By Arie Arnon | 02/04/2010
The heart of the social debate on economic matters touches on the issue of drawing a line between the private and the public. Arie Arnon reviews the thought of three seminal philosophers who dealt with the attempt to devise a formula for economic redemption, and concludes that a superior economic method has not yet been found
Privatization, and its reverse, socialization, have as long a history as the history of ownership. For our purposes, however, it is sufficient to begin in the 18th century with the thought of the legal father of many who support privatization, both in Israel and abroad, Adam Smith. In his book, The Wealth of Nations (1776), Smith claims that the proper way to organize society is to leave it to the "invisible hand." This unseen power will ensure harmony even in a developed and complicated society, in which there is a deep division of labor with no one organizing and orchestrating its economic life. The economy of the society will be organized by the invisible hand enabling it to function in the most efficient manner in terms of exploiting the means of production, yet also in a just manner. Anyone who reads Smith's manifesto, written in the philosophical tradition of "natural law" and in the tradition of historical economics, will find that the roles of the governmental authority are limited to creating the rules of the game between the economic agents (i.e. the play between the owners of capital and land, the workers and the entrepreneurs, etc.) for the sake of protecting the state from outside forces, and addressing failures of the market. In Smith's view, failures of the market are relatively rare, foremost among them being the failure of the invisible hand to create large infrastructure projects, a role that is transferred to the governmental authority.
Smith's perspective was delivered in prose, without employing mathematical language, as is accepted among modern economists, but the modern conclusions are identical to those of Smith. One might say that the mathematical economists, mainly from the mid-20th century, translated Smith's claims – with a delay of almost 200 years – to mathematical language, and since the translation succeeded, they concluded that Smith's model was correct in relation to the real world. According to this opinion, not only is there no possibility of improving the results of the mechanism of the invisible hand, but also, any attempt to make corrections, for example through government intervention in market forces, will end badly. Sound familiar?
Marx, and in his footsteps, important socialist streams, contested the claim that efficiency of production and justice are generated in a society dominated by the mechanism of the invisible hand. The depiction of the method such that any attempt to rectify it will only give rise to dysfunction, is rejected out of hand. So, too, was the depiction of the method as giving rise to harmony, or, at least, maximal harmony, countered with a critique that emphasized the various groups in society. Marx – let us not forget that he lived and wrote before Stalin and his philosophy is also relevant to the period subsequent to the fall of the Soviet Union – identified Smith and the ideology of the invisible hand with the interest of private capital. Most members of society have other interests. Marx believed that the method, which according to Smith is the only possible method, is replaceable and temporary. This was the conclusion arising from Marx's historical and philosophical perspective, and contrary to what many think it was not accompanied by a proposal to reorganize society.
Although Marx suggests no formula for organizing post-capitalistic society, and the model of central planning implemented in the U.S.S.R. and the Eastern Bloc countries is only tenuously linked to him, it is clear that his viewpoint aspired towards socialization and rejected privatization. The question as to how to organize contemporary human society, in which the division of labor has created a network of almost infinite mutual relations, remains open. Marx, in contrast to the erroneous interpretations of a number of his less-critical admirers, offered no answer to this question. However, it is clear that the Marxist answer resides in the necessity of causing the economy to obey the majority. In order to achieve this, it is necessary to infringe on the rights of possession accruing to owners of capital and to interfere in the organizing mechanism of the economy: the price mechanism. In other words, if private ownership of production assets interferes with democratic control of the economy, it is permissible – and even imperative – to limit it. Marx, it is safe to say, would have joined the opponents of privatization; Smith's second critic, Keynes, would seemingly have disagreed with this conclusion.
Keynes presented his critical view in a book that launched a new age in economics and is considered one of the most important economic treatises of the twentieth century. The book, The General Theory of Employment, Interest and Money, was written in 1936, in the shadow of the great economic crisis, at a time when the Marxist view regarding the transience of capitalism was accepted in many circles. Keynes developed an economic theory that concluded that the mechanism of the invisible hand that had been accepted since Smith was sometimes fallible. The failure that brought about the terrible crisis, according to Keynes, could be rectified by the visible, governmental hand, by implementing appropriate policies. According to Keynes, it was not imperative, and in his opinion not necessary at all, to infringe on the rights of possession, but it was necessary to intervene at the level of the market as a whole and to manage its demands. According to some Keynesian economists, it is impossible to make adjustments unless the investment process in society is socialized, i.e. transferred from private hands to the control of public interests.
The three economists surveyed here variously posit a necessary delineation between the private and the public. Smith leaves to the public realm the status of general regulator, who plays between the private interests; Marx leaves to the private realm a marginal status after transferring economic sovereignty to the majority of society, which represents its own interests; Keynes grants the economic sovereign responsibility for directing the market and steering it clear from the realm of crises. In other words, none of the three dismiss the mechanism of arranging production and distribution through the price mechanism, but while Smith suggests not intervening in the results of its activity, Marx and Keynes suggest making use of the visible hand. Marx suggests socializing ownership (not necessarily nationalizing! – public ownership is not identical to state ownership) while Keynes suggests socializing important economic decisions. Where to draw the line in delineating between the private and the public in organizing society is, therefore, the heart of the social debate.
The British Phenomenon
While each society has its own characteristics, the example of England is helpful and worth a momentary glance. The aftermath of World War II, under the shadow of Soviet communism, the Great Depression, and the shadow of Keynes, spurred the British Labor Party to a process of broadening the public realm at the expense of the private. The state nationalized key industries, took responsibility for a social safety net including education, health and welfare, and adopted an active macro-economic policy. Beginning in the 1980s, however, first under the Thatcher government but also subsequently, a far-reaching, counter-process was set into motion. Under the heading of privatization, the industries not in private control were transferred to private hands, and the state reduced its responsibility and involvement in the areas of education, health and welfare. Every aspect of the active economic policy was replaced with passivity. In short, from the ways of Keynes and perhaps even to a small extent Marx, England turned to the ways of Smith.
The British phenomenon, i.e. the retreat from the public to the private, or a re-delineation – characterizes broad swaths of today's world, both the more developed and the less so. This is accompanied by an old-new international trend: globalization. Here as well, we have a case of remaking the line, this time all over the world, from the public, with its variety of institutional arrangements, to the private.
Privatization reached Israel in the mid-1980s. It began with state attempts to sell factories in its ownership, mainly monopolized infrastructure and banks. This was achieved using the tools of deification of the private sector, and attributing demonic ills to the public sector. The claim that public society is inefficient and therefore must be sold off, even if the privatization report prepared by the American investments company First Boston for the government on Israel Chemicals Ltd. states the reverse, was accepted. Privatization in the sense of selling ownership was implemented, even though commission after commission explained that it is competition and not ownership that is important, as in the case of Bezeq.
However, privatization, in the sense of redrawing the line between private and public, includes more than transfer of ownership. Reducing the role of the state in the economy was expanded beyond ownership of government companies to realms of state responsibility. And so, Israel is opening the areas of health (yes, yes, despite the National Health Insurance Law of 1994) and education to the evil hand of privatization, as well as the realms of welfare and employment.
Privatization knows no bounds. It is present not only in social-economic policy, but also in peace policy. The Oslo Accords, those temporary agreements signed between the Israeli government and the P.L.O., established a Palestinian governmental authority, and the economic relations between the Israeli and Palestinian markets were set forth in a contract signed in 1994 in Paris. According to this agreement, the invisible hand was granted a central role. The parties left it to the invisible hand to direct a substantial portion of the economic development by preventing the establishment of an economic border between the two economies, a border that could have enabled the authorities of both sides to determine a portion of the economic developments.
It was not by chance that the accords prevented the establishment of an economic border, and in so doing left economic policymakers without space in which to act.
Determining the market strategy in terms of the new proposed border suited the perspective of the authors of Oslo, led by Peres, regarding the place of the invisible hand in economics. The perspective known as the "new Middle East," was appropriate to globalizing trends and was calculated to replace a political solution requiring territorial compromise with an economic solution, as if, through the invisible economic hand, it is possible to evade the national conflict.
However, the damage that the economic strategy of the invisible hand caused to peace is greater than one might think. Those who stand to gain most from implementation of the market-based peace perspective are again the owners of capital, as it affords them cheap means of production, easy markets, and big profits. And yet their way poses an actual threat at many levels in Israel and the surrounding world. Women laborers in the textile industry in Israel are threatened from the rule of market forces, since under a peace arrangement empty of content, their livelihood is threatened. And in the world around us, the "new Middle East" has become synonymous with the threat of takeover not by weapons, but by capital. This threat, even if it is presented hyperbolically, plays a significant role in arousing opposition to peace among many strata of society that have not enjoyed its fruits. Not everyone, indeed, desire casinos and lotteries that re-distribute nothing.
The search for a suitable alternative for organizing society, an alternative that is realistic but also strives towards social utopia, has not ended. The establishment of a society in which want will be reduced and solidarity and social justice will be central, is accepted by most of the Israeli public as a desirable vision. In order to achieve this, it is necessary to define the objectives of society not only in the economic dimensions accepted today (inflation, deficit, etc.) and not only by adding important objectives (growth, optimal unemployment level, minimum and maximum wage), but also objectives for maximum and measured inequality. In a society committed to equality and solidarity, no gap will remain that is greater than the agreed level, both in the income of individuals and in ownership of property; likewise, democracy and equality will also apply in the economic realm and not merely in the political. In other words, the fundamental rule accepted in political systems: "one woman, one vote," will be expanded to the economic realm: "one man, one banknote," or, at least, "no person shall be left with fewer than 'X' banknotes." The expanded aspiration to reduce inequality will also include ownership of property. Society will discuss and decide, in a democratic process, in what realms to permit private ownership and how to limit it, and in what realms to impose non-private ownership in all of its manifestations.
It is possible and also necessary to remove from the realm of the invisible hand's control realms that are considered basic life needs: education, health and shelter, food, and care for the weak. The supply of health and education services in a society led according to economic democracy will be such that equality between all members of society is preserved. Money is not meant to purchase preference in these realms. Education and health can be provided in a range of ways, but it is not right to give the rich more than the poor. Other basic life needs will be ensured for all, to a minimal level to be determined by society. In other words, inequality in these realms will be limited in a manner that prevents control by market forces. In other realms, maximal gaps will be agreed upon.
The path to achieving these ambitious objectives will certainly include confrontation with various interests that will be adversely affected. These groups will most definitely raise claims regarding the lack of an ability to catalyze such changes in a world presently in the throes of globalization. This threat is directed at those who aspire to change in any place where a reduction in the power of those controlling the various economies is attempted. The example of Brazil (take note!) is a case in point. This does not obviate a maneuver that strives for increased equality, but it is clear that it is a change that itself will have to be global. The flight of industries to countries where labor is cheap, for example, cheap child labor, brings into focus the international dimensions of every struggle for equality. And yet, the minority that seeks to preserve the status quo will find it difficult to persist in the global journey of eternalizing and increasing gaps vis-à-vis the citizens of the world who wish to preserve human dignity, as most understand it.
The experience around the world in recent years, and an analysis of the failures and the successes, strengthen the opinion that we are still in the age of searching. In all likelihood, the new tools we have been afforded, networks that link masses and enable the flow of great amounts of information, will place an efficient and just mechanism within reach. Decentralization of the economy, diverse public ownership, and use of intervening policy mechanisms controlled by the democratic method, are the correct way.
Arie Arnon is a professor in the Economics Department of Ben Gurion University and Chairman of "Commitment to Peace and Social Justice," a non-profit organization that operates a hotline for the rights of the unemployed.