The Mugwumps and Progressives emphasized management issues and execution of programs. Herbert Croly, for instance, discussed scientific management and work restructuring in his 1912 Progressive Democracy. In the late nineteenth century EL Godkin discussed the role of incentives in managing railroads. The Muckrakers discussed management problems and Ida Tarbell, as much as she contemned John D. Rockefeller, favorably discussed his management abilities. In contrast, the post World War II liberals rarely discuss management or execution of programs. Their emphasis is on program advocacy not implementation. The reason may be that in implementing the New Deal, which in part relied on partnership between state and federal government, FDR overlaid federal programs like unemployment insurance on state governments that were often corrupt. The New Deal did not attempt to reform government as Progressivism had (and often failed to do) but rather added broad federal policies to an already corrupt system. This policy of see no evil, hear no evil, speak no evil seems to have been transmitted to subsequent generations of social democrats. Yet, the problem of execution and management is not independent of programs themselves. A social security program that is not well-designed is no better and may be worse than none at all. A welfare system that motivates beneficiaries to become dependent and that motivates despondency and drug addiction may be worse than no welfare program at all. An urban renewal program that creates ugly and alienating city projects that stimulate crime and roads that destroy neighborhoods may be worse than no urban renewal program at all. Government programs that generate high costs and few benefits, that drive out business because of high taxes and yet fail to accomplish their goals are worse than no programs. Management and execution are as much a component of programming as policy ideas. Yet, how often do proponents of new programs discuss management and execution issues? Very infrequently.
According to the French industrial Fayol, management is comprised of five tasks: planning, leading, organizing, coordinating, and controlling. This model was updated in the mid twentieth century by Edward I. Deming who argued that management is the reduction in variability of an output. The Deming interpretation of management is related to that of Taiichi Ohno, Toyota's production guru who created the ideas of lean manufacturing. Ohno argued that management is the elimination of waste. In any management system there needs to be a picture of what is going to be accomplished, a process that is required to achieve that goal, and a means of controlling the process so that it remains focused. The selection of the appropriate technique is not easy and it is not incidental. It cannot be accomplished by just anyone. A political appointee appointed along party or personal loyalty lines is not likely to be able to accomplish the managerial task as well as someone who has spent a lifetime thinking about production problems. An employee who has spent a lifetime focused on a certain process or kind of problem is likely to be best equipped to implement a quality program IF the employee understands the management techniques necessary to do a good job. Without taking such considerations into account, government programs are likely to be wasteful. Without controls, there is little likelihood that they will accomplish the objectives their advocates set out for them. If liberals build a ship that cannot sail, they cannot be said to have accomplished much. When the ship sinks, have they done more good than harm? Yet, social democrats advocate programs without thinking about process or about evaluation methods.
There are a number of natural blockages to the management of government programs. First, the cost of losses is not born by any concentrated interest. Because the costs are diffused, there is limited motivation by managers to reveal losses. Managers who reveal losses risk losing their jobs, but the public is not likely to feel the costs of the losses because they are spread over the entire tax paying population. Second, there are incentives for suppliers to cheat, to exaggerate the need for their products or to overcharge. Third, the customer base is captive. Because government enjoys a monopoly, those who use its services have nowhere else to go. Fourth, there is ideological resistance to criticism of government failure and waste by social democrats. Therefore, critics are likely to be humiliated. Fifth, even if public managers do radically improve programs, they are not necessarily rewarded for doing so. Sixth, waste may create patronage opportunities for politicians who in turn are likely to harass or fire government employees who resist it. Seventh, experts and specialists in government may be self-seeking and so not be motivated to improve programs.
Politics in America became largely a debate between two groups that advocate expansion of government: the Progressives, who are Republican in party and who advocate efficiency and effectiveness in government, and the social democrats (who also call themselves liberals and progressives) who do not. But it is not clear that Americans favor expansion of the state, whether it be the social democratic welfare state or the managerial state of progressivism. Moreover, the ideas that progressivism offers with respect to rationalization of the state do not, and likely cannot, reflect the state of the art with respect to management. Hence, Americans are given the choice between the second-rate services that the Progressives have on offer and the incompetence and chaos that the social democrats and their friends in the media gleefully advocate.
Thursday, July 3, 2008
Wednesday, July 2, 2008
Factionalism and the Two-Party System
Americans may stick to the two-party system as an artifact of the founding fathers' fear of faction. By limiting the number of parties to two Americans limit the number of explicit political divisions.
In Elkins and McKitrick's Age of Federalism* the authors emphasize the universal fear and dislike of faction among the public and the founding fathers in the 1790s and earlier. This came in part from the belief that competition among factions had divided and harmed democracies in antiquity. Madison and Hamilton wrote about this in the Federalist, but the discomfort with factions or private associations of any kind (other than religious ones) was widespread. One exception was the Sons of Liberty during the revolutionary period and another, which Elkins and McKitrick don't mention in their masterful work, was the Freemasons. Also, there were incipient labor unions in the 1790s. Labor courses don't typically discuss the dislike of labor unions evidenced in the famous Philadelphia Cordwainers case as associated with a broader distrust of associations of any kind, but that may have been the case. In the Cordwainers (shoemakers) case a Philadelphia court held the union to be a criminal conspiracy. The criminal conspiracy doctrine was changed in the 1830s under the means-end doctrine enunciated in the Commonwealth of Massachusetts v. Hunt. The point is, though, that the shift in attitudes toward unions coincided with a shift in attitudes toward associations more generally. Usually the shift is described as responding to greater power of workingmen in the 1830s associated with Jacksonian presidency.
But the point is that in general private associations of any kind were viewed with suspicion, and minor political parties may be sensed in this way.
During the 1790s, Elkins and McKitrick point out, there was the rise of an early association called the Democratic Societies. The purpose of these clubs was mild, basically to discuss political issues and oppose corruption in government. President Washington viewed these clubs with suspicion, calling them "self-created societies" as did many leading politicians. Two Democratic Societies in Washington Town and Mingo Creek, Pennsylvania were involved in the Whiskey Insurrection in western Pennsylvania in 1791-4 in which tax collectors were tarred and feathered; Inspector of the Excise John Neville's house was burned after an open battle; and as many as 6,000 armed Pennsylvania militia massed on August 1, 1794. President Washington handled the situation masterfully and ultimately sent militia to quell the revolt, but there was no violence beyond scattered incidents.
Elkins and McKitrick point out that Washington blamed the Democratic Societies for the insurrection (p. 484):
"If Washington ever had a fixed obsession, it was these societies, "self-created in the sense of having no sanction in popular authority, societies which had been up to nothing but mischief since the first ones were formed...He had felt very early that if they were not counteracted they would 'shake the government to its foundations'; and 'now if this uprising were not subdued, we could bid adieu to all government in this Country except Mob and Club Govt.'"
Washington wrote that (quoted on p.494, Elkins and McKitrick)
"all combinations and associations under whatever plausible character, with the real design to direct, control, counteract or awe the regular deliberation and action of the constituted authorities are destructive of this fundamental principle (of the duty of every individual to obey the established government)...They serve to organize faction; to give it an artificial and extraordinary force; to put in the place of the delegated will of the nation the will of a party, often a small but artful enterprising minority of the community, and, according to the alternate triumphs of different parties, to make the public administration the mirror of ill-concerted and incongruous projects of faction rather than the organ of consistent and wholesome plans, digested by common counsels and modified by mutual interests."
Elkins and McKitrick quote a Senate resolution recorded in the Annals of Congress:
"Our anxiety arising from the licentious and open resistance to the laws in the Western counties of Pennsylvania has been increased by the proceedings of certain self-created societies...proceedings in our apprehension founded in political error, calculated if not intended to disorganize our Government, and which...have been influential in misleading our fellow citizens in the scene of insurrection."
Might this early distrust of associations, which had disappeared by the time De Tocqueville published Democracy in America in 1835, be the source of the American commitment to the two-party system? While the conflict between the Republicans and the Federalists in the 1790s amounted to a battle between centralizers and decentralizers; proponents of government subsidy to business and proponents of Whiggish suspicion of centralized authority, and so was unavoidable, might the fear of more factionalization than the Federalist-Republican or later Democratic-Republican division be the distant remnant of this early American fear of faction?
*Stanley Elkins and Eric McKitrick, The Age of Federalism: The Early American Republic, 1788-1800. New York: Oxford University Press, 1993.
In Elkins and McKitrick's Age of Federalism* the authors emphasize the universal fear and dislike of faction among the public and the founding fathers in the 1790s and earlier. This came in part from the belief that competition among factions had divided and harmed democracies in antiquity. Madison and Hamilton wrote about this in the Federalist, but the discomfort with factions or private associations of any kind (other than religious ones) was widespread. One exception was the Sons of Liberty during the revolutionary period and another, which Elkins and McKitrick don't mention in their masterful work, was the Freemasons. Also, there were incipient labor unions in the 1790s. Labor courses don't typically discuss the dislike of labor unions evidenced in the famous Philadelphia Cordwainers case as associated with a broader distrust of associations of any kind, but that may have been the case. In the Cordwainers (shoemakers) case a Philadelphia court held the union to be a criminal conspiracy. The criminal conspiracy doctrine was changed in the 1830s under the means-end doctrine enunciated in the Commonwealth of Massachusetts v. Hunt. The point is, though, that the shift in attitudes toward unions coincided with a shift in attitudes toward associations more generally. Usually the shift is described as responding to greater power of workingmen in the 1830s associated with Jacksonian presidency.
But the point is that in general private associations of any kind were viewed with suspicion, and minor political parties may be sensed in this way.
During the 1790s, Elkins and McKitrick point out, there was the rise of an early association called the Democratic Societies. The purpose of these clubs was mild, basically to discuss political issues and oppose corruption in government. President Washington viewed these clubs with suspicion, calling them "self-created societies" as did many leading politicians. Two Democratic Societies in Washington Town and Mingo Creek, Pennsylvania were involved in the Whiskey Insurrection in western Pennsylvania in 1791-4 in which tax collectors were tarred and feathered; Inspector of the Excise John Neville's house was burned after an open battle; and as many as 6,000 armed Pennsylvania militia massed on August 1, 1794. President Washington handled the situation masterfully and ultimately sent militia to quell the revolt, but there was no violence beyond scattered incidents.
Elkins and McKitrick point out that Washington blamed the Democratic Societies for the insurrection (p. 484):
"If Washington ever had a fixed obsession, it was these societies, "self-created in the sense of having no sanction in popular authority, societies which had been up to nothing but mischief since the first ones were formed...He had felt very early that if they were not counteracted they would 'shake the government to its foundations'; and 'now if this uprising were not subdued, we could bid adieu to all government in this Country except Mob and Club Govt.'"
Washington wrote that (quoted on p.494, Elkins and McKitrick)
"all combinations and associations under whatever plausible character, with the real design to direct, control, counteract or awe the regular deliberation and action of the constituted authorities are destructive of this fundamental principle (of the duty of every individual to obey the established government)...They serve to organize faction; to give it an artificial and extraordinary force; to put in the place of the delegated will of the nation the will of a party, often a small but artful enterprising minority of the community, and, according to the alternate triumphs of different parties, to make the public administration the mirror of ill-concerted and incongruous projects of faction rather than the organ of consistent and wholesome plans, digested by common counsels and modified by mutual interests."
Elkins and McKitrick quote a Senate resolution recorded in the Annals of Congress:
"Our anxiety arising from the licentious and open resistance to the laws in the Western counties of Pennsylvania has been increased by the proceedings of certain self-created societies...proceedings in our apprehension founded in political error, calculated if not intended to disorganize our Government, and which...have been influential in misleading our fellow citizens in the scene of insurrection."
Might this early distrust of associations, which had disappeared by the time De Tocqueville published Democracy in America in 1835, be the source of the American commitment to the two-party system? While the conflict between the Republicans and the Federalists in the 1790s amounted to a battle between centralizers and decentralizers; proponents of government subsidy to business and proponents of Whiggish suspicion of centralized authority, and so was unavoidable, might the fear of more factionalization than the Federalist-Republican or later Democratic-Republican division be the distant remnant of this early American fear of faction?
*Stanley Elkins and Eric McKitrick, The Age of Federalism: The Early American Republic, 1788-1800. New York: Oxford University Press, 1993.
The Federalist Number 24 and the Scope of Government
In the Federalist Number 24 Hamilton makes the following statement about the powers that the Constitution confers upon the federal government:
"The powers are not too extensive for the OBJECTS of federal administration, or, in other words, for the management of our NATIONAL INTERESTS; nor can any satisfactory argument be framed to show that they are chargeable with such an excess."
Are the powers that we have granted the federal administration today impractical for the management of national interests? I refer to the myriad of large-scale administrative tasks that the President and Congress are asked to review: Social Security, the Federal Reserve monetary system, Housing and Urban Development and the Department of Education. These are broad, comprehensive programs of such scope and extent that no group of people, much less a single person, could competently oversee all of them.
Compare the problems of the federal government to the problems of General Motors. The president of General Motors is beset with complex details and administrative challenges concerning a handful of products: automobiles, parts, financing and some additional products. Yet, the management of this handful of products has proven too difficult for the management of General Motors to handle all that well, and the firm seems to be drifting to bankruptcy.
Are the politicians who serve in Congress or the President that much more capable than the executives of General Motors? Are the people whom the president appoints to his cabinet and to senior posts in the federal agencies that much more competent than the management of General Motors? In the case of Hurricane Katrina, it seemed that the government agencies are not competent at all. Yet, the public has burdened the federal government with such extensive powers that the management problems, ranging from control to budgeting to personnel selection are orders of magnitude more complex than the problems that confront the executives of an automobile company.
When Hamilton, Madison and Jay wrote the newspaper articles that form the Federalist Papers, the United States of America had a population of three million. Today, the average state has a population of six million. Yet, the powers of government have been federalized to a much greater extent than Hamilton anticipated. This enormous concentration of managerial demands resulted from the perceived threat that industrial concentration posed to the economy. Yet, the concentration resulted in enhancing such concentration. The New Deal intensified the extent of concentration by establishing federal programs that replaced state discretion in fields like social security. The concentration was also enhanced by the civil rights struggles of the 1950s and 1960s, which required a degree of federal intervention to end Jim Crow laws and discrimination.
Today's problems are managerial as much as strategic or political: how to make social security work; how to best combine incentives for innovation with an equitable tax system; whether to extend or contract the scope of government; how to manage the nation's money supply to limit economic crisis and corruption. All of these are managerial problems that lend themselves to a range of strategic choices. The political arguments about them become more emotional and cantankerous as the various protagonists, Democratic and Republican, know less about each question. The expertise that fields like economics, sociology and business offer do not offer one or another optimal solution to any of these problems. In industry, trial and error has proven to work better than grand theory. Yet, subjects of considerable subtlety from the Iraqi War to the management of Social Security are pronounced upon with dogmatic rigidity in the pages of the daily newspapers and in the blogs.
Why can't a pragmatic delegation of complex managerial decision making to states, which are on average twice as large in population as the entire nation was in Hamilton's day, permit a multiplicity of solutions? Such a multiplicity would serve (a) to afford experimentation and learning about solutions; (b) to test alternative ideological approaches; (c) to resolve bitter conflict among Red and Blue proponents (d) to reduce and contain the risk of failure; and (e) to enhance democracy.
"The powers are not too extensive for the OBJECTS of federal administration, or, in other words, for the management of our NATIONAL INTERESTS; nor can any satisfactory argument be framed to show that they are chargeable with such an excess."
Are the powers that we have granted the federal administration today impractical for the management of national interests? I refer to the myriad of large-scale administrative tasks that the President and Congress are asked to review: Social Security, the Federal Reserve monetary system, Housing and Urban Development and the Department of Education. These are broad, comprehensive programs of such scope and extent that no group of people, much less a single person, could competently oversee all of them.
Compare the problems of the federal government to the problems of General Motors. The president of General Motors is beset with complex details and administrative challenges concerning a handful of products: automobiles, parts, financing and some additional products. Yet, the management of this handful of products has proven too difficult for the management of General Motors to handle all that well, and the firm seems to be drifting to bankruptcy.
Are the politicians who serve in Congress or the President that much more capable than the executives of General Motors? Are the people whom the president appoints to his cabinet and to senior posts in the federal agencies that much more competent than the management of General Motors? In the case of Hurricane Katrina, it seemed that the government agencies are not competent at all. Yet, the public has burdened the federal government with such extensive powers that the management problems, ranging from control to budgeting to personnel selection are orders of magnitude more complex than the problems that confront the executives of an automobile company.
When Hamilton, Madison and Jay wrote the newspaper articles that form the Federalist Papers, the United States of America had a population of three million. Today, the average state has a population of six million. Yet, the powers of government have been federalized to a much greater extent than Hamilton anticipated. This enormous concentration of managerial demands resulted from the perceived threat that industrial concentration posed to the economy. Yet, the concentration resulted in enhancing such concentration. The New Deal intensified the extent of concentration by establishing federal programs that replaced state discretion in fields like social security. The concentration was also enhanced by the civil rights struggles of the 1950s and 1960s, which required a degree of federal intervention to end Jim Crow laws and discrimination.
Today's problems are managerial as much as strategic or political: how to make social security work; how to best combine incentives for innovation with an equitable tax system; whether to extend or contract the scope of government; how to manage the nation's money supply to limit economic crisis and corruption. All of these are managerial problems that lend themselves to a range of strategic choices. The political arguments about them become more emotional and cantankerous as the various protagonists, Democratic and Republican, know less about each question. The expertise that fields like economics, sociology and business offer do not offer one or another optimal solution to any of these problems. In industry, trial and error has proven to work better than grand theory. Yet, subjects of considerable subtlety from the Iraqi War to the management of Social Security are pronounced upon with dogmatic rigidity in the pages of the daily newspapers and in the blogs.
Why can't a pragmatic delegation of complex managerial decision making to states, which are on average twice as large in population as the entire nation was in Hamilton's day, permit a multiplicity of solutions? Such a multiplicity would serve (a) to afford experimentation and learning about solutions; (b) to test alternative ideological approaches; (c) to resolve bitter conflict among Red and Blue proponents (d) to reduce and contain the risk of failure; and (e) to enhance democracy.
Tuesday, July 1, 2008
Howard S. Katz's Portflolio Performance versus Fund Managers'
Katz's performance in blue, fund managers' in red. The data can be viewed here. Katz's newsletter can be purchased at http://www.thegoldbug.net.
Stock Prices, the Fed and America's Win-Lose Economy
What is the role of the Fed in generating income inequality because low interest rates boost the stock market while the monetary expansion that causes low rates creates inflation and so reduces real wages? In a web page on stock market returns Jeremy J. Siegel in the Concise Encyclopedia of Economics notes:
"The average compound rate of return on stocks from 1802 through 1991 was 7.7 percent per year: 5.8 percent from 1802 to 1870, 7.2 percent from 1871 to 1925, and 10.0 percent from 1926 to 1991. The increase in the rate of return of stocks over time has fully compensated the equity holder for the increased inflation that has occurred since World War II. "
However, these numbers do not follow the contours of changing American policy concerning the Fed. Before 1913 there was no Fed. From 1913 to 1932 there was a Fed whose inflationary power was limited by a gold standard. From 1932 to 1971 Roosevelt had abolished the gold standard but the Bretton Woods monetary regime required that the US convert foreign dollar holders' dollars into gold. In 1971 Richard M. Nixon abolished the international gold standard.
To track the effects of Fed policy on real wages, inflation and stock market returns, I computed Dow Jones Industrial Average returns for four periods: the pre-Fed period from 1896 to 1913; the Fed/gold standard period from 1913 to 1932; the Fed/international gold standard only period from 1932 to 1971; and the gold standard-free period from 1971-2008. I also computed as best as I could with rough and ready Internet data (a) the inflation rate, (b) the Dow returns less inflation, (c) the compounded return on the Dow, (d) the change in real (inflation-adjusted) hourly wage, (e) the compounded real wage change and (f) the compounded inflation change for the four periods.
I was searching for income inequality data (the usual method of measuring income inequality is the "Ginni coefficient") but could not find a measure on the Web that goes back to 1896. I did find a partial measure in an article by Jared Bernstein and Laurence Mishel. To estimate the compound rates I relied on the 1040tools future value calculator here. Data on real hourly wage changes from 1896 to 1913 are available here. The Dow Jones website makes available its Dow Jones Industrial Average index from 1896. There are estimates available of stock returns from 1802, but what is gained in longitude is lost in comparability. Corporations prior to 1890 did not have the same legal attributes as they did after. Moreover, prior to 1880 stocks were limited as to their breadth of circulation, the nature of the firms for which they were traded and the risk involved because of changes in the corporate form of organization. Therefore, the 1896-1913 period will have to do as a pre-Fed measure to compare with subsequent periods.
The chart below (column A--see here for better view) shows that inflation was lower in the pre-Fed period than in any period since the establishment of the Fed in 1913. From 1896-1913 inflation averaged one percent (column H), while from 1913-1932, the Fed/gold standard period it averaged 1.7%. From 1932-1971, the international gold standard period it averaged 2.82% and during the gold standard- free period, thanks to Republican President Richard M. Nixon, it averaged 3.92%, the highest sustained inflation in American history. The media story that the Greenspan Fed achieved low inflation is but puffery by historical standards. The post-1980 era has a poor record with respect to inflation. At the same time, stock market returns have been boosted since the abolition of the gold standard in 1932 but not before. Column C shows that the Dow increased 108.1% from 1896 to 1913; it fell 23.32% from 1913 to 1932 because of the Great Depression and then it rose 1,143.7% from 1932 to 1971 and 1,266% from 1971 to 2008. Adjusting for inflation and compounding, stock market returns were 3.83% during the 1896-1913 period, -2.9% from 1913 to 1932, 5.93% from 1932 to 1971 and then 5.9% from 1971 to 2008. The key change seems to have been in 1932.
The establishment of the Fed and the abolition of the gold standard seem to have coincided with at first a dramatic increase in real wages and then a reduction from 1971 onward (see Columns F and G). From 1896 to 1913 real hourly wages increased 30.2% over 17 years or 1.6% compounded. From 1913 to 1932, the gold standard period of the Fed, real wages increased 45.5% or 2.12% compounded. This is in part due to reduced inflation during the Depression. However, and this contradicts my theory, from 1932 to 1971 real wages increased 171.8%, a compounded real wage change of 2.6%. Then, from 1971 to 2008, the gold standard-free period compounded real wages fell 27% or a compounded rate of -1.1%. This is a unique 37-year period, but it follows a period of very high wage growth from 1932 to 1971.
Despite the extensive discussion of income inequality, I could not find readily historical data available on Ginni coefficients or other income inequality measures going back to 1896. It is clear from the Bernstein and Mishel article that since 1972 income inequality as measured by the 90-10 cutoff has been increasing.
The data support the idea that changing the monetary regime boosted the stock market. The 5.9% real stock market returns post 1932 are 35% greater than the real, pre-Fed stock market returns from 1896-1913. If you factor in the Fed/gold standard period of 1913-1932 the boost is greater still. There seems to have been a correction in wages but not stock market returns from 1971 to 2008.
But there is conflicting evidence for the Fed/real wage connection. From 1932 to 1971 real wages increased by 2.6% per year, faster than in the 1896-1913 period, but then from 1971 to 2008 they fell by 1.1% per year. Arguably, the New Deal institutions such as labor unions sustained real wage growth for roughly forty years. Thereafter, there was a shift in employers' bargaining power. This may be because of the dramatic boost to monetary and credit expansion that the elimination of the gold standard permitted. Price inflation from 1971 to 2008 was 432% compared to 196.5% for the 1932 to 1971 period. The increasing price inflation may have enhanced firms' ability to substitute technology and equipment for labor and to finance overseas expansion sufficiently to counteract the wage gains made during the 1932-1971 period. As well, the effects of monetary expansion on real wages may be cumulative over many decades, and it is possible that 40 years of inflation resulted in a 40-year stimulus of demand for labor followed by adjustments due to even longer term inflationary effects. It may be that 40 years is the time required for inflation to influence real wages. However, it is also possible that labor unions were weakened during this period and so lacked the bargaining power to counteract employers' strategies. It is also possible that globalization has increased wage competition and has forced firms to be more competitive.
Rather than view stock returns as resulting from investor demand, as Professor Siegel does, it might be more logical to view them as ensuing directly from the Federal Reserve Bank's subsidization of the stock market. The Fed subsidizes the stock market by depressing real interest rates, which increases stock valuations and enables firms to borrow cheaply. Lower interest rates enable firms to substitute machinery and technology for workers to a greater degree than they otherwise would and to finance moves overseas. As well, workers may not be completely aware of inflation's effects on pay, and accept wages under illusory price stability. Thus, the Fed may have served as a wealth transferal device from workers to stockholders. The one fly in this story's ointment is the sharp increase in real wages during the 1932 to 1971 period.
"The average compound rate of return on stocks from 1802 through 1991 was 7.7 percent per year: 5.8 percent from 1802 to 1870, 7.2 percent from 1871 to 1925, and 10.0 percent from 1926 to 1991. The increase in the rate of return of stocks over time has fully compensated the equity holder for the increased inflation that has occurred since World War II. "
However, these numbers do not follow the contours of changing American policy concerning the Fed. Before 1913 there was no Fed. From 1913 to 1932 there was a Fed whose inflationary power was limited by a gold standard. From 1932 to 1971 Roosevelt had abolished the gold standard but the Bretton Woods monetary regime required that the US convert foreign dollar holders' dollars into gold. In 1971 Richard M. Nixon abolished the international gold standard.
To track the effects of Fed policy on real wages, inflation and stock market returns, I computed Dow Jones Industrial Average returns for four periods: the pre-Fed period from 1896 to 1913; the Fed/gold standard period from 1913 to 1932; the Fed/international gold standard only period from 1932 to 1971; and the gold standard-free period from 1971-2008. I also computed as best as I could with rough and ready Internet data (a) the inflation rate, (b) the Dow returns less inflation, (c) the compounded return on the Dow, (d) the change in real (inflation-adjusted) hourly wage, (e) the compounded real wage change and (f) the compounded inflation change for the four periods.
I was searching for income inequality data (the usual method of measuring income inequality is the "Ginni coefficient") but could not find a measure on the Web that goes back to 1896. I did find a partial measure in an article by Jared Bernstein and Laurence Mishel. To estimate the compound rates I relied on the 1040tools future value calculator here. Data on real hourly wage changes from 1896 to 1913 are available here. The Dow Jones website makes available its Dow Jones Industrial Average index from 1896. There are estimates available of stock returns from 1802, but what is gained in longitude is lost in comparability. Corporations prior to 1890 did not have the same legal attributes as they did after. Moreover, prior to 1880 stocks were limited as to their breadth of circulation, the nature of the firms for which they were traded and the risk involved because of changes in the corporate form of organization. Therefore, the 1896-1913 period will have to do as a pre-Fed measure to compare with subsequent periods.
The chart below (column A--see here for better view) shows that inflation was lower in the pre-Fed period than in any period since the establishment of the Fed in 1913. From 1896-1913 inflation averaged one percent (column H), while from 1913-1932, the Fed/gold standard period it averaged 1.7%. From 1932-1971, the international gold standard period it averaged 2.82% and during the gold standard- free period, thanks to Republican President Richard M. Nixon, it averaged 3.92%, the highest sustained inflation in American history. The media story that the Greenspan Fed achieved low inflation is but puffery by historical standards. The post-1980 era has a poor record with respect to inflation. At the same time, stock market returns have been boosted since the abolition of the gold standard in 1932 but not before. Column C shows that the Dow increased 108.1% from 1896 to 1913; it fell 23.32% from 1913 to 1932 because of the Great Depression and then it rose 1,143.7% from 1932 to 1971 and 1,266% from 1971 to 2008. Adjusting for inflation and compounding, stock market returns were 3.83% during the 1896-1913 period, -2.9% from 1913 to 1932, 5.93% from 1932 to 1971 and then 5.9% from 1971 to 2008. The key change seems to have been in 1932.
The establishment of the Fed and the abolition of the gold standard seem to have coincided with at first a dramatic increase in real wages and then a reduction from 1971 onward (see Columns F and G). From 1896 to 1913 real hourly wages increased 30.2% over 17 years or 1.6% compounded. From 1913 to 1932, the gold standard period of the Fed, real wages increased 45.5% or 2.12% compounded. This is in part due to reduced inflation during the Depression. However, and this contradicts my theory, from 1932 to 1971 real wages increased 171.8%, a compounded real wage change of 2.6%. Then, from 1971 to 2008, the gold standard-free period compounded real wages fell 27% or a compounded rate of -1.1%. This is a unique 37-year period, but it follows a period of very high wage growth from 1932 to 1971.
Despite the extensive discussion of income inequality, I could not find readily historical data available on Ginni coefficients or other income inequality measures going back to 1896. It is clear from the Bernstein and Mishel article that since 1972 income inequality as measured by the 90-10 cutoff has been increasing.
The data support the idea that changing the monetary regime boosted the stock market. The 5.9% real stock market returns post 1932 are 35% greater than the real, pre-Fed stock market returns from 1896-1913. If you factor in the Fed/gold standard period of 1913-1932 the boost is greater still. There seems to have been a correction in wages but not stock market returns from 1971 to 2008.
But there is conflicting evidence for the Fed/real wage connection. From 1932 to 1971 real wages increased by 2.6% per year, faster than in the 1896-1913 period, but then from 1971 to 2008 they fell by 1.1% per year. Arguably, the New Deal institutions such as labor unions sustained real wage growth for roughly forty years. Thereafter, there was a shift in employers' bargaining power. This may be because of the dramatic boost to monetary and credit expansion that the elimination of the gold standard permitted. Price inflation from 1971 to 2008 was 432% compared to 196.5% for the 1932 to 1971 period. The increasing price inflation may have enhanced firms' ability to substitute technology and equipment for labor and to finance overseas expansion sufficiently to counteract the wage gains made during the 1932-1971 period. As well, the effects of monetary expansion on real wages may be cumulative over many decades, and it is possible that 40 years of inflation resulted in a 40-year stimulus of demand for labor followed by adjustments due to even longer term inflationary effects. It may be that 40 years is the time required for inflation to influence real wages. However, it is also possible that labor unions were weakened during this period and so lacked the bargaining power to counteract employers' strategies. It is also possible that globalization has increased wage competition and has forced firms to be more competitive.
Rather than view stock returns as resulting from investor demand, as Professor Siegel does, it might be more logical to view them as ensuing directly from the Federal Reserve Bank's subsidization of the stock market. The Fed subsidizes the stock market by depressing real interest rates, which increases stock valuations and enables firms to borrow cheaply. Lower interest rates enable firms to substitute machinery and technology for workers to a greater degree than they otherwise would and to finance moves overseas. As well, workers may not be completely aware of inflation's effects on pay, and accept wages under illusory price stability. Thus, the Fed may have served as a wealth transferal device from workers to stockholders. The one fly in this story's ointment is the sharp increase in real wages during the 1932 to 1971 period.
Monday, June 30, 2008
The Federalist 14 and Decentralizaton
In the Federalist 14, Madison argues that while direct democracy is possible only in a small country, a republic can cover a larger geographic area. Based on the transportation available in the 1780s, he shows that a federal republican form of government is possible since the delegates can travel the distance required. He adds that:
"It is to be remembered that the federal government is not to be charged with the whole power of making and administering laws. Its jurisdiction is limited to certain enumerated objects, which concern all the members of the republic, but which are not to be attained by the separate provisions of any. The subordinate governments, which can extend their care to all those other objects which can be separately provided for, will retain their due authority and activity. Were it proposed by the plan of the convention to abolish the governments of the particular States, its adversaries would have some ground for their objection; though it would not be difficult to show that if they were abolished the general government would be compelled by the principle of self-preservation to reinstate them in their proposed jurisdiction."
Madison's recognition of the principle of decentralization anticipated the evolution of large scale corporate enterprise in the twentieth century. In his classic book Strategy and Structure, Alfred Chandler argues that big business evolved from the functional into the decentralized form in the twentieth century in response to strategic shifts, notably the concentration of industry and the formation of conglomerates. The reason the decentralized form was necessary was that the informational demands and transactions costs of a large organization inhibit intelligent processing. Madison anticipated this development in the 18th century.
The information demands of government are greater than the informational demands of private industry. The flexibility required is greater and the scope of the market is greater, which implies the need for greater diversity of strategy. Yet, the modernist or progressive approach to organizing government has been to centralize decision making authority. This runs counter to the insight not only of Madison but of practical business strategists who have learned that efficiency as well as responsive, flexible strategy depend on integration of small scale with large scale and the loose coupling of federal and local units.
"It is to be remembered that the federal government is not to be charged with the whole power of making and administering laws. Its jurisdiction is limited to certain enumerated objects, which concern all the members of the republic, but which are not to be attained by the separate provisions of any. The subordinate governments, which can extend their care to all those other objects which can be separately provided for, will retain their due authority and activity. Were it proposed by the plan of the convention to abolish the governments of the particular States, its adversaries would have some ground for their objection; though it would not be difficult to show that if they were abolished the general government would be compelled by the principle of self-preservation to reinstate them in their proposed jurisdiction."
Madison's recognition of the principle of decentralization anticipated the evolution of large scale corporate enterprise in the twentieth century. In his classic book Strategy and Structure, Alfred Chandler argues that big business evolved from the functional into the decentralized form in the twentieth century in response to strategic shifts, notably the concentration of industry and the formation of conglomerates. The reason the decentralized form was necessary was that the informational demands and transactions costs of a large organization inhibit intelligent processing. Madison anticipated this development in the 18th century.
The information demands of government are greater than the informational demands of private industry. The flexibility required is greater and the scope of the market is greater, which implies the need for greater diversity of strategy. Yet, the modernist or progressive approach to organizing government has been to centralize decision making authority. This runs counter to the insight not only of Madison but of practical business strategists who have learned that efficiency as well as responsive, flexible strategy depend on integration of small scale with large scale and the loose coupling of federal and local units.
Kennedy v. Louisiana and Limiting the Supreme Court's Power
The progressive movement that began in the early twentieth century has followed a gradualist approach to the erosion of liberty. Its left wing makes extreme demands, and then its center argues for moderation, which means less erosion than the left demands. The process repeats so that the extreme demands are achieved through several small steps. As well, the progressives, starting with John Dewey, have been deceitful. They argue that they they idealize democracy and public deliberation, but then they advocate increasing centralization and bureaucratization of power, for instance the accretion of the Supreme Court's power over state law, that stifles democracy. These steps have the effect of restricting the majority of people's freedom, as in the economic realm, or of increasing the power of the progressive elite to impose the cultural values of the wealthy and Ivy League-educated onto the general public.
In Kennedy v. Louisiana, the Court held that a Louisiana law that provided the death penalty for a child rapist is cruel and unusual punishment and so unconstitutional. The New York Sun summarizes the Court's reasoning about cruel and unusual punishment as follows:
'Cruel and unusual punishment,' which is prohibited by the Eighth Amendment, derives its meaning from 'the evolving standards of decency that mark the progress of a maturing society.' These evolved standards, according to Justice Kennedy, require a distinction, 'between intentional first-degree murder on the one hand and non homicide crimes against individual persons, even including child rape, on the other.' Citing precedents, Justice Kennedy claims this distinction shows that the "severity and irrevocability" of child rape cannot be compared to murder 'in terms of moral depravity and of the injury to the person and to the public.'
Kennedy v. Louisiana is a chord in the progressive symphony. In the nineteenth century the Court did not have the power to apply the Bill of Rights to the states. In 1925, near the end of the Progressive era, in the case of Gitlow v. New York the Court ruled that the Fourteenth Amendment extended its power to review state law.
In 1965, in Griswold v. Connecticut, the Supreme Court held that Estelle Griswold, director of planned parenthood of Connecticut and Dr. Buxton of the Yale Medical School could not be fined for giving advice to patients encouraging them to use contraceptives even though the legislature of Connecticut had passed such a law. In the decision Justice Douglas wrote:
"specific guarantees in the Bill of Rights have penumbras, formed by emanations from those guarantees that help give them life and substance. Various guarantees create zones of privacy. The right of association contained in the penumbra of the First Amendment is one, as we have seen."
Thus, the Court went from not reviewing constitutionality of state law in the nineteenth century to reviewing it in the pre-World War II period and then to creating new rules not in the Constitution ("penumbras") in the post-World War II period that the Court then dictatorially imposed on the states. Paradoxically, Herbert Croly and other progressives of the early twentieth century argued that the Court had too much power in the nineteenth century and that democracy ought to supplant Court authority. Instead, progressivism has seen a vast extension of Court power and restriction of democracy. Despite their deceptive claim to support democracy, progressives have hailed this process. Progressives' values have emphasized extension of the First Amendment to revolutionaries (the speech involved in Gitlow involved Gitlow's advocating overthrow of the government, which New York had illegalized) and birth control. Progressives have repeatedly emphasized results like these over democracy.
In Kennedy v. Louisiana the Court claims the authority to reinterpret the Constitution in light of the evolving standards of decency that mark the progress of a maturing society. Yet, there is nothing in the Constitution that gives the Supreme Court that authority any more than the Constitution suggests that its penumbras have Constitutional force. The Supreme Court has simply re-interpreted the Constitution in a way that arrogates power to itself and that is profoundly anti-democratic. The fact that the "progressive" movement has never complained about this pattern evidences its elitism.
The Supreme Court views itself as an arbiter of decency, yet the Supreme Court has no qualification to function as such an arbiter. In Roe v. Wade the Supreme Court held that states could not illegalize abortion. Yet, according to ABC News, 57 percent of Americans oppose abortion solely to end an unwanted pregnancy. In other words, the majority of Americans do not think that the Supreme Court's judgment is decent. Nor should the Supreme Court imagine that it somehow reflects the moral standards of the majority of Americans. Some justices, schooled in elite universities and indoctrinated in politically correct ideology, have values that deviate sharply from the majority of Americans. If so, then the Court has become an arbitrary possessor of power, a factional dictatorial force that represents the "Blue" half of the country, not an interpreter of the Constitution. Perhaps it is time to restrict this anti-democratic, factional force.
An amendment to the Constitution could limit the Court's power to apply the Constitution to the states. If progressives believe in democracy, then they should favor this proposal, because enhancement of the power of the states would significantly enhance democracy. Such an amendment might state that the Constitution, except where it states to the contrary specifically, does not apply to the states. Then, the states will be free to decide what "penumbras" they wish to adopt, and which Supreme Court penumbras they find morally reprehensible.
In Kennedy v. Louisiana, the Court held that a Louisiana law that provided the death penalty for a child rapist is cruel and unusual punishment and so unconstitutional. The New York Sun summarizes the Court's reasoning about cruel and unusual punishment as follows:
'Cruel and unusual punishment,' which is prohibited by the Eighth Amendment, derives its meaning from 'the evolving standards of decency that mark the progress of a maturing society.' These evolved standards, according to Justice Kennedy, require a distinction, 'between intentional first-degree murder on the one hand and non homicide crimes against individual persons, even including child rape, on the other.' Citing precedents, Justice Kennedy claims this distinction shows that the "severity and irrevocability" of child rape cannot be compared to murder 'in terms of moral depravity and of the injury to the person and to the public.'
Kennedy v. Louisiana is a chord in the progressive symphony. In the nineteenth century the Court did not have the power to apply the Bill of Rights to the states. In 1925, near the end of the Progressive era, in the case of Gitlow v. New York the Court ruled that the Fourteenth Amendment extended its power to review state law.
In 1965, in Griswold v. Connecticut, the Supreme Court held that Estelle Griswold, director of planned parenthood of Connecticut and Dr. Buxton of the Yale Medical School could not be fined for giving advice to patients encouraging them to use contraceptives even though the legislature of Connecticut had passed such a law. In the decision Justice Douglas wrote:
"specific guarantees in the Bill of Rights have penumbras, formed by emanations from those guarantees that help give them life and substance. Various guarantees create zones of privacy. The right of association contained in the penumbra of the First Amendment is one, as we have seen."
Thus, the Court went from not reviewing constitutionality of state law in the nineteenth century to reviewing it in the pre-World War II period and then to creating new rules not in the Constitution ("penumbras") in the post-World War II period that the Court then dictatorially imposed on the states. Paradoxically, Herbert Croly and other progressives of the early twentieth century argued that the Court had too much power in the nineteenth century and that democracy ought to supplant Court authority. Instead, progressivism has seen a vast extension of Court power and restriction of democracy. Despite their deceptive claim to support democracy, progressives have hailed this process. Progressives' values have emphasized extension of the First Amendment to revolutionaries (the speech involved in Gitlow involved Gitlow's advocating overthrow of the government, which New York had illegalized) and birth control. Progressives have repeatedly emphasized results like these over democracy.
In Kennedy v. Louisiana the Court claims the authority to reinterpret the Constitution in light of the evolving standards of decency that mark the progress of a maturing society. Yet, there is nothing in the Constitution that gives the Supreme Court that authority any more than the Constitution suggests that its penumbras have Constitutional force. The Supreme Court has simply re-interpreted the Constitution in a way that arrogates power to itself and that is profoundly anti-democratic. The fact that the "progressive" movement has never complained about this pattern evidences its elitism.
The Supreme Court views itself as an arbiter of decency, yet the Supreme Court has no qualification to function as such an arbiter. In Roe v. Wade the Supreme Court held that states could not illegalize abortion. Yet, according to ABC News, 57 percent of Americans oppose abortion solely to end an unwanted pregnancy. In other words, the majority of Americans do not think that the Supreme Court's judgment is decent. Nor should the Supreme Court imagine that it somehow reflects the moral standards of the majority of Americans. Some justices, schooled in elite universities and indoctrinated in politically correct ideology, have values that deviate sharply from the majority of Americans. If so, then the Court has become an arbitrary possessor of power, a factional dictatorial force that represents the "Blue" half of the country, not an interpreter of the Constitution. Perhaps it is time to restrict this anti-democratic, factional force.
An amendment to the Constitution could limit the Court's power to apply the Constitution to the states. If progressives believe in democracy, then they should favor this proposal, because enhancement of the power of the states would significantly enhance democracy. Such an amendment might state that the Constitution, except where it states to the contrary specifically, does not apply to the states. Then, the states will be free to decide what "penumbras" they wish to adopt, and which Supreme Court penumbras they find morally reprehensible.
Sunday, June 29, 2008
Freedom of Information Act Request for Barack Obama's Birth Certificate
I have written and will mail on Monday two Freedom of Information Act requests to the State of Hawaii for copies of Barack Obama's birth certificate as per Larwyn's suggestion. Pamela Geller of Atlas Shrugs argues that there may be no problem with Mr. Obama's birth certificate, but the State of Hawaii and Mr. Obama have an ethical obligation to come clean on this matter.
Mark Bennett, Attorney General
Department of the Attorney General
State of Hawaii
425 Queen Street
Honolulu, Hawaii 96813
Dear Mr. Bennett:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Janice Okubo
Department of Health
State of Hawaii
1250 Punchbowl Street Room 326
Honolulu, Hawaii, 96813
Dear Ms. Okubo:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Mark Bennett, Attorney General
Department of the Attorney General
State of Hawaii
425 Queen Street
Honolulu, Hawaii 96813
Dear Mr. Bennett:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Janice Okubo
Department of Health
State of Hawaii
1250 Punchbowl Street Room 326
Honolulu, Hawaii, 96813
Dear Ms. Okubo:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Pamela Geller and the Obama Birth Certificate
Pamela Geller of Atlas Shrugged (hat tip Larwyn) cites Israel Insider about the missing Obama birth certificate. There is uncertainty about the authenticity of the copy of Barack Obama's birth certificate produced on Obama's fight the Smears site. Geller's correspondent Joe has analyzed the birth certificate and found a potential seal, though Israel Insider questions it. Geller concludes that the seal is really there and suggests:
"I believe the Obama campaign would deliberately keep such a question alive to diminish the veracity of the real scandals Obama is guilty of (Rezko, Auchi, Wright, Nation of Islam, Malley, Powers, Odinga, corruption, lies etc."
Perhaps Mr. Obama should make the birth certificate available and Republicans should emphasize a range of criticisms. There are many to choose from.
"I believe the Obama campaign would deliberately keep such a question alive to diminish the veracity of the real scandals Obama is guilty of (Rezko, Auchi, Wright, Nation of Islam, Malley, Powers, Odinga, corruption, lies etc."
Perhaps Mr. Obama should make the birth certificate available and Republicans should emphasize a range of criticisms. There are many to choose from.
Two Ways To Organize a Society
Two ways to organize society are equity and achievement. Under the equity principle there can be economic inequality only if it is associated with equal opportunity and if the inequality optimally benefits the disadvantaged. Under an achievement theory, society is best off if it is organized so that the quantity and quality of achievement is optimized. Thus, a nation like Athens would certainly not qualify under the equity principle because there was slavery, but it would qualify under the achievement principle as one of the great societies in history.
Principles like these are not easily tested empirically. Only through history can we judge whether societies that operate under one optimizing rule or the other have worked best. One problem is execution. Few societies (ancient Sparta is one) have been able to establish equal opportunity. If they could, the result would likely be unsatisfactory. The poorest and the wealthiest people in society would possibly be much worse off precisely because of equality of opportunity. This is because achievement is the source of progress and achievement is possible only if there is inequality.
In his book Creativity: Beyond the Myth of Genius* Robert W. Weisberg of Temple University argues against the idea that creativity results from genius or luck. Rather, creativity results from focused application of ordinary thinking based on well-developed expertise. Creative works are not "set breaking" and do not constitute "revolutions", but rather build on prior inventions and pre-existing knowledge bases. Weisberg writes that to encourage creativity in the young "we should emphasize development of deep expertise in a particular domain"**. As well, motivation to create plays a role. To motivate people to be creative "exposure at an early age to subject matter in the arts and sciences, structured in such a way as to appeal to the young, can result in a child's naturally developing an interest in some area. At a later age exposure to mentors can play multiple roles." Even with respect to prodigies: "these skills will not express themselves without strong support from the environment, especially the family, as we saw...in the case of Mozart and Picasso. Thus, even the most talented must have the right environment if their talent is to bear fruit."
If Weisberg is right, then achievement depends in part on unique opportunities. It is impossible to provide the same nurturing to all, nor would it be desirable. To create a society where all have the opportunity to be Mozart, it would be necessary to exclude anyone's being a Picasso. To create a society where Mozart would not be entitled to the rewards of Mozart's work would likely de-motivate him. But even the worst-off member of society benefits to a large degree from Mozart's creative genius (or Puff Daddy's).
It is true that the achievement theory leads to distributional inequity. Some achieve more than others, and this in part is due to skills developed in the family at an early age. But does that mean that the achievement theory is inequitable? It may be that the worst off is best off in a society that stimulates achievement through the recognition of basic rights.
In addition, there is the question of pragmatic execution. What have been the outcomes of societies organized along the lines of equity and what have been the outcomes of societies organized along the lines of achievement? When the equity principle was first brought to public awareness in the eighteenth century there was considerable injustice. (It also is true that few societies had been organized along any lines but tribal at that time.) Throughout the nineteenth century, societies such as England and America that were organized on the achievement principle were attacked as inequitable. Yet, in the twentieth century, societies that were organized on the equity principle, such as the Soviet Union, Nazi German and Red China, committed far worse atrocities than any in the eighteenth and nineteenth centuries. Today, the United States and England have increasingly been organized along equity principles, but the two societies are less, not more, equitable than they were under the achievement principle.
Thus, there is a gulf between the theory of equity and the results of the equitable philosophy because human nature and human power needs do not coincide with the cool rationality of a philosopher's anticipating outcomes under a "veil of ignorance". Thus, the resolution of the dispute between equity and achievement needs to be reviewed empirically and experimentally, not through philosophical speculation.
Achievement may be defined as a creative act that merits social recognition. The social recognition evolves because the creative act is helpful to at least a portion of society. The best way to motivate socially useful action is through fair reward. Because there is no true way to determine the fairness of rewards, and because human reason is inevitably self-serving and biased, the fairest way is to let the marketplace determine them.
*Robert W. Weisberg, Creativity: Beyond the Myth of Genius. New York: W.H. Freeman and Company, 1993.
**As well, this contradicts the idea that basic skills are unimportant to creativity, a fundamental precept of progressive education.
Principles like these are not easily tested empirically. Only through history can we judge whether societies that operate under one optimizing rule or the other have worked best. One problem is execution. Few societies (ancient Sparta is one) have been able to establish equal opportunity. If they could, the result would likely be unsatisfactory. The poorest and the wealthiest people in society would possibly be much worse off precisely because of equality of opportunity. This is because achievement is the source of progress and achievement is possible only if there is inequality.
In his book Creativity: Beyond the Myth of Genius* Robert W. Weisberg of Temple University argues against the idea that creativity results from genius or luck. Rather, creativity results from focused application of ordinary thinking based on well-developed expertise. Creative works are not "set breaking" and do not constitute "revolutions", but rather build on prior inventions and pre-existing knowledge bases. Weisberg writes that to encourage creativity in the young "we should emphasize development of deep expertise in a particular domain"**. As well, motivation to create plays a role. To motivate people to be creative "exposure at an early age to subject matter in the arts and sciences, structured in such a way as to appeal to the young, can result in a child's naturally developing an interest in some area. At a later age exposure to mentors can play multiple roles." Even with respect to prodigies: "these skills will not express themselves without strong support from the environment, especially the family, as we saw...in the case of Mozart and Picasso. Thus, even the most talented must have the right environment if their talent is to bear fruit."
If Weisberg is right, then achievement depends in part on unique opportunities. It is impossible to provide the same nurturing to all, nor would it be desirable. To create a society where all have the opportunity to be Mozart, it would be necessary to exclude anyone's being a Picasso. To create a society where Mozart would not be entitled to the rewards of Mozart's work would likely de-motivate him. But even the worst-off member of society benefits to a large degree from Mozart's creative genius (or Puff Daddy's).
It is true that the achievement theory leads to distributional inequity. Some achieve more than others, and this in part is due to skills developed in the family at an early age. But does that mean that the achievement theory is inequitable? It may be that the worst off is best off in a society that stimulates achievement through the recognition of basic rights.
In addition, there is the question of pragmatic execution. What have been the outcomes of societies organized along the lines of equity and what have been the outcomes of societies organized along the lines of achievement? When the equity principle was first brought to public awareness in the eighteenth century there was considerable injustice. (It also is true that few societies had been organized along any lines but tribal at that time.) Throughout the nineteenth century, societies such as England and America that were organized on the achievement principle were attacked as inequitable. Yet, in the twentieth century, societies that were organized on the equity principle, such as the Soviet Union, Nazi German and Red China, committed far worse atrocities than any in the eighteenth and nineteenth centuries. Today, the United States and England have increasingly been organized along equity principles, but the two societies are less, not more, equitable than they were under the achievement principle.
Thus, there is a gulf between the theory of equity and the results of the equitable philosophy because human nature and human power needs do not coincide with the cool rationality of a philosopher's anticipating outcomes under a "veil of ignorance". Thus, the resolution of the dispute between equity and achievement needs to be reviewed empirically and experimentally, not through philosophical speculation.
Achievement may be defined as a creative act that merits social recognition. The social recognition evolves because the creative act is helpful to at least a portion of society. The best way to motivate socially useful action is through fair reward. Because there is no true way to determine the fairness of rewards, and because human reason is inevitably self-serving and biased, the fairest way is to let the marketplace determine them.
*Robert W. Weisberg, Creativity: Beyond the Myth of Genius. New York: W.H. Freeman and Company, 1993.
**As well, this contradicts the idea that basic skills are unimportant to creativity, a fundamental precept of progressive education.
The Federalist No. 13 and Economies of Scale in Government
In the Federalist Number 13 Hamilton argues that an advantage to adoption of the Constitution and establishment of a unified nation as opposed to 13 separate states or three regional confederacies is efficiency that results from economies of scale. Hamilton argues:
"No well-informed man will suppose that the affairs of such a confederacy can be properly regulated by a government less comprehensive in its origins or institutions than that which has been proposed by the convention. When the dimensions of a State attain to a certain magnitude, it requires the same energy of government and the same forms of administration which are requisite in one of much greater extent."
Hamilton was right about the costs of government. The cost of governing 3 million people is much less than twice the cost of governing 1.5 million people. But Hamilton could not have foreseen the increasingly strategic role that government plays in economic development. That is, a range of federal policies restrict and influence business decision making in ways that Hamilton could not have foreseen. These include the creation of money, the social security system, funding of urban renewal, health plans for the elderly. Hamilton did advocate central banking and federal involvement in the economy, such as the creation of a state manufacturing incubator, but he could not have imagined the degree to which government influences economic behavior in our world.
The choice between centralization and decentralization involves two considerations: the economies of scale that Hamilton identified, and the creativity and experimentation that decentralization permits. Thirteen states permit thirteen approaches to regulation. Two or three confederacies would permit two or three approaches. Diversity of strategies permit comparisons and learning. Hamilton was right with respect to the Constitution, but he overstates the value of economies of scale as they might apply to our world.
"No well-informed man will suppose that the affairs of such a confederacy can be properly regulated by a government less comprehensive in its origins or institutions than that which has been proposed by the convention. When the dimensions of a State attain to a certain magnitude, it requires the same energy of government and the same forms of administration which are requisite in one of much greater extent."
Hamilton was right about the costs of government. The cost of governing 3 million people is much less than twice the cost of governing 1.5 million people. But Hamilton could not have foreseen the increasingly strategic role that government plays in economic development. That is, a range of federal policies restrict and influence business decision making in ways that Hamilton could not have foreseen. These include the creation of money, the social security system, funding of urban renewal, health plans for the elderly. Hamilton did advocate central banking and federal involvement in the economy, such as the creation of a state manufacturing incubator, but he could not have imagined the degree to which government influences economic behavior in our world.
The choice between centralization and decentralization involves two considerations: the economies of scale that Hamilton identified, and the creativity and experimentation that decentralization permits. Thirteen states permit thirteen approaches to regulation. Two or three confederacies would permit two or three approaches. Diversity of strategies permit comparisons and learning. Hamilton was right with respect to the Constitution, but he overstates the value of economies of scale as they might apply to our world.
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