Center for Community and Economy Newsletter – December 16, 2010

Thinking Outside the Economic Box

By Allan Carlson

Why did more than 90 percent of American economists not see the economic implosion of 2008 coming? Why did the few who did foresee disaster face such ridicule among their peers? How did the federal debt grow from $700 billion in the year Ronald Reagan assumed the presidency to a staggering $13 trillion in 2010, with annual interest payments of $500 billion alone? Why has all the praise for “free market capitalism” over the last 30 years resulted in declining living standards (average household income in the United States fell by 5 percent between 2000 and 2010) and ever more concentration of power in Washington, D.C.?

In his new book, Toward a Truly Free Market: A Distributist Perspective on the Role of Government, Taxes, Health Care, and More, John C. Medaille answers these questions, and, more importantly, points to an alternative economic model – what he calls “political economy” – that would restore security and economic authority to families, towns and states. Critically examining such fresh thinking is one of the purposes of the Sutherland Institute’s Center for Community and Economy.

A fundamental problem with modern economic theory, Medaille maintains, derives from the insistence that – in the words of Milton Friedman – “economics is, or can be, an ‘objective’ science, in precisely the same sense as any of the physical sciences.” The author counters this claim by drawing a distinction between the physical sciences and the humane sciences. The former operate on the basis of iron laws, such as the law of gravity, from which there is no escape (for example, a planet cannot decide to reverse its orbit). Humane sciences, in contrast, involve human relations and human choices. Since economics concerns “the material provisioning of society,” which necessarily involves human interaction, Medaille concludes that “it is therefore a humane science and not a physical science.”

This is more than a play on words. Medaille argues that economic theory lost its way under the influence of two 18th-century European writers. David Hume claimed that unless a truth claim rested on quantification (“number crunching”) or experimental reasoning, it was false and should be committed “to the flames.” Bernard de Mandeville, in his work The Fable of the Bees, asserted that the worst vices found among men (such as greed, lust, envy and gluttony), when applied to economic life, would magically produce the greatest public good. Roll these ideas together, Medaille implies, and you have the basic framework of much modern economic theory.

In raising up “political economy” as a “humane science,” Medaille draws primarily on his two favorite economists: Aristotle and Adam Smith. It was the ancient Greek who coined the word “economics,” from oeconomia, meaning the material health of the household. In Aristotle’s view, “the family is the association established by nature for the supply of men’s everyday wants.” Medaille elaborates: “It is the family, and not the individual, that is the starting point (contrary to modern economics) because only the family is self-sufficient; an individual in isolation can neither reproduce nor provide for himself.” In this sense, true economics is necessarily social.

From Adam Smith, Medaille draws the idea that economics must be a moral science, concerned with both the generation of wealth and justice among men. The author correctly notes that, when Smith wrote about the “invisible hand” in 1776, he “assumed an economy of small and mostly local producers, none of which had any market power, and hence no way to substantially alter the competitive outcomes.” Smith’s sharpest words were reserved for the economic system of mercantilism, which combines private privilege with public power. With state governments showering “favored” firms with subsidies and special tax breaks and with the federal government favoring massive bailouts for giant corporations (e.g., General Motors, Citibank, AIG), while small, family-held firms are allowed to die, Medaille concludes that mercantilism has now returned; the free market in America has been replaced by a form of crony capitalism.

To set things right, Medaille argues that any true economic theory must first identify the purpose, telos, or goal of human life, which clarifies in turn the nature of economic justice. “Channeling” Aristotle here, Medaille sees the telos of humankind as happiness within self-sufficient, property-owning families, which create in turn neighborhoods, villages and local communities. Many implications follow from this vision of a morally rooted, bottom-up economics. For example, Medaille is able to define the “just wage” as one where working families can live in the dignity appropriate to their society; “…can do so without putting wives and children at work”; have some security against sickness, layoffs, and old age; and can achieve these conditions without reliance on government welfare payments or usury (high-interest consumer loans).

The balance of Toward a Truly Free Market applies such principles to an array of contemporary policy issues, including control of the money supply, government regulation, the health care system, and taxation. Many of these lessons bear directly on state-level questions. For instance, regarding the so-called “Fair Tax” plan being pushed by some enthusiasts (which would replace the federal income tax with a 30 percent national “sales tax”), Medaille concludes that it “would constitute the biggest government intervention into free-market pricing since the Russian [Communist] Revolution.” Moreover, since state governments would not be exempted, they would have “to raise property and other taxes to pay for the 30 percent increase in the cost of their purchases.”

A hundred years ago, the English author Hilaire Belloc argued that crony capitalism of the sort we now witness would lead to a new kind of slavery, the Servile State, where most persons no longer held productive property, relying instead on welfare state benefits for survival. In this age of massive state subsidies for favored corporations (lurking under the label “economic development”), food stamps, Medicaid, Medicare, Obamacare, Social Security, and long-term unemployment benefits, Americans are closer to this regime than ever before. John Medaille’ sToward a Truly Free Market explains how this has occurred and shows ways to recover an economy based on healthy families and vital communities.

The author, Dr. Allan C. Carlson, is director of Sutherland Institute’s Center for Community and Economy, president of The Howard Center for Family, Religion & Society, and an associate professor at Hillsdale College in Michigan. Dr. Carlson founded the World Congress of Families in 1997. He has written for numerous publications including The Wall Street Journal, National Review, and Intercollegiate Review, and is the editor of The Family in America. He is the author of nine books, including The Natural Family: A Manifesto (Spence, 2007), which he co-authored with Paul T. Mero.