The Spartan doctrine of laissez-faire versus the Roman doctrine of external recourse
The Spartan doctrine of laissez-faire versus the Roman doctrine of external recourse
The Council of Economic Advisers, an office comprised of a rotating advisory group of economists and their staff within the White House administrative structure, was created 70 years ago by the Jobs Act of 1946 .
In his First annual report to the president, published in December 1946, the CEA tries to present its global vision of public policies and the American economy. (For those who pay close attention to their prepositions, this First Annual Report to the President is not the same document as the first President’s Economic Reportwhich was published in January 1947. This document is a detailed overview of the state of the American economy around 1946.)
Remember that in 1946 the American economy had just gone through an extraordinary series of stresses and disturbances, including the brutality of the Great Depression of 1929-1933, the abrupt and severe recession of 1937-38, the disturbances of the wartime production and a post-World War II recession from February to October 1945. Thus, it is interesting to me that the CEA’s economic policy overview sought to strike a balance between two extremes that remained recognizable in political discussions ever since, whom they named “The Spartan”. Doctrine of laissez-faire”, which contained a somewhat fatalistic critique that sometimes bad things happen in the economy, and “The Roman doctrine of an external remedy”, which argued that well-designed government action could almost always prevent bad economic results. Here is how the 1946 report describes the two views.
”THE SPARTAN DOCTRINE OF LAISSEZ FAIRE The first reflections on the general fluctuations of affairs were of a highly individualistic and essentially fatalistic character. Those who follow this line of thought – and some still do – accept the cycle as the result produced by causes deeply rooted in physical nature or basic human behavior and following a complex pattern of short, medium and long term oscillations. . They do not claim that this pattern is precise in timing or invariant in magnitude, like the movement of stars. But they think in terms of essentially mechanical relationships rather than in terms of human institutions that can be changed by intelligent action in a republic, and human behavior that can be changed by wise leadership. …
THE ROMAN DOCTRINE OF AN EXTERNAL REMEDY Contrary to those whose belief in the external character of the cycle leads them to conclude that there is nothing else to do but adapt one’s business operations or exploit it for a individual profit, a second group would master the cycle in a remedy also external to the processes of private business: the power of government to spend and to create a means of purchase. In recent years, a widely held belief has emerged that whatever “cyclical” forces affect business in general or whatever adaptations to those forces may be spontaneously brought about by the imperatives of understanding or private managerial prudence, the economy as a whole can be kept on a reasonably balanced keel by central government intervention in monetary and fiscal matters alone. According to this philosophy of external recourse, the essential phenomenon of a business depression is too little purchasing power returned to the system, particularly in the form of capital expenditure. The obvious remedy, therefore, is for the central government to measure the amount of this aggregate deficit and restore the affairs of the Nation to a satisfactory state of activity by injecting an appropriate amount of the means of purchase. …
In discussing these polar extremes, the CEA report attempted to find common ground, stating that “it’s with the 100 percent or the 90 percent that we disagree.”
“Contrary to Spartan business theory and practice which carried a cult of individual autonomy to the point of brutality and needless waste, we believe it is not fanciful to compare this doctrine of global compensation to a managerial maladjustment to the Roman system that swung to an extreme opposite to that of Sparta. Roman citizens were – for a time – relieved of the compulsion of relying on their own efforts to maintain their economy at a desirable level. “Bread and the games” were provided to all by the power of the state. Likewise, this theory relieves businessmen of the necessity of making for themselves those commercial adjustments by which they would keep the system at a satisfactory level. As we We’ve seen it in the Spartan school of thought, it’s the 100 percent or maybe the 90 percent that we don’t agree with. We don’t have to worry about the inadequacies of our business system. Monopolistic pricing policies can restrict markets and cause unemployment. Excessive wage demands can drive up costs and cripple profits, investment and employment. We need not worry because we can always create full employment by injecting enough purchasing power into the system. If there is too much demand for labor and materials, i.e. inflation, we turn off the tap and cause a contraction. So, by manipulating government spending and taxation, continued full employment is ensured and we don’t have to worry about anything else in the economy.
“Although American thinking has been largely of the Spartan model of self-reliance, not without some of the brutally unnecessary accompaniments of laissez-faire, and although the milder Roman philosophy of outward salvation has been aggressively sponsored in recent years , we believe that the larger body of American thought on economic matters tends toward a more balanced middle-of-the-road view. This view underscores the importance of having specific wage-profit-investment-disbursement relationships properly adjusted at the points where the business is actually done, markets found and jobs created. …
“For the effective functioning of large forms of business, we need the intimately informed and flexible decision-making of individuals in their business relationships and of the leaders of professional organizations. But we must also recognize that practically sound and individually efficient management of private agriculture, manufacturing, transportation, distribution and banking in the practical situations in which active managers must make their decisions will not suffice, year after year, to a satisfactorily sustained and stabilized total utilization of the resources of the Nation in the production of the national welfare of which we are in fact capable. Experience and experimentation therefore teach us that there is an important area for government action to stimulate, facilitate, and complement private enterprise, however well individually managed. This functional differentiation and this co-operation between private enterprise and public enterprise is in our eyes very different and much better adapted to our situation and our temperament than the nationalization of industries to which our English cousins are now resorting. Nor does it imply that regulation of the actual operation of business which would constitute bureaucratic ‘regulation’.
Alongside the more modern view of government macroeconomic policy that the report sums up as when the government “injects enough purchasing power into the system” or “we turn off the tap”, the CEA report also highlighted the importance of consultation and communication among “the most thoughtful and responsible leaders” representing business, labor, consumers and various levels of government. Such consultation sounds a bit strange to my modern American ear: maybe naive, or old-fashioned, or European, or all of that. But that doesn’t mean we couldn’t do more. Here is the 1946 report:
We therefore believe that when Congress directed the Council of Economic Advisers to establish consultative relationships “with representatives of industry, agriculture, labor and consumers, state and local governments, and other groups it deems desirable”, this describes one of the major characteristics of our work and one of the most important ways in which we can contribute to creating and maintaining maximum conditions of employment and the high standard of living that goes with. By consulting with the most thoughtful and responsible leaders of these groups regarding the conditions that would promote the well-being of the country as a whole, we believe that our advice and advice on the national economic program will reflect a realistic understanding of the needs and the difficulties of the various factors of the total economic process. We also hope that during these consultations we will be able to refer to the leaders of these groups some of the requirements that the proper functioning of a global system imposes on each of its components. In particular, we are convinced that we will be able to translate objectively to the representatives of the various business, labor and agricultural groups the objectives and methodology of government programs so that instead of blind opposition which could result from a misunderstanding, it can always have constructive criticism. , which will lead to a useful adaptation.