23.02.2012

The ordoliberals and Adam Smith's invisible hand

The 'big society' is not such a new idea, argues Werner Bonefeld. This is an edited version of his talk at the CPGB's 'Fundamentals of political economy' school

I would like to discuss here the ‘political’, as it were, in ‘political economy’: the state. In the Communist manifesto of 1848, penned as a 27-year-old, very excitable young man, Marx wrote: “The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.”^[1] How do we understand the idea of the ‘executive committee of the bourgeoisie’?

My work over the last 20 or 30 years has been in the area of Marx’s political economy, but during the last two or three I moved away from that. I did so in order to understand Marxism better. Reading Adam Smith was quite an education in terms of the idea of the state. Smith normally is seen as somebody who argues for the regulation of society by the free-price mechanism, laissez-faire liberalism, the ‘open society’ and so on. But if one actually reads Smith one does not find this. There might be the idea of the ‘invisible hand’, but he argues that, for the invisible hand to operate, all sorts of impediments need to be removed and the remover of these impediments is the state.

Weak state?

Is that a weak state? Is that the night-watchman state? What power of removal does that state need to have in order to provide a society and an economy that really is regulated by the free-price mechanism, by the ‘invisible hand’? A society that not only lets itself be regulated, but, according to the moral sentiments, also loves to be regulated by the invisible hand?

If, however, the operation of the invisible hand depends on the removal of impediments to that operation, one can say that in fact the invisible hand presupposes the political, presupposes the state as its condition of operation. Is that perhaps what Marx had in mind when he talked about the bourgeois state as the executive committee of the bourgeoisie?

Within the tradition of liberalism there is not, I would think, apart from some loony liberal fringe players, anybody who would say that the state is redundant or obsolete. There is always the suggestion, of course, that the state is too powerful, that it intervenes too much, regulates too much. But there is never the suggestion that the state should not regulate, should not intervene, should not organise the market. In The road to serfdom Friedrich Hayek puts that very clearly. He says that the job of the liberal state is to intervene for, to plan for, competition. Now, is that the weak state, the state that plans for competition? We are all used to the rhetoric of neoliberalism - the idea that the market rules supreme. How does ‘the market’ rule? Have you ever said hello to ‘the market’? Embraced it, cuddled it, kissed it? Can you do that? Yet the market talks to you, decides on your redundancy and regulates your level of subsistence. It rules supreme, as real abstraction that is infused with tremendous subjective power. What is it if not a social institution that individuals have entered into in the course of their history? - and yet it rules over society as if it were a person apart.

It is argued that the market gained power over the state roughly by the late 1970s or early 1980s as a consequence of neoliberalism. I never heard anyone say that the Thatcher governments were weak governments, that she was limiting the state to the role of a night watchman. Yet, in academic discourse, that is the idea. The market rules supreme and the state is in retreat. What do we mean when we say a ‘weak state’?

The tradition of liberalism that I have been reading includes ordoliberalism - the liberalism that emerged in Germany in the late 1920s-early 1930s as a decisive attempt at rethinking what needed to be done to rescue capitalist rationality, rescue market rationality, reinstate the supremacy of the invisible hand of prices and of social forms. It argued that a weak state was one that yields to social interests and that therefore does not govern over society. A weak state is one that succumbs to social forces, which use it for their own specific purposes. A weak state is one that has become the prey of social forces, and has fragmented and decomposed as the body of market liberal resolve. A weak state does not govern. It is a state of ungovernability. This weak state is not a socialist state, because socialism, it was argued, was basically anti-state. The weak state is a state of planned chaos. In order to rescue liberal purpose, a strong state that governs with authority and resolve is needed.

The strong state, the ordoliberals argued, is one that does not yield to specific social demands and does not become the prey of social forces, be they pluralistically organised in terms of unsocial competitive interests or be they class-organised in terms of a socialist labour movement. The strong state does not yield: a strong state governs over society according to certain principles, according to certain social values. And they said a strong state not only governs over society, but also governs through society, in order to maintain the ‘moral sentiments’ without which capitalist society cannot be sustained. Economists, they say, know the price of everything, but the value of nothing. Yet, in order to empower individuals as willing and enterprising followers of the price mechanism, they need to have the requisite moral stamina and perspective to cope with economic shocks in an entirely self-responsible manner, as entrepreneurs of their own life circumstances. That, they say, is the neoliberal state. A state that governs, sustains the moral values of society, and that imposes the legal, the moral, the social and in fact also the economic prerequisites of what they then call a ‘free society under state protection’.

The term ‘neoliberalism’ itself was used for the first time in 1938 at the Colloque Walter Lippmann, which transformed later into the Mont Pelerin Society - the apparent birthplace of neoliberalism. At this colloque liberals of different persuasions discussed the future of liberalism. What needs to be done to secure a liberal future? On the one hand, there was Ludwig von Mises, the Austrian economist who thought that uninhibited market forces was the best of all worlds and who, in his 1927 book The free and prosperous commonwealth, praised Italian fascism for saving all of European civilisation. On the other hand, there was Alexander Rüstow, the German neoliberal who emigrated in 1933 to Istanbul. Rüstow was the first to coin the phrase ‘neoliberalism’ - in distinction to the tradition of laissez-faire liberalism, and to von Mises in particular, whom he called a paleo-liberal. Rüstow said that the free-market idea of the state as a weak, indecisive, night-watchman state, and of the economy as a sphere that is governed by the magic of the invisible hand, amounts to the “theology” of liberalism. The state is not an alternative source of power in competition with the invisible hand: for the neoliberals, the invisible hand is a political project; it is, he said, a praxis of government. And that, I would have thought, expresses the Marxist idea of the state as the executive committee of the bourgeoisie in a cogent manner.

‘Big society’

In 1987 Margaret Thatcher said: “There is no such thing as society.” Her stance appeared in an interview that was published in Woman’s Own on October 31 1987, just a few days after the stock market crash (Black Monday, October 19 1987). The stock market crashes, and Thatcher says, “There is no such thing as society”.

Now amidst the crisis of 2008 and austerity, we have David Cameron. Not only does he think that there is such a thing as society; he also thinks this society is ‘big’. The first distinction of the ‘big society’ is that it is not small. What is the ‘small society’? The small society is one that lacks the ‘bigness’ to cope with austerity. It has no moral stamina to cope with the economic shock out of its own resources, by means of its own effort, and on the basis of its own self-responsibility. The small society, it is claimed, does not do that. The small society looks at the state and asks, ‘What can you do for me in order to meet my subsistence needs?’ For Cameron the small society is akin to the Keynesian welfare-state society. People in the small society lack ingenuity, entrepreneurship, enterprise and responsibility for themselves and others. That is the small society.

So the ‘big society’, first of all, is something of an aspiration; that which is small must be empowered to become big. In that sense the small society does not entail the small state, as it is made ‘big’ through the action of the state as a political project, as a form of government. What then does the ‘big society’ mean?

I will quote from David Cameron: “You can call it liberalism. You can call it empowerment. You can call it freedom. You can call it responsibility. I call it the big society.”^[2]

So we have liberalism, empowerment, freedom, responsibility. These are the important characteristics of the ‘big society’. The ‘big society’ idea says you are empowered and free to look at your own circumstances as a self-responsible individual. Don’t ask what government can do for you: ask what you can do for government. That is the sentiment and politics of the ‘big society’ as a project that seeks to balance the books of ‘financial socialism’ by taking money out of the pockets of workers, slashing public expenditure, slashing jobs in the public sector, governing the redundancy of a whole host of social individuals, and declaring progress is not just a measure of economic growth, but, rather, that it is measured by what the ‘big society’ can do for itself out of their own resources and on its own responsibility.

In the face of a desperate attempt to meet subsistence needs, it declares: ‘Don’t be small, don’t whinge: be big! Look after your own affairs, be responsible. Don’t ask others to subsidise you: subsidise yourself. Be an entrepreneur.’ Red Toryism, particularly the people around the ResPublica think tank, say that the next increase in productivity will come from this entrepreneurial society, in which frugality and industriousness go together as the foundation and means of greater labour productivity.

Smith and the state

As I have said, my research took me to Adam Smith and what he has to say about the state (and the ‘big society’). Smith, of course, was writing at a time that did not know the word ‘liberalism’ - I do not think you will find it in his work. Smith wrote in critique of mercantilism as a man possessed by things still to come. In The theory of moral sentiments, his first book (1759), he writes that a people is governed by self-love, and self-love oils the machinery of an ever increasing division of labour. But, he says, a society based only on self-love will destroy itself - I suppose the phrase, ‘cut-throat competition’, expresses this well. If you think about it - it cuts its own throat and bleeds to death. That is, self-love needs to be restrained to render it sociable.

So, he said, the moral sentiments also means that the society based on self-love has to be one based on sympathy, on regard for others. But in the tension between sympathy and self-love, he said, self-love wins. So you cannot trust the individual as a sympathiser of someone else’s misfortune. No-one lives like Bill Gates, making billions, on the one hand, and behaving like some Mother Teresa, on the other. For many people this is an impossible position. So, he says, the state is required as the impartial observer of the system of liberty, of the system of self-love. Of the system that gives us the law, of the system indeed, for Adam Smith, that provides us with the right sort of moral sentiments. A system based on self-love cannot succeed: it needs a morality that governs it. And this morality is in fact the marriage of Bill Gates and Mother Teresa. Not in the form of the person, but in a political institution - the state.

Why else is the state necessary in Adam Smith? He says the state is absolutely necessary in order to remove all sorts of impediments from the market. But what are these impediments? On the one hand, he says, there are capitalists who love themselves too much and fix the markets by mean of monopoly pricing - oligopoly - and they have to be reminded of the beauty of the perfect system of liberty by a politics of competition. Competition is good, he says, for workers. An uncompetitive system is not good for workers.

In other words, he determines an important state function by looking at the condition of the workers and the state’s role. So, he says, the interests of the master and the worker are not the same; the former wants to give as little as possible to the worker; the latter wants get as much as possible from the master. Thus there is class struggle, he says. The workers will rise - their position is desperate. But risings, insurrections, riots, strikes are “false consciousness”. They do not help employment prospects. They do not help the further division of labour. They do not help increase productivity. Therefore they do not help the trickle-down effect. How can we get the trickle-down effect going?

The masters, he says, have lots of money in their pockets. They can starve workers to death if they go out on strike. The masters are fewer in number and it is easier for them to combine against a big mass of people in turmoil, misery and hunger. The masters have the upper hand. So the masters need to be restrained too. Strikes and competition must be constrained according to a moral order which must be in place, Smith argues, for the benefit of the working class. The working class can only benefit if the employers are competitive, if the employer succeeds, if the employer can expand and absorb ‘redundant’ labour. That will lead to what the liberals call the trickle-down effect. The bigger the whole cake is, then the bigger is the slice for the poor. The rich might be getting richer, but the poor appear enriched as well!

In doing this, he says, we cannot trust the masters. The state is the executive committee of the bourgeoisie, to use Marx’s term, because, appearing as an impartial observer, it enforces the system of liberty that allows the constant increase in the division of labour and of productivity of labour. So the state operates not on behalf of a master, but on behalf of the system of liberty, of competitiveness, of lower unit labour costs, and thus on behalf of workers. So Smith says that the state is necessary to protect the rich against the rapacity of the poor expressing a false consciousness. The poor need to understand that a life of frugality and industriousness is in their own interest. Conditions will only improve for the better if they submit to the “system of liberty” (Smith’s term). There was thus need for a system of education to instruct the people in what is good for them. According to Smith, government should take pains to offset the socially and morally destructive effects of accumulation, by assuming responsibility for cultural activities to render society civil.

Is the Smithean state a weak state? Is the Smithean state the night-watchman state that liberalism tells us about? Or is his state one that governs for the invisible hand? For Adam Smith “the proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country, where he could either carry on his business, or enjoy his fortune more at his ease.”^[3]

What needs to be done? If things are at a standstill, Smith says in Lectures on jurisprudence, police are needed to secure the cheapness of provision. Policing is not an economic matter. It is proper to the state. The state is responsible, he says, for ensuring that society makes constant advances in competitiveness, in the productivity of labour, so that things do not come to a standstill. So that things progress. So that people are endowed with the right moral sentiments. So that they recognise human purpose as the purpose of economic progress. For Smith, the state is the strong, market-enforcing state. It makes society big. It governs for the operation of the free-price mechanism and, as such, the state is the political form of the invisible hand.

Ordoliberals

Let us turn now briefly to the German ordoliberals in the late 1920s-early 1930s. Put yourself in their shoes for a moment, so you can understand their point of view, their argument, their conception of the state as the executive committee of the bourgeoisie. Mass unemployment, mass demonstrations. Political assassinations, political violence. A severe regime of austerity by what was called the “famine chancellorship” of Heinrich Brüning. Entrenched class positions. An anti-systemic party system. And all of this against the background of the crash of 1929 and economic depression.

Now if you would have been a liberal would you have said, ‘Laissez-faire - c’est la vie! Let the market decide where it goes: if it crashes, then so be it. If the Bolsheviks succeed, then good luck to them!’ Is this a feasible liberal response? Is liberalism really apolitical, devoid of social values, etc? Or would you as a liberal in that position think that you have to stand up because things are going from bad to worse; something needs to be done, decisions must be made, order must be rebuilt so that the rule of law is restored? Does the law apply to chaos or does the application of the law presuppose social order? Does the law enforce itself? Or is enforcing an order itself a matter of ordering? Of policing? Does the invisible hand regulate the market without law, without order, without moral sentiments, without ‘society’ - that is, without a legal, moral, social framework? If, however, everything depends on order - good order, that is, not the bad order of Bolshevism; the order of liberal values - what in the late 1920s would you have declared for in the hour of liberal need? What kind of order must be enforced? Who enforces it?

The law does not enforce order. How to enforce order on a people who do not have the moral sentiments for the kind of social order that you call ‘liberal’? What kind of education is needed for a people to internalise the moral sentiments of the market, of self-responsibility and willing compliance with the price mechanism? It’s tough out there though - there are millions of people unemployed. What do you do? Are you arguing for a welfare state? Or are you arguing that these people need to acquire the moral stamina to succeed? What to do in the face of disorder and liberal emergency?

So German ordoliberals in the late 1920s-early 1930s called for order to be restored by means of a coup d’etat that was to be led the conservative politician, Franz von Papen. They said that democracy needed to be suspended. They did not call for a sovereign dictatorship. They called for a commissarial dictatorship, which temporarily suspends the rule of law in order to reinstate it, once the liberal emergency is over. They said that society lacked the moral stamina to cope with economic hardship. In today’s words, they declared for the creation of the ‘big society’! One that is enabled to look after itself, empowered to face adversity in an entirely self-responsible manner, does not whinge and gets on with things in the spirit of the entrepreneur. For this to happen, they said, we need to make a decisive turn to the state - a state that makes decisions, governs and thus empowers society in the self-responsible use of economic freedom.

Alfred Müller-Armack argued that social policy is about the incorporation of competition into normal life. This is the same Müller-Armack who in 1946 introduced the term, ‘social market economy’, and who understood the ‘social’ in the social market economy to stand for decisions for the free market, because only the free market is able to increase the wealth of nations, improving the condition of the poor by means of the trickle-down effect. It is this trickle-down that characterises the free market as a social market. Or, as his colleague, Franz Böhm, put it, nothing is worse than a condition in which the free-price mechanism regulates the coordination of, and adjustment between, millions and millions of individual preferences - only for “the will of the participants to rebel against that movement”. The formatting of this will defines the ordoliberal purpose of the strong state. Liberal society, says Böhm, loses its moral compass if it yields to demands for welfare, for housing, for subsidy, for care. Rather, what is needed is a state that governs the mentality of society to secure the will of the participants.

No ‘moral stamina’

I would like to conclude with the issue of the proletariat in these writings. I talked earlier about the conception of the working class and class struggle in Adam Smith - the master wanting to give as little as possible; the worker wanting to receive as much as possible. As far as the ordoliberals are concerned, laissez-faire liberalism amounts to a theology of the invisible hand. It is thus blinded to the social consequences of free economy. If things are just given free rein, they say, then the gravediggers will turn up. Suddenly the workers are transformed into proletarians - and a proletarian, they say, is someone that does not have the moral stamina to look after themselves in an empowered and self-responsible manner.

The proletarian is not a citizen of the free-price mechanism. Rather s/he rebels against it! The proletarian, they say, is someone who demands employment guarantees, who demands welfare guarantees, who demands public solidarity for their own subsistence - that is, the welfare state is the political outcome of a proletarianised society. For the sake of the common wealth, society needs to be deproletarianised. How? The proletarian, they say with reference to Marx, is someone who is doubly free. They have no means of market-independent subsistence and thus depend entirely on the sale of their labour-power. That makes the ability of the proletarian to respond to economic shocks in a self-responsible manner very difficult, as they are not able to fall back on alternative means of subsistence.

So what needs to be done, they say, is to transform the proletarian into a proper citizen of the world. Since the proletarian is characterised by the lack of private property, deproletarianisation means an attempt at private property provision or, as Sam Brittan called it in the 1980s, it means popular capitalism, including particularly home ownership. What else? Share ownership, they say. Private pensions. Everything that infuses the workers with the mentality of the citizenship of private property is a good thing. Private debt is also a form of property: it reduces the willingness to strike if people are desperate to hold onto their homes: they price themselves into jobs for the sake of debt service.

The market liberal social policy includes a whole host of measures that are not aimed at changing the proletarian position of the worker - that is bad for business - but at changing the mentality of the worker. To quote Wilhelm Röpke, the father of German social-market economy, to be a proletarian is not a “material condition”: it is “an attitude”. An attitude which must be changed for freedom’s sake! For the neoliberals the state is the organisation charged with embedding these “psycho-moral forces” (Röpke) into society.

Finally, none of what I have described is the economy. The economy, according to the ordoliberals, has no independent existence. The economy has no force of social cohesion. The economy has no force of social integration. They say the idea of an invisible hand governing us is just theology, has no standpoint to defend, is subject to disorder and turmoil, is devoured by greedy self-seekers, and gives in to its proletarian gravediggers. For them the economy is rendered independent, as an automatic entity, by the state. The state forces order on society, provides for the rule of law, secures the moral make-up of society, polices disorder, and reminds us of our duties and obligations as an empowered people who look after ourselves and our own affairs in freedom and responsibility.

This is a definition of the ‘big society’ with which I began.

Notes

1. www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm.

2. www.number10.gov.uk/news/big-society-speech.

3. A Smith An inquiry into the nature and causes of the wealth of nations: www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book05/ch02b-2.htm.