by From June Sekera In standard economics scripting, government is most often cast in the role of bumbler or villain. Whether as market fixer, intervenor, enforcer or redistributor, its actions are portrayed as resulting in “distortion,” “inefficiency,” “deadweight loss,” and worse. Three quarters of a century ago, Paul Studenski rejected such casting. He found government to be a vital figure whose role was not simply to intervene or redistribute. Government was a producer. A professor of economics at New York University (1927-55), an authority on public finance, and a widely-respected historian of national income accounting,[1] Studenski argued that “government is a productive, wealth-creating organization. It supplies direct utilities as well as aids to private production” (1939, p.
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from June Sekera
In standard economics scripting, government is most often cast in the role of bumbler or villain. Whether as market fixer, intervenor, enforcer or redistributor, its actions are portrayed as resulting in “distortion,” “inefficiency,” “deadweight loss,” and worse.
Three quarters of a century ago, Paul Studenski rejected such casting. He found government to be a vital figure whose role was not simply to intervene or redistribute. Government was a producer. A professor of economics at New York University (1927-55), an authority on public finance, and a widely-respected historian of national income accounting,[1] Studenski argued that “government is a productive, wealth-creating organization. It supplies direct utilities as well as aids to private production” (1939, p. 34). He elaborated:
“Under all forms of organized society, economic activity has required some collective effort in addition to the individual one, and this is still true of the modern society. The notion that production for exchange is alone ‘productive’ is preposterous.
Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value-namely, utility and scarcity. They satisfy human needs and must be economically used. Government is, therefore, engaged in production just as much as is private enterprise. Government employees are just as much producers as are private employees and entrepreneurs. To deny this fact is to demonstrate one’s faulty economic education or the fact that one’s idolatry for business has thwarted one’s vision” (emphasis added).
His language and logic challenged mainstream economic thought, which by his era had turned to “exchange” theory and had sidelined “production”. However, production had been of central interest to 18th century and subsequent generations of economists, who were concerned with the processes by which value was created. But, even then, government had persistently been placed outside the “production boundary” (Mazzucato, 2018) and the state was, at most, assigned only a supporting role. Even Karl Marx, who wrote of the “hidden abode of production” in the first volume of Capital (Böhm & Land, 2012) did not address the state’s role as producer. And once Marx adumbrated a “labor theory of value” that could be used effectively to reveal the exploitation of workers by employers, liberal economists began to downplay the significance of production itself. In reaction to Marx, mainstream economists moved “to recast economics as a science of exchange rather than production” (Perelman 2006). This transformation facilitated mathematical modeling in economics and the eventual construction of a quantitatively precise but pragmatically constricting “production function.”
In short, by the time that Studenski was writing, not only was government viewed as not productive, there was essentially no basis for even considering government as a producer, since economics had made “exchange” [2] between sellers and buyers the embodiment of economic value.
But Studenski’s stance would not have been out of line with the thinking in the “German Public Economics” school that had flourished in the late 19th and early 20th centuries. Economists in Germany (and other European countries) had concerned themselves with “[u]nderstanding the economic foundations and explaining the scope of the state” (Sturn, 2010). Some saw the state as “a framework of collective agency for common purposes,” and understood government as a producer – the “mechanism” for producing the goods and services necessary to meet “collective needs.” However, with the rise of Nazism and the emigration of many of these theorists, a flourishing school of public economics fractured and the very idea of a “public economy” was eventually expunged from mainstream economics.
This paper calls for recognition of the public economy, argues for a reformed public economics, and proposes the elements of a new conceptual model. read more
[1] In The Income of Nations (1958), Studenski traced the history of national income accounting and competing historical conceptions of production. Descriptions of Studenski’s work can be found in Warren 2005 and Ogle 2000.
[2] Concerning the diminished role of production in neoclassical theory see: Bernstein, 2001, p. 95; Haring and Douglas, 2012; Stretton and Orchard, 1994, p. 158. Hudson (2012) writes: “Today’s supply and demand approach treats the economy as a ‘market’ in a crudely abstract way, as quantities of goods (already produced), labor…and capital…are swapped and bartered with each other.” Ogle traced the history of production in his 2000 thesis. He writes: “According to Walras, ‘The theory of exchange based on the proportionality of prices to intensities of the last wants satisfied … constitutes the very foundation of the whole edifice of economics.’” … “Neoclassical economics thus posited a definition of production based on the preferences of (autonomous, rational, utility maximising) individuals expressed through the market.”