Dividing the Labor to Ensure a Strong Economy

Neither the private nor the public sectors can ensure successful economic growth alone, but by recognizing this division of labor, DPEs can channel government and corporations toward mutually reinforcing successes. Attention to this division of labor and the structural properties that guide each sector can help achieve significant economic gains. Governments can work to create enabling political economy frameworks (like the Global Information Instrastructure/Internet) that are beyond the scope of private enterprises, yet significantly enhance economic opportunities. [2]

Companies drive economic activity by investing in potential profit-making activities while governments strive to provide enabling frameworks for economic prosperity. The corporation has emerged in modern times with a legally-shaped fiduciary duty to maximize shareholder value through return on investment (ROI). This legal stance tends to marginalize “ESG” (Environmental, Social, and Governance) concerns, including labor concerns such as fair wages, equal opportunity, sufficient benefits, and adherance to labor laws. The influence of ESG on investor decision-making continues to grow, including pressure to reduce environmental “externalities,” the costs paid by third parties when a product or service destroys or pollutes air, land, or water.

Democratically elected governments want to organize infrastructure, legal systems, and services to create economic value for voters and maintain political power for themselves and their party. Failure to enable and entice investment and produce economic success within a political boundary can raise significant difficulties for a government and its internal populace. Unstable economies can experience rapid de-investments due to the mobility of capital.

Globalization of commerce and finance since the 1970s has created new forms of competition and mobility for capital. This trend has challenged the economic base of national and local governments as they compete with each other to attract fluid multinational capital. Tax cuts facilitated US capital flows into China and other low-cost producers, reducing inflation but also jobs and infrastructure investments. At stake are jobs and investment returns.

While capitalists are often quite capable of success at the microeconomic level, they are not in a position to manage the economy as a whole. Towards procuring that success, corporations lobby governments and conduct other activities to influence government actions that will help their companies and industry.

Entrepreneurs and other people in business and professional services tend to be highly focused on their own profitability while spending only limited resources on community and civic affairs. Market activities are competitive and barriers to entry transitory. Private activities are insufficient and unable to maintain parks, libraries, roads, and other public goods that enhance the quality of life. And yet, these public goods are often responsible for attracting capital and talent needed for innovation and competitiveness.

As a result, democratic political economies tend to divide the responsibilities for modern economic life. Corporations focus on commercial and financial success. Governments provide, among other things, a judicial system to protect contracts, educational support to train workers, and administrative support to protect the populace from pollution and other dangers. Each shares an interest in robust commercial activities, albeit for differing reasons.

Perhaps most important is a monetary system that facilitates transactions and maintains price stability. DPEs primarily use a fractional reserve banking system that creates money through debt. This is capitalism’s “pedal to the metal” economic system that creates what what economists like Joseph Schumpeter and Werner Sombart called “creative destruction.” Modern Monetary Theory (MMT) has effectively argued that currency issuers like national governments play a crucial role in wealth production by supplying much-needed money and debt instruments. Governments spend money into the economy so companies and consumers have the liquidity to produce and consume.

When it comes to ensuring a successful and prosperous political economy, democratic societies have certain structural conditions that guide the emergence of their particular form of capitalism. Within limits, the political economy can take a variety of forms, such as highly exploitive and accumulation-oriented oligarchies or, on the other end of the scale, a highly redistributive society. Effective development strives for high integration strategies that balance accumulation and distribution strategies.[3]

Neither the public nor private sector in modern democratic societies have sufficient managerial or policy competencies to ensure a thriving economy. Yet, both rely on a vigorous economy for their success. Each needs economic success to satisfy their respective electoral and fiduciary constituencies. Despite the division and differing reasons, the goal is the same, a vibrant economy that will ensure both private profits and political triumph.

Governments look to the fruits of a growing economy to offset spending for debt interest, defense, and other services, including welfare. They aim to maintain a happy populace that will keep them in office. They want a prosperous economy to keep people employed, keep share prices high, and keep investment flowing into productive activities that will keep people feeling economically secure and provide tax revenues.

The private sector, in general, is unable to ensure overall capitalistic growth on its own. It lacks sufficient organizational capacity to ensure success at the macroeconomic level. That does not mean the private sector cannot infiltrate governance and the policy sphere. Donald Regan, the former CEO of Merrill Lynch, played a significant role in shaping the economic policies of the Reagan administration. As Secretary of the Treasury and Chief of Staff, he helped define and implement “Reaganomics,” emphasizing tax cuts, deregulation, and tight monetary policy. Along with Citicorp CEO Walter Wriston and others, they shaped a global framework based on capital mobility, fiat money, and credit markets. Still, it was not their roles as heads of major financial institutions but their participation in the US political administration that shaped a high accumulation, low distribution DPE with national and global implications.

While corporations are often quite capable of success at the microeconomic level, they are not in a position to manage the economy as a whole. The private sector wants growth and profits as well. Corporations strive to fulfill their primary fiduciary responsibilities – maintaining high profits for owners and shareholders. Towards procuring that success, they lobby governments and conduct other activities to influence government actions that will help their companies and industry. However, while these attempts may help individual companies or industries, they are insufficient to ensure the success of capitalism as a whole.

The Republic’s Interest in the Economy

In the first of the major structural mechanisms that Fred Block proposed to explain why government officials pursue policies that are in the general interest of capitalism. According to his view, government officials are, to some extent, dependent on the level of economic activity that 1) allows the state to finance itself through taxation or borrowing and 2) maintains popular support among the voting citizenry. Significant business investment, high employment levels, and minimal government competition for surplus capital are the most common strategies for ensuring high tax receipts while keeping the voting public relatively content.[4]

Governments require a monetary base to help fund their activities, whether meeting the bureaucracy’s payroll, building infrastructure, or funding defense activities, munitions, and personnel. According to MMT, governments also provide a monetary system to standardize the currency used in the collection of taxes. While MMT argues that national governments are currency issuers that create wealth when they legislate money. Taxes do not provide revenues for government spending, but provide a regulatory mechanism to limit inflation due to consumer and investment spending. These actions are often needed to reduce prices and motivate official economic activities that use the prescribed currency.

In the US, both Democrats and Republicans have spent liberally. The “Double Santa Claus” argument was set forward by Wall Street Journal editorial writer Jude Wanniski in 1976. In “Taxes and the Two Santa Claus Theory,” he argued that the Democrats should be the spending “Santa Claus” and redistribute wealth while the Republicans should be the tax reduction “Santa Claus” and help spur income growth. The Reagan administration institutionalized this approach with increased spending on anti-poverty programs such as Medicare, Social Security, and food assistance programs like the Supplemental Nutrition Assistance Program (SNAP). Military spending increased dramatically, including investments in new weapon systems, most notably, the Strategic Defense Initiative (SDI), commonly known as “Star Wars.” SDI proposed a space-based missile defense system designed to protect the United States from potential nuclear missile attacks and inadvertently laid the foundation for the Internet. Meanwhile, he drastically cut taxes with the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986.[5]

Tax policies affect people and groups differently. They advantage different groups and disadvantage others. In the process, they make specific governmental trajectories possible. DPEs generally tax a combination of capital gains, income, sales of goods and services, etc. Inheritance taxes, for example, are meant to not only collect revenues but also impose a cost on the transfer of wealth and limit familial privilege and class divisions. The makeup of these tax policy decisions helps dictate an economic direction, so taxation policies should focus on what they want to diminish or limit.

Administrations also produce debt instruments that help offset government spending. In the global digital financial economy, government expenditures increasingly fund a significant amount of education, healthcare, military, research and other expenditures.

Taxation and borrowing offset their spending activities and programs, and help ensure a robust commercial sphere. Excess spending in the US is limited legislatively as part of the Reagan administration’s major changes to the financial sphere.

These instruments also provide safe collateral and an important hedge for the financial sectors. The US dollar is also produced as a global currency called the “Eurodollar.” International banks produce this version of the US dollar through lending and is not regulated by the US administration. Since over 80% of global trade is facilitated by the US dollar, Eurodollars bring important liquidity to international trade. But these banks often require high quality collateral like US Treasury bonds or blue chip corporate debt to ease any hesitancy to lend.

The global trading environment is complex and requires constant trading in various financial instruments. Government debt allows traders to increase their trading activities by allowing them to hold government securities in their portfolios as a hedge against other speculative losses. Government bonds are also traded constantly in high-frequency markets for arbitrage opportunities, debt rollover, income opportunities, and as a store of potential liquidity.

Common economic doctrine argues that governments compete with the private sector for capital. Still, in reality, government spending increases the commercial and financial spheres by expanding the trading environment, facilitating transactions, and providing instruments for risk reduction. These expenditures are why the US dollar has become the dominant global reserve and transaction currency. The volumes needed are huge, and the US has been willing to go into fiscal and trade deficits to provide the currency to the world.

Elected officials also need to keep the voting populace materially happy to stay in office. Economic indicators play a vital role in the public’s perception of the economy. These indexes provide numerical representations of various states of the economy, from consumer confidence to price levels and the latest unemployment rates. In an age when pensions and retirement accounts are invested in the financial markets, the public also follows such indicators as the Dow Jones Industrial Average (DJIA) and NASDAQ to gauge their personal wealth. Many older voters see policies that increase corporate wealth, such as tax cuts, as more valuable than government expenditures on food stamps or other forms of personal welfare as they increase stock prices for mutual funds and retirement accounts.

Significant structural relationships make the business of the economy, the business of government. For one, modern democratic governments have significant fiscal determinants that compel them to establish a major stake in the economy. Voters expect sufficient government services from military, regulatory agencies, and some degree of welfare support for the disadvanged. These desires are tempered by the “taxpayer’s money” myth that says that government needs to tax voters before public money can be spent. But governments are “currency issuers” that tax and borrow for other reasons. In order to obtain the needed financing to run the government, provide for the national defense, monitor the economy, and conduct special programs.

Influence Channels and Cultural Constraints

The business class is acutely aware of the effect government has on their interests and work towards shaping that influence, whether it be depressing the minimum wage, alleviating environmental restrictions, or shaping tax policy. Many critics of democratic political economies argue that influence gives capital concerns sufficient control over the state. For Block however, it is the first of several reasons, the “icing on the cake.” Other structural factors are at work and need to be considered.

Two “subsidiary structural mechanisms” according to Fred Block are also important when it comes to shaping the actions of public administrators towards enhancing economic growth. These are influence channels and cultural hegemony.

The first of the subsidiary structural mechanisms are the influence channels. The private sector can exert significant pressure on the state through its ability influence politicians, especially in a media age requiring significant expenditures on TV and other mediums for advertising. The aims of this influence has generally been oriented towards the procurement of government contracts, favorable economic legislation, tax cuts, regulatory relief, labor control, and specific spending in certain areas. They are most often campaign contributions, lobbying activities, and other favors.

Undoubtedly, issues related to bribery, coercion, and the revolving door into higher paying jobs may be factors that influence policy actions, however, this does not discount larger structural factors at work, particularly the high costs of elections, and procuring media buys for competitive elections and public relations. These have tied government officials to the influence of economic concerns.

Cultural hegemony was cited as a second subsidiary structural mechanism. Unwritten rules infiltrate democratic political economies, which tend to indicate what is, and what is not acceptable state activity. “While these rules change over time, a government that violates the unwritten rules of a particular period would stand to lose a great deal of its popular support. This acts as a powerful constraint in discouraging certain types of state action that might conflict with the interests of capital.”[6]

A contemporary example is the cultural divide over immigration. Issues related to race, including systemic racism, police brutality, racial inequality, immigration policy, and affirmative action, continue to be sources of contention and polarization in American society. Several major cultural divide issues have become prominent in political discourse, such as fundamental values, beliefs, and identities. “Culture wars” over social and cultural issues such as abortion, LGBTQ+ rights, same-sex marriage, religious freedom, and gender identity are particularly important in the age of social media and shape public opinion, electoral dynamics, policy debates, and social movements.

One potent issue is climate change. President Trump withdrew the US from the Paris Climate Accords because of a growing cultural backlash against concerns about climate pollution influencing weather effects worldwide. Many of his “Make America Great Again” (MAGA) members were convinced that such actions would be too expensive, hurt economic progress, and threaten a lifestyle centered on oil-based products, technologies, and transportation. Others refused to believe the scientific discourse and labeled it “elite” science. But mostly, vital interests in petrochemical-related industries drive the discussion on climate change through media practices such as astroturfing to avoid a significant “carbon bubble” collapse. For the most part, liberal progressive movements have embraced sustainable technologies and renewable energies such as hybrid cars, solar panels, and low-carbon food systems.

Summary

While sharing broad common objectives for a robust political economy, the government and the private corporate sectors have differing motivations and strategies for reaching these aims. Despite the division and differing reasons, the goal is the same, a robust economy that will ensure both profits and political success. Neither can, by themselves, ensure successful economic growth, but by recognizing this division of labor and the structural properties that guide each sector, democratic political economies can guide government policies and corporations toward mutually reinforcing successes. [7]

Citation APA (7th Edition)

Pennings, A.J. (2024, Apr 12). The Division of Labor in Democratic Political Economies. apennings.com https://apennings.com/democratic-political-economies/the-division-of-labor-in-democratic-political-economies//

Notes

[1] When I was in graduate school studying public administration and political economy, one the authors that interested me was the sociologist Fred Block. In debates with instrumentalists about “ruling classes,” he delineated the set of structural mechanisms that I primarily use here to determine the relationship between governments and the private sector in modern political economies. In this Jacobin article he provides a 2020 epilogue on his classic work.

[2] An interesting situation about enabling frameworks emerged with President Obama’s “You didn’t build that” statement during the 2012 presidential election campaign.

“If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”

The statement quickly received criticism by Governor Romney, a successful businessman, and others as an example of government encroachment in the private sector. The criticism echoed a similar critique against Vice-President Al Gore’s “I took the initiative to create the Internet.” Certainly, the Internet has progressed to be a major medium of global commerce due to entrepreneurial initiatives and accomplishments. However, much of the initial research and development, as well as the policy framework, was created by a wide range of government actions that transformed what was essentially military technology into commercial products and services.

[3] Tehranian, Majid. (1990). Technologies of power : information machines and democratic prospects / Majid Tehranian ; foreword by Johan Galtung. Norwood, NJ : Ablex Pub. p.184.

[4] This is basically a rewrite of my 2018 post that I wrote after Trump was elected president. I started with a disussion of whether a president with business experience is more important than a president with good understanding of administration and politics. Fred Block’s work was particularly useful and much of the ideas of a structural division of labor is based on his work, including this quote on p. 14.

[5] In the US, the “double Santa Claus” argument was set forward in “Taxes and the Two Santa Claus Theory” by Wall Street Journal editorial writer Jude Wanniski. He argued that the Democrats should be the spending “Santa Claus” and redistribute wealth while the Republicans should be the tax reduction “Santa Claus” and help spur income growth.

[6] This is basically a rewrite of my 2018 post that I wrote after Trump was elected president. I started with a disussion of whether a president with business experience is more important than a president with good understanding of administration and politics. Fred Block’s work was particularly useful and much of the ideas of a structural division of labor is based on his work, including this quote on p. 14.

[7] This blog is dedicated to my brother, Richard Pennings, who died on April 12, far too young.

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Anthony J. Pennings, PhD is Professor at the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he was on the faculty of New York University where he taught digital economics and comparative political economy. He also taught at St. Edward’s University in Austin, Texas, Marist College in New York, and Victoria University in Wellington, New Zealand. He has also been a Fellow at the East-West Center in Hawaii.

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Category: democratic political economies
Tags: "taxpayer's money" myth > Donald Regan > Modern Monetary Theory (MMT) > Reaganomics

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