Introduction to Political Economy (Routledge Revivals)

E. Mishan, E. J. Mishan

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781136586446
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1982, Introduction to Political Economy is a clear and concise introduction to the normative aspects of economics by one of the world's leading authorities on the subject. In this highly readable book, Professor Mishan takes the student to the heart of the subject without recourse to algebra and with only the simplest of diagrams. The author carefully distinguishes the various meanings of the terms political economy, normative economics, welfare economics and allocative economics. He considers the standard allocation rules and the crucial concepts of consumer surplus and rent, which are so important to cost-benefit analysis, while then going on to resolve the paradoxes of the efficiency criterion. Lastly, Professor Mishan assesses both the social worth of radical conservatism, which is associated with the Chicago School of Economics, and the relevance of the modern theory of welfare economics to social welfare.

Part One

The agenda of political economy

1 Introductory observations

The term ‘political economy’ continues to be used in a number of related senses. For instance, what we refer to today as economics was generally known as political economy during the nineteenth century – not inappropriately since it was a mixture of the descriptive and the prescriptive. Economic doctrines and economic maxims went together. During this period, moreover, the notion of immutable economic laws was widespread. The object was to discover them, and from them to derive principles of sound economic policy.

This notion of immutable laws has evolved into the conception of economics as a discipline that is held today by a number of prominent economists, a conception of economics as a body of general principles by which one can determine only the broad direction of price and quantity adjustments in response to significant changes in technology, in institutions, in people's wants and in government policies. When this conception of economics is allied to the liberal doctrine arguing for carefully defined and limited powers of government and, consequently, an antagonism to the expansion of bureaucratic power and continual intervention in the economy, it can boast a following not only among businessmen but also among some distinguished academic economists. Certainly over the last decade or so there has been growing support for the idea of removing encumbrances placed by ambitious governments and bureaucrats on the free operation of a market economy. Support is particularly strong among economists for whom a market economy is equated with a competitive capitalist economy or, put another way, with a decentralized private enterprise economy whose interdependent activities are co-ordinated by a universal pricing system.

So regarded, the changing prices of goods and resources are the signals by which a mass of information about what people want and what can be made available is disseminated through the economy. The faith in a competitive capitalist economy of this sort draws upon a number of considerations. The first is related to the aspect of a Burkean political philosophy that favours traditional and proven institutions, among which the market is one able to trace its origins to Antiquity. Another is the belief that a private enterprise economy, as distinct from a collectively planned economy, not only offers a wider range of choices to individuals in the selection both of goods and of vocational opportunities, but also acts to safeguard the political freedom of the individual.¹* A third consideration is that, seen as an institution for catering to the material wants of individuals and for encouraging innovation both in goods and in productive methods, it is more efficient than the alternative system of centralized planning characteristic of communist countries.

Hayek, in particular, has repeatedly emphasized and elaborated on the ‘invisible hand’ theme² – that each person, in pursuit only of his own gain is led by a providential mechanism (the ‘invisible hand') to promoting the general interest. This seemingly miraculous phenomenon is, of course, the decentralized market economy which brings together and transmits the information diffused among millions of people in the effective and economic form of price changes, these price changes being, as indicated, the signals that guide the economic system's productive and distribution activities so as to meet the changing material wants of people.

Concentrating on this third consideration, the efficiency of the signals may be regarded as turning only on relaying information about market conditions, and may therefore be judged by the infrequency and the limited duration of surpluses and shortages of goods and resources. Allowing as a judgement of fact about the working of alternative institutions, that the competitive capitalist system is the more responsive to changing conditions of demand and supply than is a centrally planned economy, the support of the market economy entails a value judgement that efficiency in this sense – the more rapid adjustment to changes in demand and supply – is a good thing. And, it may reasonably be urged that this value judgement, in addition to that which favours personal freedom, is one that is shared by the public at large.

It would be absurd to deny that this conception of economics, of the competitive market, and the conclusions derived therefrom, can legitimately be described as a branch of political economy. If I choose not to treat it in full here it is simply because the emphasis in such a study is on the political rather than on the economic, whereas in the bulk of this text I propose to place the emphasis on the economic.

Moreover, a treatment of the three considerations adduced in favour of a competitive capitalist economy, and in favour also of defined and specific restrictions on government activity, involves very limited analysis and very much description and illustration, historical and hypothetical, of the intricate interdependencies of a market economy; and, as a corollary, illustrations also of the detrimental effects of persistent government intervention in its misconceived attempts to plan for the ‘needs of the people'. Such a treatment can hardly avoid taking on the complexion of an essay in persuasion, which is contrary to my main intent in this book. The reader who is interested in this sort of political economy – and I hope there are many of them – cannot do better than go back to the original sources (including Adam Smith's Wealth of Nations) where the case for a competitive capitalist economy is lucidly and cogently argued. The present volume, however, is reserved for an introduction to the modern development of normative economics, which is clearly associated with the mainstream of positive economics, plus a fairly radical critique of the relevance of that development in so far as it is regarded as an instrument for social improvement.

It is interesting in passing, however, to reflect that the proponents of a competitive market economy, taken as a whole, who value this institution as a means of dispersing information, of facilitating adjustment to changing conditions of demand and supply, and of encouraging innovation, tend to dissociate themselves from an interest in modern theoretical welfare economics, in particular from propositions about the norms of resource allocation. This dissociation, however, is not easy to maintain. The information that is amassed and dispersed through the market mechanism produces continual changes in the allocation of the resources available to the economy. If it is argued that the competitive market is more efficient than the centrally planned economy, the question naturally arises: efficient by what criterion? I dare say that the proponents of the competitive market economy would like to confine the term efficiency to the economy's performance in adjusting smoothly to changes in the conditions of demand and supply – measured, perhaps, by its success in avoiding prolonged shortages or surpluses.

But if one presses the question, what is wrong with an economic system that does not adjust smoothly in this way, I fancy that it would be hard to offer a convincing answer without drawing on aspects of a normative theory of allocation. There are, surely, inseverable links between efficiency as conceived, on the one hand, by such political economists (as the continuing reallocation of resources in response to changes in demand and supply conditions) and efficiency as conceived, on the other hand, by the normative economist (as a criterion for ranking alternative allocations for any given demand and supply situation). After all, what should it matter if the market failed to eliminate a shortage of goods if it could be shown by normative allocation criteria that such goods ought not to be produced anyway? As we shall see later, the implied belief of such political economists that people's valuations should count, irrespective of the distribution of income, is a value judgement that is one of the maxims of modern normative economics.

Be that as it may, it was well after the turn of the century that a distinction was consciously drawn between on the one hand, an economics viewed as a positive science, one yielding hypotheses about the working of the economy which in principle could be tested against the facts, and a political economy on the other, from which maxims of economic policy might be deduced. In fact, the subject matter of political economy in this latter sense is today sometimes taught explicitly as a normative subject under the title of the ‘theory of economic policy'. At all events, by the middle of the twentieth century, the distinction between a positive (or descriptive) economics and a normative (or prescriptive) economics was well established – even though, occasionally, authors of positive economics textbooks may be found approving some economic institutions and practices and condemning others.

However, the matter does not end there. For within this explicitly normative part of the subject – and quite apart from the doctrines discussed above (and chiefly linked today with the names of Friedman and Hayek) – a dichotomy has been evident for some time. As a result, the term ‘political economy’ is often associated with the specific advice given by one or more economists (usually having strong convictions) to governments or to the public at large either on broad policy issues or on particular proposals. This advice, which appears as policy conclusions, rests upon judgements of values and judgements of facts (facts both of economic behaviour and of political responses) which are particular to the writer(s) and are not necessarily shared by other economists or by the community at large. Much of this sort of political economy – which we might call personal political economy – is the stuff that appears in newspapers, magazines, bank reviews, pamphlets and popular books.³

The other interpretation of a prescriptive economics that is comprehended by the term ‘political economy’ has been given the more general name of ‘normative economics', although the term ‘welfare economics’ (following the title of Pigou's celebrated work of 1920, The Economics of Welfare, is more popular today. The aim of this welfare economics, which is not quite as comprehensive in scope as normative economics, is better understood by the more explicit ‘economic theory of social welfare'. Stated thus, it suggests that economists seek to build a body of prescriptive generalizations resting on widely accepted value judgements and assumptions of economic behaviour.

For reasons indicated, we shall not be directly concerned in this book with the political economy of a competitive market system or with the movement seeking to restrict the role of the state and so to enlarge the area of the private sector. None the less, Part Five, which breaks out of the conventional framework of assumptions in which modern normative economics is developed, does attempt to assess some of the claims made for the market, especially in the light of post-war developments. As for the writings of the more personal sort of political economy, much of them directed towards the economic problems that beset the poorer countries of the world, they do not lend themselves easily to a textbook treatment other than a taxonomic one. However, although these writers of political economy are inspired by a personal philosophy and, perhaps, by a world view, they do indeed borrow propositions from the more formalized treatment of normative economics. Their recourse to the more familiar allocative propositions however, does not preclude injections of their own personal value judgements into their arguments. For example, they may confidently assert that a movement towards freer international trade is so advantageous that one should not carp at some incidental increase in the instability of employment and industrial readjustments. But such an assertion cannot be derived from the corpus of modern welfare economics even if the increment of free trade and of instability could be specified exactly.

In sum, a personal political economy is an art – a somewhat opinionated art – in which standard economic techniques and normative propositions form only a part. With enough experience, and with enough conviction or folly, a person may come to write political economy of this personal sort. But, in the nature of things, it cannot be imparted to the student. In contrast, welfare economics, as commonly understood, can be imparted to the student, as I hope to convince you.

I should not want to leave you with the impression, however, that there is a settled or monolithic view covering every aspect of welfare economics. Controversies still persist, as indeed they do in positive economics. But such differences that continue to exist are not the result – as they often are in controversies arising from different personal political economics – of differences in personal judgements, whether of facts or of values. They arise either from intellectual error or from misconception, such differences being properly regarded as normal and inevitable consequences of the continuing development of a discipline that aims, ideally, to reach a synthesis and, more immediately, to extend the area of agreement among scholars.

In its more general treatment welfare economics may be said to embrace two interrelated aspects, those of resource allocation on the one hand and distribution on the other. Most students have an idea of what is meant by resource allocation – loosely speaking, the amounts of the various goods that should be produced with the resources available to us – but non-economists may misunderstand the meaning of distribution in this context. It has nothing to do with the distribution trades, or with the marketing or retailing of goods. The term refers only to the distribution or the sharing of the products of industry. A more ‘progressive’ distribution is one in which a greater proportion of aggregate income goes to the ‘poor', as a result of which the structure of income looks more equal or, at any rate, less unequal.

Although, as mentioned, resource allocation and distribution are interrelated aspects of the subject, each can be treated separately from the other, at least provisionally. After we have covered some ground, I shall indicate how distributional considerations affect allocative propositions and how allocative considerations affect distribution. But for the present we are to concentrate on allocation alone, simply because economists have a great deal to say about allocating resources and very little to say about distribution (except in so far as it is related to the study of allocation).

Assuming welfare economics to be a successful discipline, it would enable us to say to society, ‘Organize the economy in this way rather than that!', or, more modestly, ‘Better build a bridge than a ferry service!', The tax on gasoline should be increased by 14.6 cents per gallon.’ (Bear in mind that figures beyond the decimal point impress the public with your expertise far more than the figures before it.)

Such statements are clearly prescriptive, or ‘ought’ statements, and the temptation to utter a few pertinent if perfunctory remarks about them is not to be resisted.

Elementary treatises on ethics sometimes draw a distinction between a ‘conditional imperative’ and a ‘categorical imperative'. An example of the conditional imperative is the statement, ‘I ought to visit granny more often – if I expect her to leave me a tidy sum in her will.’ An example of the categorical imperative is the statement: ‘Thou shalt not bear false witness.'

The example above of an ought statement that is a conditional imperative shows it to be a rule of expediency. Euphemistically, perhaps, we could view it as an example of enlightened self-interest. I begin with the thought of the joy to me of having some of granny's money. Being ‘enlightened’ (which in economics usually means shrewd), I calculate that my chances of obtaining some of granny's money would be much improved if I ingratiated myself with the dear old lady by visiting her frequently and showing an interest (which doubtless I feel) in her failing health. I conclude without hesitation that I ought to visit her more often – before it is too late.

The example of the categorical imperative is not one of expediency or enlightened self-interest. Indeed, it is altogether possible that, were I to consult my immediate self-interest, I might discover that I could materially benefit by circulating falsehoods about a particular person. Yet the biblical injunction forbids me to do so. And a good society would regard it as a binding rule irrespective of self-interest or inclination. Of course, you can try to justify the categorical imperative as an application of the golden rule: not to do to others that which you would not want them to do to you. But if, notwithstanding, you would also go so far as to question the universal validity of the golden rule, what then?

Allowing that human beings are imperfect creatures, subject to temptations and mischievous impulses, I might observe that a peaceful and stable society would not be possible if such a moral law, among others, were not binding on people. You might agree with my judgement of the consequences of a rejection of such moral laws, but then go on to question the advantages of livin...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Half Title
• Dedication
• Title Page
• Copyright
• Contents
• Part One: The agenda of political economy
• Part Two: Allocation within a partial economic context
• Part Three: Collective goods and bads
• Part Four: Resource allocation within a general context
• Part Five: Sources of economic failure in a technological age
• Notes
• Bibliography
• Index