The peculiar business of politics.

AuthorWagner, Richard E.
PositionBook review

This article stems from Jim Dorn's invitation to encapsulate my recent book, Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy (Wagner 2016). Where standard political economy treats states as singular entities that intervene in economies, I treat states as networks of peculiar enterprises that operate inside a society's market arrangements. This peculiar quality ramifies throughout a society. To be successful, political enterprises must raise sufficient revenue to return profits to investors. Those profits are disguised through indirect transactions and ideological formulations, but are profits all the same. There is thus a simple explanation for why political enterprises grow relative to commercial enterprises: they grow because they offer higher returns to relevant investors than what those investors could obtain through commercial enterprises. The analytical challenge a theory of entangled political economy must face is to explain the profit-seeking reality of the subsystem of political enterprises that operates inside a society. This article sketches the main conceptual issues with which a theory of entangled political economy must contend, and closes by considering possible implications for efforts to limit the reach of the political within society.

To start, equilibrium theory and its associated method of comparative statics is incapable of conveying the analytical vision of entangled political economy. This vision is one of continual change injected into societies by creative agents with interests that sometimes support and at other times oppose those of other agents. Cooperation and conflict are both ineradicable features of societies (Hirshleifer 2001). This theory must be constructed in the active voice, in contrast to the passive voice of equilibrium theory. This construction requires a theory of creative systems, in contrast to the standard vision of robotic or mechanical systems (Bertalanffy 1968). The magic number for conveying the central features of market interaction under private ordering is two, for two is sufficient to convey the generation of mutual gains from trade. By contrast, the magic number for illustrating public ordering is three, for three is necessary to convey how power can be used to reward friends at the expense of enemies (Schmitt [1932] 1996). The peculiar commercial quality of political interaction generates a continuing parade of societal tectonics (Young 1991), in contrast to the placidity of equilibrium theory. These tectonics can transform a constitution of liberty into a constitution of servility as private ordering recedes relative to public ordering. This article sets forth the principal analytical constructions by which the entangled vision is executed, and it closes by considering both the scope for and difficulties of restricting the reach of the political within an unavoidably entangled system of political economy.

Two Visions of Political Economy: Additive and Entangled

The compound noun "political economy" denotes a relationship between the two simpler nouns polity and economy. Just how that relationship is construed entails much of significance, as I explain in Politics as a Peculiar Business. Standard formulations of political economy, as illustrated crisply by Persson and Tabellini (2000), construe polity and economy as independent entities, with polity acting on economy to change economic outcomes in some fashion. This is the standard vision of public policy wherein a policy mechanic works on an economic engine to improve its performance, or perhaps to degrade it depending on whom you ask.

This standard framework can be reasonably described as additive political economy to indicate that political economy denotes an adding together of polity and economy wherein each entity maintains its original qualities, much as a collision between two billiard balls leaves their original qualities unchanged. While Politics as a Peculiar Business explains that this vision of political economy is incoherent, that vision nonetheless provides ideological cover for nearly the entire gamut of state activity. There is no political activity drat won't find supporters who claim to seek to fix some societal defect. After all, what political program has ever been advocated by someone who claims that there is nothing wrong with the economic engine or process? Additive political economy provides ideological cover for the interventionist state by playing upon the universal recognition that machines sometimes malfunction and require mechanics to repair them. In contrast, entangled political economy locates such so-called policy mechanics as profit-seeking enterprises that operate within the economic process, except that those enterprises have peculiar features relative to ordinary enterprises, as Eusepi and Wagner (2011) elaborate.

Orthodox welfare economics and its claim on behalf of the Pareto efficiency of competitive equilibrium reflects the additive vision of political economy. The first-order conditions for Pareto efficiency pertain to transactions among commercial actors. If those conditions are satisfied, the economic engine is working efficiently. Such conceptual constructions as public goods and external effects invoke claims that the engine is not working efficiently and requires intervention by policy mechanics. To be sure, there has been extensive debate over whether common claims of inefficient performance are truly what proponents of state intervention claim they are, as Coase (1974) and Krause (2015) illustrate for lighthouses and Cheung (1973) and Johnson (1973) illustrate for bees.

The language of welfare economics enables someone to support or oppose nearly any imaginable policy proposal. Markets work well or they don't, depending on the proclivities of the observer and not on any so-called facts of the matter. This situation arises because the conditions for Pareto efficiency refer to states of mind. Those states cannot be observed. Only action can be observed, and action speaks ambiguously. Does a ship crashing on rocks indicate market failure? Or does it show that scarcity will be present even in a Pareto-efficient world? An economist can argue either position. One could argue that the ship's sinking reflects the unfortunate fact of scarcity, because if it were Pareto efficient to build another lighthouse it would have been built already (Stigler and Becker 1977). One could argue alternatively that transaction costs are involved in trying to aggregate small valuations across large numbers of people, and that a public agency is able to lower that cost (Kahn 1966). Yet again, someone could argue that political agencies have neither the incentive to perform such aggregation nor the knowledge that can only be generated through market transactions (Hayek 1937, 1945). In short, the categories of welfare economics do not provide a recipe for the resolution of disputes but rather provide a grammar for generating interminable disputes (Wagner 2015).

This interminable quality arises because of the presumption buried within the framework of welfare economics that those who articulate those arguments are not ordinary economic actors with ordinary commercial interests, but rather are detached from and independent of commercial activity. Yet real mechanics operate within the market, and an economist can use the theory of markets to say useful and intelligible things about observed patterns of mechanical activity within a society. How is it any different for so-called policy mechanics? The scheme of entangled political economy claims that there is no formal difference, for policy advocacy reflects the same economizing logic as ordinary commerce (McCormick and Tollison 1981, Tollison and Wagner 1991). To be sure, there are significant substantive differences due to the peculiar quality of political activity relative to commercial activity. Political activity is commercial activity, only it is not organized through the private law framework of property and contract (Streit 1992). Indeed, these days there is perhaps little commercial activity that stands outside the direct influence of public ordering.

It should be noted that entangled political economy is not some new theoretical development. Entanglement was a common scheme of thought during the classical period of political economy, as illustrated by Robbins (1952) and Samuels (1966), as well as by Frank Knight's (1960) examination of the problem of bringing intelligence to bear on democratic action. With respect to practice, moreover, Jonathan Hughes (1977) explained that entanglement among political and commercial enterprises was widespread in Colonial America, though not nearly to the extent that it is today. It was only with the coming of tine neoclassical period in economics starting late in the 19th century, with its replacement of political economy with economics (Milonakis and Fine 2009), that the construction of additive political economy starts to take shape with its isolation and separation of what were thought to be purely economic phenomena from political phenomena. Entangled political economy represents a reformation of classical modes of thinking, as Maria Paganelli (2014) illustrates with respect to Adam Smith, making use of new modes of thought in the process.

Most significantly, the entangled vision of political economy treats economics as a genuine social science and not a science of rational action writ large (Wagner 2010). To execute this alternative scheme of thought requires replacement of the common presumption that economic observations pertain to states of societal equilibrium. If observations are thought to reflect states of societal equilibrium, sound economic reasoning requires that society be reduced to a representative individual to economize on analytical effort (Kirman 1992). Once this reduction is accomplished, there is no option but to treat...

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