than half market economy and more than half state economy. And recent events clearly indicate that this statist trend is continuing, with the federal government expanding military expenditures for an endless and ill-defined war on terrorism, while trying to hide the $44 trillion unfunded welfare liabilities that will have to be funded out of monetary inflation, increased taxes, and reduced benefits. See Note 15 from this chapter for more on federal government budgets.

(12)  In a rather humorous reference to his reknown open mouth operations, Alan Greenspan, Chairman of the Federal Reserve Board, was quoted as saying, apparently in response to an affirmative comment by a U.S. Congressional Representative, "If I've made myself clear, you must have misunderstood me." Source: The Independent (London) April 7, 1997.

The systemic connections between the Federal Reserve’s monetary policy and the trends in money supply, debt, saving, investment, asset prices, wages, taxes, and exchange rates will be explored more carefully in Chapter 7.

(13)  According to Hodges (2004), total American public and private debt as of 2003 was approximately $37.5 trillion, not including the unfunded “off-balance-sheet” Medicare and Social Security liabilities of the federal government, which were estimated to be an additional $44 trillion. Of this on-balance-sheet debt of $37.5 trillion, approximately $8.6 trillion is held on the public sector balance sheet, with $7 trillion on the federal government balance sheet and $1.6 trillion on the combined state and local government balance sheet. The remaining $28.9 trillion private sector debt balance is allocated as follows: $9.4 trillion to the household sector; $7.4 trillion to the business sector; $11.4 trillion to the financial sector; $0.7 trillion to all other categories. The total on-balance-sheet debt of $37.5 trillion is about 340 percent of the total Gross Domestic Product, a ratio that was only approached once before in recent history: in the pit of the Great Depression.

(14)  In response to the wave of corporate scandals, the market system has been criticized by politicians from the Democratic, Republican, and Green Parties. It is consistently defended by the Libertarian Party. For examples of recent essays assailing or defending the market, see Anderson (2002b), Anderson (2002e), McCain (2002), Paul (2002), Rockwell (2002b), Rockwell (2002c), Rockwell (2002d), Rockwell (2002e), and Winter (2002).

(15)  The U.S. Congressional Budget Office reduced its projected budget surplus for the ten-year period 2002-11 from $5.6 trillion as of January 2001 to $1.6 trillion as of January 2002 and then again to $0.3 trillion as of August 2002. In August 2003, after actual figures were known for 2002, the CBO was projecting a deficit of $2.3 trillion for 2002-11. These projections included the surpluses of the so-called Social Security Trust Fund, which politicians will certainly raid to cover the real budget deficits as they materialize. By stripping out the officially “off-budget” Social Security surpluses that should be set aside to fund future Social Security liabilities, the real “on-budget” projections are even more disappointing. The projected budget for 2002-11, net of the projected Social Security surplus of $2.3 trillion, was a surplus of $3.3 trillion as of January 2001, a deficit of $0.7 trillion as of January 2002, and an even more severe deficit of $2.0 trillion as of August 2002. In August 2003, with the projected Social Security surplus having been reduced to $2.1 trillion (presumably due to higher projected unemployment), the ten-year budget deficit had ballooned to $4.5 trillion.

Therefore, in less than three years, the federal government reduced its projected “earnings” for the period 2002-11 by a total of $7.8 trillion, or an average annual reduction of nearly $800 billion. Even if the August 2003 projections prove to be perfectly accurate (which is unlikely given the fact that the costs for the U.S. military occupation of Iraq were excluded), the only way the government can avoid adding an additional $4.5 trillion to the federal debt, which stood at $5.8 trillion at the end of 2001, will be to raid the misnamed Social Security Trust Fund for its projected $2.1 trillion surplus. Because there is no law establishing a genuine trust fund and no law preventing the government from spending the Social Security tax revenues on non-Social Security expenditures, doing so will create an “off-balance sheet liability” in the amount of $2.1 trillion for future Social Security payments in lieu of an “on-balance sheet liability” in the same amount for future debt service payments. Either way, the people will be taxed, the funds will be spent, and the additional $4.5 trillion liability for future debt service and Social Security benefits will add to the burden of U.S. taxpayers. See Congressional Budget Office (2002a), (2002b), (2002c), (2003).

In a related issue, in May 2003, while President Bush was signing into law a new 10-year, $350 billion tax-cut package, word leaked of a study projecting future federal budget deficits of more than $44.2 trillion (in current dollars), or roughly seven times the size of the national debt and nearly equivalent to the total value of all US household assets. This is one of the major “off-balance sheet liabilities” that the federal government is reluctant to acknowledge to the American taxpayers. The study concluded that dramatic tax increases and/or massive spending cuts will be unavoidable if the federal government is to fulfill its Medicare, Social Security, and other welfare promises to future generations of retirees. It estimated that closing the deficits would require “the equivalent of an immediate and permanent 66 percent across-the-board income tax increase.”

The reports of the study did not mention the third strategy by which the government will attempt to meet its welfare obligations: monetary inflation. By continuously inflating the supply of money and credit, the Federal Reserve will gradually reduce the real, inflation-adjusted burden of these obligations, secretly taxing workers who fund the programs and secretly reducing the real value of the benefits ultimately received by retirees. The critical question is this: how far and how fast can the Federal Reserve reduce the purchasing power of the US Dollar before its managed devaluation becomes a self-reinforcing crisis of confidence (commonly experienced as hyperinflation in prices)? When is the so-called currency of last resort no longer the currency of last resort? When there is a new currency of last resort.

Just as interesting, from the perspective of transparency and accountability, is the fact that the study was originally commissioned by former Treasury Secretary Paul O’Neill, but subsequently suppressed when it was realized that the results would impair the Bush administration’s ability to negotiate a new round of tax cuts and spending increases. Although the study was completed and its results were privately circulated to several independent think tanks in Washington, it was kept out of the 2004 annual budget report published in February 2003 and was not reported to the public until just hours after the President had signed the new tax legislation. Source: Despeignes (2003).
For more information on the U.S. federal government’s off-balance sheet liabilities and their burden on the market economy, see Walter and Weinberg (2002) and Wallison and Ely (2000). For more general criticism of the federal government’s accounting practices, see Anderson (2002b), Bandow (2002), Brinkley (2002), Edwards (2002). For more information on the astounding growth in government spending, taxation, and debt during the 20th century, see Hodges (2004). To track the growth in federal government debt, visit the U.S. Treasury’s The Debt to the Penny website at http://www.publicdebt.treas.gov/opd/opdpenny.htm.

(16)  My decision to use personal labels—like libertarians, egalitarians, and authoritarians—in place of what many would regard as more politically correct ideological labels—like libertarianism, egalitarianism, and authoritarianism—was primarily a matter of rhetorical efficiency. It is just easier to read sentences that take the form of “libertarians believe in the market” than it is to read the more cumbersome “libertarianism includes a belief in the market.” I therefore use these personal labels as short-hand references to economic philosophies rather than heavy-handed attempts to tag specific people with overly simplistic names (notwithstanding the fact that many of them will proudly pronounce themselves as libertarian, egalitarian, etc.). Furthermore, these terms were carefully selected to describe (not to denigrate) the essence of each economic philosophy in relation to the others.

(17)  See Hampden-Turner (1990) for an introduction to the use of dilemmas in strategic thinking. For more on clean technology, see Hawken, Lovins, and Lovins (1999).

(18)  Of course, neither economic culture will deny the importance of freedom and fairness, efficiency and effectiveness, growth and sustainability. After all, who could really argue with these ideals in their pure forms? As the remainder of this book will demonstrate, the dilemmas are rooted not so much in a clash of ideals, but in the limited perspective that each culture has on the nature of these ideals and the means available for their pursuit. Thus, many economic libertarians see the free market as the only fair way to organize an economy and, therefore, advocate for economic freedom with the assumption that economic fairness is fully incorporated in their perspective. In response, many economic egalitarians see the fair market as the only valid measure of freedom and, therefore, advocate for economic fairness with the assumption that its pursuit automatically enhances economic freedom. As we will see, the root of the debate between the libertarians and the egalitarians lies in the contradictory visions that each holds of the market and, by extension, the incompatible means that each employs to achieve the equally desirable ends of freedom and fairness.

Comments

[carol routh]

well. i didn't think i had the time, or wanted to spend the time, to read an article THIS long. and i read the whole thing! i guess that says a lot. i'll be forwarding it, too. i like your perspective. i'm reminded of 3 books i've enjoyed: polarity management (recommended by marilyn hamilton), which seems to be addressing the either/or vs. balancing both/and issues you cite here. cradle to cradle by william mcdonnough, who helps businesses achieve both growth and sustainability (and saving money.) and orbiting the giant hairball by gordon mackenzie, whose book is delightfully fun and perceptive, and he talks about efficiency vs. effectiveness.

you're onto something here, dan, and i'm looking forward to the whole book!

[Daniel O'Connor]

Thanks Carol... for reading it through, for the positive feedback, and the additional reading. I hadn't heard of the MacKenzie book, so I'll check it out. If you liked the Polarity Management book, you might also like Hampden-Turner's Charting the Corporate Mind. Let's see if TypePad will allow the weblink through a comment:
http://www.amazon.com/exec/obidos/tg/detail/-/0631176535/qid=1109045394/sr=8-1/ref=sr_8_xs_ap_i1_xgl14/103-4241755-5919020?v=glance&s=books&n=507846

McDonnough, of course, is a terrific thinker and designer.

Cheers

[Virginia Hammon]

Excellent read and the insights will be useful to all.

A thought about the Integral Economy model…

Juxtaposing freedom and fairness defines a contrast in the social realm, and economies are social constructs that span the interior and exterior.

However, people who are at a stage of development with a focus in “I,” do not see issues like welfare and wealth inequality as a polarity between freedom and fairness. They see them as a polarity between freedom and responsibility; when people are responsible as individuals they do not need welfare and they will succeed in the market.

Much of the argument today crosses swords from the we-fairness /I-responsibility worldview 'truths.' It's a challenge to create a model that transcends and includes both these worldviews and I salute and support your efforts!

[Daniel O'Connor]

Thanks Virginia.

As I see it, the three dilemmas are generally only viewed as dilemmas from a more integral perspective that acknowledges the basic validity of both opposing perspectives, while avoiding the traps of moral relativism and tepid pseudo-integral compromises.

Those who fervently advocate for economic freedom have a way of framing the entire dialogue in terms that make it difficult to see any validity in the perspective of those who fervently advocate for economic fairness... and vice versa.

So, one person may argue for individual "freedom from" coercion by others on the grounds that such coercion is unfair. But that same person may not be able or willing to see that the absence of another's "freedom to" pursue certain ends might also be considered unfair. And yes "responsibility" both personal and social, as well as universal, will come into play in this dialogue.

I will have much to say about these opposing philosophies and as you seem to have already noted I believe that the incorporation of a developmental dimension can help us clarify the confusion and resolve the dilemmas.

[John Smith]

Excellent article, the world really needs such a judicious appraisal of the influential trends in contemporary economic thinking. Thank you.

Perhaps you might get time to recommend some unbiased introductory texts for someone like me striving to familiarise themself with the fundamentals of economic theory. Thanks again!