Walter Weyl and the Escalation of American Mental Uniformity

In the late nineteenth century the standardization of parts contributed to American competitiveness. That idea was taken further by the Progressives, who incorrectly assumed that increasing scale and centralizing management would improve efficiency. The assumption of the historian Alfred Chandler (in his books The Visible Hand and Strategy and Structure) that increased scale means increased efficiency is not a rule at all. Toyota showed that nimble management technique can easily overcome inefficient manufacturers of the largest scale.

The current trend toward conformity of thought, standardization of consumption, and media-induced mass hysteria continues the incorrect, 130-year-old theory of the Progressives that standardization and scale are the most important sources of efficiency.

Centralized financial control via the Fed is central to this process. I wrote a piece that hasn't been published about how a similar process applied to higher education. You see the same thing with K-12 education. The Dept. of Education was a first step toward national centralization, but the process began in the first half of the 19th century with Horace Mann's advocacy of public education. Widespread adoption of teacher education in the mid-twentieth century standardized the ideological framework that infuses K-12. Diane Ravitch's Left Back: A Century of Battles over School Reform focuses on teaching methodology and progressive education, but there was ideological content affiliated with progressive education theory.

The result of a century of increasingly standardized training is increased standardization of thinking. The now-declining centralized mass media has also played an important role, and I suspect that the debate about Internet regulation is linked to the need to think strategically about homogenizing content by regulators in the Progressive tradition.

The argument for obtaining ever more education in the name of supposed higher wages of graduates is a tacit argument for uniformity of thinking. Relatively few grads study science or technology. The bulk study business, education, and psychology. They often learn little, but their behavior and thinking are standardized. (Christopher Loss discusses the emphasis on human resource management as an aim of higher education in the first chapter of his important book Between Citizen and State.)

The Progressives were the ones who instituted today's educational system. Horace Mann was the first advocate of public education, but the current approach with high school, elementary school, and college admission based on standardized testing was the creation of the early 1900s.

What we are witnessing is a playing out of the Progressive ideology of someone like Progressive ideologue Walter Weyl. (Weyl cofounded the New Republic magazine with two other central Progressive thinkers, Walter Lippmann and Herbert Croly.) Weyl saw Progressivism as leading to socialism, and in this he was prescient. He did not anticipate the continued vibrancy of the free market economy, and its ability to innovate.

For instance, Weyl thought that Progressivism would lead to a perfectly planned national train system; he didn't realize that air travel would replace trains. Progressivism has no place for the kind of rapid innovation that took place under laissez faire capitalism. It requires a slow, limited rate of innovation, and it incorrectly assumes that scale and standardization increase efficiency and wealth. 

Rationality and Decentralization in Montesquieu's Spirit of Laws

In his famous article "The Nature of the Firm", Ronald Coase claimed that firms exist because they are cost minimizing. It is cheaper to coordinate a set of economic processes using methods available to business concerns than on the market. Coase thus suggests that marginal costs of organization will tend to be equated to the returns from organization. In general, the larger the firm the greater the costs of organization. Transactions involved in maintaining complex or large organizations are more costly than transactions involved in maintaining smaller ones. Firms grow to an optimal size given the costs and benefits to scale. Economies of scale refer to declining unit costs because of increasing sized firms' increasing ability to spread overhead over a large number of units. But increasing organization costs, also due to increasing size, may outweigh the costs per unit.

Anticipating Coase by more than two centuries and relying on comparative historical analysis, Charles de Secondat, Baron de Montestquieu, makes a parallel claim about the benefits of scale in the design of republics. Montesquieu writes that the optimal size of republics is small, because large scale republics permit large fortunes, which in turn create immoderate demands by interest groups. The competition of special interests leads to an overemphasis on private concerns and an underemphasis on the public good:

"In an extensive republic the public good is sacrificed to a thousand private views; it is subordinate to exceptions, and depends on accidents. In a small one, the interest of the public is more obvious, better understood, and more within the reach of every citizen; abuses have less extent, and of course are less protected."*

Montesquieu gives as an example the Greek republics, which were small city states. Montesquieu also notes that there are advantages to great as opposed to petty states. Thus, he is arguing for a balance, or optimization, of benefits as opposed to costs. In Book IX Montesquieu notes that small republics may be destroyed by foreign invasions and large repulics are destroyed by "internal imperfections". But, argues Montesquieu "confederate republics" have the advantages of a republic together with the external force of a monarchical government. "Hence it proceeds that Holland, Germany and the Swiss cantons are considered in Europe as perpetual republics." The many states balance power. Insurrections in one state can be quelled by others. But confederacies must consist entirely of republics (this was integrated into the Constitution). I would add that confederacies permit intelligent management of information while permitting economies of scale with respect to defense and economic markets.

Of course, there are many other factors relevant to the nature of government. In writing about the geographical differences between Europe and Asia**, Montesquieu notes that geographical differences facilitate the "slavery" of Asia and identifies large scale with despotism:

"In Asia they have always had great empires; in Europe these could never subsist. Asia has larger plains; it is cut out into much more extensive divisions by mountains and seas; and as it lies more to the south, its springs are more easily dried up...Power in Asia ought, then, to be always despotic: for if their slavery was not severe they would make a division inconsistent with the nature of the country."

In the 1960s and 1970s, Mancur Olson and George Stigler argued that ease of organization of interest groups and the economic benefit per participant due to successful lobbying lead to success or failure of specific groups in economic competition. For a long time physicians formed a successful lobby because they shared common training, common values and attended conferences of the American Medical Association. Geographic advantages would certainly be among the kinds of advantages different interests might enjoy. Geography, argued Montesquieu in 1748, contributes to the nature of political organization, and large geographic scope is most consistent with despotism.

A school of historians, to include William Appleman Williams, Gabriel Kolko, Martin Sklar and James Weinstein, has identified Progressivism, which appeared following the advance of big business and the closing of the American frontier, as a pro-big business ideology; that Progressivism was the ideology of big business even though it was packaged as "liberal" and served to preempt socialism (and end laissez-faire capitalism). Montesquieu did not anticipate Progressivism, but he did anticipate that as nations grow in scope they are more likely to be dominated by economic special interests and that the domination is likely to be authoritarian in nature, which is the claim that Kolko-Williams school makes about Progressivism.

Montesequieu also anticipated the ideas of David Riesmann in his famous book The Lonely Crowd. In Book XIX Montesquieu discusses "Laws in relation to the principles which form the general spirit, the morals and customs of a nation".*** He notes that factors like climate, attitudes toward tyranny, religion, laws, morals and other factors influence "the spirit of mankind". He argues that nations ought to pass laws that fit their temperaments. In a puritanical nation with good character "no one ought to restrain their manners by laws, unless he would lay a constraint on their virtues." For instance, laws that reduce luxury or restrain women might cause the nation to "lose that peculiar taste which would be the source of the wealth of the nation, and that politeness which would render the country frequented by strangers." Thus, it is difficult to be rational with respect to law, and it is easiest to fit the temperament of the populace in designing law. Law should be avoided:

"Let them but leave us as we are, said a gentleman of a nation which had a very great resemblance to that we have been describing, and nature will repair whatever is amiss..our indiscretions joined to our good nature would make the laws which should constrain our sociability not at all proper for us."

If laws are necessary, they should build on existing patterns

One of the key attributes (Book XIX, section 8) is "effects of a sociable temper". This is analogous to Riesmann's other-directedness. Montesequieu writes:

"The more communicative a people are the more easily they change their habits, because each is in a greater degree a spectacle to the other, and the singularities of individuals are better observed. The climate which influences one nation to take pleasure in being communicative, makes it also delight in change, and that which makes it delight in change forms its taste.

"...the desire of pleasing others more than ourselves gives rise to fashions. This fashion is a subject of importance; by encouraging a trifling turn of mind, it continually increases the branches of its commerce."

Riesmann notes that the commercial centers are characterized by other-directedness while rural America is still inner- and tradition-directed. Likewise, David McClelland finds in his book Achieving Society that high achievers couple other-directedness with need for achievement. But McClelland was writing after America's greatest achievements were complete. The inner-directeds' achievements were in building a great nation, the other-directedness in consumption and mass communication. Other-directedness, as in Athens and likely Rome, are associated with decline after the inner-directeds have built their vision.

Montesquieu anticipated 20th century arguments such as Walter Lippmann's claim that the public is incapable of rational democratic decision; Mancur Olson's and George Stigler's claim that in a democracy special interest groups tend to organize along economic contours and extract rents from the public; and James March and Herbert Simon's claim that boundaries on rationality inhibit firms from thinking strategically or clearly.

Montesquieu notes the link between commerce and communication.++ It is likely that other-directedness is most advantageous where coordination is more important, i.e., in large firms and in interpersonally driven-tasks involving diplomacy or sales.

He adds:

"The effects of commerce is riches; the consequences of riches, luxury; and that of luxury the perfection of the arts. We find that the arts were carried to great perfection in the time of Semiramis; which is a sufficient indication that a considerable commerce

This is seen in his claim that the necessities of state and those of the taxpayers need to be balanced in assaying taxes, but that few politicians have "the wisdom and prudence" to limit tax levels.+ The wisdom required in a very large state is greater than the wisdom required in a small one. Much as Coase argued that there are limits to economies of scale, so Montesquieu argued, 220 years before Coase, that there are limits to the advantages of the scale of nations.

*Montesquieu, The Spirit of Laws. New York Prometheus Books, 2002. Translation originally published in New York by the Colonial Press, 1900, p. 120.
**Ibid., Book XVII, section 6, p. 269.
***Ibid., p. 292
+Ibid., p. 207
++Ibid., p. 334.

The Paradox of Economies of Scale and Government Bounties to Big Business

One of the key arguments that economists and historians have traditionally made in favor of big business, and one that the public has generally accepted, is that it is necessary because of economies of scale. This image was exemplified by the Ford production plants of the 1920s, which could produce thousands of cars per week. The reason that economists and the general public have traditionally believed that economies of scale are important is that the fixed costs of production, costs that will be there whether one or a million units are produced such as advertising, rent, and administrative staff costs, when spread over a large number of units of output become lower per unit. The argument for scale amounted to an argument for centrally planned economies. In his book "Managerial Revolution", written in the 1930s before the murderous nature of Nazism had been fully revealed, James Burnham argued that a new managerial class was independent of owners and he cheered the advent of national socialism in Germany because government control and guidance of large industry reflected the realities of the new managerial power. Thirty years later, in the early 1960s, John Kenneth Galbraith described the economy of big business as based on planning by a "technocratic" elite in his book New Industrial State.

But while the public has accepted the argument that big business is necessary for consumerism because only large firms can produce large numbers of outputs, big business has tactically demanded and likely required government subsidies in order to survive. And there is a paradox. For if big business is most efficient, then why does it need subsidies? In his 1977 book Politics and Markets Charles Lindblom argued that business occupies a "privileged position". More fundamentally, ever since the days of Hamilton, and with the exception of some business interests in the late nineteenth century, much of American business has asked for two crucial kinds of subsidies: protectionist tariffs and monetary expansion. When Jackson abolished the Second Bank in the early 1830s he limited the degree of monetary expansion. That period, from the 1830s to 1900, was the period of greatest innovation in technology and strongest gains in real hourly wages of workers of any in American history. It was also a period of uncertainty, volatility and conflict between labor and management. However, even in the nineteenth century monetary expansion associated with the Civil War facilitated expansion of credit and therefore enhanced the size of business. By the late nineteenth century the Mugwumps, traditional, mostly Protestant (there were some Catholics and Jews as well in their ranks) Yankee elites in Boston and New York protested the support to speculators like Jay Gould that the monetary expansion had provided, coupled with erosion of their annuities and bank accounts.

The expansion of the railroads contributed mightily to the expansion of US markets into a single whole, and were the crucial step in making big business economically viable and efficient. But the railroads were largely the product of subsidy, and the canals that preceded them were government public works projects, not private enterprise. Neither the railroads or canals were entirely responses to market demand. Rather, they were made possible by land grants and rights of way granted by often corrupt state and local governments. An example is New York, where Jay Gould was so indebted to Boss Tweed that he paid Tweed's bail when Tweed was arrested for corruption. Thus, the Civil War inflation and government subsidies to railroads made expansion of the railroads possible. In turn, the railroads coupled with high tariffs made expansion of business possible. In turn, business enjoying both these supports and economies of scale, consolidated in the nineteenth century.

Late nineteenth century big business was poorly managed. It is likely that the labor conflicts and inefficiencies of the large firms were due to their too-rapid expansion. In management, experience is the foundation on which expansion depends. In a laissez-faire market, a firm becomes large as its managers gain expertise in one market and then duplicate the success in subsequent markets. An example is McDonald's. The founders of McDonald's, Dick and Mac MacDonald owned a single store in San Beranardino, California. Ray Kroc, a multi-mixer distributor, read about their success and visited the store. Kroc's vision of a national chain of stores led to his agreement with the McDonald brothers. But it took Kroc many years to make McDonald's a success. He had to learn the importance of standardization through multiple false starts in California. He had to learn the importance of professionalization of the franchisee relationship through mismanagement of franchises by his friends from his country club who did not focus on managing the stores. He had to learn how to use real estate investment to help finance store expansion and contribute to profit margins from Harry J. Sonneborn. He had to learn how to standardize equipment and the size of French Fries. Kroc did not conceptualize almost any of the food offerings, most of which were the result of suggestions from franchisees. He did not create the clown, which was the result of a local advertising campaign by one of his large Washington, DC franchisees.

Would any of the steps that McDonald's took have been made had there been a massive tariff on hamburgers or if state governments, in return for bribes, had offered exclusive distributorships to Ray Kroc, or if credit expansion through the Federal Reserve Bank had benefited McDonald's as it does Wall Street today? Would any of the innovation in McDonald's have occurred?

In the early 1960s Ronald Coase wrote about the reason that organizations reach a given scale or size. He argued that, like much else in economics, it is due to an equilibration of costs and benefits. The costs of scale include ability to manage, incentives to top management, conflicts between labor and management, difficulties in obtaining information about operations, inflexibility in changing direction when markets change and office politics. The advantages of scale include economies of scale and economies of scope, i.e., the ability to share information learned in one business to a different business, much as Time Warner's AOL unit was able to share information with Roadrunner (that's a joke; the Time Warner and AOL units were in constant conflict after their ill-advised and incompetently executed merger).

The subsidies to big business have increased, not diminished, over time. The Democrats have inadvertently or not, been big business's best friend by demanding regulation, supposedly in support of big labor, that squelches smaller firms by further increasing the advantages of scale economies. They have also established the Federal Reserve Bank, which once the Republicans realized was actually the most important of all the subsidies to big business went on a binge and nearly doubled the rate at which the money supply grew after 1971. The Democrats have never complained, and have follwed the same course since. Thus, both parties have seen subsidization of Wall Street and big business at public expense as the cornerstone of their economic policies. The Democrats came up with the idea and the Republicans enhanced it. I became a Republican because the Democrats are better at initiating big government programs that subsidize big business. They do it by telling everyone that they support the poor and that the regulation supports the poor. But there were no segregated inner cities before the Democrats began to "support" the poor.

Which will outbalance the other--office politics or economies of scale and scope? Clearly, if government is providing support to big business, the amount of support needs to be subtracted from the gains from economies of scale.

Moreover, time has revealed that scale is not the most important factor in management. The Japanese were able to defeat big American business not because of scale but because of skill. Wal-Mart was able to defeat K-Mart not because of scale (it was a smaller firm until the 1990s) but because of skill. In particular, management of information, incentives, labor relations, inventory, factory management, total quality management, technology, product design and marketing, and similar factors can generate competitive advantages. Large firms like Nike have found it necessary to emulate small firms. They outsource their manufacturing and reserve the product design and marketing for themselves. In effect, they are consultants who control the business. These ideas have been circulating for many years. Yet, they bring into question whether scale provides much of an advantage. Coca Cola has found that local manufacturers can out-think them with respect to understanding local tastes, and has had to scramble to decentralize in order to compete globally. Its original vision of a one-world market drinking trillions of gallons of Coca-Cola was illusory.

Thus, the American idea, rooted in the expansion into the frontier, that scale and the expansion of markets is necessary results in a paradox. If scale is the source of economic gains, then why are such extensive subsidies to big business necessary? And if scale is crucial, why has there been so much volatility in world business?

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.

Economies of Scale, Progressivism and Conservatism

Progressive-liberalism and conservatism arose from debates that occurred in the late 19th century about how to grapple with the increasing scale of industry. Historians and economists view scale as critical to the development of the consumer society. This was the assumption of all parties to the debate, beginning in the postbellum period. The railroads required large land grants. In turn, they linked the national economy. As John R. Commons, the labor economist and historian, has argued, expansion of markets characterized the growth not only of industry but also of the natural response, labor unions, which are a cornerstone of modern liberalism. As railroads became the "arteries" of America, wider markets facilitated larger distribution centers hence larger factories hence greater amounts of financing. This story has been told by most business and labor historians.

But there is little empirical evidence that scale was a crucial to the development of the consumer society as most observers have assumed. If scale were so crucial, then government subsidies would not have been necessary to encourage large scale railroads. As the large-scale philosophy proceeded, observers of the late nineteenth century immediately saw problems. Large scale industry is associated with corruption. The financing facilitates large scale manipulation and fraud. Democratic institutions have trouble sustaining the corrupt incentives that large scale financing offers. Yet, it seemed apparent to all observers, those friendly to corporate enterprise and those hostile, that there was no choice. It was as though the subsidies did not exist.

Both modern conservatism and modern liberalism appeared at the same time in response to the challenges that large scale industry posed. Both assumed that what Nancy Cohen in The Reconstruction of American liberalism calls the "producerist" philosophy of early American was a relic of a smaller-scale era, and that to understand society in an era of large scale organizations, a new philosophy was needed. Conservatism originated in the ideas of John Bates Clark and EL Godkin, many of the Mugwumps. It held that the proper response to the growth of business was to inhibit unionization, provide legal support to corporations and use government experts to handle market failure and provide data to companies. The liberal view, which also was advocated by some Mugwumps, Henry Carter Adams, Richard T. Ely and the early American Economics Association, was to support unionization, pass legislation that enforced workers' rights and potentially socialize industry. Both were responses to the belief that scale was essential to the development of industry, and that a unified national market was essential to scale.

It is not possible to know whether an alternative path could have been taken whereby technology might have developed in a purely laissez faire environment without encouragement of scale. Scale might have proceeded to its economically optimal point and its importance been superseded by technologies that limit the importance of scale. There is no question, however, that scale and a unified national market are no longer as important today as they were during the late nineteenth century. Firms voluntary leave the country to perform manufacturing in other countries; to say that a unified national market is essential to manufacturing ignores that most manufacturing occurs in the third world in countries with different legal, regulatory and cultural regimes from our own. Outsourcing and new organizational forms have eliminated the need for large organizations. A firm like Nike is a sneaker firm that produces no sneakers. The need for a unified market is a relic. Alternative organizational forms, new technology that links individuals and business strategies that span the globe have resulted in firms for which coordination does not depend on organization, on coherent culture or on regulatory consistency, but rather on innovation and fast communication. In such environments technological innovation replaces scale as the driving factor. Moreover, the managed kind of technology that characterized say the automobile industry of the 1960s is passe. Increasingly innovation can occur due to a small entrepreneur, such as the developer of Youtube or Google for that matter. Thus, the economic philosophies that emphasized central coordination, both liberalism and conservatism, are now passe. It is true that there is still the question of poverty and insecurity of those excluded from the primary economy, but the central state solution to that problem has been a complete failure.