(Part 4 of a series on Political Economy I am writing on this blog. See the series Introduction here. See Part 1 here. See Part 2 here. See Part 3 here. I recommend reading the Introduction, Part 1, Part 2, and Part 3 of the series prior to reading this piece)
Introduction
Recap
In Part 1, I developed a post-liberal grounding of the field of political economics, largely through a discussion of the moral-political background of the field of economics. I examined how the sovereign makes non-economic decisions that define and shape the economic choices (and goals, etc.) of agents. In Part 2, I used that post-liberal grounding to deconstruct Liberal notions of the market, especially the “‘free’ market,” and reconstruct a new, more rigorous understanding of the true nature of the market. In Part 3, I critically examined the means of production, determined which ones need these ownership criteria (Capital and Land), and explored the ownership criteria a Sovereign may choose for those means of production.
In today’s piece, I will introduce arguably the most important element of this series: the foundational problems of political economy. Far too often, our understanding of economic systems does not get deep enough to the real reasons why we have the systems we do. Furthermore, when we ask ourselves “why didn’t this alternative system work,” our answers are generally clouded by ideological biases. I aim to answer this question by analyzing political economy itself to identify collective action/incentive problems that define why some systems succeed and others can’t even get off the ground.
Central Question
In the introduction to this series, the fourth question in the “Five Questions” section was posed as:
What kinds of problems exist with political economy? In other words, what collective action problems must any system of political economy answer in order to actually work and be viable?
Behind that question is a motivation driven by a more fundamental question:
why do some economic systems work and others either fail outright, cant grow beyond a certain size, or collapse into a different form/system?
Throughout this piece, we will be engaging with this question and examining the real answer to it. As mentioned earlier, political economy must engage with collective action/incentive problems. And there are 3 classes of collective action/incentive problems that are so fundamental that they represent the difference between a system that works and one that doesnt. In other words, a system will never even have the potential to get off the ground unless it has a serious solution to these problems (it may still have functional issues that need to be resolved, but these fundamental problems need to be answered before you can even begin to address the functional issues).
The 3 classes of these foundational problems of political economy are:
- Information Problems
- Defector Problems
- Innovation/Efficiency Problems
We will analyze all three classes and break them down into more particular issues/topics/questions throughout this piece. From this base, tomorrow we will analyze how Capitalism answers these three problems (and, therefore, works) and lay down the gauntlet for what a non-capitalist system must do to also work.
Information Problems
As we noted in Part 1 of this series:
The fundamental elements of production are labour-time and resources and economics studies how we distribute those resources to produce the goods and services needed to achieve our goal(s).
But even when we have all the labour-time and resources in front of us, we still have to ask ourselves: How do we distribute these resources? Or, more particularly, how do we distribute these resources well? Information problems are some of the first problems to arise when we try to answer that question. How do we make sure that enough goods and services get produced? How do we know how many goods and services need to be produced? How do we know we are using our resources in the most efficient manner? How do we know that people’s preferences are being satisfied (or utility maximized, etc.)? And countless more related questions.
This is perhaps the easiest problem to intuitively understand. When people ask how a system would “work” they’re frequently asking how it would resolve questions of distributing resources to produce the goods and services people want and need. It’s also one of the fiercest battlegrounds of empirical debate between capitalists and anti-capitalists (notably, socialists — more particularly, defenders of states like the USSR — and, no, I am not entertaining a debate about whether the USSR was “truly” communist or whatever. It doesn’t matter and I don’t care). The various decades-long debates over the Economic Calculation problem is a manifestation of the fact everyone understands that information problems are central to a political economy system actually functioning properly (if, at all). Alex Salter summarizes the Economic Calculation Problem as such:
Can a rationally planned economic order outperform the market process as a means of using resources efficiently?
(Salter, “Economics and the Calculation Problem,” Foundation for Economic Education. https://fee.org/articles/economics-and-the-calculation-problem/)
Now, I am not positing a position on those debates; instead, I am simply pointing out how these debates reflect the intuitive importance that any political economy system must answer information problems sufficiently to work.
Defector Problems
One of the classic collective action/game theory/etc. problems. The most famous defector problem is how to deal with the notorious Free Rider. He who takes, and does not give. He who consumes, and does not produce. While this is typically considered a “market failure” problem, the issue is more fundamental than any market, as free riders exist in many different ways outside markets (consider the social offense of “being a parasite/leech/mooch” as an example).
A variant of the Free Rider problem that is particular to economics is: “what if everyone wants to be an artist”? In other words, how do you make sure enough goods and services are produced to satisfy (to some degree) the needs and wants of consumers even if people don’t want to produce those goods and services/would prefer to produce other goods and services?
While the Free Rider problem and its variants are the most obvious defector problems, plenty of other ones exist. Adam from GABlog lists just a few:
Cheating, strikes, adulterations of materials, side deals, black markets, etc.
(Adam, “Can Networks Crowd Out Markets,” GABlog. http://gablog.cdh.ucla.edu/2019/02/can-networks-crowd-out-markets/)
All of these can, obviously, have marked negative impacts on the reliability of the economic system.
So, a system must resolve these problems. In other words, it must answer the question “How do I prevent self-interested defections from destabilizing, or perhaps destroying, the economic system and making it unable to function?” Now, no system (not even capitalism) does this perfectly. Some niche systems get pretty close, such as the economic systems that exist within monasteries, but trying to export the economic system of a monastery to the broader society would require exporting the religious fervor with it and that’s simply not possible (if it’s even desirable in the first place). So, a system must sufficiently answer the question. In other words, it must prevent enough self-interested defections that the economic system can still function properly overall.
Innovation/Efficiency
I want to make a note before beginning this section: when I refer to “efficiency” as a component of innovation/efficiency problems, I do not mean “how do we know resources are distributed efficiently” but rather “how do we incentivize people to produce more efficiently”. This “more efficient” production may be considered an innovation, but I find describing this class of problems as the “Innovation/Efficiency problems” helps people grasp the concept more readily.
Innovation problems are pretty easy to understand: How to incentivize people to improve the production process? How do we make sure that we produce better products (depending, of course, on what “better” means)? If there is no reason to improve on the production process other than a feeling of accomplishment, you will not see much innovation (and innovations that are produced likely won’t spread as far, on average).
Now, there are various frameworks people have come up with to try to understand motivation and to try to get people to innovate and be more efficient; however, many of these miss the deeper point: there must be a built-in component of any system of political economy that rationally incentivizes innovation, for that system to be possible.
So…Now What?
Recap
As noted at the beginning of this piece, we’ve moved through this series by building a post-liberal foundation for understanding political economy. We established the grounding itself in Part 1; we interrogated our typical understanding of one of the most fundamental structures in political economy, markets, in Part 2; we engaged with the means of production and established a post-liberal understanding of those means in part 3; and here in part 4, we’ve laid out the foundational problems of political economy that any economic system must answer in order to work. These problems can be sorted into three classes of problems (Information problems, Defector problems, and Innovation/Efficiency problems), and each class poses many problems an economic system must answer.
Moving to the Next Level of Analysis
The first 4 parts of this series can really be grouped as the “foundation-building” section. In other words, these parts of the series are not engaging with any system of political economy in particular; rather, they are engaging with the field in a broad/general manner. I have presented a new system for us to analyze any economic system through a post-liberal lens.
Now, we have to move into part 5 of the series, where we finally move to a particular economic system: capitalism. What we will do is, using the first 4 parts of the series, answer the final question of the “Five Questions” section of the Intro to this series:
Why has capitalism succeeded while non-capitalist systems have largely failed? In other words, what does capitalism do that other systems do not? And, by extension, what must other systems accomplish to provide functional alternatives to capitalism?
