Progessivism's Ossification

The current political, economic and social system in the United States was formed in the Progressive era. There were some additional changes in the Depression era, notably introduction of some pro-labor legislation and the abolition of the gold standard, but Roosevelt, Taft and Wilson established the basic outline of today's political economy. The argument for reforming the 19th century approach to American government, which was not laissez faire because of the spoils system and involvement of local government in the economy, was that economic evolution leads to the need for new approaches to government. In particular, it was believed that the rise of big business changed the relationship between the state and business enterprise because big business was capable of abuses that needed to be regulated. In addition, there were arguments that the federal government needed to provide guidance and expertise to big business. As well, the Progressives believed that credit markets needed to be managed.

Without treating the claims that Progressives made, the question is, why do we still have, 90-100 years on, the same economic system that the Progressives developed? Have business processes not changed? Have labor relations not changed? Do the supposed threats that Standard Oil and US Steel posed in 1911 remain the same today? Have economic processes and technology not changed? If so, then why do we have the same system of regulation today that Woodrow Wilson considered to have been evolutionary in 1914?

The model of business regulation has proceeded as follows:

government support for business (19th century) ---> regulation and selective support(Progressive era) ----> attack and hyper-support (New Deal era) ----> ossification and increasing special interest power; inability of corporate/government system to increase net living standards ---->de-modernization, increasing income inequality and social stratification.

The problem is that Progressivism failed to anticipate evolution, despite its claim to be founded on evolutionary economics. The Progressives did not understand that government policies did not necessarily lead to rational decision making, and even if they did were going to become outdated. When they do become outdated, they are far more difficult to change. Thus, the Progressives' mainstream, statist model (and I include all three presidents, Taft, Wilson and Roosevelt) led to inflexibility and inability to evolve. This has led American society to become less imaginative, innovative, progressive and equal than it could have been. Mainstream academics, who see their role as supporting the liberal-big business consensus via Marxist and state liberal ideologies, have appeared increasing retrogressive and out of touch with developments in world business. For instance, no academic of importance advocated quality management before it became a critical competitive issue in the 1970s and no academic of importance has offered a coherent explanation for declining real wages since the 1970s.

This Week's Triumph of Howard S. Katz

Last week Howard S. Katz pulled out of gold and commodities and went long on stocks. The next day his stock picks went up 15%. They fluctuated since but are now significantly up. Many who heard of this move last week were puzzled. Mayer Rothschild once said, leave the last 10% to someone else. Howard seems to have left the last 5%, for although gold went up to $1002, it is now in the $920s, and Howard sold at 950. In place, Howard bought certain specific stocks that have aggressively outperformed the indexes. Howard's "conservative" portfolio is now at an all time high. Yay Howard!

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.

Progressivism in Decline

The early twentieth century saw the triumph of Progressivism. By the time Theodore Roosevelt assumed the presidency following the assassination of William McKinley in 1901 Progressive doctrines had become dominant in elite circles. As Martin J. Sklar shows in his monumental Corporate Reconstruction of American Capitalism 1890-1916, the key debate in the Progressive era was among three or four schools of thought. Both today's conservatism and today's liberalism are offshoots of those schools of thought. The first school was small business populism which held that all big business was undesirable. In response to this movement, the US Supreme Court held for about 15 years that all business combinations were in violation of the Sherman Anti-Trust Act beginning with the 1897 decision in United States v. Trans-Missouri Freight Association. Progressives were troubled by this decision because they believed that only unreasonable restraints of trade should be illegal under the Sherman Anti-Trust Act, and that was the opinion of the law's authors. In response to this decision, Progressives held that corporations should be permitted to exist but should be regulated. The most aggressive advocate of regulation was Theodore Roosevelt, who evolved into the position that the state should largely control and set policy for corporations (Sklar provides rich detail about Roosevelt's ideological evolution). In contrast, William H. Taft, who succeeded Roosevelt as president in 1908. Taft believed in very minimal regulation of the trusts with aggressive enforcement of the Sherman Anti-trust Act through the courts. This was so following the Supreme Court's Standard Oil decision, which broke up Standard Oil (arguably to satisfy populists and the left) but overturned the Trans-Missouri decision and reinstated the common law interpretation of the Sherman Act that only unreasonably uncompetitive trusts are illegal. Thus Taft's Republican position was that corporations ought to be minimally regulated with aggressive enforcement of the anti-trust law to satisfy small business interests, anti-union small manufacturers and the left. Roosevelt might have agreed with Taft's approach during his presidency, but had veered to a highly statist viewpoint and so ran against Taft as the Bull Moose candidate in 1912. The third view, that of Democrat Woodrow Wilson, was that big business was natural but there needed to be a combination of meaningful regulation (but less than the Republican Roosevelt advocated) but also enforcement through the courts. Taft can be viewed as the progenitor of today's Republicans while Roosevelt can be viewed as the progenitor of today's "progressives". Both were Progressives in the early twentieth sense, so today's politics can be viewed as a battle between forms of Progressivism. By 1900 there was no serious advocate of laissez faire and this was not part of any significant conservative movement. Nor did the advocates of laissez fair in the late nineteenth century grasp the arguments of the twentieth century Austrians, Friedman and Schumpeter. Thus, today's free market economics, while relying on marginalism that John Bates Clark, an advocate of the kind of big business statism that the Progressives adopted, as well as crucial insights of Smith and Ricardo, was a twentieth century develop and appeared after progressive-liberalism, the conservative Progressivism of Taft, the evolutionary Progressivism of Wilson and the radical Progressivism of Roosevelt.

That said, there was a devolution of Progressive ideas that occurred in the twentieth century's subsequent 8 decades. Progressivism was largely concerned with molding of the system of regulation of business. Theodore Roosevelt was most concerned with balancing labor and corporate interests, and all the Progressives were interested in developing a system of business regulation and corporate enterprise that would be dynamic and productive but would not permit excessive power to corporations. However, the Progressives were overly impressed with the size and power of contemporary business. They did not realize that technology had the potential to overturn large firms fairly quickly. Thus, they implemented systems of support and structure that served to protect the very power of big business that they claimed to wish to minimize. The establishment of regulatory systems raised entry costs; the establishment of the income tax created barriers to capital formation among the poor and small business interests; the establishment of the Federal Reserve Bank facilitated a monopoly of capital by big business, commercial banking and the investment banks that tended to foreclose entrepreneurship; and the labor regulations that Roosevelt, Herbert Croly and other Progressives advocated that saw much of its realization later in the 20th century, also created entry barriers and high fixed costs for small business. The result was excessive protection to big business.

The model of manufacturing that the Progressives reinforced was mass production or continuous flow, in the terminology of Joan Woodward. This model was characteristic of the late nineteenth through the mid twentieth century. It involved a degree of technology and managerial sophistication, but it relied on large scale production runs. This kind of technology requires consistency of output. Its apex was the Model T Ford, which had little variation and could be produced at low cost but had poor quality. The American regulatory system thus geared itself to protecting the modernist, mass production model by allocating credit; at various times via protectionism; and by creating entry barriers.

Franklin D. Roosevelt's New Deal of the 1930s reinforced the Progressive model in a number of key respects. First, it established a modernist labor regulation system which assumed that labor unions that required large bargaining units would represent employees. In response, the industrial labor unions of the Congress of Industrial Organizations was formed. In short order following the National Labor Relations Act the number of unionized workers more than doubled and by 1945 about 35% of the workforce was unionized. The NLRA labor system assumed that unions would face the same modernist model that the Progressives thought firms would eternally face: large work units characterized by low skill workers who could be organized in large groups by industrial unions (unions that represent all the workers in the plant) such as the United Auto Workers union. However, this model was not to materialize.

The chief problem facing union organization is the same as the chief problem facing the Progressive regulatory regime. Within 40 years of the establishment of the Progressive regime Toyota Motor Company in Japan began experimenting with a process known as lean production. Taiichi Ohno, Toyota's executive vice president for manufacturing in the post-World War II era and the creator of lean production says that he worked on the lean production or kanban model for 15 years, from the late 1940s until the early 1960s, before Toyota finally iron out the process. The important point about lean manufacturing is that it inverts the assumptions of modernism. It depends on producing one unit at a time; it depends on teamwork; it depends on highly committed workers who cannot be in a conflictual relationship with the firm and who need to feel secure in their jobs; it emphasizes not mass production but coordination; and it views the factory as a series of supermarkets where line workers are consumers who obtain just enough inventory from the next lower level of the production process. Thus, information becomes critical, and highly trained workers who are flexible are equally crucial. Likewise, single units are produced at a time.

The characteristics of Ohno's lean manufacturing are amplified by the ideas of Edward I Deming, who was also appreciated in Japan before being recognized in the United States in the 1980s and 1990s. Deming argued that quality is a process rather than an outcome; that quality depends on both management and employee; that teamwork is crucial; that systems are the foundation of quality and that employees need to be trained and have long term relationships with their firms. Decision making is profound and subtle, and often criteria used to improve processes are impossible to communicate to outsiders. They depend on the knowledge that only workers possess. Therefore, the assumption of Progressivism that rational knowledge is fundamental to good management is overturned by quality management processes. No expert can replace the profound knowledge of simple line workers who are familiar with machinery.

While these management developments were occurring, there were no changes in the Progressive and New Deal regulatory formation. Indeed, quite the opposite. In 1931 Franklin D. Roosevelt abolished the gold standard, which released banking from market discipline. Banks could lend entirely on the basis of personal relationships rather than market performance, and firms could be rewarded with capital infusions regardless of performance. At the same time, American firms did not suffer from competition in part because of World War II and in part because firms had not yet reached the scale sufficient to compete with the American firms. However, continued American ascendency would have depended upon competitive quality developments; rapid innovation; and a market-drive economy, and these patterns were increasingly absent from the economy. Small businesses had increasing trouble forming because of high marginal tax rates, regulation and inability to obtain credit, which was locked by the Fed and given to connected large banks and their client large corporations. The corporations, such as General Motors, felt no need to compete with smaller foreign firms that were still learning how to manufacture. This began to end in the 1950s, when Ford built the Falcon which imitated Volkswagons, but American manufacturing firms had little concept of lean manufacturing or TQM until these processes were well familiar to Japanese firms. Thus, American firms lost their ascendency due to the protective, stable system that the Progressives and the New Deal had created; the lax management in fields like steel and autos that flourished because of the stable system and lack of competition; and the inability of the US government which oversaw the Progressive regulatory model to understand or to anticipate the fundamental changes in production knowledge that the Japanese were accruing.

Thus, the early twentieth century saw the formation of a Progressive regulatory model that aimed to adjust the economy to the rise of big business. But the system the Progressives created did not contemplate the possibility of progress. The Progressives could not foresee that Franklin D. Roosevelt would ratchet up the degree of regulation and take a number of steps that inhibited the formation of new businesses. But the Progressives also did not grasp that the big business system of large scale mass production was only a step in the development of industry, a process which will continue well beyond this and the next centuries.

Progressivism's rigidity and inability to attract experts with the requisite ability to understand developments like lean production was only part of the reason for the inability of the Progressive model to anticipate progress. The model of Progressivism is based on a faulty concept of planning. It contemplated the existing business structure as capable of innovation and that scale rather than process and new ideas were the key variables. AS the twentieth century progressed, though, it was new ideas, the ability to anticipate change and the ability for nimble, often small firms, to cooperate in innovation that mattered most. Yet, such firms are crippled by the banking and credit systems, which allocate credit to secure risks such as large corporations and real estate developers. Thus, the American economy has seen a frenzy of large retail and home building but considerably less innovation in a wide range of fields outside of electronics and telecommunications that might have occurred.

Moreover, there are a number of artifacts of Progressivism that the Progressives themselves attribute to markets, but can do so only by claiming that the Progressive/New Deal model had not been established in the first place by Taft and Franklin D. Roosevelt. First, the skewness in accessibility to credit has facilited a higher degree of income inequality than would exist in a market economic system. This has occurred because the Federal Reserve Bank has inflated asset levels, notably the stock and real estate markets, at the expense of wages. Second, relatively high paid manufacturing jobs have left the United States because of financial manipulation by the Fed, most directly the propping of the value of the dollar through encouragement of foreign governments to hold United States bonds. Third, the stimulaton of the stock market coupled with corporate emphasis on stock options has made executives sensitive to low-risk means of increasing short term profits, which would suggest moving plants to Mexico and overseas. This was done while the Progressive system provided loan guarantees to Chrysler and various protectionism measures to the automobile firms in the 1970s and 1980s.

Thus, Progressivism is responsible for US manufacturing firms' lack of emphasis on quality management, which they felt little pressure to adopt during the 1960s and 1970s, and the rewarding of corporate executives despite their firms' poor performance because of outsourcing. Indeed, Progressivism devolved into a system of special interest brokerage which ensures that little of benefit occurs on the public's behalf; that large firms benefit at the expense of small; and that the public is harmed by the Progressive regulatory regime.