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The Public Economy: Understanding Government As a Producer a Reformation of Public Economics

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The Public Economy: Understanding Government As a Producer a Reformation of Public Economics The public economy: Understanding government as a producer A reformation of public economics June Sekera Senior Research Fellow, UCL Institute for Innovation and Public Purpose Visiting Scholar, Heilbroner Center for Capitalism Studies, New School for Social Research, NYC UCL Institute for Innovation and WORKING PAPER Public Purpose WP 2020-01 About the Institute for Innovation and Public Purpose The UCL Institute for Innovation and Public Purpose (IIPP) aims to develop a new framework for creating, nurturing and evaluating public value in order to achieve economic growth that is more innovation-led, inclusive and sustainable. We intend this framework to inform the debate about the direction of economic growth and the use of mission-oriented policies to confront social and technological problems. Our work will feed into innovation and industrial policy, financial reform, institutional change, and sustainable development. A key pillar of IIPP's research is its understanding of markets as outcomes of the interactions between different actors. In this context, public policy should not be seen as simply fixing market failures but also as actively shaping and co-creating markets. Re-focusing and designing public organisations around mission-led, public purpose aims will help tackle the grand challenges facing the 21st century. IIPP is housed in The Bartlett, a leading global Faculty of the Built Environment at University College London (UCL), with its radical thinking about space, design and sustainability. This report can be referenced as follows: Sekera, J. (2020). The public economy: Understanding government as a producer. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2020-01). Available at: https://www.ucl.ac.uk/bartlett/public-purpose/wp2020-01 The public economy: Understanding government as a producer A reformation of public economics June Sekera Abstract 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 theorised 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 the artful, but artificial, construct that subverts the ability of the public economic system to produce on behalf of the polity. I call, instead, for 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); recognises a public economy with distinctive purpose and drivers (as did the German public economics theorist, Gerhard Colm, in the 1920s); and focuses on government as a producer (as did Paul Studenski in the 1930s to 1950s). Finally, it draws on two centuries of physics and 21st- century systems ecology in recognising biophysical imperatives inherent to production. Developing and promoting a cogent theory of the public economy system is vital to the effective operation and, ultimately, survival of the governmental systems by which democratic nation-states function today. The simplistic typecasting of government, the ‘market-failure’ rationalisation for state action, the invalid imposition of market axioms and assumptions on the public domain, and the disregard of public purpose must all be rejected. It is time for a reformation of public economics. Keywords: economics; political economy; biophysical economics; public administration JEL codes: A10; A11; A13; A20; B00; B50; H00; H20; H40; K00; N00; P00; P40; Q40; Q50; Q58 1. Mainstream economics and the state In standard economics scripting, government is most often cast in the role of bumbler or villain. Whether as market fixer, intervenor, enforcer or redistributor, its actions are portrayed as resulting in distortion, inefficiency, deadweight loss and worse. Three-quarters of a century ago, Paul Studenski rejected such casting. He found government to be a vital figure whose role was not simply to intervene or redistribute. Government was a producer. A professor of economics at New York University (1927-55), an authority on public finance and a widely-respected historian of national income accounting,1 Studenski argued that ‘Government is a productive, wealth-creating organisation. It supplies direct utilities as well as aids to private production.‘ (1939, p. 34). He elaborated: ‘Under all forms of organized society, economic activity has required some collective effort in addition to the individual one, and this is still true of the modern society. The notion that production for exchange is alone ‘productive’ is preposterous.’ ‘Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value — namely, utility and scarcity. They satisfy human needs and must be economically used. Government is, therefore, engaged in production just as much as is private enterprise. Government employees are just as much producers as are private employees and entrepreneurs. To deny this fact is to demonstrate one’s faulty economic education or the fact that one’s idolatry for business has thwarted one’s vision.’ (emphasis added) His language and logic challenged mainstream economic thought, which by his era had turned to ‘exchange’ theory and had sidelined ‘production’. However, production had been of central interest to 18th-century and subsequent generations of economists, who were concerned with the processes by which value was created. But, even then, government had persistently been placed outside the ‘production boundary’ (Mazzucato 2018) and the state was, at most, assigned only a supporting role. Even Karl Marx, who wrote of the ‘hidden abode of production’ in the first volume of Capital (Böhm & Land 2012) did not address the state’s role as producer. And once Marx adumbrated a ‘labour theory of value’ that could be used effectively to reveal the exploitation of workers by employers, liberal economists began to downplay the significance of production itself. In reaction to Marx, mainstream economists moved to ‘recast economics as a science of exchange rather than production’ (Perelman 2006). This transformation facilitated mathematical modelling in economics and the eventual construction of a quantitatively precise, but pragmatically constricting, ‘production function’. 1 In The Income of Nations (1958), Studenski traced the history of national income accounting and competing historical conceptions of production. Descriptions of Studenski’s work can be found in Warren 2005 and Ogle 2000. 1 In short, by the time that Studenski was writing, not only was government viewed as not productive, there was essentially no basis for even considering government as a producer, since economics had made ‘exchange’ 2 between sellers and buyers the embodiment of economic value. But Studenski’s stance would not have been out of line with the thinking in the German public economics school that had flourished in the late 19th and early 20th centuries. Economists in Germany (and other European countries) had concerned themselves with ‘understanding the economic foundations and explaining the scope of the state’ (Sturn 2010). Some saw the state as ‘a framework of collective agency for common purposes’ and understood government as a producer — the ‘mechanism’ for producing the goods and services necessary to meet ‘collective needs’. However, with the rise of Nazism and the emigration of many of these theorists, a flourishing school of public economics fractured and the very idea of a ‘public economy’ was eventually expunged from mainstream economics. This paper calls for recognition of the public economy, argues for a reformed public economics and proposes the elements of a new conceptual model. This section describes and challenges the role-casting of mainstream economics, and very briefly reviews the history of the emergence and then submergence of the concept of a ‘public economy’. Section 2 outlines the impacts on the polity and the planet that have resulted, at least in part, from submerging the public economy in economic theory, and concurrently imposing market axioms and assumptions on the public sphere. In Section 3 I revive the idea, also buried by modern mainstream theory, that there are multiple economies, not simply a market economy. Section 4 introduces the elements of a new theory of the public economy which both returns to the 18th- century roots of economics and also breaks new ground. The new public economics concept offered here has the following features: 1) it takes a systems perspective (as did Quesnay and the early 18th century-physiocrats); 2) it recognises a public economic system with distinctive purpose and drivers (as did Gerhard Colm, a leader in late 19th- century German public economics); 3) it focuses on government as a producer (following Studenski); and 4) it incorporates biophysical imperatives and
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