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The Return of Political Economy
When an economic consensus collapses, who picks up the pieces?
I had the opportunity to kick off the Intercollegiate Studies Institute’s summer conference this year, addressing the question, “Which Way, American Political Economy?” The institute is one of the preeminent conveners of conservative debate; that it would even pose this question is an encouraging sign of the speed with which conservative economic thinking is shifting. American Compass has been a major catalyst for the shift, and our presence loomed large over the two-day gathering. Senate candidate J. D. Vance and former attorney general Jeff Sessions both addressed our work in their keynote remarks. Most panels featured at least two of our contributing writers. At one point, Washington Post political reporter David Weigel called it the “American Compass conference.”
Somewhat immodestly, I must say that I was an inspired choice for a political economy conference’s first presenter, having managed to actually major in political economy, which is fairly unusual. Not that a bachelor’s degree in much of anything makes one qualified in much of anything, but because most people have no idea what political economy is, those of us choosing to study it have to think long and hard about how to explain it—preferably in a pithy way suitable for Thanksgiving dinner.
Political economy, I always tell people, is political science without all the reading, and economics without all the math. Honestly, that’s what drew me to it—still draws me to it—and only partly because I was lazy. The definition says something important about why political economy is so useful: it has no time for theory.
The premise of political economy, right there in the name, is that politics and economics are inseparably intertwined. As a result, theory only gets one so far. I’m reminded of the three-body problem in physics, where trying to predict the motion of three gravitational bodies acting upon one other becomes impossible as their motion becomes chaotic. We “social scientists,” to use the oxymoron, must content ourselves with a two-body problem, in which human beings and their non-economic interests inevitably prevent economic theory from describing the real world while the resource constraints and trade-offs of economics prevent political theory from doing any better. Political economy is the pragmatic art of understanding, of explaining, and of trying to improve upon the way these forces are colliding to create the world we inhabit.
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Political economy has no inviolable truths. Anything that economists or political scientists claim as inviolable truth, then, is incomplete—it may hold within the narrow confines of their analysis, but it will not hold in reality over the long run. The conceit of the economists, in particular, is that some set of equations proving out on a blackboard must offer a correct model. Certainly, economic models offer useful intuitions, but give them too much credence and we invariably end up with the wrong answer. While few of his modern adherents seem aware of it, the first line of Alfred Marshall’s Principles of Economics reads: “Economic conditions are constantly changing, and each generation looks at its own problems in its own way.”
This holds even for the simplest of concepts, like supply and demand. Surely there is some obscure commodity market that works more or less like Economics 101 predicts. But look carefully at the standard supply curve, sloping upward to show a rising marginal cost of production: the more of something that is produced, the more it costs to keep producing more of it, says the model. Try telling that to Google or Facebook—or to Tesla, for that matter.
For the great political economists through history, their most important insights didn’t rely on math or modeling at all. They were observing and describing the economy as it was. With international trade beginning to expand and specialization taking hold in the domestic economy, Adam Smith explained how these phenomena worked and how policymakers could respond. Karl Marx reacted to the early years of the Industrial Revolution, a time when “economic growth” coincided with the declining health and welfare of the working class, quite in conflict with predictions Smith had made from his own era. Like Smith, Marx produced groundbreaking analysis of how labor and capital were behaving in markets. Like Smith’s, this analysis had a shelf life. Early in the 20th century, Joseph Schumpeter documented the process by which the “creative destruction” of extraordinary technological progress swept away the old. John Maynard Keynes is perhaps the best example of someone who did economics by describing the world as it was, and whose views and theories changed as the world changed around him.
Finally, we arrive at Milton Friedman and Friedrich Hayek. Both were extraordinary political economists. But both were describing a narrow period in history, one where a justifiable fear of communism pervaded both political and economic thought and one where markets in the West were working especially well to deliver widespread prosperity. In Hayek’s famous essay “Why I Am Not a Conservative,” he asserts confidently that the “self-regulating forces of the market will somehow bring about the required adjustments to new conditions.” To illustrate the point, he chooses, of all things, how “necessary balance … between exports and imports” will naturally occur. He was writing midway through a 20-year period in which the U.S. experienced almost perfectly balanced trade, which was indeed remarkable, and which he was trying to understand and explain. But the shortcomings of those insights are easy enough to discern after 60 years, especially when America has accumulated $12 trillion of trade deficits over the past 20.
Some market fundamentalists, striving to claim the mantle of conservatism for their dogmatism, define the American tradition in terms of an intellectual thread that they trace from Adam Smith, David Ricardo, and John Stuart Mill through to Friedman and Hayek. This is doubly foolish. First, because Smith, Ricardo, and Mill were all British—as American Compass research director Wells King has shown, this “British School” actually stood in opposition to the 19th-century “American School” thinkers, who recognized the British arguments for free trade as tailored to the British circumstance of a dominant industrial power. For instance, Henry Charles Carey, leader of the American School and economic adviser to Abraham Lincoln, warned that British prescriptions would “secur[e for] the people of England the … monopoly of machinery” and argued instead for aggressive protection of American domestic industry to “break down this monopoly” and support “stabler self-sufficient communities.”
Second, as the very existence of the American School confirms, the tradition of American political economy is not attached to any one substantive outlook. Certainly, from the Declaration of Independence onward, the nation has been strongly committed to elements of the Enlightenment tradition, like respect for private property. Certainly, we have always had a market economy. But beyond that, the principle would seem to be “anything goes.” Alexander Hamilton proposed much of what became the American System of Henry Clay and Lincoln, but those ideas gained hold only after the British trounced us in the War of 1812. As the 19th century gave way to the more industrial 20th, Teddy Roosevelt and the progressives brought forward a different understanding of what ailed us and what role policy could play in addressing it. With the Great Depression came Franklin Roosevelt’s New Deal. With the sclerosis and stagflation of the 1970s came the Reagan Revolution.
So in answering the question, which way, American political economy?, we must look back to Hamilton not because his answer should be our answer but because he, and Lincoln, and Roosevelt, and Reagan remind us that each in his own era was someone who responded to conditions and used public policy to solve problems. Market fundamentalists at once dismiss reference to the healthier economy of the mid-20th century as “nostalgia” and insist on adhering dogmatically to ideas of political economy developed in and for that era. Conservatives, however, will recognize that while consistent principles will guide us, today’s challenges are different from those of any previous era and we must give shape to a new political economy capable of responding.
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What are today’s challenges? Obviously, one is China, whose rise has been the most significant geopolitical and economic event of the past 30 years. Having an authoritarian, quasi-communist, state-controlled economy as a near-peer—or perhaps already peer, certainly in scale and as our main trading partner—presents a fascinating set of policy questions different from what economists have previously tried to solve. This may be a second Cold War, but it will not be a replay of the first.
The Internet is another such challenge, with its consequences for industrial organization and market concentration within the technology sector, and with extension of the market’s logic into every corner of our lives. This challenge parallels in many ways that faced at the turn of the 20th century, when the most dynamic industries hoovering up investment were also ones that tended toward natural monopoly and led to a reorganization of society. The effects on investment patterns and on economic, cultural, and political power were extraordinary. They triggered the muck-raking and trust-busting that gave rise to progressivism. We will have to be equally creative in conceptualizing the problem and formulating solutions this time around.
The decline of the family may be the most serious challenge we face and the one we least know how to address. We have become inured to talk of family collapse after decades of rising rates in divorce and children born out of wedlock. But what’s happening now is different: families are failing to form in the first place, as fewer people marry or have children at all. That Americans lack either the desire or capacity to raise the next generation is the most damning possible indictment of our cultural and economic condition, and it poses tangible problems for economic dynamism and growth as well.
Our financial markets are malfunctioning, failing to channel investment and talent to their most productive uses. Public education is malfunctioning, too, failing to provide most Americans with reliable pathways to productive lives in their local communities. Both these system failures are contributing to an enormous geographic problem. After decades of convergence, in which poorer parts of the country closed the gap with richer ones, we now see regional divides widening and wealth agglomerating. A continent-spanning democratic republic can withstand such trends for only so long.
In a variety of ways, these challenges manifest in our labor market. At the end of the day, how we allocate income to workers through our market economy is central to the well-being of individuals, their families, and their communities. That allocation has been going poorly for decades. Wages have stagnated for a significant share of the population, but not because the economy has stagnated. GDP keeps growing, profits keep growing, incomes at the top keep growing, but the prosperity is not broadly shared. The problem is reminiscent of that seen early in the Industrial Revolution. Unfortunately, the great political economist of that era was Karl Marx, who, for all his incisive analysis, left much to be desired when it came to prediction and prescription. We had probably better do some more thinking.
Rather than look backward to decide which decade from American history we will claim to be trying to conserve, conservatives need to work from a clear definition of the principles that we intend to apply to these novel challenges. I would emphasize four:
First, conservatives place heavy weight on the value of institutions and relationships. Those are the basic unit and currency of the healthy society. They need to be built, nurtured, and treasured, even when they cannot be seen or measured in conventional ways.
Second, conservatives accept human nature’s immutability and the obstacle it poses to the goals that well-meaning leaders might wish to pursue. A public policy or civil institution can succeed when it adapts itself to human limitations. It fails when it ignores or aims to override them.
Third, conservatives appreciate that which works at all and recognize that improvements are easily designed on paper but transitions are difficult; and in achieving them, much else may be lost.
Fourth, conservatives balance rights and obligations. One of the right-of-center’s most obvious failures in recent years has been its stampede in the direction of rights language and its obsession with individual liberty. Rights and liberty are, of course, an important part of the conservative tradition, but putting them in their place as two considerations among many is a more important part.
Now, I don’t think conservatives are always right. I think it’s very important, and conservative, to acknowledge that if we could just snap our fingers and make everyone a conservative who thinks this way, we would have a quite dysfunctional nation. A healthy polity is one that has strong conservative and liberal traditions held constantly in tension with each other, always fighting and challenging and negotiating.
But genuinely conservative thinking has been absent from our economic debates for most of the post–World War II era. Our politics and our political economy have been characterized by debates within a very narrow corridor bounded by left-liberals and right-liberals. The results of this are apparent in the huge gains in individual autonomy and material prosperity, accompanied by huge declines in the things that conservatives would have watched more closely.
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I love the question, which way, American political economy?, because it’s also an answer. By asking the question, we take responsibility for making a decision at this moment about which way our political economy should go from here, and thus we acknowledge that we have the agency to make a decision, that the decision is context-dependent, and that we should debate it and grapple with its trade-offs. We are called to go through the exercise that Hamilton went through, that Clay and Lincoln went through, and that both Roosevelts and Reagan went through.
Going through the exercise, thinking anew, is not a repudiation of those great leaders. When Reagan and his fellow Cold Warriors went through it in the 1970s, the playbook they developed was incredibly important and effective. Nothing I’ve said here calls that into doubt. What I do call into doubt is whether carrying around the Reagan playbook 40 years later, treating it like the Bible, is going to help us address the problems of today. While working from timeless principles, we also need to accept our generation’s responsibility, as has been every generation’s responsibility in every era, to apply our principles to our challenges.
For organizations like American Compass that seek to influence the public debate, our goal cannot be only to stand for abstract principles.
We must show how those principles can be useful to policymakers and equip them to improve upon the status quo. With so many new challenges, and so many decades of sclerosis on the right-of-center, this is an incredibly exciting time to be playing that role.
No one has all the right answers; certainly, we don’t pretend to. But we have powerful ideas, and we are proving that those ideas can catalyze the long-dormant debates that are necessary to sharpen conservatism and develop the playbook that will carry America forward as others have done in the past. We feel both proud and privileged to have so many supporters, probably none of whom agree with us on everything, but all of whom agree on the importance of the work.
Adapted from remarks at the Intercollegiate Studies Institute’s July 2021 conference, The Future of American Political Economy.See more from this series
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