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.

American Workers Are Worse Off--But Why the Baloney?

The table below lists government data on savings rates, the prime interest rate, inflation and real wages since 1972. It is evident from the real wage data in the last column, which states average hourly earnings in 1982 dollars for all private sector US employees, that wages have fallen over the past 35 years from $9.07 per hour in 1972 (in 1982 dollars) to $8.27. This is an unprecedented decline in US workers' welfare. As can be seen in the table as well, in any year since 1972 inflation has not fallen below 1.0 percent. In six of ten years in the 1980s inflation exceeded 4.0 percent. In five of ten years in the 1990s inflation equaled or exceeded 3.0 percent. In three of eight years in the 2000s inflation exceeded 3.0 percent.

In recent weeks there have been several articles in the New York Sun and Newsweek that argue that Americans' lives have grown more prosperous. No serious data is offered to support this claim. Robert J. Samuelson's Newsweek article offers the following: there are more two-car families; more Americans have cable television; and more students go to college.

However, greater consumption evidences little if indebtedness has increased along with the consumption. More Americans likely have two cars because more women are forced to work because their husbands' salaries are dismal. The second car soaks up a good part of the second income. This is not evidence of prosperity. House prices, which the Bureau of Labor Statistics excluded from the Consumer Price Index in the early 1980s, have escalated until this year and have posed an enormous burden on two-income families. In the book Two Income Trap: Why Middle Class Mothers and Fathers Are Going Broke Elizabeth Warren and Amelia Warren Tyagi show that the economic burden of house payments coupled with two wage earners has been the single greatest source of personal bankruptcy. The reason for the inflated house prices is the same as the flat real wages: inflation that Keynesian economic policies have caused.

Samuelson claims that there is greater risk for workers than before so that workers' sense that they are worse off is but a psychological illusion. It is true that workers face more risk than before 1972. But in most contexts higher returns accompany higher risk, while the American economy has produced both higher risk and lower wages for workers. There is only one meaningful measure of workers' welfare, and that is their real hourly wage adjusted for benefits and risk. But benefits have declined as have real hourly wages and, according to Samuelson, risk has increased. In his attempt to put a positive spin on workers' sad fate Samuelson makes things sound worse.

Why is there so much nonsensical news coverage claiming that Americans are better off when a casual glance at real wage data shows that Americans are in fact worse off? This is not rocket science. Real hourly wages were $9.07 in 1972 and $8.27 in 2007. Americans are worse off, and they have been so since 1972 when Richard M. Nixon declared "We are all Keynesians now".

I ask: why do news media like Newsweek, normally eager to criticize the Bush administration, stack baloney when it comes to Fed policy and inflation? One answer has occurred to me: the media are owned by conglomerates that take on a large amount of debt. Inflationary Fed policies keep interest rates low and so subsidize the debt burden of the same media corporations whose units, like Newsweek, report on the news. As well, low interest rates inflate the stock market, helping media stocks to remain unnaturally high so that executives earn high bonuses. My guess is that the volume of pro-Fed propaganda will increase in media outlets whose owners have greater indebtedness. In other words, my hypothesis is that there is an inverse correlation between support for the current economic situation by newspapers, television stations and magazines and the debt to asset ratio of the corporate parents of the media conglomerates that own them.

Perhaps we should view the opinions of the MSM to have the same value as the dollar. As the dollar declines, our faith in the MSM can decline along with it. In the end, we can haul wheel barrows of Newsweek Magazines along with worthless $100 bills.

Personal Saving as a Percentage of Disposable Personal Income

Year....Saving Rate(1)..Prime Rate(2).CPI(3).Real Hr. Wages(4)

1972........8.9................5.25....................3.2..........9.07
1973.......10.5................6.00....................6.2..........8.85
1974.......10.6................9.75...................11.0..........8.55
1975.......10.6...............10.50....................9.1..........8.44
1976........9.4................7.25....................5.8..........8.63
1977........8.7................6.25....................6.5..........8.68
1978........8.9................7.75....................7.6..........8.65
1979........8.9...............11.75...................11.3..........8.23
1980.......10.0...............15.25...................13.5..........7.94
1981.......10.9...............21.50...................10.3..........7.84
1982.......11.2...............15.75....................6.2..........7.92
1983........9.0...............11.50....................3.2..........7.97
1984.......10.8...............11.00....................4.3..........7.95
1985........9.0...............10.75....................3.6..........7.91
1986........8.2................9.50....................1.9..........7.97
1987........7.0................7.50....................3.6..........7.86
1988........7.3................8.75....................4.1..........7.80
1989........7.1...............10.50....................4.8..........7.74
1990........7.0...............10.50....................5.4..........7.57
1991........7.3...............10.00....................4.2..........7.57
1992........7.7................6.50....................3.0..........7.53
1993........5.8................6.00....................3.0..........7.54
1994........4.8................6.00....................2.6..........7.54
1995........4.6................8.50....................2.8..........7.57
1996........4.0................8.50....................3.0..........7.59
1997........3.6................8.25....................2.3..........7.79
1998........4.3................8.50....................1.6..........7.95
1999........2.4................7.75....................2.2..........8.02
2000........2.3................9.50....................3.4..........8.08
2001........1.8................9.50....................2.8..........8.24
2002........2.4................4.75....................1.6..........8.29
2003........2.1................4.25....................2.3..........8.29
2004........2.1................4.00....................2.7..........8.21
2005........0.5................5.25....................3.4..........8.18
2006........0.4................7.25....................3.2..........8.33
2007........0.4................8.25....................2.8..........8.27



(1) Source: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=58&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1971&LastYear=2008&3Place=N&Update=Update&JavaBox=no
(2) Source: http://mortgage-x.com/general/indexes/prime.asp
(3) Source: Department of Labor, BLS, CPI increases
(4) Source, Department of Labor, BLS, Average Hourly Earnings http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

American Social Democrats and the Fallacy of Rationality

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

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

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

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

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

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

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

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

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

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

Theodore Roosevelt on Government Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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