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ECONOMISTS ON PRIVATE INCENTIVES, ECONOMIC MODELS, AND THE ADMINISTRATIVE STATE: THE CLASH BETWEEN HAPPINESS AND THE SO-CALLED PUBLIC GOOD

Published online by Cambridge University Press:  11 October 2021

Sandra J. Peart*
Affiliation:
Leadership Studies, University of Richmond, USA

Abstract

This essay examines the administrative state as a ubiquitous phenomenon that results in part from the mismatch of incentives. Using two dramatic episodes in the history of economics, the essay considers two types of mismatch. It then examines how economists increasingly endorsed the “general good” as a unitary goal for society, even at the expense of private hopes and desires. More than this, their procedures and models gave them warrant to design mechanisms and advocate for legislation and regulations to “fix” the supposedly suboptimal choices of individuals in service to the overarching goal. The rise of New Welfare Economics dealt an additional blow to the sovereignty of individual motivations, notwithstanding that Hayek and Buchanan warned that this engineering approach allowed social goals to override individual preferences. Throughout, the argument is that it is important to recognize that people within or advising the administrative state are influenced by the same sorts of (private) motivations as actors throughout the economy.

Type
Research Article
Copyright
© 2021 Social Philosophy & Policy Foundation. Printed in the USA

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Footnotes

*

Jepson School of Leadership Studies, University of Richmond, speart@richmond.edu.

References

1 Schuck, Peter G., Why Government Fails So Often And How It Can Do Better (Princeton, NJ: Princeton University Press, 2015), 150 CrossRefGoogle Scholar.

2 My approach complements studies that examine the advantages and disadvantages associated with the administrative state or challenges to it. See Ronald J. Pestritto, “Constitutional and Legal Challenges in the Administrative State,” this volume, and Anne Barnhill and Brian Hutler, “SNAP Exclusions and the Role of Citizen Participation in Policy-Making,” this volume.

3 The phrase “turn away” is used by Lawrence White, The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years (Cambridge: Cambridge University Press, 2012), 1231 CrossRefGoogle Scholar. The most dramatic example of reform achieved through democratic discussion was the abolition of slavery. J. S. Mill was involved in many other significant reforms, repeal of the Corn Laws, extension of the franchise and property rights to women, the Governor Eyre controversy, and the question of birth control. See Peart, Sandra J., “Editor’s Introduction,” Hayek on Mill: The Mill-Taylor Friendship and Related Writings, Volume XVI of The Collected Works of F. A. Hayek, ed. Caldwell, Bruce (Chicago: Chicago University Press, 2015), xix–lCrossRefGoogle Scholar.

4 Joseph Postell, “The Ambiguity of Expertise in the Administrative State,” this volume, also emphasizes the role of trained, so-called experts who administer policy with a goal of efficiency. As we will see in Section II.B, I would add to this that the stated goal of efficiency may obscure the private goals of the administrators who enriched themselves while creating food and other shortages in the former Soviet Union.

5 Buchanan, James, “Positive Economics, Welfare Economics, and Political Economy,” Journal of Law and Economics 2 (1959): 124–38CrossRefGoogle Scholar.

6 For an account of these measures in the American context, see Tiffany Miller, “Richard T. Ely, the German Historical School of Economics, and the ‘Socio-Teleological’ Aspiration of the New Deal Planners,” this volume.

7 Hunt was president of the Anthropological Society and the owner and editor of the Anthropological Review. Arthur Keith writes: “[Hunt] has the fire and enthusiasm of an evangelist and the methods of a popular political propagandist.” Keith, Arthur, “Presidential Address. How Can the Institute Best Serve the Needs of Anthropology,” Journal of the Royal Anthropological Institute of Great Britain and Ireland 47 (1917): 19 CrossRefGoogle Scholar. See Peart, Sandra J. and Levy, David M., The ‘Vanity of the Philosopher’: From Equality to Hierarchy in Post-Classical Economics (Ann Arbor: University of Michigan Press, 2005), 6774 CrossRefGoogle Scholar.

8 Wallace, A. R., “The Origin of Human Races and the Antiquity of Man Deduced from the Theory of ‘Natural Selection’,” Journal of the Anthropological Society of London 2 (1864): clviiiclxxxvii CrossRefGoogle Scholar. Today, sympathy has resurfaced as a concept of significance. See Sympathy: A History, Eric Schliesser, ed. (Oxford: Oxford University Press, 2015). For our purposes, it suffices to consider sympathy as the means by which individuals connect to the group.

9 Peart and Levy, The Vanity of the Philosopher.

10 Greg was a classmate of Darwin and, in his time, an influential writer on political economy. He argued, contra J. S. Mill, that the Irish were naturally inferior. He was also long associated with The Economist whose role in applying biological models to political economy has been largely overlooked.

11 Greg, W. R., Enigmas of Life (Boston: James R. Osgood, 1875), 119 Google Scholar.

12 Greg, W. R., “On the Failure of Natural Selection in the Case of Man,” Fraser’s Magazine for Town and Country 78 (1868): 360 Google Scholar.

13 Wallace, A. R., Social Environment and Moral Progress (London: Cassell and Company, 1913), 127 CrossRefGoogle Scholar. Later in the century, the economist F. Y. Edgeworth would attempt to work this out using a utilitarian calculus. Those whose lifetime happiness was negative, because of an inferior capacity for pleasure, were net drains on social welfare and might therefore be removed from society. See Edgeworth, F. Y., Mathematical Psychics (London: C. Kegan Paul and Co., 1881)Google Scholar and Peart and Levy, Vanity of the Philosopher, 226–30.

14 See Darwin, Charles, The Descent of Man, or Selection in Relation to Sex (London: John Murray, 1871), 125 Google Scholar and, for additional detail and discussion, Peart and Levy, Vanity of the Philosopher, 222ff. In addition to the “general good” wording, Darwin used the phrase “welfare of mankind” (ibid., 643). Peart and Levy, ibid., discuss the contrast with J. S. Mill’s (and Adam Smith’s) notion of the happiness of individuals.

15 Levy, David M. and Sandra, J. Peart have written extensively about the jury as an instance of democratic decision-making. See Escape from Democracy: The Role of Experts and the Public in Economic Policy (New York: Cambridge University Press, 2016), 211–31Google Scholar.

16 Queen v. Charles Bradlaugh and Annie Besant. June 18, 1877 (London: Freethought Publishing, 1878), 139, 147.

17 Mill, J. S., Principles of Political Economy, The Collected Works of John Stuart Mill, Volumes 2–3, ed. Robson, John (Toronto: University of Toronto Press, 1965)Google Scholar.

18 David M. Levy and Sandra J. Peart systematically study the treatment of Soviet growth in American textbooks from 1960 through 1980. This section draws upon that research. See “Soviet Growth and American Textbooks: An Endogenous Past,” Journal of Economic Behavior and Organization 78 (2011): 110–25.

19 See Samuelson, Paul A. and Scott, Anthony, Economics: An Introductory Analysis (Toronto: McGraw Hill, 1966–1971)Google Scholar.

20 See Levy, David M., “The Bias in Centrally Planned Prices,” Public Choice 67 (1990): 213–36CrossRefGoogle Scholar, and Shleifer, A. and Vishny, R., “Pervasive Shortages under Socialism,” Rand Journal of Economics 23 (1992): 237–46CrossRefGoogle Scholar.

21 Nutter, G. Warren, The Strange World of Ivan Ivanov (New York and Cleveland: World Publishing, 1969)Google Scholar.

22 It is important to note, however, that there were some exceptions at the time. Warren Nutter and W. W. Rostow, who did not share an ideological affinity, held that the institutional frameworks in the Soviet Union and the United States were so different as to make such comparisons unwarranted.

23 Hutchison, T. W., On Revolutions and Progress in Economic Knowledge (Cambridge: Cambridge University Press, 1978), 95120 Google Scholar.

24 See, for example, Jevons, William Stanley, “Inaugural Address as President of the Manchester Statistical Society on the work of the Society in Connection with the Questions of the Day,” “Amusements of the People,” and “Married Women in Factories,” in Methods of Social Reform (New York: Augustus M. Kelly, 1965), 180–93Google Scholar, 1–27, and 156–79, as well as Theory of Political Economy, 4th ed. (London: Macmillan, 1911). Sandra, J. Peart provides additional detail on the material in this and the following two paragraphs, including source material for the passages quoted above. See “Irrationality and Intertemporal Choice in Early Neoclassical Thought,” Canadian Journal of Economics 33 (2000): 175–88Google Scholar.

25 Marshall, Alfred, Principles of Political Economy, 8th ed. (London: Macmillan, 1930), 120 Google Scholar.

26 Ibid., 120.

27 For more detail, see Peart and Levy, Vanity of the Philosopher.

28 Webb, Sydney, “Eugenics and the Poor Law: The Minority Report,” The Eugenics Review 2, no. 3 (1910): 241 Google Scholar. As noted above, at its extreme, such thinking led some late nineteenth- and early twentieth-century economists to endorse eugenic policies. At issue was whether the tendency to make poor choices was inherited, or whether education might correct one generation at a time. Most economists favored education, but some also came to endorse forced sterilization in an apparent attempt to “correct” for purportedly inherited flaws.

29 Tiffany Miller, “Richard T. Ely,” this volume, examines the paternalistic policies that flowed from the pronouncements of irrationality. For a definitive challenge to the idea that such preferences are irrational, see Rizzo, Mario J. and Whitman, Glen, Escaping Paternalism: Rationality, Behavioral Economics and Public Policy (Cambridge: Cambridge University Press, 2020)Google Scholar.

30 Boettke, Peter J., F. A. Hayek: Economics, Political Economy and Social Philosophy (London: Palgrave Macmillan, 2018), 161 CrossRefGoogle Scholar.

31 Edgeworth, Mathematical Psychics, 132.

32 Robbins, Lionel, An Essay on the Nature and Significance of Economic Science, rev. ed. (London: Macmillan and Co., 1932)Google Scholar. Even this was, for Robbins, something of a reach as there was no reason to believe economists possess complete understanding of religious views, customs, or other factors that influence demand. The following two sections draw on David M. Levy and Sandra J. Peart, Escape from Democracy, 68–88.

33 Kaldor, Nicholas, “Welfare Propositions of Economics and Interpersonal Comparisons of Utility,” Economic Journal 49 (1939): 549–52CrossRefGoogle Scholar. Emphasis in the original. Unlike Buchanan, Kaldor takes no account of process in his analysis: if physical output increases via theft, it is the same as if it increases via a lower tariff. For Buchanan’s contrasting view, see Section V.B.

34 See Hicks, J. R., “The Foundations of Welfare Economics,” The Economic Journal 49 (1939): 696712 CrossRefGoogle Scholar.

35 Hayek, and before him Mill, argued that state intervention by definition implied the imposition of unitary goals upon the policy. In his study, Samuel DeCanio examines how the implementation of such goals is necessarily by monopoly means. See “Efficiency, Legitimacy, and the Administrative State,” this volume.

36 Hayek, F. A., The Road to Serfdom: Text and Documents—The Definitive Edition, The Collected Works of F. A. Hayek, Volume II, Caldwell, Bruce, ed. (Chicago: University of Chicago Press, 2007), 100 CrossRefGoogle Scholar. “The ‘social goal,’ or ‘common purpose,’ for which society is to be organized is usually vaguely described as the ‘common good,’ the ‘general welfare,’ or the ‘general interest.’ It does not need much reflection to see that these terms have no sufficiently definite meaning to determine a particular course of action. The welfare and the happiness of millions cannot be measured on a single scale of less and more. The welfare of a people, like the happiness of a man, depends on a great many things that can be provided in an infinite variety of combinations. It cannot be adequately expressed as a single end, but only as a hierarchy of ends, a comprehensive scale of values in which every need of every person is given its place” (ibid., 100–101).

37 Mill to Gustav d’Eichthal, October 8, 1829, in The Earlier Letters of John Stuart Mill, 1812–1848, ed. Francis E. Mineka, volumes 12-13 of The Collected Works of John Stuart Mill (Toronto: University of Toronto Press, 1962–1991), 36. See my “Editor’s Introduction” to Hayek on Mill for a detailed discussion of the parallel between Hayek and Mill in this regard, xxxviii–xxxix.

38 This section draws on Levy, David M. and Peart, Sandra J., Towards an Economics of Natural Equals A Documentary History of the Early Virginia School (Cambridge: Cambridge University Press, 2020)Google Scholar.

39 Black, Duncan, Theory of Committees and Elections (Cambridge: Cambridge University Press, 1958)Google Scholar.

40 Buchanan, James, “Social Choice, Democracy, and Free Markets,” Journal of Political Economy 62 (1954): 114–23CrossRefGoogle Scholar.

41 Mill, J. S., “On Liberty,” The Collected Works of John Stuart Mill , Volume 18, Essays on Politics and Society Part I, Robson, John, ed. (Toronto: University of Toronto Press, 1977)Google Scholar.

42 “By clarifying the role of that momentous engagement in a truly outstanding pair of articles in the Journal of Political Economy in 1954, Buchanan immensely enriched the subject matter with which social choice as well as public choice has to be centrally engaged. In contrast with Arrow’s initial inclination—as he put it—‘to assume … that individual values are taken as data and are not capable of being altered by the nature of the decision process itself,’ Buchanan had to insist that seeing ‘democracy as government by discussion’ implies that individual values can and do change in the process of decision-making” ( Sen, Amartya, “On James Buchanan,” Journal of Economic Behavior and Organization 80 [2011]: 368 CrossRefGoogle Scholar). See Arrow, K. J., Social Choice and Individual Values, 2nd ed. (New York: John Wiley, 1963)Google Scholar, and Buchanan, James, “Social Choice, Democracy, and Free Markets,” Journal of Political Economy 62 (1954): 114–23CrossRefGoogle Scholar. In Sen’s judgment, “It can be claimed that it is only through Buchanan’s expansion of Arrow’s departures that we can do justice to the Enlightenment enterprise of advancing rational decision making in societies, which lies at the foundation of democratic modernity” (ibid., 368).

43 Levy and Peart, Towards an Economics, reproduce the full letter as well as the (unsuccessful) application to the Ford Foundation and related documents. At the time of the correspondence, Kermit Gordon was Director, Program for Economic Development and Administration at the Ford Foundation. Buchanan and his colleagues at the Thomas Jefferson Center applied in May 1960 to the Ford Foundation for $1.14 million to support the Center. Buchanan, Warren Nutter, and University of Virginia president, Edgar Shannon, met with Ford Foundation officials on August 31, 1960. They were unsuccessful in their attempt to obtain support.

44 James Buchanan, “Positive Economics.” For a contemporary extension of Buchanan’s opposition to the expert-imposed goal of efficiency, see Paul Dragos Aligica, Boettke, Peter J., and Tarko, Vlad, Public Governance and the Classical-Liberal Perspective: Political Economy Foundations (Oxford: Oxford University Press, 2019)Google Scholar.

45 In this respect, my argument is an extension of the case David Levy and I have made regarding experts. In Escape from Democracy, we suggest that awareness that experts are motivated by private desires and hopes is a first step toward obtaining the benefits of expertise while reducing the risk associated with uncritical acceptance of their recommendations.