Originally published February 19, 2012 on the New Economic Perspectives blog.
The households and business firms in a modern capitalist economy make many of the important economic decisions that contribute to determination of the level of employment and output, the composition of that output, the distribution of income, and the prices at which output is sold.
Claims are sometimes made that a “free market” economy comprised of individuals seeking only their own self-interest can operate “harmoniously” as if guided by an “invisible hand”. While modern capitalist economies are often characterized as “market” economies, it must be admitted that much or even most economic activity takes place outside markets. For example, much activity takes place within the household or extended family and social groups. Parents (mostly) care for their children without monetary compensation and without inducement from “market forces”. And as Ronald Coase demonstrated long ago, the organization of production within a firm is, by design, an attempt to reduce the role played by “the market” to increase the firm’s efficiency. Industrial structure—including vertical and horizontal integration—also takes place to subvert market forces. Labor unions and organization of management replace markets with bargaining.
Given such realities, it would be quite a stretch to conclude that capitalist economies approximate the “free market economies” of textbook economics—and an even greater leap of faith to believe that government can be removed, to let the invisible hand guide our real world economies to equilibrium.
In fact, economists had rigorously demonstrated by the 1950s that the conditions under which such a stylized economy could reach such a result cannot be expected to exist in the real world. In other words, there is no scientific basis for the claim that “free markets” are best. In any case, these claims—even if true for some hypothesized economy–are irrelevant for the modern capitalist economies that actually exist. This is because all modern capitalist economies are “mixed”, with huge corporations (including multinational firms), labor organizations, and big government. Individuals and firms operate within socio-politico-cultural-economic structures that are constraining and also enabling. Sometimes the goals of individuals and firms coincide with what might be called the public purpose while often they do not. In this blog we will discuss the public purpose and the role played by government in trying to align private interests with the public purpose.
What is the public purpose?
It is not easy to define or to identify the public purpose. One of the basic functions of any social organization is to provide the necessary food, clothing, shelter, education, health care, legal framework, and socialization for survival of the society.
While the subject of this primer is macroeconomics, there is no sharp distinction between the sphere of economics and the concerns of other social sciences that study social processes. We usually think of the economy as the main part of the social organization that is responsible for provision of the material means of survival—the food, clothing, shelter, and so on. However, the economy is always embedded in the social organization as a whole, affecting and affected by culture, politics, and social institutions. Even if we can agree that any successful economic organization should be able to produce adequate food for its population, that still leaves open many questions: What kind of food?; How should it be produced?; How should it be distributed?; and even What does adequate mean?
Further, no society is comprised of harmonious individuals and groups. There are always conflictual claims and goals that must be moderated. There is no single, obvious public purpose to which all members of a society wish to strive. Even if we can identify a set of goals that the majority of society would like to work toward, that set will surely change over time as hopes and dreams evolve. The public purpose is an evolving concept. The national government must play an important role in society as it helps to identify the social purpose and to establish a social structure in which individuals and groups will work toward achieving the social purpose.
It has long been believed that a democratic government is better able to do this.
There is also a role to be played by international organizations in helping to identify widely accepted goals. For example, the United Nations Universal Declaration of Human Rights, which was adopted in 1948, commits signatory nations to a common set of relatively well-defined goals. In 1968 the United Nations International Conference on Human Rights advised that the Charter “constitutes an obligation for the members of the international community” to protect the human rights of all persons. There are 30 Articles that describe the included rights. Here we will only list a few that will be important for the subsequent discussion.
- The right to be free of discrimination due to race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status
- The right to a standard of living adequate for the health and well-being of [the individual] and of his family, including food, clothing, housing and medical care and necessary social services
- The right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control
- The right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment
It is obvious that many of these identified human rights are connected to the operation of the economy.
For example, we argued above that any successful economy should provide adequate food, clothing, and shelter, and many of the human rights listed in the UN Declaration address the material well-being of a nation’s population. Further, other human rights that superficially appear to be unrelated to economic performance actually presuppose fulfillment of other human rights that are directly related to material well-being.
For example, in a modern capitalist economy access to paid employment is necessary for full participation in society (another recognized human right). Not only does a job provide income that allows one to purchase food, clothing, and shelter, but it also provides access to social networks, generates feelings of self-worth as one contributes to social production, enhances social prestige, and helps to provide for retirement in old age.
Indeed, employment has been shown to have a wide range of other benefits to individuals and to society including better physical and psychological health, reduced crime and drug abuse, lower child and spouse abuse, and greater participation in other social and political activities. In recognition of the importance of access to jobs, we will soon address a specific program that helps to ensure this right—the Job Guarantee.
We conclude with three important points. First, the public purpose is broad and evolving, and for these reasons it varies across time and place. The UN Charter lays out what its signatories see as “universal” human rights. This is a useful but not wholly satisfactory list to be included in a statement of the public purpose. What is considered to be a human right today might have appeared to be radically utopian a century ago; and today’s list will appear far too cautiously conservative at some date in the future. The public purpose is inherently a progressive (liberal in the US sense) agenda that strives to continually improve the material, social, and physical, and psychological well-being of all members of society. It is inherently “aspirational” in the sense that there is no end point as the frontiers of the public purpose will continually expand.
Second, the national government as well as international organizations (such as the United Nations) must play important roles in shaping our vision regarding the types of societies to which we aspire. And beyond setting these goals, governments at all levels must take the lead in developing sets of institutions, rules of behaviour, and sanctions for undesirable behaviour in order to move toward reaching the goals set as the public purpose. And there is no presumption that either the national government or the international organizations automatically promote and pursue the public purpose. All human organizations are fallible.
And that leads to the third point: all of this is highly contentious. No signatory nation has yet satisfactorily ensured these human rights. In that sense, the Charter is, indeed, an aspirational statement. Nations that have endorsed the Charter might choose to ignore some of its provisions. Or, they might prefer to put off to the future some measures that are necessary to achieving the provisions. Further, it is likely that some rights conflict with others—meaning that trying to ensure one might make it more difficult to ensure another. Domestic interest groups might fight hard against policy designed to meet the goals.
There are many reasons why no nation has yet been successful in guaranteeing these rights.
Clearly, all of this carries us far beyond economics and into the realm of politics, sociology, religion, ideology, and culture. Generally, conservatives tend to define the public purpose in narrow terms, desiring to constrain government.
As discussed earlier in this Primer, that is part of the reason for the “balanced budget myth”—government is said to be financially constrained. We know that is not true. However, that does not mean the government can, or should, do everything.
On the other side, liberals (in the American sense of the term) tend to define the public purpose in broader terms—closer to the UN ideal. It is their belief that without substantial government help, these human rights cannot be achieved. Conservatives who might agree with the thrust of the UN Charter would object that even if these are desirable goals, government is not the appropriate agent of change to achieve them.
While economics can shed some light on this issue, it cannot provide a conclusive answer. In the next blog we will examine a conservative—Austrian economics—approach to MMT. We will see that MMT is consistent with a small government economy—one whose view of the “public purpose” is quite narrow. This is not a view embraced by this primer, but it is one that is consistent with the MMT approach. That is an important recognition. On one level, MMT, by itself, is neither left nor right. It is a description: how “modern money” works.
However, when we add MMT to the more liberal vision of the public purpose (as represented by the UN Declaration), or when we add to the public purpose considerations such as “full employment and price stability”, or even just “economic stability”, then MMT helps us to find a way to achieve that public purpose by quickly disposing of the notion that government cannot “afford” such policies.
To be sure, one who understands MMT can reject “full employment”, “price stability”, and “economic stability” as undesirable goals of policy. Some might argue that the “public purpose” has no business in pursuing such goals. At the extreme, they might even reject the notion of “public purpose” altogether. That, however, is an extreme view that is (fortunately, in my estimation) soundly rejected all over the world.
After our excursion to “small government” and “minimal acceptance” of the notion of a public purpose, we turn to a full employment program that would help to achieve a number of the human rights enumerated by the UN. It will simultaneously achieve full employment (at least on one definition) while it actually promotes price stability and even economic stability. That might sound like a tall order, but it follows from the logic of Lerner’s functional finance approach.