What is “Social Economy”?
Many people have asked me “What is social economy?” I say to them,
“read my books,” but that’s not fair to those who are just curious. So here is
a quick way to answer it.
“Social economy” is a field of knowledge about how people organize
the production, distribution, and consumption of scarce resources in society.
It is a sociological concept, broader than economics and political economy.
It is not based on the principles and premises of capitalist markets. People in
every society down through history have experienced scarcity and organize
associations and engage in social interaction in very different ways.i
Furthermore, every society and its economy changes and evolves over
time. Capitalism did not exist in the middle Ages and today it is not the end
of history. It is changing within the culture and institutions of the larger
society. The business sector, as one part of the economy, has its own
subculture, evolving in the context of other sectors like religion, science, and
government.ii
The idea of “economy” comes from the Ancient Greek word
oikonomia, which for Aristotle meant "management of a household." In the
transition into the modern period (16th–18th century), overseas expansion
led to the growth of commerce and the economic policies of mercantilism,
which was a system that inspired a body of literature around nationalism. In
the late 17th and the 18th centuries a protest against the governmental
regulation was voiced, especially by the physiocrats. That group argued that
business should follow freely “natural laws” without government
interference.iii
. The idea of “political economy” did not begin until the appearance
of the social contract philosophers (notably Jean Jacques Rousseau) who
described the economy in the context of the larger state, not society. Then in
the latter 19th century (notably Alfred Marshal) recommended “economics”
as a term emphasizing how this new field is a science.iv
The concept of political economy is still used but it is narrower than
social economy. All organizations and human interactions that take place in
the economy are not just political. They are all broadly based on social
relations. Social forces take place in markets that have nothing to do with
power and politics. The term “social” is larger and more abstract in meaning.
It includes political relations but also relationships that are not -- like
emotional relations or religious symbols or a sense of art and beauty.
Furthermore, the social economy in the modern period includes the Third
Sector with its churches, science associations and civic groups with their
own cultures. In its broad sense, the social economy includes all income
making organizations including the family and government.v
Etymology
The origin of such terms in history is relevant here. The words
“social” and “economy” evolved with the concept of “society.” The word
“society” did not exist in the time of the ancient Greeks. Aristotle did not
write about the economy in society, rather, he wrote about the family and
government. And economics was not a word in his vocabulary even though
he talked about the use of goods in the marketplace.vi
The words themselves, “social” and “society,” appeared at the time of
the Social Contract philosophers in the sixteenth and seventeenth century.
The word “society” was evolving variously to mean “A system of sharing
within a group,” and the “condition of living or associating with others,” and
“companionship, fellowship, or company,” as well as human association or
friendly interaction with other people. It evolved to mean “the company of
others, the system of customs and organization adopted by a group of people
for harmonious coexistence or mutual benefit, an aggregate of persons living
together in a community, esp. one having shared customs, laws, and
institutions.” (See The Oxford Dictionary.) It was then defined in more
complex terms by sociologists in the nineteenth and twentieth centuries. See
the history of civil society as a concept in Appendix A and B of the Civil
Republic posted on my webpage.vii
Adam Smith did not know the word “capitalism”. It did not exist in
the English language when he was writing in 1776. It came to be popular
with Karl Marx’s Das Kapital in 1867.viii
The Social Factor
Capitalism for professionals came to be defined as an economic
system based on private ownership of the means of production and the
creation of goods and services for a profit. Competitive markets, wage labor,
capital accumulation, voluntary exchange, and personal finance are part of
markets considered capitalistic but this is not the whole story.
The work of Karl Polanyi is important here because he saw how an
economy is submerged in social relationships. Government policies for him
were instrumental in helping to develop capitalist markets. His book on The
Great Transformation is a history of the self-regulating market and its
emergence from the Industrial Revolution. He wrote about the cultivation of
the market economy through the efforts of statesmen of England in the first
decades of the nineteenth century. The market was brought into existence by
government not just by “natural” forces. He saw how social processes like
cooperation, reciprocity, and association (not just competition) were central
to the development of markets.ix
People think today that the market is based primarily on competition
and the bottom line is economic (money and profits) i.e. markets are driven
by financial incentives. Many believe that there would be no incentive to
work and that no inventions would take place without the goal of making
money. They forget that inventions took place long before the appearance of
capitalism. Inventions are part of nature.x
Put another way, there is a social order that underlies every economic
order. The bottom line is “social” in its analytical meaning, not “economic”
in its scientific meaning with formulas and calculations on prices, or making
money. The capitalist economy is based on human organization, not just
profits. This perspective of the “economic order” based on a “social order” -alters the way we see it change in the context of society.xi
Sociologists study the way a corporation is socially organized, and not
all by command systems. (A corporation can be organized successfully on a
system of “mutual governance” as well as on a system of “command
bureaucracy”.) We can study how some corporations have decentralized
their operations and developed self-management and worker ownership
successfully in a market changing its character. Employee ownership is
evolving now in business but it is not typical of capitalism.
The way a market is socially organized can show how the capitalism
is changing as well as predict a market sector’s success or failure. This is
because there are many social processes by which a market system is
organized, not just by competition. These processes include collaboration,
accommodation, assistance, adjustment, support, conflict, tension,
negotiation, absorption, integration, cooperation, assimilation and
democratic processes, not just competition. Indeed corporations were
competing so hard in the 19th century that they were destroying each other;
hence, they decided to cooperate and created trade associations. Trade
associations developed as a form of democratic governance with electoral
processes based on their members.xii
There are different theories that develop around markets. For
example, there is the so-called “social market theory” and also “market
socialism.” Proponents seek a middle path between socialism and laissezfaire economics. Theorists argue that government regulation is required to
establish fair competition. They argue that governments can maintain a
balance between a high rate of economic growth, low inflation and low
levels of unemployment, good working conditions and social welfare -- by
using state intervention.
This has truth in it, factually and normatively, but it is not my theory.
I claim that the purpose of a government is to cultivate a basis for the
market economy to regulate itself. In this case, the state encourages market
organizations that will help corporations govern themselves for the common
good apart from the state. The purpose of government is to lessen its need to
regulate the economy. In addition to other purposes like promoting the
general welfare and protection of its citizens from outside invaders, the
purpose of a state is increase the transparency and public accountability of
markets. The goal of government is to lay the basis for self-governance in
the private sector.
This is different from positions taken by Democratic and Republic
parties in the United States but in accord with their key values.
Most Republicans and conservative economists claim that the market
is already self-regulating. This is partially true but not enough to keep the
market from being destructive to people and the environment. I view the
current market organization as self-destructive in ways that require a parent
state to regulate it. The capitalist economy is not truly self-regulating. It is
like in an adolescence stage of evolution, not yet developed and mature
enough to be independent of the government.
Democrats and leftist economists claim that the government should
regulate the market. This is true, normatively, but such policies alone lead
toward bigger government. The capitalist market will find new ways to be
exploitive in spite of government regulations.xiii
Hence, the market requires the government to build a new
organization to be truly free, profitable, self-regulating, self-correcting and
self-reliant without government regulations.xiv
Let’s look at modern history to see how states developed selfgovernance. In the 18th century we see state self-governance emerging by
degree -- from feudalism to become a " democracy" with a representative
assembly, and a judicial system. At the same time we see the business sector
evolving as a private domain keeping the feudal tradition.
In the United States, citizens were afraid of the new corporations and
required state charters with ethical rules to operate. But states began to
compete for charters and corporations went to those with the lowest social
standards in their charters, mainly Delaware and New Jersey. By the end of
the 19th century people described the market composed of the “lords and
barons of industry.” The capitalist economy developed without the basic
forms of democracy. Government regulations then began to take place to
protect the public.xv
My question is how the economy could become self-governing as a
private sector so that it works for the common good apart from the state.
How can the private sector become truly free and self-regulating?
In 1776 Adam Smith wrote The Wealth of Nations in which he
thought the new economy would work for the common good. He described
how wealth is produced in a “self-regulating market.” The market was selfregulating for Smith because people produced according to what people
would buy and people consumed according to what they wanted and could
afford. Businesses in his day were new and small. Freedom to trade was part
of this so-called self-regulating market -- a freedom depicted by Frenchmen
as laissez faire. The great value in these innovative markets was “freedom
from government controls.”
Smith coined the phrase “invisible hand” to describe how individual
ambition and self-interest benefits society even when such motives have no
benevolent intention. Since Smith's time, the principle of the invisible hand
has developed in economic theory but the fact is: nobody really understands
how it happens. Well, it did happen by some measure but how it failed
miserably is not explained by economics.xvi
Competition in markets alone could not support laissez faire apart
from the state. Markets were kept from collapsing by social forces and
processes not economic. In the social economy, I see concepts like
cooperation and association to be part of the answer as to how selfregulation happened by very small measures.
Private entrepreneurs and professionals found themselves competing
so fiercely that they were destroying one another. It was a joint recognition
that association was needed for survival. They had to cooperate to set social
standards as trade and professional associations. They had to set up
standards by which to compete and stay alive. They created private
adjudicatory courts to settle disputes between them. They sought to make
trade associations democratic with electoral processes and judges.
Laborers also cooperated to organize unions with electoral processes
to protect themselves from business corporations and trade groups. In these
and other cases, like the social movement to create cooperatives, we see
small indications of self-governance advancing in the capitalist economy.
But the changes were not good enough.
Corporations at the end of the 19th century demanded federal
regulations. Giant corporations lobbied for government regulations in order
to make entry more difficult for startup competition. The classic case is
Meatpacking regulation. Gabriel Kolko, historian of the era, said. "The
reality of the matter, of course, is that the big packers were warm friends of
regulation, especially when it primarily affected their innumerable small
competitors." Small packers, it turned out, would feel the regulatory burden
more than large packers would.xvii
The economist Joseph Schumpeter saw markets on a path of “creative
destruction.” Capitalist markets are creative but remain essentially selfdestructive. They force the government to regulate them.xviii
My question is how to lay the basis for markets to be creative for the
common good. In other words, how can markets be developed without a
parent having to supervise them so much?
The short answer is that markets need countervailing powers in new
associations and new standards (e.g. environmental protection) and modes of
cooperation between trade groups that work for the common good. Markets
that are structured by competition alone have to be governed by the state.
They end up harming consumers and fail to meet the common good, hence,
the need for government controls.
In other words, the state should create the conditions whereby the
economy can be truly self-regulating. This means advancing democratic
structures with private “electoral processes” and “judiciary organizations”
and standard making for the common good. Nonprofit corporations (e.g.
universities, museums and hospitals) cooperate to have outside judges and
professional evaluators to make sure they maintain their standards. Now it
means advancing the values of democracy, freedom, justice, and equality in
the business sector. It means stakeholder participation at local and national
levels.xix
I call this process “social development” because it leads to a growth in
public accountability in the private sector. Social development, ironically,
recognizes the key values of both political parties, Democrats and
Republicans. For Republicans it leads to a smaller government, i.e. less need
for state regulation. For Democrats it leads to more market transparency and
a socially accountable business sector.
Government policies are needed to help create a transition for a new
economy I call “civil” not capitalist. The economy becomes civil as it
develops self-governance and becomes part of a civil society, building step
by step by social contracts. Its civility is evolving but will develop quicker
and more predictably with new government policiesxx
New government policies should be designed to help the economy
become more free, productive, efficient, and profitable, and socially
accountable to stakeholders and the public. Markets should be encouraged
by government to be transparent for the common good.
“Self-interest” remains a motive, a theoretical part of a new civil
economy but it coexists with other concepts like “mutual governance” and
the general meaning of “public interest.” It was in the self-interest of
members in trade associations and unions to “cooperate” in face of market
forces. For a definition of all these concepts see The Glossary on my
homepage on the left side under A Civil Republic.
Social History and the Future
Relatively “free markets” developed slowly from feudalism with
government support. Likewise it is important to see now how non-capitalist
structures are evolving inside business markets. These include democratic
credit unions, community development corporations, community land trusts,
community finance corporations, social investment, cooperatives (consumer,
distributive, worker owned companies), ethical codes in corporations and
standards in their associations and much more. Each of these corporations
operates in their own self-interest but is non-capitalist in the sense they have
developed electoral processes, self-evaluator mechanisms, and adjudicatory
systems.
By voluntary action (e.g. social movements) and by government
encouragement (e.g. a new tax system, subsidies, bully pulpit, etc), this
“public standard making” (safety, health, environment protection, etc.)
should continue among trade associations across all industrial and
commercial sectors. It is an intentional process of reducing the need for
government controls.
It took centuries to develop a capitalist economy and may take
centuries to develop a democratically “associated market” not capitalist, a
“civil economy” not laissez-faire. For more details on how to develop civil
markets, click on Beyond Capitalism on my webpage.
i
Sometimes I say symbolic interaction (instead of social interaction) and
that might confuse professional sociologists. Symbolic Interactionism
originated with George Herbert Mead, Charles Cooley, and Herbert Blumer.
Blumer held premises about this outlook including: "Humans act toward
things on the basis of the meanings they ascribe to those things” and “the
meaning of them is derived from the social interaction that one has with
others and the society." For many in this tradition, it refers to the patterns of
communication, interpretation and adjustment between individuals.
But my perspective is different in the sense that symbolic life is not just
based on interpersonal relations among individuals. While this is true in part,
people also think and act on symbols (words) already produced collectively
in previous societies. Thus we are able to communicate and examine society
both objectively and subjectively. We live in the tension of opposites
seeking resolution.
Max Weber argued that the meaning of “social” was the root of all human
communication and subjective but sociologists can also think objectively as
did Emile Durkheim. If Weber’s view were taken as the truth, it would lead
to subjectivism. If Durkheim’s view were taken as the truth, it would lead to
objectivism. So this term (social) should be seen as standing between these
two extremes, subject and object. The market is also in the tension of
opposites “order” and “freedom” seeking resolution. For different views on
symbolic interaction, see Herbert Blumer, Symbolic Interactionism;
Perspective and Method. 1969, Englewood Cliffs, NJ: Prentice-Hall.
Sheldon Stryker; Symbolic Interactionism: A Social Structural Version
*Menlo Park, CA: Benjamin/Cummings) 1880.
ii
“Social economy” assumes that there is a constant process of diffusion and
accommodation among different institutions. This is one cause for change in
the market system. William Graham Sumner in the early 1900s recognized
how “diffusion” occurs between society’s different institutions (with
different values, customs and folkways) but he never studied the
phenomenon happening in the economy of the United States. Nonetheless,
the manifest values in capitalist markets, like freedom, competition, profit
making, productivity, and privacy, contrast markedly with other societal
values, like justice, cooperation, standard making, social accountability, and
transparency. These contrary values are in a constant interaction,
accommodation and synthesis. The tension among these society-wide values
is one “cause” for changes that bring about the evolution of society and its
economy. For example, people live and work in institutions that have
contradictory values. They seek integrity and this is a cause for change.
A person teaches “cooperation and altruism” in a Sunday school to
children and the next day promotes vicious competition and strong selfinterest in his or her business. Or, let us say, a scientist believes in
transparency in his profession and then believes in privacy for his
discoveries in the laboratory of his corporations. We can say that
“opposites” seek resolution in people and a sense of wholeness in society.
iii
The assumption in “classical theory” is that the economy is selfregulating. Classical economists maintain that the economy is always
capable of achieving the natural level of real GDP or output, which is the
level of real GDP obtained when the economy's resources are fully
employed. While circumstances arise from time to time that cause the
economy to fall below or to exceed the natural level of real GDP, selfadjustment mechanisms exist within the market system that work to bring
the economy back to the natural level of real GDP. The classical doctrine—
that the economy is always at or near the natural level of real GDP—is based
on two firmly held beliefs: Say's Law and the belief that prices, wages, and
interest rates are flexible. This fails to take account that the economy exists
in the larger culture of society.
iv
There is a long history here that includes the theories of Mercantilists,
Physiocrats, Classical Economics, and Modern Economics. The history
shows many sub varieties in the field of economics have emerged in the last
century -- like institutional economics, social economics, socio-economics,
welfare economics, evolutionary economics, etc. They are all based on the
concept that a capitalist economy is socially conditioned. But in all these sub
varieties, the field of economics assumes the values of capitalism. It simply
recognizes that a social factor conditions market operations. None of these
subfields root themselves in the society with its larger varied culture. They
cannot envision how capitalism is evolving into a different system of
exchange.
The social factor is at the root of every economy. The field of “social
economy” began in 1977 with my book by that name and in the 1980s it
became a theme in the sociology department at Boston College. In February
1999, the ASA Council approved a proposal to create a new Section on
Economic Sociology. In accordance with ASA policy, Economic Sociology
is now an official Section. At the first official business meeting in the 1999
annual meetings of the ASA in Chicago, Richard Swedberg gave an
overview of the growth of interest in economic sociology in Europe.
v
A social economy is a fact of life in any country where material scarcity
prevails. Every economy is based on the way of people socially interact
through their culture of values, norms, traditions, fashions, customs, and
mores in society.
vi
Aristotle wrote about the “economy” in reference to the household -- not in
reference to society. In Book I of the Politics, Aristotle distinguishes
between use value and exchange value. It was Aristotle who created the
concept of value in use. The use value or utility of a good or service depends
upon its being productive for the good of the family.
vii
When Karl Marx used the word “social” he implied the meaning of
“human” in some cases and in other cases he implied “cooperation.” He was
looking for what lay at the base of the capitalist market. Max Weber later
came to see the whole field of sociology based on what is “social.”
“Sociology is a science”, he said, but it is different from physical science in
the sense of researchers dealing “with social action seen by agents as
subjectively meaningful.” This meaningfulness can be observed as intended
in human interaction or as an ideal type interpreted as a number of agents
view the world.
Other sociologists had different outlooks on what is “social.” Georg
Simmel defined the word “social” as the way people resolved their
interactions into “togetherness” or a union with others. It referred to the freeplaying interacting interdependence of people. Auguste Comte considered
“social” equivalent to the word “human.” Emile Durkheim defined “social”
as the virtual opposite of Max Weber’s meaningful human interaction. He
saw “social facts” as objective conditions set by a community that teaches its
members how to act in associations with statuses and roles. The larger
community defines all these positions. Put another way, Weber emphasized
the subjective meaning of “social” while Durkheim emphasized its objective
meaning. Talcott Parsons saw the word “social” as a concept that integrates
all the social sciences.
So what is correct?
My answer: the word “social” can be used in all these ways but it is
important to indicate one’s own definition. I emphasized Weber’s definition
of “Verstehen” in writing The Human Perspective (1966) and in The Social
Economy (1977). I also used Weber’s ideal type. Generally, the word
“social” refers to human interaction and organization. In my book on
Evolution from the Big Bang I added the analytical (unconventional) word
that refers to a natural interaction of atoms and molecules based governed by
attraction and repulsion.
The word “economy” can be equally various in its usage. The
common reference is to the business sector but it can also refer to the Third
Sector apart from government. It may also be used to refer to the whole
society that includes government, business, and the Third Sector. In general
it exists where income is created. This broader usage makes the “general
economy” coterminous with society. See Appendix C under Glossary on my
webpage.
The variety of uses and definitions makes it possible to develop
different theories of social economy. Definitions are important. Those
theories affect “facts” and shape government policies.
viii
The Oxford English Dictionary locates the first usage of Capitalism in
English in 1854 by William Makepeace Thackeray in his novel, The
Newcomes. Smith’s The Wealth Of Nations was a critique of the political
economy of UK State power. Smith was worried about the tendency for
state-sponsored monopolies, and legal local monopolies in the Guilds, as
well as the international monopolies from their Royal Charters (including in
the British colonies of North America), in their chartered trading companies.
The East India Company was the prime example of imperialism. Adam
Smith would surely be worried today about multinational corporations that
extend their influence overseas.
ix
Polanyi looked at early societies, like Polynesian tribal groups and ancient
empires like Egypt and Rome. He finds relationships characterized by
"reciprocity and redistribution" as well as "symmetry and centricity," not
“competition” and “profit.” Polanyi says that a market economy implies a
self-regulating system. A capitalist economy is directed by market prices.
But he notes how the economic system is actually absorbed in a social
system. A self-regulating market demands an institutional separation of
society into different spheres. Polanyi, Karl. The Great Transformation: The
Political and Economic Origins of Our Time (Boston: Beacon Press by
arrangement with Rinehart & Company, Inc.) 1944, 1957.
x
Inventions can be traced back to animals (e.g. birds building nests) and on
to Australopithecus and Homo sapiens with flint stones, and the evolution of
civilization with agricultural implements and on to feudalism with
windmills.
xi
Karl Marx in the 19th century saw the evolution of civilization moving
from the primitive (tribal) society to the ancient empire (slave) society to the
feudal (serf) society to the capitalist (wage-earner) society. He anticipated
that there would be a succeeding form of economy he called communism in
which equality would exist for the lower class. These roughly hewed
categories in history came from the anthropology of Marx’s day and implied
a progression of stages in which the lowest class in society was increasing its
freedom at each stage of evolution. The cause for change was in the material
forces of production, not in the development of any ideals. But hidden in this
reference we see ideals like freedom and equality increasingly becoming
realized in that history of society. Historians have trouble with Marx’s rough
“labeling” of classes in stages because the story is so various in different
regions and locations around the world.
xii
Now we see 25,000 trade associations in the United States some of which
have set standards that operate for the common good and at the same tim in
their own self-interest. But this growing trade process of cooperation in
setting standards is no panacea for eliminating capitalist markets. This
“cooperation” among firms through associations helps to protect them from
government regulation and trade unions. How “cooperation” in the market
works at best for the common good is a subject for more study in social
economy. See my book The Civil Republic.
xiii
For example, there is collusion between the business sector and
Congress by way of lobbying power and the appointment of big business
leaders to head government agencies that (ironically) regulate the conduct of
their friends in corporations.
xiv
Here is an example of how I took action to help build civil markets. In
2008 I told Representative Barney Frank during the financial crisis how
“rating agencies” (like Standard and Poor, Moody’s, and Fitch) are paid fees
by the very corporations that evaluate them. They give triple “A” ratings to
corporate clients even when they are in deep financial trouble. I argued that
this type of financial organization had to be changed. It is ludicrous for
rating agencies to get paid by the corporations they monitor.
I said to Barney: “Here is what you could do: Have the rating system of
corporations done by organizations that suffer from corporate misconduct.
(The S&P does not suffer for its misjudgments and wrong calculations.)
Rating should be done by pension funds like CALPERS, TIAA-CREF and
other countervailing powers that have billions of dollars invested in the
stock market. They (not S&P and Moody’s) have a vital interest in keeping
businesses financially stable because they risk investing in this market. Their
survival depends on sound and transparent corporate finance.
Another alternative would be for the government to set penalties for
misjudgments by rating agencies. If the SEC finds Moody’s ratings are
unprofessional, or seriously misjudged, then Moody’s (or any rating agency)
pays a penalty to the government for its mistakes. The penalty money goes to
the SEC. The SEC then has more staff and incentives to keep an eye on the
rating agency. At the same time the penalty would give the rating agency a
reason to get its judgment right, stay professional, not get cozy with
corporate clients.
I also said to Barney: John Kenneth Galbraith wrote about the principle of
“countervailing powers”. Organizations in the Third Sector are
countervailing and help keep the market self-regulatory, reducing the need
for government agencies and regulation. The government should support
countervailing powers in the market to make it self-regulatory. It is a major
principle to follow in changing capitalist markets into civil markets.
I gave him examples of how governments acted helpfully on market crises in
the past. Here is one example I emailed to him:
Willamette Industries was destroying the environment a decade ago. The
government ignored it. The EPA and the State of Oregon were tied to
business interests and refused to let citizens get vital information from the
company. But when civil society groups finally documented the pollution and
pressed for solutions, the federal government began to act.
Willamette Industries agreed in July 2000 to pay a fine ($11.2 million) to the
federal government to settle pollution claims, according to the Justice
Department and EPA. EPA Administrator Carol Browner called the
settlement on violations of the Clean Air Act involving factory emissions the
largest in agency history. Under the plan, Willamette will also be required
to spend $74 million to install new pollution-control equipment at its 13
factories in Oregon, Arkansas, Louisiana and South Carolina. Browner
estimated that cleaning up the emissions from the Willamette plants would
keep an average of 27,000 tons of pollution out of the air. She said that is
the equivalent of taking 287,000 cars off the road.
So, this is how governments work at best in capitalist markets with pressure
from non-governmental organizations (NGOs). But how would a
government handle this case differently by following a (civil market) model?
How could the government create a civil market?
First, the money from this public fine for Willamette Industries should have
been given to those Third Sector organizations (NGOs) that exposed the
problem. It cost them a lot to do the investigation -- against both business
and government interests. The money would reward them as whistleblowers
and strengthen their associations. In this case, the money would be given to
the Northwest Environmental Defense Council, its parent EDC, and the
Plumbers Local 290. The reward would pay for their work to expose the
problem.
Barney did not reply. I said: “Support the Third Sector like this and help
create justice in the market.”
In the midst of the financial crisis, I emailed Barney to support legislation
for a Consumer Financial Protection Bureau being advanced by Elizabeth
Warren. (He agreed that it was a great idea.) But I argued the government
agency would not work by itself without the Third Sector. It would become
just “another regulatory agency” doing nothing to protect the public. More
must be done to change the market system. The government, I said, supports
capitalist markets, not civil markets.
I said, “Governments fail to protect consumers -- regardless of which
parties are in power, Republicans or Democrats. It is not just one party or
the other. Every new administration appoints experts from business to
regulate their market sector. The government’s reasoning is that businesses
and their executives know best on how to act on corporate misconduct.
I said: “Business leaders in these government agencies will protect their
market sector.” This collusion of a “government-market system” has been
going on for a century. It is still unresolved. A Consumer Protection agency
will be dysfunctional in the future just like the SEC, FCC, FTC, and other
government agencies. The staff will not really (seriously) regulate the
market. So what should be done in this case?
I sent Barney a list of consumer organizations that were countervailing in the
nonprofit (Third) Sector. I said: They should be part of the legislation that
helps to protect consumers. The government cannot do this regulation alone.
These nonprofit organizations included The American Council on
Consumer Interests, the American Council on Science and Health, the
Center for Auto Safety, the Coalition Against Insurance Fraud, Consumer
Action, and the Consumer Federation of America, Consumers Union, the
U.S. Consumer Public Interest Group, and others. Such groups should be
associated with the Consumer Protection Agency and by legislation have the
opportunity to give advice and counsel. And they should have access to the
mass media. If new staff on the government’s consumer agency did not
“see” a consumer problem, these NGOs could go to the mass media and
inform the public. They would be “whistle blowers” with inside information.
They would increase transparency about how the government is not acting
properly.
Again, I said the principle to follow is: Create “countervailing powers to
solve this problem. Corporate malfeasance happens so often that it should
be obvious to government representatives. Lehman Brothers cooked its
books so that its quarterly reports would make the firm look far more solvent
than it actually was. It used “repurchase agreements” ("repos"), which are
short-term loans to disguise $30 to $50 billion worth of liabilities. Their
balance-sheet manipulation began in 2001.
Barney did not follow my suggestions. He phoned and asked me to stop
sending recommendations. He was too busy.
This kind of corporate misbehavior demonstrates the systemic failure of the
government to protect investors, creditors and the larger economy from
corporate fraud. The Securities and Exchange Commission, which had
personnel investigating Lehman at the time, completely missed what was
going on right under its nose. It keeps happening -- like the Madoff scandal.
The government in such cases is part of the problem, supporting and
subsidizing the capitalist system.
A big way for government to treat market problems is to stop subsidies that
are unwarranted. For example, big agricultural corporations get every kind
of corporate subsidy, including dairy price supports, export-enhancement
programs, and payments for not growing certain crops. Other privileges
include special deals for ranchers, oil companies, and lumber companies to
graze on, drill in, or cut resources from federally owned lands at drastically
reduced prices. Each case needs Congressional research to maintain a
balance in trade and keep societal self-sufficiency in the economy.
xv
In the early 1800s statutory limits in the United States were placed on the
size, capital, scope of power, and indebtedness of corporations. See Severyn
Bruyn, The Social Economy (John Wiley & Sons) 1977, Chapter One.
xvi
Léon Walras developed a four-equation general equilibrium model that
concludes that individual self-interest operating in a competitive market
place produces the unique conditions under which a society's total utility is
maximized. Ludwig von Mises, in Human Action, claimed that Smith
believed that the invisible hand was that of God.
xvii
Gabriel Kolko believed that large-scale corporations turned to
government regulation precisely because of their inefficiency and that the
Progressive movement actually defined the general welfare in terms of the
well being of business. For Kolko, the enemy has always been what
sociologist Max Weber called “political capitalism, that is, “the
accumulation of private capital and fortunes via booty connected with
politics.” G. Kolko, (1963), The Triumph of Conservatism, (The Free Press)
1963. G. Kolko, Railroads and Regulation, 1877-1916, (Greenwood
Publishing Company) 1965
xviii
In Capitalism, Socialism and Democracy (1942), Joseph Schumpeter
developed this special concept of “creative destruction” after reading Marx’s
thought, arguing (in Part II) that the creative-destructive forces unleashed by
capitalism would eventually lead to its demise as a system.
xix
There are thousands of examples of civil associations and democracy at
work in the nonprofit sector. For example to maintain quality pet care, the
AAHA has developed a set of accreditation standards that are used to
measure excellence in veterinary medicine. Currently, more than 3,200
veterinary clinics hold the “AAHA-accredited” designation.
The Joint Commission (TJC), formerly the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), is a nonprofit
organization that accredits more than 19,000 health care organizations and
programs in the United States. A majority of state governments have come
to recognize Joint Commission accreditation as a condition of licensure and
the receipt of Medicaid reimbursement. Surveys (inspections) are made
available to the public in an accreditation quality report on the Quality
Check Web site.
Universities and colleges have their own accrediting agencies in the
private sector. They are visited periodically to determine whether they meet
high standards in the market system. The National Association of Colleges
and Employers provides “best practices”, trends, research, professional
development, and conferences. The Standards for Libraries in Higher
Education are designed to guide academic libraries in advancing and
sustaining their role in achieving their institutions’ missions on their
campuses. Libraries must demonstrate their value and document their
contributions to overall institutional effectiveness and be prepared to address
changes in higher education. They note: “These Standards were developed
through study and consideration of new and emerging issues and trends in
libraries, higher education, and accrediting practices.”
xx
Adam Smith took transparency for granted as he looked at the emergence
of a business sector in the 18th century. When the market is transparent with
small enterprises in the economy, then “reason” should win; people can
make rational decisions in their own self-interest.