Patrons of the King

Charles Krauthammer rediscovers the foundation of economics:

In the old days -- from the Venetian Republic to, oh, the Bear Stearns rescue -- if you wanted to get rich, you did it the Warren Buffett way: You learned to read balance sheets. Today you learn to read political tea leaves. You don't anticipate Intel's third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

Today's extreme stock market volatility is not just a symptom of fear -- fear cannot account for days of wild market swings upward -- but a reaction to meta-economic events: political decisions that have vast economic effects.

Studying financial statements, measuring inputs and pricing outputs, and theorizing about how individuals and firms allocate scarce resources, all that, is only one dimension of economics. The science of economics, concerned with prices and allocations is part of a greater area of study called political economy. And it is pretty much what Krauthammer had in mind:

Political economy originally was the term for studying production, buying and selling, and their relations with law, custom, and government. Political economy originated in moral philosophy. It developed in the 18th century as the study of the economies of states — polities, hence political economy.

In late nineteenth century, the term "political economy" was generally replaced by the term economics, used by those seeking to place the study of economy upon mathematical and axiomatic bases, rather than the structural relationships of production and consumption.

Using logic and axioms driven by observation, economists were able to determine laws of price and allocation which are as sure and predictable as gravitation or thermodynamics. Economic laws usually operate more subtly and slowly than gravity. So it is easy for people and politicians to believe those natural laws can be circumvented by mankind’s laws.

But they can’t. Not any more than a legislature can cause bricks to levitate. When a legislature with the size and power of the US Congress declares a nation will spend 10% of its national output trying to make bricks fly, that changes preferences and allocations across the entire economy of said nation.

Some will get in line for research grants into brick-floating technology, others will speculate on sectors related to masonry, and a few with better knowledge will attempt to profit from all the broken bricks and other debris resulting from this politically-driven national effort which they know is ultimately futile. All that work and applied genius, trillions of dollars worth, will be wasted.

In absence of the politics, all of those agents in the nation’s economy would have spent their potential, both in stored wealth and human creativity, trying to make lives better by meeting some demonstrated need. Without government mandates, each person and company would be working toward their own good, with their own assets at risk. Reading balance sheets and all the “economics” stuff within “political economy” enable them to make the best allocations, leading to the entire nation having more wealth and better lives.

That’s where the moral element of political economy comes in. Each person innately wants a better life. What organization of society leads to building wealth with the least suffering? Can a nation manage the complexities of economic interaction without creating hordes of unseen victims?

For perhaps a couple of centuries the operation of American economics was not controlled by the operation of government. Influenced, sure, always. But in the USA, government was a tiny fraction of the entire productive economy. It was under 10%, and maybe as small as 5%, depending on which statistic one uses. The ensuing free application of scientific economics led to vast and wonderful improvements in the lives of Americans.

This was an age of economic liberty. Government was little involved, and a separation developed between politics and economy. That age is over. Government spending was 36.6% of GDP last year. That’s before adding in several bailouts which themselves represent potentially 10% of GDP.

About half of all production in the US will now flow through government. Politics is again wedded with economics. We have not fully returned to the age of kings, where every person was not only a Royal subject, but a patron dependent upon the King’s benevolence. Essentially 100% of a nation’s output was controlled by the monarch and his ministries.

We haven’t “progressed” back that far. But we’re halfway there. Which means we’re about halfway away from the political-economic structure under which the US became the wealthiest and most productive of all nations.

Krauthammer sums it thus:

The ruling Democrats have a choice: Rescue this economy to return it to market control. Or use this crisis to seize the commanding heights of the economy for the greater social good. Note: The latter has already been tried. The results are filed under "History, ash heap of."

Kings rarely surrender their power. The incoming US government may be only half-kings today. Does anyone expect they’ll be overcome with moral sympathy and humility, returning control of the economoy to the people?