The notion that regulators or public deliberation can better anticipate the valuation of commodities than can speculators is wrong for several reasons. First, there is no reason to believe that the public at large, professional economists, politicians or appointed officials are better equipped to value an asset like commodities than are private traders. The information required to do so is specific to time and place and requires the judgment and expertise appropriate to an individual with specific knowledge about commodity markets. This can only be obtained through professional experience.
Second, commodity speculators take considerable risk in investing in commodities and therefore are motivated to make the most accurate predication of future price. In contrast, politicians, appointees and the general public are unaware of the risk associated with a given price prediction. If the commodity speculator is wrong he loses his investment. If the politician is wrong, someone else goes hungry. That is, regulation of commodity prices potentially creates shortages. Such shortages can cause starvation and other forms of deprivation. The economists, experts, politicians and public advocates who clamor for regulation are not the ones who will suffer. Theirs is a special sort of greed and viciousness.
The ability of markets to assess value is unparalleled. Shortages induce increases in price. If speculators irrationally bid up prices, then public demand for the commodity will marginally decline. Depending on the responsiveness or elasticity of the commodity price, a small decline in demand potentially can have a large effect on price. It is not unusual for speculators to lose large fortunes in the commodity field. This would be associated with a price correction.
The power of markets to reassess erroneous price determinations was unknown in the days of the Progressives. Today's social democrats are likewise economically illiterate. It is not surprising that many Republicans, schooled in the Progressive tradition, are, like social democrats, eager to greedily cause shortages that harm the poor.
When Warren G. Harding won the presidency in 1921 he was the first non-progressive president in almost twenty years, since William McKinley. The public had been frustrated by an inflation that occurred following World War I and, as well, by Woodrow Wilson's obsession with the League of Nations. Progressivism was primarily a Republican, not a Democratic, movement. Not all Republicans were Progressives, but a large share of the Republican Party, perhaps half, bolted in 1912 to vote for Theodore Roosevelt, the Progressive Party candidate, enabling Wilson to win. Wilson was a progressive but of a different stripe from Roosevelt. He emphasized individualism, he opposed the minimum wage, he had long been an advocate of the gold standard, and he retained a belief in the producerist philosophy that had informed 19th century Republicans.
Harding was not idelogical and has generally been viewed with skepticism by left wing historians as well as by the Progressives of his day. However, by 1920, after nearly two decades of Progressivism, the assumptions that politicians made were very much in the Progressive tradition. Neither Harding nor Coolidge, who succeeded Harding after his death, had any interest in repealing Progressive legislation such as the Hepburn Act, which established federal price controls on railroads, or the Federal Reserve Bank. Instead, Harding argued for "normalcy". In his riveting book The Politics of Normalcy*, Robert K. Murray describes the 67th Congress, which was Republican, as was Harding, as involving a contest between several special interests for regulatory privilege. The idea of laissez faire had already been forgotten. In its place, farm interests were clamoring for tariffs and farm supports and business interests were clamoring for tax reductions. In addition, there were regional conflicts over regulatory advantage.
One of the laws that the agricultural lobby pushed through early in the Republican Congress (irritating the business lobby, which thought they would get their special interest legislation passed first) was the passage of the Capper-Tincher bill**. The Capper-Tincher bill was passed as the Future Trading Act that:
"...more carefully regulated the grain exchanges by placing a prohibitive tax on speculative transactions involving puts and calls, bids and offers."
Although the politics of the 1920s are thought of as a reassertion of conservatism, it is important to understand that by 1921 Harding no longer thought in terms of the limited government philosophy of the late nineteenth century Mugwumps, Jackson or Jefferson. Rather, Harding's normalcy simply referred to an end to the inflation, radical emphasis on the League of Nations and war-related imbalances that occurred during the Wilson administration. It was no rejection of Progressivism.
Today, we again hear clamor for regulation of freedom of exchange in the name of economic illiteracy. Not surprisingly, the clamor comes from both parties.
*Robert K. Murray, The Politics of Normalcy: Government Theory and Practice in the Harding-Coolidge Era. New York: WW Nortn, 1973.
**Ibid., page 50
Wednesday, May 28, 2008
Tuesday, May 27, 2008
Post CNN World
Doug Ross @ Journal proposes a new book entitled The Post CNN World. As I have recently blogged, people who believe television news are like the people in the late 1990s who believed that the X-Files was news.
My Letter in the Chronicle of Higher Education
The Chronicle of Higher Education printed my letter concerning David Seidemann's case here:
To the Editor:
The remarks of union officials quoted in "Federal Judge Rules Against Faculty Union on Refunds of Nonmembers' Dues" (The Chronicle, April 25) are misleading. There have been considerable "soft" activities by the leadership of the faculty union at the City University of New York involving protests, demonstrations, and conferences about the war in Iraq. The leadership is paid salaries to represent the faculty, but much of the leaders' time has been spent in antiwar and other political protests.
To be fair, agency dues payments should be reduced by the proportion that salaries for the union leadership's time spent on unrelated political activities bears to the union's total budget.
The article quotes Christopher M. Callagy, a union attorney, as saying that the union's chief political efforts have been in Albany. The union leadership has many times notified faculty members about antiwar protests via CUNY's e-mail system and used union officials' time and union resources for such protests, conferences, and related activities.
Professor David E. Seidemann's case does not go far enough. Lehnert v. Ferris Faculty Association, on which Magistrate Judge Lois Bloom relies in Seidemann v. Bowen, anticipates that agency payers may be free riders because they receive the benefit of collective bargaining but would not contribute to the costs of negotiation if they did not pay dues. But the Professional Staff Congress has won no benefits for its membership. Rather, because of its adversarial approach, it has managed to diminish faculty wages and benefits relative to virtually every other New York union.
Mitchell Langbert
Associate Professor of Business, Management, and Finance
Brooklyn College
City University of New York
Brooklyn, N.Y.
To the Editor:
The remarks of union officials quoted in "Federal Judge Rules Against Faculty Union on Refunds of Nonmembers' Dues" (The Chronicle, April 25) are misleading. There have been considerable "soft" activities by the leadership of the faculty union at the City University of New York involving protests, demonstrations, and conferences about the war in Iraq. The leadership is paid salaries to represent the faculty, but much of the leaders' time has been spent in antiwar and other political protests.
To be fair, agency dues payments should be reduced by the proportion that salaries for the union leadership's time spent on unrelated political activities bears to the union's total budget.
The article quotes Christopher M. Callagy, a union attorney, as saying that the union's chief political efforts have been in Albany. The union leadership has many times notified faculty members about antiwar protests via CUNY's e-mail system and used union officials' time and union resources for such protests, conferences, and related activities.
Professor David E. Seidemann's case does not go far enough. Lehnert v. Ferris Faculty Association, on which Magistrate Judge Lois Bloom relies in Seidemann v. Bowen, anticipates that agency payers may be free riders because they receive the benefit of collective bargaining but would not contribute to the costs of negotiation if they did not pay dues. But the Professional Staff Congress has won no benefits for its membership. Rather, because of its adversarial approach, it has managed to diminish faculty wages and benefits relative to virtually every other New York union.
Mitchell Langbert
Associate Professor of Business, Management, and Finance
Brooklyn College
City University of New York
Brooklyn, N.Y.
Social System Matching and the Expertise Culture
In the twentieth century the idea of convergence was suggested to explain the trend of socialist economies to look more like capitalist ones and capitalist economies to look more like socialist ones. This idea fell on hard times in the 1980s because socialism failed and some capitalist countries deregulated. The idea of convergence is linked to the idea of optimality. The notion that there is one best way to do a job or one best way to solve a social problem was characteristic of the Progressive era. Convergence was a remnant of Progressivism.
But perhaps there is no such thing as optimality with respect to social systems. Rather, there is an infinite array of potential strategies which match citizens' needs to a better or worse degree. Optimality depends on the match between the culture in which people live and the social system. Social evolution involves the search for optimal matching. If a system is suboptimal the system which permits the greatest flexibility with respect to searching for matching arrangement may be most preferable. That is, there are likely an array of systems which match varying cultural configurations, and an approach which provide equal matching but more flexibility will be preferable to an approach which provides less flexibility.
Labor economists have argued that some workers fit some kinds of jobs, other workers fit other kinds. In the same way, some cultures may fit some kinds of social systems while others fit different kinds. Discovering a optimal match depends on how well the social system can change to fit a given region or culture.
If that is so, then the trend toward increasing federal power and centralization during the twentieth century may have been an error since centralized power is more difficult to change than decentralized power. The founding fathers in America had hit upon an excellent formula to exploit regional and cultural differences: permit variations in across state governments so that local match can be optimized. Moreover, variations permit experimentation so that the knowledge base develops much more quickly than with a centralized one.
The centralization of power in America in the past 100 years may have impeded learning through decentralization and so had a crippling effect on progress. As well, forcing regional and cultural uniformity across a large country results in lost opportunities to match sub-systems to sub-cultures. Centralization of power is authoritarian and so as the nation has grown and simultaneously centralized power deviations from optimal points for specific subgroups have become greater. In turn, this has lead to increasing stridency of public debate.
Advances in organization theory that started with James March's and Herbert Simon's 1958 book Organizations have permitted firms to think about the key problem that faces them: information. Organizing information, gathering information, undestanding it and using it is a problem that faces government as well as private firms. In the twentieth century firms decentralized and experimented with increasingly flexible organizational forms. Toyota's Taiichi Ohno took 15 years to develop the process known as lean manufacutring, which includes just in time inventory. No expert had thought of this concept. Similarly, E.I. Deming's total quality management was unknown in business schools until he convinced a number of Japanese firms to adopt it.
In contrast, progressives and social democrats have made an antiquated assumption about rationality based on the ideas of Herbert Croly and Theodore Roosevelt: that experts can discern optimal solutions. Naturally, such experts will see the possibility of convergence toward an optimality in which they believe because of sharing of ideas, peer review and the like.
The corporate world has found that preconceived strategies rarely materialize and that focused or organized chaos results in the spontaneity of creativity that also depends on interaction and supportiveness of change. Supportiveness of change is foreclosed by the expertise culture. If an expert claims an optimal answer, then alternative views are ignored. Thus, fundamental errors in social science and economics have been perpetuated, and the public's ability to debate and innovate has been forestalled by social democracy.
There are many other concepts in organizational theory, such as the learning organization, organizational differentiation and integration and differentiation can be applied to the modern state. However, instead of thinking small and decentralizing, federal power has been increasingly concentrated in poorly performing agencies like the Department of Education and the Social Security Administration.
But perhaps there is no such thing as optimality with respect to social systems. Rather, there is an infinite array of potential strategies which match citizens' needs to a better or worse degree. Optimality depends on the match between the culture in which people live and the social system. Social evolution involves the search for optimal matching. If a system is suboptimal the system which permits the greatest flexibility with respect to searching for matching arrangement may be most preferable. That is, there are likely an array of systems which match varying cultural configurations, and an approach which provide equal matching but more flexibility will be preferable to an approach which provides less flexibility.
Labor economists have argued that some workers fit some kinds of jobs, other workers fit other kinds. In the same way, some cultures may fit some kinds of social systems while others fit different kinds. Discovering a optimal match depends on how well the social system can change to fit a given region or culture.
If that is so, then the trend toward increasing federal power and centralization during the twentieth century may have been an error since centralized power is more difficult to change than decentralized power. The founding fathers in America had hit upon an excellent formula to exploit regional and cultural differences: permit variations in across state governments so that local match can be optimized. Moreover, variations permit experimentation so that the knowledge base develops much more quickly than with a centralized one.
The centralization of power in America in the past 100 years may have impeded learning through decentralization and so had a crippling effect on progress. As well, forcing regional and cultural uniformity across a large country results in lost opportunities to match sub-systems to sub-cultures. Centralization of power is authoritarian and so as the nation has grown and simultaneously centralized power deviations from optimal points for specific subgroups have become greater. In turn, this has lead to increasing stridency of public debate.
Advances in organization theory that started with James March's and Herbert Simon's 1958 book Organizations have permitted firms to think about the key problem that faces them: information. Organizing information, gathering information, undestanding it and using it is a problem that faces government as well as private firms. In the twentieth century firms decentralized and experimented with increasingly flexible organizational forms. Toyota's Taiichi Ohno took 15 years to develop the process known as lean manufacutring, which includes just in time inventory. No expert had thought of this concept. Similarly, E.I. Deming's total quality management was unknown in business schools until he convinced a number of Japanese firms to adopt it.
In contrast, progressives and social democrats have made an antiquated assumption about rationality based on the ideas of Herbert Croly and Theodore Roosevelt: that experts can discern optimal solutions. Naturally, such experts will see the possibility of convergence toward an optimality in which they believe because of sharing of ideas, peer review and the like.
The corporate world has found that preconceived strategies rarely materialize and that focused or organized chaos results in the spontaneity of creativity that also depends on interaction and supportiveness of change. Supportiveness of change is foreclosed by the expertise culture. If an expert claims an optimal answer, then alternative views are ignored. Thus, fundamental errors in social science and economics have been perpetuated, and the public's ability to debate and innovate has been forestalled by social democracy.
There are many other concepts in organizational theory, such as the learning organization, organizational differentiation and integration and differentiation can be applied to the modern state. However, instead of thinking small and decentralizing, federal power has been increasingly concentrated in poorly performing agencies like the Department of Education and the Social Security Administration.
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