Pancho, Lefty, and the Free Market

Townes Van Zandt

 Someone in my Sunday Introduction to Management class raised the point that the original creators of a musical work are not always the ones who profit. Is this a shortcoming of capitalism?

In response, I mentioned Townes van Zandt. The Wikipedia article about Van Zandt's life is here.

In 1983 Merle Haggard and Willie Nelson made Van Zandt's most famous song, "Pancho and Lefty," a number one hit on the country charts with their Pancho and Lefty album. In contrast, Van Zandt had suffered from bipolar disorder and alcoholism, and he died at 53 in 1997. Mostly touring bars and other small venues, he was little known during his lifetime, although he gained some fame because famous artists, including Bob Dylan as well as Haggard and Nelson, performed his work.

Even if you dislike country music, you'll enjoy these two versions of the song. See if you agree that Van Zandt's version, which appeared in the documentary Heartworn Highways, is better than country giants Haggard and Nelson's.

Haggard and Nelson's version: http://youtu.be/CvdmxszsDM8

Van Zandt's Version: http://youtu.be/zprRZ2wFQD4

Is it a failure of the market system that creators like Van Zandt are often not the ones to benefit financially  from their creations?  Westinghouse, not Tesla, profited most from Tesla's discovery of AC electricity, for example.

It is only the free market system that allows innovation to flourish on a broad scale; even under the Rome-like state capitalism of today's America, artists often do profit to some or a large degree. Could Townes Van Zandt or Jackson Pollock have existed in North Korea or the USSR?

In her classic novel The Fountainhead, Ayn Rand describes the life of an innovative architect Howard Roark, who is modeled after Frank Lloyd Wright.  Roark is not as successful as his less talented but more conformist colleague, but he creates major new concepts in architecture. Like Van Zandt, Roark gradually wins recognition. 

Those who seek profit over greatness may be the ones making the suboptimal choice; only in a free society is the choice to innovate possible.

Question for Steve Forbes

Sharon Gitelle of the Forbes Blog Network sent the following:

Re: The Forbes Network: December 11th interactive call: Steve Forbes

Dear Mitchell,

Please join us for an interactive call with Steve Forbes, on Friday, December 11th at 3 PM Eastern time for a discussion about his new book called How Capitalism Will Save Us. (To learn more about this book please click here: http://bit.ly/WT2Um )

The expected duration of the call is 45 minutes.

Steve Forbes will be answering your questions about capitalism—please submit your question(s) to me by e-mail by Wednesday, December 9th. You will be notified by me if your question has been selected prior to the call.

My response:

Here is my question for Steve Forbes, Sharon.

In the 1870s an investment bank, Jay Cooke and Co., failed. In many respects it was similar to Citigroup and other of the Wall Street firms in that it had been heavily subsidized by the federal government throughout its life but was so incompetently run that it failed despite the large subsidies. In the case of Jay Cooke, the subsidy resulted in part from its involvement with the Civil War greenbacks (like Henry Paulson, one of its representatives, if I recall Salmon P. Chase, had been been appointed to be Secretary of treasury). In the case of Wall Street and the money center banks today, the government subsidy has taken the form of access to large amounts of artificially created money. That is, until the socialist Bush-Obama bailout, where cash was simply handed to the incompetently run American financial institutions.

In the aftermath of the Civil War, despite the subsidies it had received, Jay Cooke failed in tandem with the crash of 1873. No one was foolish or gullible enough to believe that sustaining Cooke would have helped the economy. That would have been a fool's fantasy. Following Cooke's failure and the crash there was a depression. The depression and crash were associated with the federal government's retiring of the greenbacks and deflation. During this continual deflation there were three depressions. However, real wages grew at a much faster pace than they have since 1970. Moreover, innovation occurred at a much faster pace than at any time in the history of the world, culminating with the creation of the concepts of television and radio by Nikola Tesla in 1897 and numerous inventions that were so vibrant that they continued to subsidize the American economy through the 20th century, a century of dramatically slowed creativity.

At the same time, real wages rose at an uneven clip, roughly two percent per year, more or less until the founding of the Federal Reserve Bank in 1913. As David Ames Wells points out in Recent Economic Changes (1889) the innovation and real growth of the economy was astonishing. What Wells mistakenly calls "overproduction" (see diatribe in Hazlitt's Economics in One Lesson) resulted from the dramatic innovation, as Wells points out. Of course, corporations, banks and Wall Street disliked the intense competition and deflation, which led to declining profits and hard work, but American workers saw their wages grow rapidly, as Wells pointed out.

Since the abolition of the gold standard in 1971, real wages of American workers have grown 2% over the 40 years. That's 2% in total over 40 years. In contrast, during the deflation of the late nineteenth century, real wages rose 2% per year. Yet, today's all-thumbs economics establishment claims that deflation is a major threat. It is, of course, to the banks who provide economists with endowed chairs, but it is not to workers who wish to raise their living standards. Workers did much better under deflation from 1865 to 1913 than they have under inflation from 1970 to 2009.

Thus, the 1873 failure of the major investment bank in America and the contraction of the money supply, deflation, left American workers much better off but Wall Street and corporate America less profitable. This was the period of freest markets in American history, the closest to what might be called a libertarian economy. Of course, Wall Street and the money center banks, then like now, opposed libertarianism and free market capitalism, preferring the socialist pattern that Alexander Hamilton and the Federalists advocated (Hamilton was indeed a socialist and advocated a government owned manufacturing firm that would establish American manufacturing).

Forbes has supported the bailout of Wall Street. In addition, you have echoed the all-thumbs economics establishment's obsessive fear of deflation. When I say "all-thumbs" I mean all-thumbs as far as the public is concerned, not all-thumbs as far as the government-subsidized banking interests are concerned. Politically the economists are wise servants of power.

Forbes has been on the bailout bandwagon. The bailout does not reflect libertarian or pro-free market sentiments, but sentiments in favor of the subsidization of a specific sector of the American economy through state intervention, Wall Street and banking. As I wrote to one of your columnists, and contrary to your philosophy, a libertarian America would need Wall Street as much as I need lung cancer.

Thus, it would seem that Forbes has taken not so much a free market position, but a crony capitalist or socialist position, closer to Hamiltonian Federalism, or fascism than to libertarianism, the idea that markets should be governed by a non-judgmental, objective legal standard.

Can you reconcile Forbes's position on the bailout with the views of Presidents Andrew Jackson and Grover Cleveland?

Best wishes,

Mitchell Langbert

Sharon's reply:

Great. Thank you!

Barack Obama's Leeches

Mayor Bloomberg was on television yesterday. I wasn't paying careful attention but he seemed to be suggesting that American International Group will survive despite financial losses and that markets need to be regulated. The Sun reports today that Governor Paterson is changing New York insurance law to allow the firm to borrow from its subsidiaries. The rule of law is is becoming an alien concept to our increasingly socialistic, government-by-whim society. What especially troubles me is that I doubt that Governor Paterson or Mayor Bloomberg have ever learned about or thought about why the rule of law was associated with the solitary (in world history) rise of technology and wealth under free market capitalism, and how violating it will destroy the incentives and flexibility that enable it. Americans have allowed themselves to be led by fools.

Another potential milestone on America's government-built expressway to serfdom is that, as the Sun's Russell Berman reports, our inept automakers may get a bailout from the American people. The automakers don't think enough of American workers to locate their plants in Flint or Detroit, but they are happy to accept alms from those same workers.

The Sun notes:

"The nation's top car manufacturers are pushing Congress to act by the end of this month to guarantee $25 billion in loans to help them invest in the production of fuel-efficient vehicles. The idea is being greeted warmly by both the Democratic and Republican presidential candidates, who see it as a way to win votes in the swing state of Michigan while also moving America away from dependence on foreign oil."

The pattern of government support for incompetently managed businesses, from Fannie Mae in Washington to General Motors in Detroit to Bear Stearns in Manhattan, is a function of a failed, mercantilist economic model associated with Harvard University and the New Deal. The vicious harm that this ideology is doing to America's future is evident. When firms are badly managed, they should be closed and replaced by more nimble firms with more capable managements, not supported at taxpayer expense through the printing of money. Readjustments are painful, but the alternative is economic decline as resources are diverted to incompetent and slothful cronies at the expense of innovative entrepreneurs.

In response to massive over-regulation, government subsidized-firm incompetence and failed, New Deal economic theories, Senator Barack Obama, like Mayor Bloomberg a product of Harvard's graduate program, calls for more regulation. This call is echoed by John McCain, Harry Reid and our other illiterate leaders, who tell the American public that they will illegalize greed, all the while snickering as the laws that they pass reflect their own greed.

Senator Obama reminds me of Benjamin Rush, the physician who signed the Declaration of Independence. As a political activist we can respect Rush, but as a physician he advocated the aggressive use of leeches to cure disease. The idea that leeches can cure cancer is much like Senator Obama's and Mayor Bloomberg's idea that more regulation can cure economic decline.

The Sun notes that Senator McCain's diagnosis is as off base as Senator Obama's, and they are right. The state of education about economics is this. The establishment advocates economic ideas that harm innovation and the average American's long term prospects, and they do it in the name of helping the average American. Regulation is a leech-cure that weakens the patient instead of curing him. What is worse, though, is that regulation does protect one group: the physicians' friends, the wealthy recipients of corporate welfare.

Benjamin Rush aimed to cure his patients. Barack Obama and Mayor Michael Bloomberg are much worse. They are willing to harm the American public in order to benefit themselves, their contributors and their fellow Harvard alumni. They may really believe their silly ideas. But alternative knowledge is available, and they are unwilling to be educated.

Congestion Tax No, Fee Yes

I met Saul Weprin, who was David Weprin's father, in 1991 when I briefly worked on the staff of the New York State Assembly. Saul, who later became speaker, was chair of the ways and means committee.

David Weprin is a member of the New York City Council. He has an op ed in the June 25 NY Sun about Mayor Bloomberg's plan to tax vehicles that enter mid-town Manhattan. He argues that the tax will cost commuters as much as $2,000 per year and firms as much as $5,000 per year, devastating them financially and forcing them to take the subway, which Weprin does not mention is in terrible shape after 70 years of city and state management.

Weprin is right that Mayor Bloomberg ought not to raise taxes when the bulk of industry has already fled New York and the rest is likely to do so. Weprin is wrong if the tax is really a use fee aimed to capture the costs that motor vehicles impose on the public in the form of congestion and pollution. A nation-wide use fee would be preferable to a tax aimed to shield the Mayor's wealthy friends from traffic.

Mayor Bloomberg's congestion tax proposal needs to be viewed in light of the paradoxes and unintended effects that government subsidies create. In the 1930s the city took possession of the previously private subways and allowed them to deteriorate. In the 1950s and 1960s, the federal and state governments, coordinated by Robert Moses, subsidized interstate highway construction and guaranteed loans for suburban single family home construction. New York City responded to the deterioration of its tax base because of "white flight" (that resulted from the federal subsidies to interstate highways and single family homes) by raising taxes. By the 1970s, the city was in a major state of deterioration. This is evident in movies made from 1965 to 1990 or so, such as Martin Scorsese's Taxi Driver.

Subsequently, the city had a rebirth that Mayor Koch conceived and that was delivered under the Giuliani administration whereby increased emphasis on law enforcement, subsidies to real estate developers, high taxes and low-quality services maintained an equilibrium of special interest pressure groups (unions, service industries, the welfare industry). The Koch-Giuliani model permitted the very affluent to develop the city into a consumer center but also permitted those on welfare to to remain. Those with jobs that led to average or above-average incomes (ninety percent of the American population) left, with some continuing to work in the city as commuters. High-margin service firms could continue to function, but many of their employees could not afford rent, which, even in nearby places like Brooklyn and Hoboken that were once butts of jokes, is now often five times the national average.

Now, Mayor Bloomberg suggests a commuter tax that would dissuade vehicles from entering the city without addressing the stratospheric taxes and other city policies that have forced firms to leave and that encourage commuters to avoid the subways.

If commuters choose to take the subways instead of driving, they will incur significant psychic costs. If commuters choose to drive, they will have to pay the congestion tax on top of the already very high taxes. This is likely to stimulate further exodus of business from the city as commuters demand higher pay to compensate for the increased costs (psychic or financial) of commuting.

While avoiding taxes, the nation should consider road-use fees to fund all highway and local street use. There is no reason why the public should subsidize drivers and consumers of trucked merchandise. However, such a fee should be applied based on computer monitor-based charges and should not favor one economic class over others, as Mayor Bloomberg's proposal would. Heavier drivers and trucks should pay larger fees. Those who do not have cars and who consume less, i.e., the poor, should not subsidize the wealthy.