Power and Rationality

Decentralization enforces pragmatism. In a competitive economy markets test firms. Decentralization creates competition and so the possibility of failure. Without failure there is no pragmatism, for experiments fail more often than they succeed.

Centralization presupposes the ability of the rational mind to solve problems. It denigrates or neglects experimentation, even as it uses the rhetoric of science as its rationale. Without trial and error there is no science and no reason. There is no such thing as a priori expertise. Progressivism claims to be a movement of experts, but its claims are self contradictory. Progressivism forestalls experimentation by centralizing decisions. Progressivism is (a) ideological and (b) aims to facilitate the operation of special interests. It uses the rhetoric of "conscience" rooted in Christianity to justify special interest brokerage.

The use of centralization to facilitate special interests goes back to the Romans. The institution of free bread to the proletarians began with the Republic, and Septimius Severus increased the welfare benefits as well as special benefits to the military two centuries later. Septimius's escalation of welfare in Rome preceded Rome's fall by over a century. The Romans justified centralization of power in part in terms of welfare benefits to Roman citizens, but the biggest beneficiaries were businesses that catered to the Roman state, the military industrial complex.

Like the ancient Romans, Progressivism re-distributes wealth using claims of social welfare. However, its project is complicated by technological and scientific discovery that evolved out of Hellenic and barbaric decentralization. In order to coopt the source of progress, Progressivism needs to claim that it offers a superior method of scientific advance. It develops this claim through the ritualization and control of knowledge in universities. It also develops methodologies of allocating the "right" to think through IQ and other standardized tests that have validity. Such validity is partially related to the ability to invent or to create economic value, but to a greater degree to the ability to accomplish tasks within parameters, e.g., to perform a job well. IQ tests have been validated with respect to job performance but NOT with respect to entrepreneurship. Studies of millionaires do NOT find that they have extraordinarily high IQs, merely above average. Rather, they have moral, time preference and interpersonal skill characteristics that facilitate acquisition of wealth.

Development of methods of wealth creation is at part dependent upon the characteristics that IQ measures, but far from exclusively so. Progressivism limits access to universities based on IQ, then claims that universities are the chief source of wealth creation. National wealth is allocated to university-approved projects, specifically finance, legal and banking interests whose ranks are dominated by university graduates. Central planners come up with failed ideas, but ones with good rationales. IQ facilitates the spinning of manipulative explanations but without decentralization, experimentation and failure characteristic of markets IQ is not capable of innovation.

The result is a society that fixates on allocation of human resources through standardized tests and then subsidizes those with the highest IQs through government. Elements of risk are included. The economy becomes a casino, entry to which is made possible through admission to an elite university. Power rather than market and rituals associated with rationality rather than reason determine allocation of wealth. The system is self perpetuating and susceptible to manipulation. It is a system characteristic of decline.

Centralization Begets Disharmony

One of the themes that runs through the writings of most of the Founding Fathers is opposition to political party. The opposition is found not only among the Federalists, who were the majority, centralizing party of the 1790s, but also among the Democratic Republicans, who were the opposition party in the 1790s and became the one dominant party in the "era of good feelings" after 1800. Both Hamilton and Jefferson disliked parties. In the Federalist Madison argued that faction posed a threat to liberty. Part of the opposition to political parties was the interest in harmony. References to classical history, such as the overthrow of the Roman republic by the centralizing Julius Caesar, who established an empire in place of the Roman republic, and to Athens. As well, more recent sources such as Bolingbroke and Trenchard and Gordon's Cato's Letters, were influential. According to Richard Hofstadter in Idea of a Party System (University of California Press, 1972, p. 14) Trenchard and Gordon were quoted more frequently than Locke in the Founding Fathers' writings. As well, Hofstadter argues that Washington may have seen himself as a non-monarchical realization of Bolingbroke's "Patriot King". Bolingbroke was a Tory, not a Whig, yet the Founding Fathers valued his ideas. In America, the Federalists were the equivalent of the court or Tory Party and the Democratic Republicans of Jefferson were the equivalent of the country or Whigs. Note that in the Federalist 10 Madison attacks "faction", a term which in those days referred to parties, or a more intensive, self-interested form of party. It did not exactly mean special interest group as it might today, although the meaning was close.

In part to understand the context of Bolingbroke and anti-faction libertarians like Trenchard and Gordon it is necessary to refer to de Juvenal's 1945 On Power, about which I have just been blogging. Understanding of medieval history was not so strong in the 18th century. Although Montesquieu's Spirit of Laws was a path breaking source on the subject, the Founding Fathers, like most Europeans, had a better understanding of classical (Greek and Roman) history than of the Middle Ages. Europeans did not have a firm understanding of their more recent tribal history or of the relations among the three estates, clergy, nobility and commoners. The concept of the great chain of being that dominated medieval thought was still smoldering--witness the property requirements for voting that were adopted in America. Nevertheless, the historical context preceding the 15th century was not utmost in their minds. But that history, as de Juvenal points out, were critical to understanding the more recent past, especially the English Civil War, a major factor in the 18th century's dread of party and faction.

Prior to the Tudor Kings in, the 15th century and earlier, Europe was considerably more decentralized than it is now. The barons, dukes and lords who were tenants of the king, had considerable power. In many cases their ancestors had been soldiers and officers in the invading barbarian armies, and their inherited rule originated in conquest. Much of medieval history involved the kings' wresting of power from these local rulers. The decentralization was overlaid not only by the king, who frequently had very limited resources, but also by the Church. Thus, the king's power was considerably restricted not only by decentralization and the nobility, but also by the Church. Moreover, there were considerable customs inherited from the barbarian codes, Roman law, local custom and Church law that limited the kings' power. The Hapsburg's' Holy Roman Empire, for instance, was dotted with various local duchies and dukedoms that had widely varying rules for how kings might comport themselves. Although the Hapsburg's were the most powerful family in Europe, they had limited power in their various holdings. The fact that they held a multiplicity of titles is evidence of the various restrictions on their power.

Henry VII and Henry VIII took a variety of centralizing steps in England. Among the most important was that they abolished the affinities of the English nobility, that is, the nobility's armies with which they could threaten the king. As well, Henry VIII took control of church lands, abolished monasteries which were a source of independent local power and granted considerable power to court officials like Cardinal Wolsey and Thomas Moore. He brutally suppressed Protestants as well as taking control of the Church. The court officials like Wolsey and Moore, early versions of state bureaucrats, could give out offices and favors. This included employing commoners as court officials. De Jouvenal emphasizes that the European kings in general, not just Henry VIII, gained considerable power between the 12th and 17th centuries by playing the commoners against the nobility. This meant establishing bureaucracies that gave employment to commoners, who in turn fought the nobility for power. This was accelerated in England during Henry VIII's reign.

Attendant upon Henry VIII's centralization of power was the move from Catholicism to Protestantism. Henry VIII assumed the mantle of the Pope, accruing additional power to himself and removing the historical limits that the Church set on kingly power. However, not everyone agreed on religious questions, and there ensued more than a century of bitter violence, strife, warfare and murder concerning religion, culminating in the English Civil War of the 1640s.

Viewed in large perspective, Henry VIII's centralizing steps contributed to the way the religious disagreements were mishandled. The Founding Fathers recognized this in separating Church and state. However, the Constitution was in the centralizing tradition, uniting the 13 colonies under a federal government that had more power than it had under the Articles of Confederation. The fear of faction had the same source as the interest in separation of church and state, but the Founding Fathers took a somewhat more particularistic approach in that they allowed private decision making with respect to religion but not with respect to other issues that might create factions such as the establishment of a central bank and tariffs. How far should unification go? The history of centralization was largely the development of totalitarianism. The first modern mass murders occurred under Cromwell's treatment of the Old English Irish Catholics and in the following century 16,000 Frenchmen were killed in the French Revolution.

Centralization begets conflict because if the nation is to function in harmony there must be agreement, and by uniting disparate localities and cultures into a single nation the kings and then the centralizing republicans were bound to create disagreement.

To the extent that the central government aims to manage conflict, it has to take one of four conflict resolution steps:

-Ignore the conflict by downloading decision making to the or localities. This was the basic federalist approach, which permitted a new way to look at decentralization. The medieval approach was tenancy and feudalism overlaid on manorial farming and often serfdom. The American approach, which reflected a centralizing move from 13 more independent states under the Articles of Confederation to 13 states under a stronger federal government under the Constitution with a free citizenry with inalienable rights largely composed of freemen farmers
-Compromise. By compromise I mean split the difference. This was the approach taken with respect to slavery. Limits were put on the slave trade (abolished in 1808, I believe) and over time the spread of slavery through the various compromises you study in high school, the Missouri Compromise, etc.
-Forcing, i.e., warfare or the threat of warfare. This was the outcome of the failure of the compromises concerning slavery
-Collaboration, finding creative solutions to apparent disagreements.

The point is, to the extent that the centralizing theme of Federalism was to take hold, the amount of conflict was bound to increase, and conflict was bound to become more prevalent, subverting the aim of harmony. If disagreement was to be suppressed, as it was during the Civil War, then freedom (at least for the non-slaves) was to be restricted. Compromise also led to a restriction on freedom because compromise amounts to splitting the difference. Collaboration is always the best way to solve problems, but how could the nation have found a collaborative solution concerning slavery? One idea that has been suggested would have been for the North to buy out the slaves. The combined cost of the Civil War for both sides might have covered a large share of the cost of buying out the southern slave holders. As well, it would have probably limited the bitter racism and resentment against the freed slaves.

Thus, the reason the founding fathers feared factions was the English Civil War, which in turn was the product of several centuries of medieval centralizing by the English (and European) kings. The opponents of faction and party, such as Bolingbroke and Trenchard and Gordon, were reacting to the recent history of the English Civil War, which had been preceded by religious discord, which in turn was the product of the kings' eagerness to centralize power.

The Unity Philosophy Failed Because Laissez Faire Succeeded

In the US, the notion that there needs to be a strong central state began with the Federalist Papers. The Federalists left a considerable degree of decentralized authority with the states, but from the beginning there was ambiguity as to how decentralized decision making ought to be. Centalization was re enforced with the Civil War, which further strengthened the federal government and opened the door to Progressivism. The Progressives were not necessarily centralizers. However, the key federal legislation that came from Progressivism, the Hepburn Act, the Federal Trade Commission, the federal income tax and the Federal Reserve Bank as well as imperialist ventures like the Spanish American War were all centralizing. On the other hand, much of the Progressive legislation, such as Workers' Compensation, housing codes and wage and hours laws respecting women and children proceeded at the state level. The New Deal served as a centralizing force on Progressivism, and may be viewed as the culmination of 160 years of Hamiltonian federalism.

The centralizing trend came about because of conflicts about morals and economic opportunism. As Charles Beard and other Progressives argued, much of the motive for the federal Constitution was economic gain to domestic manufacturers, which Hamilton wholeheartedly supported as did Madison and Jefferson to a lesser degree. But abolitionism and then concern about trusts led to moralizing about the economy. Until the post-bellum era Protestantism had been associated with local community as in John Winthrop's City on a Hill. The states were separate religious communities and did not aim to impose their religious-based moralities on other states. But slavery posed a national moral problem, as did the central bank. Thus Calvinist morality took on a national scope. The notion that the nation was a moral community took hold. Among the advocates of this notion were the late nineteenth century Mugwumps, who were among the first media-based national moral movements. The Mugwumps were mostly Protestant, although there were a few Catholics and Jews among their ranks as well (there were few Jews in America in the 1870s but there was a handful of notable Jewish Mugwumps, such as Simon Sterne). The Mugwumps were not necessarily religious, but they had been religiously trained and applied the morality of their education to the economic problems facing America, for instance, the corruption associated with the railroads, the Greenback inflation and most of all the need for a civil service to counteract the urban corruption of the political boss system. Although the Mugwumps were laissez faire in ideology they were very much the precursor to the Progressives in that they focused on national issues and saw national solutions in terms of the need to rationalize government.

The trend toward centralization thus came out of the Civil War and was re enforced by one outcome of Progressivism: the intensification of Jim Crow laws, especially in the South. As the results of Jim Crow became evident in the early twentieth century, the need to counteract it took hold in a reincarnation of the Civil War in terms of the Civil Rights movement. As well, the Roosevelt administration saw economic problems as resolvable at the federal level. Thus, Social Security, labor law, wage and hour laws, securities regulation, agricultural regulation and public works took hold in the public mind.

This was occurring precisely as it became evident to managers in America's large industrial firms that centralization does not work. This was noted by Alfred Chandler in his book "Strategy and Structure", especially with respect to Alfred Sloan. Sloan modeled General Motors after the federal government, downloading responsibility to the automotive and other manufacturing divisions just before Roosevelt saw fit to centralize decision making in Washington.

As it turned out, Sloan was right, although subsequent generations of General Motors executives dropped the ball. As General Motors re-centralized it failed to be able to compete with innovations of the much smaller Toyota Automotive in the 1950s. These innovations were known as lean manufacturing. As well, Toyota was able to adopt the ideas of Edward I. Deming.

As American industry found that decentralization was necessary to competent management, the federal government became more insistent on centralization. Part of this was due to intensification of the Civil Rights struggle in the 1960s, but part was due to the egos and greed of politicians and academics who oversaw federal policy. Thus, plans like Medicaid and Medicare which could have been experimentally adopted at the state levels, with the best results revealed, were thrown into existence in a slipshod manner at the federal level without the pragmatic advantage of state-based experimentation. Policies concerning health care, social security, pension regulation, health and safety regulation, auto safety, pollution and most of all monetary policy were adopted at the federal level, typically with poor to mediocre results.

The failure of the Great Society Programs; the mismanagement of social security; the crippling effects on inner city blacks of urban renewal and labor laws; the instability due to monetary policy under Richard M. Nixon and the early years of the Carter administration might have given the centralizers pause. But it did not.

Unwilling or unable to grasp the reasons why centralization does not work, they continue to push for dramatic, centralized solutions to America's problems. The result: the sub-prime crisis; the series of bubbles that occurred in the 1990s and 2000's; declining real hourly wages; a failing social security system (or a social security that fails to provide an adequate retirement benefit despite 14% annual contributions by workers and their employers); and declining career opportunities for young people.

Despite these and other failures, the "progressives" continue to agitate for the same failed, centralized approach. This should be called the "pathology of centralization".

Americans Fed Up

Phil Orenstein of Democracy Project has blogged about Glenn Beck's new protest group. Phil writes:

>"When I stood up to speak, introducing myself as a Republican and promoting certain candidates for public office as potential standard bearers for disenfranchised American patriots like us, I could sense the overall disdain for politicians and political parties. I got the idea that they have no use for the Republican, Conservative or Libertarian parties or the corresponding labels that define their alleged principles. They see their elected officials and party leaders mostly as petty, self serving, unprincipled charlatans, except perhaps for Rep. Peter King. Nothing I said regarding translating their anger into action at the polls in November, made any sense to them."

The disenfranchisement of many Americans stems from the excessive size of the Amnerican federal republic. When the nation was founded it had 3 million people and the states had an average of 231,000 people each. In 1995 and 1996 231,000 foreign immigrants came to New York City alone. 231,000 is the population of Plano, Texas. Los Angeles and Chicago alone have populations of about 3 million.

The nation has become too large to govern. The problem is aggravated by the conflicting commitments to democracy and to the welfare state. Both are incompatible with ever-increasing size. Service delivery must respond to local needs so that nationalized programs like Social Security are too inflexible. Democracy requires that voters have some input into electoral processes. But the small effect of a single vote in a nation with 50 states and an average population of six million per state means that voters have no reason to believe that their voice counts. Size stifles voice. Thus, voting rates tend to be low and voting is dominated by people with something to gain from advocacy of state wealth transfers. American government therefore discourages creativity and progress by taxing production. The federal government has become a cancer on the promise of American life to provide increasing improvement in technology and standards of living. For the past 36 years, since 1971, real hourly wages have declined as government spending has mushroomed.

The problem is compounded by practical limits on the size of Congress. In a state with 231,000 people, each Senator could represent 115,000 people. In a state with six million people, each Senator reprsents three million. Each Senator today has the same representation ratio that the president had in 1790. The first House of Representatives had 59-64 members. That is one Congressman for every 48,000 citizens. The 110th Congress had 434 members. That is one Congressman for every 691,000 citizens. The ratio has increased fourteen fold.

The Federalists based much of their thinking on Montesquieu, who argued that democracy was possible only in a small republic. Madison argued otherwise in the Federalist Number 10, that the potential magnitude of the United States would support democracy because factions or special interests would counteract each other.

The Montesquieu effect is that an individual's voice has greater effect the smaller the republic becomes. The likelihood of political action increases with decreasing size because action has efficacy. Personal reputation, public respect, and economic gain are more likely to be achieved. However, crowd emotion threatens democracy. In larger republics, such as the United States in 1790, interest groups form and counteract each other. The nation is still small enough that individuals can influence interest groups. Large size makes communication and transportation difficult. There is less responsiveness due to the larger size than in the smaller democracy. But the large size has the advantage of permitting dissidents to exit and encourages more reasoned discussion by interests. The Madison effect outweighed the Montesquieu effect in 1790 because interest groups can correspond to a legitimate range of public needs.

However, there is no reason to believe that this will be so indefinitely, that size can increase infinitely and the Madison effect will continue to outweigh the Montesquieu effect. It is quite likely that the Montesquieu effect will begin to outweigh the Madison effect when interest groups are too large to motivate individuals to participate or skewness in benefits from organization become marked.

Mancur Olson has outlined this process. When the benefits from organization outweigh the organizational costs to each individual, then organization is likely. Small groups with large benefits tend to be better at organizing. They contribute to politicians and have the most access. Politics increasingly becomes a matter of economic opportunism. Specific financial arrangements that depend on special interest organization, for example the monetary creation powers of the Federal Reserve Bank, governmental privileges of health care providers, laws protecting trial attorneys and the like delineate the contours of power. General public concerns become mired in cross conflict because reward structures are unclear. Interests such as Wall Street arrange $2.5 trillion subsidies while defense, government operations, education, and other governmental responsibilities are botched or co opted by specific interests. Thus, there is a tipping point where the Montesquieu effect outweighs the Madison effect. This began to occur a century or so ago. In 1884 the Mugwumps were still willing to organize a national outcry against supposed corruption of a presidential candidate, James G. Blaine. In 2008, corruption by congressmen occurs with impunity.

There are other factors that modify size effects, specifically the development of technology. It would seem that centralized media changed the Montesquieu effect. This may be why as America grew to large population in the 19th century the republic was able to function. Yellow journalism bound the nation together. This was reinforced by radio, then television. Centralized media made the nation smaller so that its large scale was less of an impediment. The effect of the corrupting influence from centralized economic actors, railroads and other large corporations, led to a Madisonian response: reforms proposed by the Mugwumps, the Progressives and the Roosevelt New Deal. But such reforms were ineffective. They assumed away the scale and rationality problems that confront large organizations. This was because the idea of cognitive limits on management was unknown. The Progressives, moreover, chiefly focused on state reform. By the 1930s, naivete about the management possibilities of large scale had escalated even business enterprise had arrived at decentralizing responses to limits on the ability to manage large organizations. The Roosevelt New Dealers claimed that they could surmount scale impediments to competent management that had stymied America's best managers.

The centralizing trend of the federal government continued unabated. There are numerous reasons why this trend would result in destructive, suboptimal outcomes. The interest group problem becomes exacerbated. Competent execution of programs is difficult. One program after the other has either failed to be discarded; has failed to respond to public needs; has responded instead to particular needs of special interests; and/or has been mismanaged.

Jan Tinbergen on Decentralization

Jan Tinbergen was a Dutch economist who won the Nobel prize in economics. His brother, Nikolaas, won the Nobel Prize in physiology or medicine. Tinbergen was a mathematically oriented economist who wrote from a Keynesian perspective. In 1954 he wrote a monograph "Centralization and Decentralization in Economic Policy"* in which he outlines structural equations that might be useful in studying the effects of decentralization on social welfare. He defines "conformity" as the conformity of policy makers' assumptions to the real world. In the chapter on centralized economic policy he notes the importance of trial and error to policy making. He is talking about quantitative policy goals such as income and price levels (p. 16):

"Conformity will hardly ever exactly be realised in practice, if only because of our imperfect knowledge of the structural constants or because of changes in such 'constants'. This circumstance makes it necessary and more or less usual for policy-makers to follow a trial-and-error policy method. They will try a certain value of their instrument and observe the result. Dependent on this result they will adjust the instrument variable. In view of this practice it is sometimes doubted whether it is any use to make econometric estimates for the values of the instrument variables. The answer is that although it is possible by trial and error to find the correct values, this method nevertheless implies some waste...social utility is usually unfavourably influenced by the frequency of changes in political instrument values."

The problem of uncovering the correct policy course becomes even more severe in the case of qualitative policies:

"In the case of qualitative changes all we can do, as a rule, is just to calculate the outcome for the alternative cases and to compare them...the problem of comparing alternative forms of organisation of economic life constitutes the problem par excellence of economic science; its real raison d'etre."

Tinbergen notes that:

"If in particular a higher degree of centralization would have been possible and would have led to target variable values with a higher utility, the reason of the discrepancy may be said to be the very fact of decentralization. In the case of non-conformity it is by wrong insight into or knowledge of the objective equations that wrong instrument variables are chosen. Simple though this phenomenon and its remedy may seem, it is not so simple in practice. One reason is that exact knowledge on the mechanism of an economy does not exist and that there can, therefore, only be question of better or worse approximations. Another reason is that even experts in this field are not unanimous and that it will be very difficult, then, for non-experts to be. Even if there is unanimity among experts in some cases, it is not easy to convince the rank and file of large organizations of this expert opinion."

Although economies of scale make centralization more efficient (p. 59):

"(I)t is in the nature of centralization that it will be more costly as soon as purely technical economies of scale are out of the question. It generally requires a bigger administrative machinery and, before all, more interference with private freedom,"

and (p. 62):

"any application of an instrument in a centralized way will imply higher disutilities, or will lower utility more than will the same application in a decentralized situation would. There is, therefore, a general tendency in a centralized situation to make less use of all the instruments, which will be the stronger the higher the disutilities are."

However, in decentralized situations policies which help other units are used to a lesser degree than they would be in a centralized situation so if there are positive overflows, the decentralized approach may not be as good.

Where all the units have similar or identical perceptions of their own social welfare then centralized regimes are to be preferred. Moreover, where policy instruments conflict among the goals of subunits or where a policy would help all the subunits if applied across the board, then a centralized approach is better.
But instruments which do not affect other decentralized units are better applied at a decentralized level (p. 74):

"In plain language, the cost and trouble will be diminished, without changing the situation any further...Each decentralization means reduction of costs and disutility generally."

Thus, where each unit's social welfare is similar to the others, policies which are neutral or do not affect the other units are best pursued on a decentralized basis and policies that can have an across the board positive effect are best pursued on a centralized basis (such as general price levels).

It is difficult to know which policies have positive overflows. Many policies have negative effects. Economists of the 1940s believed that the Fed was an instrument for positive results. Today, even the Keynesian descendants of this group does not deny that Fed oversight of the banking system has resulted in endemic catastrophes and miscalculations leading to the need for a trillion dollar welfare infusion from the public.

Polices which have outright negative effects, which I would argue that the Fed and the American banking system has, are better implemented on a decentralized basis because the groupthink, ideological commitment to central banking and massive errors that policy makers commit can be limited to local units that have preferred to take such risks.

*J. Tinbergen, "Centralization and Decentralization in Economic Policy". Amsterdam: North-Holland Publishing Company, 1954.

Decentralization, Banking and the Two Party System

The American party system has changed four times, and three of the changes were linked to money and banking. Moreover, three of the changes were linked to the issue of decentralization and states' rights. The current tremors surrounding monetary policy and the Federal Reserve Bank coincide with increasing questioning of why the Democrats and Republicans have failed to question the subsidization of investment and commercial banks and the recent Federal Reserve Bank inflation of the monetary base. One key difference between the current crisis in the American party system and past crises is the absence of a competent press or media. These were central to political debate in America until the 1930s. However, the transition from passive to active electronic media has reinvented, downsized and in a sense traditionalized the press from the centralized mainstream media that was prevalent in the 1950s to websites and blogs that are reminiscent of early newspapers.

The changes in the American party system were as follows. First, the establishment of the Federalist and Democratic Republican parties in response to Alexander Hamilton's advocacy of the First Bank and federal subsidies to manufacturing. Second, the split between the National Republicans and the Democratic Republicans, which became the split between the Whigs and the Democrats in 1836 specifically in response to Andrew Jackson's removal of federal assets from the Second Bank and his veto of the Second Bank. Note that decentralization played a role both in the Federalist-Democratic division in the 1790s and the Whig-Democratic division of 1836. Both the Federalists and the Whigs were elitist centralizers and the Democrats were decentralizers, pale copiers of the earlier anti-Federalists.

The third party formation was of course in the 1850s, the formation of the Republican Party, the centralizing party that inherited Whig elitism but reformulated its ideology to combine (a) surface advocacy of laissez faire, in imitation of Jackson with (b) the traditional Whig advocacy of centralization. The Civil War was fought not over banking but slavery. It was here that the centralization issue came to the fore.

The fourth party formation occurred in 1896, when William Jennings Bryan reinvented the Democratic Party as the party of inflation and free silver. Many of the subsequent centralizing ideas of Franklin D. Roosevelt were included in Bryan's philosophy. In 1896 the debate between centralizers and decentralizers died. Although the southern Democrats continued to advocate decentralization, the majority of the two major parties became committed to reform on a centralized basis.

This transformation was reinforced in the 1930s, when Roosevelt accelerated the Democrats' insistence on centralization.

Of the four changes, only the establishment of the Republican Party did not involve banking. However, the Republicans' insistence on intensification of centralization, not only concerning the Union but also the National Banking Act, led to establishment of the Federal Reserve Bank five decades later.

The development of American politics, then, has been toward centralization. But in management, business, economics and political theory, centralization was increasingly shown to be an inferior solution during the past eight decades.

One of the pivotal moments in American politics was Andrew Jackson's formulation of the Democratic Party. Until then, parties barely existed in America. Jackson identified the special interest of privilege linked to paper money and held that the formation of an organized party of common Americans was necessary to forestall privilege and banking interests. He was not certain that the average American was capable of withstanding the onslaught of paper money advocacy and privilege associated with central banking. The power of Jackson's vision was great, and the powerful party organization of the nineteenth century and the public's commitment to sound money permitted survival of the Jacksonian system for nearly eight decades.

However, the ideas of Fabian socialism, Bismarck's social democracy and Progressivism provided American elites with new ammunition that the Jacksonian model could not contemplate. These included the use of pretense of supporting the common man in the name of elite privilege as a tool to wrest control of banking and money in favor of economic elites. This was accomplished in the context of modest reform in areas such as workers' compensation and then in the 1930s minimum wages and social security, all with dubious value to the average American.

Nor was Jacksonian democracy itself free of special interest characteristics. There have been wrinkles and overlap in all of the American party formulations. The Jacksonian Democrats were cruel racists. Jackson oversaw the Trail of Tears march and the insistent American racism traces its resonance to Jacksonian Democracy. Jacksonian Democracy itself was a form of special interest formulation, of the common white male identifying himself as superior to blacks and native Americans.

As Louis Hartz correctly points out, the brilliance of the Whigs was the use of the Lockean imagery in the interest of mercantilist philosophy. This has been the artifice of the Republicans since the Civil War. But all of American party ideologies have been self-contradictory, and the Republican is as well. Jackson claimed to be a democrat, yet he forestalled South Carolinian nullification. He claim to be for states' rights, yet he created rigid national party organization.

Today, the Republicans claim to be for free markets yet institute socialism. Much like the Democratic Republicans in 1836, the Republicans are at the breaking point.

Centralization of Federal Power Has Led to Coddling of Business

The relationship between the state and federal governments fluctuates, but the overall trend has been toward centralization, with a few blips. This came about in part because of the Civil War, which enforced centralization in order to achieve noble objectives. The 13th, 14th and 15th amendments enhanced federal power over the states, requiring states to recognize citizenship, right to make contracts, equal treatment under the laws and voting rights to former slaves and, for that matter, to all citizens. The states' reaction to the growth of the railroads in the late 19th century was to subsidize them, and they enhanced the natural advantages of economies of scale through land grants, rights of way and other subsidies. In turn, the new, complex corporations faced multiple regulatory regimes across the states. This raised their costs. In the 1876 Munn v. Illinois Chief Justice Morrison R. Waite, writing for the Court, held that states have the right to regulate railroads because railroads reflect the public interest. In the 1886 Wabash, St. Louis and Pacific Railroad v. Illinois, law concerning the Illinois Grange's clamoring for regulation of railroad rates was federalized. The court held that states could engage in indirect regulation like safety regulation but not direct burdens on interstate commerce like rate regulation. The following year Congress passed and President Grover Cleveland signed the Interstate Commerce, which established the Interstate Commerce Commission. The ICC's responsibility was to set maximum railroad rates and eliminate individual discrimination. Thus, the age of centralization was born.

The aim of centralization was regulation coupled with subsidization. The regulation part reflected the impetus of Populist movements like the Grange, social Gospel Christianity, fear of labor unions and socialism and pressure from Progressives like Walter Weyl and Herbert Croly who, in the early 1900s argued that European-style social democracy was more "progressive" than American laissez-faire.

The centralization of regulation helped big business because it established a stable, unitary source of regulation that made it easy to comply. Fifty states pose a fifty times greater compliance problem than a single federal government. Moreover, industry or what Williams calls "syndicalist" influence over government is easier to organize. Mancur Olson and George Stigler have written about the economic conditions for effective lobbying, and centralization of power makes lobbying considerably easier for large firms and gives them considerable advantages over small. Many small firms over a national market are far more difficult to organize than one fiftieth the number over a state-wide market. At the same time, it is far cheaper for a few large firms to lobby a single federal government than it is for them to lobby fifty state governments. Thus, in the name of "regulation" the Progressives tipped the political scale in big business's favor.

Theodore Roosevelt and other Progressives of the early 20th century believed that big business produced wealth. Historians such as Alfred Chandler argued that transportation and communication advances with respect not only to canals, railroads and then trucking and air delivery but also with respect to telegraph, telephone, and then fax, e-mail and Internet, expanded markets facilitating reduced costs and enhanced economies of scale. There were other subsidies to big business, specifically the creation of federally subsidized credit and banking through the Federal Reserve System, tariffs almost continuously to the days of Wilson and then after, cartels and price fixing during World War I, and a host of regulations that make it more expensive for small business to compete with big.

But has big business really delivered? Since 1980 manufacturing firms increasingly exited the United States. Hence, the subsidization of manufacturing through credit and protection did not yield permanent jobs to average Americans. Executive compensation, rationalized through artificially elevated stock prices due to Federal Reserve policy, has been an exercise in self indulgence and waste. Increasingly, Americans hanker after a few high-wage investment banking and celebrity jobs, and are unwilling to work hard in traditional crafts. The images of today's youth, rap singers since the 1980s, Beavis and Butthead in the 1990s, Paris Hilton today, suggest a culture of dim wittedness and sloth. These images are broadcast by subsidized big business concerns, the media conglomerates, who profit from popular music that advocates drug use and violence. Television shows like "Entourage" suggest that the way to succeed is to hang out with other self indulgent boneheads, as long as they are good looking.

The transition from decentralized to centralized federalism and from laissez-faire to statism altered incentives in the economy. The combination of centralized creation of credit and inflation of scale enhances returns to stock offerings, first because large firms are artificially profitable because of their subsidization and second because monetary expansion itself inflates the stock market by reducing interest rates. This inflation of stock returns makes investment and commercial banking far more profitable than they would be in a decentralized and laissez-faire system. In turn, firms are encouraged to maximize stock returns by minimizing costs in that low interest rates make stock returns more elastic with respect to increases in net profit. This does several things. First, firms are encouraged to move plants overseas, where labor costs are lower. Second, their incentive to innovate is reduced because ample returns can be obtained due to the reduced interest rates and the elasticity of stock prices to small gains. Why risk invention of a new technology, when you can, like the typical US CEO, simply think about reorganization or moving plants to another country and so earn $100 million? Third, the returns to initial stock offerings are enhanced. Thus, returns to investment banking exceed market levels. Because the manpower needed to issue and trade securities is small relative to the inflated returns, the high salaries divert human resources from manufacturing to investment and speculation.

It is likely for these reasons that the innovation level of late nineteenth century laissez faire America was far greater than during the Progressive twentieth century. The most innovative Americans have been attracted to investment banking and law rather than manufacturing. Firms like Intel need to recruit engineers from overseas in order to compete. This misallocation of human resources leads to lower growth and less innovation in the economy than there would have been in a decentralized, laissez-faire economy.

The coddling of business results in a trade off between risk and return. In a laissez faire economy credit is difficult to obtain, profits are reduced and stock returns are reduced because interest rates are relatively high. This results in considerable discomfort to business executives, who in the nineteenth century complained about "overproduction" and "depression". However, the decreasing prices resulting from slow monetary growth increase real gains to labor. Real wages rise because firms are forced to think carefully about productivity given the intensely competitive milieu. Moreover, innovation is stimulated because that is the only way to earn large profits. Thus, the laissez-faire economy is rocky soil in which only the hardiest firms can grow, and they grow by extending roots that crush even the largest competitive rocks. Workers, the soil in which these competitive plants grow, benefit from the nutrients that the innovative stems produce. But the weaker plants, the firms that thrive in politically driven, low-innovation "Progressivism" complain endlessly about depression, the need for subsidization, the need for a central bank, the unfairness of the competitive economy. They are, of course, backed by feudalists and socialists, who similarly yearn for stability at the price of innovation.

The Progressive economy does not reward achievement. It rewards potential. Investment banks hire from the ranks of Ivy League students, who are in turn admitted to Ivy League schools on the basis of SAT scores. But SAT scores are not achievement, they are just potential, and they do not explain the majority of what might explain achievement. Americans are rewarded for ability, and this reduces their risk. But this also has the effect of draining men and women of ability from the ranks of the innovators into the ranks of transfer recipients. There may indeed be economic gains from stock offerings and trading, but they are minute compared to the potential gains from innovation. A single Tesla is worth all of the investment bankers in history times 10. Yet of all of the thousands of potential Teslas, only a handful will succeed. Why risk failure, when a certain career in investment banking has a far greater probability of significant success. Thus, elite Americans have become increasingly risk averse. They have chosen the way of relatively certain but high returns, but sacrificed the moral rectitude of economic creation and productivity. They have come to favor the sleight of hand that Wall Street capitalism offers, claiming to create efficiency but depending upon credit expansion and government largess.

Community and Progressivism

Progressivism expressed the moral impulse of social Gospel Christianity and Populism as well as the social democratic ideas that late nineteenth century American university students brought home from the University of Berlin and other German universities. But the intent of morality is not the same as its execution. We can try to improve a bridge, but if the new bridge does not stand, then we have not helped. Moral action requires efficacy.

Progressivism emphasized large scale. In urban redevelopment, Robert Moses built roads, beaches, highways and public housing, but disregarded the effects on neighborhoods and personal networks within them. Jane Jacobs dissected his work on the Cross Bronx Expressway and New York City's public housing projects in her book Death and Life of Great American Cities. Progressivism aimed to improve efficiency and quality by increasing scale and applying a regularized pattern. But large scale often does not work. It is inflexible and difficult to change.

Robert Putnam has written an excellent book, Bowling Alone, about the decline of community. But the last thirty years has increasingly seen the failure of Progressivism, so it is not surprising that many Americans have chosen to shift from what Daniel Elazar calls the moralistic to the individualistic political pattern. Not only neighborhoods but the individual's relationship to the state, to his family, his employer and his economic future have been modified by the centralizing tendency of Progressivism, resulting in increasing distance from decisions and processes that modify his life. The classic example of this transformation is the Great Depression of the 1930s, which was the first major failure of Progressivism. Caused by a combination of inappropriate central bank tightening (Milton Friedman) or by President Hoover's mistaken attempt to cajole major employers into refusing to cut wages (Murray Rothbard), the Depression followed the establishment of the Federal Reserve Bank by less than twenty years and the implementation of Wilson's World War I economy (in which Hoover played a crucial role as Food Administrator) by less than ten.

Increasingly, government has been centralized and inflexible and incapable bureaucracies have been established. The Progressives claimed that "experts" could solve problems, so a hierarchy of expertise was established, and citizens' opinions became less important. Americans allowed themselves to be convinced that experts knew better. The news media also centralized, in part in response to growing labor costs facilitated by the National Labor Relations Act and the advent of television. The centralized news media became an advocate for government by expertise, the wisdom of Keynesian economics and bureaucracy.

The Progressive policies of urban redevelopment led to near-extinction of urban centers and the subsidization of suburbs, which in turn led to increasing commutes. As well, since the abolition of the international gold standard in 1971, declining hourly real wages have led to increasing hours of work as Americans have struggled to keep up with the declining economic opportunity that central planning has caused. The pure exhaustion of multiple jobs coupled with the distraction of television and the need to decompress has increasingly alienated Americans from their communities.

Moreover, a sense of apathy has set in because the centralized, unresponsive firms and government bureaucracies that Progressivim has established seem to be beyond the efforts of most Americans. As a result, a society that is increasingly stratified between those who benefit from Federal Reserve and governmental subsidies and those who do not has been accomplished in the rhetoric of moralistic, Progressive reform. The dissonance created by the discrepancy between the ideology of Progressivism and its assault on human dignity and living standards leads inexorably to loss of community and economic decline.