Political Economy: An Old System for a New Day

No, this isn’t a post about banks. It isn’t a post about personal finance either. It’s a post about the founders of the United States’ concept of “Checks and Balances” within the US Constitution as it could be applied to the field of economics.

We all know that our government has three branches: the Presidency, Congress and the Judiciary. And we know that those three branches were created to act as a check on each other to ensure a balance of power among themselves.

Within Congress there was a further subdivision to ensure a balance of power between “the masses,”  (represented by the House) and the “propertied interests” (represented by the Senate).

Those propertied interests were mostly plantation owners in the South. Nine of the first twelve US Presidents were southern slave-owners. The tenth President of the US was a northern slave-owner.

The House and Senate were intended to act as checks and balances on each other, but no one anticipated that one branch of Congress would actually try to checkmate the other by use of the the perpetual filibuster! The assumption was that Congress and the Senate would work out their differences to keep the country going.

And now, despite the Founding Fathers’ best intentions, we find ourselves with a Congress that’s as close to “checkmate” as it can get. This stalemate stems not from politics, as so many of us think, but from economics!

The Anglo-American world of 1776

At the same time the Founding Fathers of the United States were promising its citizens a government that would guarantee citizens “safety and happiness,” a scholar over in Edinburgh, Scotland published a book that remains a classic even today. Along with the American Declaration of Independence, Adam Smith’s The Wealth of Nations was published in early 1776.

Adam Smith is called the “Father of Economics,” and his writings are still very visible in the thinking of both liberal and conservative economists in the United Kingdom and here in the United States.

But here’s the thing. There was not such thing as economics in 1776. The field that for at least two centuries before this had talked about the “economy” of nations was called “political economy.” There was no separation of state, i.e., the government, and economy in Adam Smith’s world!

In 1776 in the “New World” there were only 13 states, i.e., nation-states in their own right. The total population of those 13 states was 2.5 million. That’s about the size of of the city of Brooklyn or of Toronto or Rome nowadays.

The “economy” in early America consisted of villages with small shops and stalls. Trade within the states was was conducted on foot or by horseback, wagon or small boat.

Paul Revere with his little silversmith shop in Boston and Ben Franklin with his print shop in Philadelphia were the “tycoons” of those days. Nowadays we’d call these guys “middle class.” or “small businessmen” and lament their demise.

The anglo-american world of 2011

Now our world is dominated by large, multinational corporations. Large corporations now have even more money than most of the nation-states in our world. Only twenty out of 190 countries in the world have a GDP (gross domestic product) that exceeds the revenues earned by giant companies like General Electric, Shell Oil, Exxon Oil, and Toyota. Multinational corporations are clearly able to “buy” politicians’ votes in any democracy they like, including ours. These votes decide whether government revenues from our taxes will be spent to help expand corporate coffers even more!

Given the phenomenal growth of the corporation under legal protection by the US federal and state governments, it’s not surprising to us that one family of six people,  who own the Walmart Corporation have been able to amass as much wealth as the bottom 30 % of the entire US population! Indeed, if they wanted to, the Walton family could purchase a two small countries, e.g., Ethiopia and Uruguay, with the family’s net worth of $69.7 billion dollars!

In fact, corporations are so out of control that they are now flourishing while our governments are not. In our bifurcated economy, large corporations are sitting on billions of dollars while small businesses and governments are struggling to pay their debts each day. It’s gotten so bad that some government’s in Europe are even considering a “transactions tax” to bail other governments out of debt. And that’s ironic.

A transaction tax on financial investments (a “Tobin tax”) is what the The Stamp Act of 1765 did. The Stamp Act tax (a tax on financial documents transported from one place to another) was one of the two famous taxes that started the “American War for Independence” from Britain!

In our world, trade is global, and trust is virtually nonexistent. There is a scandal a day in the financial papers. There is a “big” scandal every few months. We do not live in the world of our Forefathers. We live in the world of Bernie Madoff. We do not live in the world of Adam Smith. We live in a world now where politics is increasingly deadlocked because economists, right and left cannot agree on what to do.

Where is the way out of this? I suggest what we need is a blend of the wisdom of these forebearers in the worlds of politics and government on one hand, and the world of economics on the other hand, that can work for the 21st century. We need to restore the field of “political economy”.

Next time: Checks and Balances: For the Field of Economics

Follow Nancy Humphreys on Twitter @brucenomics