The Dirigiste Mind

Famous dirigistes from the past.

Particularly notable dirigistes from the past. From top-left clockwise: King Louis XIV of France, Karl Marx, Adolf Hitler, Benito Mussolini
Image Credits from top-left clockwise: Wikimedia Commons/Louvre Museum, Wikimedia Commons/John Jabez Edwin Mayall,
Wikimedia Commons/German Federal Archives, Wikimedia Commons/Time.com
Recent thoughts I have had concerning Vladimir Putin, Karl Marx, Adolf Hitler, and Benito Mussolini have led me to wonder about the following question: What causes any human being to adopt the dirigiste mind-set? There seem to be an awful lot of people in the world who believe economies would work one heck of a lot better if they were only more centrally directed by their government. These include progressives in the United States, Western European-style socialists in the European Union, the fascists of the Russian Federation, the communist mandarins of China, and most Japanese involved with the Japanese government. For that matter, I get the impression dirigisme claims most of humanity as believers. But what can possibly convert them all to that religion?

The Meaning of Dirigisme

Why am I using the word “dirigisme”, rather than socialism or fascism? The reason is because it is a broader classification than socialism or fascism, encompassing all socialists (which includes fascists), but also including less autocratic people who would nevertheless like to see a great deal of state intervention in the economy. For example, all Keynesians should be counted in the dirigiste ranks, and all American progressives are certainly dirigiste.

Here I must be very careful to at least remove all ambiguity about what I mean by the word, as I believe there is a certain amount of confusion about its meaning among some. As an example of such confusion, I would cite the article on dirigisme in the online encyclopedia Wikipedia. In the definition given in the article’s opening sentence, we are told

Dirigisme or dirigism (from French diriger, meaning “to direct”) is an economic system where the state exerts a strong directive influence over investment. It designates a capitalist economy with a strong directive, as opposed to a merely regulatory role for the state.

Everything is fine in this definition up to the point where it is claimed that the word refers specifically to a capitalist economy with a state proclivity for intervention. Now, the way the adjective “capitalist” is applied nowadays, I would certainly agree that “dirigiste” could describe some capitalist economies. As is often emphasized, Capitalism and Socialism are polar opposite platonic ideals that might be approached but never realized by any real-life economy. Instead, what we always experience are “mixed” economies with the state producing some things (even in the capitalist U.S., the government produces some transportation infrastructure and provides some educational services for children), and a free-market producing other things (even in Soviet Russia, some food was produced by private farmers). As a consequence, when we apply the words “socialist” and “capitalist” to any real economy, we can only mean the economy more closely approaches one platonic ideal or the other. In this way we might well see a dirigiste capitalism, although it would be a very bastardized version of capitalism.

A much better definition of dirigisme is provided by the Encyclopedia Brittanica on their website.

Dirigismean approach to economic development emphasizing the positive role of state intervention. The term dirigisme is derived from the French word diriger (“to direct”), which signifies the control of economic activity by the state. Preventing market failure was the basic rationale of this approach. Dirigisme was introduced in France following World War II to promote industrialization and protect against foreign competition, and it was subsequently mimicked in East Asia. Dirigiste policies often include centralized economic planning, directing investment, controlling wages and prices, and supervising labour markets.

The farther you get into the Encyclopedia Brittannica’s description, the less capitalist a dirigiste economy sounds!

Why Are People Persuaded of the Goodness and Efficacy of Dirigisme?

So, why would perfectly intelligent people be convinced that a government must deeply intrude into the economy to maintain its health and ensure the distribution of its fruits to all? More than that, why would most of the educated people in the world believe in this? It is not as if history provides a lot of positive examples of dirigiste influence on economies. Certainly, there is no such evidence in the collapse of communist socialism under the Soviet Union and Eastern Europe.  Nor is there any in the almost non-existent economic growth of India or China before they began substantial free-market reforms. To rub the message in a bit more, consider the scatter plot below of per capita GDP in 2014 of all the world’s nations plotted against their index of economic freedom. The precise way in which this index is constructed is reviewed in the post A Closer Look at the Index of Economic Freedom, but suffice it to say the larger a country’s index is, the less its government intrudes into the country’s economy. The larger a country’s index of economic freedom, the more freedom that country’s free-market has from government dictates. As you can see below, a country’s per capita GDP does not get respectably large until its index of economic freedom gets at least above 60, and really does not take off until the index is above 70,

Country Per Capita GDP vs. the WSJ/Heritage Foundation Index of Economic Freedom for 178 countries.

Country Per Capita GDP vs. the WSJ/Heritage Foundation Index of Economic Freedom for 178 countries. GDP Data courtesy of the World Bank.

So what about the distribution of wealth? The American progressives constantly claim that as an economy becomes more free-market with less government interference, wealth is increasingly hogged by the very rich with less of the economy’s output going to the middle and lower classes. If this were true, we could see it in a scatter plot of all the nations’ GINI indices versus their index of economic freedom. A country’s GINI index is zero if the income distribution is absolutely equal, and is 100 if only one person takes all the economic income for himself and no one else gets any thing. The smaller a country’s GINI is, the more even is the distribution of its wealth. Below you can see, that on the whole, the more economic freedom from the state a country has, the more its GINI tends to trend downwards and the more even the distribution of income becomes.

Countries' GINI index versus their economic freedom. for 2014.

Countries’ GINI index versus their economic freedom for 2014. GINI data courtesy of the World Bank.

So what more do the dirigistes have to convince anyone — particularly themselves — of the goodness of state intervention into the economy? Answer: Not much! I can understand how idealistic young people, seduced by arguments of the Left on how the rich are depriving the poor, could support dirigiste policies. But how can their elders, who supposedly have more knowledge and experience, continue to support dirigisme?

For a great many  the answer may be as simple as they have never bothered to learn how real economies work. Many of my acquaintances would rather use their free-time to go to the movies, or to watch sports shows, or to go to a bar to socialize with their friends. If they use their time to pursue pleasure rather than studying how reality actually works, and then if they hear from all sides that capitalism is corrupt and does not work well, one should not be surprised they believe that government should manage the economy more. Certainly much of our currently debauched news media, dominated by progressives with very few exceptions (such as Fox News and the Wall Street Journal), are pushing such an interpretation.

That explanation works for much of the population, but what can explain the continued devotion of progressive intellectuals, particularly Keynesian economists? Surely they can see the massive failure of Keynesian policies, especially Keynesian monetary policies as I documented in the posts Why have ZIRP and QE Failed?, Economic Damage Created by the Fed,  The Insanity of Negative Interest Rates, BOJ Also Losing Credibility And Its QE War, The Bad Examples of the ECB and BOJ, and The Fecklessness of the U.S. Federal Reserve. How does a Keynesian intellectual like Larry Summers keep his faith? He and his colleagues do indeed see the world’s growing and desperate economic problems, which they call secular stagnation. The reason the stagnation is “secular” is because it is a long-term stagnation not caused by the business cycle. Unless something new is done to conquer it, there is every reason to believe it would continue forever.

The big problem with this Keynesian response is they are looking for causes of the stagnation in so-called “market failures”. That is the wrong place to look, as we have more than enough explanations for languishing economic growth in existing government failures, as I discussed in the post What to Do About Keynesian Secular Stagnation.

I have a suspicion that a large part of the faithfulness of Summers and company to the Keynesian faith has to do with intellectual and cultural inertia. Keynesian ideas, with a great deal of modification, have reigned more often than not since the 1930s. Overall, as an intellectual structure it has a subtle and intricate beauty that very occasionally might even describe reality correctly. For example, take a look at my successive essays on the Solow-Swan growth model, beginning with The Solow-Swan Model and Where We Are Economically (1) to see a Keynesian macroeconomic model that may not conflict with microeconomic reality.

From what I can see, the Keynesians’ main intellectual sin has been not to perceive that the microeconomic balances of suppliers and consumers are incredibly sensitive to economic changes created by the government. Those balances are so fragile and delicate that economy-wide perturbations created by Keynesian stimulus programs can easily upset them, creating both shortages and surpluses, either of which can cause increases in unemployment and reductions in economic activity. In fact, economies are almost certainly chaotic systems because of their many degrees of freedom and the microeconomic nature of the basic interactions between individual pairs of suppliers and consumers. Should Keynesians like Summers ever come to believe this, the support for dirigisme would crumble like a house of cards.

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