Friday, February 15, 2008

David Ames Wells on Creative Destruction

Joseph Schumpeter is generally cited as the economist who fashioned the concept of creative destruction in his book Capitalism, Socialism and Democracy, published in 1942. But David Ames Wells wrote this in 1889 in his well known book Recent Economic Changes (p. 31):

"In all commercial history, probably no more striking illustration can be found of the economic principle that nothing marks more clearly the rate of material progress than the rapidity with which that which is old and has been considered wealth is destroyed by the results of new inventions and discoveries."

In a footnote Wells quotes Edward Atkinson:

"'In the last analysis it will appear that there is no such thing as fixed capital; there is nothing useful that is very old except the precious metals, and all life consists in the conversion of forms. The only capital which is of permanent value is immaterial--the experience of generations and the development of science.'"

David Ames Wells on the Depression of 1873, George W. Bush and Today's Fed Policy

David Ames Wells, whom Abraham Lincoln first appointed to public office, was commissioner of revenue in the late 1860s and was a consultant to the nascent railroad industry. He became an advocate of free trade, a Mugwump supporter of President Grover Cleveland and an advocate of hard money.

In 1889 he copyrighted Recent Economic Changes. In the introduction he notes:

"The existence of a most curious and in many respects unprecedented disturbance and depression of trade, commerce and industry, which, first manifesting itself in a marked degree in 1873, has prevailed with fluctuations of intensity up to the present time (1889), is an economic and social phenomenon that has been everywhere recognized. Its most noteworthy peculiarity has been its universality...the maximum of economic disturbance has been experienced in those countries in which the employment of machinery, the efficiency of labor, the cost and standard of living and the extent of popular education are the greatest...It is also universally admitted that the years immediately precedent to 1873--i.e., from 1869 to 1872--constituted a period of most extraordinary and almost universal inflation of prices, credits and business; which in turn has been attributed to a variety or sequence of influences, such as excessive speculation; excessive and injudicious construction of railroads...the opening of the Suez Canal...the Franco-German War; and the payment of the war indemnity which Germany extracted from France...Under date of March 1873, the London Economist in its review of the commercial history of the preceding year, says:

"'Of all events of the year 1872, the profound economic changes generated by the rise of prices and wages in this country, in Central and Western Europe, and in the United States, have been the most full of moment.'"

And the London Engineer under date of February 1873 thus further comments on the situation:

'...In 1872 scarcely a single step in advance was made in the science or practice of mechanical engineering. No one had time to invent, or improve, or try new things...'" (emphasis in the original).

Thursday, February 14, 2008

Toward the Democratization of Capital

Wealth can only be created by work or invention. It cannot be created by monetary expansion. In recent years there has been an increasing interest in expansion of the money supply in order to increase stock market and real estate prices. The reason for the Federal Reserve Bank's interest in easing is that there is political pressure from wealthy interest groups on the Fed. The result of the excessive easing has been that those who hold equities have become wealthier relative to those who do not. As well, property, commodity and other asset holders have benefitted.

There are two effects. One is increasing income inequality and the other is a reduction in innovation and hard work. There are persistent shortages of workers in certain fields such as auto technicians and construction crafts. At the same time, innovation has been limited to a few narrow fields where capitalists feel comfortable financing new technology, notably computer, biotech and telecommunications. Innovation in alternative fields has slowed.

Progressive-liberals have advocated taxing the rich to equalize incomes. There are several problems with this. First, taxation is subject to exceptions that result in continuation of the pre-existing biases. The current income tax system is proof enough that progressive taxation does not work, and those at the high end of the system are least likely to actually pay. I sometimes wonder where the progressive-liberals who advocate progressive income taxation and the inheritance tax have been for the past 80 years. Have the Rockefellers paid any inheritance tax?

Second, taxation may inadvertently deter innovation. It may be true that many billionaires have profited from Fed easing and it is likely that there has been a crowding out effect whereby those in the riskiest and most innovative businesses have been crowded out by financiers, large businesses and technology firms who have monopolized access to credit. Imposing taxes on the wealthiest Americans may redistribute income or wealth from those who have benefitted from federal policy but may also deter those who have to overcome the massive disincentives that federal policy places on risk taking. The result may be even less productive innovation in the economy.

Third, some, including myself, object to taxation on philosophical grounds. It is compulsory and therefore creates an atmosphere of distrust.

Rather than an income tax on the wealthy, why not provide a tax credit to people who invest in assets like stocks and real estate? The tax credit could involve a sliding scale that maxes out at the top 5 or 10 percent of the income distribution and is indexed for CPI increases. Anyone who invests in assets would do so on a dollar for dollar tax reduced basis. That way, the middle class could more easily participate in the inflationary boondoggle and there need not be any compulsion involved in doing so.

Wednesday, February 13, 2008

Review of Nancy Cohen's Reconstruction of American Liberalism 1865-1914

Nancy Cohen. The Reconstruction of American Liberalism 1865-1914. Chapel Hill: University of North Carolina Press, 2002, 318 pages.

Nancy Cohen's Reconstruction of American Liberalism 1865-1914 is a history book that reads like a detective novel. The book deserves a wider audience than that of academic historians. As a layman, I was riveted, in part because the book has important policy implications but also because of Cohen's brilliant scholarship and rich depiction of a wide range of 19th and early 20th century social thinkers. Libertarians and conservatives as well as progressive-liberals will find much of interest.

The libertarian implication arises from the lack of empirical support for the views of the Gilded and Progressive Age social philosophers that Cohen describes beyond a few government case studies. In particular, the underlying assumption of theorists from EL Godkin to Herbert Croly that large size was necessary for modern production, efficiency and consumerism was taken for granted both by those who favored more socialistic reforms and by those who favored market oriented approaches. As well, the model of efficiency based on expertise and professionalism was, as McFarland has pointed out, partly due to the Mugwumps' professional interest (the Mugwumps were often lawyers and academics). But in both cases, the emphasis on scale and the emphasis on civil service systems, the policies that the Gilded Age theoreticians advocated, were primitive from today's management standpoint.

At the same time, the most important progress that was made during the Gilded Age came from developments that most historians have omitted, specifically from individual or small-scale inventors such as Alexander Graham Bell, Thomas Edison, Nikola Tesla and the discoverers of kerosene, who functioned at the margin of society.

Thus, Professor Cohen's excellent review of the Gilded Age reformers suggests (in part by omission) that the Gilded and Progressive Age reformers may have inadvertently staunched the source of innovation and progress that was the most valuable development of the period through emphasis on rationalization, large scale, professional interests and corporate interests at the expense of spontaneity and flexibility. For instance, postbellum subsidies to large business included land grants to the railroads, high tariffs and incipient regulation of industry such as the creation of the Federal Reserve Bank in 1913, which facilitated allocation of credit to large banks and industry at the expense of small inventors.

This may be so even as many of the Progressive-era reforms, especially under Roosevelt, aimed to control "bad trusts" and were not targeted at small business. By establishing regulatory rules and the Federal Reserve Bank the Gilded Age reformers, Mugwumps and Progressives created high fixed costs and inflation which may have deterred innovation and facilitated allocation of credit to the largest and not the most innovative firms.

Virtually all business historians assume that scale was essential to economic development, an assumption that the Gilded Age dogmatists themselves held. It is impossible to prove a counter-factual, but perhaps the pervasive Gilded Age assumption was just a failure of imagination. Today, large firms do not out-perform smaller ones as Google, for instance, demonstrates vis-a-vis Microsoft. Firms like General Motors limp along for decades, aided by Federal Reserve and protectionist policies, while nimble small firms develop new ideas such as the personal computer and the Internet but we never hear of many of them because they are prevented from adopting ideas by rigid credit markets (technology is an exception).

Was it necessary for large scale modernism to replace producerism in the ante-bellum period? I'm not as sure of that as business historians are. If big business had been necessary, prices would have been sufficient to reap profits sufficient to buy land or rights of way and to function without subsidies. But there were subsidies aplenty, often won through corruption. Common sense suggests that, were scale essential, then market performance would have eliminated the need for subsidies. But the problems of the Gilded Age, the corruption, the Jay Goulds and Jim Fisks, the political bosses, the tariffs, all revolved around the inability of large organizations and government to produce value without help from government. Perhaps the Gilded Age should be called the Age of Gilded Corporate Welfare.

Moreover, Cohen argues that today's big business liberalism had been shaped by Gilded Age intellectuals "who had little direct involvement in corporate enterprise". Many of the arguments of the Gilded Age intellectuals were dogmatic. None of the theorists had any grasp of key concepts that we understand today such as Schumpeterian creative destruction, the use of knowledge in free markets and the Hayekian importance of price. Thus, the shaping of today's corporatist system was largely based on dogmatic philosophical debates, none of which were well grounded in theory or evidence. As Cohen points out, a crucial theory like marginalism was not invented until the late nineteenth century at the earliest.

The implications for the modern corporatist state may be that it was an atavistic attempt to reassert medieval tribal relations at the expense of more innovative individualist approaches which existed in embryo in antebellum America. The designers of the corporatist state did not understand the importance of business life cycles, to include bankruptcy, and the importance of environment to stimulation of innovation. Many of them understood the role of credit in creating business cycles, but the widespread belief that, as DA Wells put it, "overproduction" was the cause of the depressions of the 1870s, 1880s and 1890s is evidence of the primitive knowledge base on which corporate reform through big government was based.

The book also has important implications for conservatives. There is little question, after reading Cohen's work, that conservatism and liberalism were created at the same time in reaction to the same phenomena, namely, the expansion of markets and scope of industrial firms. Conservatism does not reassert the values of an earlier age any more than liberalism does. The very terms "conservatism" and "liberalism" are utter misnomers. President Theodore Roosevelt's reaction to large scale enterprise was to expand government control to a greater degree. President William H. Taft's reaction was to limit government control. Roosevelt called Taft a reactionary. But both approaches were developed at the same time in reaction to the same phenomenon. As it turns out, Taft's approach is the more progressive because it permits a greater degree of flexibility and allows a greater likelihood of corporate death. Government programs rarely die, hence Roosevelt, who would have put utilities and other large concerns under government control, had ideas that would have lead to a more conservative approach than Taft did. Advocates of flexible social arrangements have been bamboozled into allowing their position to be called conservatism.

Cohen begins her brilliant and fascinating discussion by pointing out (p. 5) that Gilded Age liberals were in large part analyzing the defeat of producers' movements and the rise of corporate capitalism. The liberalism that the Gilded Age reformers devised was very close to the Progressivism of Herbert Croly and Walter Lippmann. Today's progressive-liberalism was the result of Gilded Age theory. The Gilded Age debate, argues Cohen (p. 6) involved a "triangular struggle for power between liberals, conservatives and socialists." Part of the debate involved a struggle between the Mugwumps or earlier independent Republicans such as EL Godkin and a post 1890 group led by Richard T. Ely that aimed to introduce the views of the German historical school into public policy. The Mugwumps, who were relatively conservative, stopped the socialists and leftists from succeeding. At the end of the 19th century, the marginalism of John Bates Clark, who had been a leftist but became a corporatist, argued for a regulated corporate economy and consumerism. Subsequent Progressive reforms did not significantly modify Clark's corporatist model.

Cohen argues (p. 29) that the "producerist" philosophy of free labor held that "economic independence, gained through ownership of real property or the possession of a skill that could provide a solid competence and independence was a precondition of true freedom." But "other Northerners, particularly those directing and financing the new industrial economy" emphasized freedom of contract.

The Civil War enhanced workers' claims and contributed to labor organizing. Radical Republicans felt uncomfortable with the labor movement, to include the eight-hour day movement in Massachusetts (p. 35). The conflict that the Radical Republicans experienced between the old free labor ideology and their defense of capital from the demands of the eight-hour and other labor movements led to their abandonment of the "producerism" of Andrew Jackson's day.

Cohen goes on to discuss the evolution of EL Godkin's attitude toward the labor movement. At first, Godkin argued that although workers had the right to contract, they labored under unequal bargaining power. "Unions acted as collective evaluators of the individual worker's interest and, in doing so, served as the main actors in the last phase of the emancipation of workers into the regime of contract" (p. 49). Later, though, Godkin was to oppose trade unions (p. 50). As workers demonstrated an interest in radicalism, Godkin became less supportive of unions (p. 57). Ultimately (p. 59), "Damning Mill, the intellectual idol of his youth (who had become a socialist late in life), he instead scrapped the greatest happiness principle and consecrated individual liberty as the one, supreme object in politics." This contrasts with John Dewey, who, a few decades later, consecrated democracy as the supreme object.

The problem that organized labor posed to the independent Republicans matched the problem that the emancipated slaves posed.

Part of the problem in the Mugwumps' eyes was that (p. 86) large scale capitalism "unsettled the moral order, in which property anchored individual selfhood and individual proprietors" Thus, in Cohen's view, consumerism replaced individualism as the basis for liberalism.

Thus, David Ames Wells (p. 88), 1860s commissioner of revenue and civil service advocate, argued for "a vibrant export trade" and against greenback inflation. "Wells...worried about the eclipse of the moral order of propietary capitalism. In condemning the spirit of trading and speculation and praising the spirit of production, Wells drew on the ideal conception of the self-directed, autonomous property owner" In general, Cohen's arguments about Wells are fascinating. I think Wells's ideas are applicable to the Federal Reserve policies of today. In fact, our post-modern world is very susceptible to Wells's arguments about speculation versus production. This is a fascinating section of the book. But Cohen is too pessimistic when she writes that "no nation has ever achieved the industrial development Wells desired and at the same time preserved 'thousands of little separate industries.'" Arguably that situation exists today.

Another really interesting point that Cohen makes is that the modern corporation as it is currently legally constituted did not get established until 1890 or so (p. 96). The corporation is not a product of laissez faire capitalism. It is a legal construction of relatively recent origin.

One of Cohen's chief themes, along with the relationship between consolidation of industry, producerism and labor relations, is the relationship among democracy, efficiency and consumerism. Charles Francis Adams, a railroad executive, argued that regulation by legislatures harmed the public and brought "community and corporation into conflict". Adams argued for "state-supported economic development and that required a rational form of state regulation." In Adams's view, regulation should be shifted from legislatures to expert administrations that would understand the limits of regulation and how to enhance rather than interfere with efficiency. Adams (p. 130) was for industry consolidation coupled with government ownership of some business, what Cohen calls "mixed ownership". Today this plan sounds hopelessly naive. As he learned that rational administrative solutions were indeed a naive plan, Adams switched to a laissez faire orientation (p. 131).

In chapter 4 Cohen argues that the late 19th century theorists', such as William Dean Howells's (pp. 110-112) emphasis on rationalization was often anti-democratic (I would add that it never resulted in much efficiency either.) It is undoubtedly true that the legislatures were incompetent at administrating regulatory systems and were corrupt, but there was little real evidence that experts would be any better at it, but this is what the postwar Radicals claimed. At the same time, though, the Mugwumps like George W. Curtis (editor of Harper's Weekly Magazine) opposed Greenback inflation on the grounds that it was "debt repudiation" (p. 115). Was this for moral reasons or was it because they were debt holders? Maybe a little of both. There are few today with such moral scruples, though. The rule today is inflate and if the bond holders and wage earners are harmed, well too bad because Lord Keynes and Jim Cramer say it is ok.

Cohen argues (p. 121) that historians overrate the limited government aspect of the Gilded Age reform movement as well as the "Liberal Republican" movement. Rather, she argues that it was the goal of administrative rationality that characterized most of the reform movement and that the inability to win support for the administrative vision "turned many to a more extreme classical liberal vision". This makes sense. It is likely the case that if they were acting in good faith they would have found that government reform, civil service, administrative rationalization and the like failed anyway, so they would have ultimately gone the route of laissez faire. The liberals focused mainly on local corruption and political bosses, but also maladministration of the national economy.

One example of the Gilded Age reformers' emphasis on rationality was the commission that New York's Governor Samuel Tilden appointed in 1875. The commission, which included EL Godkin and Simon Sterne, recommended that only taxpayers be allowed to vote and (I'd have to check this because the paragraph is a bit unclear) that the city be turned into a corporation. Too bad the ideas weren't adopted. I wonder if you could buy stock in New York City or Los Angeles if the cities wouldn't be better run by corporate boards than by voters. When I graduated from college a century later New York City was midway through a massive economic decline due to maladministration and excessive wages.

Cohen disapproves of the anti-democratic aspects of the Gilded Age reformers' emphasis on rationality. I would argue that the belief in rationality was a chimera. There is no such thing as rationality in government because incentives to respond to the environment are missing. Government mostly serves elites and its own organizational needs. If the Mugwumps were acting in good faith they would have been disappointed with the results of government reform, and many were and so turned to laissez faire. Cohen attributes this to the popularity of collective action and socialist ideology among the working class.

According to Cohen (p. 148) William Graham Sumner, a Yale professor in the 1870s, was a popularizer of laissez faire capitalism in the Gilded Age who aimed to "exterminate" socialism. State action amounted to malevalent anti-civil libertarianism. Sumner and other Mugwumps opposed rights for women and minorities. He was a social Darwinist. He couched his arguments in the social science of the day. Cohen argues that Sumner's writings were derivative of other thinkers, such as Spencer and Godkin. Likewise, David A. Wells (p. 185) advocated the gold standard, free trade and laissez faire. But Cohen also emphasizes that Wells believed in "economic consolidation and corporate administered markets".

Henry Carter Adams was one of the first American economists to adopt the German historical school paradigm that became foundations to the ideas of John R. Commons and other Progressives. Adams attended Johns Hopkins University, where he earned the university's "first doctorate in the social sciences" (p. 157). He then went on to study at the University of Berlin. The German historical school (p. 157) argued that economies were the products of particular histories so there is no governmental policy inevitably dictated abstract economic laws. They rejected laissez faire and strongly supported statism (one wonders whether this rejection contributed to the rise of the Nazi-Sozi Party 54 years later). It is somewhat puzzling, though, why if history and culture determine the appropriate policy, Adams did not conclude that given US history and culture a limited government approach would be most appropriate. If the German historical school really thought that history ought to determine policy (and not statism under all circumstances), why did he argue for reforms that overlooked American history? The German historical school philosophy seems extremely conservative to me. Some of the professors were, according to Cohen "right wing Bismarckians" but others were "left wing socialists". This suggests that the difference between the two is one of tone. Both German nationalism and German socialism were conservative in their objectives (namely the reassertion of tribal European social relations) but radical in method and led to the tragedies of national socialism in Germany and Russia. The German historical school's emphasis on statism ought deserves credit for more than Henry Carter Adams's apostasy from the independent reformers.

Adams adopted the socialism of his German professors. He became (p. 159) the leader of the "ethical" economics movement in America (p. 159). These were American academics sent to Germany who came back advocating the German historical school's ideas, to include socialism. EL Godkin had thought that universities would produce "sober" social scientists who could help manage the laissez faire economy. Instead, the ethical economists turned out to be socialists. John Bates Clark was among them.

Clark began as a socialist but he couldn't shake his individualistic outlook. He argued that true socialism involved social organization rather than individual ownership(p. 161). That sounds like Progressivism, but Clark wrote it in 1879. As part of this ethical economics movement, Cohen points out that Richard T. Ely, whom she regards as a less important thinker than Adams or Clark, founded the American Economics Association. Ely suffered from the fact that his pro-labor book Labor Movement in America appeared at the time of the Haymarket riot in 1886, and Ely barely held on to his job at Johns Hopkins and Henry Carter Adams was fired from Cornell but wound up at the University of Michigan when he recanted his radicalism. In the 1880s (p. 230) Carter worked for the Interstate Commerce Commission and continued to advocate government intervention in labor relations. He also advocated business school education post 1896 (p. 231). Adams was concerned that corporations could not be moral and so social morality would deviate from economic behavior under a corporatist system.

Clark on the other hand was the theoretical progenitor of marginalism and neoclassical economics. He would seem to be the most important of all of the thinkers of that period but not the most relevant to the establishment of liberalism. Clark's ideas were more conservative. He argued that the marginalist principle applied even to large firms and large blocks of labor.

In the final chapter Cohen makes clear how the ideas of the Gilded Age social thinkers was carried forward by Progressive politicians like President Roosevelt, Taft, and Wilson and writers like Herbert Croly and Walter Lippmann. Much of Progressivism came out of the Mugwumps' emphasis on rationality and government reform.

Overall, this is an absolutely mind blowing book and I heartily recommend it. Thank you, Professor Cohen.


Norma Segal just sent me the following press release:

"Bill Gouldman, candidate for Assembly in the 90th District, today criticized a new property tax proposal that would give relief to only half of the families that the current program includes.

"Gouldman once again called on the Democratic Leadership in the Assembly to put forth a property tax cap, which studies have shown to be the most effective way to curb the problem.

"'Residents in Putnam and Westchester County are feeling the squeeze everywhere, whether it's filling up our gas tanks, heating our homes or paying our outrageous property taxes," said Gouldman. "It is time for some relief and we need to start with property taxes. Our current representative in the Assembly has come up with a plan that simply doesn't provide enough relief and leaves out many who need help. After 16 years in office, shouldn't we expect a better solution from the Chairwoman of the Committee on Real Property Taxation? She's the most powerful woman in Albany on the issue of property taxes and unfortunately we've gotten rhetoric, not action and misguided proposals, not real relief.'

"Gouldman contends that the best way to solve the property tax problem is to impose a cap on the increase to our property taxes. By tying it to the rate of inflation, homeowners will be able to better afford the taxes and our schools will still get the funding they need. However, the latest proposal does nothing to slow down spending, which is the root of the problem. Property taxes will continue to grow unless the rate of spending decreases.

"'I'll be the first person to say that my opponent is a nice woman," stated Gouldman, "but unfortunately, she has been in Albany too long and has become an insider, simply voting for spending increase after spending increase with the political bosses from New York City. Evenworse, her committee has turned into the place where promising property tax relief proposals go to die. We don't need more elected officials who simply 'taxand spend' with no regard for what a budget means. We need someone with a business background who has the common sense to rein in spending and give middle class families a real break."

"After extensive analysis, Gouldman has found that the proposal is little more than a band-aid that is actually a step backwards from the current relief that is provided. Under this new plan, homeowners would still have to pay their entire bill before they receive a rebate, but the checks will go out to 1 million fewer people. In addition, homeowners who have owned their home for less than five years are excluded. Often, the people who fall into this category are new families and they need the help as much as anyone. Nevertheless, the biggest flaw in the plan is a
failure to rein in spending.

"'Even Governor Spitzer recognized he was wrong, when an overwhelming majority of the public disapproved of his plan to give driver's licenses to illegal aliens," added Gouldman. "Now it is time for our Assemblywoman to listen to the public and push for the property tax cap that we so desperately want and need. Regardless of what she chooses, I guarantee that I'll fight for it.'


John McCain's Brother and the Dachau Death Camp

Recently LGF reported that a member of Barack Obama's campaign staff hung a Cuban flag and a picture of Che Guevara on the wall of the Obama Houston campaign office. The Obama staffer's indifference to Cuban mass murder reminds us that the possibility of equivalent tragedy remains. This is especially because of the American education system's agenda of belittling limited government in the interest of unlimited democracy, political correctness and left wing groupthink.

John Lukacs has argued that all socialism in the twentieth century was national socialism. In Germany, the Nazi-Sozi Party rejected Marx's internationalism, as did Stalin, who like Hitler advocated "socialism in one country". Mao's socialism was also nationalistic. In Stalin's and Mao's cases, the New York Times and American mass media overlooked the murder of tens of millions of human beings in the interest of precious left-wing ideology. Today, Barack Obama's staffers, educated in benighted American schools, continue to apologize for mass murder. How much butchery is enough for the left?

Merle Levine just sent me a post that appears on several sites, such as Menorah Blog that quotes Joe McCain, John McCain's brother, about Jewish history. McCain notes that he went to the concentration camp memorial at Dachau:


I too took the commuter train from Munich to Dachau in the winter of 1975. Too, the scene depressed me. The proximity of the town to the concentration camp struck me. There is no possibility that the events there weren't known to the local citizens. While I was there, four mindless American tourists were clowning around the ovens, pretending to push each other in. While on the plane home from Europe I read Hannah Arendt's Eichmann in Jerusalem, which served to reinforce what I had intuited in the concentration camp, which was the same as Joe McCain.

The fact that a campaign staffer could put the flag of a mass murderer in the campaign office of a major American candidate is one more bit of evidence that the left has learned little from its persistent failures and butchery.