Robust Political Economy: Classical Liberalism and the Future of Public Policy
By Mark Pennington
(Edward Elgar Pub, 2011, 302 pages)
Nonetheless, Mark Pennington has written perhaps the most important book in classical liberal political economy in at least two decades. It deserves to be read widely, and for those who do, a richly rewarding intellectual experience will surely be in the offing.
The phrase ''robust political economy'' is derived from the efforts of economists, particularly Peter Boettke at George Mason University in Virginia, who sought to explain economic phenomena even when relaxing some crucial underlying assumptions concerning human agency.
As any student or informed observer of economics would appreciate, neoclassical economic theory rests on the idea that economic agents of all stripes are rationally omniscient.
This implies that all information about market conditions, including current relative prices attached to goods and services, and changes to relative prices if circumstances change, are perfectly known to those who trade for mutual benefit.
Economists have also assumed that individuals are self-interested, in that they seek to optimise net benefits from the market transactions they engage in. As Adam Smith noted, the interplay of the expression of self-interest by sellers and buyers, as if led by an invisible hand, leads to a continuous improvement in material living standards.
The neoclassical economists believe that everyone is omniscient and self-interested except, well, for politicians and government bureaucrats who are as omniscient as the traders in the village square, but are imbued with a benevolence that can only be expected of those taxing, spending and regulating in the community's interest.
As any intellectual refugee from Economics 101 might appreciate, public sector benevolence is a central aspect of the neoclassical narrative that suggests only governments can rectify inefficient resource allocations resulting from the (curiously growing) catalogue of market failures.
While neoclassical economics might be spoon-fed to undergraduate economic students and public servants on policy management short courses, it has come under intense challenge from a variety of schools of economic thought.
The Austrian school of economics has long criticised the neoclassical assumption of human omniscience, as exemplified by Ludwig von Mises and Friedrich Hayek's famous exposition of the ''knowledge problem''.
The relaxation of the omniscient agent assumption applies as much to the impossibility of centralised economic planning by government as it does to the marvel of decentralised plan coordination, guided by prices, for individuals.
It took the emergence of the public choice school of economics from the late 1940s, which culminated in James Buchanan winning the Nobel Prize in Economics in 1986, to finally break the pretence of benevolent public sector agency as a guiding star for economic analysis.
In their particular brand of ''politics without romance'', public choice theorists describe a world of self-interested politicians, budget-maximising bureaucrats, rent-seeking special interests and rationally ignorant voters in rehabilitating the Humean imperative for checks and balances to constrain discretionary political conduct.
Whereas Austrian economics and public choice once rode on parallel train tracks, Boettke and other researchers in classical liberal political economy saw opportunities for their theories to provide better explanatory power if the Austrian critique of omniscience and the public choice critique of benevolence were merged.
And so emerged robust political economy, a theory grounded on testing the ability, or ''robustness'', of alternative institutions to deliver desirable outcomes in the face of deviations from ideal assumptions such as agent omniscience and benevolence.
In the opening pages of Robust Political Economy, Mark Pennington lays the groundwork for the analysis that follows. By contrast to the rhetorical flourishes of the political left that the modern world has acquiesced to the ''neoliberal'' agenda, the scope of the state in economic and social life has been left largely intact with new fronts opening that favour larger government in the areas of welfare provision, international economic development and the environment.
For Pennington, the objective in response to these challenges is no less than to restate the case in favour of the minimal state, and this can only be satisfactorily achieved by looking squarely at human imperfections. Which institutions will work best if human cognition is bounded by the knowledge problem, and may people possess incentives to exercise self-interested behaviour?
The answer to this question, according to Pennington, is ''that the institutions of private or severally owned property, a market economy, and a limited government confined to the resolution of disputes between private parties, are best placed to meet the requirements of a robust regime''.
While not even hardcore libertarians would contend that decentralised markets and their supporting institutions can guarantee perfectibility in a world of bounded cognition and self-interested motivations, Pennington shows that classical liberalism provides the institutional robustness needed for individuals to experiment and learn of ways to improve their circumstances without being violated through the arbitrary application of coercion by authorities.
In simple terms, the freedoms afforded under a liberal minimal state trump the cold hard directives meted out under socialism.
Robust Political Economy provides the great service of critiquing the theoretical fashions of Rawlsian social justice and Habermasian deliberative democracy that are steadfastly worn by those who subscribe to anti-capitalist sentiments.
In response to the works of Habermas and his fellow travellers, who claim that markets are an alien construct that deny a voice to the populace at large, Pennington helpfully suggests that ''classical liberalism conceives of markets and other 'spontaneous orders' as complex communicative networks that facilitate the exchange of knowledge, ideas and expectations.''
Within this, the exit mechanism available to participants within open markets and federal states is seen as a robust method for those who want to exercise dissent from majority opinion without impinging upon the right of the majority to express theirs.
A thorough critique of neoclassical economics, particularly Joseph Stiglitz's homilies on information failures, is also presented for good measure, emphasising that economics is at its most relevant in addressing real world problems when it drops its unrealism concerning human agency.
Another appealing feature of Pennington's work is that it is not limited to a theoretical treatise on robust political economy, as important as this might be. It presents an ambitious critique of some of the great political controversies of our time that is invaluable to the general reader and policy protagonist alike.
Robust Political Economy prosecutes a detailed case for a transformation of welfare emphasising the centrality of economic growth to lift the standard of living for all strata within a society.
However, acknowledging that some people may not be able to participate in a market economy due to loss of employment, old age, illness or disability, Pennington argues for a revival of voluntary collective action rather than a bloated tax-financed welfare state to ameliorate the strains of financial hardship.
In other words, Mark Pennington revives the notion of private welfare, including through mutual aid associations, that time forgot both in Australia and in other places such as the United Kingdom.
Next, Robust Political Economy chronicles the debate over how best to promote economic development around the world without the need to channel foreign aid through burgeoning, middle class bureaucracies such as the United Nations or the World Bank.
A focus on economic growth, facilitated through the emergence of market friendly institutions protecting rights to the acquisition and disposal of private property, is seen as a key strategy that is robust to the knowledge and incentive problems that have long complicated this area of public policy.
In perhaps one of the more interesting chapters, Pennington asks whether the classical liberal minimal state concept or a ''green leviathan'' would prove to be more effective in responding to local environmental degradation or even global warming.
Free markets, developed with the aid of exclusion technologies and the codification of private property rights for resources of an open access state, such as fisheries, may prove to be effective in discouraging their overuse. This was a key conclusion from the work of Elinor Ostrom, who won the Nobel Prize in Economics only two years ago, and is given its due credence in Robust Political Economy.
Of intense interest to Australian readers will be Pennington's musings about how to deal with the ''dilemma of climate change''.
The merits of global governance arrangements are discounted, in part because of the extensive monitoring costs associated with ensuring that climate change agreement signatories keep to their end of the emissions pollution reduction bargain. The knowledge problem rears its head once again.
Presuming that climate change is a real problem requiring management, Pennington suggests that ''a not unreasonable case can be made in favour of decentralised adaptation to climate change'' with remedial actions by individuals, companies and countries to adapt to problems as they arise.
While Robust Political Economy provides considerable focus on these three domains of public policy, there are many other important policy lessons available for those who take the effort to pore carefully through its 302 pages.
For example, the discussion on pages 34 and 35 of the book on the regulatory failings that precipitated the Global Financial Crisis is simply outstanding and should be carefully noted by policymakers who responded to ineffectual regulation and financial market dislocations with a damaging Keynesian inspired manipulation of aggregate demand.
In summation, the considerable buzz in classical liberal circles that has greeted the publication of Robust Political Economy is undoubtedly deserved.
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