The Economy Isn’t a Machine, and Politicians Aren’t Mechanics

A good deal of current American political commentary centers on disputes about whether the American economy has truly recovered from the slump of 2008. Our political candidates offer different narratives about the causes of the slump as well as about how to promote societal flourishing going forward. What should an ordinary citizen make of these sharply divergent narratives? Despite this divergence, both narratives use the same rhetorical imagery of politicians as mechanics, economies as machines, and economic theory as providing tools for the mechanics.

This image has been reinforced by a century of economic theory that treats an economy as a system of equilibrium relationships, much as the pieces on a chessboard comprise an equilibrium pattern at any particular moment. Armed with this image, politicians parade as policy mechanics whose job is to maintain smooth performance of the economic engine. This common image understandably propels politicians onto center stage of the human drama, for the quality of societal flourishing depends on the ability of politicians to keep the economic engine performing well.

It’s easy to understand why politicians would be attracted to the mechanical image of societies. But is the image of a mechanism good or useful? Someone who looks at a chessboard in the middle of a game might see that black is in a hopeless position. To equalize black’s chances going forward, the observer rearranges some of the pieces. This chessboard image corresponds to typical discussions of economic policy where the use of power is advocated to force some change in social outcomes.

What would happen, however, if those pieces had minds of their own? In response to being moved by the observer, a piece could move to some other square of its choosing. This situation is not possible for simple mechanisms. It is, however, common practice with complex ecologies of creative and interacting people. If societies were mechanisms, illegal drugs would long ago have vanished. Their robust presence today offers strong evidence as to the ecological quality of our social economy. This ecological vision sets political economy on a strikingly different analytical path from the mechanical vision: social economies are not like automobile engines that might misfire; to the contrary, they are like coral reefs or tropical rainforests which host immensely complex patterns of interaction among their participants.

In the late-18th century, the Scottish political economist Adam Smith asserted that little was required to carry a society from poverty to opulence but peace, low taxes, and a tolerable administration of justice. With those conditions in place, human ingenuity and cooperation would facilitate the rise from poverty to opulence. Smith’s conditions, however, do not provide instruction manuals for mechanics. To the contrary, they provide guides for living well within complex ecologies that are continually changing through the creative efforts of the inhabitants of those ecologies. Maintaining a well-working ecology is nothing like maintaining a well-working engine. An engine has a designer who can determine when a part malfunctions and then fix it. Contemporary politicians and their supporters would have us believe that this is what they are seeking to do. Only they can’t succeed because the complexity of the ecology that is society overwhelms the effort to try.

Within this complex ecology, the human drama is improvisational and not scripted. In this respect, economists are mostly wrong in working with scripted models which give precise answers to questions about the effects of policy interventions. What results is a continuing parade of policy measures to repair what are claimed to be defective engines, when those so-called defects reflect the continual adaptation to previous policy measures. It is easy to understand why those who identify with the political class would want to maintain this image of policy mechanics, for it maintains political action in the foreground of the human drama. In contrast, ecological images would relegate political activity to the background.

With respect to foreground and background, Jane Jacobs explains in her Systems of Survival that a well-working society requires a mix of what she describes as commercial and guardian moral syndromes. Her distinction is not the same as the ordinary distinction between government and business, but it is similar. It is not identical because good commercial practice also often requires some guardian activity. For instance, a construction firm is wise to engage in such guardian activities as creating procedures for monitoring inventory to limit conversion of company assets to personal accounts. Jacobs coined the term “monstrous moral hybrids” to express the outcome of excessive comingling between commercial and guardian activities. For instance, a company auditor might act commercially in altering the books for a fee to hide someone’s theft. Alternatively, an executive for a bridge authority might direct contracts to relatives, creating a cousin to money laundering.

In my book, Politics as a Peculiar Business, I use the term entangled political economy to encapsulate recognition that contemporary society has evolved in a direction that features extensive commingling among commercial and political enterprises. With respect to the slump that began in 2008, commentators have disputed whether this slump points to an insufficiency of public regulation or an excess of it. The ecological orientation enables recognition that this kind of outcome is something we should expect as a systemic feature of a deeply entangled political economy where businesses engage in politics and politicians engage in business.

For instance, under a system based on private ordering, lenders would create portfolios of loans based upon their own commercial criteria. It would be reasonable to think that there would be differences in the willingness to bear risk among lenders, but the resulting outcomes would be determined through private ordering in any case. Who receives loans and under what terms would be governed within the principles of private property and contractual liberty.

Public ordering has now come to attain deep presence within the operation of credit markets. In consequence, the standard of free-market profitability is no longer sufficient for the creation of loan portfolios. Those portfolios must now reflect public ordering requirements with respect to conditions regarding gender, race, income, and geography. This situation means that some loans will be made that reasonably are regarded as unprofitable but politically required, while there are other loans that would have been profitable that will not be made because room must be made for politically required loans. At the system level, greater turbulence will result, with such turbulence manifested in slumps and surges.

What does it mean to say that politics is a peculiar business? Many people earn their livelihoods in political practice just as others earn them in commercial practice. People invest in politicians and their enterprises just as they invest in businesses. Politicians advertise for supporters just as do businesses. Politics is an intensely competitive business just as is regular business. Politics is a business, only it is a peculiar business in comparison with ordinary businesses. This peculiar feature, moreover, is a source of societal tectonics that generates the social equivalent of earthquakes.

The problem in this respect is that competition necessarily plays out differently in political than in commercial environments. It is surely reasonable to claim that open competition selects for higher quality competitors than does closed competition. Yet we must also recognize that different systems of competition will select for different qualities of competitor. The coach of a swimming team will not select a team by watching the candidates dive. Nor would the coach of a diving team select a team by watching the candidates swim.

For commercial competition, there is a market test that stands in judgment of competitive success. A firm might believe it offers wonderful products that give consumers fine value for their money. But if consumers don’t buy the products, the firm will disappear. In contrast, politicians engage in popularity contests. They do so, moreover, in environments where people do not pay to play, so to speak. Political competition centers on the articulation of ideological and personal images that resonate more fully with voters than do the images that other candidates present.

Politics is a struggle for power, and the challenge for any system of political economy is to maintain some reasonable distinction between the private and civil foreground where human flourishing mostly occurs and the political background which is an unavoidable feature of societal living together. While there is no recipe for maintaining a good separation between foreground and background, recognition that societies are complex, continually evolving ecologies can provide a point of orientation for thinking about political economy that is superior to the image of politicians as mechanics.

This post comes to us from Richard E. Wagner, Harris Professor of Economics at George Mason University. It is based on his paper “Has the U.S. Economy Really Recovered? A Curmudgeonly Answer,” forthcoming in The Global Analyst and available here.