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Blogging my thoughts about the Government’s Role in the Economy

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Blogging my thoughts about the Government’s Role in the Economy:

My economics professor, D’Anghel N. Rugina (1913-2008), taught us students about economic models.[1] He called a free economy that affirmed private property and had a government of limited powers, Model alpha (Mα) and a completely controlled and planned economy that prohibited private property, whose government had unlimited powers, Model omega (Mω). He sometimes applied his models to the government, society, and the economy, which, according to him, are in an organic relationship. He noted that in France the society could be described as Mα 95% and ω 5%, the economy as Mα 45% and ω 55%, and the government as Mα 30% and ω 70%. (Because their models did not match there was friction. In the long run, the models of the government, economy, and society have to come close.) Narrowing the focus to the economy, however, a purely free one was theoretically 100% Mα and 0% Mω and Rugina described our mixed economy as more or less 50% Mα and 50% Mω. (To fix the historical time period, I took his course in economics in Northeastern University fifty years ago in the early sixties.)

Coming from a horrible experience with communism in Romania, Rugina identified that system or model with slavery and the Mα economy with freedom. In any case, he argued that the Mα economy sat on the base of a stable triangle, while that economy, which was completely centralized, planned, and controlled, i.e. Mω, sat on the point of the triangle making it completely unstable.

Mα Mω

In Mα the people had the freedom of choice, could take initiative to start a business, and participate in the competition of the market place. In Mω the government had centralized and unlimited control over a planned economy.

Meanwhile it is important that the percentage of the Mα increase and that of the Mω decrease. Rugina noted that before World War I, no classical economist used the term capitalist for a free society that championed the free markets with limited government. When the term “capitalism” was first used it was pejorative connoting depression and over-production.

Today with as mixed an economy as ever, it is still necessary to champion the gradual increase of the Mα percentage and the decrease of the ω percentage. In the words of Rugina, to have full and natural stability, we must bring the system closer to Mα. But that can only proceed by greater approximations and not by giant disruptive steps, e.g., going back to the gold standard for money as Ron Paul would have us do. It is important that the government not interfere in our economy, but then we must also realize that if we devise policies as if we have Mα 100% and ω 0%, then we are being completely ideological. Rugina did not consider the anti-trust laws government interference, because as he says in an important essay in the Economist, capitalism has to be regulated with all the instruments, dials, and gauges like in the cock-pit of an airplane for it to fly.[2]

Because Rugina was a classical economist, he considered John Maynard Keynes (1883-1946) a Marxist masquerading as a liberal economist, but he felt that Keynes’ theories applied to economies that were in a slump, which could describe ours right now. He noted, however, that despite Keynsian economic policies, there were still nine to ten million workers unemployed when World War II broke out, and it was the war and not the administration of F.D.R. that finally solved the unemployment problem.

Importantly, Rugina noted that the government had a legitimate role in defense and justice, as well as doing what the private sector could not provide for the people.

Thus it is necessary to see that ideological policies, whether from the right or the left, are not helpful in the reality of our mixed economy. It follows that when the government determines that it is unjust to have 45 million of its citizens uncovered by health insurance, while an insurer strikes 5 million from its rolls to become more profitable, then it is legitimate for the government to provide that service. We might call that socialism, but it takes place where the free markets could not find a profitable way to cover a basic need of the citizens of our society.[3]

While clear and right answers for a pure model of an economy are possible, such clear policies are not possible in our 50% Mα and 50% Mω economy. I believe that in our society, which has a government of limited powers, there are places where a limited socialism is appropriate and should not be avoided, because there are places where capitalism is inappropriate. If body organs for transplants were for sale under the law of supply and demand, the rich would live and the poor would die. The important thing is to distinguish where capitalism is appropriate and where it is not.[4]

Rugina notes that “the power of a private monopoly in a capitalistic society is limited.” He further said, “Pure monopoly in a mixed economy cannot be equated with Mω. It does not have that same absolute power. Mω qualified is a centrally controlled and planned economy.”[5] This insight should make those who oppose the Affordable Health Care Act less anxious. Even though it represents the government entering a sector of our economy, it is not one that the private sector has dealt with adequately and justly. First of all, attaching health care insurance to employment with good benefits fails to cover people in times of high unemployment. Secondly, there is the progressive unwillingness of employers to provide such an expensive “fringe” benefit. When the supply of labor is so much greater than the demand, employers can hire cheap labor. What ground does a worker have to stand on when three others are standing in line for his or her job?

Let’s look at the electric utility, which is a government regulated monopoly, and socialist in the restricted sense that it is in a capitalist society and not an Mω centrally controlled and planned economy, which robs people of their freedom. As a government monopoly it distributed electricity to everyone with monthly bills that except for the very poor were at least affordable by everyone. When the hype about deregulation of this utility took place recently, it was a veritable disaster. Big corporations placed first bids on large batches of energy, which they could purchase cheaply. For the remaining expensive electricity, ordinary individuals and households suddenly gasped as their electric bills became thousands of dollars a month. Then Texas corporations like Enron used criminal measures to bilk the citizens of California out of billions of dollars. Tactics called Death Star shut down energy plants to initiate artificial shortages and black outs designed to bring an excessive increase in the price of electricity. Enron also used the manipulation called Ricochet to export and import energy out of state and back to multiply the price again many fold. The induced energy shortages were designed to bring Enron exorbitant profits at the expense of Californians.

Those are facts. Now I will indulge in some conjecture, for which I’ve seen some evidence, but which I cannot prove. Dick Cheney’s secret energy conferences, where Ken Ley was probably present, most certainly did not only deal with oil fields in Iraq and various pipelines, but probably also with Enron’s distribution of electricity to California. Thus suddenly the democratic governor, Gray Davis was looking at a $9 billion deficit brought on by the criminal activity of Enron. As in foreign countries, where the Bush administration wanted regime change, the opposing democratic governor could also be replaced. Arnold Schwarzenegger, the republican, may have been given the green light to start his recall campaign. After Gray Davis was recalled, California was not reimbursed for the $9 billion it had been bilked, and then Schwarzenegger left California with a $26 billion deficit from which our state has not recovered. My hypothesis is that this was a conscious republican energy strategy against the democratic power-house of California. I admit that this is conjecture, but very plausible conjecture from my point of view.

Back to the deregulation of electricity: Regulation had to be quickly reintroduced with one government regulated monopoly that provided electricity in an equitable way to everyone, that is, to corporations as well as individual households at affordable prices. Thus for electricity a limited form of socialism works while capitalism does not. It is granted that this government regulated monopoly is in a capitalist society with a government that is very limited in power.

Once when Helmut Gollwitzer, a theologian in Berlin, spoke out for socialism, I asked him how he could take that position when the Sowjet Union was such a failure. He answered that what was called socialism there was really state capitalism. The premier was like the CEO of a corporation which entailed the whole economy. His Politburo was like his board of directors, who drew up the five year plans for their centrally controlled and planned economy. From this pretentious center they could not at all anticipate and meet the needs of the people. So in East Germany, one always had to stand in a long line, even for ice cream, and when you got to the window they had just run out. The whole economy, which was run as one giant and total corporation, did not work.

When the Sowjet Union began to split up and introduce capitalism in the oil sector and others, those that became their CEO’s quickly became billionaires and Putin clapped one, who dared to run for his office, in prison. The decentralization and multiplication of corporations is proceeding in the way of a crony capitalism that is likely to privatize more and more.

I’m not sure what is happening in China. They are decentralizing corporations over various energy and industrial sectors, but still having them be government owned and regulated like our electric utility, e.g., Con Edison in New York, PG&E here in our part of California. Granted that their governmentally owned corporations are doing business in a Mω economy where the government has unlimited powers and does not exist by the consent of the people.

Back to our limited form of socialism: In the communications sector, deregulating ATT worked. Now many telephone companies rival and compete with one another and through the Internet communications have even taken another giant step forward, although Comcast, Verizon, and Apple smart phones have drastically increased the previous price of the regular telephone bill. All told deregulation brought an advantage to the communications sector. Deregulation of the airlines may have brought cheaper airfares, but the decrease in services is remarkable.

In the words of Reinhold Niebuhr, there are some things that we need the courage to change and we have to have the serenity to accept the things we cannot change with the wisdom to know the difference. Similarly there are some sectors that we can deregulate and allow the market forces of capitalism free reign and some that we cannot and we need the wisdom to know the difference. Furthermore, some institutions can be privatized and some cannot and for that we also need the wisdom to know the difference. For example, privatizing the military by the use of “contractors” – working for special corporations that keep changing their names, is a case in point. The name “contractors” is designed to hide the fact that they are mercenaries operating and hired by mercenary corporations.

Let’s turn to health care. I wish this was merely a thought experiment about an extreme case, but it really happened. Several years ago, three doctors in a hospital in Redding, CA did a great number of intrusive heart tests and open heart surgeries and realized that the more tests and operations they performed the more money they made. Imagine opening a person’s chest and operating on his or her healthy heart merely for the sake of profit! This notorious little hospital made about $50 million a year while a large general hospital across the street made only about $5 million. This continued until a priest was told that he needed heart surgery and he went to another doctor for a second opinion and discovered that he did not need surgery at all!

In our healthcare system operations bring in a great deal of money and the operating room has become the engine room of the “factory” hospital. That model of payment for each surgery may be as inappropriate as the “operation” run by those Redding doctors. Meanwhile in socialist Cuba doctors get paid very little, but they still go from house to house caring for the sick and doing preventive medicine, perhaps making last resort operations much less central to their health industry.

Now if the bottom line of the health care industry is to make money, rationalizing its sector like any business, then the capitalist models for it is by-and-large inappropriate. Health care is a necessity and the first thing a clinic asks for, even in the telephone call before a doctor visit, “Do you have health coverage; if so, what kind?” Then in comparison with Cuba, I believe it was fifty years ago when I remember a doctor making a house call. As sick as we can be, we have to go to the doctor’s office and the doctor is allotted only a few minutes to attend to us. What’s wrong with this picture? Is it capitalist medicine?

There is a very collective aspect to illness in our society as well. What fault is it of a person who catches a virus or catches a deadly infection in the hospital that was supposed to make him or her well? What about a person who gets cancer? These sicknesses have a collective aspect and are often environmentally and socially determined. If I go skiing and break my leg, it is accidental, but certainly related to my life-style. If I drink and smoke and ruin my liver and get lung cancer, there is certainly a measure of individual fault. But say that I get lung cancer from second hand smoke as a non-smoker! To become bankrupt by paying doctor bills seems to add insult to injury, which itself has been inflicted by society.

Let me return to the theme of unnecessary operations with a personal anecdote. When I went to an old doctor with knee trouble, he said that he could operate to take out my torn meniscus, but I still had arthritis, so he advised against the operation. He was honest enough to advise me against an operation that could have brought him $20,000 to $30,000 in income – but how many doctors can muster that kind of integrity?

To conclude with the economy in general, even with the total rationalization for profit as the bottom line, a business can have the integrity of paying its workers a living wage, providing dental and health insurance as well providing an excellent product for purchase enhancing the common welfare of the people. Such companies and such corporations represent capitalism with a human face, to coin a phrase opposite Dubček’s short-lived (1968-69), Czechoslovakian socialism with a human face.

Real ethics have to permeate every sector of our economic lives, whether they are appropriately capitalist and freedom based or based on sheer necessity. Parents are not free to feed or not to feed their children. Their freedom consists in fulfilling their responsibility to feed and nurture their children. Often one cannot presuppose that what is true for the individual is true for the whole society, but although they are different, individuals have to take responsibility just like the governments has to take responsibility for its people. People also have the right not be made sick by the environment.

[1] “A model,” according to D’Angel Rugina, “is a set of assumptions to define a framework, where we are [re]searching  a problem.” In other places from my notes: “A model is a small picture.” and “A model is a world in itself.” Such a model resembles Max Weber’s archetypes, which should not become confused with reality. Models can help to investigate economic realities and perhaps realities can be shaped to resemble a certain model more. Rugina argued that the Sowyet Union proved that the 0% Mα and 100% Mω was possible, so therefore the 100% Mα and 0% Mω should also be.

[2] “Is there anything new to be said after Adam Smith, Marx, Walrus, and Keynes? Toward a third revolution in economic thinking” by my old inspiring college professor from Northeastern University in Boston, Anghel N. Rugina: International Journal of Social Economics, Vol 26 No. 10/11, 1999, pages 1227-1248. See my essay, “On Anghel Rugina and our Financial Crisis” for the exact citation.

[3] D’Angel Rugina taught before the issue of universal health coverage was debated, so I do not know if he would have supported it. But he held that the government should do what the private sector could not do for the people.

[4] When Rugina charts the society, economy, and government it is somewhat like Habermas theorizing the life-world and the two systems: the economic and the political ones. The relationship is somewhat clearer in Habermas, because the systems exist for the sake of the life world and the money of the economic system and the power of the political system should not uncouple the language, the words, the communication, which is the currency of the life-world. When this occurs then the life-world becomes colonized by the systems. Rugina sees the basic principles of his models bringing freedom or slavery to all three sectors.

[5] These quotations are taken from the notes I took in his course.

N.B. For a review of Anghel Rugina’s life and work, as well as a list of his many publications, see “Facets in the life and Work of Anghel Rugina.”


One Response

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  1. Dear Peter Krey,

    I found your article by Google search using as key-words “Anghel Rugina”. This year, in May, it is the anniversary of 100 years since the birth of Anghel Rugina. He was born in our county, Galati. The Faculty of Economics and Business Administration from University “Dunarea de Jos” of Galati, Romania, intends to celebrate him. We would like to contact professors (colleagues) or former students of him at Northeastern University from Boston. In order to highlight his all-around personality, opinions of those who have known him would be very welcomed.
    If you think you should send a testimony of your relationship with Anghel Rugina, or you know other persons who have met professor Rugina, please be kind to reply to my message.

    Thank you,

    Edit Lukacs
    Dean of Faculty of Economics ad Business Administration
    University “Dunarea de Jos” of Galati, Romania

    Lukacs Edit

    February 17, 2013 at 8:24 am

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