Friday, March 7, 2008

Decentralization in America's Future

The centralized solution to American economic development was characteristic of modernism. Modernism emphasized scale, mass production and was threatened by monopoly power. Post modernism emphasizes flexibility and change and is threatened by uncertainty. Continuous improvement was important to modernist production strategy. Strategic innovation is necessary for post modern production strategy.

Government has not changed to respond to the changes. One government policy ought not to fit all publics. Change and differentiation are healthy. The idea that a single model car ought to fit all consumers is as outdated as the idea that a single government policy ought to fit all citizens.

There were two key reasons that America abandoned its decentralized political policy: the shift to economic modernism and the problem of racial discrimination. The economic reason was the more important and preceded the racial one. Progressivism was the assertion of modernisn in the political realm, and it was a method of grappling with changes in public policy that were necessary to confront popular anxieties about the power of big business.

Progressivsim was always founded on contradictions. The rationale for government rationalization of markets was overproduction. Overproduction suggests decreasing prices and profits, and this was indeed the case. In the late nineteenth century profits were falling but real wages were rising. Thus, Progressivism needs to be viewed first as a corporate movement whose main goal was to protect corporate interests. However, the advocates of economic Progressivism, beginning with David Ames Wells in the 1880s, was that unemployment attended overproduction. This is a contradiction. Wells argued that on the one hand firms could not shut down because the costs of shutting down exceeded the cost savings from shutting down, thus overproduction became the norm. On the other hand he argued that unemployment attended overproduction. But if the plants could not shut down, why was there unemployment? Overproduction would imply over-employment. But the problem of unemployment was raised in Wells's book as associated with overproduction. This sounds suspiciously like a self-conscious rationale for business interests, which may have been legitimate. These include mergers to limit production output. But the mergers would result in unemployment plus higher prices, while overproduction and excess competition would result in overemployment. Common sense.

There is more in the way of prima facie contradiction for the rationale for Progressivism. The Progressives believed that monopoly power was a key threat that required government intervention to reduce the power that corporations had over production. But the rationale for government intervention was overproduction,which is the opposite problem of monopoly. Monopoly implies under-production as marginal revenue product equals marginal cost rather than price. That means under-production, not over-production. But the advocates of Progressivism based their arguments on continued over-production.

The problems with Progressivism's rationales are not the main point, though. For today we do not face problems of overproduction or underproduction, excessive competition or monopoly. Rather, the problem that industry faces is how to devise new and better products. To do this, the appropriate degree of government regulation is necessary. But how to determine the appropriate degree? The appropriate degree can only be determined by trial and error. Hence the monolithic federal government impedes progress. It does so because post-modernist progress depends on a complex optimality that cannot be discerned through logic. It is an experimental process.

The modernist world was simple. Production depended upon sequential technology, i.e., assembly lines that are modestly interactive. The post modernist world is complex. It depends on reciprocal technology that are highly interactive, i.e., skunk works, research teams and collaborations among innovators. The government policies most conducive to such collaboration are not the same as the government policies conducive to modernism. Economic security, predictability and long term relationship are not as important.

The improvement process that best fit the modern world was continuous improvement, and the Toyota Production system is the highest development of modernism. However, the Toyota Production system already has elements of post modernism, namely the power of employees to stop production and the greater degree of interaction along the supply chain.

The improvement process that best fits the post modern world is discontinuous innovation. New ideas, new products and new strategies need to be developed. Government that serves a stabilizing function that is essential to modernism serves only as an impediment to post modernist economic development. In post modernism, the small and flexible, not the stable, win.

How to determine the best approach to government in the post modern world? There are several possible learning tools. These include imitation, continuous improvement, electoral turnover and experimentation. Of these, experimentation is the most powerful. Firms that experiment the most find the best approaches. Conversely, the most successful firms tend to experiment.

The means by which the American government needs to learn to experiment is through decentralization. The reasons for centralization have whithered away. Racial discrimination is no longer a critical issue and the need for a strong-armed federal government to manage "trusts" is no longer a serious issue. Indeed, the most aggressive actions taken against Wal-Mart were by state and local governments; and the most aggressive prosecution of ethics violations in the late 1990s and earlier this decade were by the New York State district attorney, Eliot Spitzer.

Modernist federalism needs to be replaced by post-modernist federalism or decentralization.

No comments: