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Conceptualizing the Economic Role of the State: Laissez-Faire, Technocracy, and the Democratic Alternative

Polity

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Abstract

This article contrasts three visions of political economy that appear in the writings of Keynes, Hayek, and Polanyi, and discusses their relevance to current debates over economic policy in the United States. Keynes proposed optimizing market practices through technocratic governance. In recent decades, this influential approach has proven vulnerable to the revival of Hayek's laissez-faire arguments. Polanyi, by contrast, introduced a framework that criticizes both laissez-faire conceptions and the technocratic approach pioneered by Keynes. Because of its emphasis on democratic participation, Polanyi's reasoning provides the building blocks for a new type of contemporary progressive politics.

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Notes

  1. As we later shall see, so-called laissez-faire political economy also relies on state power. But the basic distinction between different visions of political agency remains.

  2. For a review of the difficulties in distilling progressivism into a coherent movement or conceptual framework, see Daniel Rodgers, “In Search of Progressivism,” Reviews in American History 10 (1982): 113–32.

  3. See, for example, James Kloppenberg, Uncertain Victory: Social Democracy and Progressivism in European and American Thought, 1870–1920 (New York: Oxford University Press, 1986); David Price, “Community and Control: Critical Democratic Theory in the Progressive Period,” American Political Science Review 68 (1974): 1663–78, at 1669–73; and Sheri Berman, The Primacy of Politics: Social Democracy and the Making of Europe's Twentieth Century (New York: Cambridge University Press, 2006). It is beyond the scope of this current article to trace the history of this definition of progressivism. Instead I use this definition of progressivism as a temporary shorthand, albeit one with roots in the history of progressive thought.

  4. On the social and political influence of Keynes, see generally Peter Hall, ed., The Political Power of Economic Ideas: Keynesianism Across Nations (Princeton: Princeton University Press, 1989), and Michael Sandel, Democracy's Discontent: America in Search of a Public Philosophy (Cambridge: Harvard University Press, 1998), 250–317.

  5. John Maynard Keynes, “Economic Possibilities for Our Grandchildren,” (1930), in Keynes, Essays in Persuasion (New York: W.W. Norton, 1963), 358–73, at 369.

  6. Keynes, “The End of Laissez-Faire” (1926), in Keynes, The End of Laissez-Faire and the Economic Consequences of the Peace (New York: Prometheus Books, 2004), 15–45, at 44.

  7. Keynes, “Economic Possibilities,” 372.

  8. Keynes, The General Theory of Employment, Interest, and Money (New York: Prometheus Books, [1936] 1997), 379–80.

  9. Keynes, “Am I a Liberal?” (1925), in Essays in Persuasion, 323–38, at 337.

  10. It is interesting to note that Keynes's rejection of the left was partly practical and partly principled. On the one hand, he saw leftists as lacking a practical agenda; Labor was vaguely “sentimental” when coolheaded pragmatism was required. At the same time, while he celebrated the altruism and boldness of leftist state socialism, he chided state socialists for seeking to expand individual (positive) liberty, when the real problem (in his view) was collective rather individual. This perhaps reflects Keynes's misreading of Marx and Marxism. See Keynes, “Liberalism and Labour” (1926), in Essays in Persuasion, 339–45 at 344, and “End of Laissez-Faire” 40–41.

  11. Keynes, “The End of Laissez-Faire,” 43, emphasis added.

  12. Ibid., 40.

  13. Ibid., 41.

  14. Indeed, as Wayne Parsons notes, Keynes and Hayek exchanged letters following the publication of Hayek's Road to Serfdom, in which Keynes agrees with Hayek's views on the importance of individualism, but disagrees with Hayek's contention that economic problems are not solvable by political means. Ultimately, for Hayek, the uncertainty and lack of knowledge surrounding political decision-makers neuters the positive impact of political agency. Keynes, by contrast, is more optimistic about the potential of politics to make decisions that ameliorate social and economic problems. As we shall see in the next section, this dispute about the viability and efficacy of political agency continues to animate debate over the role of the state in the economy into the late twentieth century and shapes the terrain on which debates about social justice and the welfare state take place. See Parsons, “Politics and Markets: Keynes and His Critics,” in Cambridge History of Twentieth Century Political Thought, ed. Terence Ball and Richard Bellamy (New York: Cambridge University Press, 2003), 45–69.

  15. See Sandel, Democracy's Discontents.

  16. Keynes, “Am I A Liberal?” 324, emphasis original.

  17. Alan Brinkley, “The Late New Deal and the Idea of the State,” in Liberalism and Its Discontents (Cambridge: Harvard University Press, 1998), 37–62, at 44–45.

  18. Aziz Rana, “Obama and the New Age of Reform,” Constellations 16 (2009), 271–79, at 271.

  19. See, for example, Philip Pettit, “Depoliticizing Democracy,” Ratio Juris 17 (March 2004): 52–65.

  20. Political philosopher Thomas Christiano refers to this as the “overall-ends model,” where the public registers its overall values through elections, and bureaucratic officials then are given wide discretion in realizing these goals. Thomas Christiano, The Rule of Many: Fundamental Issues in Democratic Theory (Boulder: Westview Press, 1996).

  21. Henry Richardson, for example, notes that the overall-aims model breaks down because in practice it is not clear how to separate the ends to be determined politically, from the means to be determined by technocrats. What some individuals may see as a means or an “intermediate end,” others may see as a “final end.” Further, for the overall-aims model to work, there must be a clear end, and no real disagreement over how to choose the best means—yet both decisions are deeply contested in political practice. Henry Richardson, Democratic Autonomy: Public Reasoning about the Ends of Policy (New York: Oxford University Press, 2002).

  22. Patchen Markell, “The Insufficiency of Non-Domination,” Political Theory 36 (February 2008): 9–36.

  23. Patchen Markell, “The Rule of the People: Arendt, Arche, and Democracy,” American Political Science Review 100 (February 2006): 1–14, at 12.

  24. Parsons, “Politics and Markets.” It is worth noting that Hayek at times seems to support minimum socioeconomic standards for individuals in market society. However, this did not alter his basic argument for a market-based approach to structuring economic relations—and his corollary rejection of various forms of state intervention in market society.

  25. Friedrich von Hayek, “The Use of Knowledge in Society,” in The Essence of Hayek, ed. Chiaki Nishiyama and Kurt Leube (Stanford, CA: Hoover Institution Press, 1984), 211–24, at 212.

  26. Hayek, “The Use of Knowledge,” 213.

  27. Ibid., 217.

  28. Hayek, “Competition as a Discovery Procedure,” in The Essence of Hayek, 254–65, at 258.

  29. David Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2005).

  30. S. M. Amadae, Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism (Chicago: University of Chicago Press, 2003). On the limits of current approaches to regulation, see also David Moss and John Cisternino, eds., New Perspectives on Regulation (Cambridge: The Tobin Project, 2009); and Edward Balleisen and David Moss, eds., Government and Markets: Toward a New Theory of Regulation (New York: Cambridge University Press, 2009).

  31. Robert Goodin, “The End of the Welfare State?” in Cambridge History of Twentieth Century Political Thought, 202–16. These arguments often tracked what Hirschman identifies as the three major “rhetorics of reaction”: the perversity argument, where the proposed intervention is rejected because it will exacerbate the problem; the futility argument, where the intervention is rejected as having no real effect; and the jeopardy argument, where the intervention is held to threaten some other, more fundamental value or achievement. See Albert Hirschman, The Rhetoric of Reaction: Perversity, Futility, Jeopardy (Cambridge, MA: Belknap Press, 1991). For example, the arguments advanced to reduce welfare benefits in the United States during the mid-1990s echoed charges in the nineteenth century against the English state's efforts to promote social welfare. Just as the Speenhamland system of poor relief in nineteenth-century England was seen as actually creating more poverty (by reducing incentives for the poor to find work), so too were modern welfare-state policies attacked in the 1980s and 1990s. See Fred Block and Margaret Somers, “In the Shadow of Speenhamland: Social Policy and the Old Poor Law,” Politics and Society 31 (2003): 283–323. By the way, Block and Somers show that the empirical story of Speenhamland was actually very different: increased poverty arose from structural macroeconomic shifts resulting from global trade and the changing agricultural and industrial base in England. They also contend that the Speenhamland debates were not merely over welfare policy and social justice; they were more fundamentally debates about the very efficacy and desirability of statist political agency. By discrediting the very notion of political agency, neoliberals have succeeded in limiting the scope for realizing social justice. The result has been politically devastating for progressive thought in America.

  32. Jodi Short, “Coercive State Anxiety and the Rise of Self-Regulation” (2009), Working paper on file with author.

  33. Fred Block, “Swimming Against the Current: The Rise of a Hidden Developmental State in the United States,” Politics and Society 36 (2008): 169–206.

  34. However, even during 2010, familiar Keynesian policies of fiscal stimulus faced stiff opposition, on the grounds that government spending was wasteful, ineffective, and indicative of excessive state power.

  35. See Peter Gourevitch, “Keynesian Politics: The Political Sources of Economic Policy Choices,” in The Political Power of Economic Ideas, 87–106.

  36. For example, Charles Tilly and Sidney Tarrow emphasize the role of “contentious politics” in generating institutional reforms. Social groups mobilize and pressure state officials, who in turn bargain with these groups while enacting reforms. Charles Tilly, Democracy (New York: Cambridge University Press, 2007); Tilly and Sidney Tarrow, Contentious Politics (Boulder, CO: Paradigm Publishers, 2007).

  37. Dan Carpenter makes this general argument in his study of American bureaucratic formation in the early twentieth century: Dan Carpenter, Forging Bureaucratic Autonomy (Princeton: Princeton University Press, 2001). Theda Skocpol makes a similar general point about the importance of political association in catalyzing social reform: Theda Skocpol, Diminished Democracy: From Membership to Management in American Civic Life (Norman: University of Oklahoma Press, 2003). This same mobilization-bargaining cycle occurs outside the United States. See, for example, Patrick Heller, “Social Capital as a Product of Class Mobilization and State Intervention: Industrial Workers in Kerala, India,” World Development 24 (1996); Jean Dreze, and Amartya Sen, India: Economic Development and Social Opportunity (Oxford: Clarendon Press, 1995); Timothy Besley, and Robin Burgess, “The Political Economy of Government Responsiveness: Theory and Evidence from India,” Quarterly Journal of Economics 117 (2002): 1415–51; and Ritva Reinikka and Jakob Svensson, “The Power of Information: Evidence from a Newspaper Campaign to Reduce Capture,” Wold Bank paper WPS3239 (2003).

  38. See Sandel, Democracy's Discontents.

  39. See Michael Dorf and Charles Sabel, “A Constitution of Democratic Experimentalism,” Columbia Law Review 98 (1998): 267–473; and Robert Goodin and John Dryzek, “Deliberative Impacts: The Macro-Political Uptake of Mini-Publics,” Politics and Society 34 (1998): 219–44.

  40. The central elements of Polanyi's thought reappear in the writings of social democratic and (more democratic) progressive thinkers in both Europe and the United States. See, for comparison, Berman, Primacy of Politics and Kloppenberg, Uncertain Victory.

  41. This is precisely the kind of argument that Hayek advanced. He contends that because there is no localized agency behind distributional outcomes, there is no one against whom claims of social justice can be directed. Thus, the concept of social justice has no practical meaning. See Hayek, “ ‘Social’ or Distributive Justice,” in Cambridge History of Twentieth Century Political Thought, 62–99.

  42. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, [1944] 2001), 60.

  43. Hayek, “ ‘Social’ or Distributive Justice.”

  44. Polanyi, The Great Transformation, 131.

  45. Ibid., 265.

  46. Ibid., 266.

  47. Gosta Esping-Andersen, Three Worlds of Welfare Capitalism (Princeton: Princeton University Press, 1990).

  48. Berman, Primacy of Politics.

  49. See Philippa Strum, ed., Brandeis on Democracy (Lawrence: University Press of Kansas, 1995); Menand, Pragmatism; Kloppenberg, Uncertain Democracy; Dorf and Sabel, “A Constitution of Democratic Experimentalism”; Archon Fung, Empowered Participation: Reinventing Urban Democracy (Princeton: Princeton University Press, 2004).

  50. Michael Burawoy, “For a Sociological Marxism: The Complementary Convergence of Antonio Gramsci and Karl Polanyi,” Politics and Society 31 (2003): 193–261. The emphasis on democratic mobilization as the driver of institutional innovation and social change is empirically supported by a range of sociological and historical case studies of democratic reform. See footnotes 36–37.

  51. Burawoy, “For a Sociological Marxism,” 222–30.

  52. Many democratic theories contend that the principle of empowering all affected interests lies at the heart of genuine democracy. See Robert Goodin, “Enfranchising All Affected Interests,” Philosophy and Public Affairs 35 (2007): 40–68.

  53. This political aspect of associationalism separates this approach to democracy from more generic conceptions of social capital and civic life. See Dana Villa, Public Freedom (Princeton: Princeton University Press, 2008).

  54. A similar commitment to both democracy and a particular vision of substantive justice or freedom appears in a number of related theories, including republican theories of self-rule (see, for example, Markell and Villa), and decommodification accounts of freedom (see, for example, the work of Amartya Sen and Elizabeth Anderson). Some, like Sen, have linked democracy and active civil society to the achievement of greater welfare benefits and social justice. See Amartya Sen, Development as Freedom (New York: Anchor Books, 1999).

  55. A number of empirical, historical, and theoretical studies emphasize the mutually reinforcing relationship between democratic vibrancy and substantive debates over economic justice. See, for example, Daniel Carpenter and Gisela Sin, “Policy Tragedy and the Emergence of Regulation: The Food, Drug, and Cosmetic Act of 1938,” Studies in American Political Development 21 (Fall 2007): 149–80; T. H. Marshall, “Citizenship and Social Class,” in his Citizenship and Social Class, and Other Essays (Cambridge: Cambridge University Press, 1992), 1–86; Michael Sandel, Democracy's Discontents; Hanna Pitkin, “Justice: On Relating Private and Public,” Political Theory (August 1981): 327–52. Legal scholar William Forbath similarly notes that the movement for greater popular sovereignty has “never been motivated by the principle of popular control over constitutional law and constitutional development. It has been driven by substantive principles—about the rights of citizens and the duties of government, about the constitution of American society and political economy, about the conditions of popular self-rule at a given moment in national history … Liberal and left constitutional politics these days are defensive, however, not because they are in thrall to judicial supremacy, but because left and liberal Americans are without a substantive politics that inspires citizens to action on behalf of a left-liberal vision of the rights of citizens and the duties of government, and of the nation the Constitution exists to promote and redeem in the twenty-first century.” Forbath, “Popular Constitutionalism,” 81 Chicago-Kent Law Review 967 (2006), at 968–68, 990.

  56. See Niccolo Machiavelli, The Discourses on Livy, trans. Harvey Mansfield and Nathan Tarcov (Chicago: University of Chicago Press, 1998); Hannah Arendt, On Revolution (New York: Penguin, 2006); and Dorf and Sabel, “A Constitution of Democratic Experimentalism.” As Hanna Pitkin argues, responsiveness of political elites who are meant to represent the interests of the public—whether they are independent policymakers or elected legislators—is ultimately best secured by empowering the citizenry itself to engage with the policymaking process. Hanna Pitkin, The Concept of Representation (Berkeley: University of California Press, 1972), 233–34.

  57. Recent theories of epistemic democracy suggest exactly this point that democracies can function as knowledge-aggregating forms of decision-making. Danielle Allen, “A More Perfect Monument,” The New Republic, March 18, 2009. This argument was also advanced by pragmatist philosophers like John Dewey. See also Louis Menand, ed., Pragmatism: A Reader (New York: Vintage 1997).

  58. The experimentalist and innovative aspects of democracy are noted by theorists of epistemic democracy cited in lxi. See also Dorf and Sabel, “A Constitution of Democratic Experimentalism.”

  59. For similar arguments, see Fung, Empowered Participation; and Edmund Mierzwinski, “Regulation as Civic Empowerment,” The American Prospect, August 5, 2009.

  60. For similar elite-accountability arguments about democratic participation, see John McCormick, “Machiavelli Against Republicanism: On the Cambridge School's Guicciardinian Moments,” Political Theory 31 (October 2003): 615–43; “Contain the Wealthy and Patrol the Magistrates: Restoring Elite Accountability to Popular Government,” American Political Science Review 100 (May 2006): 147–63; and Machiavellian Democracy (New York: Cambridge University Press, forthcoming). McCormick argues that the primary threat to contemporary democracy is the political power of elites. He contends that greater participatory institutions are needed to strengthen the political power of ordinary citizens, who thus can check elite interests.

  61. Even Kenneth Arrow, whose work on social choice is often read as describing the impossibility of rational political action on issues including social justice and welfare, acknowledges the importance of public deliberation in shaping people's preferences and thereby making collective political action possible. Kenneth Arrow, Social Choice and Individual Values (New Haven: Yale University Press, 2nd edn., 1963), 86–91.

  62. See, for example, Goodin and Dryzek, “Deliberative Impacts: the Macro-Political Uptake of Mini-Publics”; Fung, Empowered Participation; Mierzwinski, “Regulation as Civic Empowerment.” More detailed institutional analysis of how participatory democracy can be reconciled with the need for expertise and the demands of macro-level policymaking lies beyond the scope of this paper. However, these works suggest some promising institutional innovations.

  63. See, for example, Dorf and Sabel, “A Constitution of Democratic Experimentalism;” and Fung, Empowered Participation.

  64. See Mark Blythe, Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (New York: Cambridge University Press, 2002); Mika LaVaque-Manty, Arguments with Fists: Political Agency and Justification in Liberal Theory (New York: Routledge, 2002).

Acknowledgements

The author thanks Richard Tuck, Michael Sandel, Nancy Rosenblum, and the editors and three anonymous reviewers for Polity for comments on earlier drafts of this paper. Additional thanks to Oliver Bevan, Emma Saunders-Hastings, and Metin Eren for helpful conversations in developing this paper.

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Sabeel Rahman, K. Conceptualizing the Economic Role of the State: Laissez-Faire, Technocracy, and the Democratic Alternative. Polity 43, 264–286 (2011). https://doi.org/10.1057/pol.2010.29

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