American Social Democrats and the Fallacy of Rationality

The fundamental strategy of American social democrats*, beginning with the late nineteenth century Mugwumps through today's progressives has been the introduction of experts via state planning agencies to improve fairness and encourage stability and growth. The Mugwumps were a liberal, limited government group in the late nineteenth century who believed that the boss system could be reformed by the introduction of a civil service. At the federal level the Pendleton Act that implemented a rudimentary federal civil service and was passed during Chester Alan Arthur's administration in response to the assassination of President James Garfield was one of their achievements. As Robert Wiebe argues in The Search for Order the key step in the transformation of movements like Populism and social gospel Christianity into Progressivism was the evolution of these ideas into a concept of bureaucracy. Nancy Cohen shows in her Reconstruction of American Liberalism that the origins of today's social democratic ideas were in the Mugwumps' emphasis on rationalization of municipal administration, ending the boss system and replacing the spoils system with a civil service based on merit. As well, the Mugwumps were interested in establishing academic, legal and other professions and were the first American movement to emphasize professional interests. In Europe, Max von Weber made his ideal of bureaucracy a cornerstone of his sociological system. The idea that rationality implies efficiency was fundamental to late nineteenth century progressivism and remains to this day a cornerstone of both the fossilized Progressivism of the Republican Party and the aged New Deal social democratic ideas of the Democratic Party. The bureaucratic philosophy was implemented in the Progressive era through Roosevelt's adoption of laws like the Hepburn Act which aimed to replace market processes with public decision making. This bureaucratic approach intensified in the 1930s with the social democrats' advocacy of Keynesian economics, which argues that the money supply can be manipulated to ensure full employment. This in turn led to further steps toward bureaucratization of the economy.

The intellectual reaction to the bureaucratic philosophies of the Progressives and the social democrats reveals much about the relationship of bureaucratic power to the economic interests of the professional class. Although bureaucratization claims the mantle of rationality, the reaction reveals that at root it is as much a rationale for professional privilege and power as it is an effort to improve the functioning of society. The reactions to the bureaucratic social democratic philosophy were evident by the 1940s. In sociology, Robert Merton observed that bureaucracy became an end to itself, that rules became a fetish, and so the efficiency principle was undermined by bureaucrats' obsession with rules. Also in the 1940s, Friedrich Hayek, building on the ideas of Ludwig von Mises, pointed out that information and knowledge in an economy is too complex for the mind of any cadre of experts, or super-computers for that matter. Because the information available in society is quantitatively infinite and qualitatively incomprehensible, central planners cannot grasp the most rudimentary issues confronting the economy. For instance, in recent decades the Federal Reserve Bank in the United States expanded credit, making it available to real estate developers. In turn, farmers sold their land for real estate development. The stimulus to real estate development encouraged banks to make credit available to people who could not afford to repay the loans. The farmers sold their land to developers, receiving the newly minted Fed money to people who could not afford it. The Fed could not anticipate that banks would be unable to assess credit risk intelligently and that the land being developed had economically better use than real estate development. The result was food shortages in the early 2000s, starvation in Third World countries and a "subprime" crisis whereby large numbers of home buyers and real estate speculators have been unable to repay the banks. The Fed's failure is but one example of the inability of bureaucrats to grasp the subject matter in which they claim expertise. The Fed officials have been intelligent men. Their failure is not one of policy or of ability but rather of the underlying bureaucratic principles behind the Fed.

Merton's critique of bureaucracy in the context of efficiency and Hayek's critique of the ability of bureaucrats to rationally plan the economy were joined in the late 1950s by Herbert Simon and James March, who wrote a seminal book entitled Organizations. One of the key themes in Organizations is the idea that economics excessively assumes the ability of decision makers to think rationally. They argue that decision makers face bounded rationality. The management and organization field has positioned this critique as one of the assumptions of neo-classical economics. They argue that economists assume that decision makers aim for optimal solutions (such as that firms aim to maximize profit or that consumers aim to maximize pleasure or utility) and that economic actors act rationally in the pursuit of optimal solutions. This model, March and Simon argue, is incorrect not just because decision makers are not able to obtain the information necessary to think rationally but also because time and search costs "bound" rationality and place cognitive or mental limits on rationality.

The relative fates of Hayek and March and Simon in business schools is revealing. Both make similar arguments about limits on rationality and March and Simon refer to Von Mises and Hayek in the final chapter of their book (see Nicolai Foss in the organization and marketsblog for this point). Hayek wrote prior to March and Simon. Hayek's "Use of Knowledge in Society" appeared in 1945 and Organizations appeared in 1958. If March and Simon are right about cognitive limits on rationality in organizations than Hayek must be right about rationality in the economy because the problems confronting planning for an entire economy are considerably, perhaps infinitely, more complex than problems confronting planning for a single organization. Yet while March and Simon's analysis became a fundamental cornerstone of organization theory, Hayek's analysis was hardly recognized and remains at the fringe of public policy thinking to this day. In other words, the state of today's academy and modern social thinking is that (a) it is impossible for executives to think rationally about how to market Coca Cola or how to optimize profits in doing so, that firms must satisfice, that is, act in a way that reaches only a satisfactory as opposed to an optimal level of profits, but (b) it is possible for bureaucrats to think rationally about how to optimally decide the level of interest rates, how much money to print, whether Microsoft is really a monopoly and whether tariffs should be raised. That is, when thinking about organizations, business schools have been quick to elevate a critique of executives' abilities to the center of management theory, but when thinking about the much more difficult problem of utilizing information in an entire economy business schools have ignored the parallel critic of social democratic and bureaucratic ideas.

Two additional ideas of Katz and Kahn in their Social Psychology of Organizing also lead to fundamental criticism of the bureaucratic model. First, the idea of an open system. In the Progressive and bureaucratic models of organizations, organizations are viewed as closed systems that require rational optimization of task efficiency in order to yield the best results. In contrast, Katz and Kahn argued, organizations are open systems that interact with their environment. Because organizations interact with their environment, Progressive ideas like scientific management need to be applied judiciously. Market shifts, changes in technology, and fluctuations in the quality of labor all impinge on the ability of planners to base solutions to production problems on expertise.

Second, Katz and Kahn applied the idea of Arturo Rosenbleuth and Norbert Wiener in their article Behavior, Purpose and Teleology ** concerning feedback loops to organizations. Organizations can learn only through failure. This same notion was applied by Oskar Lange to his theory of socialist economic planning. However, bureaucratic organizations have difficulty with change. This occurs for two reasons. First, as Merton pointed out in his article, the bureaucratic rules become an end into themselves. Employees become fixated on the propriety of bureaucratic rules and so resist efforts to change them even when they do not work. Second, as Mancur Olson shows in his Rise and Decline of Nations and as George Stigler shows in his article Economic Theory of Regulation, rules create economic interests which resist change. Thus, feedback loops are impeded by civil service and bureaucratic rules. This means that rationality is curtailed in public sector decision making even under Oskar Lange's claim of the ability of socialist entities to experiment to obtain optimal outcomes. Experimentation is curtailed precisely by the ritualization of bureaucratic rules, the inability of central planners to react in a timely way to change and their inability to begin to grasp the critical economic variables, and by economic interests of constituents, who will fund opposition to change because it threatens private gains that social democratic policies create.

There are additional reasons as well. The experts' training becomes institutionalized and ideological. Thomas Kuhn's Structure of Scientific Revolutions argues that scientific paradigms become ingrained for long periods of time and require significant intellectual upheaval before they are replaced. In academia, interest groups form around ideological solutions such as Keynesian economics or radical sociology and such paradigm- or ideology-driven solution sets are entrenched for economic as well as ideological reasons. A critique of social democratic rationality would need to integrate the failure of American universities to anticipate and explain important shifts in society and the economy and to remain rooted in passe solution sets that reflect the economic and intellectual interests of the professoriate.

Thus, the Progressives and social democrats both began as movements to encourage rationality through expertise. But there are contradictions inherent in the methods that they applied, namely the hiring of experts to replace market processes and the claim that central planners can experiment and act rationally. Where there has been no political or economic agenda (or an agenda that is consistent with the claim that rationality is absent) such as in the case of business corporations, academics and experts have been quick and aggressive in claiming the inability of corporate executives to act rationally. However, where the problem is most acute, public sector and governmental decision making about the economy, academics, experts and professionals have resisted introduction of basic ideas about limits on rationality and feedback loops. This resistance reflects both the intellectual baggage of paradigms to which academics and their social democratic allies are loyal as well as the professional and economic interests of the interest groups that support social democracy, namely, the professions, government employees, some big business groups, high finance, and the media.

*By social democrats I refer to the movement that began with Franklin D. Roosevelt's New Deal, integrating earlier Progressive and Mugwump ideas, and adding elements of socialism. At various points social democrats have called themselves "liberals" and at others "progressives". They also claim that they are "pragmatic". Social democrats advocate expansion of state power toward an undefined and ever-receding maximal point while claiming an ultimate global convergence to a "mixed economy". But social democrats rarely if ever advocate elimination of governmental programs that fail while they aggressively emphasize the failure of markets. The joint themes of market failure and governmental efficiency remain constant in social democratic ideology.

**Arturo Rosenblueth, Norbert Wiener and Julian Bigelow, Behavior, Purpose and Teleology, Philosophy of Science, Vol. 10, No. 1 (Jan., 1943), pp. 18-24

Theodore Roosevelt on Government Regulation

Conservatives and libertarians have been frustrated by the lack of choice between the two parties. There is a belief that the Republican Party is a conservative party and that the Republican Congress of the mid 1990s and early 2000s failed to actualize the Republicans' true nature. Many conservatives argue that Republicans are a moderately conservative party and that Democrats are a moderately social democratic party and that a moderate conservatism is all that can be expected. However, there is a limited historical reason to believe that the Republican Party is a conservative or libertarian party even in a moderate sense. If not, then conservatives' recent disappointment with the Republican Congress is not a result of failure to deliver or deviation but a case of Republicans' returning to their true nature.

With respect to the Democrats, there is reason to believe that the Democratic Party is a moderate social democratic party and not a conservative or socialistic one, although there is a strong strain of socialism running through the membership. There have always been divisions within the Democratic Party. There was traditionally a southern Democratic Party which was very different from the northeastern urban Democratic Party. But those differences have evaporated as divisions about race have subsided. Today there is a significant presence of left-wing Democrats coupled with a more moderate social democratic element that is not so interested in aggressive redistribution of wealth. However, the differences within the Republican Party are greater than within the Democrats.

The notion that the Republican Party is a conservative one arises from the New Deal. Franklin D. Roosevelt and his associates applied the same tactics to the Republicans that Theodore Roosevelt applied to his opponents in the early 1900s, whom he called "reactionary" and "stool-pigeon progressives". The truth is that the current social democratic edifice of government regulation was largely formulated by Republicans, notably Theodore Roosevelt and his appointees such as Herbert Knox Smith, whom Roosevelt had appointed to head the Bureau of Corporations.

Progressivism was a Republican ideology. The one exception to this rule was Woodrow Wilson, who came to progressivism late and who emphasized individualism and small business interests to a greater degree than did the Republican progressives, especially Roosevelt and Taft. Although Warren G. Harding and Calvin Coolidge were Republicans, they were not progressive. But they were not conservative in today's meaning either. Both were "home grown" in their "conservatism". Coolidge was from Vermont and his upbringing was in the tradition of home grown Yankee Americanism. He did not have a well-formulated ideology and he integrates a number of progressive ideas with conservative ones in his autobiography. Likewise, his predecessor, Harding, was an Ohio newspaper editor with limited philosophical and economic training. Harding was not adverse to progressivism any more than he was a proponent of limited government or Burkean conservatism. Harding and Coolidge, who had limited reform agendas in any direction, were elected because America had tired of progressivism, Wilson's idealism and World War I. Herbert Hoover, who was the third Republican elected in the 1920s, was, like Roosevelt and Wilson, an ideological progressive who advocated reform.

American politics since 1932 largely has been a battle between two ideologies: the ideology of progressivism and the ideology of New Deal social democracy. The Republicans were the party of progressivism, which emphasized efficiency and bureaucracy, while the Democrats' New Deal social democracy advocated application of Progressive principles to redistribution of wealth. (Claiming that the redistribution was from rich to poor, by abolishing restraint on the money supply Roosevelt accomplished a longer term redistribution from poor to rich. Post World War II inflation and today's stagnant real wages and wealth inequality follow directly from the abolition of restraint on the Federal Reserve Bank's ability to create money. Progressives like Wilson did not believe in Keynesian economics because it was not created until the 1930s and did not anticipate this aspect of Roosevelt's New Deal.)

The home-grown conservative element in the Republican Party from 1908 to 1964 was a fossil. The fossil-conservatives reacted to the New Deal in tandem with the non-New Deal progressives, who were the most visible element called "conservative". I suspect that many involved in the Liberty League that some big businessmen founded in the early 1930s to fight the New Deal were progressives, not traditional conservatives. I suspect that few if any of them believed in the ideas of Sumner, Cobden or EL Godkin. Rather, they, like the Republican Party more generally, were a statist movement that had been preempted by a different statist movement. Until Barry Goldwater reformulated the image of conservatism in the 1960s the Republican Party was dominated by progressives. By the 1980s these progressives were called "Rockefeller Republicans". Even Ronald Reagan carried forward many elements of their progressivism.

In June 1906 Roosevelt pushed through the Hepburn Act which gave the Interstate Commerce Commission the power to set just and reasonable railroad rates and to view railroads' financial records even if the railroads were privately held. Some have argued that the Hepburn Act led to the railroads' inability to compete with trucking in ensuing decades. As well, bestowing the power to federal agencies to set prices and manage corporations can easily be interpreted as the first step toward socialism. The public tired of Roosevelt's radicalism. No subsequent president except for his cousin, Franklin D. Roosevelt, was as radical as Theodore Roosevelt.

In The Writings of Theodore Roosevelt* William H. Harbaugh edits a series of Roosevelt's speeches and articles. Here is an excerpt from Roosevelt's 1906 Annual Message to Congress which Harbaugh entitles "For More Thorough-Going Regulation". This Progressive motif has not disappeared from elements within the Republican Party to this day (p. 93):

"The present Congress has taken long strides in the direction of securing proper supervision and control by the National Government over corporations engaged in interstate business--and the enormous majority of corporations of any size are engaged in interstate business. The passage of the railway-rate bill...of the pure-food bill, and the provision for increasing and rendering more effective national control over the beef-packing industry, mark an important advance in the proper direction. In the short session it will perhaps be difficult to do much further along this line; and it may be best to wait until the laws have been in operation for a number of months before endeavoring to increase their scope, because only operation will show with exactness their merits and their shortcomings and thus give opportunity to define what further remedial legislation is needed. Yet in my judgment it will in the end be advisable in connection with the packing-house-inspection law to provide for putting a date on the label and for charging the cost of inspection to the packers. All three laws have already justified their enactment...

"In enacting and enforcing such legislation as this Congress already has to its credit, we are working on a coherent plan, with the steady endeavor to secure the needed reform by the joint action of the moderate men, the plain men who do not wish anything hysterical or dangerous, but who do intended to deal in resolute common-sense fashion with the real and great evils of the present system. The reactionaries and violent extremists show symptoms of joining hands against us. Both assert, for instance, that if logical we should go to government ownership of railroads and the like...As a matter of fact our position is as remote from that of the Bourbon** reactionary as from that of the impracticable or sinister visionary...

"...What we need is not vainly to try to prevent all combination, but to secure such rigorous and adequate control and supervision of the combinations as to prevent their injuring the public, or existing in such form as inevitably to threaten injury--for the mere fact that a combination has secured practically complete control of a necessary of life would under any circumstances show that such combination was to be presumed to be adverse to the public interest. It is unfortunate that our present laws should forbid all combinations,instead of sharply discriminating between those combinations which do good and those combinations which do evil."

Theodore Roosevelt established the state regulatory edifice that both the Democrats and Republicans support. With the big-government tradition that Roosevelt bequeathed to the Republican Party, it is incorrect to call the Republicans a conservative or libertarian party.

*Theodore Roosevelt. The Writings of Theodore Roosevelt. Edited by William H. Harbaugh. Indianpolis, Ind.: Bobbs-Merrill Company, 1967.
**The Bourbon Democrats were a 19th century Democratic Party faction who supported free trade, the gold standard and laissez faire policies.

When Will They Ever Learn?

Larwyn just forwarded a post by the Dinocrat blog that led me to paraphrase the old '60s anti-war song "Where Have All The Flowers Gone?":

Where have all the conservatives gone?
Long time passing
Where have all the conservatives gone?
Long time ago
Where have all the conservatives gone?
Gone to big government solutions every one
When will they ever learn?
When will they ever learn?

Dinocrat links to Mike Masters' Senate testimony and refers to Dan Dicker's article. Masters and Dicker blame speculators for increasing commodity prices and aim to regulate commodities markets. Dinocrat doesn't indicate whether Masters and Dicker are from Wall Street, are long on stocks or short on commodities and are offering self-serving testimony to Congress or whether they just like the Bear Stearns bail out. Wall Street dislikes commodity speculation.

There is a much more accurate explanation for the run up in commodity prices than commodity speculation: Federal Reserve Bank inflation, which is now currently working its way through the economy. If futures prices are higher than the underlying demand warrants, there will be a correction in prices. The index speculators will pay for their errors if commodities are at higher-than-market prices. As well, foreign producers can enter the market and undersell inflated commodity prices.

There is a more fundamental error in the Masters-Dicker proposals. Few people can outsmart financial or commodity markets, and those who can are very rich. Why should anyone believe Masters and Dicker are smarter than the funds who are buying the commodities indexes? Passing a law limiting economic activity because a few observers have a hunch based on limited information that they are right and the market is wrong would be inept.

If limits are put on ways of trading or holding commodities, these will not reduce commodity prices. For example, if pension funds are not permitted to hold commodities, traders outside of pension funds will profit from the Masters proposals. Likewise, if limits are put on commodity prices, then there will be shortages.

It is true that across-the-board price increases are a major public concern, but these have been caused by the Federal Reserve Bank, not by speculators. If the speculators are over-bidding, then farmers and commodity producers from overseas will undercut the speculators and bankrupt them.

We do not need a "Federal Commodity Commission" to create more bureaucratic waste and to rip off the American public to a greater extent than the Federal Reserve Bank already does.

Orenstein Reports Sighting of CUNY Faculty Meeting

Phil Orenstein has written an excellent article in Frontpagemag about his close encounter with a handful of fringe CUNY faculty. Professional Staff Congress officer "Sue" O'Malley, currently engaged in a McCarthyist law suit against the awe-inspiring Sharad Karkhanis, was in attendance. Orenstein does not mention whether the panelists were wearing white hoods and sheets. But he writes of this close encounter of the fourth kind:

"What I witnessed was a closed forum dedicated to a veiled radical agenda, riddled by hysterical paranoia, name-calling, slanderous accusations against prominent scholars and city officials, and strategies for their ouster, where the panelists professed that “attacks” against Arabs and professors are a coordinated right wing smear campaign launched by Daniel Pipes, CUNY trustee Jeffrey Wiesenfeld and their ilk, which they dubbed the “New McCarthyism.”

Read all about Orenstein's encounter with uncollegiality among extremist elements of CUNY's senior faculty here.