The Obama Cabinet and the Teapot Dome Scandal

Rev. Jeremiah Wright and William Ayers (1968).







During recent debate about Barack Obama's associates, Mr. Obama's proponents have claimed that he should not be accountable for his friends' opinions. But presidents appoint their friends to cabinet and staff posts. In 1924 it was revealed that Warren G. Harding's cabinet appointees had illegally sold medical supplies and leased oil wells to Sinclair Oil interests in the famous Teapot Dome scandal. Let us imagine President Obama's potential cabinet:

Secretary of Education: William Ayers
Secretary of Health Education and Welfare: Rev. Jeremiah Wright
Secretary of the Treasury: George Soros
Secretary of the Interior: Rev. Michael Pfleger
Attorney General: Reverend Louis Farakhan
Secretary of State: Sami al Arian
Postmaster General: Barbara Bowen (president of CUNY's faculty union)
Secretary of Defense: Bob Avakian

Given Mr. Obama's poor judgment in his choice of associates, how many Teapot Dome scandals will ensue from an Obama cabinet?

Hey Hey, Ho, Ho, Maurice Hinchey's Gotta Go!

It is time to defeat Congressman Maurice Hinchey. He has been riding high in a gerrymandered district that goes as far west as Ithaca and includes Ulster and Sullivan Counties. According to Heather Yakin in the Times Herald Record Congressman Hinchey yesterday called for a price control ("cap") on gasoline prices to be set at $2.59 a gallon. Those of us who remember the 1970s gas lines (see photo above) caused by government rationing know that Hinchey is out of his mind. As a Congressman, Hinchey himself likely would have a special deal on gasoline or just tell an aide wait in the two-hour lines. Those who need gasoline the most will not be able to get it, while the politically connected, like Congressman Hinchey, would enjoy an ample supply. Congressman Hinchey need not need be concerned if oil exploration firms do not seek new sources of oil and poor people cannot get gas because of the "cap", or if people who have access to the gasoline do not economize. Hinchey's proposal is selfish, vicious and anti-environmentalist since those who have access to the gas will squander it due to the artificially low price.

A glance at the map of the 22nd Congressional district delineates the extent to which Congressman Hinchey has benefited from unethical and anti-democratic gerrymandering by New York State's corrupt political establishment. The district includes eight counties (Broome, Delaware, Dutchess, Orange, Sullivan, Tioga, Tompkins and Ulster). Only Sullivan and Ulster are completely in Hinchey's district. The twenty-second district's absurd shape illustrates how Congressman Hinchey has enjoyed the fruits of New York State's political corruption. He has run unopposed for years.

Republican Antecedent to Regulatory Attacks on Commodity Speculation

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

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.

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.

Theodore Roosevelt and Social Democracy

Theodore Roosevelt is arguably the founder of the modern social democratic movement(1) in America. The movement has many philosophical roots, to include the pragmatists like William James, the Mugwumps and the Progressives, especially Herbert Croly and John Dewey, but more than anything else social democracy is a political movement. At least in part we need to understand the politicians who formulated it to understand the pattern behind it.

Roosevelt began as a post-bellum Mugwump who favored laissez faire ideology then, through his work on the Civil Service Commission in 1889, as New York City Police Commissioner in 1895, as Governor of New York in 1898, as vice president in 1900 and as president in 1901 (following President McKinley's assassination), became increasingly committed to government solutions and ultimately, during his last campaign as the Progressive or Bull Moose Party presidential candidate, advocated a quasi-socialist ideology. The Hepburn Act, passed in 1906 during his presidential administration, gave the power to set railroad rates to the Interstate Commerce Commission. President Roosevelt would have extended this power to federal determination of prices charged by all large corporations had he been able to do this politically.

During his career, Roosevelt advocated a large share of the policies later adopted during the New Deal, to include laws concerning minimum wages (which Democrat Woodrow Wilson opposed), child labor, social security and most of all the regulation of the trusts, by which he meant big business. Roosevelt also advocated extension of the private pension system and federal arbitration of labor disputes. He was the most pro-union president until Franklin D. Roosevelt. He was sometimes critical of unions in practice but was the first president to support them in principle.

The two themes throughout Roosevelt's career are first the belief that rationality is preferable to corruption and that government can be made to function rationally through bureaucratic reform. He extends this emphasis from reform of government through Civil Service to reform of the economy through government regulation of bad trusts. Roosevelt was certainly well intentioned but he does not base his belief system on empirical evidence about economic behavior. Rather, the development of his ideology seems to involve extrapolation from the narrow problem of government operations to the behavioral problems of the economy.

The second theme, beyond rationality, is moralism. Roosevelt's ideas likely link the American Christian tradition which was important to the abolitionists, to the Mugwumps, and was present in much of the late nineteenth century political protest that Wiebe discusses. Roosevelt does not seem to have been a particularly religious man and he was a staunch advocate of religious tolerance and respect. Nor was he likely heavily influenced by the Social Gospel Christianity of Washington Gladden. Nevertheless, the moralism that runs through his thought is very much in the abolitionist tradition.

In an address to the Liberal Club of Buffalo, New York on January 26, 1893(2) Roosevelt argues for a moral, practical and socially active citizenry:

"The first duty of an American citizen, then, is that he shall work in politics; his second duty is that he shall do that work in a practical manner; and his third is that it shall be done in accord with the highest principles of honor and justice...But in advising you to be practical and to work hard, I must not for one moment be understood as advising you to abandon one iota of your self-respect and devotion to principle. It is a bad sign for the country to see one class of our citizens sneer at practical politicians and another at Sunday-school politics. No man can do both effective and decent work in public life unless he is a practical politician on the one hand, and a sturdy believer in Sunday-school politics on the other.

In an 1890 article in The Century(3) Roosevelt compares the corruption of the spoils system that had existed from the 1830s through the early twentieth century with the Civil Service or "merit" system (p. 249):

"The upholders of the merit system, on the other hand, maintain that offices should be held for the benefit of the whole public, and not for the benefit of that particular section of the public which enters into politics as a lucrative though rather dirty game; they believe that the multitude of small government positions, of which the duties are wholly unconnected with political questions, should be filled by candidates selected, not for political reasons but solely with reference for their special fitness for the duty they seek to perform...

"...It is therefore perfectly plain that the remedy lies in changing the system...The offices must be taken out of reach of all politicians, good or bad, by some permanent system of law..."

Likewise, he argued that expert commissions should make recommendations to Congress (4, 264):

"...what is needed in each case is ample provision for a commission of the highest possible grade, composed of men who thoroughly know the subject, and who possess every attribute required for the performance of the great and difficult task of framing in outline the legislation that the country, as distinguished from special interests, really needs. These men, from the very nature of the case, will be wholly free from the local pressure of special interests, so keenly felt by every man who is dependent upon the vote of a particular district every two yours for his continuance in public life. Such a...commission could get at the facts...by expert inquiry, and not by the acceptance of interested testimony.

"...As soon as business becomes at all complex...it can only be performed by delegating to experts the duty of dealing with all that can properly be delegated. It is only by such delegation that it is possible to secure the proper consideration of the exceedingly important business which cannot properly be delegated..."

It was with respect to the anti-trust issue, which was salient during the Progressive era, that Roosevelt's statism came to full flower. In his autobiography(5, 86):

"...these doctrines of the old laissez faire economists, of the believers in unlimited competition, unlimited individualism, were in the actual state of affairs false and mischievous...government must now interfere to protect labor, to subordinate the big corporation to public welfare and to shackle cunning and fraud..."

In a speech to the Progressive Party convention of 1912 quoted in the New York Times Roosevelt said (6, p. 108):

"To treat the anti-trust law as an adequate, or as by itself a wise, measure of relief and betterment is a sign not of progress, but of Toryism and reaction...The only effective way in which to regulate the trusts is through the exercise of the collective power of our people as a whole through the governmental agencies established by the Constitution for this very purpose..."

He extended this idea of rationalization through governmental regulation and experts from Civil Service, to the trusts, to the broader economy and to social weflare legislation. Thus in a March 15, 1907 letter to the Interstate Commerce concerning the Hepburn Act, which regulated railroads, Roosevelt wrote(7,258):

"Exactly as the developments in the insurance investigations a year ago showed the necessity of a far more rigid governmental control of insurance companies, so your investigations have proved the necessity of a far more rigid governmental control of railroad companies..."

As well, he argued for more "thoroughgoing regulation" in his speech to Congress in 1906 (8):

"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, and only to a less degree the passage 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...

"...It must not be supposed, however, that with the passage of these laws it will be possible to stop progress along the line of increasing the power of the National Government over the use of capital in interstate commerce...The best way to avert the very undesirable move for the government ownership of railways is to secure by the government on behalf of the people as a while such adequate control and regulation of the greater interstate common carriers as will do away with the evils which give rise to the agitation against them. So the proper antidote to the dangerous and wicked agitation against the men of wealth as such is to secure by proper legislation and executive action the abolition of the grave abuses which actually do obtain in connection with the business use of wealth under our present system--or rather no system--of failure to exercise any adequate control at all...the deadening and degrading effect of pure socialism, and especially of its extreme form, communism, and the destruction of individual character which they would bring about are in part achieved by the wholly unregulated competition which results in a single individual or corporation rising at the expense of all others until his or its rise effectually checks all competition and reduces former competitors to a position of utter inferiority and subordination."

Roosevelt's emphasis on rationalizing the economy to make it moral led naturally to his advocacy of the graduated income tax, the inheritance tax and a wide range of social welfare measures such as social security, a child labor law and the minimum wage. In his annual message to Congress in 1906(9) he stated:

"(T)here is every reason why, when next our system of taxation is revised, the National Government should impose a graduated inheritance tax, and if possible, a graduated income tax...I feel that in the near future, our national legislators should enact a law providing for a graduated inheritance tax...As the law stands it is undoubtedly difficult to devise a national income tax which shall be constitutional. But whether it is absolutely impossible is another question; and if possible it is certainly desirable."

This line of reasoning also led to his support for labor unions, although it was not uncritical support (10, p. 166):

"The workman saw, and all citizens who gave earnest thought to the matter saw, that the labor problem was not only an economic, but also a moral, a human problem....those artificial individuals called corporations become so vewry big that the ordinary individual is utterly dwarfed beside them and cannot deal with them on terms of equality. It therefore becomes necessary for these ordinary individuals to combine in their turn, first in order to act in their collective capacity through that biggest of all combinations called the government, and second, top act, also in their own self-defense, through private combinations, such as farmers' associations and trade-unions."

Thus, Roosevelt alternatively advocated federal arbitration of labor disputes and collective bargaining (11, 172)

"There must, therefore, be collective action. This need of collective action is in part supplied by the unions, which although they have on certain points been guilty of grave shortcomings, have nevertheless on the whole rendered inestimable service to the working man. In addition, there must be collective action through the government, the agent of all of us."

He also favored laws limiting the number of hours of employment of railroad employees (176), favored the 8 hour day for all workers (176), the abolition of child labor (p. 177), the minimum wage (179), workers compensation (183), and a public works administration (p.188) to provide work to anyone who is unemployed.

It is debatable whether some of these governmental steps would have occurred voluntarily without the need for state action by Roosevelt and Wilson. For instance, the eight hour day exists even for employees who are exempt from the Fair Labor Standards Act that Franklin Roosevelt passed. This is not because of legislation but rather because society became wealthier between 1908 and 1950 and so could afford shorter hours. Likewise, it is less necessary for children to work today because people are wealthier than they were in Roosevelt's day. In countries where poverty is the rule, a law against child labor would likely be ineffective.

Roosevelt's thinking is uninformed by advances in economics that were made later in the twentieth century by the Austrian and Chicago Schools of economics. His assumption that state action is necessary to rectify the ills he saw as police commissioner and governor of New York may have been mistaken.


(1)By social democratic I mean the political movement whose proponents now call liberalism and progressivism. The terms liberalism and progressivism are misleading for several reasons. Social democracy is a more accurate term. Social democracy holds that government offers more rational solutions than voluntary human choice and emphasizes political processes and the use of state violence in solving social problems rather than markets and voluntary exchange.

(2)"The Duties of American Citizenship". In William H. Harbaugh, The Writings of Theodore Roosevelt. Indianapolis, Ind.: The Bobbs Merrill Company, 1967, p.3

(3)"The Merit System versus the Patronage System", The Century XXXIX (February 1890), 628-33, reprinted in Ibid., p. 248

(4)"A Remedy for Some Forms of Selfish Legislation", The Outlook, August 6, 1910, reprinted in Op.Cit., p. 264

(6)"The Inadequacy of the Sherman Anti-Trust Law" from Roosevelt's address to the Progressive Party National Convention in Chicago, August 6, 1912. New York Times August 7, 1912, pp 8-9. Reprinted in Op.Cit., p. 108.

(5)"Resurrection of the Sherman Anti-Trust Law" from Roosevelt's Autobiography, pp. 423-32, Op.Cit., p. 83.

(7) "Letter to the Interstate Commerce Commission, March 15, 1907" reprinted in Op.Cit., p. 257.

(8)"For More Thorough-Going Regulation". From the Annual Message to Congress, 1906, reprinted in Op.Cit., p. 92.

(9)"A More Equitable Tax Structure", Op.Cit.

(10) From Roosevelt's Autobiography, p. 461-72, Op. Cit., p. 162.

(11)"Nationalism and the Working Man", The Outlook, XCVII (February 4, 1911), 253-56. Op. Cit., p 172.

Read Books

I watch the nightly television news primarily for entertainment. Since the entertainment on television these days is bad and Hollywood's offerings are worse, television news is probably the best entertainment available. The trouble is that in watching it I fear I might start to uncosciously believe the fiction, much like some viewers in the late 1990s believed that the X-Files was a news show.

This afternoon, as I was pumping gas at the Sunoco station on NY Route 28 in Boiceville, NY, I conversed with a gentleman from New Jersey on a Memorial Weekend trip. As we were pumping gas, I commented on the high prices (nearing $5 per gallon for super). He said to me that he doesn't believe the claim that oil and food prices are high because of "traders" or speculators. I gave him an earful about the Fed and inflation. But as I thought about it, I realized that this guy, probably above average in some ways but very much a guy you might meet in a gas station, had heard some media lies and rejected them. Instead, I gave him the news. He will have done better by thinking about what I told him in this chance meeting in the Boiceville gas station than the propaganda on conventional news shows.

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.

When Will They Ever Learn?

Larwyn just forwarded a post by the Dinocrat blog that led me to paraphrase the old '60s anti-war song "Where Have All The Flowers Gone?":

Where have all the conservatives gone?
Long time passing
Where have all the conservatives gone?
Long time ago
Where have all the conservatives gone?
Gone to big government solutions every one
When will they ever learn?
When will they ever learn?

Dinocrat links to Mike Masters' Senate testimony and refers to Dan Dicker's article. Masters and Dicker blame speculators for increasing commodity prices and aim to regulate commodities markets. Dinocrat doesn't indicate whether Masters and Dicker are from Wall Street, are long on stocks or short on commodities and are offering self-serving testimony to Congress or whether they just like the Bear Stearns bail out. Wall Street dislikes commodity speculation.

There is a much more accurate explanation for the run up in commodity prices than commodity speculation: Federal Reserve Bank inflation, which is now currently working its way through the economy. If futures prices are higher than the underlying demand warrants, there will be a correction in prices. The index speculators will pay for their errors if commodities are at higher-than-market prices. As well, foreign producers can enter the market and undersell inflated commodity prices.

There is a more fundamental error in the Masters-Dicker proposals. Few people can outsmart financial or commodity markets, and those who can are very rich. Why should anyone believe Masters and Dicker are smarter than the funds who are buying the commodities indexes? Passing a law limiting economic activity because a few observers have a hunch based on limited information that they are right and the market is wrong would be inept.

If limits are put on ways of trading or holding commodities, these will not reduce commodity prices. For example, if pension funds are not permitted to hold commodities, traders outside of pension funds will profit from the Masters proposals. Likewise, if limits are put on commodity prices, then there will be shortages.

It is true that across-the-board price increases are a major public concern, but these have been caused by the Federal Reserve Bank, not by speculators. If the speculators are over-bidding, then farmers and commodity producers from overseas will undercut the speculators and bankrupt them.

We do not need a "Federal Commodity Commission" to create more bureaucratic waste and to rip off the American public to a greater extent than the Federal Reserve Bank already does.

Orenstein Reports Sighting of CUNY Faculty Meeting

Phil Orenstein has written an excellent article in Frontpagemag about his close encounter with a handful of fringe CUNY faculty. Professional Staff Congress officer "Sue" O'Malley, currently engaged in a McCarthyist law suit against the awe-inspiring Sharad Karkhanis, was in attendance. Orenstein does not mention whether the panelists were wearing white hoods and sheets. But he writes of this close encounter of the fourth kind:

"What I witnessed was a closed forum dedicated to a veiled radical agenda, riddled by hysterical paranoia, name-calling, slanderous accusations against prominent scholars and city officials, and strategies for their ouster, where the panelists professed that “attacks” against Arabs and professors are a coordinated right wing smear campaign launched by Daniel Pipes, CUNY trustee Jeffrey Wiesenfeld and their ilk, which they dubbed the “New McCarthyism.”

Read all about Orenstein's encounter with uncollegiality among extremist elements of CUNY's senior faculty here.

Institutional Death in America and Europe

The new and old worlds are divided not just by their relative emphasis on flexibility and markets, but also by their openness to change. Radicalism in Europe has generally taken the forms of Hegelian emphasis on historicism. Marxism and its derivatives while pretending to advocate radical change are romantic reassertions of medieval stability and security. The chief outcomes of Russian and eastern European communism were societies that had difficulty with flexibility and change, that could not integrate information about price and consumer demand intelligently and that placed political stability before economic change. As well, Europe has emphasized the Nietzschean will to power and minimized liberal openness to change.

Both Americans like Europeans have revealed prejudices but while Americans are discarding them, Europeans are not. In the 19th century the people of California hated Asians and passed discriminatory laws against them. The first immigration law in America, the Chinese Exclusion Act of 1882, excluded Chinese mining labor from immigration under penalty of law and required that Chinese immigrants obtain certification of their qualification to immigrate. In 1902 Chinese immigrants were required to register with the government and obtain a certificate of residency. Similarly, antagonism and hatred toward African-Americans following Reconstruction led to passage of Jim Crow laws by post-Reconstruction redeemer governments beginning in 1876 and the laws continued in force until passage of the Civil Rights Act in 1964. The northeastern Mugwumps, the educated post-reconstruction Republicans who preceded the Progressives around 1884, did not advocate the Jim Crow laws aggressively but did not oppose them aggressively either. The Jim Crow laws were primarily the product of southern Democrats. The northern Democrats did not oppose them either. As president, Woodrow Wilson intensified the Jim Crow laws and supported them. During the Progressive era, imperialist sentiment fit the racism of the Jim Crow laws. Progressivism was very much associated with racism.

In Europe, there was a parallel history of anti-Semitism. Jews were banned from England, France and Spain in the middle ages and were forced to migrate to Asia Minor and eastern Europe. In Germany and Italy they were forced to live in ghettos. During the Crusades, Crusaders murdered tens of thousands of Jews (along with eastern Christians, southern French Christians and Muslims). There was a brief period of liberalization in the 19th century, but in the twentieth the rise of Nazism, a derivative of Marxism, led to the murder of the majority of European Jews.

Despite this history of bigotry in both continents, in recent decades Americans have reduced but not eliminated the degree of anti-Asian and anti-Chinese racism. In contrast, anti-Semitism is more intense in Europe than it has been since World War II. The European addiction to anti-Semitism attends a deeper inability to overcome antiquated traditions and class structures that inhibit change.

Americans' ability to create and accept change may in part be the cultural residue of the American frontier. The open frontier led this people to see the possibility of the new. As well, the science and technology that freedom made possible, the inventions and progress that came from laissez faire capitalism, led to an openness to change. Perhaps the openness to change went to far under the philosophy of modernism, but it is preferable to the alternative, which is the stagnation of bigotry, impoverishment and lost economic opportunity. The degree of tradition and change is best balanced through private decision, not through bureaucratic laws that require landmark preservation.

As well, Americans are a religious people, and their acceptance of change is likely linked to their faith. In America, religious tolerance has been the norm and religion has been a matter of belief and conscience rather than social imposition and structure. Many Americans have believed that material rewards reflect divine grace. Since belief in God is a matter of conscience, not social institution, and since material rewards reflect divine election, in many Americans' view, American are likely to pursue and feel comfortable with such rewards and with the change that they require.

Since the creation of wealth requires the creation of change, of new ideas, of new markets and new technology, the converse of new ideas, the death of old ones, is critical to change. Europeans are reluctant to give up old prejudices like anti-Semitism and tribal social arrangements like socialism. Firms cannot in the European model be allowed to go bankrupt. Business executives must be permitted to maintain their social position and employees must be secure in their jobs.

To the extent that Americans adopt such tribal, European views they will be unable to change. Change depends on death. The growth of the economy depends on the death of failed firms. Incompetent managements like Bear Stearn's or Enron's do not deserve subsidies. Their managements have failed and deserve the economic returns that failure implies.

Likewise, the introduction of Progressive and New Deal institutions were significant not so much because they reflected change, but rather because the institutions reflected the tribal views of German historicism and so became institutionalized as reaction to change. Few Progressive institutions have been overturned and those New Deal institutions that were not rejected by the Supreme Court have remained in place for the past 70 years. When change in proposed, the American people's reaction is not the openness to change that characterized America in an earlier era but a European-style tribal reacton, a fear of change and a hostility to the possibility that failed institutions ought to change. Likewise, when American business has failed, as it increasingly often has in the past decade, the American people's reaction has been to protect the wealth of those whose businesses failed to produce value for investors or for the American people and so shore up a class system that is decidedly non-American in nature.

The Sources of Middle Class Anxiety

In today's New York Sun Robert Samuelson argues that middle class anxiety results from an economy that generates greater returns at the expense of greater risk. He claims that we are better off because many of us have purchased technologically advanced consumer products like flat screen televisions and high speed internet access but at the same time the fluidity that a market economy requires has made us less secure. Mr. Samuelson's argument is half right. Americans are less secure, but they have bought less security at the price of stagnant real wages. In the past 36 years wages have increased at lower rates than in any prior period of American history.

According to the Census Bureau, in the 23 years from 1947 to 1971, American males' real incomes in 2006 dollars increased from $17,967 to $31,915, an increase of 77.6%. In 1971 Richard M. Nixon abolished the international gold standard. In the 35 years from 1971 to 2006 American males' real wages increased from $31,915 to $36,011, an increase of 12.8%. The reduction of increase from 77.6% to 12.8% is 83.5%. This is unquestionably the slowest wage growth in any 36-year period of American history.

In contrast, a 1971 dollar was worth $.55 in 1947, an inflation rate of 1/.55= 181.8%, while a 2006 dollar was worth $.20 in 1971, an increase of 1/.20 = 500%. Moreover, the consumer price index was doctored in the early 1980s to omit house prices, price increases of which have been the primary source of economic anxiety among the middle class until this past year. Thus, while real incomes increased at the slowest rate in American history between 1971 and 2006, 12.8% over 35 years, prices increased at the fastest rate in American history over the past 35 years, 500%, and their increase was understated.