Tuesday, March 18, 2008

Progressivism in Decline

The early twentieth century saw the triumph of Progressivism. By the time Theodore Roosevelt assumed the presidency following the assassination of William McKinley in 1901 Progressive doctrines had become dominant in elite circles. As Martin J. Sklar shows in his monumental Corporate Reconstruction of American Capitalism 1890-1916, the key debate in the Progressive era was among three or four schools of thought. Both today's conservatism and today's liberalism are offshoots of those schools of thought. The first school was small business populism which held that all big business was undesirable. In response to this movement, the US Supreme Court held for about 15 years that all business combinations were in violation of the Sherman Anti-Trust Act beginning with the 1897 decision in United States v. Trans-Missouri Freight Association. Progressives were troubled by this decision because they believed that only unreasonable restraints of trade should be illegal under the Sherman Anti-Trust Act, and that was the opinion of the law's authors. In response to this decision, Progressives held that corporations should be permitted to exist but should be regulated. The most aggressive advocate of regulation was Theodore Roosevelt, who evolved into the position that the state should largely control and set policy for corporations (Sklar provides rich detail about Roosevelt's ideological evolution). In contrast, William H. Taft, who succeeded Roosevelt as president in 1908. Taft believed in very minimal regulation of the trusts with aggressive enforcement of the Sherman Anti-trust Act through the courts. This was so following the Supreme Court's Standard Oil decision, which broke up Standard Oil (arguably to satisfy populists and the left) but overturned the Trans-Missouri decision and reinstated the common law interpretation of the Sherman Act that only unreasonably uncompetitive trusts are illegal. Thus Taft's Republican position was that corporations ought to be minimally regulated with aggressive enforcement of the anti-trust law to satisfy small business interests, anti-union small manufacturers and the left. Roosevelt might have agreed with Taft's approach during his presidency, but had veered to a highly statist viewpoint and so ran against Taft as the Bull Moose candidate in 1912. The third view, that of Democrat Woodrow Wilson, was that big business was natural but there needed to be a combination of meaningful regulation (but less than the Republican Roosevelt advocated) but also enforcement through the courts. Taft can be viewed as the progenitor of today's Republicans while Roosevelt can be viewed as the progenitor of today's "progressives". Both were Progressives in the early twentieth sense, so today's politics can be viewed as a battle between forms of Progressivism. By 1900 there was no serious advocate of laissez faire and this was not part of any significant conservative movement. Nor did the advocates of laissez fair in the late nineteenth century grasp the arguments of the twentieth century Austrians, Friedman and Schumpeter. Thus, today's free market economics, while relying on marginalism that John Bates Clark, an advocate of the kind of big business statism that the Progressives adopted, as well as crucial insights of Smith and Ricardo, was a twentieth century develop and appeared after progressive-liberalism, the conservative Progressivism of Taft, the evolutionary Progressivism of Wilson and the radical Progressivism of Roosevelt.

That said, there was a devolution of Progressive ideas that occurred in the twentieth century's subsequent 8 decades. Progressivism was largely concerned with molding of the system of regulation of business. Theodore Roosevelt was most concerned with balancing labor and corporate interests, and all the Progressives were interested in developing a system of business regulation and corporate enterprise that would be dynamic and productive but would not permit excessive power to corporations. However, the Progressives were overly impressed with the size and power of contemporary business. They did not realize that technology had the potential to overturn large firms fairly quickly. Thus, they implemented systems of support and structure that served to protect the very power of big business that they claimed to wish to minimize. The establishment of regulatory systems raised entry costs; the establishment of the income tax created barriers to capital formation among the poor and small business interests; the establishment of the Federal Reserve Bank facilitated a monopoly of capital by big business, commercial banking and the investment banks that tended to foreclose entrepreneurship; and the labor regulations that Roosevelt, Herbert Croly and other Progressives advocated that saw much of its realization later in the 20th century, also created entry barriers and high fixed costs for small business. The result was excessive protection to big business.

The model of manufacturing that the Progressives reinforced was mass production or continuous flow, in the terminology of Joan Woodward. This model was characteristic of the late nineteenth through the mid twentieth century. It involved a degree of technology and managerial sophistication, but it relied on large scale production runs. This kind of technology requires consistency of output. Its apex was the Model T Ford, which had little variation and could be produced at low cost but had poor quality. The American regulatory system thus geared itself to protecting the modernist, mass production model by allocating credit; at various times via protectionism; and by creating entry barriers.

Franklin D. Roosevelt's New Deal of the 1930s reinforced the Progressive model in a number of key respects. First, it established a modernist labor regulation system which assumed that labor unions that required large bargaining units would represent employees. In response, the industrial labor unions of the Congress of Industrial Organizations was formed. In short order following the National Labor Relations Act the number of unionized workers more than doubled and by 1945 about 35% of the workforce was unionized. The NLRA labor system assumed that unions would face the same modernist model that the Progressives thought firms would eternally face: large work units characterized by low skill workers who could be organized in large groups by industrial unions (unions that represent all the workers in the plant) such as the United Auto Workers union. However, this model was not to materialize.

The chief problem facing union organization is the same as the chief problem facing the Progressive regulatory regime. Within 40 years of the establishment of the Progressive regime Toyota Motor Company in Japan began experimenting with a process known as lean production. Taiichi Ohno, Toyota's executive vice president for manufacturing in the post-World War II era and the creator of lean production says that he worked on the lean production or kanban model for 15 years, from the late 1940s until the early 1960s, before Toyota finally iron out the process. The important point about lean manufacturing is that it inverts the assumptions of modernism. It depends on producing one unit at a time; it depends on teamwork; it depends on highly committed workers who cannot be in a conflictual relationship with the firm and who need to feel secure in their jobs; it emphasizes not mass production but coordination; and it views the factory as a series of supermarkets where line workers are consumers who obtain just enough inventory from the next lower level of the production process. Thus, information becomes critical, and highly trained workers who are flexible are equally crucial. Likewise, single units are produced at a time.

The characteristics of Ohno's lean manufacturing are amplified by the ideas of Edward I Deming, who was also appreciated in Japan before being recognized in the United States in the 1980s and 1990s. Deming argued that quality is a process rather than an outcome; that quality depends on both management and employee; that teamwork is crucial; that systems are the foundation of quality and that employees need to be trained and have long term relationships with their firms. Decision making is profound and subtle, and often criteria used to improve processes are impossible to communicate to outsiders. They depend on the knowledge that only workers possess. Therefore, the assumption of Progressivism that rational knowledge is fundamental to good management is overturned by quality management processes. No expert can replace the profound knowledge of simple line workers who are familiar with machinery.

While these management developments were occurring, there were no changes in the Progressive and New Deal regulatory formation. Indeed, quite the opposite. In 1931 Franklin D. Roosevelt abolished the gold standard, which released banking from market discipline. Banks could lend entirely on the basis of personal relationships rather than market performance, and firms could be rewarded with capital infusions regardless of performance. At the same time, American firms did not suffer from competition in part because of World War II and in part because firms had not yet reached the scale sufficient to compete with the American firms. However, continued American ascendency would have depended upon competitive quality developments; rapid innovation; and a market-drive economy, and these patterns were increasingly absent from the economy. Small businesses had increasing trouble forming because of high marginal tax rates, regulation and inability to obtain credit, which was locked by the Fed and given to connected large banks and their client large corporations. The corporations, such as General Motors, felt no need to compete with smaller foreign firms that were still learning how to manufacture. This began to end in the 1950s, when Ford built the Falcon which imitated Volkswagons, but American manufacturing firms had little concept of lean manufacturing or TQM until these processes were well familiar to Japanese firms. Thus, American firms lost their ascendency due to the protective, stable system that the Progressives and the New Deal had created; the lax management in fields like steel and autos that flourished because of the stable system and lack of competition; and the inability of the US government which oversaw the Progressive regulatory model to understand or to anticipate the fundamental changes in production knowledge that the Japanese were accruing.

Thus, the early twentieth century saw the formation of a Progressive regulatory model that aimed to adjust the economy to the rise of big business. But the system the Progressives created did not contemplate the possibility of progress. The Progressives could not foresee that Franklin D. Roosevelt would ratchet up the degree of regulation and take a number of steps that inhibited the formation of new businesses. But the Progressives also did not grasp that the big business system of large scale mass production was only a step in the development of industry, a process which will continue well beyond this and the next centuries.

Progressivism's rigidity and inability to attract experts with the requisite ability to understand developments like lean production was only part of the reason for the inability of the Progressive model to anticipate progress. The model of Progressivism is based on a faulty concept of planning. It contemplated the existing business structure as capable of innovation and that scale rather than process and new ideas were the key variables. AS the twentieth century progressed, though, it was new ideas, the ability to anticipate change and the ability for nimble, often small firms, to cooperate in innovation that mattered most. Yet, such firms are crippled by the banking and credit systems, which allocate credit to secure risks such as large corporations and real estate developers. Thus, the American economy has seen a frenzy of large retail and home building but considerably less innovation in a wide range of fields outside of electronics and telecommunications that might have occurred.

Moreover, there are a number of artifacts of Progressivism that the Progressives themselves attribute to markets, but can do so only by claiming that the Progressive/New Deal model had not been established in the first place by Taft and Franklin D. Roosevelt. First, the skewness in accessibility to credit has facilited a higher degree of income inequality than would exist in a market economic system. This has occurred because the Federal Reserve Bank has inflated asset levels, notably the stock and real estate markets, at the expense of wages. Second, relatively high paid manufacturing jobs have left the United States because of financial manipulation by the Fed, most directly the propping of the value of the dollar through encouragement of foreign governments to hold United States bonds. Third, the stimulaton of the stock market coupled with corporate emphasis on stock options has made executives sensitive to low-risk means of increasing short term profits, which would suggest moving plants to Mexico and overseas. This was done while the Progressive system provided loan guarantees to Chrysler and various protectionism measures to the automobile firms in the 1970s and 1980s.

Thus, Progressivism is responsible for US manufacturing firms' lack of emphasis on quality management, which they felt little pressure to adopt during the 1960s and 1970s, and the rewarding of corporate executives despite their firms' poor performance because of outsourcing. Indeed, Progressivism devolved into a system of special interest brokerage which ensures that little of benefit occurs on the public's behalf; that large firms benefit at the expense of small; and that the public is harmed by the Progressive regulatory regime.

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