Tuesday, December 25, 2007

War on The Future in Herbert Croly's Progressive Democracy

The past century has seen the persistent belief that government best copes with change. Liberals have viewed social security and regulation as cures for psychological uncertainty arising from free market policies. Yet, most progress has been associated with free markets. In countries like Russia, North Korea, Cuba, China and today's social democratic Europe there is scant innovation. In the case of more government-controlled nations, such as North Korea and Cuba, there is deprivation. Yet, the "progressive-liberals", including (a) liberal economists (b) big business tycoons like Warren Buffet and George Soros and (c) liberal journalists, continue to claim that progress comes from big government, high taxes, inheritance taxes and the Federal Reserve Bank.

The encouragement of government is associated with short-term thinking and faulty understanding of the sources of economic progress. "Liberal-progressives" since Herbert Croly have believed that progress results from increased efficiency, democracy and equity. Although these are all legitimate social goals, and efficiency does contribute to wealth hence progress, progress results from innovation, not from them. Innovation, in turn, depends on willingness to take risks, long term thinking, a realistic faith that returns will not be appropriated, and a high valuation of the returns. Although low interest rates (a low discount rate for a future dollar) stimulate increased valuation of future returns (at two percent a dollar in a year is more valuable than it is at four percent), when the Fed increases the money supply it depreciate the currency, resulting in inflation, uncertainty and insecurity.

It is unlikely that innovators will have first access to new credit (such access is given to commercial bankers, Wall Street, Warren Buffett and the like) and so will suffer from the uncertainty that inflation causes. Thus, the interests of the commercial bankers and Wall Street diverge sharply from the public's and from free markets. Innovation depends on a stable economy and the ability to predict the future so that innovators can predict returns, while Wall Street, big business and banking benefit from (and probably would not exist in their current forms without) interest rate subsidies and state support.

The progress that exploded in the late nineteenth century was due to a stable monetary base (the US was on the gold standard in the late 19th century) and limited government. Yet, the "Progressives" of the early twentieth century did not grasp that progress and innovation had resulted from the long term thinking that result from a stable money supply. In 1913, the "Progressives" pushed through the Federal Reserve Bank in order to, they argued, stop a two percent inflation rate that arose from global gold discoveries (the average inflation rate since 1979, excluding housing which has gone up faster, has been 3.7%). For the past 70 years the Fed has encouraged low interest rates and inflation. During the same period there has been less progress and innovation than there was between 1865 and 1913. Much of the progress and innovation that was made since 1930, for example television, has been based on ideas that had been conceived much earlier, for example by Nikola Tesla.

The liberal economists, tycoons like Warren Buffett and their allies encourage short term thinking in other ways, for instance, through advocating the capital gains, income and inheritance taxes, regulation of the economy and special interest subsidies to firms like Archer Daniels Midland and AT&T that squelch competitive innovators.

Herbert Croly's Progressive Democracy (1914) is a 415 page argument in favor of reconstituting the US government in order to encourage (1) greater democratic participation; (2) unfettered government power ostensibly governed by majority vote, with voice given to political minorities via a pluralistically elected legislature; and (3) enhanced professionalization and administrative power to scientific management-style government administrators who, Croly believed, could be freed from special interest pressure.

Croly believed that progress results from the application of democratic principles to science and that business had played very little role in encouraging innovation. Croly overlooks evident history that to him had been recent. In the thirty-five years preceding Croly's book Thomas Edison, Nikola Tesla, Charles F. Kettering, Alexander Graham Bell, Guglielmo Marconi, Wilbur and Orville Wright and many others flourished and invented crucial technological breakthroughs in a business-driven, laissez faire world. These were businessmen as well as inventors, who profited substantially from their inventions. They were not market manipulators and negotiators like Bill Gates and Warren Buffett. They were breakthrough inventors who came up with and marketed crucial technological breakthroughs. Such innovators are missing today because the capital formation necessary for them has been monopolized by the Federal Reserve Bank and its clients, such as Wall Street and Buffett. In other words, the policies of the "Progressives" have reduced the pace of progress by waging war on the future.

It is not coincidental that Croly overlooks the link between the accumulation of wealth and innovation. Croly lacks a theory about capital formation. He does not think that workers should save because it is, in his opinion, too painful for them to forgo current consumption. He does not make a similar kind of argument against the income tax. Yet, if workers in 1913 had saved at the rate they are taxed by the federal government today, they probably would have saved enough to purchase a business just as John D. Rockefeller did in the 1850s. Croly overlooks such examples as John D. Rockefeller, who was entirely self-made, because such examples are inconsistent with his argument that it is next to impossible for small shop owners and workers to become independent businessmen.

Croly might be viewed as the early twentieth century prophet of the early twenty-first century's sub prime loans, credit subsidies and incipient economic decline. He argues for a short-term politically-driven fix. Although he lacked the economics knowledge to argue for low interest rates (that was Keynes's job twenty years later) Croly did focus on a short-term fix: syndicalism.

Croly believes that businessmen should be asked to encourage syndicalist industrial democracy without concern for risk to their investments. He seems to believe that capital forms on its own and that the risks of investment will be absorbed without cost by....well he doesn't quite say. Some of Croly's ideas may be right in principle--the Japanese have in fact utilized autonomous work teams to encourage application of scientific management tools, an idea that Croly roughly suggests, but the industrial governance system he advocates is absurdly cumbersome by today's standards (and by the early twentieth century's as well).

Croly (p. 382) argues that 19th century liberals' argument that workers should be thrifty and save in order to buy property and so become owners rather than workers is "deplorable" because thrift implies deprivation and it is cruel to ask workers to impoverish themselves in order to save money to become wealthy down the road. Croly was among the earliest of the progressive-liberals who have waged war on the future. Twenty years later, in the 1930s, Keynes was to argue that "in the long run we're all dead." This kind of short term thinking is the heart of the liberals' and free-credit Republicans' war on America's future.

The easy, get-it-for-free mentality took further root in the American psyche. In reality, it is a streamlined version of 19th century populism, which was an ideology of agrarian land speculators who combined the advocacy of easy money with anti-Semitic and anti-British feeling.

The end result of short term thinking is economic decline. Howard S. Katz this week blogs about the role that economic reporters have had in furthering the mistaken Keynesian economic notions that economic progress is due to demand. This kind of thinking is the same kind of short-term thinking that Herbert Croly advocated in the early twentieth century. The end result of this short term thinking, stimulation of low interest rates through monetary depreciation and inflation will be further American economic decline. The century after the Federal Reserve Bank was founded was far less innovative than the century preceding it. Moreover, there was less economic opportunity and greater lunges between unemployment (as in the Great Depression and the 1970s stagflation) and full employment than there had been in the 19th century. Moreover, instead of jobs improving in quality, we have become a nation of retail fast food workers. Innovation has stalled because credit has been diverted into the pockets of Warren Buffett and George Soros.

Herbert Croly and the Progressive-liberals seem to have won their war on the future. Future generations of Americans will be poor in order to satisfy Croly's and his colleagues' narcissism.

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