Karl R. Popper on Socrates

I wonder how many "progressives", economists and social scientists fit Popper's depiction of Socrates' measure of scientific knowledge and intellectual integrity:

"Socrates was a moralist and an enthusiast. He was the type of man who would criticize any form of government for its shortcomings(and indeed, such criticism would be necessary and useful for any government, although it is possible only under a democracy) but he recognized the importance of being loyal to the laws of the state. As it happened, he spent his life largely under a democratic form of government, and as a good democrat he found it his duty to expose the incompetence and windbaggery of some of the democratic leaders of his time. At the same time, he opposed any form of tyranny; and if we consider his courageous behaviour under the Thirty Tyrants then we have no reason to assume that his criticism of the democratic leaders was inspired by anything like anti-democratic leanings. It is not unlikely that he demanded (like Plato) that the best should rule, which would have meant, in his view, the wisest or those who knew something about justice. But we must remember that by justice he meant equalitarian* justice...and that he was not only an equalitarian but also an individualist--perhaps the greatest apostle of an individualist ethics of all time. And we should realize that, if he demanded that the wisest men should rule, he clearly stressed that he did not mean the learned men; in fact, he was sceptical of all professional learnedness, whether it was that of the philosophers of the past or of the learned men of his own generation, the Sophists. The wisdom he meant was of a different kind. It was simply the realization: how little do I know! Those who did not know this, he taught, knew nothing at all. (This is the true scientific spirit. Some people still think, as Plato did when he had established himself as a learned Pythagorean sage, that Socrates' agnostic attitude must be explained by the lack of success of the science of his day But this only shows that they do not understand this spirit, and that they are still possessed by the pre-Socratic magical attitude towards science, and towards the scientist, whom they consider as a glorified shaman, as wise, learned, initiated. They judge him by the amount of knowledge in his possession instead of taking, with Socrates, his awareness of what he does not know as a measure of his scientific level as well as of his intellectual honesty.)"

----Karl R. Popper, The Open Society and Its Enemies, pp. 128-9.


*Popper uses the term "equalitarian" to refer to equality before the law, isonomy, as opposed to Plato's "totalitarian" justice, whereby Plato identified the just with the good of the state.

Obama Advocates Inflation, Big Government

The Wall Street Journal reports that Barack Obama is arguing for deficit spending and a sharp increase in government.

The Journal's Jon Hilsenrath and Jonathan Weisman report that President-elect Obama includes in his spending and stimulus plan:

"a list of priorities that included: creating 2.5 million jobs, and spending on roads, bridges, schools and clean-energy programs. Jason Furman, the Obama campaign's economic policy director, briefed Democratic leaders and conservative "Blue Dog Democrats" last week on the shape of the proposed stimulus, according to senior House aides...

"...The advisers Mr. Obama named on Monday hail from the centrist part of the Democratic Party. During the Clinton years they played an important role in turning a budget deficit into a surplus. Now they argue the worsening economy requires steep deficit spending."

There is considerable question as to what the current economic malaise really is. In the 1930s the Fed (not with the support of Herbert Hoover, as many people believe) decided to contract the money supply (i.e., raise interest rates), which led to the stock market crash, subsequent bank failures and unemployment. Franklin D. Roosevelt appointed Marriner Eccles to be Fed chairman, and he began to re-inflate. In 1935 and 1936 there was a bull market in stocks. In 1936 Eccles in effect tightened again, to the chagrin of the Roosevelt administration, and there was a second crash in 1937, leading to a market bottom. The re-inflation associated with World War II led to a subsequent 65 year inflation that continues.

In the current situation there has been no cutback in the money supply. Interest rates are at all time lows. The excessive liquidity of the Bush years had led to recklessness among bankers, to include both low-quality lending to sub-prime borrowers and willingness to provide credit guarantees, swaps or derivatives concerning those loans across financial institutions. From what I can gather, few bankers were able to assess the risk of the swaps or derivatives which they transacted, and they panicked this year, leading to their unwillingness to lend. This kind of psychological reaction to risk can be undone by adding a few extra shots of heroine. The Fed has added a few kilos.

Banks have slowed lending because of their panicked reaction to their own incompetence. Lending leads to increased circulation of money, which economists call velocity. Velocity increases the amount of money in circulation, because when a borrower deposits the loan, the bank can lend out that deposit. A shift in velocity can cause a short term reduction in the amount of money and a slowdown in economic activity. The velocity of money probably fell during the past few months of the recent bankers' psychological panic. However, it is important to note that not many (if any) commercial banks have failed. This contrasts with the Great Depression, when a large number of banks failed. AIG, an insurance company which owed money to banks was not allowed to fail, so the Fed took action several steps away.

I do not believe that the Fed was able to assess either the risk or the necessity of bailing out AIG or Bear Stearns, nor of the likelihood of Citibank's failure. This was done by guesswork akin to how an investor decides on how to invest in a stock. Someone once said that throwing a dart at a newspaper is as good a way to choose a stock as what portfolio managers do, and the quality of the Fed's decision making is probably even worse than that.

The bailout took two forms. First, a large amount of money was borrowed and used to purchase the complex derivatives from investors. This not only protected the economy but also the well being of a wide range of wealthy investors, including many in foreign countries who have no direct effect on the United States's economy. Again, the actions that the Fed has been taking have been several steps removed from any important economic effects on the nation and have the advantage, much to the pleasure of the propaganda outlets, of helping wealthy investors, the Ochs Sulzbergers, Rupert Murdoch, etc.

Second, the Fed created a large amount of new money and deposited it in the various commercial banks by purchasing bonds. This contrasts with the Great Depression, where the Fed cut back on the money supply. In other words, the situation now may have surface behavior in common with the Great Depression, but little else. So far, it seems to bear the same relation to an actual bank run as as a Hollywood movie's depiction of an earthquake is to a real earthquake. Of course, many billionaires have received direct income transfers in the name of helping the poor...or have the Keynesians dropped that pretense and just started saying what they've really meant all the time---the wealthy should be subsidized via the stock market at the expense of workers and the poor, who should have reduced wages and opportunities?

The result of credit expansion is normally twofold. The average person pays higher prices, and stockholders and large borrowers, i.e., the wealthy (not the young and poor as William Greider incompetently claims in his book Secrets of the Temple ) gain. Stockholders gain because lower interest rates increase the present value of future earnings--a lower interest rate discounts the future revenue stream less and so increases shareholder wealth. Borrowers (to include large corporations, real estate developers, hedge funds and the like) gain because interest payments are reduced and inflation reduces the value of the loan in the future. In contrast, poor people who cannot borrow because they aren't credit worthy, pensioners, the elderly who have anything more than social security but are not big stock market investors (i.e., the lower middle class elderly) pay through higher prices. Old ladies begin to eat cat food while William Greider's buddies on Wall Street see higher returns. The Democrats used to claim that this process helps the poor, and Barack Obama reinvents this tradition, as opposed to the Republican tradition of not claiming this but doing it anyway.

Obama's solution to this problem is to further enhance the amount of borrowing and inflation. His advisers are Keynesians (as are Bush's, there is no difference there) and they advocate several nonsensical ideas. First, you get the government to spend more. This in turn accelerates velocity and "stimulates" the economy. For instance, you have people dig ditches and then fill them up again, and Keynesian economists believe that this is good for the economy because demand has been stimulated. They do not contemplate that wealth is not money but real goods, and government does not produce goods that the public generally wants. As well, their assessment of a decline in "aggregate demand" depends on the existence and neutrality of the slowdown. It is not clear that there really is a slowdown. Rather, the banks may have exaggerated the risk of the derivatives in their own minds, and when they settle down there will be increased velocity. This will be an inflationary period in that case because the amount of reserves that Bush has created has been immense.

I have previously argued that George Bush = Barack Obama and we can see this in Obama's plan for a stimulus package. Obama aims to further increase already enormous federal deficits, increase the already massive increase in monetary expansion and encourage government to engage in boondoggles. Bush squandered, Obama will squander more.

Macro-economics, in which government policy makers are trained, is akin to sociology, psychiatry and theory-y management, the package of quackery that the twentieth century concocted to shore up big government, Wall Street and the Progressives' strategy of convincing the public that big government, which is the chief reason that big business exists, is necessary to regulate big business. Government has been so successful in regulating big business that big businesses like Citibank get $25 billion bailouts while small businesses get to suffer from the inflation. Sounds to me like the Bush-Obama plan is to kill small business in the interest of big.

The inflationary plan that Obama offers is just the same as the inflationary Bush plan. We can look forward to continued decline in the real economy and declining real wages coupled with inflation. Smart people will not rely on the dollar and think in terms of hard assets or going into debt, i.e., mimicking real estate moguls like the Pritzkers (Obama's chief backers), hedge fund managers and the like. It's been a nice ride for the dollar, but I would not want to be holding cash during the Obama administration. It's going to be a big payday for the Pritzkers.

Howard S. Katz responds

Dear Mitchell,

I define velocity of money as (nominal) GDP divided by the money supply.

GDP measures the amount of wealth produced. Hence it measures the total amount of money changing hands per year. Divide this by the money supply and you have the rate at which the average dollar changes hands.

Defined this way velocity is very stable, and there is no evidence that it has fallen.

Howie

Broad Quackery in the Economics Profession

The last few weeks have seen a series of political decisions that concern economic issues but whose pros and cons are not directly germane to the study of economics other than economic history. Economic history teaches us that aggressive inflation is harmful to a nation's economic future and has led to the decline and fall of Rome in the 4th and 5th centuries, to Nazi Germany and, in general, to economic stagnation and failure. In contrast, in the late nineteenth century in the United States, there were deflation and "depressed" profits but real wages were secularly rising, there was increasing standard of living and an explosion of innovation such as never has been seen in the world before or since. It is a testimony to the poor historical training of many in the economics field that economists have made public statements to the effect that the late nineteenth century was characterized by high unemployment and increasing income inequality. I recall seeing a remark along those lines by Paul Krugman, for instance. However, a careful reading of contemporary sources such as David Ames Wells's "Recent Economic Changes", published in 1889, reveals that economists and historians have often been confused by a simple fact. The word "depression" in the late nineteenth century referred to profit weakness, not to unemployment. Indeed, economists and historians who refer to this period as one of income inequality and poverty have probably not read Wells and other contemporary authors and literally misconstrue the widespread complaints about "depression". This is unfortunate, because any policy justification for the existence of the Federal Reserve Bank depends on the claim that management of the economy since 1913 was superior to what happened between 1860 and 1913, and in order to make this claim, a misreading of the word "depression" is essential. In fact, the economy performed far better between 1860 and 1913 than since 1913. The Great Depression, the stagflation of the 1970s and now the massive redistribution of wealth from the general public to Wall Street and banking interests, interests that do not produce value and have repeatedly misallocated resources, are examples of the inability of economists to manage the money supply or the economy competently.

The education of economists does not prepare them to assess business or entrepreneurial risk or the judiciousness of investment or allocation of resources. Economic theory provides an abstract framework for allocation under free market conditions. The allocation of government money to support corporations or banks or the claim that a given state of affairs results in excessive risk is not something that economists are equipped to conclude.

In recent weeks I have heard repeated claims (in the few instances when I consume the mass media, and they are very few) by economists who argue that intervention by the US government to subsidize banks is "necessary". I have not heard any empirical or historical evidence to support this claim, nor does any exist. These are ideological arguments meant to justify a political, interventionist position. They do not reflect a line of reasoning in which economists are competent or have any training, but rather reflect an interest in providing political support to investment and commercial banking and the Fed, from which the economics field receives financial support.

The economics profession has claimed for the past 95 years and especially since the 1930s that the Fed is necessary to manage the money supply and prevent "deflation". But the deflation of the late nineteenth century benefited almost all Americans. It only created pressure on owners and stockholders, who were subsidized by tariffs that facilitated excessive business start-ups. The deflation of the late nineteenth century was helpful to consumers, whose standard of living shot up 100% from 1840 to 1890. In contrast, under the regime of the economics profession that has existed since 1933, when the gold standard was abolished and the Fed given free reign to create money, standards of living have hardly increased. Moreover, innovation has been at best tepid compared with the late nineteenth century. All of those resources misallocated to incompetent banks and stupid real estate investments deprived innovators of financial support. Since 1971, the American average real hourly wage has been reduced by almost 20%, while income inequality has skyrocketed.

Economists like Paul Krugman claim that they oppose income inequality, but income inequality has been enhanced by the subsidization to the stock market that easy money due to the Fed provides. The easy money depresses interest rates which in turn increases stock prices. When inflation creates pressure to reduce the flow of money, economists like Krugman oppose such a move, and instead push for direct subsidies to the Wall Street firms whose employees are the chief beneficiaries of the income inequality. Obviously, Krugman's and other "progressives'" claims that they oppose income inequality and do anything other than support Wall Street and the Fed are lies. The cloaking of theft in benevolent-sounding phrases has long been part of a Progressive strategy that has bamboozled and increasingly impoverished America.

At this juncture, the performance of the economics profession amounts to overt quackery. The term quack is defined by the dictionary.com as:

"a person who pretends, professionally or publicly, to skill, knowledge, or qualifications he or she does not possess; a charlatan."

In claiming to have some kind of special expertise that enables them to assess whether a trillion dollar subsidy to banks and a massive injection of monetary reserves is well advised, the economics profession has exhibited widespread quackery. The public would be well advised to ignore the opinions of this failed profession.

Social Democratic Fallacies

Social democracy, which has at various times inappropriately been called liberalism and progressivism, is a doctrine that has created problems in the name of problem solving. Among the first to recognize the pattern of social democracy's multiplying and intensifying problems was William Graham Sumner in his essay "What Social Classes Owe to Each Other", first published in 1883. Toward the end of this small book, Sumner describes the "forgotten man", not the poor man who is the beneficiary of proposed regulation, but the third party whom the reformer aims to coerce and who will pay an escalating price for the reformer's fallacious schemes.

Since Sumner wrote the essay, we have seen urban renewal programs supposedly aimed to help the poor that drove jobs and housing from cities, resulting in homelessness and escalating real estate values that destroyed the possibility of urban life for all but the wealthy. We have seen welfare programs that have institutionalized poverty. We have seen massive subsidies to failed corporations that encourage a culture of incompetence and waste in a business community that is already self indulgent. We have seen a housing code in New York City whose aim is to further inflate construction costs. We have seen housing prices rise, and when they declined slightly, a declaration of a "crisis" because bankers, whose job it is to lend intelligently, could not be bothered to screen borrowers. We have seen earmarks and bridges to nowhere. We have seen billions squandered in cancer research that has been politicized to the point where Fortune Magazine asserts that cures have been staunched by senior academic researchers who feel threatened by new theories. We have seen high schools graduate seniors who can barely read, and universities graduate semi-literate college seniors under failed, progressive education theories. We have seen one social democratic blunder after the next, and as Sumner put it, the forgotten man or woman is the one who pays.

What is this social democratic doctrine to which our nation has found itself committed? Social democratic and progressive ideologies dominate both the Republican and Democratic Parties, yet the assumptions that their advocates make deviate from the core beliefs of most Americans, core beliefs that are pragmatic and liberal in the Lockean sense. Social democracy is neither pragmatic nor liberal, yet it uses the terminology of pragmatism and Lockean liberalism to cloak fallacious underlying assumptions:

1. The fallacy of scale. Social democracy argues that bigger is better and that progress involves progressive governmentalization on ever larger scale. Since the 1950s and before, most economic progress has not required large scale, and economies of scale have not been fundamental to new economic and technological advance. Yet, social democracy subsidizes scale through financing mechanisms like the Federal Reserve Bank, political favoritism, direct grants and regulatory systems that freeze out small business.

2. The eschatological fallacy. Social democracy believes that society is headed toward a specific end or purpose related to its model of large scale production, namely enhancement of government control or socialism. The belief that the "problem of production has been solved" characterized the modernist period--until the Japanese showed American firms that they were clueless about production problems and that there will always be improvement in production. Moreover, the solutions to the problems of production require information, not scale. As well, large scale organizations are too rigid to adopt the steps needed to improve production.

3. The predictability fallacy. Social democracy believes that it can solve problems because rationality is the primary ingredient to problem solving. In fact, rationality is but one of several elements in problem solving. Because demand, technology and other conditions change, information specific to time and place is often more important to solving technological and market problems, as the Austrian economist Friedrich A. Hayek argued. Therefore, experts in large governmental bureaus are not only ill-equipped to solve problems, but are guaranteed to fail to grasp what the important problems are.

4. The infinite regress fallacy. Social democrats believe that if business is corrupt, all that is needed to correct corruption is a layer of regulation. But who is to guarantee that the regulators are less corrupt than the firm? Are regulators descended from a special race of especially honest men? Might not regulators develop economic interests in the industries that they regulate? And if so, do social democrats propose regulators of the regulators, and do they believe that this additional layer, or Congress itself, is somehow better equipped or motivated to regulate?

5. The social democratic invincibility fallacy. Social democrats imagine themselves, as Sumner points out, to be smarter, more moral and better equipped to solve problems than others. Few social democrats have solved problems competently. I can state this with assurance because few government programs work. The groupthink associated with participation in the social democratic movement is the social democratic movement's greatest obstacle to pragmatism. The readers of the New York Times imagine themselves "smarter" because they read the Times, and so on. This sort of egotistical delusion precludes intelligent thinking and guarantees a rigidity and closed mindedness among social democrats that ensures the failure of any and all of their ideas.

Oskar Lange RIP: "On the Economic Theory of Socialism" in Benjamin Lippincott, Editor, On the Economic Theory of Socialism

Oskar Lange, "On the Economic Theory of Socialism". Reprinted in Benjamin E. Lippincott, editor, On the Economic Theory of Socialism Volume 2: Government Control of the Economic Order. Minneapolis, Minn.: University of Minnesota Press. 1948. Original article in Review of Economic Studies, Volume IV, Nos. 1 and 2, October 1936 and November 1937. Used copies available from Amazon.com starting at $1.34.

I've had this article on the back of my back burner for roughly 30 years and I was inspired to read it, first, by Professor Danthine my microeconomics professor at Columbia Business School who reminded me of it in 1986 and second by Nicolai Foss's blog that I blogged about two weeks ago.

This is the article in which Lange writes that a statue should be erected to Ludwig von Mises in the hall of the ministry of socialism for his arguments about the impossibility of price in a socialist economy. Lange claims that he has disproven von Mises's arguments based on elementary economics (the second section of the article is a review of microeconomic theory) but history has proven von Mises right and Lange wrong. The socialist economy of the Soviet Union fell because of the very kind of pricing inefficiency that von Mises identified. Hence, a statue might be erected to Lange in the hall of failed academic theories.

Lange's argument is elegant but there are several flaws that stand out and should have stood out even prior to the passage of the historical record.

First the part that Lange could not have known in advance. Lange overlooks the realities of bureaucratic and political decision making in organizations. He assumes that central planners are rational actors who will equilibrate marginal cost and price. History did not prove him right. Central planning was largely political, and political actors are influenced, as were the Soviet planners of Gosplan, by political considerations rather than considerations of pure rationality. Thus, the history of Soviet socialism is riddled with examples of price-setting on the basis of political concerns. For instance, bread was priced at a low level because the citizenry expected cheap bread. However, farmers had earlier supply-chain access to the bread than did retailers, and because the bread was set at a price that was cheaper than animal feed, they would purchase the bread from the distributers and feed it to their cattle while there were bread shortages in the cities. There were many examples of this type as Berliner's book Soviet Socialism from Stalin to Gorbachev illustrates.

Second and related to the first point, much of Lange's argument is based on the theory that economic planners will be able to reach optimal, market clearing prices through trial and error. He assumes away Hayek's argument that it is impossible to acquire the necessary information for the myriad products in an economy. However, Hayek was right. The trial and error process is too difficult to accomplish because product variations are too complex for planners to anticipate. No amount of theorizing about the possibility of equating marginal cost and price will change the transactions cost impediments to doing so.

Third, there were several points that should have stood out as far fetched even in the 1930s. Many of Lange's arguments make assumptions that have a tautological quality. That is, to prove pricing is possible he assumes that price information is available, and then deduces that pricing is possible because the information is available. His argument begins with a model in which socialist firms have the ability to determine price and production levels, but this is the very problem that impeded socialist central planning. Central planners want to determine price and production levels centrally and so cannot make use of imbalances between supply and demand in each region and firm. For instance, Lange writes (p. 71):

"If demand and supply are not equal for each commmodity, prices change again and we have another set of prices, which again serves as a basis for individual rearranging of choices."

But this assumes either local price determination or the ability of the central planning authority to flexibly change price. It is precisely the absence of such flexibility that caused socialist planning to fail. Trial and error are impossible because the information constraints are too severe and because the political and bureaucratic processes are too inflexible.

The tautological quality of Lange's argument is especially seen on page 75 where he writes that:

"The decisions of the managers of production are no longer guided by the aim of maximization of profit. Instead, certain rules are imposed on them by the Central Planning Board which aim at satisfying consumers' preferences in the best way possible."

But it is the absence of price that inhibits the Central Planning Board from figuring out consumers' preferences. The entire problem is that the central planners do not know consumer preferences. This is related to their inability to judge product quality because of transactions costs constraints. The complex and subtle art of quality management could not be done by a central planning board. Even competitive American firms have had trouble in this area.

Similarly, on page 76 Lange argues that the central planners can combine factors:

"in such proportion that the marginal productivity of that amount of each factor which is worth a unit of money is the same for all factors".

The problem, though, is that determination of productivity is not independent of understanding consumer demand. You cannot know the productivity of the factors unless you know whether customers view the outputs as desirable in comparison with competitive products.

Perhaps most importantly, Lange's model omits one of the key assumptions of perfect competition: ease of entry. Because there is no flexibility as to competition to the governmentally controlled firms, they can all reflect arbitrary or bureaucratic decision criteria and fail to evolve or experiment simply because consumers are forced to purchase their product, which, to put it politely, will be garbage.

It is entirely possible that the central planning board produces garbage and since there is no entry of entrepreneurial firms, there are no competitors to produce alternative products. As it turned out, this was the rule in the Soviet economy, a rule which Lange's argument simply assumes away. If all existing firms produce garbage and there is no ease of entry, then consumers are forced to choose among an array of undesirable products and prices can be set by the trial and error method that Lange outlines but they will be market clearing prices for garbage.

Lange also omits the importants of dynamic change. Without entrepreneurship there is no process for quality improvement. Hence, he outlines a static economy that can produce garbage where, if there are no transactions costs, firms can disobey the central planners at risk of their necks and experiment to find optimal prices.

Price and marginal productivity are then equilibrated, but customers remain unsatisfied. Nor could the firms that produce the garbage be closed because doing so would be too complicated politically. You would have to shut down the entire economy.

It is puzzling that Lange's argument had any influence in the first place. Now that history has proven him wrong, let us resell our copy of this book for $.85.

Social System Matching and the Expertise Culture

In the twentieth century the idea of convergence was suggested to explain the trend of socialist economies to look more like capitalist ones and capitalist economies to look more like socialist ones. This idea fell on hard times in the 1980s because socialism failed and some capitalist countries deregulated. The idea of convergence is linked to the idea of optimality. The notion that there is one best way to do a job or one best way to solve a social problem was characteristic of the Progressive era. Convergence was a remnant of Progressivism.

But perhaps there is no such thing as optimality with respect to social systems. Rather, there is an infinite array of potential strategies which match citizens' needs to a better or worse degree. Optimality depends on the match between the culture in which people live and the social system. Social evolution involves the search for optimal matching. If a system is suboptimal the system which permits the greatest flexibility with respect to searching for matching arrangement may be most preferable. That is, there are likely an array of systems which match varying cultural configurations, and an approach which provide equal matching but more flexibility will be preferable to an approach which provides less flexibility.

Labor economists have argued that some workers fit some kinds of jobs, other workers fit other kinds. In the same way, some cultures may fit some kinds of social systems while others fit different kinds. Discovering a optimal match depends on how well the social system can change to fit a given region or culture.

If that is so, then the trend toward increasing federal power and centralization during the twentieth century may have been an error since centralized power is more difficult to change than decentralized power. The founding fathers in America had hit upon an excellent formula to exploit regional and cultural differences: permit variations in across state governments so that local match can be optimized. Moreover, variations permit experimentation so that the knowledge base develops much more quickly than with a centralized one.

The centralization of power in America in the past 100 years may have impeded learning through decentralization and so had a crippling effect on progress. As well, forcing regional and cultural uniformity across a large country results in lost opportunities to match sub-systems to sub-cultures. Centralization of power is authoritarian and so as the nation has grown and simultaneously centralized power deviations from optimal points for specific subgroups have become greater. In turn, this has lead to increasing stridency of public debate.

Advances in organization theory that started with James March's and Herbert Simon's 1958 book Organizations have permitted firms to think about the key problem that faces them: information. Organizing information, gathering information, undestanding it and using it is a problem that faces government as well as private firms. In the twentieth century firms decentralized and experimented with increasingly flexible organizational forms. Toyota's Taiichi Ohno took 15 years to develop the process known as lean manufacutring, which includes just in time inventory. No expert had thought of this concept. Similarly, E.I. Deming's total quality management was unknown in business schools until he convinced a number of Japanese firms to adopt it.

In contrast, progressives and social democrats have made an antiquated assumption about rationality based on the ideas of Herbert Croly and Theodore Roosevelt: that experts can discern optimal solutions. Naturally, such experts will see the possibility of convergence toward an optimality in which they believe because of sharing of ideas, peer review and the like.

The corporate world has found that preconceived strategies rarely materialize and that focused or organized chaos results in the spontaneity of creativity that also depends on interaction and supportiveness of change. Supportiveness of change is foreclosed by the expertise culture. If an expert claims an optimal answer, then alternative views are ignored. Thus, fundamental errors in social science and economics have been perpetuated, and the public's ability to debate and innovate has been forestalled by social democracy.

There are many other concepts in organizational theory, such as the learning organization, organizational differentiation and integration and differentiation can be applied to the modern state. However, instead of thinking small and decentralizing, federal power has been increasingly concentrated in poorly performing agencies like the Department of Education and the Social Security Administration.

The Search for Order

Robert H. Wiebe. The Search for Order 1877-1920. New York: Hill and Wang, 1967. 333 pages. (Newer edition available from Amazon.com for $12.60, used from $3.00).

Perhaps the most scintillating paragraph in Robert Wiebe's Search for Order is on pages 279-80. Inadvertently, Wiebe suggests a rationale for Franklin D. Roosevelt's New Deal in the context of Democratic Party strategy circa 1920. Although Wilson won in 1916:

"Two developments nullified his advantage. Beneath a facade of victories, the organization of the Democratic party had improved only slightly during the previous decade. After capitalizing upon the Republican divisions around 1912, Democrats had been unable either to integrate their party or to secure its finances. Even the election of 1916 had depended upon transitory factors: an immediate return on New Freedom legislation, an impression of friendliness to progressive latecomers, and an image of peace. Without an enduring base such as Republicans enjoyed, the Democrats could hold their majority only by an uninterrupted flow of benefits distributed with the utmost skill. War disrupted the makeshift pattern of success, and a rapid deterioration followed. The loss of both houses of Congress in 1918 presaged an approaching disaster."

The institutionalization of redistribution of wealth via New Deal ideology beginning 12 years later, in 1932, led to a 50-60 year Democratic ascendancy that paralleled the Republican ascendancy from 1860-1932.

Robert H. Wiebe is a masterful historian who combines intellectual, political and business history in this wonderfully written book. This book serves as a good backdrop to Nancy Cohen's recent Reconstruction of American Liberalism 1864-1914 which I previously reviewed. While Cohen emphasizes the Mugwumps and academic antecedents to Progressivism, Wiebe emphasizes Populist and Social Gospel influences.

Progressivism was in large part, as Cohen argues, an assertion of professional interests in fields like law, medicine and academia. It is this thread of professional interest that links the Mugwumps, Progressives, New Deal Democrats and post-World War II liberals. As well, big business appealed to government to protect it from competitive forces in the late 19th century, and this state-government alliance can be traced through American statism's various transformations. This insight flatly contradicts the popular conception of the New Deal as antipathetic to the feelings of business executives. Indeed, Alfred Sloan and other leading executives of the 1930s fought aspects of the New Deal. However, this was necessary for Roosevelt to implement the radically pro-business inflationary program that he established in 1932 and that has in recent decades resulted in the flattening of real wages and inflation of asset values.

In his final chapter entitled "Doorway to the Twenties" Wiebe notes that following World War I:

"A bureaucratic orientation now defined a basic part of the nation's discourse. The values of continuity and regularity, functionality and rationality, administration and management set the form of problems and outlined their alternative solutions. A few recognized the fact and accepted it. 'There will be no withdrawal from these experiments' (Republican) Elihu Root announced in 1916, referring specifically to the regulatory commissions. 'We shall go on; we shall expand them, whether we approve theoretically or not; because such agencies furnish protection..."

Wiebe notes that the new bureaucracies were ineffective in fighting the 1918influenza epidemic (pp.296-8):

"Although medical science could not meet the emergency, millions of educated Americans dutifully awaited the doctor's word, donning the same masks and cleansing the same foods in a remarkable display of coordinated faith..."

In other words, while Progressivism failed to produce outcomes that worked in improving social welfare, it did succeed in establishing a high degree of social control and in subsidizing big business:

"In particular, national progressivism had been predicated upon the existence of the modern corporation and its myriad relationships with the rest of American society. Chronologically, psychologically, this network had come first."

And, of course, big business welcomed the governmental subsidies:

"Somewhat more slowly, private leaders had come to believe that they also could not function without the assistance of the government, increasingly the national government. Only the government could ensure the stability and continuity essential to their welfare. Its expert services, its legal authority and its scope had become indispensable components of any intelligent plan for order. And what they sought could no longer be accomplished by seizing and bribing. The nineteenth-century formula of direct control--taking an office for yourself or your agent, buying a favor or an official--now had very little relevance to the primary goals of society's most influential men, whether in business, agriculture, labor or the professions. They required long-range, predictable cooperation through administrative devices that would bend with a changing world. Nor were they thinking about a mere neutralization of the government, the automatic reaction many had given to the fist flurries of reform. They wanted a powerful government, but one whose authority stood at their disposal; a strong, responsive government through which they could manage their own affairs in their own way..."

(p. 298)"...Government bureaucrats looked to the private groups in their bailiwick as a natural constituency, men with whom they must develop good relations and from whom they expected regular support. These groups reciprocated, looking in turn to the bureaus for essential services and acting as their lobbies--just as long as the effective power of decision remained in private hands...In the twentieth (century), the national government parcelled an increasing amount of its power to private groups; and these then exercised it through the national government itself. Progressive legislation sketched the outlines for that new system."

This transformation was assisted by World War I.

Wiebe begins this masterful book with a discussion of the depression of the 1870s:

"...it was a strange depression. The longest in the nation's history, in human terms it proved one of the mildest. The same falling prices that deterred investors facilitated commerce..."

America in the 1870s was still largely rural. Island communities "moved by the rhythms of agriculture", and (p. 4) "If there was an American philosophy in the seventies it was a corrupted version of Scottish common-sense doctrines, taking as given every man's ability to know that God had ordained modesty in woman, rectitude in men, and thrift, sobriety and hard work in both...small-town America took its stand against 'the credit system, the fashion system,and every other system tending to prodigality and bankruptcy.." The railroads disrupted this agricultural, rural world by heightening expectations and increasing income inequality. The Granger laws, passed mainly in the Midwest, were an attempt to address resentment toward wealthy railroad owners by setting rates and regulating business conduct.

Railroads such as the Atchison, Topeka and Santa Fe, the Great Northern, the Southern Pacific and Northern Pacific united the nation and created a unitary market but (p.12) "America in the late 19th century was a society without a core."

The expansion of markets was not matched by expansion of business expertise. In banking, for instance (p. 21):

"A few institutions in the major cities experienced a phenomenal growth during the eighties in part from the demand for commercial banking facilities...Yet the apparent leaders, like their industrial counterparts, presided over vast mechanisms that had developed beyond their control...With intuitive methods for gauging the business cycle and rule-of-thumb measures for evaluating credit risks, they relied on stabs of shrewdness, not long-range wisdom, in conducting their affairs. Bankers at all levels strained to comprehend an increasingly complex, impersonal operation."

The difficulties business had in competing led to (p. 23):

"The classic sequence from tooth-and-claw competition to gentlemen's agreements to pools to trusts to holding companies...new techniques for cooperation rather than supplanting the old joined them to form a more intricate mosaic of business practice...the more complex the consolidation, the greater the internal confusion it tended to bring."

Wiebe writes (p. 25) that finance became an important field around 1890 and that JP Morgan guided many other financiers through the late 19th century: "Led by JP Morgan, whose imaginative policies in railroad cooperation had already won him fame during the eighties, a handful of financiers, almost all of them private investment bankers, took charge of the new surplus....Morgan enjoyed such respect that a caravan of domestic followers gladly marched to his beat."

As well, "the continuous need for credit as a matter of course made industrial executives vulnerable to bankers' direction...companies were showing interest in the benefits of an enforced peace." Nevertheless, in the 1890s 40% of the American railroad mileage had gone into receivership (p. 26). The investment banking community took over the railroads, reorganized them, and appointed managers who looked to Wall Street "for strategic guidance".

The expansion of markets led, according to Wiebe, to the end of the "island community" (p. 44). The growth of big business and the apparent concentration of wealth led scholar Richard T. Ely and evangelical minister Josiah Strong to argue for a social role for religion. Henry Demarest Lloyd attacked Standard Oil and moved into more radical causes, calling himself "a socialist-anarchist-communist-individualist-collectivist-co-operative-aristocratic-democrat". Lloyd's rhetoric sounded suspiciously like Herbert Croly's, 20 years later (p. 64) : " The new religion--man the redeemer...this divinity of democracy--the creative will of the people which is to be substituted for the old God." And Henry George argued for a 'single tax'. There was a sense of crisis, that "great corporations were stifling opportunity". There was a strong desire for self determination and community autonomy. There were, asserts Wiebe, Christian capitalists as well as Christian socialists. Edward Bellamy's Looking Backward was a Utopian novel, set in the year 2000, when society would be rationally designed and peace and goodwill would reign. Investment banks were abolished in Bellamy's world, and everyone would retire in middle age. All industry was to be run by the state. Everyone lives in small communities held together by fraternal cooperation.

The rural feeling of the threat of big business coupled with the fear of immigration and labor violence and strikes led to populism and the Populist or People's Party (p. 84):

"All of the community movements assumed that a natural, local society required the destruction of unnatural, national powers. As the Populist platform suggested, government would again become a function of men's everyday lives only after a direct democracy had dissolved a distant, corrupt government; technology would serve the communities only after nationalization had removed an oligarchy of railroad, telegraph, and telephone companies; power would belong to the people only after a silver currency, a decentralized postal savings system and subtreasury notes had replaced Wall Street and the national banks.."

By the early 1890s the Populist Party had captured 15% of the popular vote. Its downfall was its support for Democratic Party candidate William Jennings Bryan in 1896. When his free silver candidacy lost, the Populist Party lost credibility. In 1896 the Republicans became the party of sound money, of gold, and the Democrats became the party of silver, of inflation. A few Democrats, among them Woodrow Wilson, broke off from the Democratic Party in 1896 and fielded their own Gold Democratic candidate. Corporate America felt threatened by Bryan (they did not conceive of the advantages inflation offered them until after Lord Keynes wrote in the 1930s).

Along with a number of other authors in this field, Wiebe points out that the late nineteenth century saw a "revolution in values" (chapter nine) in that the expansion of markets shifted Americans' perceptions of wealth. In the day of the "island economies" of small town America, the relationship between morals and economic was perceived to have been that godliness and ethics led to economic prosperity. But in the expanded marketplace of big business, the relationship between morality and economic activity seemed to have been severed (p. 133):

"Now a perverted world was enabling men to perpetrate monstrous hoaxes in the name of the old morality. It had been natural enough to account for business success and nature in terms of individual virtue and vice; it was quite another matter to permit the corporations ill gotten profits because the Supreme Court adjudged them 'persons' within the meaning of the Fourteenth Amendment...No just God had given Rockefeller his money, whatever the man said. Yet for those who had customarily thought of wealth as a token of grace, re-arguing the case brought only frustration...From the seventies through the First World War, the nature of social change dominated their inquiries...With few exceptions the individual, who absorbed earlier and later generations, received only perfunctory attention."

In the 1870s and 1880s, economists believed in the wages fund theory and many combined it with social Darwinism. Some advocates of social Darwinism, such as Andrew Carnegie, argued for philanthropy. Wiebe, a product of mid-twentieth century statism, is somewhat sarcastic and condescending about the ideas of Sumner and David A. Wells, which are more viable and elastic than those of Keynes.

One response, the Social Gospel of Reverend Washington Gladden in his book Applied Christianity, was to argue for a boycott of monopolies and for employers to love employees. Another response was utopianism. In Looking Backward Bellamy argued for "the principle of fraternal co-operation...the only true science of wealth production" and a "people's economy supervised by an immaterial government". As well, Henry Demarest Lloyd argued for "cooperation to replace competition, nationalization under under an invisible government, a classless society living by the Golden rule." As a practical matter, Bellamy stated that he favored the nationalization of industry.

The utopianism of Bellamy and Gladden led to a combination of philosophical idealism and biology. Franklin H. Giddings and Brand Whitlock used biological metaphors to describe society and cities. They emphasized progress in stages. In 1883 Lester F. Ward (p. 141) argued that society had evolved in four stages.The academic Richard T. Ely argued that society would evolve through seven stages "to reach its destiny in industrial integration, essentially a Christian cooperative commonwealth." Wiebe states that following Comte, the most popular number of stages was three.

In the end, argues Wiebe, a bureaucratic mentality prevailed. The bureaucratic approach emphasized "recognizable, everyday problems" (p. 147) and eliminated biological analogies, relying instead on mechanical metaphors. This approach emphasized "scientific method", relying on statistics and a belief that "society was a vast tissue of reciprocal activity" (p. 147). Rather than discuss human psychology and focused instead on behavior (p. 149):

"Now education implied the guidance of behavior in harmony with social processes."

According to Wiebe (p.149),

"the bureaucratic orientation did not reach its peak of success until the nineteen twenties...By degrees the philosophy of urban political reform had moved from simple moral principles guaranteed by the proper forms of government to complex procedural principles advanced by the proper administration of government...A similar transformation occurred in social work. The original settlement workers had entered the slums and served the poor as moral acts. Over time...they became immersed in the endless, interrelated problems of a whole city's life."

Wiebe adds Arthur Bentley's bureaucratic analysis of government, The Process of Government, Frederick W. Taylor's scientific management and John Dewey's combination of pragmatism with a bureaucratic "theory that made individuals the plastic stuff of society."

It is evident from Wiebe's description of Dewey that modern "liberalism" (more accurately termed social democracy) is a betrayal of Dewey's ideas, particularly of his pragmatism:

"Throughout his writings ran a limitless faith in the scientific method as the means for freeing people of all ages to learn through exploration and through social experience."

But Dewey's ideas, while elegant, failed to anticipate the dominant impulse of interest groups and their extraction of rents from the state. The idea that social democratic institutions have led to rationality is laughable. Yet, instead of remaining loyal to the pragmatic impulse of William James, which would require a reassessment of failed ideology, today's social democrats ("liberals" or "progressives") continue to chant a rote commitment to failed ideas.

There is certainly a link between the bureaucratic ideas of Taylor and the classical liberalism of William Graham Sumner (p. 156):

"In a certain sense, bureaucratic thought reverted to the visions of the original classical theory, substituting an internally derived dynamic--a social process-for the externally justified balance of a John Fiske or a William Graham Sumner. Both theories, at least, sought to create unity out of diversity...the acknowledgment of society's inevitable pluralism raised difficulties that would plague bureaucratic through for years to come."

Advocates of Progressivism (which is the early twentieth century manifestation of Wiebe's bureaucratic approach) such as Walter Lippmann and Walter Weyl saw consumerism as the ultimate outcome of the bureaucratic society (p. 158).

Progressivism led to a" a strikingly different conception of government" which involved the replacement of economic with political criteria (p. 160):

"Trained, professional servants would staff a government broadly and continuously involved in society's operations. In order to meet problems as they arose, these officials should hold multiple mandates, ones that perforce would blur the conventional distinctions among executive, legislature and judiciary. Above them stood the public men, a unique and indispensible leader. Although learned enough to comprehend the details of a modern, specialized government, he was much more than an expert among experts. His vision encompassed the entire nation...Corps of servants received his general directives and translated them into their particular areas ...As the nation's leader, the public man would be an educator-extraordinary...In time, after a 'long tutelage in public affairs', the electorate would come to participate directly in certain aspects of government through the initiative, referendum and recall...The theory was immediately and persistently attacked as undemocratic...In fact the theory was not as boldly authoritarian as it sometimes appeared...The latitude he enjoyed in administration existed only because no one could predict the course of a fluid society...the theory purported to describe government by science not by men...As all citizens became rational, they would naturally arrive at the same general answers. Experts, of course, would always know more in their particualar fields, and the public man would always see the whole more clearly; but national rationality would assure consensus on the big issues, the matters of principle."

Wiebe articuately describes the essence of Progressivism. In chapter 7, "Progressivism arrives", he describes the roots of Progressivism in estern urban centers and some midwestern and southern agrarian states. The Progressives believed that a "patchwork government could no longer manager the range of urban problems" (p. 167). Mainstream business interests supported Progressivism (p. 167) "well-to-do merchants, manufacturers and bankers who sought more dependable and rewarding relations with government were moving to the vanguard of urban reform." This was accomplished in establishing utility regulation (p. 168), the secret ballot, the shortened ballot, and increasing the number of appointed governmental posts and the introduction of government budgeting. Their establishment of settlement houses led to an interest in child labor laws. Wiebe emphasizes (p. 169) the Progressives' fixation on improvement of government administration. They envisioned flexible, authority staffed by qualified experts in areas like housing regulation, early childhood education, conservation and public health. The Progressives emphasized efficiency.
In attempting to implement their ideas they linked themselves to businessmen and political bosses (p. 174).

Wiebe makes an important point (p. 174):

"It was the expert who benefited most from the new framework of politics...The more complex the competition for power, the more organizational leaders relied on experts to decipher and to prescribe...Only the professional administrator, the doctor, the social worker, the achitect, the economist could show the way...professors like Frank Goodnow, Leo Rowe and Edmund James were telling the National Municipal League what urban reforms it really wanted"

At the same time, businessmen began to institute systematizedpolitical contributions and lobbying slightly before 1900 as a concomitant of Progressivism:

"The political implications of the desire for continuity turned big businessmen into political innovators, and campaigning was one of the first areas affected. Particularly after 1896, such magnates as John McCall of New York Life Insurance, Henry H. Rogers of Standard Oil and Edward Harriman began both to contribute kmore consistently and to grant funds for a party rather than a man."

The contradiction inherent in Progressive reform, namely, its claim to rationality while at the same time encouraging a larger scale, more rationalized corruption, were apparent from the beginning.

The Search for Order is a fine historical work and anyone who reads it will be richer.

Conservatism, Surgical Radicalism and the Four Party System

The current popular political debate occurs between two kinds of conservatives. The first, called liberals or progressives, argues that the current framework of American democracy, created during the Progressive era and New Deal and now roughly 100 years old, ought to remain in place. In their view introduction of additional institutions, plans and programs like national health insurance along the lines of earlier ones is needed, but today's framework is a good one.

The second kind of conservatives, popularly so called, are not comfortable with the New Deal project---Social Security, government regulation of industry, and large-scale federal social welfare programs, but do not want to repeal these programs either. They follow Edmund Burke, who argued against radical in favor of gradual change. Burke felt that gradual transformation of institutions while protecting liberty was a better path than the French revolution's authoritarianism, political correctness and executions. Rather, he preferred the American revolution's restraint.

Today's conservatives retain Burke's dislike for radical change. But the institutions that exist in America today were radically imposed during the first half of the twentieth century. They did not evolve logically from the market economy of the nineteenth and they did not reflect economic exigencies of the the early 20th century. Rather, they reflected the imposition of a political vision of specific rent-seeking special interest groups and agenda-drive political radicals.

Burke wrote in Britain in the late eighteenth century when barbaric institutions had gradually evolved into more democratic and liberal forms in Britain and to a lesser degree in Europe. Burke did not write about what to do to unravel the harm that the French revolution had caused. Rather, he wrote about how Britain and other liberal nations might best cope with change. This is not the problem that faces America today. An excessive application of Burke is inappropriate. America has had some radical change imposed while partially retaining liberal institutions. Conservatives who wish to create a new liberalism need to be surgical radicals. They need to undo New Deal radicalism's derangement of older versions of liberalism. The derangement has taken a number of shapes, to include social security, urban renewal, welfare, the Federal Reserve Bank, excessive application of eminent domain, and excessive regulation of business. Such radically instituted habits ought to be undone conservatively but radically.

Progressivism and the New Deal were radical upheavals. They rewrote American institutions that were not very old. A radical conservatism is one that is pragmatic, and asks that if radically imposed institutions fail that they be undone. This is a surgical radicalism that devises new liberal institutions where Progressivism and New Deal social democracy have failed.

Conservatives who wish to retain Progressive institutions, who are loyal to the old Federal Reserve Bank and its old-fashioned economic planning, high levels of government spending and support for business are Progressives. Conservatives who wish to retain New Deal institutions like Social Security and the National Labor Relations Act are social democratic liberals.

Perhaps Americans should think in terms of a four-party rather than a two-party system. Perhaps there should be a surgically radical conservative party; a Progressive-conservative Rockefeller-Republican Party; a New Deal Party; and a social democratic radical party. Of these, the surgically conservative radical party would be the most radical, liberal and progressive.

Toward Separate American Communities

Woodrow Wilson argued that America ought to become a community that is united by common belief. However, Wilson did not anticipate the brokerage of special interest coalitions engendered by the expansive state. Instead of a community of interests, the expansion of the welfare state resulted in heightened factionalism to a degree unforeseen by Madison and the founders of the American constitution. The factionalism is in large part economic. The Federal Reserve Bank has served as a redistributive, extractive mechanism by which wealth is taken from workers and savers and redistributed to investment bankers. This is accomplished with the full support and flourish of the New York Times and the mass media in the name of rationalization of credit markets and similar vacuous phrases. The brokerage of coalitions and privilege extends to almost all facets of state and federal government. It is related to the passage of every law. It imbues the very substance of the American system. Under New Deal Progressivism, America has not become, as Wilson envisioned, a community of shared interests, but rather a land where various minorities wage economic war on the majority.

Progressivism entailed an increase in executive power and a reduction in the power of the states. It depended upon the federal government reflecting a popular will. But today, the popular will is fractured not only by economic but also by severe political criteria. The liberalism of Roosevelt has, for many, turned out to be a failure. The states where the New Deal has been taken to its furthest extremes, such as New York, are the dying states. Yet, the mass media cling to the New Deal paradigm as any reactionary clings to his fossilized ideology.

Many Americans have renewed their faith in traditional American values and adopted a conservative position that evolves from twentieth century progressive-liberalism. The conservative position finds that the ideas of the nineteenth century had more substance than the old Progressives thought. It finds that markets are required for flexibility and progress. It also finds that new ideas cannot be adopted by government rooted in special interest privilege.

The competition between the forces of conservative progress and the forces of progressive-liberal reaction is bitter. There can be no community of interest in a society where one half of the public hates the values of the other; where progressive-liberals reject the conditions for progress, i.e., markets and the entrepreneurial creative destruction; and where progressive-liberals hold their own country as well as conservatives in contempt. Likewise, it is unfair to those progressive-liberals who would like to be subject to government control; who want the guidance of a powerful executive leader and do not care about the independence of entrepreneurship and self employment to have freedom thrust upon them. It is unfair to ask progressive-liberals who need social and political guidance to think for themselves.

The solution to this dilemma of war of all against all, of economic interest against economic interest, is separation. A separation of state powers to enhance competing models. Through competition the states can serve as laboratories of experiment for both conservative and progressive-liberal ideas. A libertarian state can be juxtaposed to one that is progressive-liberal. Differing ideologies and the mutual contempt in which the advocates of liberty and the advocates of state power hold each other need not be brought into overt conflict. Instead, let them separate. Let them experiment. Let us see which state flourishes: the state that extols private use emininent domain, central banking and government intervention; or that state that dispenses with these institutions, views them as failed and frees entrepreneurial talent from government control. Will the anarchic state or the totalitarian state flourish? It is only through experiment that the answer can be found.

The separation of power into separate states would have advantages beyond the role of experimentation. The brokerage of special interests would be diminished with more local control. Special interest pleading depends in large part on asymmetry of resources and organization costs. As political entitites diminish in scope, the asymmetries become smaller and the advantages of wealth and concentrated power diminish as well. Perhaps progressive-liberalism will perform to a better degree should it cover a smaller geographic expanse. Perhaps European states manage themselves more professionally because of their smaller scale and lesser concomitant corruption.

The Economic Contours of a Buffett-Obama Administration

The Economic Contours of a Buffett-Obama Administration

Much has been made about Barack Obama's association with Pastor Jeremiah Wright, who represents the identity politics fringe of the Democratic Party. Mainstream Americans ought to be concerned because the Democrats have introduced leftists into staff positions in state legislatures and Congress and funded them in universities. For example, Eliot Spitzer's suggestion of granting drivers' licenses to illegal aliens likely did not spring from the mouth of his latest romantic partner, but rather from staffers whom he introduced into Albany. With associations of the Pastor Wright sort, Mr. Obama seems likely to aim to employ staffers with fringe views. If you liked the idea of granting drivers' licenses to aliens, it is certain that you will love an Obama administration.

An even more important question than identity politics, though, is what a President Obama would do to the economy. Thus, a more important association than Obama-Wright is Obama-Buffett. What clues might this relationship offer about the economic direction that an Obama administration would take? One clue is Mr. Obama's recent recommendation, quoting the authority of Mr. Buffett, to increase the capital gains tax. Mr. Buffett's investment philosophy famously involves buying and holding for the long term, and so would not be hurt and would possibly be helped by higher capital gains taxes. In contrast, traders whose investment approach involves more frequent buying and selling would be hurt. Long term holders infrequently pay capital gains taxes, while frequent traders may pay taxes more frequently. Thus, capital gains taxes would hurt Mr. Buffett's competition more than they would hurt him. That which hurts his competition would likely help him.

An increased capital gains tax would provide an incentive for investors to favor investment in Berkshire Hathaway over buying and selling commodities and stocks. The Federal Reserve Bank has increasingly become involved in timing and influencing the financial markets, increasing the returns to short term traders who respond to Fed moves but potentially harming long term holders because of market unpredictability. Mr. Buffett's Berkshire stock has nevertheless performed modestly, but only modestly, well. An increase in the capital gains tax would likely increase the value of Berkshire Hathaway stock because it would provide incentives for long term holding. Hence, Mr. Obama has already been advocating policies that would prove economically beneficial to Berkshire Hathaway, and quoting Mr. Buffett in doing so.

Mr. Buffett's investments span a wide swath of businesses. He favors domestic businesses over foreign ones. Many of the businesses and stocks that Mr. Buffett's Berkshire Hathaway owns are consumer products, media, financial, insurance, food and retail businesses (Coca Cola, See's Candies, Capital Cities ABC, GEICO, Dairy Queen, reinsurance and small retail). Thus, policies that a Buffett-Obama administration would likely favor would involve support to a broad swath of domestic consumer, financial and real estate-related businesses.

A weak dollar/high inflation policy executed in the name of full employment with increased taxes to Mr. Buffett's competitors and protectionism are the most likely outcomes of a Buffett-backed Obama presidency. High inflation serves Berkshire Hathaway's interests for several reasons. First, inflation reduces real wages and so real labor costs for Berkshire's retail and construction businesses. Second, inflation reduces real debt, and the diverse businesses that Mr. Buffett owns, from house construction to consumer products, carry debt and so benefit from inflation. Third, inflation weakens the dollar. Since Mr. Buffett's businesses tend to be domestic, a weak dollar will help Berkshire because it will make American-made goods relatively cheap. Of course, this will occur in tandem with the average American's becoming poorer due to the same inflation, so while it will help Berkshire Hathaway it will harm American workers. Thus, one can expect that an Obama presidency will harm American workers in the name of helping them.

Since Mr. Buffett's businesses are primarily domestic, protectionism would prove beneficial to them as well. We can expect protectionism from an Obama presidency. This too would harm American workers by making goods more expensive but would prove helpful to Berkshire Hathaway.

One of the fundamental principles of progressive-liberalism is that it emphasizes that low wages are conducive to full employment while it de-emphasizes the benefit that low wages, low interest rates and high inflation provide to owners. Mr. Buffett is a student of John Maynard Keynes, and we can expect the Keynesian inflationary policy to be a pillar of an Obama presidency. The Keynsian argument is that increasing the money supply reduces interest rates and real wages. This stimulates employment, but it also makes workers, savers and pension holders poorer while it improves the position of owners, like Mr. Buffett.

At the margin, the stimulative effect of the Fed's printing money will include the creation of low-wage retail jobs, and this will benefit Berkshire Hathaway, which owns retail businesses. As well, Berkshire Hathaway benefits because low interest rates boost the value of its stock price. Low interest rates cause investors to value future earnings at a higher value. If an investor knows that he is going to receive a dollar in a year, if interest rates are reduced from 10% to 1%, the value of that future dollar is considerably raised in the present. Since the stock market is a mechanism to value future earnings, increasing the supply of money (that is, reducing interest rates) boosts stock market values. Since Berkshire Hathaway emphasizes long term holdings, its value will be especially enhanced. Thus, an Obama Presidency will likely prove to be inflationary through encouraging the Federal Reserve Bank to print money.

An Obama presidency will emphasize taxes that harm small investors and traders who compete with Mr. Buffett. These would include inheritance, capital gains and income taxes. It will reduce interest rates which raise the value of Berkshire Hathaway's holdings and subsidize long term holders. It will reduce the value of the dollar, which will stimulate demand for Berkshire Hathaway's domestic businesses. It will increase protectionism and raise tariffs, especially those which reduce competition to Mr. Buffett's businesses. Mr. Obama will reduce real wages, enhance income inequality and all the while will tell Americans how much he is helping them because he has created a few low-wage jobs for employees of Berkshire Hathaway.

Firms' Goals and Pricing

Walter Nicholson. Intermediate Microeconomics and Its Application Third Edition. Dryden Press, 1983.

I have decided to treat myself to review some basic economics this evening. It's been 20 years since I looked at my last economics textbook. What better way to brush up than my 1983 copy of Walter Nicholson's Intermediate Microeconomics and Its Application textbook? In this blog I will briefly review his thoughts on costs.

Costs (chapter 9)

Economists view historical costs as sunk costs. The implicit cost of a machine is what someone else would pay for it, i.e., its "rental rate". To minimize production costs firms choose inputs such that the rate of technical substitution is equal to the ratio of input costs. Thus if wages are w and machinery rental rates are v then:

Rate of Technical Substitution = wage rate/rental rate = w / v

That is, the rate of technical substitution is the rate at which one input may be traded off against another in the production process while holding output constant and that rate is the same rate at which they are traded in the open market.

In other words, the rate of technical substitution of labor for capital is the ratio of the

marginal product (labor)/ marginal product (capital)

so that each input should provide the same additional output per dollar spent and if they don't, firms will trade some of the less productive input for the more productive.

Short versus Long Run

In the short run production capacity is fixed. In the long run production can be curtailed. Fixed costs are fixed in the short run.

Short run average total costs = (total costs) / (total output)

while

Short run marginal costs = (change in total costs) / (change in output)

In the very short run price purely rations demand. This is because supply cannot be increased. But generally in the longer run there is a supply response to changing demand. In the short run (longer than very short run) the number of firms is fixed but firms can adjust the amount they are producing.

Theoretically, marginal and average costs ought to increase in response to increases in output but most studies fail to show increasing average or marginal costs but rather find that marginal and average costs are constant over large ranges of output.

Long Run

In the long run all productive inputs are variable. Nicholson makes the point that some factors may be difficult to alter even in the long run. The rate of technical substitution must equal the ratio of the input prices.

The long run total cost curve is found by considering all short run total cost curves and choosing the lowest one for each possible output level. "The locus of all these cost minimizing choices is called the long-run total cost curve..."

Under the assumption of constant returns to scale, the long term total cost curve is a straight line and average and marginal costs are constant and equal (equal because of the assumption of constant returns to scale which means that the marginal cost equals the average cost).

If there is a fixed input, average costs fall as variable inputs are added, but then rise again as the fixed input causes diminishing marginal productivity.

At the minimum piont of the Long Run Average Total Cost Curve the Long Run Marginal Cost Curve = Long Run Average Total Cost Curve = Short Run Average Total Cost Curve = Short Run Marginal Cost Curve

In reality, many empirical studies find declining long run average costs for smaller size with a flattening minimum average cost beyond a threshhold.

Changes in input prices will tilt the total cost lines. Changing input prices will change the isoquants on which the total cost curves are based and change the ratios of inputs.

Progressivism Contradicts progressivism

Progressivism was the ideology of early twentieth century American government. Its argument was based on the idea that big business had developed to a point where it was too powerful not to be regulated and that in order to counteract big business's power the limited federal government of the 19th century needed to be expanded. Progressivism was mainly concerned with how to best manage big business in the public interest. The Progressives were pro-large business. They did not think, as many business executives did not think, that private ownership of monopolies was necessarily appropriate. In many respects Progressivism was similar to Marxism in that it argued that big business was a natural historical development and that an increase in state power was necessary to manage the big business. The Progressives wanted to make certain that the efficiency potential of big business would be actualized and that efficiencies from big business would be managed in ways that weer conducive to the public interest.

The pro-big business attitude of the Progressives changed during the New Deal. Part of the reason was that the New Deal did not focus on the efficiency goal. This was viewed as having been achieved. As well, the New Deal emphasized the importance of finance as opposed to manufacturng, and its policies primarily reflected the interest of large financial firms. In order to accomplish this, the New Deal had to cloak its positive supports for finance with imagery related to social democracy. The New Deal is thus associated in the minds of historians and the public with Social Security, the Fair Labor Standards Act, the National Labor Relations Act, the Securities and Exchange Act and unemployment insurance. However, the chief and most far reaching reform of the New Deal was the abolition of the gold standard and the granting to the financial community the power to create fiat currency in its own interest unimpeded by the gold standard.

In order to justify this profoundly redistributive policy that served the interests of large corporations, real estate holders and stockholders as well as the commercial banks and Wall Street the New Deal needed to seem anti-business. This was accomplished by insisting on unionization of large manufacturing, which created short term political resistance from Alfred Sloan and other business leaders but in the long run (seven decades) provided little or no benefit to the working class. At first, the division between manufacturers and the Roosevelt administration made Roosevelt seem a traitor to his class. However, this is not the case. The financial arrangements Roosevelt created resulted in the largest gains and the longest gains that have accrued to capitalists in the history of the world. There is no other time in recorded history when the asset markets have risen so consistently and to the degree that they have since the New Deal, and there is no other time in American history when real wages have progressed so little.

The progressives lack the perspective of the Progressives because Progressivism held that economic growth depended on a set of social relations, to include big business, stabilized markets and efficiently run companies, and that social justice would flow if big business was managed appropriately. It recognized that efficiency and productivity necessarily preceded social justice. In contrast, the New Deal did not focus on efficiency and concerns. It saw its goals as primarily redistributive. In rhetoric, business executives were reactionaries who fought its redistributional goals and big business was therefore its enemy. The New Deal assumed that the problem of production had been solved. Its followers were not able to grasp the profoundly redistributive policy that the New Deal established of redistributing from the poor to the rich because they naively assumed that the regulatory sops that were thrown to the poor constituted a major redistributional program. But the New Deal gave $100 to the rich for every $1 it gave to the poor, and in public image broadcast the $1 while cloaking the $100 in arcane Keynesian lingo that served as a cloak to 19th century Populist ideas, namely Greenbackism and free silver.

Academics were only too happy to lend credence to Keynesian rhetoric and to serve the rich. Marxism and Keynesian were two ideologies which ultimately serve to cloak the interests of the financial community and alternatively serve to so cloak the academic community's true intersest in providing succor to the wealthy.

Second, progressive rhetoric depicted big business as the enemy rather than a necessary development. Without claiming to foster business progress, progressivism becomes a form of attack on the nation's source of wealth. Small p progressives do not articulate a theory of economic growth and advocate ideas, to include protectionism, income taxation, regulation and expansion of the state that can easily be shown to harm innovation and economic development. The progressives are not troubled by their assault on progress because of their quaint insistence that the problem of production despite the development of innovative production concepts in Japan that American firms have been unable to replicate and have been protected from replicated by the progressives' inflationist and government support policies for big business.

In fact, the progressives reserve their worst venom for the few innovative businesses, such as Wal-Mart, which have contributed to economic growth. Those that have not, from Wall Street to Detroit, are viewed with favor by the progressive movement.

John "Zippy" Callister, Doug Ross and the MSM's Three Biggest Lies

Doug Ross has an interesting blog about John "Zippy" Callister's letter to the Wall Street Journal (courtesy of Larwyn). Mr. Callister had written to the Wall Street Journal complaining that while his portfolio went up during the eight Clinton years, the S&P 500 has done little during the Bush years (actually it has done alot if, as Howard Katz and I have done, you bought in 2002 and sold last year). Mr. Callister, publicly-spirited as he is, complains that he does not care about terrorism, overseas wars, social security or income tax:

"...But, a 100 point gain in the S&P 500 means about $50,000 in my pocket... It is odd that so many people forget the stock market boom of the late 1990s."

Doug is annoyed at Zippy, and rightly so, although Zippy's argument is more revealing about the Democrats and the mainstream media than Doug suggests.

According to my broker at Smith Barney, the S&P 500 is currently at 1409. If 100 points (7% x 1409) means $50,000 to Zippy, that means his portfolio is roughly $50,000/ .07 = $714,000.

Zippy suggests that his portfolio hasn't increased since 2000, so I assume it was $714,000 in 2000. In contrast, the Census Bureau says that the median household net worth in 2000 was $55,000. The median household net worth for households in the highest income quintile was $185,000. In 2000, only 27.1% of households owned stocks and mutual fund shares at all, and these had an average value of $19,268. 29.9% of households had 401k plans with average assets of $29,900. Thus, Zippy's household wealth of $714,000 put him well above the median for the highest quintile in 2000. That Zippy favors the Democrats is revealing of the the MSM's three biggest lies:

Lie Number One: The Democrats are for wage earners, not the wealthy.
Lie Number Two: Corporate interests reflect the public interest.
Lie Number Three: The stock market goes up because of general prosperity.

MSM Lie Number One: The Democrats Favor Wage Earners, Not The Wealthy

Conservatives and libertarians often wonder why the wealthy, such as George Soros, Warren Buffett, Nancy Pelosi and Zippy, tend to prefer progressive-liberals and Democrats. The "Red" states, it has been noticed, are concentrated where there are many trust fund babies and millionaires, while the "Blue" states tend to be poorer. This is chalked up to left-wing education. But progressive-liberal dogma is consistent with the economic interests of the wealthy. The reason is that the Democrats tend to be even more inflationary than the Republicans, who are also inflationary, just not so much.

Yet, the MSM repeats the claim that inflationary, high-tax, high-regulation policies favor the average American rather than the wealthy, "Red State" trust fund babies whom such policies do favor. Zippy is merely the bull in the china shop who reveals to us that selfish impulses do matter. The Republicans' policies help the average working man while the Democrats, who claim to be for the poor, help Zippy.

MSM Lie Number Two: The Stock Market Reflects The General Prosperity

Advocates of mainstream finance theories argue that markets are rational. This has a clinical sound to it. However, even if true, rational markets do not require rationally run corporations. In fact, most big businesses aren't run rationally. They require subsidies at public expense. Even if large businesses were run efficiently without the need for government welfare, their interests would not coincide with the general public's for several reasons. Laws that protect business from competition serve corporate interests but do not serve the public interest. Since the 1850s, business has lobbied, often effectively, for protectionism, regulation to rationalize markets, easy credit, lucrative government contracts and the like. Public waste is private profit. Stockholders of firms that benefit from wasteful government contracts, protectionism, regulation and subsidies become wealthier as the public becomes poorer. Joint gains are only possible in a market economy. Yet, the MSM repeatedly claims that stock market increases are good for the general public. This is not the case in a mixed economy where government subsidies are common. They are certainly good for Zippy, who is wealthier than average and who benefits from secular stock market increases. They are also good for government contractors. But they are not good for the average person.

MSM Lie Number Three: The Stock Market Goes Up Because of General Prosperity

This is perhaps the most pernicious lie because it encourages the public to harm itself. The chief driver of the stock market is interest rates. Interest rates are chiefly influenced by the Federal Reserve Bank. The Federal Reserve Bank can raise interest rates by contracting the money supply and can reduce interest rates by increasing the money supply, i.e., printing money. The advocates of printing money were known as Populists in the 19th century. In the twentieth century they realized that if they pretended to be scientists their self-serving claims would be more convincing. Thus, they packaged their argument for increasing the money supply in the garb of "science", calling themselves "macro-economists". The "macro-economics" that they advocate is in substance the same as the arguments of the 19th century Populists, who advocated greenbacks and free silver. The macro-economists claim that they can adjust the money supply at different stages of the economic cycle, but the Fed doesn't do this. Although the Fed has never done this, the "scientists" do not revise their opinions, and when they gain power they do the same thing that the Fed has always done, namely, they support the stock and real estate markets at the expense of the general public. The money supply has gone in one consistent direction since the Fed was founded--UP. The US money supply is 16 times greater today than when the Fed was founded in 1913.

Stock and real estate markets inflate along with the money supply because of low interest rates. But increasing the money supply has another effect, namely, because the number of dollars in circulation is increased at a faster rate than the value of output increases (a painfully difficult fact for progressive-liberal advocates of the large-corporations-are-rational philosophy) there are general price increases, i.e., inflation in food, energy, labor and other prices. Prices have indeed gone up by 3.5% on average since 1979. A dollar in 1979 is worth 38 cents today. The mother of three must pay more for milk and her children might be hungry, but Zippy and his fellow Democrats gets to pocket the increase, and he is happy.

In the past six years the price of gold has gone from $250/oz. to nearly $900/oz. Thus, although the Republicans may not have been as good at inflating the stock market as the Democrats, they have been much better at inflating commodity prices. Of course, neither party is different from the other because they are both following the same inflationary policy. They are the ReInflateoCrat Party (the In stands for Bloomberg Independent). Howard S. Katz argues that there is a commodity "pendulum" which causes first declines in commodity prices and increasing stock market prices then increases in commodity prices. Katz argues that we are only at the beginning of the pendulum swing favoring commodity prices and that we still have a decade or even two to go. This will be true whether Democrats or Republicans win.

In other words, the stock market increases of the Clinton years are desirable only to trust fund babies, the wealthy, Democrats and Zippy. They are not beneficial to the average American.

What is perhaps most telling about Zippy's letter is his simple-minded selfishness, a characteristic of today's wealthy that did not characterize the wealthy of the late 19th century. I attribute this to progressive-liberal education and the general triumph of progressive-liberalism, which is a philosophy of pretended altruism coupled with the devastation of the average American through taxation and other violent state policies that progressive-liberals gleefully depict as altruistic when they are mostly self-serving.

War on The Future in Herbert Croly's Progressive Democracy

The past century has seen the persistent belief that government best copes with change. Liberals have viewed social security and regulation as cures for psychological uncertainty arising from free market policies. Yet, most progress has been associated with free markets. In countries like Russia, North Korea, Cuba, China and today's social democratic Europe there is scant innovation. In the case of more government-controlled nations, such as North Korea and Cuba, there is deprivation. Yet, the "progressive-liberals", including (a) liberal economists (b) big business tycoons like Warren Buffet and George Soros and (c) liberal journalists, continue to claim that progress comes from big government, high taxes, inheritance taxes and the Federal Reserve Bank.

The encouragement of government is associated with short-term thinking and faulty understanding of the sources of economic progress. "Liberal-progressives" since Herbert Croly have believed that progress results from increased efficiency, democracy and equity. Although these are all legitimate social goals, and efficiency does contribute to wealth hence progress, progress results from innovation, not from them. Innovation, in turn, depends on willingness to take risks, long term thinking, a realistic faith that returns will not be appropriated, and a high valuation of the returns. Although low interest rates (a low discount rate for a future dollar) stimulate increased valuation of future returns (at two percent a dollar in a year is more valuable than it is at four percent), when the Fed increases the money supply it depreciate the currency, resulting in inflation, uncertainty and insecurity.

It is unlikely that innovators will have first access to new credit (such access is given to commercial bankers, Wall Street, Warren Buffett and the like) and so will suffer from the uncertainty that inflation causes. Thus, the interests of the commercial bankers and Wall Street diverge sharply from the public's and from free markets. Innovation depends on a stable economy and the ability to predict the future so that innovators can predict returns, while Wall Street, big business and banking benefit from (and probably would not exist in their current forms without) interest rate subsidies and state support.

The progress that exploded in the late nineteenth century was due to a stable monetary base (the US was on the gold standard in the late 19th century) and limited government. Yet, the "Progressives" of the early twentieth century did not grasp that progress and innovation had resulted from the long term thinking that result from a stable money supply. In 1913, the "Progressives" pushed through the Federal Reserve Bank in order to, they argued, stop a two percent inflation rate that arose from global gold discoveries (the average inflation rate since 1979, excluding housing which has gone up faster, has been 3.7%). For the past 70 years the Fed has encouraged low interest rates and inflation. During the same period there has been less progress and innovation than there was between 1865 and 1913. Much of the progress and innovation that was made since 1930, for example television, has been based on ideas that had been conceived much earlier, for example by Nikola Tesla.

The liberal economists, tycoons like Warren Buffett and their allies encourage short term thinking in other ways, for instance, through advocating the capital gains, income and inheritance taxes, regulation of the economy and special interest subsidies to firms like Archer Daniels Midland and AT&T that squelch competitive innovators.

Herbert Croly's Progressive Democracy (1914) is a 415 page argument in favor of reconstituting the US government in order to encourage (1) greater democratic participation; (2) unfettered government power ostensibly governed by majority vote, with voice given to political minorities via a pluralistically elected legislature; and (3) enhanced professionalization and administrative power to scientific management-style government administrators who, Croly believed, could be freed from special interest pressure.

Croly believed that progress results from the application of democratic principles to science and that business had played very little role in encouraging innovation. Croly overlooks evident history that to him had been recent. In the thirty-five years preceding Croly's book Thomas Edison, Nikola Tesla, Charles F. Kettering, Alexander Graham Bell, Guglielmo Marconi, Wilbur and Orville Wright and many others flourished and invented crucial technological breakthroughs in a business-driven, laissez faire world. These were businessmen as well as inventors, who profited substantially from their inventions. They were not market manipulators and negotiators like Bill Gates and Warren Buffett. They were breakthrough inventors who came up with and marketed crucial technological breakthroughs. Such innovators are missing today because the capital formation necessary for them has been monopolized by the Federal Reserve Bank and its clients, such as Wall Street and Buffett. In other words, the policies of the "Progressives" have reduced the pace of progress by waging war on the future.

It is not coincidental that Croly overlooks the link between the accumulation of wealth and innovation. Croly lacks a theory about capital formation. He does not think that workers should save because it is, in his opinion, too painful for them to forgo current consumption. He does not make a similar kind of argument against the income tax. Yet, if workers in 1913 had saved at the rate they are taxed by the federal government today, they probably would have saved enough to purchase a business just as John D. Rockefeller did in the 1850s. Croly overlooks such examples as John D. Rockefeller, who was entirely self-made, because such examples are inconsistent with his argument that it is next to impossible for small shop owners and workers to become independent businessmen.

Croly might be viewed as the early twentieth century prophet of the early twenty-first century's sub prime loans, credit subsidies and incipient economic decline. He argues for a short-term politically-driven fix. Although he lacked the economics knowledge to argue for low interest rates (that was Keynes's job twenty years later) Croly did focus on a short-term fix: syndicalism.

Croly believes that businessmen should be asked to encourage syndicalist industrial democracy without concern for risk to their investments. He seems to believe that capital forms on its own and that the risks of investment will be absorbed without cost by....well he doesn't quite say. Some of Croly's ideas may be right in principle--the Japanese have in fact utilized autonomous work teams to encourage application of scientific management tools, an idea that Croly roughly suggests, but the industrial governance system he advocates is absurdly cumbersome by today's standards (and by the early twentieth century's as well).

Croly (p. 382) argues that 19th century liberals' argument that workers should be thrifty and save in order to buy property and so become owners rather than workers is "deplorable" because thrift implies deprivation and it is cruel to ask workers to impoverish themselves in order to save money to become wealthy down the road. Croly was among the earliest of the progressive-liberals who have waged war on the future. Twenty years later, in the 1930s, Keynes was to argue that "in the long run we're all dead." This kind of short term thinking is the heart of the liberals' and free-credit Republicans' war on America's future.

The easy, get-it-for-free mentality took further root in the American psyche. In reality, it is a streamlined version of 19th century populism, which was an ideology of agrarian land speculators who combined the advocacy of easy money with anti-Semitic and anti-British feeling.

The end result of short term thinking is economic decline. Howard S. Katz this week blogs about the role that economic reporters have had in furthering the mistaken Keynesian economic notions that economic progress is due to demand. This kind of thinking is the same kind of short-term thinking that Herbert Croly advocated in the early twentieth century. The end result of this short term thinking, stimulation of low interest rates through monetary depreciation and inflation will be further American economic decline. The century after the Federal Reserve Bank was founded was far less innovative than the century preceding it. Moreover, there was less economic opportunity and greater lunges between unemployment (as in the Great Depression and the 1970s stagflation) and full employment than there had been in the 19th century. Moreover, instead of jobs improving in quality, we have become a nation of retail fast food workers. Innovation has stalled because credit has been diverted into the pockets of Warren Buffett and George Soros.

Herbert Croly and the Progressive-liberals seem to have won their war on the future. Future generations of Americans will be poor in order to satisfy Croly's and his colleagues' narcissism.