Saturday, September 6, 2008

Economies of Scale and Corruption in Walter Weyl's New Democracy

Walter Weyl was one of the co-founders of the New Republic magazine along with Herbert Croly and Walter Lippmann. After New Democracy* was published in 1912, Theodore Roosevelt called it one of the "true books of the (Progressive) movement"** I was dismayed yesterday to learn that TR is President McCain's (oops--I mean Senator McCain's) favorite President. (Recall that TR was the most left wing president of the twentieth century and virtually all of his cousin's, FDR's, ideas in the New Deal were inspired by or related to ideas conceptualized by Roosevelt Progressivism. Calling our current Democratic/Republican election system a choice between Tweedledum and Tweedledee is hardly an exaggeration. McCain favors TR, the most important Progressive politician, Obama fashions himself after the "Progressives" in general. Quite a choice.)

Weyl is a better writer than Walter Lippmann and Lippmann is a better writer than Herbert Croly and John Dewey. The book is very readable and enjoyable even if you disagree, presumably as Messers McCain and Obama, perhaps I should call them McObama, do not. The first few chapters are a potted history of the United States. What is remarkable about them is the lack of economic data and evidence on which the Progressives' arguments were based.

Like Croly and Dewey, Weyl emphasizes the shift from expansion and individualism to monopoly and teams (p. 47):

"It was indeed a strange psychological world in which the American individualist found himself, when, with the reaching of the frontier, American enterprise turned back on itself. The little gambler was like the belated boy who dreams of a Far West of Indian trails but finds there only railways and automobile roads. The individualist became bewildered when his familiar rebating became double-cross rebating and the big shipper received both his own and the littler shipper's rebate, and he became still more confused when the big shipper ended rebates by acquiring his own railroads and his own pipe lines. The individualistic American was dumbfounded when he saw that the favorable terminal facilities, public service franchises and other special privileges, given to a competitor, had ended competition; when he saw competition become parasitic; when he saw the trusts organizing a fictitious competition against themselves. His psychological development had lagged decades behind the industrial development of the country."

More on this below.

Note that there is a contradiction fundamental to the Progressive argument, and it is evident in Weyl's book. Europe, especially Germany, was already experimenting with social democracy in the late nineteenth century, yet rather than attempt such experiments, immigrants from Italy, eastern Europe and northern Europe continued to flock to the United States. This is a puzzle. Why would all these oppressed Europeans come here, rather than to enlightened Germany? Maybe enlightenment isn't all that enlightened. And given subsequent developments in Germany, the birthplace of social democratic enlightenment, I suspect that the impoverished immigrants were smarter than Weyl, Roosevelt and the Progressives.

Weyl writes (p. 68):

"In 1876 as now the American Commonwealths were far behind the leading countries of Europe in laws regulating hours of labor, conditions of work, the prevention of accidents; in laws regulating truck stores, sweat shops, the employment of women, the employment of children...While American manufacturers had been protected against the competition of foreign manufacturers, our resident laborers had not been protected against the competition of European laborers. Immigration had brought in nation after nation, each with a lower standard of living. Whether the ultimate effect was good or bad, whether the immediate burden upon the city toiler was tolerable or intolerable, the nation had not cared. The labor market might be glutted or anemic, the city tenements and shanties might be crowded, the political machine might already be creaking under the weight of illiterate and inarticulate voters. Nevertheless, if immigrants came--or could be made to come--they must be admitted...The poverty of even our most destitute Negroes is opulence compared with the bottomless misery of south Italy or Russia. The enormous wealth of the continent, and our long immunity from serious foreign war or the fear of war, lessened our pauperism."

Weyl predates Schumpeter, Hayek and Mises and so overestimates the importance of regulation and monopoly. His chapter VII, "The Resplendent Plutocracy" emphasizes the role of size and standardization in economic efficiency, which is a theme virtually all historians reiterate. However, he overstates these. It took a number of decades until the limitations of scale in generating progress became evident. Weyl uses the phrase "divorce of ownership and control" (p. 88) which is often attributed to Adolph Berle and Gardiner Means who wrote about this subject twenty years after Weyl in their classic 1932 Modern Corporation and Private Property.

Many of the reforms that Weyl discusses, such as the need for greater disclosure in investment (p. 88) are unexceptionable, and were subsequently adopted during the New Deal (one more piece of evidence that most of the New Deal was already advocated in the Progressive era). He writes (p. 94):

"The trusts are teaching us --as we are teaching them--that the end of it all must be production on the largest scale compatible with efficiency but a production so regulated as to ownership, stock issues, dividends, prices, wages and profits as to safeguard the whole community."

But there are at least three flies in this Progressive ointment. First, in the following chapter on "Plutocracy in Politics" Weyl argues (p. 99)

"The organizing skill of the business magnate in systematizing political corruption has changed it from a local though chronic phenomenon to one which is organic and nation-wide. 'Every time I attempt to trace to its sources the political corruption of a city ring,' says Lincoln Steffens, the acute political pathologist, 'the stream of pollution branches off in the most unexpected directions and spread out in a network of veins and arteries so complex that hardly any part of the body politic seemed clear of it...Not the political ring, but big business--that is the crux of the situation'".

But in arguing for an expansion of the federal government, Weyl overlooks the problem of agency. Who is to ensure that the regulators are not equally corrupt? And if they are, then the expansion of regulation to be national in scope guarantees a governmentally enforced monopoly of corruption. The Progressives never raised, much less solved, the agency problem. Nor have their followers.

The second fly in Weyl's Progressive ointment is the incentivization of special interest lobbying by increasing the scale of government. It is not surprising that Weyl did not anticipate this problem because Madison and Hamilton missed it as well. In the Federalist 51 Madison argued that a large republic is less likely to be subject to faction than a small one because the competition among factions would cancel each other out. It was not until the 1960s that Mancur Olson and George Stigler began to realize that small lobbies with large benefits, i.e., the very trusts with which Weyl was most concerned, had structural economic advantages over dispersed lobbies, and the larger the size of the republic and the more concentrated industry the easier the large firms have it. Since this development went against the thinking behind the framework of Progressivism, what William Appleman Williams calls the "syndicalism" of Herber Hoover and the New Deal and the Federalist model, it is not surprising that Weyl missed it as well. But it causes Weyl's program to be self-destructive.

The third fly in Weyl's Progressive ointment is the inflexibility and inability to change that the capturable regulatory systems that he advocated would entail and the dynamic, mortal nature of big business. Like a stock market investor who buys at the top, the Progressives believed that the trusts would continue to expand. But few of the firms that were in existence in 1912 remain. In contrast, most of the government bureaucracies that Weyl and his colleagues advocated, do remain.

*Walter E. Weyl, The New Democracy. Harper Torchbook Edition. New York: Harper and Row, 1964.

**Ibid, p. viii.

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