In the contemporary world, the economy defends itself against the political economy of populism and reforms by taking out loans and increasing debt. Typically, it falls even deeper into its clutches.
The dangerous triumph of the political economy of populism (PEP) globally has mobilized many serious economists to seek a specific new political economy of socialism (PES). This time, PES is meant to be not one of the two sides of an ideological struggle but a third way between PEP and the political economy of liberalism (PEL) – strongly critical of both (symmetry?). However, all three political economies may falter when confronted with the great problems of the contemporary world, which in the 21st century are mainly solved through the exploitative use of one of civilization’s greatest inventions: credit and debt.
Berlin Manifesto
At the end of May, 70 well-known economists in Berlin signed a declaration that severely criticizes PEL and demonstrates the potential to defeat PEP using well-known ideas from PES. These ideas include:
– The state as an effective remedy for market failures – deemed weakly competitive on one hand, and unable to operate everywhere on the other.
– Fiscal measures to combat social inequalities.
– Preventing austerity cuts in public spending.
– Market deconcentration.
– “Modern industrial policy.”
– Equalizing development opportunities for young people.
– Above all, protecting the climate and the natural environment.
Revolutionarily, it is assumed that all this can be achieved if economists reconcile with political conditions and agree that efficiency is not the primary economic concern: political rationality is more important than economic rationality.
The manifesto is signed by renowned economists such as Dani Rodrik from Harvard, Mariana Mazzucato from University College London, Nobel laureate Angus Deaton, and – not coincidentally – a whole array of French economists led by Thomas Piketty, Olivier Blanchard, and Gabriel Zucman. The “left turn” of French economists has been well-known for a long time, and currently, French economists make up half of the 20 most important economists in the US, led by Nobel laureate Esther Duflo. They place a very strong emphasis on the social and political nature of economics.
One might say that apart from the increasingly dramatic circumstances of its creation, there is nothing new in the manifesto compared to what has long been discussed in social sciences and journalism. However, a closer analysis of the manifesto and the discussions about it reveals several innovative inspirations. These inspirations can, in reality, stop PEP and not stray too far from PEL because all political economies are overshadowed by the Damocles sword of state, corporate, and household debt. Therefore, it is worth paying attention to the “new political nature of the political economy,” a new understanding of economic policy, and a broad, substantive, not formal, understanding of efficiency, which needs to be evaluated.
The Political Nature of Political Economy
At the beginning of the systemic transformation, the political economy of socialism and the political economy of capitalism were loudly thrown out of Polish universities. This was justified by the fact that political economy was associated with the violence against economics committed by politburos shaping programs, methodologies, and scientific conclusions since the October Revolution, freeing researchers from scientific effort.
Of course, most did not bask in the luxury of this laziness. The initial essence of political economy was different. Unlike economics as the science of managing a household (Greek oikos: home), political economy meant managing within the community, cities, or states (Greek polis: city-state). Far from laziness and submitting to the politburo’s diktat, economists like Janusz Beksiak or sociologist Winicjusz Narojek wrote famous books about societies that must learn to manage and plan as a whole.
In the contemporary world, political economy thus means the necessity of managing societies as a whole, which cannot be separated from politics, although, of course, it does not close the disputes between economists, who, as we see, engage in PEP, PES, PEL, and many other political economies, perhaps less loud but engaging researchers.
Contemporary political economy also has its pathologies, like those from the politburo. In this pathology, politicians deliberately pursue their private or group goals through economic policy and legal changes, while researchers try to estimate the “benefits” of such pathology for society. It should be noted that PES rightly identifies such pathology as PEP: “they steal, but they share.”
Practical benefits from analyzing the society-politics-economy relationship through PEP and PES usually appear only in crises that force reforms and restructuring of society, politics, and economy. No one changes their lifestyle before a heart attack. Economics is often called the dismal science because despite many of its wonderful definitions, it is primarily the science of the necessity of continuous changes – restructuring – adjustments. Only in crises, however dismal it sounds, does the opportunity for necessary reforms arise, and then as many and as deep as possible must be made.
The Modern World and Political Economy
The modern world defends itself against PEP and reforms by taking out loans and increasing debt. Typically, it falls even deeper into the clutches of PEP. In the third decade of the 21st century, public, corporate, and household debt has exceeded 250% of global GDP, while at the beginning of the 21st century, it did not exceed 200%, in the 1990s it was around 180%, in the 1980s around 150% of GDP, etc. Between 2021-2023, the debt-to-GDP ratio fell “thanks” to inflation, meaning the economy, like a wise organism, starts to defend itself against abuses.
Stefanie Stantcheva from Harvard, one of the most influential French economists in the US, shows in her original research that if Joe Biden loses the elections in November, it will not be because of his age but because of inflation, which the US society has identified as public enemy number one and blamed the president for. Almost daily, the newspaper “Le Monde” proclaims that the rise to power of the populist National Rally of Marine Le Pen and Jordan Bardella is primarily due to the declining purchasing power (pouvoir d’achat) of the French. What role did the decline in the purchasing power of Poles play in the October 15 elections?
Economists from the Berlin Manifesto are very aware of the limitation and trap of fighting PEP through increased public spending and debt – hence, they resort to their wonder weapon in the form of new industrial policy.
Statism Without Keynes
Promoting new industrial policy as a miraculous means in PES is undoubtedly thanks to Mariana Mazzucato and Dani Rodrik, who have long pointed out in their numerous works that the state can be an effective entrepreneur in the economy – beyond its obvious great role in the so-called policy mix, i.e., fiscal and monetary policy.
The state as an entrepreneur should, however, stay far away from Keynesianism and its recommendations of maintaining demand in the economy through spending on any purposes. The state should focus on ambitious expenditures primarily concerning research and development, modern technologies, environmental protection, combating climate change, etc. In this regard, it should cooperate with the private sector, even strongly nudging it (nudge) towards such pro-development actions.
Cooperation with the private sector is also an opportunity to engage “private money” for public purposes, and to get the private sector involved in public ventures, it should be coaxed (cajoling). This coaxing does not have to be as pleasant as traditionally thought in industrial policy, where the state granted monopoly privileges to cooperating enterprises, set tariffs for competitors, exempted them from taxes, or provided a political umbrella. The new industrial policy often, on the contrary, following Philippe Aghion’s research, wants to develop various economic fields by facilitating entry for new competitors.
A New Philosophy of Law
Wise state spending, not verified by market business profitability, should be ensured by a new philosophy of law. According to this philosophy, every new public expenditure should have a strictly defined amount, implementation period, and goals to be achieved in the law. Positive external evaluation of the achievement of goals by a given public expenditure can be the basis for passing a new expenditure law. Although the Mill-Bastable test has long been known in economics, showing, for example, how long to support new industries, it has so far had more of an intellectual discourse than a legal way of rationalizing public spending.
This PES problem has already been partially recognized by the OECD and the European Union, and as known, according to the concept of Independent Fiscal Institutions, a Fiscal Policy Council is being created in Poland. This is certainly progress in evaluating the state’s economic policy, but paradoxically for political economy, it would be better if such councils had a genuinely external, professional, and independent character, e.g., by being elected by academic communities. This applies to many other councils and institutions in democratic systems. Allowing political entrenchment of supra-term institutions is a clear weakness of legal sciences – dangerous both for the political economy of socialism and the political economy of liberalism.
Adam Noga. Professor at Kozminski University. Member of TEP
