Populist Backlash and Political Economy

Live from High Above the Former Iron Curtain: The very sharp Dani Rodrik:

Dani Rodrik: The Politics of Anger: “Perhaps the only surprising thing about the populist backlash that has overwhelmed the politics of many advanced democracies…

…is that it has taken so long…. Politicians’ unwillingness to offer remedies for the insecurities and inequalities of our hyper-globalized age… create[s] political space for demagogues with easy solutions… Ross Perot… Patrick Buchanan… Donald Trump, Marine Le Pen, and sundry others…. [In] the first era of globalization… mainstream political actors had to downplay social reform and national identity because they gave priority to international economic ties. The response… [was] fatal…. Socialists and communists chose social reform, while fascists chose national assertion. Both paths led away from globalization to economic closure (and far worse). Today’s backlash most likely will not go quite so far….

Still, the conflicts between a hyper-globalized economy and social cohesion are real, and mainstream political elites ignore them at their peril…. The internationalization of markets for goods, services, and capital drives a wedge between the cosmopolitan, professional, skilled groups that are able to take advantage of it and the rest of society… an identity cleavage, revolving around nationhood, ethnicity, or religion, and an income cleavage, revolving around social class. Populists derive their appeal from one or the other…. You can barely make ends meet? It is the Chinese who have been stealing your jobs. Upset by crime? It is the Mexicans…. Terrorism? Why, Muslims…. Political corruption? What do you expect… [from] big banks?… Establishment politicians are compromised… by their central narrative… [of] helplessness… [which] puts the blame… on technological forces… and globalization… as inexorable…. Mainstream politicians… [must] offer serious solutions…. The New Deal, the welfare state, and controlled globalization (under the Bretton Woods regime)… gave market-oriented societies a new lease on life… not tinkering and minor modification of existing policies that produced these achievements, but radical institutional engineering…

I find it alarming that here we are, more than one a half decades into the twenty-first century, and the wisdom and true knowledge that is state-of-the-art as far as political economy is concerned is still to be found in the writings of John Maynard Keynes and Karl Polanyi…

(1) Keynes taught that rich, free, capitalist societies could not survive without full employment–without giving everyone a useful, dignified, and prosperous economic role in society:

Inflation is unjust and Deflation is inexpedient…. It is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The Individualist Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual entrepreneur, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one. For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of… matters… settled by natural causes… the resultant of the separate action of many individuals acting independently, or require a Revolution to change them…

(2) Keynes taught that rich, free, capitalist societies could not survive without promising stability in the rules-of-the-game–that the wealth and income you earned by following the rules would be yours, and not taken away by sinister economic processes you could not understand that did things like, for example, debauch the currency:

The problem of the re-inauguration of the perpetual circle of production and exchange in foreign trade leads me to a necessary digression on the currency situation of Europe. Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens… not only confiscate, but… confiscate arbitrarily…. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution…. The real value of the currency fluctuates wildly from month to month, [and] all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. In the latter stages of [World War I] all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design…

(3) Keynes taught that proper government policy could attain those two ends–full employment and price stability–with only minor tinkering and adjustment to make sure that the automobile that was the economy actually would start when you turned the key: all that was required was proper monetary policy, with (probably) a somewhat comprehensive socialization of public and private investment:

The foregoing theory is moderately conservative in its implications…. The State will have to exercise a guiding influence on the propensity to consume… through… taxation… fixing the rate of interest, and… other ways…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism…

(4) Keynes taught that if those conditions were satisfied, the task of guiding economic destinies could be confidently and safely left to a sober bourgeoisie interested in accumulation:

If we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… no more reason to socialise economic life than there was before… no reason to suppose that the existing system seriously misemploys the factors of production which are in use…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires…. There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.

Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency–the advantages of decentralisation and of the play of self-interest… even greater, perhaps, than the nineteenth century supposed…. Above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

Whilst, therefore, the enlargement of… government… in… adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it… as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…

(5) whose efforts would redound to the benefit of all:


(6) and that there was little need to fear an extravagant plutocracy of aristocratic parasites:

There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto; and, so far as one can guess at the schedules of the marginal efficiency of capital corresponding to increasing amounts of capital, the rate of interest is likely to fall steadily, if it should be practicable to maintain conditions of more or less continuous full employment unless, indeed, there is an excessive change in the aggregate propensity to consume (including the State).

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward…

(7) Rather, instead, in a century or so, the economic problem would be largely solved:

I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not-if we look into the future-the permanent problem of the human race.

Why, you may ask, is this so startling? It is startling because-if, instead of looking into the future, we look into the past-we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race-not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms. Thus we have been expressly evolved by nature-with all our impulses and deepest instincts-for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose. Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades…. Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well…. I feel sure that with a little more experience we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs….

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession -as distinguished from the love of money as a means to the enjoyments and realities of life -will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard….

We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight…

Polanyi’s teaching was less hopeful, less practical, and less visionary–and not quite parallel to Keynes’s. It was that there were three things, land, labor, and finance, that should not be turned into “commodities” and thus subjected to allocation by the laws of the self-regulating market economy. And, Polanyi argued, if they were turned into “commodities” and thus subjected to allocation by the laws of the self-regulating market economy, the result would be disastrous:

Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance…

(1) Finance could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for what were essentially Keynesian reasons–the system could not be stable:

The market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts were in primitive society…


Even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism. This should dispose of the suspicion which the very term “man” and “nature” sometimes awaken in sophisticated minds, who tend to denounce all talk about protecting labor and land as the product of antiquated ideas if not as a mere camouflaging of vested interests. Actually, in the case of productive enterprise as in that of man and nature the peril was real and objective.

The need for protection arose on account of the manner in which the supply of money was organized under a market system. Modern central banking, in effect, was essentially a device developed for the purpose of offering protection without which the market would have destroyed its own children, the business enterprises of all kinds…. If profits depend upon prices, then the monetary arrangements upon which prices depend must be vital to the functioning of any system motivated by profits…. If the price level was falling for monetary reasons over a considerable time, business would be in danger of liquidation accompanied by the dissolution of productive organization and massive destruction of capital. Not low prices, but falling prices were the trouble. Hume became the founder of the quantity theory of money with his discovery that business remains unaffected if the amount of money is halved since prices will simply adjust to half their former level. He forgot that business might be destroyed in the process….

(2) Land could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for essentially sociological reasons: where people lived determined who they were, and a self-regulating market that told people they could no longer afford to live in the community where they thought they belonged would trigger such a strong sense of communal injustice to spark the chaos of revolution:

Commercialization of the soil was only another name for the liquidation of feudalism which started in Western urban centers as well as in England in the fourteenth century and was concluded some five hundred years later in the course of the European revolutions, when the remnants of villeinage were abolished. To detach man from the soil meant the dissolution of the body economic into its elements so that each element could fit into that part of the system where it was most useful….

Some of this was achieved by individual force and violence, some by revolution from above or below, some by war and conquest, some by legislative action, some by administrative pressure, some by spontaneous small-scale action of private persons over long stretches of time. Whether the dislocation was swiftly healed or whether it caused an open wound in the body social depended primarily on the measures taken to regulate the process….

The inertia of the common law was now deliberately enhanced by statutes expressly passed in order to protect the habitations and occupations of the rural classes against the effects of freedom of contract. A comprehensive effort was launched to ensure some degree of health and salubrity in the housing of the poor, providing them with allotments, giving them a chance to escape from the slums and to breathe the fresh air of nature, the “gentleman’s park.” Wretched Irish tenants and London slum-dwellers were rescued from the grip of the laws of the market by legislative acts designed to protect their habitation against the juggernaut, improvement. On the Continent it was mainly statute law and administrative action that saved the tenant, the peasant, the agricultural laborer from the most violent effects of urbanization. Prussian conservatives such as Rodbertus, whose Junker socialism influenced Marx, were blood brothers to the Tory-Democrats of England…

(3) Labor could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for the same essentially psychological reasons for which Keynes condemned inflation: a self-regulating market that told people they could no longer afford to practice the occupations they thought were theirs belonged would trigger such a strong sense of personal injustice–the same injustice Keynes saw as produced by wealth-confiscation-via-inflation–that it, too, would spark the chaos of revolution:

To allow the market mechanism to be the sole director of the fate of human beings… would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused without affecting the human being who happens to be [its] bearer…. In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to the tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure [and] social dislocation…

Polanyi calls the fixing of these problems generated by utopian and impractical attempts to turn over all authority to a self-regulating market by the name “socialism”:

Socialism is, essentially, the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society. It is the solution natural to industrial workers who see no reason why production should not be regulated directly and why markets should be more than a useful but subordinate trait in a free society. From the point of view of the community as a whole, socialism is merely the continuation of that endeavor to make society a distinctively human relationship of persons…

For both Keynes and Polanyi, social insurance in the form of progressive taxes, a universal basic income, and government provision of public goods plus private necessities would help, but that would not be enough to do the job. Also essential are: first, useful employment and the resulting honorable and dignified role in society; second, justice in the sense that playing by the rules of the economic game calls forth the expected rewards; and, third, communal stability in the sense that should people’s lives be transformed in place, community, and occupation it is by being pulled out of old ruts by brilliant opportunities locating in other places, living in other communities, and practicing other occupations–not being pushed out by regional or sectoral economic collapse, or perhaps by having one’s community transformed too rapidly around one.

There is a pronounced particularistic-cosmopolitan tension here. We economists do not like it at all when the opportunities for upward mobility for those who chose to be born in the wrong country or to the wrong parents are hobbled by restrictions on migration and trade. We economists do not like those who try to mobilize particularistic and nationalistic energies to the service of what look like negative-sum policies. This has been true for a long time. We economists, after all, looked at American labor’s early-1990s opposition to NAFTA’s hoped-for expansion of economic opportunity in NAFTA–the opposition that arose not because people thought NAFTA would be bad but because they thought it would be good for the working class of Mexico–and felt the same disgust then as Dani Rodrik does now when he looks at today’s “Donald Trump, Marine Le Pen, and sundry others…” But Dani Rodrik wisely warns us Rootless Cosmopolites that we dare not come down entirely on the cosmopolitan side. Let me repeat him:

Establishment politicians are compromised… by their central narrative… [of] helplessness… [which] puts the blame… on technological forces… and globalization… as inexorable…. Mainstream politicians… [must] offer serious solutions… not tinkering and minor modification… but radical institutional engineering…

But what engineering? To create what institutions?

  • Patrick Iber and Mike Konczal: Karl Polanyi for President
  • John Maynard Keynes (1919): The Economic Consequences of the Peace
  • John Maynard Keynes (1924): A Tract on Monetary Reform
  • Karl Polanyi: [The Great Transformation
  • Dani Rodrik: The Politics of Anger](https://www.project-syndicate.org/commentary/the-politics-of-anger-by-dani-rodrik-2016-03)

May 30, 2016


Brad DeLong
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