Economic History as Moral Philosophy,
Social Theory, and Political Science

“GREAT CHANGES IN THE CODE OF MORALS”?

What is at stake in empowering consumers and embracing consumer culture? To put the same question more expansively, What is growth for, anyway? Who benefits from it, and who doesn’t? Are there any limits on it? Should there be? To address such questions, we’ll have to follow the lead of Adam Smith, the founding father, who thought of political economy as a new kind of moral philosophy. For the way we think about the economics of investment and consumption will determine our approach to moral issues, social problems, and political programs. As John Maynard Keynes put it in 1930, “When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.”

But we don’t have to reach into the history of economic theory if we want to understand the intimate relation between political economy and moral philosophy. The budget battles over so-called entitlements that deadlocked Washington in 2011 are, at bottom, debates about the proper alignment of effort and reward, work and income, production and consumption. The Republican argument for cutting or capping entitlements like Medicare, Medicaid, and Supplemental Nutrition Assistance (food stamps), for example, goes like this: “A government that buries the next generation under an avalanche of debt cannot claim the moral high ground in the world.... From a moral perspective, these programs are failing the very people they are intended to help.... The safety net should never become a hammock, lulling able-bodied citizens into lives of complacency and dependency.”

Moral Philosophy

So let’s see what happens when we speak this language. If we go along with the Republicans who wrote the report I just quoted and assume that private investment drives growth, we’ll tend to believe that the redistribution of income in the name of more consumption and greater equity is a disincentive to save—that is, to accumulate wealth. As such, it is also a death sentence on individual initiative, personal ambition, and economic growth. It is a moral disaster because it teaches us that hard work and the deferment of gratification (saving for a rainy day) are pointless; by the same token, it is an economic disaster because it deprives the banks of the deposits they need to loan to businesses that want to invest in new plant and equipment. Taxing the wealthy at higher rates thus becomes a very hard sell even for left-wing economists like Dean Baker, because, just like their opponents on the supply side, they assume that enterprise and equality don’t mix; the either/or choice they offer is, as always, between growth and redistribution, between the jet engine and the oxcart.

If we drop the assumption that private investment drives growth—in other words, if we acknowledge the measurable fact that, since 1919, real growth has happened in the absence of increasing net private investment—then we can easily justify taxing the wealthy and redistributing income on both moral and economic grounds. And we don’t have to cite the emergency of recession-induced deficits. All we need do is consult the historical record.

The short version of the argument goes like this. Private-sector profits and high-end incomes have not found, and cannot find, remunerative outlets in productive venues because both laborsaving and capital-saving innovations have made them more or less redundant since the 1920s— because net private investment has been unnecessary to drive growth. They have flowed, therefore, into speculative channels like the stock market bubble before the Great Depression and the housing bubble before the recent crisis. To increase corporate profits and high-end incomes by cutting taxes on them is then to invite more speculation, more “gambling in financial markets.”

Incentives to invest in the form of tax cuts can only augment the supply of redundant profits and surplus capital; so they must corrupt the morals of both Wall Street and Main Street by inflating every available bubble. And by inflating those bubbles, such incentives become causes of economic crisis, not conditions of economic growth. By reducing the volume of surplus capital, the redistribution of income in the name of equity reduces both the temptation to gamble with other people’s money—a “moral hazard” if ever there was one—and the risk of bubbles and crises. In sum, the redistribution of income in the name of equality changes the moral season for the better, but it also improves the chances of balanced growth.

So conceived, economic analysis unbound by the assumption that private investment drives growth reopens pressing moral questions. For example, most economists, journalists, and talking heads agree that the real causes of the economic crisis that finally struck in 2008 were financial excesses fueled, in turn, by an unsustainable model of growth favoring consumption at the expense of saving and investment. By their accounting, greed, fraud, corruption, and crime on Wall Street were matched—maybe even exceeded—by greed, fraud, chicanery, and debt on Main Street.

From this standpoint, the explosion of household debt in the last two decades is a moral problem that stems from the erosion of prohibitions against borrowing and spending beyond one’s means. The orgy of excess that resulted was clearly a function of a hedonistic consumer culture, where everybody’s “branded” and happily sunk deeper in debt. So the crisis that still besets us is a reminder that the market is a godlike presence, a universal moral calendar: it will finally exact its price; it will eventually reassert a proper, proportionate relation between effort and reward, work and income, assets and liabilities, self-discipline and saving, or crime and punishment—not to mention supply and demand.

With all due respect to God, this idea is at best a faith-based initiative. In fact, the astonishing increase in household debt after 1990 sustained growth by balancing the nation’s current account deficit in two ways. First, it absorbed the “global savings glut,” as Ben Bernanke called it before he became chairman of the Fed. Second, it offset the atrophy of net investment from the private sector. This debt also allowed for consumer spending in line with improvements in labor productivity enabled by computer technology over the last twenty years; in doing so, it temporarily rectified an increasingly unequal distribution of income that couldn’t support growth because it rewarded management at the expense of labor, and thus magnified the volume of surplus capital that already saturated the system.

The astonishing increase of household debt is not, then, a moral problem. It was instead a makeshift market solution to real economic problems—balancing the current account deficit and sustaining consumer demand. The better solution would, of course, have been empowering consumers through higher wages; but this adjustment of income shares was unlikely in the absence of a strong labor movement and public policies conducive to union organizing, collective bargaining, and wage rates pegged, as in the 1940s, 1950s, and 1960s, to productivity gains.

Social Theory and Political Science

Economic analysis unbound by the assumption that private investment drives growth raises social and political questions as well. Here is how. We know that the social structure and the paths of social mobility are determined by the occupational composition of the labor market—by the quantity and the quality of jobs created from year to year. We have assumed, along with the economists and the journalists and the politicians, that these jobs were created by private investment, and have provided tax incentives accordingly, to maintain an appropriately “American” standard of living. But when we drop this assumption, in view of the historical evidence, our thinking about growth gets complicated.

For then we have to ask, What role does private investment actually play in creating jobs, improving productivity, increasing per capita incomes, and underwriting social mobility? If it does not and cannot play the role written for it in economic theory, how do we choose an understudy that will determine a social structure in which the public goods of mobility and opportunity are realities? The historical evidence suggests that private investment can’t play the part as written, so we have to somehow recast the function of investment—we have to redefine this function, hitherto monopolized by capitalists and managers in the private sector, of allocating resources in the most productive ways. We have to schedule new auditions. But where do we post the appropriate announcement? Who’ll show up?

As soon as we ask these questions, others appear. If we know that incentives to private investment which increase after-tax profits are invitations to speculation rather than means to the end of growth, the profit motive loses its regulative purpose in allocating resources; it begins to look like a vestigial urge, something like a prehensile tail or an intestinal appendix, maybe even an anal fixation. When we see it that way, as a mere vestige of a past we can’t reclaim, we know what Keynes was getting at because we’re no longer hostages of what Henry James called the “grope of wealth” and “the reiterated sacrifice to pecuniary profit.” But what alternative purposes would be effective in allocating resources properly? If we know that private investment can’t create the jobs that will underwrite the public goods—the use values—of mobility and opportunity, we will probably have to use political means to define alternatives to the profit motive, and to generate a social structure in keeping with the American Dream.

But if the politics of growth takes on this new meaning, where do we draw the line between the state and the market—or have we already crossed that line in bailing out the banks and turning the Fed into an extralegal equivalent of the Reconstruction Finance Corporation? The questions before us boil down to these: How do we socialize the investment function without making the economy the mere adjunct of the state apparatus? How do we preserve the central principle of American politics—the supremacy of society over the state, the sovereignty of we, the people?

To drop the assumption that private investment drives growth, is, then, to ask social questions that carry political connotations. This is especially true when our discussion turns to the relation between private investment, jobs, work, and wages. For example, what has offset declining net private investment in sustaining job growth and rising per capita incomes? If the key offset has been the redistribution of income enabled by progressive income taxes, transfer payments, entitlements, and public spending—if a more equitable distribution of income has already proved to be the condition of growth—then we should welcome higher taxes on the wealthy and more federal spending. If the key offset has been the explosion of consumer debt rather than better jobs and higher wages, then we should ask how we can treat it as a macroeconomic problem—a problem of income distribution, not of moral standards—to be solved by public policy, perhaps more federal spending to create better jobs and higher wages.

Either way we answer, more questions arise, because to let public spending stand in for private investment is to start, not settle, an argument about the meanings of work and the distribution of income. We know that the largest and the fastest-growing components of the federal budget are so-called entitlements and transfer payments such as Medicare, Medicaid, Aid to Dependent Children, Supplemental Nutrition, and Social Security; as we have already noted, transfer payments have grown 10 percent per year since 1959, amounting to 20 percent of all labor income by 1999. Income derived from these sources is received by individuals who have made no commensurable contribution to the supply of goods and services; they’re receiving income but not working for it. A new analysis of Medicare payments and distributions suggests, for example, that a retired couple’s combined lifetime contribution of $140,000 in taxes yields about $430,000 in current dollar benefits from Medicare.

David Brooks, among many others, calls this situation “immoral.” They mean that Medicare beneficiaries (or welfare recipients as such) are challenging the premise of the Protestant ethic and the American Dream, because they inhabit a world in which a legible relation between effort and reward, between work performed and income received—between production and consumption—has been erased. Brooks and his strange bedfellows are too quick to enter moral indictments against what they call an “unaffordable” welfare state. But they’re raising the right questions.

They make us ask, What is work for if it is not the basis of a legitimate claim to a share of society’s goods? If the receipt of income (wages, salaries, compensation as such) is now detached from the production of things with value, how can work serve as a source of self-discipline or an index of real effort? In other words, what’s the proper relation between effort and reward? Should we begin to think of work as an end in itself, as if higher education had somehow become our basic industry? Or should we begin to think of work as merely necessary, something we have to get done—not as the proper measure of our meaningful exertions, but as time diverted from what we want to do? In view of increasing incomes without work, are we now to believe that the criterion of need is the principle that should regulate the allocation of resources, as in “from each according to her abilities, to each according to her needs”? If so, what follows for the conduct of American politics? More to the point, what follows for the possibilities of economic growth?

THE POSSIBILITIES OF ECONOMIC GROWTH

Once we drop the assumption that private investment drives growth, we’re already in search of alternatives to the profit motive as the purpose that regulates the allocation of resources. And so we’re already asking central questions: What is growth for, anyway? Who benefits from it, and who doesn’t? Are there limits on it? Should there be?

I’ve suggested that if we want balanced economic growth rather than serial crises fed by redundant profits and high-end incomes, we should be empowering consumers and embracing consumer culture; we should be decentering decisions about resource allocation by giving priority to consumers’ preferences (use values) as against investors’ imperatives (exchange values). I’d like to think that decentering these decisions could democratize the market economy.

The premise of my optimistic view is that the long-term atrophy of net private investment and the unmistakable rise of consumer spending have made a more equitable distribution of national income the condition of growth. Instead of accumulating surplus capital and inflating bubbles by cutting taxes on profits, dividends, and capital gains, we should now be empowering consumers by ensuring that they can earn, or rather receive, incomes sufficient to make their demand for goods and services effective; we should be embracing consumer culture rather than bemoaning the excesses of the recent past and imposing austerity on ourselves among others. One way to spell out the morality of spending rather than saving is, then, to say that balanced growth requires a more perfect union based on a closer approximation of equality.

Another way to spell out the morality of spending rather than saving is to say that a model of growth based on consumer culture would have to socialize the economic function of investment in two related senses. First, the criteria of productive investment must be complicated by making the occupational composition of the future labor market a public good, a social goal—a use value—which requires political discussion; where shortages of private investment are obvious, public spending can make the difference. The Congress, the electorate, and the media already engage in this kind of discussion by debating tariff and immigration policy, so the politics of growth are, at this level of discourse, nothing new.

But the quality of investment is just as important as the quantity of investment. We already know from long experience that the kinds of industry favored by investors, not to mention the employment practices typical of those industries, will shape the racial and the gender and the age composition of the workforce as well as wage levels. So the relevant political discussions must feed into macroeconomic “indicative planning”—not the central plan of Soviet-style development—which uses interest rates, federal subsidies, matching grants, and tax incentives, and meanwhile enlists trade associations, consumer cooperatives, environmental movements, and labor unions to guide productive investment, both public and private. Senator John Kerry’s recent proposal for a bank to fund infrastructure renewal and development is a good example of socialized investment in this sense: it’s a mix of public and private enterprise, neither a government program nor corporate welfare. It would use matching federal loans and grants to encourage private enterprise in what has long been the province of public spending.

Second, investment as such, whether public or private, should hereafter be understood as the effect, not the cause, of consumer incomes and expenditures—as something induced by consumer preferences registered in market choices and money values, not produced by the superior wisdom of “the best and the brightest,” the insiders who know where to place their bets on the future. Treating investment in this way not only reinstates but also redefines profitability as an incentive from the demand side of the economic equation. To my mind, it offers a better market-based solution to the problem of private investment than tax cuts on profits, dividends, and capital gains, because it provides a decentered, bottom-up set of signals in the form of prices rather than a consensus imposed from the supply side by financial planners who are removed from the retail realities of consumer demand. Treating investment in this way is certainly consistent with recent research suggesting that it’s the effect, not the cause, of growth: it follows the demand curve. More importantly, however, treating investment in this way gives priority to the use values consumers know they want rather than the exchange values investors think they need.

In sum, then, to socialize investment is not to expropriate and collectivize the means of production on behalf of the working class—whatever that may be—but to assert only as much public control of the investment process as necessary to make broadly social goals, rather than the private profit of the very few, its central purpose. The tax system is a good place to start thinking along these lines, especially since discussion about its social functions has already begun in earnest. For decades now, we’ve thought of taxing corporate profits as a constraint on private enterprise and investment (thus productivity), and so we’ve lowered them in the hope of growth induced by more enterprise and more private investment. The revenue side of the question has rarely come up, because faster growth is supposed to increase the volume of taxes the government can collect: the social goal of growth has trumped the fiscal requirements of the state. In this sense, investment has already been socialized, since elected officials have reshaped the tax code in the name of a social goal most Americans still agree on. So I’m proposing to take the socialization of investment a step or two further, to broaden, maybe even redefine, the social ends that economic means can meet. A radical redistribution of income has been happening for a generation because the tax code, among other political artifacts, has allowed and enforced it. But to merely reverse this redistribution is not enough to protect us from the effects of private investment driven by profit alone. We now have to discuss and decide on the goals that a socialized rendition of investment could realize.

But notice that to treat investment in this way is also to export consent from the public sector to the private sector, and meanwhile to turn a principle of political obligation into a social norm that could enlarge the domain of democracy by including the market economy. Here is how. We’re politically obligated to abide by the decisions of the state—by the laws—because we’ve participated in their making, mainly but not only by electing our representatives. Our prior consent as citizens and voters of the republic gives legitimacy to the ongoing exercise of power—the enforcement of the laws—by the state. Now public opinion is the practical embodiment of consent. The politician who claims to ignore it in the name of a higher truth, or just because he knows better than his constituents, is therefore betraying the very possibility of democracy because he’s acting as if consent is irrelevant to legitimate governance.

So, when I suggest that we need to socialize investment because consumer spending has become the condition of growth, I’m also insisting that the investors among us learn to treat consumer preferences as politicians have learned to treat public opinion, as the practical embodiment of consent—something to be consulted, not controlled or ignored. With that lesson learned, consumers would finally be given a voice, and a choice, in answering those central questions about growth. When they are thus enfranchised, the future of public goods—use values like equal opportunity and social mobility in the labor market—would no longer appear as “externalities” that are irrelevant to the decisions made in private by investors in search of higher profits, more exchange value.

By the same token, the public good or use value of environmental integrity would no longer appear as another one of those “externalities.” So the limits to growth could become a real, practical question to be decided democratically, in public, using both market devices and political measures—but only if we understand consumer preferences as a vital, measurable form of public opinion. We will probably decide that growth must go on because it serves our social purposes; the point is that we will have the choice to speak as a majority, and to debate the means to our common ends.

The possibilities of growth are not endless. By this I mean that there are limits to growth, and that we can no longer treat it as an end in itself. But we now have the opportunity and the obligation to ask what we want from it. In the past, growth was a way of avoiding class formation and then pacifying class conflict. Herman Melville got it right in Clarel, his epic poem of 1874: “The vast reserves, the untried fields / These shall long keep off and delay / The class war, the rich and poor man fray.” Economic growth had an overriding political purpose—to preserve popular government by allowing social mobility, thus avoiding the rigidities and resentments of class society. Growth still has political purposes, of course, as every piece of American foreign policy and every defense of globalization will attest. But now we can see that the economics and the politics of democracy converge on the meanings and the scope of consent—on what we, the people, can choose. And this range of choice is where consumer preferences can become a form of public opinion as well as an economic option.

Once upon a time, before capitalism changed everything, consumption was, in fact, the end—both the goal and the limit—of goods production. Money and credit were widespread, but they were merely means of exchange, what people needed to acquire the use values they wanted. The point of goods production was not, then, to expand wealth in the abstract, to enlarge monetary claims on the future by seeking the highest return on investment in the present; instead, the point of goods production was to re-create the material foundation of a self-determining individual, a priceless use value if ever there was one.

But when I propose to empower consumers by socializing investment, I don’t mean to point us toward a precapitalist arcadia in which easy money and instant credit were economic encroachments on a moral equilibrium. Instead I mean to improve the market efficiencies of capitalism by redistributing income, so that balanced growth rather than another speculative bubble is the likely result of consumer preferences as well as public policy; consumer credit will be a key component of growth so conceived. Unlike the politically correct talking heads on both the Left and the Right, I can’t blame the wretched excess of consumer culture for either the degradation of the environment or the current financial debacle. I can’t because I assume that when consumption is the end of goods production, then exchange value can be contained—in both the inclusive and the exclusive sense—by use values, and the proper limit of growth comes into view.

But in saying this, I don’t mean that we already know what we need, so that bearing coupons, buying locally, and bargaining aggressively will suddenly align us in a self-evident program of moral improvement with all the right economic results. The new Puritans, those “frugalistas” who believe that a sustainable model of growth requires a “return to thrift”—less consumer debt, more saving and investment, and so on, in keeping with the common sense of our time—are peddling nineteenth-century news.

I mean instead that we can’t know what we need until we ask the following questions. What kinds of individuals do we want to be, and to cultivate in the future? And what is the material foundation of that individuality—what kind of economic development, and what kind of consumption, would sustain it? Does consumer culture undermine political engagement by “privatizing” personal experience, or does it permit a new politics? Does the sex of things determine their meanings? Does advertising deceive you, or teach you where true freedom lies? And what kind of work do we want to do? Or are we finally in a position to ask not how but whether the production of value through work determines your character and measures your moral capacity? My answers follow in Part Two: The Morality of Spending.