Special Issue On The Public Economy and a New Public Economics | Real-World Economics Review

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Special issue on the public economy and a new public economics

issue no. 84 19 June 2018

Edited by Michael Bernstein and June Sekera

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Reconstructing a public economics: markets, states and societies

Michael A. Bernstein 

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Liberating contemporary economic analysis from the straitjacket of mainstream neoclassical theory is the animating theme of the essays assembled in this special number of the Real-World Economics Review (RWER). The authors of the works assembled here are all committed to the idea that what is regarded by traditional economic theory as a set of exogenous forces framed and deployed from outside the market mechanisms that are the focus of the discipline – namely, the public sector – is in fact an integral agent that directly affects the very issues and phenomena neoclassical theory claims to explain. Indeed, it is the very failure of traditional economic thinking to account for the “public economy” in any systematic and meaningful fashion that prevents it from explaining how societies actually produce goods and services and, in compensation, constructs inapt and futile framings, such as “market failures,” to explain why governments exist.

In contradistinction to prevailing doctrine, the following articles strive to reconstruct a public economics by embedding the public sector intrinsically within economic models. Rather than separate the “public sector” from economics, understanding collective action as something distinct from the economy, a public economics views the entire economic system – the “macroeconomy” as a whole – as comprised of multiple economic systems: of markets, of public activities, and of domestic interactions. As Neva Goodwin explains (“There is More Than One Economy”), human economies may be understood as a construction of the market or “private business economy,” a “public purpose economy,” and a “core economy.” The market is the focus of virtually all of mainstream economic thinking today. Public purpose economy is defined by Goodwin as government, non-profit, and non-governmental entities that focus on a broader array of goals not simply defined by profit-maximization. In the core economy, one finds the domestic activities of consumption, distribution, and resource management that are focused on the survival, nurturing, and welfare of its constituents.

Simply understood as venues within which rational agents pursue optimization goals, markets cannot account for public purpose articulated and projected within collective-action dynamics, domestic and intimate goals framed by affective and cultural behaviors, and ecological and environmental contexts imposed by the physical and biological realms within which all human activities occur. That being the case, an economics that only accounts for the workings of “perfect” markets, understood to exist separately from domestic, public, and ecological frameworks, is not even remotely useful in explaining how economies actually function, let alone how they might be improved. If, for example, government is understood simply as a remedial instrument to rectify “market failure,” its essential role in the economic mechanisms of consumption, production, and distribution is obscured. Similarly, if both the domestic sphere (of family and human relationships) and the environment are grasped as dimensions external to, and non-constitutive of the economy, it becomes impossible to analyze and predict economic behaviors and outcomes in reliable ways.

Reframing how economic theory accounts for the public and domestic realms of social life is uniquely tied to the manner by which we understand government action. As June Sekera demonstrates (“The Public Economy: Understanding Government as a Producer”), by viewing governments as essentially economic “operating systems,” that function according to a non-market economic logic and within the constraints of biophysical realities, we gain a far more effective understanding and appreciation of society, markets, and the environmental impacts of economic activity. This not only allows for more accurate analyses of proposed policies; it also animates a deeper and more genuine understanding of the ways in which public goals and purposes may in fact be effectively conceptualized and achieved. There is no better historical demonstration of this fact than in the twentieth century experience in the United States…

There is more than one economy

Neva Goodwin  

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Human economies can be understood in more than one way.

  • The private business economy is what economics textbooks are generally about.
  • The public purpose economy consists of governments and their agencies as well as non-profits and international institutions like the World Bank or the United Nations. The public purpose economy is a collection of institutions that are justified by their stated intention to act for some broader good than their own profit or enrichment – though they may differ widely in their definitions of what is “good”.
  • The core economy is where households and communities carry on their internal activities of production, distribution and consumption. The core economy’s justification and purpose is the survival and well-being of its members. It is located in home, family, and neighborhood; places that function as markets for emotional, social, and civic transactions. This paper will consider some distinguishing characteristics of these three economies – in particular: their goals or justifications; what currency they use; what kind of demand they respond to; and how they define and reward work.

The second half of the paper will offer reflections on the harms caused by an excessive dominance of the private business economy over the other two, with thoughts on some of what will be required to redress this balance. It will conclude with an image of a healthier relationship between humanity and our natural environment – a relationship that will inevitably come about, whether we choose to move into it positively, or are forced into it by breakdowns in all of our economies resulting from natural and social disasters.

The public economy: understanding government as a producer.
A reformation of public economics

June Sekera 

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In mainstream economics scripting, government is either bumbler or villain. Cast as market fixer, intervenor, enforcer or redistributor, the state cannot but act inefficiently or, worse, illegitimately. Public goods and collective action are called “problems,” the commons a “tragedy.” Even today’s so-called “public economics,” as represented by the “public choice” school, is decidedly anti-public. It was not always thus. More than a century ago, economists theorized the state as a framework of collective agency for public purpose and understood government as a producer meeting collective needs. A cogent concept of “the public economy” guided this nascent field of public economics, long since lost to historic upheavals and repression by proponents of market-centric rational choice theory.

This paper rejects today’s orthodoxy and its artful, but artificial, construct that subverts the ability of the public economic system to produce on behalf of the polity. I call instead for the embrace of a new public economics that returns to lost roots while breaking new ground by taking into account the biophysical imperatives of production. The model offered here takes a systems perspective (as did Quesnay and early 18th-century Physiocrats); recognizes a public economy with distinctive purpose and drivers (as did the “German Public Economics” theorist Gerhard Colm in the 1920’s); and focuses on government as a producer (as did Paul Studenski in the 1930s-50s). Finally, it draws on two centuries of physics and on 21st century systems ecology in recognizing biophysical imperatives inherent to production. Developing and promoting a cogent theory of the public economy system is vital to the effective operation and, ultimately, the survival of the governmental systems by which democratic nation-states function today. The simplistic type-casting of government, the “market-failure” rationalization for state action, the invalid imposition of market axioms and assumptions on the public domain, the disregard of public purpose must all be rejected. It is time for a Reformation of public economics.

Economic benefits of public services

David Hall and Tue Anh Nguyen

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The article reviews the extensive global empirical evidence on the relative efficiency of the private versus public sectors. The evidence does not support the view that there is any systematic difference in efficiency between public and private sector companies, either in services which are subject to outsourcing, such as waste management, or in sectors privatised by sale, such as telecoms. If the private sector does not have this efficiency advantage, then there is nothing to offset the higher private cost of capital, and it is always likely to be better value to use the public sector.

At the macro level, far from being a burden on the economy, growth in public spending as a proportion of the economy has had a persistent positive link with GDP growth for more than a century, in developing countries as well as high income countries. The mechanisms linking public spending and economic growth include investment in, and maintenance of, infrastructure, supporting an educated and healthy workforce, redistributing income to increase the spending power of poorer consumers, providing insurance against risks, direct support for industry – including through technological innovation – and increasing efficiency by taking on these functions. This public sector activity, directly and indirectly, supports half the formal jobs in the world, and has a comparative advantage in delivering public goods such as universal access to healthcare, affordable housing, and protecting the planet from climate change.

The need for public services and public spending is expected to grow globally due to continuing economic development, climate change and ageing populations, but, as in the past, this depends on the outcome of political processes.

Bureaucracy shouldn’t be a dirty word:
the role of people-responsive bureaucracy in a robust public economy

Janine R. Wedel

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Bureaucracy, government, and practically all things “public” are under enormous siege in the age of Trump. This comes at an already perilous moment. Over the past several decades, government reform, privatization, checklist-type “accountability,” and digitization, among other developments, have reorganized governance in a way that has weakened public institutions, apparently making them less responsive to the people they are supposed to serve. The status quo may well be connected to the collapse of public trust; wholesale disaffection is surely a key reason that voters have elected the likes of Trump and counterparts elsewhere. Now at the helm, Trump is further attacking the already weakened pillars of democratic society.

To help remedy this state of affairs, the “public” must come back as a virtue. Establishing a vibrant public economy relies on a well-functioning bureaucracy that truly serves people. We need to reconsider developments such as the outsourcing of government functions and the prevailing checklist approach to accountability. True accountability cannot be reduced to metrics that are poorly conceived, encourage appearances over truth, obscure the broader picture, and are severed from larger institutional knowledge and public trust.

A robust public economy is needed to help restore public trust. No democratic society can survive indefinitely without it.

The need for a new public administration

James K. Galbraith

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The economic model according to which markets are self-equilibrating rests on a world-view of harmony and stasis that goes back to classical China, and was already fully rejected in all domains of science and also in political economy in the 19th century. Somehow it survives in textbook economics to this day. A new public administration needs to rest on modern scientific habits, recognizing that all biological, mechanical and social systems require effective regulation, not to “reduce externalities” but because otherwise they cannot exist at all. Once this is recognized, the task of government is to make regulation and public provision of services work well, minimizing predation, parasitism, force and fraud.

Industrial policy, then and now

Victoria Chick

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After 40 years of neoliberalism, even governments believe that they are inefficient when compared to the private sector. And economics, in its swing to the right, reinforces this view. The philosophy behind public expenditure for social purposes and the criteria for judging such projects has not been a subject for public debate until recently. In particular, industrial policy was very simple: leave it to the private sector to allocate resources as the market prompts. In Keynes’s time this was not the case. This article reviews some of the issues concerning industrial policy that were aired in the interwar period. The debate needs to be revived, revisited and, where appropriate, revised to suit the present day, but on basic principles there is much to learn from the interwar discussions. The contrast between the recent (2018) UK government’s White Paper on Industrial Strategy and the Liberal Industrial Inquiry’s Britain’s Industrial Future (1928) is quite instructive.

Putting the nation-state back in: public economics and the global economy

Michael Lind

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The project of creating a new public economics requires rejecting the custom of treating the international economy as an afterthought. What is needed is a return to what is arguably the great tradition in political economy, which has included Renaissance and early modern mercantilism, Enlightenment-era cameralism, the German Historical School, institutional economics and Schumpeterian or evolutionary economics. In this tradition, states as well as individuals and firms are actors in the international economy and zero-sum rivalries among states over relative power and global market share are central to public policy.

In this essay I draw on the enduring insights of this tradition of economic realism to analyze the central global economic phenomenon of our time–not the supposed creation of a free global market, something that hardly exists, but rather the rapid emergence in the last generation of global oligopolies and monopolies in industries with increasing returns to scale. Imperfect and oligopolistic global markets present challenges for national and transnational policymakers, but also opportunities which are not considered by conventional neoliberal thought and practice. These include opportunities for nation-states to negotiate directly with transnational firms, as well as the collaborative creation of transnational agencies to achieve collective goals.

The entrepreneurial state: socializing both risks and rewards

Mariana Mazzucato

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The paper looks at the way the state is understood in traditional economic theory, as limited to “fixing markets” and to “enabling” or de-risking the private sector. These assumptions are based on a limited understanding of value creation, as only happening within business organizations. Value is understood as being enabled or redistributed by the state, but not co-created by it. In truth, the state has often actively co-shaped markets, and taken high risks, before the private sector was willing or able. This is especially true in the innovation economy, where individual entrepreneurs and companies are mythologized as being the only risk-taking wealth creators. Understanding the market shaping and co-creating role of the state requires recognizing that public actors are also risk-taking investors, and the implication of this for how rewards are shared between public and private actors. A market shaping role of public policy, which also allows risks and rewards to be socialized, can better enable growth to be both “smart” (innovation-led) and also more inclusive.

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