Business Cycles and Liberal Morality

Thus, there is an important moral backdrop to the emergence of the economy as a terrain of administrative action. Business cycle theory came out of a discipline—economics—which had traditionally taken the right to private property for granted and assumed that a privately run economic system was superior to any other. Free market competition would lead to the best social outcomes for all, namely, through increases in the productivity and wealth of the nation. While the concentration of capital in large corporations from the late nineteenth century onwards certainly challenged some of the central principles of classical liberalism

(Brick 2006), business cycle theory sought to maintain the centrality of the calculations of individualistically oriented private property owners. No other agent, least of all the state, could be relied upon to make decisions in the best interest of maximizing productive wealth. Thus, even as cycle theorists like W.C. Mitchell and G.H. Hull pointed out the social harm caused by over-exuberant speculation, they did not seek to revise key tenets of the liberal social order.

Indeed, this new analysis also offered reassurance that such a revision was precisely not its intent and that the economy could be improved without directly intervening in the decision-making of private economic actors. As W.C. Mitchell pointed out in his famous work of 1913, “it is those who desire to see the present form of economic organization perfected rather than fundamentally changed who are most concerned with pressing the demand for better governmental reporting of business conditions” (Mitchell 1913: 596). Despite his deep concern for the fate of the unemployed, Beveridge also did not see any final solution to the problem of business cycles, noting that there can be “no cure for industrial fluctuations within the range of practical politics” (Beveridge 1910: 67). While this also suggests that there were solutions outside of this range (e.g., socialist planning), most early theorists of the business cycle suggested “palliatives” to the cycle rather than an outright fix. This theme would remain in effect through the end of the 1920s. The British economist A.C. Pigou, for instance, firmly retained his commitment to free enterprise, despite the importance he had begun to place on economic fluctuations. As he noted, “to show that industrial fluctuations are a social evil is not to show that government should attempt to remedy them” (Pigou 1967 [1927]: 246). As in the immediate pre-World War I period, when business cycles were just beginning to gain a new degree of interest, there was no attempt to cure the malady through a radical re-organization of the economy. Instead, as the American businessman G.H. Hull suggested in his 1911 book, it was a malady that humanity would have to learn to deal with in the industrial phase of history, just as livestock diseases, he reasoned, had challenged humanity in an earlier epoch. Business cycles were a natural part of the industrial landscape, an inconvenience to be certain, but not a dangerous challenge to the liberal moral values of individualism, private property, laissez-faire, and market competition. Business cycles provided economists with a set of concepts that held out an alternative to state economic planning.

In the American context after World War I, a deep cultural commitment to economic liberalism and a political consensus behind entrepreneurial voluntarism restricted any experimenting with direct intervention by the state to plan productive investment or even to regulate or limit socially harmful types of speculation and malproduction. It would remain so until the cauldron of the 1930s. Yet at the same time, Progressive Era social movements of the interwar period were determined to solve social problems—including those related to class struggle, unemployment, and poverty—by applying social scientific knowledge. Thus, it was in the United States that some of the more prescient examples of economic government at a distance can be gleaned. As Alchon pointed out (1985), a counter-cyclical machinery was brought together in the United States during the depression of1921, centred on informing the decision-making of business actors. Much of this effort was the result of the aforementioned collaboration between the Republican US Secretary of Commerce Herbert Hoover, a progressive and engineer, and W.C. Mitchell, an economist and statistician, who became the Director of the NBER (founded in 1920). While much of the early efforts of the NBER consisted in compiling national income accounts, which could be used to rationally plan aspects of the economy, Alchon notes that Mitchell quickly returned to his interest in business cycles in the 1920s, seeing in them opportunities for statistical development and prescriptive policy solutions to the problems of unemployment and depression.

Hoover, for his part, felt that through enlightened self-interest, the economic system could be modernized in such a way as to reduce inefficiencies, speculation, and the likelihood of economic collapse. Under Hoover’s leadership, President Harding’s administration sponsored a national conference on unemployment, with the intent of finding market solutions to the social problems of industrial capitalism. This programme received significant media attention beginning in 1923.7 In this way, the Republican administrations of the 1920s sought to avoid greater state activism while nonetheless contributing to economic rationalization and the welfare of the working classes. As W.C. Mitchell noted in the NBER’s report on business cycles and unemployment produced by the conference, “recognition of the importance of economic research and the interpretation of economic facts would be the beginning of better control of business conditions by business men” (Mitchell 1923: xxiii). The agenda of Hoover and the NBER was to provide technical devices for a liberal, anti-statist counter-cyclical form of private economic planning that might suffice to reduce the social evils of depression and unemployment. These problems continued throughout to be the backdrop for investigations of business cycles in the 1920s and 1930s.

As the suggestion of better governmental reporting of business conditions implies, business cycle theorists sought to provide more information about business cycles to the public, and thereby influence economic actors’ calculations and decisions. The representation of business cycles through statistical time-series in the 1910s and 1920s was intended to provide business actors with greater information against which to rationalize and optimize their calculations. As W.C. Mitchell argued, “progress lies in the direction of bettering our forecasts of business conditions. For when coming troubles are foreseen they may be mitigated often, and sometimes averted” (W.C. Mitchell 1913: 588). Likewise, G.H. Hull argued for better reporting by government of statistics related to construction in order to provide the public with better information about cyclical movements of the economy. Similar demands were made in Britain, notably by D.H. Robertson (1915). Economic forecasts, and “business barometers” would work much like weather forecasts, providing information that would enable calculating economic actors to make informed decisions about investment and production (see also Morgan 2001: 246). But this was the extent of the state’s responsibility, which was, initially, very minimal in its being restricted to the improvement of collection and reporting of data (Alchon 1985).

As Herbert Hoover pointed out in his preface to the first NBER report on business cycles in 1923, the downward side of the cycle was attributed to the “evils” of speculation, over-expansion, and inefficiency brought about by boom times (in Mitchell 1923: vi). For Hoover, the social challenges of economic crises and depressions could be met through the perfection of the self-regulating mechanism of the economy.8 Cycle theory, thus, sought to indicate a steady state of economic activity against which rational calculation could take place through enlightened self-interest. In this respect, American business cycle approaches (and British approaches to a lesser extent) were the perfect administrative devices of a society firmly entrenched in the liberal sanctity of private property, and also of private control over business decisions.

It was not until the latter part of the 1930s, when the stagnationist and under-consumptionist arguments of economists such as Alvin Hansen (1938, 1939) and John Maynard Keynes (1936) combined with the more statist and interventionist Democratic presidency of Franklyn Roosevelt, that the fluctuations of the economy themselves became the object of new administrative techniques to optimize their overall performance and boost employment in the United States and elsewhere. Government was called to play a new role, intervening not merely to regulate, control, and restrain particular abuses of market actors but to supply “motive force itself where motive force is lacking” (Clark 1936: 430). Here, too, the business cycle was the object of new techniques of government and statistical quantification, techniques that were built on the earlier, liberal understanding of economic fluctuations, and ones that, as Keynes stipulated, would optimize the backdrop against which private economic calculations were made. It was around this new problematiza- tion that national income accounting eventually emerged as a key device for active state planning of the economy in the postwar period. Yet, this intervention was, at least initially, oriented towards a technical resolution of what were otherwise social problems, particularly those related to lack of employment, and the new category of involuntary unemployed, which had so shaken the moral foundations of early twentieth-century liberal society (Walters 2000; Topalov 1994). These social problems would be addressed indirectly, whether by state management of aggregate demand or private calculation against the backdrop of business knowledge. The transformation of these social problems into a technical problem of the business cycle left the social relations of mature capitalism untouched and unquestioned.

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