By James H. Nolt
I will take a detour from the thread I was pursuing last week to reflect on the importance of judicious leadership in a capitalist system. The final U.S. presidential debate on Wednesday provoked my thoughts. In keeping with the themes of this column, I will not indulge in psychoanalysis of the candidates, but rather consider the long-term implications for the two-party system.
As I have often argued, capitalism is naturally a two-party system because business interests naturally bifurcate into bears and bulls, plus nationalists and internationalists. This idea is not new. James Madison, one of the greatest political theorists among the American founders, used this sort of argument as the basis for his constitutional theory including checks and balances. He hoped the constitutional system he helped design would provide another lever of influence and that contending private powers would continue to play the political game rather than chronically subverting it or resorting to civil war.
The private power of slaveholders jeopardized federal constitutionalism; because it was so fundamental to private alignments, it tended toward polarization and frustrated compromise, resolved ultimately by civil war. This was the exception that proved Madison’s fears were well founded.
Modern conservatism has evolved during my lifetime from a movement that accepted the basic parameters of capitalism as a conflicted system requiring judicial management of private power abuses to a market fundamentalism that pretends private power does not exist. This is the primary reason why conservatism has evolved from a doctrine of good government to one where, as Ronald Reagan famously contended, “Government is the problem, not the solution.” Madison would be appalled.
One of the principle causes of this evolution of conservatism, and consequently the Republican Party, was the massive expansion of untaxed “charitable” foundations established by libertarian conservatives like the now infamous Koch brothers.
I first encountered libertarianism when I started graduate school at Stanford University in 1979. I was amazed to find that there was a major called “engineering economic systems” filled with market fundamentalists who fervently believed, against all historical evidence, that all great fortunes were legitimate market-determined rewards for economically efficient behavior rather than being primarily the result of vigorous exercise of private power. Who could believe such nonsense? It was not until decades later that I realized that libertarian billionaires like the Koch brothers were funding this creeping triumph of market fundamentalism. The book Dark Money by Jane Mayer documents this well.
I blame economics, plus the fact that the other social sciences tended to defer to the supposed expertise of economists in matters related to the economy. Business and economic history tended to disappear from the curriculum during this same period, making it harder for others to learn what I already knew. I sought out the few remaining places in the U.S. where I could learn more about private business power. The University of Massachusetts at Amherst was one of the few economics departments that had not completely succumbed to market fundamentalism. I later studied international political economy at the University of Chicago because it seemed to me one of the few fields that still invited consideration of business power, such as the influence of multinational corporations on the global economy.
Yet the basic theoretical perspectives being taught, liberalism and realism, were no less effective than textbook economics in diverting attention away from private power. Thus in order to talk about what I knew was important, I was forced to innovate conceptually and characterize myself as something different, a corporatist.
When I was younger, I aped economists by considering the economy as something analogous to a machine, like engineering. Consequently, I had little appreciation for leadership or strategy. More recently, particularly since the world financial crises of 2007, I have come to appreciate that the economy is not a self-regulating machine, but a battleground of contending forces. The dynamic of private economic “wars” is influenced by the quality and strategic vision of leaders, public and private, for better or worse. In such private wars, ordinary people too often suffer the collateral damage.
That it was so hard for a critical social scientist to learn this lesson is indicative of the decay of our knowledge and understanding of capitalism. John Kenneth Galbraith was one of the last of a vanishing breed of economists who understood private power. He coined the memorable concept “countervailing power” to express a need similar to that articulated by Madison’s “checks and balances.” Capitalism tends to polarize, but it does not tend toward balance. Only leadership organizing countervailing power can restore balance when opposing private interests are out of balance in extreme ways.
Such leadership is above liberal and conservative. It is beyond political labels. It is necessary because economic textbooks are wrong. Credit-driven economies do not tend toward “market equilibrium.” They do not naturally balance. Capitalism generates, and sometimes polarizes, bear and bull interests pushing in opposite directions. If bulls are too strong, as in Japan of the 1980s and China today, excessive expansion of credit creates asset bubbles that provide the opportunity and, indeed, the necessity of bears to counterattack, eventually precipitating a crash to their own great profit.
John Maynard Keynes understood this. In Treatise on Money, he describes how polarization of bears and bulls creates culminating points where the direction of the economy must tip drastically one way or another. The surest sign of a looming crisis is the rapid escalation of opposing positions, just as the rapid mobilization of opposing armies is a harbinger of war.
Keynes believed that good leadership in government might mitigate capitalism’s tendency toward crisis. Indeed, modern liberalism includes this Keynesian mandate as part of the burden of government. Conservatism did, too, as late as the Nixon era. Reagan in America and Thatcher in Britain rejected this in favor of market fundamentalism.
Keynes was perhaps naïve because he was too sanguine about the prospect that government economic management could be exercised strategically by wise leaders adequately insulated from the pressures of contending private forces. The bipartisan consensus for Keynesian macro-management from the 1940s through the 1970s facilitated the illusion that capitalism was easily manageable.
Since then, the Keynesian consensus has broken down, not just because political leadership failed, but also because private business leadership reasserted power through the doctrine of market fundamentalism, what I often call “the myth of the market.”
The solution is not restoring textbook Keynesianism. The textbook bastardization of Keynes failed because it ignored his insights about countervailing power. Instead, postwar textbooks tried to domesticate Keynes by presuming that government leadership would always keep the strategic initiative over private business leaders with an interest in subverting government management. The decline of political economy has contributed to the failure of government leaders, liberal and conservative, to adequately conceive the private forces in motion and the immense burdens of managing countervailing private powers.
Leaders must educate their constituents about what is necessary, not just pander. That task is hobbled by the gross deficiencies of contemporary political economy.
James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.
[Photo courtesy of USCapitol]