By James H. Nolt
Last week I promised to discuss more about the details of U.S.-China bargaining, but since relatively little has happened despite the meeting of Chinese President Xi Jinping and U.S. President Donald Trump, I will return to the thread of two weeks ago about the foundations of political economy, specifically, power in a capitalist system.
Textbook economics treats “the market” as the locus of freedom and “the state” as the realm of power and policy. In fact, power and policy are exercised by both business and government. The difference is that government leaders often love to flaunt their power, to appear strong and effective, whereas business leaders often prefer the shadows. If business leaders seek publicity, it is typically for the products they sell rather than the power they wield.
In most countries, democratic or not, government leaders are typically held responsible for the nation’s economic performance, despite the fact that there is often little they have done or could do to change the economic situation. The decisions that governments do make are often elevated in importance far beyond what they deserve.
There are exceptions. Major wars critically impact economic fortunes. Political leaders responsible for them do bear the burden of their decisions. Sometimes leaders take broad new initiatives that change the possibilities of government action and regulation, whether increasing it, as with President Franklin Roosevelt’s New Deal, or decreasing it, as with President Ronald Reagan and Prime Minister Margaret Thatcher of Britain, both undoing the regulations on finance and redistributive taxes that were central to Depression-era recovery.
Compared with public power, the history of private power is far more obscure. I give an outline of major themes and turning points in my book, International Political Economy: The Business of War and Peace. This blog series has also emphasized private power from the first blog. Political science and economics both largely ignore private power.
Economics has neglected private power since its inception in the 1870s. The only form of private power it notices at all is market power, which I prefer to call pricing power. Yet economics textbooks relegate discussion of market power to later chapters, after expounding the main principles of economics using only “perfect market” assumptions, which assume no private power. Private power is neglected in finance, where it is most important, by use of the efficient market hypothesis. Private power over employees is also neglected. Instead the wage is treated as a voluntary agreement between equal parties and whatever happens in the workplace itself is ignored. The broad conclusion of economics is that consumers are the sovereign power. Capitalists exist not to advance their own power and interests, but only to serve consumers.
Political science ignores private power because it largely agrees with economics that governments are the locus of power. Private power only appears at the margins of political science in forms such as campaign contributions and lobbying. Lobbying is not the quintessential activity of political insiders, however, but of outsiders. Literally, those catching politicians in “the lobby” during their busy walks to and from meetings are on the outside, petitioning for access to power. As I discovered doing archival work in graduate school, true insiders do not need to lobby because they can call the president and their calls are answered—or the president calls them. Insiders are also political contributors, but more than that, they organize the process of mobilizing money for politics. Often they are financiers or attorneys fronting for top business leaders. While political science has more variety of viewpoints than economics, the most common perspective is that voters are ultimately the sovereign power that shapes political outcomes.
My perspective is that neither voters nor consumers are sovereign. Power is highly concentrated along with wealth, information, and the freedom to choose alternative strategic directions. Individual people, if unorganized, are more of an inertial than strategic force. Of course, consumers and voters make choices, but those choices are bounded by choices made by capitalists about what products to manufacture and what processes to use, and by political party leaders and donors who largely determine which potential candidates will run with what range of issues and themes. At the apex of both public and private power, leading financiers determine when to advance credit and when to deny it.
While it is important to recognize that the hierarchies of private power extend to great heights where strategic action can have truly breathtaking impact, we must reject conspiracy theories that claim there is a single all-powerful elite. Capitalism is inherently and necessarily a two-party system, since creditors and debtors always contend as conflicting interests, not the least in monetary issues. Inflation erodes the value of debts; deflation enhances their value. Likewise, there are always opposing bear and bull parties pushing in opposite directions. Every derivative contract has two sides. Both cannot win. If you intend to act effectively you need to think strategically about the contending private forces always in contradictory motion.
Economies are relatively stable as long as most capitalists are bearish in some assets and bullish in others, as long as bears and bulls are not sharply polarized. Polarization typically occurs when several of the peak creditors sense that the economy is “overheating,” i.e., it is overly bullish and many bulls are loaded with debt. Tightening credit will bankrupt the most overextended bulls and force many others to liquidate suddenly to avoid losses as the asset values fall. Of course, selling pressure becomes a self-fulfilling process, accelerating the fall. Bulls able to liquidate quickly will survive. Bears who have established short positions prior to the crash will prosper mightily.
The clash of bears and bulls that animates the business cycle is of both active parties acting strategically and inertial investors (including those with degrees in finance) reacting after the fact rather than initiating market movements. Power is exercised at the peaks, not in the trenches, where most of the losses will be tallied.
True leadership must anticipate movements before they happen and set them in motion. What is typically called “political strategy” in politics and “risk analysis” in business is backward looking. It is not strategy because it uses statistical models to connect that dots that show where we have been, not where we are going next. If we are about to turn a corner, either in the business cycle or by political innovation, the statistical modelers, the “bean counters,” are typically the last to know. In order to anticipate the future, you need to understand all the major forces in motion and their interests and strategies. You need to be able to think like a capitalist, even if you are not one.
James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.