March 22, 2003

Brink Lindsey Is Very Good Indeed

I've been rereading Brink Lindsey's book, Against the Dead Hand. God, it's good! When I compare it to other books that have gotten much more attention like... Ummm....

Well! Here's what I said about Brink's book on an earlier occasion:


Now Brink Lindsey has written a book: Brink Lindsey (2002), Against the Dead Hand: The Uncertain Struggle for Global Capitalism (New York: John Wiley: 0471442771). The purpose of the book is to celebrate the end of one of what Lindsey sees as one of the great obstacles to human progress. The obstacle is "the dream of centralized, top-down control over the course of economic development" (p. 2). In Lindsey's mind, whether the policies were the bloody collectivization of agriculture by Stalin, Mao's command that peasants smelt steel in their backyards, French bureaucrats providing indicative guidance to enterprises for capacity expansion, the UK Labour Party nationalizing the "commanding heights" of the economy, Franklin D. Roosevelt commanding the separation of investment from commercial banking and decreeing the creation of the TVA, or Park Chung Hee offering large subsidized loans to chaebol that would successfully export--it was all one dream: the dream that government controls could successfully manage the economy. It is this dream that has crashed in the past twenty-five years:

It died in the United States and Western Europe during the stagflation of the 1970s. It died in China when Deng Xiaoping declared... "it doesn't matter if the cat is black or white..." It died in Latin America during the debt crisis... of the 1980s. It died in the Soviet Empire with the collapse of the Berlin Wall. And it died in East Asia with the bursting of the Japanese bubble and the financial crisis of 1997-98.... As faith in government controls has dissipated, markets have been given wider play.... Trade and investment liberalization are thus of a piece with a broad array of market-oriented policies: in particular, the privatization of state-owned industries, commitment to a monetary policy of price stability; elimination of price and entry controls that sustained domestic monopolies and oligopolies; the resurrection of labor markets; the reform of punitive tax systems; and the overhaul of financial institutions to make the allocation of capital more responsive to market returns... (p. 3).

Government controls have, as Lindsey sees it, collapsed because they simply did not work: "the worldwide rediscovery of markets has been guided by pragmatism, a rejection of the failed dogma of centralized control in favor of something, anything, that works" (p. 7). Call it the invisible hand of the market versus the dead hand of government control. (Yes, I realize that to view grand political economic thought as a two-sided match with people as diverse as Roosevelt, Keynes, Stalin, and Nehru on one side against Friedman and Hayek on the other darkens more than it illuminates, but Lindsey doesn't. Let him run with his orienting concept for a while--he takes it to interesting places.)

Yet Brink Lindsey is also a Manichean. From his perspective, it is not at all certain that the good guys' victory is going to be permanent. Claims (Tom Friedman provides a convenient target) that market pressures enforce neoliberal policies throughout the world are nonsense, for "[t]he plain fact is that market pressures--even souped-up, internet-driven market pressures--exert only modest and occasional discipline on national policies.... [Friedman's] 'golden straightjacket' is a loose fitting garment indeed" (p. 5). Countries around the world have turned to markets because markets promise to deliver economic growth, and successful economic growth is a necessity for their political survival. Should the political wheel turn again, and should something other than market-driven growth turn out to be a prerequisite for assembling dominant political coalitions--either because special-interest propaganda deceives voters about the value of the market, or because psychological flaws drive people to seek community and solidarity rather than liberty and prosperity--then the current pro-market worldwide political consensus will vanish as quickly as it came together. And the political power of special interests always has the market under threat: it was, after all, the dead hand of government control that caused the U.S. savings-and-loan disaster through "distortions caused by the promise of government bailouts" (p. 13).

His finest example of the dead hand in action, in my view at least, comes in his description of the Indian vehicle industry:

With a billion people, India has only around 40 million vehicles.... Total duties on used cars, for instance, are 180 percent.... Known alternately as a "jugaad," a "maruta," or a "boogi," the vehicle offers barebones transportation for Indian farmers. It has no roof. The 10-14 horsepower engine must be hand-cranked. It maxes out at 15 miles per hour. The driver sits on a wooden bench. But the rear compartment--a plywood bed with wood-paneled sides--has plenty of room for passengers or cargo. And the price of only around $1000 makes it an unbeatable bargain. We found boogi manufacturers... no assembly lines, no factories... just three small mechanics' garages spaced out along the semi-paved road.... The mechanics buy minivan spare parts--wheels, axles, transmissions, gear boxes, and steering--from markets in Delhi. They get their engines, made to power water pumps, from Agra. And they pick up steel for the chassis and wood for the framing from Jaipur.... One shop can turn out four or five boogis a month. Technically, these vehicles are illegal (pp. 163-4)...

Because these vehicles are illegal, any shop that tries to expand--to make more than four or five a month--will find itself attracting the attention of the state. An honest magistrate will shut it down. A dishonest magistrate will squeeze it dry through extortion. Only by staying small enough to evade the gaze of the state can the cheap-alternative-vehicle industry survive. And thus it is perhaps two or three times expensive as--with reasonable scale economies--it could be. Here the dead hand has produced enormous social waste: first with the extremely high tariffs on vehicle imports (which are fine with domestic truck and conventional automobile manufacturers), and second with the regulatory hand that cripples the efficiency and the scale (although not the existence) of the alternative-vehicle industry.

For another example of the dead hand in action, consider the commodity trading firm Phibros' involvement in Argentina, in Tucuman. An Argentine sugar mill wanted to expand. Phibro offered $20 million in financing "...secured by the sugar inventory. When the mill ran into problems, workers seized the factory.... Months went by before an accomodation was reached, and Phibro never returned to Tucuman" (p. 173). The next time an Argentine sugar mill wants to borrow on the world capital market to expand, it will in all probability be out of luck: the word in New York is that Argentina has no judges who will enforce contracts. If you think that foreign investment is a source of oppression, surplus value extraction, and "unequal exchange," you cheer the revolutionary sugar mill workers. But for a low- or medium-income country to assemble from its own savings the financing needed to accumulate the capital stock necessary for a modern post-industrial economy is a nearly impossible task.

But this does not mean that Lindsey calls for the abolition of government. He sees government as simultaneously doing "too much and too little. At the root of so many problems... is the failure of governments to provide reliable security for property and contract rights.... [T]op-down develoment schemes diverted attention away from the mundane but crucial work of building workable market institutions" (p. 13). For Lindsey realizes what the hardcore market fundamentalists do not. He realizes that the classical-liberal "night watchman" state--the government that has only two employees: a judge to decide who is right when contracts are disputed, and a constable to make sure nobody steals anything after dark--is a historically-unique, unusual, sophisticated, and immensely powerful politico-social institution. Think of it: The night watchman state must be able to enforce contracts--it must have, in reserve, sufficient authority and force that what its judges command actually happens. The night watchman state must be able to control local notables--it must be able to keep them from applying pressure to sign over property or other rights that those without local wealth, authority, prestige, and dependents cannot resist. (One thinks of the current wave of stories of Wal*Mart managers forcing employees into mandatory, unpaid overtime.) Most important, the night watchman state must be able to control its own functionaries--so that equal and exact justice is administered according to law, rather than according to who is the mayor's cousin or who has offered the biggest bribe.

In short, a government can be weak--can be the background rule maker for a laissez-faire economy--only if it is immensely strong. Lindsey does not shrink from this paradox. And he does not shrink from pointing out how many, many governments around the world--including the government of Thailand--are not strong enough to be a weak laissez-faire-supporting state:

In the case of Kaset Thai, supposedly all-powerful Western capital set out to challenge these breakdowns [in contract enforcement] and was decisively repulsed. Despite the pressure by a French bank to put the case under court supervision, and despite the court appointment of a Big Five accounting firm to oversee restructuring, nothing much changed.... In a high-profile case conducted under the hot spotlight of international scrutiny, the Thai legal system proved incapable of upholding the single most rudimentary norm of any legal system--the rule against murder. Instead, the proceedings degenerated into a squalid and pathetic farce of corruption and fecklessness...

Moreover, Lindsey's description of a free-market economy turns out to have a large amount of centralized control in the mix. He appeals to Ronald Coase to say that a market economy is not an economy in which all transactions are mediated through the market, a market economy is an economy in which firms can decide whether efficiency is best served by exchange or control:

...in a modern economy there is a vital, if limited, role for localized centralization within the market system in the form of large business enterprises. Second, the market system itself exists within a larger political order defined and enforced by the centralized ocercion of government. Collectivists asserted the superiority of a 'planned economy' over the market system, but in fact the market system is intricately planned.... The existence of large, sophisticated 'planning units' within the market order... serve[s] a vital function... created by the coming of mass production (p. 52).

Thus Lindsey's neo-libertarian vision makes contact with a left-wing economist's dream of the ideal social-democratic government: one that compensates for externalities by providing the appropriate market-based incentives while harnessing all the entrepreneurial energy of the market to the problems of invention, production, and distribution.

However, this ideal government--the one that provides the right rules of the game to structure market activity, but that refrains from fixing prices and mandating quantities itself--is not what we had in the decades after World War II. Why and how did we as a species get off track? Lindsey calls the process of getting off-track "the industrial counterrevolution."

In Lindsey's view, the industrial counterrevolution had two wellsprings. The first came in the desire of big businessmen, big bureaucrats, and later big labor unions to stabilize the structure of industry through comfortable oligopolies. People like Otto von Bismarck, first Chancellor of Imperial Germany and Judge Gary, first President of U.S. Steel sought to establish the individual welfare state of publicly-provided health insurance and pensions, and the corporate welfare state of cozy oligopolies and natural monopolies loosely regulated by captured agencies. However, in Lindsey's view there was a second source of the industrial counterrevolution. This second source was spiritual, or rather psychological. The market economy, especially the pre-WWI market economy, offered people liberty and prosperity. But what people wanted was solidarity and community:

...the appeal of the Industrial Counterrevolution was at bottom a spiritual one. The coming of technological urban society was the most... sweeping transformation.... Ways of life that had persisted for thousands of years were suddenly wiped away; the beliefs and institutions that had grown out of and adapted to traditional agricultural society now came under withering assault. Such rapid and radical change could not help but exact a heavy psychological toll.... Amidst the spiritual turmoil and disorientation, collectivism promised deliverance... community... rootedness (p. 96).

This collectivist movement took many names: fascism, communism, socialism, Naziism. It did, however, answer to deep psychological needs. It grew in strength. And the contrast between the failure of market economies to provide full employment during the 1930s and the apparent success of planned industrialization in the Soviet Union--where central planning built the steel mills of Magnitogorsk, and where the T-34 tanks built at Magnitogorsk broke the back of the Nazi army and carried Russian troops to the Elbe River--sealed the fate of the post-World War II World. "The Soviet Revolution.. had lit a bright flame... and laid the foundation for a new civilization" wrote Jawaharlal Nehru. As Lindsey says, "Nehru would be accompanied by Mao in China, Nasser in Egypt, Sukarno in Indonesia, Nkrumah in Ghana, and many others" including Clement Attlee in Britain: "'In matters of economic planning,' Attlee said in 1946, 'We agree with Soviet Russia'" (p. 96).

In the world in which Lindsey dwells, all these countries that adopted the "collectivist" model after World War II doomed their economies to stagnation. Lindsey quotes Latin American economic guru Raul Prebisch's second thoughts on the consequences of the protectionist, import-substituting policies he had recommended: "'the proliferation of industries of every kind in a closed market has deprived the Latin American countreis of the advantages of specialization and econmies of scale, and owing to the protection afforded by excessive tariff duties and restrictions, a healthy form of internal competition has failed to develop, to the detriment of efficient production...'" (p. 104) and asks, "[T]his was a surprise?"

Lindsey thus returns full circle. Collectivism--the dead hand of the state--gained power as a result of the confluence of special interest desires for economic stability, an Eric Fromm-like flight from freedom in search of solidarity and community, and the misinterpreted lessons of the Great Depression. The dead hand of the state throttled growth behind the iron curtain, crippled growth in the Soviet Union-emulating developing countries and in the protectionist-oligarchies of Latin America, and hobbled growth in European social democracies. Eventually, after decades of experience had demonstrated its failures, pragmatic politicians seeking economic growth drew the obvious lessons and abandoned the dead hand of state controls for the invisible hand of the market.

Yet Lindsey is aware--or at least half aware--of flaws in his grand argument. British post-World War II growth was disappointing relative to the U.S., yes, but it was also the fastest growth the country had ever seen. The state intervention-heavy social democracies of northwest Europe built world-class economies and welfare states that absorbed 50% of GDP in the generation after World War II. And the dirigiste export-subsidizing industrial policies of East Asia produced the fastest growth the world had seen, anywhere, anytime, in spite of their failure to worship at the altar of laissez-faire. Clearly the dead hand was not all that dead in at least two major regions of the globe. Clearly Lindsey's model is incomplete. He recognizes that it is incomplete, explaining, for example, that the "...various industrial policies of the East Asian miracle economies... sent a strong cultural signal. The government was committed to fostering economic growth and a pro-business environment. That signal doubtless contributed positively to the development of the strong entrepreneurial cultures that now grace the region. In other words, the cultural effect of industrial policy gave a boost to economic dynamism that was wholly separate from the actual substance" (p. 151) of the industrial policies, which were, in Lindsey's view, destructive of economic efficiency.

Moreover, one is tempted to ask Lindsey: what of the Frommian "flight from freedom" that was the source of the industrial counterrevolution? If people seek solidarity and community--if Labor Secretary Bob Reich's message that American workers should get used to change, should expect to have ten jobs and three careers in a lifetime, laid a big goose egg long before it got to Broadway--then isn't any laissez-faire state likely to be politically unstable unless it has a large does of nanny-state added to the mix?

Nevertheless, even if you don't buy all of Brink Lindsey's assumptions--and I don't, I'm a social democrat, not a neo-libertarian--it is a brilliant, brilliant book: fearlessly and intelligently argued, and a true joy to read.**


**I do have a few pickier criticisms, but let me save them for another time: they are worth making only because the rest of the book is of such high quality, and I don't feel like playing the skunk at the garden party right now.

Brink Lindsey a Manichean: not at all certain that the good guys are going to win.

pp. 2-3: ...the dream of centralized, top-down control over the course of economic development... has expired in universal failure. It died in the United States and Western Europe during the stagflation of the 1970s. It died in China when Deng Xiaoping declared... "it doesn't matter if the cat is black or white..." It died in Latin America during the debt crisis... of the 1980s. It died in the Soviet Empire with the collapse of the Berlin Wall. And it died in East Asia with the bursting of the Japanese bubble and the financial crisis of 1997-98.... As faith in government controls has dissipated, markets have been given wider play.... Trade and investment liberalization are thus of a piece with a broad array of market-oriented policies: in particular, the privatization of state-owned industries, commitment to a monetary policy of price stability; elimination of price and entry controls that sustained domestic monopolies and oligopolies; the resurrection of labor markets; the reform of punitive tax systems; and the overhaul of financial institutions to make the allocation of capital more responsive to market returns..."

p. 5: The plain fact is that market pressures--even souped-up, internet-driven market pressures--exert only modest and occasional discipline on national policies.... the 'golden straightjacket' is a loose fitting garment indeed...

p. 7: "By and large, the worldwide rediscovery of markets has been guided by pragmatism, a rejection of the failed dogma of centralized control in favor of something, anything, that works. This is a time of idol smashing, not of setting up new gods."

p. 8: Why are governments increasingly deciding to pay attention to market signals? The usual answer is that the microchip and the Internet have allowed businesses to... move... and give[n] them the leverage to play national governments against each other.... [But] since when did attracting foreign investors become an economically irresistible proposition for countries of the old third world?"

pp. 8-9: However appealing the notion that the two great trends of recent times--the information revolution and globalization--really boil down to the same thing, the spread of more market-oriented policies cannot be explained by crude technological determinism.... Globalization is not a simplistic technological imperative. In fact, it is not primarily an economic phenomenon at all.... [but] a political event. Globalization... [is] but one consequence of the death and repudiation of the old ideal of central planning.... It is the retreat of the state that has allowed international market relationships to regain a foothold. The retreat was provoked, not by the impingement of blind economic forces or by transports of libertarian enthusiasm, but by disillusionment...

p. 12: Call it the invisible hand versus the dead hand...

p. 13: Distortions caused by the promise of government bailouts plague even the banking sectors of the advanced nations, as evidenced by the U.S. savings-and-loan disaster...

p. 13: Governments... are simultaneously doing too much and too little. At the root of so many problems... is the failure of governments to provide reliable security for property and contract rights.... [T]op-down development schemes diverted attention away from the mundane but crucial work of building workable market institutions..."

p. 28: Business leaders like Gary and Perkins stoutly opposed... outright expropriation.... Instead, they pushed for a more moderate course of extinguishing competition through regulation--either government regulation or the self-regulation of industrial cartels. Both sides agreed that competition had to be suppressed...

p. 29: Today it is odd to think of American big business as an inspiration for collectivists, rather than their nemesis. But it was...

pp. 32-33: In Germany, the first and crucial moves toward collectivism were made... by the right--in the form of Otto von Bismarck's 'state socialism'...

pages 34 ff. What Lindsey somehow never says is that proto-authoritarian, relatively-centralized, nationalized-railroads imperial Germany was a great economic success...

page 42 ff. Lindsey can't figure out whether the problem of central planning is a problem of information or a problem of incentives...

p. 52: The market system accelerates the evolution of useful new ideas in a two-step process: First, it increases the number of 'mutations' by decentralizing investment decisions; second, it then applies to those mutations the ruthless selection pressures of profit and loss...

p. 52: ...in a modern economy there is a vital, if limited, role for localized centralization within the market system in the form of large business enterprises. Second, the market system itself exists within a larger political order defined and enforced by the centralized coercion of government. Collectivists asserted the superiority of a 'planned economy' over the market system, but in fact the market system is intricately planned.... The existence of large, sophisticated 'planning units' within the market order... serve[s] a vital function... created by the coming of mass production...

p. 53: Coase recognized that firms represent the supercession of the normal market method of allocating resources... by centralized control. He concluded that corporations supercede markets because it is sometimes less costly to organize production administratively...

p. 57: Most fundamentally, markets rely on the elaboration and enforcement of basic property and contract rights...

p. 63: In 1913, merchandise trade as a percentage of gross output totaled... 11.9 percent for the industrialized countries... not matched again... until sometime in the 1970s... p. 63: Before the advent of the [railroad], a journey form new York to Chicago took three weeks; just one generation later, in 1857, that same trip took only two days...

p. 96: ...the appeal of the Industrial Counterrevolution was at bottom a spiritual one. The coming of technological urban society was the most... sweeping transformation.... Ways of life that had persisted for thousands of years were suddenly wiped away; the beliefs and institutions that had grown out of and adapted to traditional agricultural society now came under withering assault. Such rapid and radical change could not help but exact a heavy psychological toll.... Amidst the spiritual turmoil and disorientation, collectivism promised deliverance... community... rootedness...

p. 99: 'The Soviet Revolution.. had lit a bright flame... and laid the foundation for a new civilization,' wrote Jawaharlal Nehru from prison during World War II.... In 1947 India would win its independence, and under Nehru's leadership, plunge into mimicry of Stalinist planning.... Nehru would be accompanied by Mao in China, Nasser in Egypt, Sukarno in Indonesia, Nkrumah in Ghana, and many others--all eager to mobilize and modernize their people through the agency of the centralizing state.... Collectivism, Nkrumah and his fellow third world leaders believed, would provide the needed shortcut.... 'Capitalism is too complicated a system for a newly-independent nation...'

p. 91: "In matters of economic planning," Attlee said in 1946, "we agree with Soviet Russia."

p. 108: "market mechanisms were a useful way of administering given economic structures, but the task of economic architecture--of choosing and designing those basic structures--remained the preserve of a small technocratic elite."

p. 104: Only 13 years after his manifesto for economic self-sufficiency, Raul Prebisch offered this disillusioned assessment of the consequences of taking his advice: "the proliferation of industries of every kind in a closed market has deprived the Latin American countreis of the advantages of specialization and economies of scale, and owing to the protection afforded by excessive tariff duties and restrictions, a healthy form of internal competition has failed to develop, to the detriment of efficient production." One is tempted to ask: And this was a surprise?

p. 115: "In this same regard, consider the various industrial policies of the East Asian miracle economies. Regardless of their effectiveness as purely economic measures, they sent a strong cultural signal. The government was committed to fostering economic growth and a pro-business environment. That signal doubtless contributed positively to the development of the strong entrepreneurial cultures that now grace the region. In other words, the cultural effect of industrial policy gave a boost to economic dynamism that was wholly separate from the actual substance of the measures taken...

p. 117: As Yegor Gaidar... observed in 1993: "After the first stage of industrialization... no industry in Russia had its resources distributed to other industries. Production would not cease because there was no demand for the products, or because there was a more efficient way to produce them.... This type of economy could be dynamic and could have a high level of growth, but only until its resources were needed to create a new industry"

p. 120: "half the tanks of the Red Army were made from Magnitogorsk steel"

p. 135: Meanwhile, Russian steel mills were especially hard hit by the U.S. steel industry's protectionist rampage..."

p. 143: "On that point Clyde Prestowitz's formulation was typical: 'A key objective in any economy... is to create an industry that produces technologically sophisticated products with high income inelasticity... and a rapid growth rate.... That objective... cannot be achieved without government intervention.' What is most striking about the criteria that Prestowitz uses to identify 'strategic' industries is the one that is missing: namely, profitability..."

p. 161: In the case of Kaset Thai, supposedly all-powerful Western capital set out to challenge these breakdowns and was decisively repulsed. Despite the pressure by a French bank to put the case under court supervision, and despite the court appointment of a Big Five accounting firm to oversee restructuring, nothing much changed.... In a high-profile case conducted under the hot spotlight of international scrutiny, the Thai legal system proved incapable of upholding the single most rudimentary norm of any legal system--the rule against murder. Instead, the proceedings degenerated into a squalid and pathetic farce of corruption and fecklessness...

pp. 163-4: With a billion people, India has only around 40 million vehicles.... Total duties on used cars, for instance, are 180 percent.... Known alternately as a "jugaad," a "maruta," or a "boogi," the vehicle offers barebones transportation for Indian farmers. It has no roof. The 10-14 horsepower engine must be hand-cranked. It maxes out at 15 miles per hour. The driver sits on a wooden bench. But the rear compartment--a plywood bed with wood-paneled sides--has plenty of room for passengers or cargo. And the price of only around $1000 makes it an unbeatable bargain. We found boogi manufacturers... no assembly lines, no factories... just three small mechanics' garages spaced out along the semi-paved road.... The mechanics buy minivan spare parts--wheels, axles, transmissions, gear boxes, and steering--from markets in Delhi. They get their engines, made to power water pumps, from Agra. And they pick up steel for the chassis and wood for the framing from Jaipur.... One shop can turn out four or five boogis a month. Technically, these vehicles are illegal...

p. 172: Argentinian government spending as a percentage of GDP climbed from 9.4% in 1989 to 21% in 2000, "in spite of the fact that sweeping privatizations were at the same time freeing the government of significant fiscal burdens".

p. 173: "Phibro... provid[ed] $20 million in financing to a local sugar mill secured by the sugar inventory. When the mill ran into problems, workers seized the factory.... Months went by before an accommodation was reached, and Phibro never returned to Tucuman..."

p. 175: Olson argued persuasively that underdevelopment reflects, not the absence of markets generally, but rather the absence of particular types of markets--namely, "socially contrived" or "property-rights-intensive" markets that arise and flower only with the help of appropriate, government-provided legal institutions...

p. 176: "Those essential government activities that undergird a liberal market order are, by and large, so routine and uncontroversial that they do not figure in the ongoing debate over the role of government. In that context, economic liberals are always seen demanding less government intervention, and so develops the misconception that 'the less government, the better' is the sum and substance of their position. But the situation is altogether different for roughly five billion of the earth's six billion people.... it is the underdevelopment of legal institutions that is especially debilitating. In a continuum from bad to worse--from corrupt officials and inadequate courts, to laws so dysfunctional that many or most people are chased into the informal sector, to the arbitrary confiscations of kleptocratic misrule, to the chaos of Hobbesian anarchy--the poorer countreis are all plagued by the insufficient protection of property and contract rights. Under these conditions, most economic activity is confined to what Olson called "spontaneous" or "self-enforcing" markets--markets based on personal relationships or face-to-face contact. But those markets, however resilient and durable, cannot produce the division of labor upon which affluence depends..."

p. 209: "A clear distinction can be drawn between the financial systems of Thailand, Korea,and Indonesia--the economies hardest hit by the Asian crisis... heavy reliance on bank lending... poor legal infrastructure... limited access granted to foreign financial institutions...

p. 211: liberalization left untouched many anti-market policies whose effect was to distort the new flows of capital in ultimately calamitous ways... pegged exchange rate systems... segmentation of financial markets... restrictions on foreign banks... moral hazard... overloading of backward domestic financial sectors... none of this can be confused in any way with economic liberalism. And when these anti-market policies operated on newly liberalized capital movements, the results were disastrous...

p. 249: During the Seattle riots, one junior diplomat from Gabon: "They understand nothing, and are as remote from our problems as you'd expect from middle-class whites from Washington State..."

Posted by DeLong at March 22, 2003 08:40 AM | TrackBack

Comments

I usually really love the postings on this page, but...

"should something other than market-driven growth turn out to be a prerequisite for assembling dominant political coalitions ... because psychological flaws drive people to seek community and solidarity rather than liberty and prosperity"

How is it that a desire for anything other than "liberty and prosperity" is a "psychological flaw"? Perhaps it is a "mistake" from the viewpoint of a libertarian, but that's about it. If community, solidarity, or any other value system---some people seek an intentionally simple life, or a spiritual one, or one they perceive as "natural"---satisfies people, why are they flawed? And how can anyone claim this "flaw" is at least partly medical or "cognitive" ("psychological")?

This statement belies a stunning prejudice against value systems not based purely on free markets. It is an insult to say that if I think markets are good and efficient, but feel that materialism should be curbed and community protected, that I either need my head examined, or am making some sort of cognitive error. And language like this will always lead lay people to suspect economists don't understand any preferences other than those drilled into them in grad school.

Posted by: Chris Adolph on March 22, 2003 11:03 AM

Touche...

Posted by: Brad DeLong on March 22, 2003 11:13 AM

Where was it that I read that learning astronomy made you a better, altruist, person, while learning economy made people more egoistical?

DSW

Posted by: Antoni Jaume on March 22, 2003 11:25 AM

Chris Adolph writes:

"How is it that a desire for anything other than "liberty and prosperity" is a "psychological flaw"? Perhaps it is a "mistake" from the viewpoint of a libertarian, but that's about it. If community, solidarity, or any other value system---some people seek an intentionally simple life, or a spiritual one, or one they perceive as "natural"---satisfies people, why are they flawed? And how can anyone claim this "flaw" is at least partly medical or "cognitive" ("psychological")?"

One advantage of liberty and prosperity is that they afford the maximum opportunity for people to choose their own values. For example, many people in the US choose artistic or spiritual pursuits over wealth maximization. That choice is not always an easy one, but it is easier under a regime of liberty and prosperity than under an alternative system.

A market economy is not in conflict with community and solidarity. The amount of community and solidarity in the USA compares favorably with that in other countries. De Tocqueville observed this long ago, and it remains true even today.


Posted by: Joe Willingham on March 22, 2003 12:25 PM

Trust libertarians to bring up De Tocqueville, a man who would be utterly repelled if he looked at the political-economic system that today's libertarians so often defend. All four branches of the U.S. government today--the executive, legistlative, judicial, and news media ("the fourth estate") have become the playthings of quasi-monopolistic corporations, a type of situation which was Adam Smith's nightmare. The sense of community and solidarity that the USA had at the time of De Tocqueville's visit was due to two things which simply do not exist today: first, the active participation of a large majority of Americans in the political process, even if only at the local level, and second, the fact that a substantial proportion of Americans owned their own businesses (usually their farms) as opposed to having to sell their labor.

The paradoxical weak/strong night watchman government that Lindsey discusses seldom lasts for long in the real span of history. Eventually, any market economy that is not sufficiently regulated (not in the sense of a social security welfare state, nor in the sense of steel industry-style labor-management corporatism, but more in the sense of vigorous anti-trust, anti-securities fraud, and anti-conflict of interest enforcement) will see its larger players begin to regulate the government for the sake of their own ends--resulting in utterly self-seeking and influence-corrupted governments of the GW Bush variety. It is this conundrum, and not tameable business cycles or fanciful propositions that the rate of profit falls over time, that is the real cancer of capitalist economies.

Unless eternal vigilance is maintained for all government institutions, the dead hand usually ends up arriving anyway, though in a different form.

Posted by: andres on March 22, 2003 02:47 PM

It's pretty hard not to laugh at that. To pick just one example - Roosevelt's division of the financial markets was bad? Uh huh. The very idea is ludicrous and it is refuted by the events of the last twenty years - where financial deregulation lead to widespread fraud (legal and illegal), and heavily contributed to a bubble and the economic collapse.

Also, the government determines who wins economic competitions. It just favours bigger players these days. Anyone who thinks the US marketplace is anything close to remotely free has never worked in compliance. Every day, I see between 5 to 10 (on average) new or proposed bills or amendments or regulations or explanations of regulations cross my desk. Just for the life, pension and annuity business. And I don't see all of them.

Posted by: Ian Welsh on March 22, 2003 05:48 PM

Radical Libertarians are idiots. The government must make sure that the business community does not break the law and collude against consumers. There is also no such thing as a totalist economic system. It's always a matter of degree. Fortunately, the United States has a much freer market system than the Old Europeans and the declining Canadians. Gosh, can you imagine what these nations would do if America didn't give them free military protection? They would most certainly have to cut back on their social welfare programs.

I hope that our national leaders soon pass a law mandating that Canadian citizens pay full freight for our pharmaceutical products. That would be very nice to see. It’s time that Canada stops mooching off the United States.

Oh by the way, some of you might wish to ask Ian Welsh about his friends who were thrilled by the terrorist attacks on 9/11. He was very glad to tell everybody on the discussion board of TheAtlantic.com. I’m sure we can get Mr. Welsh to relive this experience for the benefit of the visitors to Brad DeLong’s blog.

Posted by: David Thomson on March 22, 2003 06:26 PM

"I hope that our national leaders soon pass a law mandating that Canadian citizens pay full freight for our pharmaceutical products. That would be very nice to see. "

Uh-huh. And this would be enforced how?

Wait--let me guess--I see it now: George W. Bush at the AEI, explaining how he's going to bring democracy to the Canadians...

Posted by: Paul on March 22, 2003 10:34 PM

How such first order analysis continues to be considered worthy of discussion is beyond me. Unless we economists fully internalize once and for all that markets do not properly factor environmental and social costs without an enlightened "dead hand" steping in, we will always be relegated the realm of vapid theorists. "Psychological flaw"??!! The stupidity is appalling... wow.

Posted by: Tudor Boloni on March 23, 2003 07:31 AM

Listen to the sound of Canadian "mooching." Mooch, mooch, mooch. All those free drugs from America. Why Merck will soon be out of business. Mooch, mooch, mooch.

Heck, why sell drugs to Canadians at any price? Those mooching Canadians are too darn helathy as it is. Mooch, mooch, mooch.

Texans never mooch. Yippe, kayyay.

Posted by: bill on March 23, 2003 09:22 AM

Turn over an American Enterprise type and you get an FDR lament. Rotten Social Security, rotten TVA, rotten FDR policies that saved American capitalism. Let the banks run free. Duh. Why am I not iompressed with BL? We see how well deregulation and Enron got along together. L<ove ya, Enroners.

Rotten Social Security. That is what American enterprise is really after, now.

Posted by bill at March 23, 2003 09:28 AM
March 23, 2003

Perle's Plunder Blunder
By MAUREEN DOWD - NYTimes

It's Richard Perle's world. We're just fighting in it.

The Prince of Darkness, a man who whips up revelatory soufflés and revolutionary pre-emption doctrines with equal ease, took a victory lap at the American Enterprise Institute on Friday morning.

The critical battle for Baghdad was yet to come and "Shock and Awe" was still a few hours away. (The hawks, who are trying to send a message to the world not to mess with America, might have preferred an even more intimidating bombing campaign title, like "Operation Who's Your Daddy?")

Posted by: bill on March 23, 2003 10:09 AM

Just so. Canadians must not be allowed to buy American made drugs at prices the companies choose. We must tax those mooching Canadians. Mooching Canadians have abused us long enough. Time to get really really really tough. We have been far too soft far too long.

Posted by: jd on March 23, 2003 10:47 AM

Canada's declining? How can you justify saying that? It has the best or second best performing rich country economy.

Posted by: Mitch on March 23, 2003 12:18 PM

Can someone explain to me how it is Canadians don't pay the full freight for pharmaceuticals? It seems to me a price differential is partially explained by differing patent regulation regarding brand-name drugs and generics. So I guess Canadian generic producers "lift" patented drugs and produce them cheaply north of the border? That would explain the bus loads of US seniors crossing the border each week to stock up.

Speaking of Americans crossing the border for discounts, I think US-based firms such as GM and Ford might be upset if the next round of CBA negotiations with the Canadian Autoworkers Union bogged down due to increased drug costs - most over-the-counter prescriptions are covered by private insurance.

Canada did lag behind the US after the recession in the early 90s - the economy didn't shrink, it simply didn't grow as quickly as in the US. But the last few years have been decent, GDP growth has been among (if not the...) tops in the G7. Lower levels of consumer debt (particularly smaller amounts of wealth-effect debt) than in the US and balanced federal and provincial books bode well. Recent indicators show a slight resurgence of inflation (energy costs), but the Bank of Canada seems confident it can raise rates by 75 or 100 basis points without doing much harm.

Posted by: Stephane on March 23, 2003 08:25 PM

The whole drug company argument is a big basket of worms. However, perhaps if they spent less money on advertising and treated fewer false ailments drugs would be cheaper. Most of the greatest advances in health care did not come out of private companies (antibiotics, pasteurization, sterilization) etc . . . What worked for the first half of the 19th century is, however, supposed to no longer work - for reasons that I have never seen adequately explained.

The real reason, on suspects, is that you can't get rich off public medicine.

Posted by: Ian Welsh on March 23, 2003 09:31 PM

The reason, it seems to me, that the countries of central Europe were able to achieve impressive economic growth in the post-war period as they maintained extensive, highly regulated welfare states, while at the same time the Soviet Union, China, India, Latin America and other parts of the world were not able to do the same, has to do with economic innovation.

Large welfare states, and more significantly, massive government regulation of economic activity, stifle innovation. The vast majority of innovations in the Western world of the last 50 years, not just technoloigcal but social as well, have come out of the United States. These innovations could be easily exported to more regulated economies in Europe because those countries shared a relatively similar cultural and material reality with the United States.

But the nations that did not do so well with heavily regulated economies in the postwar world did not share a common culture and material standard of living with the U.S. Those societies therefore were less able to import U.S. innovations. Take your example of illegal car makers in India. The U.S. can invent the automobile and refine its design over the course of many decades (yes yes, I know that German and Japanese engineers have contributed mightily to the evolution of the automobile, but the bulk of the innovative work in building the modern car was done by American engineers operating in a relatively free market economy). But the end product of all that innovation is quite expensive, by third world standards.

Postwar France could borrow much of the innovation in automotive design from the U.S. because the French are able to afford cars comparable to American cars. But rural Indians are not, and thus they require innovations of their own. But these innovations are unlikely to come from India itself, because the market in India does not reward risk-taking innovations (And they're unlikely to come from America, because Americans don't want cars that can be built for $1,000). We see that enterprising Indians can produce servicable vehicles on a tight budget, but the regulatory environment prevents them from refining and expanding on these innovations. Perhaps in a more free economy those local autosmiths in India could start producing $1,000 cars that were much more comparable to modern automobiles - more reliable, faster, safer. They could never produce a $1,000 car that would match the performance and features of even a low end Western-made automobile, but they might well be able to make quantum leaps of their own.

Proponents of globalization often want to export the practices and technologies of modern industrialized nations to the third world. In a sense, this is entirely good. After all the material standard of living is immeasurably better in the U.S. and Europe than it is in Latin America and India, not to mention sub-Saharan Africa. But we should also encourage the free flow of practices and technolgies between third world countries, because many of the innovations that have sprung up in poverty-ridden countries to make life a little better in those places will be more immediately useful in similar countries.

Posted by: sd on March 24, 2003 08:51 AM

Brad, am I missing something on the East Asian economies and your critique? Wasn't much the increased growth in those economies caused by the same increases in investment that the Soviet Union was able to acheive? As such, they wouldn't stand against Lindsey's argument.

Antoni, the threat of capture seems very closely tied to the level inequality. It is the Libertarian argument for Estate Taxes.

Joe, increased efficiency is not an end unto itself. Increasing efficiency doesn't make paving over grandpa's grave the right thing to do.

Posted by: Stan on March 24, 2003 11:18 AM

Among the reasons Canadians pay less is US made drugs is that the Canadian health care system makes mass purchases and the drug companies bargain over price. Not to worry, Merck does just fine in Canada and England and France and Sweden.

Posted by: dahl on March 24, 2003 11:27 AM

Merely the remarks about FDR show that Brink Lindsey is a typical American Enterprise propagandist. So what if the wriiting is more subtle. These so-called thinkers wish to destroy all that was restorative about the New Deal and Great Society.

I value Social Security, Medicare, and all sorts of regulatroy balances.

Posted by: jd on March 24, 2003 11:32 AM

//
Antoni, the threat of capture seems very closely tied to the level inequality. It is the Libertarian argument for Estate Taxes.
//

Stan, I do not see the background of these sentences. Would you be so kind to extend yourself on these points?

DSW

Posted by: Antoni Jaume on March 24, 2003 11:51 AM

"Turn over an American Enterprise type and you get an FDR lament. Rotten Social Security, rotten TVA, rotten FDR policies that saved American
capitalism."

Saved American capitalism? Kind of the way that the military "saved the village" in the well-known one-liner?

Do you think it's a coincidence that Roosevelt's embrace of socialism coincided with nearly a decade of depression?

"Eventually, any market economy that is not sufficiently regulated (not in the sense of a social security welfare state, nor in the sense of steel industry-style labor-management corporatism, but more in the sense of vigorous anti-trust, anti-securities fraud, and anti-conflict of interest enforcement) will see its larger players begin to regulate the government for the sake of their own ends--resulting in utterly self-seeking and influence-corrupted governments of the GW Bush variety."

But anti-trust, anti-securities fraud, and anti-conflict-of-interest enforcement are among the methods that the players use to regulate the government for the sake of their own ends. They, and the politicians they ally with, pretend that these laws are to rein in the corporations for the benefit of the people, when they really rein in competitors for the benefit of established corporations.

"However, perhaps if they spent less money on advertising and treated fewer false ailments drugs would be cheaper."

That doesn't make any sense. Treating "false ailments" is a profitable activity; it's not something that's subsidized by the profits derived from treating "real" ailments; thus ceasing to treat "false ailments" cannot have any positive impact on the price of treatments for "real ailments".

Posted by: Ken on March 24, 2003 11:57 AM

""Do you think it's a coincidence that Roosevelt's embrace of socialism coincided with nearly a decade of depression?""

Read some history. The Great Depression started during the aftermath of the stock market crash of October 1929, more than three years before Roosevelt became president. Unemployment during the GD was at its highest point in the runup to the 1932 elections, i.e. before Roosevelt assumed the presidency and well before whatever economic policies he put in place started to take effect.

Posted by: andres on March 24, 2003 01:20 PM

Antoni, sure. I see why you ask:

"Clearly Lindsey's model is incomplete. He recognizes that it is incomplete, explaining, for example, that the "...various industrial policies of the East Asian miracle economies... sent a strong cultural signal. The government was committed to fostering economic growth and a pro-business environment. That signal doubtless contributed positively to the development of the strong entrepreneurial cultures that now grace the region. In other words, the cultural effect of industrial policy gave a boost to economic dynamism that was wholly separate from the actual substance" (p. 151) of the industrial policies, which were, in Lindsey's view, destructive of economic efficiency."

Brad, am I missing something on the East Asian economies and your critique? Wasn't much [of] the increased growth in those economies caused by the same increases in investment that the Soviet Union was able to acheive? As such, they wouldn't stand against Lindsey's argument.


"The paradoxical weak/strong night watchman government that Lindsey discusses seldom lasts for long in the real span of history. Eventually, any market economy that is not sufficiently regulated (not in the sense of a social security welfare state, nor in the sense of steel industry-style labor-management corporatism, but more in the sense of vigorous anti-trust, anti-securities fraud, and anti-conflict of interest enforcement) will see its larger players begin to regulate the government for the sake of their own ends--resulting in utterly self-seeking and influence-corrupted governments of the GW Bush variety. It is this conundrum, and not tameable business cycles or fanciful propositions that the rate of profit falls over time, that is the real cancer of capitalist economies."

Antoni [Andres], the threat of capture seems very closely tied to the level inequality. It is the Libertarian argument for Estate Taxes.


"One advantage of liberty and prosperity is that they afford the maximum opportunity for people to choose their own values. For example, many people in the US choose artistic or spiritual pursuits over wealth maximization. That choice is not always an easy one, but it is easier under a regime of liberty and prosperity than under an alternative system.

A market economy is not in conflict with community and solidarity. The amount of community and solidarity in the USA compares favorably with that in other countries. De Tocqueville observed this long ago, and it remains true even today."

Joe, increased efficiency is not an end unto itself. Increasing efficiency doesn't make paving over grandpa's grave the right thing to do.


Posted by: Stan on March 24, 2003 02:24 PM

"The sense of community and solidarity that the USA had at the time of De Tocqueville's visit was due to two things which simply do not exist today: first, the active participation of a large majority of Americans in the political process,...."

Heh, heh, heh! Perhaps you should follow your own advice, and "Read some history." DeTocqueville visited the United States in 1831. Women--50% of the population--could not vote. Slaves--15% of the population--could not vote.

In 1831, U.S. senators were elected by state legislatures. In 1831, some states also chose presidential electors by the vote of state legislatures (not tied to a popular vote in the state).

In summary, in the U.S. in 1831, there wasn't even 1/3rd of the potential for participation in the political process that there is today. (There was, however, far less federal government interference in most people's lives.)

Posted by: Mark Bahner on March 24, 2003 02:33 PM

"If community, solidarity, or any other value system---some people seek an intentionally simple life, or a spiritual one, or one they perceive as "natural"---satisfies people, why are they flawed?"

****Federal**** pursuit of "community, solidarity, simple life, spiritual life, etc." are all flawed, because:

1) they curb economic growth (economic growth is higher when people are free to spend their money as they desired, rather than as chosen by the government),

2) in the U.S., such *federal* pursuits are simply against The Law (against the Constitution), and thus promote the Rule of Men (the government doing whatever it chooses) rather than the Rule of Law (the government being limited by the Constitution),

3) such pursuits could be performed at the state and local level, where there is competition, rather than at the federal level, where there is a monopoly (unless one desires to move to another country).

Other than those 3 strikes, federal government promotions of "community, solidarity, simple life, spiritual life, etc." are a big hit.

Posted by: Mark Bahner on March 24, 2003 02:39 PM

"Radical Libertarians are idiots."

An interesting comment, considering your support of Republican G.W. Bush. It's a shame Bush was too much of a coward (and apparently not enough interested in "Ethics in Government") to come onto the same stage with Libertarian Harry Browne, at the Judicial Watch presidential debate, in 2000. The whole world could have judged who was smarter. (And Al Gore would be President.)

But President Bush has a chance to get his courage back by 2004. Let him get up on a stage with the Libertarian candidate--whoever he or she may be--and we can all see who the smarter person is.

There is absolutely nothing "idiotic" about "radical Libertarianism"...the idea that the only purpose of government is to protect people from force and fraud. Similar sentiments were expressed by "radical Libertarians" like Thomas Jefferson, George Washington, James Madison, and John Stuart Mill. I can guarantee you those men were way smarter than G.W. Bush:

“It is to secure rights that we resort to government at all.” (Thomas Jefferson, 1795)

"Were we directed from Washington when to sow and when to reap, we should soon want bread." --Thomas Jefferson

"A wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and all that is necessary…"-- Thomas Jefferson, in his 1801 inaugural address

The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant." --John Stuart Mill

“Government is not reason, it is not eloquence, it is force; like fire, a troublesome servant and a fearful master. Never for a moment should it be left to irresponsible action.” (George Washington)

“That is not a just government, nor is property secure under it, where the property which a man has in his personal safety and personal liberty is violated by arbitrary seizures of one class of citizens for the service of the rest.” (James Madison, 1792)

“If in the opinion of the People, the distribution or modification of the Constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates. But let there be no change by usurpation; for though this, in the one instance, may be the instrument of the good, it is the customary weapon by which free governments are destroyed.” (George Washington, farewell address, 1796)

Mr. Thompson continues, "Government must make sure that the business community does not break the law..."

Such as producing cars that don't get lower gas mileage than required by federal law? Or perhaps you're thinking of not producing toilets that use less water per flush than required by federal law?

If you are instead talking about laws against fraud or violence, "radical Libertarians" support such laws.

Posted by: Mark Bahner on March 24, 2003 03:32 PM

Brad DeLong writes, "Nevertheless, even if you don't buy all of Brink Lindsey's assumptions--and I don't, I'm a social democrat, not a neo-libertarian--it is a brilliant, brilliant book: fearlessly and intelligently argued, and a true joy to read.**"

Dr. DeLong, your use of phrases to classify yourself and others fascinates me!

Here, you refer to yourself as a "social democrat." In another post (one having to do with what systems produce economic growth), I recall you referring to yourself as a "neoliberal." (Correct me if I'm wrong.)

And here you refer to Brink Lindsey (of the Cato Institute) as a "neolibertarian."

Just what do you mean by "neolibertarian"...as opposed to just plain "libertarian?"

And when you referred to yourself as a "neoliberal"...that is frequently what people refer to Ronald Reagan as. (Milton Friedman too, for that matter.) Does that mean you'll now refer to yourself only as a "social democrat"? ;-) As far as I can tell, you don't consider yourself in the same political philosophy as those men! (Personally, I don't consider those men even in the same political philosophy with each other...though Reagan occasionally talked like Milton Friedman. )

Posted by: Mark Bahner on March 24, 2003 04:08 PM

Oops. I wrote, "Such as producing cars that don't get lower gas mileage than required by federal law?"

I forgot to edit out the "don't." It should have read, "Such as producing cars that get lower gas mileage than required by federal law?"

My point basically being that there are literally thousands of government laws that businesses are compelled to obey that are, by objective analysis, "idiotic." (To use Mr. Thompson's phrase.)

Posted by: Mark Bahner on March 24, 2003 04:18 PM

"Read some history. The Great Depression started during the aftermath of the stock market crash of October 1929, more than three years before Roosevelt became president. Unemployment during the GD was at its highest point in the runup to the 1932 elections, i.e. before Roosevelt assumed the presidency and well before whatever economic policies he put in place started to take effect."

I must concede that Roosevelt wouldn't have had a chance to keep the economy in the crapper for nearly a decade if his idiot predecessor hadn't cut off world trade and jacked up taxes in the early stages of the downturn. It also didn't help that the Federal Reserve promised to bail out banks that ran into trouble, lulling them into a false sense of security, then left them to twist in the wind.

But I still maintain that, if not for Roosevelt's subsequent policies, recovery would not have taken nearly 10 years from that point, a length of downturn completely unheard of.

"My point basically being that there are literally thousands of government laws that businesses are compelled to obey that are, by objective analysis, "idiotic." (To use Mr. Thompson's phrase.)"

And let's not forget that for every transaction that "big business" is would have engaged in if not for a government act forbidding it, there is another party, often an "ordinary person", that is also prevented from engaging in that same transaction by the same government act. Why don't the "champions of the little guy" ever stand up for his rights in these matters?

Posted by: Ken on March 24, 2003 08:02 PM

"But I still maintain that, if not for Roosevelt's subsequent policies, recovery would not have taken nearly 10 years from that point, a length of downturn completely unheard of."

I read that the Federal Reserve raised the required reserve ratio in 1936, just as things started to recover.

When I was studying economics, the required reserve ratio was called the "atomic bomb" of monetary policy. It was said that the Fed never should use it, because it's too crude an instrument.

Therefore, from what I understand, about the last thing in the world the Fed should do during a depression, is to raise the required reserve ratio, just as recovery seems possible.

So at least some blame for increasing the length of the Depression should go to the Fed.

I blame FDR much more for the long-term consequences of abandoning the Constitution, such that no federal program or spending is any more considered unconstitutional. This has led to the horrendous long-term subsidies for Agriculture, not to mention creation of the Departments of Energy, Education, Health and Human Services, etc.

My guess is the federal spending spree started by FDR slows average GDP growth by...2 percentage points per year. At least.

Posted by: Mark Bahner on March 24, 2003 08:19 PM

One of Roosevelt's disasters was the subsidies that artificially raised the prices of agricultural goods. Imagine this logic: people are losing buying power, so let's raise the cost of everybody's groceries at the benefit of a select few!

Thomas Sowell stated (I forget where) that the primary cause of the Depression was deflation. The shrinking value of the dollar was especially hard on those with fixed-rate debts. As personal incomes shrink, debt payments, remaining nominally the same, eats up an increasing portion of the household (or business) budget. If deflation continues long enough - which it did - individuals and firms get to the point of bankruptcy.

The stock market crash was an indicator of the hard times, not a cause, and seems to have been caused by three factors. In Free to Choose, Milton Friedman explores the speculation that is often scapegoated. His claim is that the earlier crash merely brought the market back to the level prior to the speculative boom; something else had to have sunk the healthy portion of the market.

Friedman points a finger at the Fed's failure to prop up failing banks. He does not pose the question, "What sank the banks?" I think Sowell has the answer to that; writing off a bunch of loans ain't good for business.

So the stock market crash(es) were caused by deflation, speculation, and...yes, the Smoot-Hawley Tarriff. In The Way The World Works, Jude Wanniski reveals how the market responded to major news stories on the progess of the tariff's passage. I believe he overestimates its role in bringing about the Depression. Sowell has the most convincing argument as to its primary cause. Smoot-Hawley certainly exacerbated the situation, but it doesn't get top billing.

Posted by: Alan K. Henderson on March 25, 2003 12:30 AM

For the nth time Mark misunderstands what I was saying, though I'm willing to concede I wasn't being specific enough:

"Heh, heh, heh! Perhaps you should follow your own advice, and "Read some history." DeTocqueville visited the United States in 1831. Women--50% of the population--could not vote. Slaves--15% of the population--could not vote."

Mark, I was not referring to political participation as voting, though that is obviously necessary to belong to a full democracy. By political participation I mean both the willingness to discuss government policies with your friends, neighbors, others on the internet, etc., _combined_ with regular communication with the people who represent you in state and federal legislatures and even with government executives, whether or not you were able to vote for them. I think the U.S. had far more of this in the 19th century than today, though I am hoping that the internet will reverse this.

Ken, you are right that FDR helped extend the Great Depression, though not for the reasons you say he did. Simply put, FDR did not engage in large-enough amounts of deficit spending to restore full employment until the shadow of war with Germany and Japan loomed--what the Federal gov. chose to spend the money on is an unrelated question. As pointed out by Mark, the Fed also has to take a significant portion of the blame--its monetary clampdown in 1936-37 only made things worse.

Also, I think you are still mistaken about the causes of the GD. The consensus among economists is that Hoover's fiscal policy prior to 1930 and the Smoot-Hawley tariff had little to do with the GD, which was really caused by the monetary policy regime--namely, its suicidal commitment to maintain the gold standard up to 1933. The failure to bail out banks that you mention was simply a part of this commitment.

Posted by: andres on March 25, 2003 09:02 AM

"By political participation I mean both the willingness to discuss government policies with your friends, neighbors, others on the internet, etc.,..."

Not a h@ll of a lot of that (discussions with others on the Internet) going on when DeTocqueville visited, was there?

"...combined_ with regular communication with the people who represent you in state and federal legislatures and even with government executives,..."

And not a h@ll of a lot of THAT going on, either. I've emailed not only my own Representative, but Representatives of other districts in the U.S. Congress. I can virtually guarantee you that Congresspersons get *far* more communications per constituent represented today, than they did in 1831. (My guess would be in the neighborhood of 100 times more.)

So you're wrong, wrong, wrong. The were fewer people allowed to vote in 1831, there were fewer political discussions among people in different parts of the country in 1831, and there were fewer communications (per registered voter) with people in the federal government in 1831.

But I don't expect these three facts to bother you, as you make your (wrong) case.

"I think the U.S. had far more of this in the 19th century than today,..."

Yes, and what you think is totally contradicted by the facts (see 3 contradictions listed above). But I'll be very surprised--shocked, in fact--if the facts change what you think. You'll continue think that there was more participation in democracy in 1831, despite the overwhelming evidence to the contrary. (I wonder why you advised Ken to "Read some history?" It's pretty clear that no amount of historical fact can change what *you* think. ;-))

Posted by: Mark Bahner on March 25, 2003 09:59 AM

Got it. FDR was an awful President. Except that FDR was indeed among the greatest of Presidents. FDR haters are really strange critters. Sorry critters, we could not have been more fortunate that to have had such a President at such a time.

Posted by: bill on March 25, 2003 11:14 AM

"Sorry critters, we could not have been more fortunate that to have had such a President at
such a time."

Yes, we were fortunate indeed. If we hadn't had FDR in office during that time, we might have found ourselves mired in depression until the early 1940's!

"Friedman points a finger at the Fed's failure to prop up failing banks. He does not pose the question, "What sank the banks?" "

Actually, he does have an answer to that. I don't have my copy of "Free to Choose" available, but I do recall that he discussed the means banks employed to get through previous downturns intact, then pointed out that the establishment of the Federal Reserve Act convinced them that the Feds would come riding to the rescue and their preparations were no longer necessary. When the Feds failed to come riding to the rescue, the banks were unprepared and therefore thoroughly screwed in short order.

Friedman also touched on the fact that the Federal Reserve contracted the money supply during the early stages of the downturn.

Throw in a tax hike and a large tariff, and you've got a good recipe for disaster. Hoover didn't just sit by and let the situation deteriorate; he intervened and made things worse.

Once the dust settles, however, you'd expect the economy to recover over the next few years, absent further stupid government tricks. Unfortunately, Roosevelt came into the picture and did everything he could to discourage investment and business activity, notably by imposing massive controls on businesses and investors.

Posted by: Ken on March 25, 2003 12:08 PM

"Sorry critters, we could not have been more fortunate that to have had such a President at
such a time."

Yes, we were fortunate indeed. If we hadn't had FDR in office during that time, we might have found ourselves mired in depression until the early 1940's!

"Friedman points a finger at the Fed's failure to prop up failing banks. He does not pose the question, "What sank the banks?" "

Actually, he does have an answer to that. I don't have my copy of "Free to Choose" available, but I do recall that he discussed the means banks employed to get through previous downturns intact, then pointed out that the establishment of the Federal Reserve Act convinced them that the Feds would come riding to the rescue and their preparations were no longer necessary. When the Feds failed to come riding to the rescue, the banks were unprepared and therefore thoroughly screwed in short order.

Friedman also touched on the fact that the Federal Reserve contracted the money supply during the early stages of the downturn.

Throw in a tax hike and a large tariff, and you've got a good recipe for disaster. Hoover didn't just sit by and let the situation deteriorate; he intervened and made things worse.

Once the dust settles, however, you'd expect the economy to recover over the next few years, absent further stupid government tricks. Unfortunately, Roosevelt came into the picture and did everything he could to discourage investment and business activity, notably by imposing massive controls on businesses and investors.

Posted by: Ken on March 25, 2003 12:13 PM

"...we could not have been more fortunate that to have had such a President at such a time."

"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."---Benjamin Franklin.

FDR deliberately, massively, and laughingly violated his oath of office to "preserve, protect, and defend the Constitution." That he is respected at all merely supports two other Benjamin Franklin quotes:

"Our new Constitution is now established, and has an appearance that promises permanency; but in the world nothing can be said to be certain except death and taxes."

And, upon being asked by a woman outside the Constitutional Convention, what type of government the Founding Fathers had devised, a monarchy or a republic:

"A republic, if you can keep it."

http://www.house.gov/paul/congrec/congrec2000/cr020200.htm

Posted by: Mark Bahner on March 25, 2003 03:16 PM

Ken, you still need to do some more reading up. I wonder what your high school history teacher was thinking. Anyway:

""Actually, he does have an answer to that. I don't have my copy of "Free to Choose" available, but I do recall that he discussed the means banks employed to get through previous downturns intact, then pointed out that the establishment of the Federal Reserve Act convinced them that the Feds would come riding to the rescue and their preparations were no longer necessary. When the Feds failed to come riding to the rescue, the banks were unprepared and therefore thoroughly screwed in short order.""

To blame the Fed for this disaster, as Friedman does, is to miss the point entirely. The Fed _had_ to follow this policy of not riding to the rescue because high interest rates (and the resulting wave of bankruptcies) were the only thing that was going to preserve their commitment to the gold standard. If the Fed had ridden to the rescue with plenty of credit, as you claim, then real interest rates would have fallen, which in the wake of the stock market crash would have led to a hemorrhage of gold from the USA and to the impossibility of maintaining a fixed exchange rate of dollars to gold. It wasn't the Fed itself which was the main proponent of this policy of strict abiding by the gold standard--it was the country's largest bankers and businessmen who were obsessed with monetary stability even if that meant letting the economy come crashing down around their ears.

""Once the dust settles, however, you'd expect the economy to recover over the next few years, absent further stupid government tricks. Unfortunately, Roosevelt came into the picture and did everything he could to discourage investment and business activity, notably by imposing massive controls on businesses and investors.""

You should start reading up on the New Deal. The only massive controls that were imposed by Roosevelt were in the financial system, where all sensible analysts agreed that a combination of Federal deposit insurance and strict prudential regulations enforced by something like the SEC were absolutely necessary to prevent a future stock market collapse and banking crisis. Considering what has happened in the past year because the SEC was lax or coopted, this policy has stood the test of time.

In short, to blame even the second half of the GD on Roosevelt is not just wrong, it is silly since it assumes a degree of omnipotence which even today's presidents do not have. Roosevelt could not control events in Europe which were depressing the business outlook for the world economy; he could not control the Fed's role in monetary policy; and until war approached he could not ask a moderate congress for the huge fiscal stimulus which modern economic theory would have demanded in such circumstances. Roosevelt had many faults, but he deserves better than this type of posthumous character assassination.

Posted by: andres on March 25, 2003 09:14 PM

Mark, I wonder if it's really worth it to continue this discussion, since you seem to live in another world entirely, but let me give it another try.

Sure, there are a lot more pieces of mail and e-mail (much of it, however, of a chain-letter type, and another large portion coming from interest groups rather than individuals) landing on the desks of congressmen and Senators today than there were in the 19th century. That proves nothing. What counts is that in the 19th century, legislators and even candidates for governors and the president had to do something which most politicians seldom do today--they had to go out and _talk_ to their constituents, and by that I do not mean giving speeches at fund-raisers or preaching to the choir as many Republicans do when giving speeches to NRA gatherings. I mean listening to voters' concerns face to face, rather than just feeding them the same old tired platitudes.

Most legislators today are limited in their campaigning to talking only to the narrow group of individuals who finance their campaign war chests, and their only attempts to communicate with individual voters are through ridiculously oversimplified TV ads. You can see this in action in the party conventions--I don't know about the libertarians, but the Republican and Democratic conventions are nowadays exercises in Chinese-style rubber stamping. The lack of popular participation in this process can be looked at by examining the party platforms, which are very often tailored to the demands of extremists in both parties--a couple of people on this board have pointed out the almost surreal nature of the Texas Republican party platform.

Maybe all of what I have described here differs somewhat from my original comments on political participation, but I stick to my guns--democracy in this country today, such as it is, is far less participatory than in the 19th century unless you count the simple act of punching in a ballot as participation. True democracy needs much more than that in order to function.

Posted by: andres on March 25, 2003 09:37 PM

"You should start reading up on the New Deal. The only massive controls that were imposed by Roosevelt were in the financial system, where all sensible analysts agreed that a combination of Federal deposit insurance and strict prudential regulations enforced by something like the SEC were absolutely necessary to prevent a future stock market collapse and banking crisis. "

You forgot the National Recovery Act, which imposed controls on industry (not simply the "financial system" that could only be characterized as "massive". It set hours of work, wages, prices, and other terms by fiat. After this was passed early in Roosevelt's term, with prospects for more to come, people were (not surprisingly) not exactly falling all over themselves to invest in much of anything.

And that was just the beginning.

"he could not control the Fed's role in monetary policy; and until war approached he could not ask a moderate congress for the huge fiscal stimulus which modern economic theory would have demanded in such circumstances."

Neither could any of his predecesors, and yet every previous downturn ended much more quickly than his did.

"If the Fed had ridden to the rescue with plenty of credit, as you claim, then real interest rates would have fallen, which in the wake of the stock market crash would have led to a hemorrhage of gold from the USA and to the impossibility of maintaining a fixed exchange rate of dollars to gold."

That doesn't change the fact that the Fed was established with the explicit purpose of riding to the rescue when needed, and that promise by the Federal Government changed the behavior of the banks. They operated under the assumption that they were covered, and when it turned out they weren't, disaster ensued.

In short, if there were good reasons why the Fed couldn't come riding to the rescue, then the Fed should not have been promising to do just that. Far better for the Federal Reserve not to exist at all than for its promise of rescue to be unfulfillable.

Posted by: Ken on March 26, 2003 10:58 AM

Ken: The National (Industrial) Recovery Act is a footnote in history, and no economic source that I know of blames it for prolonging the downturn. I knew of its existence, but I had to do a little googling in order to find out about its specific contents.

http://srd.yahoo.com/S=2766679:WS1/R=1/K=National+Recovery+Act/H=0/T=1048718472/F=718837300d597ed264badc3421c66302/*http://www.spartacus.schoolnet.co.uk/USARnra.htm
http://www.law.du.edu/sterling/Content/ALH/Indust_Recov.pdf

It turns out that most of the codes and controls you mentioned were drafted in close cooperation with the businessmen in each industry, and that most of the controls were voluntary, in the sense that products made by businesses which complied with the labor codes (which included such awful investment-destroying measures as maximum 40 hr. work weeks and minimum wages) could wear a special NRA label, while others could not. Even this did not last long--the Supreme Court declared the NIRA unconstitutional in 1935. So an act which was in effect for less than 2 years helped to prolong the GD for over seven years. That's stretching it too far, I think.

As for the Fed, I don't think the Fed ever made a public declaration that it would automatically come to the rescue in a financial crisis. The 1913 act establishing the Fed never resolved the basic contradiction of the institution: that it was supposed to act as an ironclad guarantor of monetary stability even as it functioned as a lender of last resort during crises. In the aftermath of October 1929, these two objectives became irreconcilable, and so the Fed chose the former at least until 1933. If businesses had had rational expectations in the 1920's, they would have realized this problem.

Posted by: andres on March 26, 2003 03:03 PM
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