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Originally published March 8, 1982

MY HEAD is spinning-which is not surprising, for I have been reading a circular argument. If you read much economics, you encounter a good many circular arguments. This one is a dandy.

I refer you to the “Annual Report of the Council of Economic Advisers.” It is said to be a document of 357 pages, but all I know of it is what was printed in the New York Times, which is enough. In the section headlined “Why Deficits Matter” we find the following:

“Financing a budget deficit may draw on private saving and foreign capital inflows that otherwise would be available to the private sector …. Weak and marginal borrowers may be ‘rationed’ out of the market by higher interest rates unless saving flows are adequate…. During a recession-as now exists-the borrowing requirements of business and consumers tend to be relatively small. At such a time a given deficit can be financed with less pressure on interest rates than during a period of growth…. Much of the Administration’s tax program is designed to increase the private saving of the nation. As a consequence, both public and private borrowing will be accommodated more easily.”

What (if anything) is being said here? Restating the argument, it goes like this: First, the Administration’s tax cuts are a net addition to an already existing deficit. Second, government borrowing will have to go up to cover the raised deficit. Third, there will be no trouble with the increased borrowing, provided the recession continues (or deepens)-and the people who receive the tax cuts lend the money back to the government.

In short, at the end of the circular maneuver-assuming it works as it is intended to-the recession will be just what it was, and sizable transfer payments will have been made to people judged not to need them. In fact, they have been chosen to get the money precisely because they don’t need it. Also (incidentally) the deficit will be increased, and interest at 14 per cent or so will have to be paid on that. It adds up to real money, and it’s crazy, no matter how you look at it.

Let’s imagine (as I’ve remarked before, economists have to have good imaginations) that we had a Republican administration that knew something about finance. It would occur to such an imaginary administration that it would be simpler to keep the tax money it has, instead of returning part of it to rich people in the hope that they will lend it back to the government. Not only simpler but, of course, cheaper. Not only cheaper but, of course, less disruptive of the economy. Not only less disruptive of the economy but, of course, more equitable.

I don’t know what I’d do if I were a supply-side economist (my imagination isn’t lively enough for that). The supply-sider’s game plan is to put money into the hands of producers, who will invest it in new plant, which will eventually improve our productivity and make possible a higher standard of living for us all. He’d have to be blind not to see that, in general, producers are richer than other people. Thus to get money to them, he cuts taxes for the rich rather than for the poor or even for the middle class. He’s playing for the trickle down. Fair enough.

He recognizes that when taxes are cut faster than expenditures, the Federal deficit (not to mention the state and local deficits) rises. The Laffer Curve doesn’t say there won’t be an initial deficit rise; it merely promises, as President Hoover did, that prosperity is around the corner. So Jack Kemp isn’t worried about the deficit; he’s going for the long ball.

Nevertheless, the deficits have to be monetized or funded. Monetizing the debt means just printing money to pay the bills, and supply-siders are afraid to do that. The deficits therefore have to be funded. That is, bonds have to be issued to cover them. But one doesn’t simply issue bonds, one sells them. To.whom? Why, naturally, to the rich. No one else has the money to buy them. Unfortunately, the money the rich use to buy the bonds is the money they were supposed to invest on the supply side.

Try as he will, the supply-sider can’t get money into the hands of producers. This is not because of the conspicuous consumption of the rich or the notorious perversity of Wall Street. Even when everyone is doing his best to cooperate, the scheme can’t work. The supply-sider’s tax cuts go to the rich, all right; but the recipients have to lend the money right back to the government to cover the deficits. No more money becomes available for productive investment than there was before the game started.

Actually, even less is available, because the pressure of the deficits pushes up interest rates. This doesn’t have to happen, yet it will happen as long as the Federal Reserve Board clings to its monetarist doctrine of restricting the money supply (if it could only figure out what money is). You may be sure that the Fed will depress both the supply side and the demand side if it can. The resulting high interest rates will increase the cost of government borrowing and add to the deficits in what is now a pretty tight upward spiral. But that’s not the end.

High interest rates inhibit investment. Businesses that used to borrow money to expand in the good old-fashioned capitalist way can’t afford to pay 15-20 per cent for their money and have to cut back in order to survive.

Hence the supply-side tax cuts, with the best will in the world, will reduce the amount of money available for investment. You will note that I say” available,” because I don’t for a minute believe much of that tax windfall would go into productive investment even if it could. Almost all of it is earmarked for speculation. No goods will be produced as a result of it, nor any services rendered. But the rich will be richer.

TO SHOW what I mean about speculation, let me call your attention to some figures the Times printed a couple of weeks ago about Merrill Lynch, Treasury Secretary Regan‘s old firm and, breeding apart, the very model of a modern “investment” house. It turns out that by far the biggest part of Merrill Lynch’s income comes from interest its clients pay on margin accounts. Margin accounts are nothing if they are not speculations, and interest on them is 45.4 per cent of Merrill Lynch’s income. Next we have commissions, which amount to 22.8 per cent of their income, and the transactions the commissions were earned on were also speculations, buying and selling securities, without a penny of all those billions going into new productive enterprise.

Then comes “investment banking,” 8.6 per cent of income. That sounds more like it. Well, it sounds more like it until you hear what the small print says. Then you learn that “investment banking” includes “municipal and corporate underwriting and merger and acquisition advice.” Of this, the only part (and we don’t know how large it is) that might concern productive investment is the corporate underwriting, but even that is unlikely, coming in close conjunction, as it does, with “merger and acquisition advice.” Was Merrill Lynch involved in the $3 billion US Steel borrowed to buy Marathon Oil, or the $4 billion DuPont borrowed to buy Conoco? I don’t know, but I do know that transactions like that are speculations, not productive investments. No more oil is refined- no more anything is produced- as a result of them.

Yet this is the sort of thing-and the only sort of thing-that is encouraged by the supply-side tax breaks. Don’t get me wrong. I’m in favor of producers; after all, I’m sort of one myself. The late Professor John William Miller used to say that an entrepreneur is an economic surd: there’s no accounting for him, but you don’t have any economic activity at all unless some willful character says that, come hell or high water, there’s going to be this here-now business. Such types should be encouraged. I’m willing to believe that at least some supply-siders want to encourage them. But I’m here to declare that Reaganomics is going to encourage only those whose principal activity is clipping coupons.

Let me, as the fellow said, make myself perfectly clear. I’m not arguing against a deficit or against tax cuts, or for them. All I’m saying is that unless the government is running a surplus, there is no way for tax cuts to be a direct stimulus to productive investment [editor’s bolding]. Tax cuts can be an indirect stimulus: By giving some people more money to buy things, they can eventuate in producers producing more. But that is the demand side, not the supply side.

To be sure, Reaganomics has its demand side: the military buildup. Because of its specialized nature, this is not the most efficient stimulus the economy could have; it produces comparatively few jobs for a buck. Moreover, it cannot continue to stimulate the economy even as much as it does unless the arms race speeds up. (That may rate as a suitably dismal thought.)

If you really want to stimulate the demand side (which you really ought to want to do), you will give tax breaks to people who will spend their windfalls, not “save” them. In short, you will start cutting taxes at the bottom (Social Security taxes, for example) and work tentatively upward. This is the precise contrary of Reaganomics, but it makes precise sense.

The New Leader

Originally published February 28, 1982

The Dismal Science

PRODUCTIVITY:
THE NEW
SHELL GAME

BY GEORGE P. BROCKWAY

WE HAVE a new economic sport in town. Oskar Morgensterns theory of games has been with us for decades.  Comparatively recently, Lester C. Thurow gave us his pretended zero-sum game. Now President Reagan has created a 33-member National Productivity Advisory Committee headed by former Treasury Secretary William Simon. The committee has not yet announced the rules for its planned year-long study, but I have no hesitation in telling you that it will result in the additional refinement of a modernized shell game that has been played informally ever since the present inflation started. In this extraordinary contest there is a pea under every shell-yet you and I always lose.

The shells, all identical of course, are made of a statistic devised by eminently respectable economists. It is called the Productivity Index, an apparently innocent and objective figure obtained by dividing the Gross National Product of a period (usually three months or a year) by the total number of man-hours worked in the period. If I had not promised to try to refrain from grousing about how the GNP is compiled, I’d say the Productivity Index is what you get when you divide a grossly misleading estimate by another that is merely an educated guess. Even those who calculate it will admit that its ostensible precision is spurious, and that at best it may sometimes be useful in comparing one period with another. As the automobile advertisements put it, “Your mileage results may be different.” Indeed.

The vice of the Productivity Index, though, is not that it is an estimate based on estimates (thus multiplying their unreliability). The vice is that it does not measure-and cannot measure what its users pretend it measures.

Let’s go back a bit. We learned in school-perhaps from one of the academic experts on the President’s new committee-that the factors of production are land, labor and capital. Some add technology to the list, and others add an array of propensities to do this, that or the other. No matter. The point is that regardless of how many items you have on your list, labor is only one of them. Consequently, dividing the GNP by the number of hours worked to determine productivity is like using the average number of yards gained per first down to decide the winner of a football game. You might do that if you were Howard Cosell, but not otherwise.

If one persists in using only “hours worked” to arrive at the Productivity Index-as we can be pretty sure the President’s committee will-one is in effect declaring that the contributions of land and capital are negligible. They don’t have to be counted, because they count for nothing. Any way you look at it, that’s going to be pretty funny talk coming from a committee that is as conservative as the President dares make it-and he’s a brave man. I will tell you straight out that I am something of an old-fashioned entrepreneur, and you’ll never catch me saying anything like that. In fact, you’re not likely to convince me that the interest rate-to name only one other factor-has nothing to do with productivity.

Well, despite the reservations we may have, that’s what the shells in this game are like. Now let’s examine some of the peas that have been used in the informal games we’ve seen of late; we’re odds-on to see them again.

The first pea is an all-purpose variety that always turns up on metropolitan bars and suburban bridge tables: No matter where you look, it just seems that people aren’t willing to work the way they used to. This is what the Productivity Index seems to show, and it certainly seems plausible, remembering how hard you and I used to work when we were young. In the old days we didn’t have coffee breaks and extended vacations and … No doubt you can think of examples as well as I can. This part of the game is just a warm-up, to get everyone in the proper mood.

The next pea is more serious. It is the America-has-gone-soft pea. We let them beat us in Vietnam (or beat ourselves); investigative journalism got out of hand over Watergate; and now a court has said that creationism isn’t science. It’s hard to tell what the country stands for anymore. Moreover, since there’s too much money chasing too few goods’, it’s no wonder that productivity is down and we have to have this recession to get us back on the track. (You may think it odd that a recession, which is defined as fall In Gross National Product, could be a way of increasing productivity. But let that pass.)

Under the third shell there is the archaic-industry pea. The industry in question is usually important in the military-industrial complex, so our role as leader of the free world is said to be at stake. The afflicted industry is unhappily mature, obsolete, decrepit, and hence unable to compete with the newer, more modern, more efficient plants that the Germans and Japanese had to build because we blew up their old ones in the War. Although this is certainly an ironic state of affairs-that being blown up is good for you-we intellectuals have learned to live with irony and actually find it more to our taste than simplicity. (I seem to remember that the British were heavily bombed, too; yet their factories are said to be even worse than ours. Nor does bombing seem to have been a great blessing to the French on one side, or to the Italians on the other. But let that pass.)

At any rate, we’ve been hearing that U.S. Steel made a bad mistake in staying with the Bessemer process instead of switching to whatever it was the Germans and Japanese switched to, and that therefore it needs protection from foreign competition. (Steel’s mistake would seem to have been a mistake on the part of management, though it isn’t nice to point. I wonder why bankers who deplore that mistake are so eager to underwrite the same management in its takeover of Marathon Oil. It is surely a very pretty irony that botching the steel business fits you for success in the oil business. And it does raise questions about how difficult it can be to run an oil company, and what can possibly justify the $1 million annual salary of Mobil’s president. But let that pass, too.)

If you were not born yesterday, you can readily see that the America-has gone-soft pea can be used to justify not merely the recession but more particularly the recession’s effects in rising unemployment, lower wages and union busting generally. The archaic-industry pea can be used to justify fast write-offs for tax purposes and low capital-gains taxes to encourage what is called investment but is actually speculation (I’ve fussed about that before and no doubt will again). In other words, the   winner of the new shell game is always Reaganomics.

THERE’S NO WAY you and I can stand a chance here, unless we look again at the so-called Productivity Index. As we’ve noted, it is flawed macroeconomically by its failure to take account of such crucial factors as the interest rate. Microeconomically it overlooks the obvious fact that in any particular firm the efficiency of the labor force depends in large part on the skill and luck of the management. Where management decides to manufacture a product that turns out to be unsalable (say, a gas-guzzling automobile), the result tells us nothing about the efficiency of the production line. Similarly, a badly run production line will yield bad results no matter how hard the individual workers work.

More fundamentally, the Productivity Index is guilty of the fallacy of composition, which is the assumption that what is true of every member of a class is true of the class itself. Thus it is fallaciously said that since every firm is run to make a profit, the nation is run to make a profit. (This points, too, to the fundamental fallacy of Marx’s theory of surplus value, but we won’t go into that now.) In the case of the Productivity Index, the fallacy appears in the use of “hours worked” as its denominator.

The Productivity Index, let us remember, is a simple fraction, whose numerator is the GNP and whose denominator is “hours worked.” As with any fraction, the value of this one can be increased by increasing the numerator (two-thirds is greater than one-third), or by decreasing the denominator (one half is also greater than one-third). An individual firm can increase its profits (“productivity”) even in the face of declining sales, provided it can cut its labor costs still faster; and this is the course surviving firms take in a recession.

But transfer the same thinking to the economy as a whole and you are saying that the nation’s productivity can be improved (or the nation made stronger and wealthier, if that’s what you want to talk about) by deliberately-in cold blood- fixing it so that nine or 10 or 11 million potential workers don’t do any work. With the denominator decreased, the index should go up. This is absurd on its face and vicious in its results.

While recognizing the vicious absurdity of the Productivity Index, you may still want to measure the efficiency of the economy. There is a pretty good figure for doing that: the GNP per capita. This won’t show you why the economy is more or less efficient than it used to be (and, as I have suggested, I could tell you a tale about the GNP). Yet at least the term “per capita” includes us all; and we are all, employed and unemployed alike, members of the nation the” N” in GNP. Further, if you look at the GNP per capita you will see what common sense has already told you: that a deliberately induced recession what we have today-is stupidly and pointlessly cruel to millions of men, women and children, as well as destructive of the national interest.

The cruelties and absurdities of the Reaganomic shell game flow from the apparently innocent and objective Productivity Index that well-intentioned economists have devised. It has been observed before that the road to hell is paved with good intentions. We may not, I fear, be quite so sure of the intentions of the bankers and brokers and politicians who are hot for Reaganomics. In that case we might inquire what it is they produce that qualifies them to lecture the rest of us on productivity.

The New Leader

[Over a year later a letter was received regarding this article. That letter and George Brockway’s response are found here: http://wp.me/p2r2YP-5Q]

Originally published January 11, 1982

This is the FIRST article published in the series named “The Dismal Science”

THE REAGAN Administration has not managed the feat singlehandedly, and we may hope that it will not be completely successful, but in the very short time of a year it has gone a very long way toward destroying the morale of the American people. By morale I do not mean merely eagerness for life or sense of well being, though they are included. More fundamental than psychological tone are morale as mores and morale as morality. It is these that are being destroyed. For the first time in the history of the world, a society is being deliberately and cheerily based on the proposition that it’s good to be greedy. The world has certainly seen greedy people before, and many of these have been completely convinced of their right to their riches; but never before, I think, have the rich pretended that they benefit the poor by stealing from them.

For 35 years, since the end of World War II, we have been giving ourselves quite a beating. It is an argument for our strength that we have survived McCarthyism and Vietnam and Watergate. Yet these traumata were not comparable to Reaganomics. The junior Senator from Wisconsin notwithstanding, very few saw Red-baiting as more than a political ploy; tragic though Vietnam was, it cannot be seriously argued that we embarked on it to get anything for ourselves; Watergate was an ad hoc lunge for personal survival, not a way of life proposed for a society. But Reaganomics is earnestly hailed as a universal ethical system. There is nothing- well, almost nothing-cynical about it. There is a world of difference between, say, the thinly veiled threats of CREEP‘S fundraisers and the boyish candor of President Reagan. We will learn that boyish is not better.

Most of the discussion about the effects of Reaganomics has understandably focused on the harm it does to the poor, in whose safety net it has ripped gaping holes. Many lament this harm. Some expect it to result in an electoral reaction of the underprivileged that will sweep the Republicans from power. Cruel as the fact may be to contemplate, there is little in the political experience of mankind to encourage such an expectation. Unlike the rich and the pseudo rich, the poor don’t vote their pocketbooks; they just don’t vote. Even Marx expected little from the lumpenproletariat. It implies no indifference to the desperate plight of the poor to suggest that the special and original vice of Reaganomics lies elsewhere, nor did we really need David Stockman’s indiscretions to call it to our attention.

What President Reagan is accomplishing is the corruption of the economic elite, that is to say the rich, who are assured that they will serve mankind better the richer they manage to become. This is not Adam Smith’s Invisible Hand guiding entrepreneurs-that is, doers-for the public good. Our new rich are expected to work their miracles merely by being rich, not by doing anything at all.

The doctrine is of course not without its recent forerunners, including the “maxi-tax” of 50 per cent on earned income that produced, in 1972 and after, a rank and gross efflorescence of six- (and even seven-) figure executive salaries(and now we’ll have a maxi-tax on all income). Then there is the flaccid side of consumerism, which, under the tutelage of television, presents living it up as the aim of life. And it says a great deal that for many years now men who think of themselves as honorable have used the term “tax shelter” without shame or even a trace of embarrassment.

For a parallel to our present debauch, one must go back to the Germany of World War I and its aftermath. The Junkers and industrialists made no pretense of uplifting their fellow-men, but their greediness provides a chilling example of how the morale of a society is destroyed from the top. It is often contended that the Weimar inflation of 1922-23-with its wheelbarrows of marks for a loaf of bread-ruined the middle class and so destroyed the society. Actually it was the other way around. The center did not hold because it had already been destroyed by wartime profiteering.

Hjalmar Schacht, no wild-eyed radical in spite of his middle names (Horace Greeley), wrote of “the bountiful flow of money [during the War] from the coffers of the Treasury into the pockets of the producers [industrialists and Junker agriculturalists],” and contrasted this with the relatively heavy wartime taxation in Great Britain and the United States. After the War there was “the impression made on the public by the spectacle continually paraded before their eyes of particular undertakings and firms expanding their concerns, acquiring new works or erecting new buildings, amid the general monetary collapse, all with the aid of paper mark credits which they were able to obtain at will and repay in currency which every day was worth less and less. The private banks, in giving such paper mark credits, did so at the expense of their depositors or at the expense of the Reichsbank …. ”

Change a few words and you might think you were reading today’s newspaper accounts of the oil companies, who insist that they need their windfall profits in order to drill for more oil yet instead use them to start an office machines company (Exxon), to buy Montgomery Ward (Mobil), and to try to gobble up “competitors” (Mobil again). Or you may be reminded of DuPont borrowing $4 billion to buy Conoco; or of U.S. Steel begging the government for protection against foreign competition while using its credit, not to update its obsolete plants, but to bid for Marathon Oil. In Germany, since the rich insisted on being rewarded rather than taxed, and since by 1922 the middle class had already been despoiled, resort was finally had to the printing press. Speculation, as Schacht tells us, “spread to the smallest circles of the population.”

I’MNOT SAYING that we are condemned in a Santayana-esque way to repeat that, or any other, history. I am saying that if you want to destroy an economy, the first thing to do is to corrupt the rich. The rot will spread very fast indeed, simply because the rich are the ones with the money.

Money is a sign of faith. The full faith and credit of some institution is behind it. Money is good if it is issued in good faith and credited-accepted-in good faith. The question of faith extends far beyond the relationship between the one who tenders the money and the one who accepts it. Although tenderer and acceptor must have faith in each other, they also must have faith in the relative stability of the economy and the relative equity of the society in which they participate. The acceptor must have faith that someone else will accept the money should he decide to spend it; and the tenderer must have faith that he will be able to enjoy what he bought with the money he tendered.

Money circulates only when these faiths are living. To the extent that they are compromised, the money is compromised. This is true even of so-called hard currencies. Gold is preferred to paper by the individual who wishes to opt out of the economy; but even he has to have faith that somewhere at some time there will be an end to whatever prompts his preference for gold, and that someone else will then accept the gold in the ordinary course of living. If no such use for gold can be foreseen, if the hand of every man is indeed against every man, only guns and butter are worth accumulating. The Inca’s hoard did him no good.

People fear that too much money will be issued unless it is tied to something tangible, like gold. But there is too much money in an economy only when a society’s morale is sagging: The government can exhibit bad faith by taxing inequitably. The banks can exhibit bad faith by creating money for speculative rather than productive purposes. And both of these exhibitions are very visible today. They are centerpieces of Reaganomics. Hard as the Federal Reserve Board may try to fine tune the economy, it has neither the strength nor the means to overcome the effects of the bad faith of Reaganomics, except by destroying faith in the economy altogether. This is the notorious trade-off between continuing inflation and deepening depression.

Every editorial writer in the land worries that if the Fed releases its brakes on the money supply, the economy will, as they say, overheat and inflation will, as they say, roar out of control. Those bitter alternatives are inexorable only where a people’s morale has been destroyed, where the rich are rewarded rather than taxed, where greed is held to be the height of virtue. We are not there yet, but boyish enthusiasm has already taken us a long way.

The New Leader

Perspectives

ZEROING IN
ON THUROW

THE OTHER DAY, as I was going down in an elevator with a black activist friend of mine, we were joined by a young black messenger who pulled out a paperback and started to read. My friend, having nothing more active to do at the moment, snatched the book away. “What’s that you’re reading?” he demanded. “The dictionary.” “The dictionary! Why the dictionary?” “Well,” the young man said, “it has the words.” My friend frowned, then thrust the book back. “All right,” he said sternly, “but challenge it.”

That is more or less how I feel about Lester C. Thurow’s The Zero-Sum Society, which I just got around to reading as a result of an Op-Ed piece he had in the Times a couple of weeks ago. If you haven’t read it, I think perhaps you ought to, all right-but challenge it, starting with the title. In the book trade, the rule is that a good title is the title on a bestseller. It doesn’t have to mean anything, and The Zero-Sum Society doesn’t mean anything, even to Professor Thurow. In his first chapter he announces that “All sporting events are zero-sum games.” But the precise contrary is the case. I can’t offhand think of any sporting event that is a zero-sum game. I grant that in every sport there are winners and losers, but the sum of their scores is not zero (as it is in gambling). As for political economy, it is not like any kind of game at all (the election of Richard Nixon was a situation where everyone in the nation lost).

Thurow actually understands this very well, for in the Times article I mentioned he points out the risk we all run in allowing our cities to deteriorate. He is absolutely right that the risk is great, and that we all-repeat, all-run it. If deterioration is a game, it’s one that has no winners, and whose score is a great deal less than zero. So I advise you to challenge the title and all those passages scattered through the book where Thurow remembers the title and works it into a paragraph or two. That’s mostly window dressing.

I also advise you to challenge what he has to say about environmental problems in Chapter 5, especially as compared with his Times article. He starts off with an unsupported ad hominem comment to the effect that “environmentalism is an interest of the upper middle class.” What’s that supposed to mean? Are all interests of the upper middle class (economics, for example) suspect? Has Harlem no interest in good garbage collection? (My activist friend thinks it has.)

Next he does a bit of shadow boxing with the GNP, because it doesn’t include a clean environment among the goods worth counting. This point is even more important than he allows: Not only does the GNP have no way of registering the value of clean air; it actually counts the unhappy results of pollution – higher doctor and hospital bills – as additions to the GNP. A miner who contracts black lung disease is thus improving our national productivity.

Thurow is aware of this, at least up to a point, yet he goes ahead and asks questions that presuppose a clean environment is not a real economic objective because it is not counted in the GNP. (But don’t get me started on the GNP.) Then, on the assumption (still unsupported) that different economic classes look on the environment differently, we are presented with an allegedly intractable problem of allocating benefits and costs. Zero-sum melodrama aside, it happens that our society has made a good bit of progress with these questions – just as it supports schools (even though many taxpayers have no children), builds highways (even though many taxpayers have no cars), “and maintains parks (even though many taxpayers have hay fever).

In the meat of the chapter, Thurow tells us how we “should think about the problem of how much ‘clean environment’ to buy. Imagine,” he says (economists are great imaginers), “that someone could sell you an invisible, completely comfortable face-mask that would guarantee you clean air. How much would you be willing to pay for such a device? Whatever you would be willing to pay,” he explains, “is what economists call the shadow price of clean air.” As Mark Twain would have said, ain’t that a daisy! I have a question or two for him: How much would you pay to avoid death in the next instant from asphyxiation? Or lingering death next Earth Day from lung cancer? My questions make just as much sense as his. In other words, no sense at all.

This absurd discussion leads into the most fantastic proposal in the book (not, I understand, original with Thurow): Rather than prevent pollution, we should charge for it by a system of “effluent charges.” The confusion here is between public and private good, and the unstated assumption is that since there is no absolute line between them, they are really the same. But what would you pay for a Superman suit so you could go jogging in Central Park at midnight? Your answer is the shadow price of police protection; and instead of trying to protect you, we’ll charge muggers for a license to beat you up (if they want to kill as well as maim you, the fee will be somewhat higher).

The point is that although all costs are stated in dollars, they cannot all be compared. Police protection has a cost, but it is a condition for society. Clean and decent public services are also a condition for society – for our society – as Thurow’s Times article shows. These services cost dollars. The dollars that this magazine or Thurow’s book cost are not comparable because these goods (though surely great) are incidental, not fundamental, to our society. That environmental concerns are relatively new fundaments for society is no argument against their necessity. London didn’t have a public police force until Sir Robert Peel invented the bobbies in 1829.

All public goods are, in principle, historical, and the environmentalists are making history today. If I find so much to challenge in only one chapter of The ZeroSum Society, why do I recommend that you read it? Aside from the stimulation the book provides (you can see that it has stimulated me), it has a few pages in another chapter that say some extraordinarily interesting things about taxation. I would never have believed it possible that anyone could convince me the corporation income tax should be abolished, yet Professor Thurow has done it. I fear his proposals on capital gains taxes are unworkable (he wants them withheld as the gains accrue; but fast growing companies – the ones with substantial gains – generally don’t have the cash to withhold), If I had my druthers, I’d trade off the abolition of the corporation income tax against the cancellation of special treatment of capital gains (which ought to be taxed as they are realized, as regular income, as they were before 1922) and the elimination or drastic modification of deductions for contributions and interest expenses. This is all moderately complicated, but I am told that Congress’ Joint Committee on Taxation has an excellent staff, and I am sure they could work it out.

SPEAKING of capital gains reminds me of a circular letter just received from Senator Daniel P. Moynihan. It is always a pleasure to hear from the Senator, because, like Professor Thurow, he writes so well. This time, however, he’s congratulating himself on his role in lowering capital gains taxes, and he’s dead wrong. As proof that he was right in advancing the lowered rates, he cites increased total collections in spite of them. The Senator connects this result with the Laffer curve. It ain’t necessarily so (more likely a lot of long-term gains were cashed for a one-time killing), but it doesn’t matter.

What does matter is that the Senator seems to be saying that (1) taxation is for revenue only, and (2) the best tax is the one that’s easiest to collect. The first question was put on the road to settlement by Andrew Jackson’s” force bill” of 1833, and was definitively settled by the Civil War. About the second issue the Greeks and Romans (not to mention the Kwakiutl Indians) had much more efficient ideas than anything proposed today. When the ancient Greeks wanted to hold a festival or build a trireme, they simply told off a rich man for the honor of paying for it. The Romans used to do the same before they became an empire, and thereafter they developed the system of selling collection rights to a tax farmer. These were a sort of license to steal (like a license to pollute) and caused no immediate trouble at all to the government selling them. The Kwakiutl evened things up by holding a potlatch: very easy and lots of fun. So the Senator’s ideas on taxation are neither so new nor so pragmatic as he thinks. The thing about special treatment for capital gains is that it is a special break for the rich, which stimulates them to gamble (not to make productive investments), and which results in more inflation for the rest of us. See THE NEW LEADER for September 7, 1981.

GEORGE P. BROCKWAY, a past NL contributor,
is the chairman of the board of directors of W. W. Norton & Co.

Originally published September 7, 1981

Thinking Aloud

WHY
SPECULATION
WILL UNDO
REAGANOMICS

IF YOU’VE GOT some money and want to use it to get more, there are three quite different things you can do: You can gamble, you can speculate, or you can invest. Since all three are ways of getting rich – or of going broke – your choice may not make much difference to you. But it will make an enormous difference to the economy, especially in a period of inflation. Perhaps because the choice is immaterial to the person with money, the effect on the economy is not generally noticed, with devastating consequences.

Speculation – what we’re mostly going to be concerned about here – has long had a bad name with the man in the street. Speculators, whether in Continental scrip or Civil War greenbacks, in city lots or rolling farm land, in domestic silver or imported coffee, have traditionally excited the envy or the hatred of their fellow citizens. In everyday speech speculation falls somewhere between gambling and investing; its connotations are disapproving. Although not quite so reprehensible as gambling, it is still suggestive of something secured for nothing, generally at an undue or unsafe or unsound or even unsocial risk. Brokers warn against speculative stocks, and the courts consider it imprudent to risk widows’ and orphans’ pittances on such issues. A successful speculator is a standing reproach to anyone who works for a living.

Most academics, however, disapprove of disapproving holding it to be unscientific, and possibly for this reason you can read many standard introductions to economics without ever encountering the word “speculation.” Hard-headed bankers and publicists ‘and – more to the point – hard-headed lawmakers tend to follow ‘the textbooks’ lead and ignore the activity. This neglect has helped to skew the economy and, in the present state of the world to frustrate many well intentioned measures to control inflation. For speculation is real enough, and there is reason to believe it is as much a cause as a result of inflation. To see why, we must distinguish among the three roads to riches. Our distinctions are not idle; they are of the utmost importance for the understanding and management of the economy-and, I am sorry to say, they are original.

Gambling is risking wealth in a zero-sum game. In any gamble-betting on cards or horses or football games- if some players win, some other players must lose the same amount. The winnings and the losings (after properly allocating taxes and the house’s cut) add up to zero. Nothing has been accomplished.

Speculation differs significantly from gambling in that it is not a zero-sum game. Speculation is risking wealth in an activity where all the players can win, or all can lose, or some can win and some can lose. It involves the buying and selling of stocks and other claims to wealth, the attempt to profit from or hedge against the vagaries of the market, the merging and spinning off of businesses, occasionally the churning of exchanges, the hoarding and dumping of almost anything imaginable. It creates no wealth but rearranges – sometimes to the very great profit of the re-arranger – wealth that already exists. It has been argued that, in the aggregate and over time, what goes up must come down and therefore speculation is a zero-sum game, too. But the speculative run is parallel, if not identical, with the inflationary run. If speculation were an irrelevant zero-sum game, inflation would likewise be nothing to fuss about: the two would rise and fall (assuming they do) together.

Investing is akin to speculation in that it is not a zero-sum game. In a healthy economy it is possible for all reasonably astute producers to profit, at least to-a degree, and contrary to current thinking this is true whether or not resources are limited. Investing differs from speculating in that it uses wealth to create new wealth. Its aim is the production and distribution of goods and services. These may be new kinds of goods and services, or they may be more of the same; they may be produced in new ways or in the good old ways; they may be provided by new businesses or by expansions of existing businesses; they may be what your heart desires or what you scorn as shoddy. The point is, economically they are goods.

Gambling, speculating and investing are frequently distinguished, notably by laymen and lawyers, on the basis of risk. Yet all three are risky. (To paraphrase President Kennedy, life is risky.) Nor is there any correlation between risk and economic effect. In gambling, the odds are often known with mathematical precision; that is ‘what makes casino owners rich. In speculating, one can command the services of brokers and advisers who spin out their lives poring over charts and tables. Investing, On the other hand, can be very risky indeed; despite meticulous market research, a highly promising new product may turn out to be an Edsel.

Economists, being locked into their equilibrium models; generally confuse the issues in another way. Gambling, it is obvious to them, has no impact on the economy, except to the problematic extent that it distracts people from more productive endeavors. What one wins, another loses, and the GNP remains as before. I n a world enjoying relative equilibrium, speculation seems no different. Commenting on John Maynard Keynes‘ ultimate disapproval of speculation (after he had made a small fortune buying and selling foreign currencies), Roy Harrod gives us the classical view: “As regards the gains of the successful speculator, in the case of foreign exchanges, this was solely at the expense of the unsuccessful, who, since he has voluntarily incurred the risk, had no legitimate hardship if the risk went wrong. In the case of commodities, the same argument largely applied: what speculator A gained, speculator B lost….”

That is a fair enough description of what happens-provided the-economy is in equilibrium. But suppose the economy is not in equilibrium, or even close to it. Suppose, indeed, that inflation is, as they say, raging: 4 per cent a year, 5, 8, double-digit, 12 per cent-with no end in sight. What does speculation look like now? Most important for our purposes, it no longer looks even vaguely like a zero-sum game. With a little bit of luck almost any of the speculators can win. There need be no losers among those who play the game. Some may, to be sure, gain more than others. I may sell my pot of gold just before it makes a great leap forward, but even the more sluggish hog-belly futures that I then buy are also on their way up.

IN SUCH a situation only the timid or foolish (or impoverished) will forgo the fun. The brash and clever and rich will, moreover, recognize that in inflationary times the thing to do is speculate: in common stocks of companies that (like Conoco) have substantial holdings of natural resources, in commodities, condominiums, works of art, objets d’art, collectibles. Almost anything can be a collectible. One of G. Gordon Liddy’s regrets was that he felt obliged to shred his match-folder collection lest it reveal to the Watergate investigators the many motels he had stayed at as he careened down the sub rosa way.

Keynes devoted 10 pages of The General Theory of Employment, Interest and Money to an attempt at differentiating between short-term speculation (which he saw as the pervading vice of Wall Street) and long-term “investment” by a “professional” who makes a point of understanding the businesses whose securities he buys and “who most promotes the public interest.” Yet except as one has a pseudo-esthetic preference for steadiness over flashiness, it is hard to see the differentiation. Even Keynes acknowledges that the lucky or clever speculator may make larger sums than his more careful cousin. And it does not matter to the companies whose securities are traded. After the first sale to the public, the buying and selling of their shares does them no good, and ordinarily no harm, either. Surely they don’t care how intelligent or stupid the buyers and sellers may be.

Corporation executives do of course take an intense interest in the vicissitudes of their companies’ stocks. Partly this is because they may own some, or have options that are worth more as the stock goes up; partly it is because their present salaries, and prospective salaries elsewhere, are dependent upon their success in making money for the speculative investors who play the market. In certain instances their companies may want to attract additional funds for some purpose or other-even including the expansion of production, although this is not very likely in inflationary times.

One of today’s common misapprehensions is that the securities and commodities exchanges are engaged in supplying capital to those who produce goods and offer services. No doubt the exchanges once did actually encourage the investment of funds that might otherwise have lain hidden in mattresses because of their owners’ liquidity preference. But that day is long past. The value of all new stock issues (many – if not most- of which had only speculative ends in view) on all exchanges in all of last year, was about the same as one week’s trading on the New York Stock Exchange alone.

 It is safe to say that considerably less than 1 per cent of the transactions on the financial and commodities exchanges have anything whatever to do with productive investments. The rest are speculations. No producer gains the use of capital from them. Though the traders-may become rich, no new wealth is created by their frenzied activity. Yet because it became public policy (Icing before supply-side economics was thought of) to encourage investment, so-called long-term capital gains are taxed at a very favorable rate-just cut to

20 per cent. Given the tiny fraction of exchange transactions actually supporting production, it is plain that the favorable treatment almost exclusively stimulates speculation.

And speculation sucks money into itself like a firestorm. It always can use more. Vast sums are needed merely to keep transactions afloat for the few days it takes the brokers’ back rooms to complete them. These sums swell with speculation. In the first six months of this year, the New York Stock Exchange set a new record of 6.1 billion shares traded, thus requiring upwards of 10 times as much money to conduct its business as it did only a few years ago. Meanwhile, everything from a collection of beer cans to an example of Picasso’s blue period has been soaring in price as much as 100 percent a year, and the amount of money this ties up obviously has been increasing correspondingly

No productive enterprise can make money that fast. The after-tax earnings on equity of the Fortune 500 business runs around 10-15 percent, even in good years. Now that the interest rates they have to pay (or earn internally are well into the double-digit range, their record is poorer. (That’s why this inflation hasn’t sent the stock market through the roof, as everyone expected.) Smaller businesses – the kinds that arouse the same sentiments as mom’s apple pie – are on the whole having a much harder time. A man is a fool to work to produce something in the hope of earning 10-15 per cent when he can make many times that simply collecting Dresden china (should his fancy rake that turn).

The speculator, on the other hand, is perfectly happy borrowing every dollar he can lay his hands on at 15-20 per cent or more if he can thereby turn a profit of 20-30 percent. Aside from his apparent gain, he gets an enormous bonus from the income tax laws. The interest he pays on the money he borrows is deductible at the same rate as ordinary income, while his profits are taxed at the very much lower capital gains rate. Leverage like that can be very attractive.

Similar considerations underlie the activities of conglomerating corporations. In fact, they levy a greater toll on the money supply than all the individual speculators combined. DuPont is borrowing $4 billion to consummate its CONOCO deal (a speculation in coal more than in oil, but certainly not in enterprise). Bankers argue that Conoco’s happy stockholders will recirculate their windfall by making new” investments.” Yet whether they take out their profits in riotous living or use them to bid up other speculations, the economic effect will be inflationary.

Twelve other giant corporations – mostly oil companies with conglomeration in mind – have secured lines of credit totaling $42 billion. This may be the iceberg. or only its tip, for scores of smaller (but still large) corporations have un totaled lines of credit to finance takeovers, Whatever they add up to, they represent money withdrawn from the economy at least until taken down, and in any case not available for productive investment. There is seldom the slightest pretense that conglomeration will increase production; the goal is the fast buck, and many billions of dollars are being devoted to pursuing it.

The situation has been aggravated by the policy of the Federal Reserve Board under former chairman Arthur F. Burns and his successor, Paul Volcker, The Fed’s attempt to hold down inflation by controlling the money supply has further encouraged speculation at the expense of productive investment. With speculators and conglomerators snapping up the limited funds available irrespective of interest rates, producers cannot afford the financing they would invest in new products or services, or new ways of providing old ones. This is how the recently discovered productivity gap came about, and the easing of the capital gains tax will widen it for having enhanced the appeal of speculation.

Productive enterprise has been so systematically starved during the Burns- Volcker years that-especially with the addition of millions of women and blacks to the labor force-a great influx of money probably will be required to get the economy working again. This is, indeed, an insight that supply-siders share with fiscalists. But so long as nothing is done to curb speculation, the new money, whether from the Fed or from lower taxes, will flow into speculation or consumption and leave production as hungry as before.

THE THING about speculation, of course, is that sooner or later the kissing stops; and almost everyone gets caught with a long position in tulip bulb futures. The South Sea Bubble bursts; Wall Street lays an egg. When the bubble bursts, speculation feeds on itself going down, as it had fed on itself going up. Going up, everyone can win; going down, everyone can lose. Successful bears are very few, and their contribution to the common wealth is to make the disaster worse faster.

Is a disastrous outcome inevitable? In the light of the nostrums the Reagan Administration has had enacted into law, some sort of disaster can be predicted with confidence (if that is the right word). Because of the FDIC (horrors! – Federal regulation), there will be no run on the banks this time, and that will be a blessed distinction from the Great Depression. Because of the SEC (another regulative agency!), Wall Street pools are a thing of the past, and it’s harder to make a killing there (so fewer will be killed).

But the expectations of the innocent supply-siders will surely be dashed on the rock of speculation: The proceeds of the tax cuts will not go into productive investment; the money· supply will continue to resist management; interest rates will not fall; the surge of inflation wiII not abate this side of recession. If there are cynical supply-siders, and I rather think there may be some, they will be pleased with what they see:· The rich will be richer (at least comparatively), the big will be bigger, and the nation’s markets will be more firmly controlled by the kind of leaders who have made such recent successes of the automotive and steel industries. Amid all this, cruel unemployment will steadily spread.

The disease was first named by the British, who called it “stagflation.” A moderately reflective person might have expected that the experience of Great Britain (which doesn’t have the excuse of OPEC) would give pause to the noisy enthusiasts for low capital gains taxes and high interest rates. The British have been playing the game longer than we have-and their stagflation is worse than ours. But it seems (hat we are doomed to repeat their game plan.

It is a crying shame. The grief that will be caused is incalculable. And speculation could be easily inhibited. The Federal Reserve Board could forbid the granting of loans for purposes of trading on any securities or commodities exchange, or for purposes of merging or acquiring businesses, The Fed already sets limits to brokers’ margin accounts; at various times in the past it has forbidden them altogether; it could do so again tomorrow morning. Congress could readily tax capital gains as. ordinary income (owner-occupied dwellings might be treated differently, although I can imagine strong arguments against this). At the minimum Congress could, without being reproached for irrationality, define a long-term” capital gain as one on property held for IO years instead of one. Even five years (recognized by the money markets as the definition of “long-term” financing) would be a great step forward, particularly if coupled with modifications of the charitable deduction and elimination of other inflationary tax shelters.

The Fed and the Congress don’t do these things because they think the sole difference between speculation and productive investment is that the former involves more risk than the latter. But the true difference is, to repeat, that speculation has only financial gain in view, while productive investment uses wealth to produce more wealth. Though the risks may be great, investment can stimulate the production of goods and services. Regardless of risk, speculation can only stimulate inflation. Production improves the common wealth and the standard of living of the citizens; speculation simply redistributes what is otherwise created, and deflation destroys it.

It should be remarked that my proposals to deter speculation do not take sides – and do not need to take sides – in the fiscalist vs. monetarist controversy. There is very likely much truth on both sides, but there is assuredly no help possible from either side if speculation is not discouraged. While I am not a gambling man myself, I do not think there will be no more cakes and ale. It is not proposed to outlaw gambling or speculation. It is merely proposed that our government stop encouraging speculation. The Fed’s doctrinaire (false doctrine) refusal to consider the uses to which our money is put encourages speculation. The Congress’ espousal of a low capital gains tax encourages speculation. The new gift and inheritance tax encourages speculation. It would be easy enough for us to cease and desist from these encouragements.

As matters stand, one may read the Wall Street Journal or the financial pages of tile New York Times or any other metropolitan newspaper day after day and find very little news on some days none at all – concerning people producing something to sell to other people to satisfy their needs or wants. The shocking fact is that a great number of the best and best educated brains in the country are caught up in speculation of one kind or another, in devising new speculative schemes and new tax shelters. Our laws foster a sad misuse of this potential national resource. Getting and spending we lay waste our powers. President Coolidge was wrong: The business of America in the 1920’s was not business; it was speculation. It is speculation again today,

Finally, it may be objected that the proposed discouragement of speculation will not, of itself, control inflation. Certainly not. But unless speculation is deterred, inflation cannot possibly be controlled. Unless one is ready to run the printing presses flat out, the only way to get money into productive hands is to see that little or none of it falls into speculative hands. The first step toward achieving this is understanding what speculation is. Speculation is not risky productive investment. Nor-emphatically-is it economically neutral, like gambling. Far from it: Speculation is coterminous with inflation-and, as we are in grave danger of soon rediscovering, coterminous with deflation, too.

The New Leader

Originally published November 16, 1981

THE NEW Chairman of the Federal Trade Commission, James C. Miller III, must be surprised at the initial flak he has had to fly through for proposing that the FTC drop its programs (such as they are) protecting consumers against fake advertising claims and defective products. “Consumers are not as gullible as most regulators think they are,” he remarks, almost plaintively. He need not worry. He is in the mainline of the ideology of this most ideological of administrations; he is saying nothing that has not already been said by Virginia  Knauer, the President’s consumer affairs adviser. The President himself is understood to want to scrap the Consumer Product Safety Commission in the interest of balancing the budget. The commission is in for $33 million a year, while the deficit is feared likely to run perhaps 2,000 times that; so the effect would be petty, but at least it would show he’s trying.

Such a move would also fulfill a campaign promise, and we all know it’s good to keep a promise-even a stupid one. President Reagan has in fact kept a high percentage of his campaign promises- up to a point, anyway-and a high percentage of them have proved stupid. Wall Street and Main Street (not to mention Broadway) were mobilized to lobby for the new tax law, and now they’re unhappy with the result. Everyone else figured out that if you cut taxes more than you cut spending, you increase the deficit, but brokers and bankers  and businessmen couldn’t see that far ahead. It would be a Laugher if we weren’t all liable to be hurt.

The same sort of thing will happen with the demise of Federal consumer protection, though it’s possible that in this case most businessmen won’t even finally recognize that they have managed to hit themselves in the solar plexus. Herbert Stein, Nixon’s Chairman of the Council of Economic Advisers, once made a widely retailed mot to the effect that people of liberal mind trust anyone over 18 to vote for President of the United States (billed as the most powerful office in the world), but don’t think the common man or woman capable of buying a bicycle without do-gooding governmental protection. Caveat emptor, says Professor Stein (like me, he had five years of Latin).

To gain a little perspective on the question, let us turn caveat emptor around. A purchase, after all, is not a one-way transaction; I don’t get a bicycle for nothing. When I buy one from Professor Stein for $99.99, I give him a $100 bill and he gives me a penny and the bike. Stein says that I, the emptor, should make myself a self-reliant expert on bicycles before I trade in his shop; if what he sells me proves dangerous or shoddy, it’s my fault, not his.  Now, my question is, Why shouldn’t caveat emptor be balanced by caveat venditor? If he can (unintentionally or maybe not) sell me a dangerous or poorly made bicycle at my peril, why can’t I pay him with a counterfeit $100 bill at his peril? Or a rubber check? Or a credit card I happened to pick up on the street? Why shouldn’t he be required to make himself a self-reliant expert on these matters, and not be allowed to go running to the sheriff for help? It is no answer to say that counterfeiting is against the law. That law can be repealed, just as the Consumer Product Safety Commission can be abolished.

It is no answer either to say that check bouncing is cheating, and therefore immoral and bad for the soul. The same can be said for selling dangerous bicycles. Nor is it any answer that government regulations impose an intolerable burden of paperwork on the bicycle business. The legal requirement that I have enough money in my account to cover my checks means I must balance my checkbook, and I find this chore an intolerable burden of paperwork.

These matters have a long history, going back at least to Lydia in Asia Minor in the seventh century BC, when government coinage was invented. For the next 2,500 years princes and principalities and powers struggled with the problems of coinage: how to get away with debasement on the one side and prevent clipping on the other. Then there came the nagging problems with counterfeiters of paper money (a collateral forebear of mine was so good at it that the entire note issue of a Connecticut bank had to be withdrawn a couple of hundred years back). Only in the past 50-60 years have checking accounts been widely used, while credit cards are a mere 30 years old.

All of these inventions-coined money, paper money, personal checks, credit cards-have been good for business. They make business easier to transact. Neither  seller nor buyer now needs to wear out his teeth biting coins. Within very broad limits we can trust what is proffered. We can trust because this is in general a trustworthy society. And it is a trustworthy society in part because the sanctions of the criminal law enforce the trust.

If the merchant who receives a rubber check had to rely on the civil law, he would be faced with endless delays and absurd costs. He would have to spend hundreds or thousands of dollars, plus many hours in court appearances, to try to get what was due him. He couldn’t afford this; so he couldn’t afford to accept checks; so he’d have to restrict himself to a much slower and smaller cash-only business. The threat of criminal penalties, enforced by the state, deters check cheats and makes it possible for merchants to trust the rest of us, to the merchants’ benefit and ours.

What’s sauce for the goose is sauce for the gander. I’ll be readier to buy Professor Stein’s bicycle if I know its safe; and I’ll be surer it’s safe if I know the law will crack down on him in the event that it’s not. I can’t afford to sue him for damages  unless I’ve been catastrophically hurt, which neither of us wants to happen. Since he really does not intend to cheat me, and I really do not intend to cheat him, we’ll both be better off knowing the law will call to account those who do cheat: We’ll both be better able to trust each other.

Ultimately, trust is what economics is all about. The simplest barter is impossible without some measure of it. Among barbarians the trust may be minimal, yet that is what marks them as uncivilized. In civilized society the most suspicious traders, exchanging a bushel of wheat for a pound of meat, can carry their skeptical examinations only so far. Volume and weight can be readily tested, but it is well-nigh impossible to guard against adulteration. The grains of wheat cannot all be microscopically examined, nor the meat be completely dissected, especially if the traders are ever to do anything else.

Besides, the proof of the foods is in the eating-and that must await the consummation of the trade.
So if the traders are to do business, they must trust that there are limits to the deviousness of their trading partners. The greater the trust, the easier the trading; the easier the trading, the more trading can be done in a given period of time; and time is money, especially with the prime rate at 17 or 20 per cent.

PRACTICALLY all business depends on the reliable nosiness of the Bureau of Weights and Measures. The meat industry would go out of its mind if it could not base its pricing on USDA standards and regulations. Lobstermen may grumble, but without regulation they’d fish themselves out of business in short order. Even the stock exchanges provide a dramatic example of the effectiveness of regulation in promoting trade. In the Great Bull Market of blessed memory, the New York Stock Exchange, “self-regulated” as it was, traded roughly 4 million shares a day (and only 16.4 million shares were traded in the frenzy of Black Tuesday). Now, in spite of (really because of) the interference of the SEC, trading is at a 40-50 million share a day clip. The common man can still lose his shirt on Wall Street, but because he is no longer likely to be cheated out of it he is more willing to risk it-to his broker’s profit, and possibly to his own.

It is a notable fact that businessmen with one side of their brains-understand the principle at work here very well. That is why they spend millions to establish brand names, which are a sort of pledge of product quality. Their reasonable expectation is that weary travelers, for example, unable to face the uncertainty of the inspection of local accommodations, will settle for an interchangeable HoJ oMoLo even though they might prefer some variety in their plastic decorations. A recent Holiday Inn advertising campaign labored precisely this point. As with brand recognition, and at less cost, Federal standards instill consumer confidence and thereby increase trade. One of the reasons for the current troubles of the automobile industry is the doggedness of the Big Three in fighting every measure for consumer protection. The understandable inference is that they wouldn’t be making such a fuss unless they intended to put something over on us.

Consumers (that is, all of us) will of course be hurt by the elimination of consumer protection programs. But producers (that is all of us, too) will also be hurt. Although businessmen are no doubt right to protest the onerousness or irrelevance of this regulation or that, it is a fundamental mistake to oppose the whole movement. The truth of the matter is that the consumer movement has been good for business. Ralph’ Nader insists that he’s trying to make the capitalist system work, and the Marxists, clear eyed on this point anyhow, oppose him as wholeheartedly as do the Reaganites.

GEORGE P. BROCKWAY, a past NL contributor,
is the chairman of the board of directors of W. W. Norton & Co.

Presented at Brigham Young University by George P. Brockway
March 3, 1988

Let’s start with a story. Professor Paul Samuelson tells us that several years ago, when he was asked by a Harvard mathematician to name “one proposition in all the social sciences which is both true and nontrivial,” he confessed that this was a test at which he always failed. “But now, some thirty years later, he says, “on the staircase, so to speak, an appropriate answer occurs to me: the Ricardian theory of comparative advantage; the demonstration that trade is  mutually profitable even when one country is absolutely more or less productive in terms of every commodity.

If Professor Samuelson is right, there is no point to this conference. Foreign trade goes on the way it does because of the law discovered by David Ricardo less than two centuries ago. While subject to refinement and correction, as is any scientific law, it is nevertheless immutable in the sense that we poor mortals cannot repeal it.

Most economists consider their discipline a science on the model of physics. There is nothing good or bad about “S = ½ gt²”; that’s the way the natural world works regardless of our feelings on the ethics of falling bodies. Even when Aristotle, two millennia before Galileo, had an entirely different theory, no one thought ethics had anything to do with it. And most economists hold that there’s nothing good or bad about the law of comparative advantage, which, they say, is the way the economic world works, regardless of our feelings and intentions.

Let us consider this remarkable law in three ways: historically, empirically, and morally.

First, what is the law? Ricardo explained it this way: Suppose that a certain amount of wine exchanges for a certain amount of cloth. Suppose that in England it would take a year’s labor of 100 men to make the cloth, and of 120 men to make the wine, while in Portugal the man-years required are 90 and 80 respectively. In these circumstances, it would be to Portugal’s advantage to make only wine and England’s to make only cloth, with the countries exchanging the surpluses. Portugal would multiply its wine output 2.125 times, and England its cloth production 2.2 times; and since the cloth and the wine are equal in value, both countries would come out ahead, as follows:

Table I

Men per Cloth

Unit
Wine

Product per Man

Total Men

Total
Product

England

100

120

1/100

220

2.2 units

Portugal

90

80

1/80

170

2.125 units

[editor’s note: The Khan Academy has a 9 minute video that explains in more detail]

You can see why economists are fascinated by the law. In the case before us, Portugal is more productive than England in both wool and wine; yet specialization is advantageous for both countries, and particularly advantageous for England, the less productive of the two. And note this: Ricardo does not even mention the economies of scale that might well result from the specialization.

The law of comparative advantage is the bedrock of the standard theory of international trade, taught with remarkable unanimity in almost all economics departments throughout the land. On this foundation arguments for free trade–for GATT and against Gephardt–are erected. There have of course been many more or less technical corrections. For example, when Ricardo compares industries on the basis of the labor involved, he is using his special brand of the generally discredited labor theory of value. Today the notion of productivity is usually used. (For my part, I should question that notion, too, but that’s another matter.)

The principal modification of Ricardo was advanced by the Swedish economist Eli Filip Heckscher in 1919 and developed by his student B. Ohlin in 1933. They argued that it would always be advantageous for countries to specialize in those industries where they were capital intensive and to import those goods where they were labor intensive.

So much for the history of the law. Now we come to what I find one of the most astonishing facts about it. Ricardo published it in 1817, but it was not until 1951–one hundred thirty-four years later that a serious attempt was made to find empirical confirmation of the law. The attempt was made by one G. D. A. MacDougal, and in the thirty-odd years since his paper appeared in Economic Journal, a debate has smoldered as to whether his results actually do support Ricardo. Of two widely used textbooks on international trade that I consulted at random, one says flatly that MacDougal did confirm Ricardo, and the other says just as flatly that he did not.

I think you will agree that this is an extraordinary state of affairs for a discipline that claims to be a science. Can you imagine a proposition in physics being taught as gospel for one hundred thirty-four years before anyone bothered to test it? And can you imagine it still taught as gospel when the test proved equivocal? And finally, in your wildest nightmare, can you imagine such an equivocally tested theory used to design a structure on which the livelihoods of literally billions of people may depend? An engineer who proposed to build on such a basis would be treated as a madman and locked up as a threat to civilized society.

But wait, as the television commercials say, there’s more. Professor Ohlin published his elaboration of Professor Heckscher’ s theory in 1933. It had to wait only twenty years–still an unconscionably long time for an alleged science to act–before its first full-dress test, which was conducted by Professor Wassily Leontief. And what was the outcome? The sad fact is that the empirical findings were the diametric opposite of the predictions of the Heckscher-Ohlin theory. Leontief didn’t merely fail to confirm Heckscher-Ohlin; he refuted it.

What do you think the economics profession, that stern band  this of scientists, did when faced by this contretemps? I could give you a million guesses, and you’d never hit it. Psychologists tell us that the first step in mastering a fear is to name it; so the economists gave the results a name in capital letters–Leontief’s Paradox. Then they said Leontief had chosen a bad year for the test. (So Leontief took another year, and Heckscher-Ohlin still failed, though not quite so badly.) Then an entire new industry grew like a fungus within the economics profession. If you needed a subject for your dissertation, or if (after getting your Ph. D.) you needed a subject for a journal article to ensure your promotion, all you had to do was to come up with a new explanation of Leontief’s Paradox. The field was, and is, wide open. The only comparable situation I can think of is the Modern Language Association’s fascination with William Faulkner. Since it was not clear, perhaps not even to Faulkner, what he had on his mind, there are no limits to what one can write about him. It’s hard to say something new about Shakespeare, but anyone can be an innovative critic about Faulkner. It’s an academic goldmine. Likewise Heckscher-Ohlin and Leontief’s Paradox.

There is, however, a difference. Much ink and paper and brain power are no doubt wasted on Faulkner, but the damage is pretty well controlled within the profession. A few susceptible students may suffer temporary disorientation, but no one is much hurt. The case is otherwise with Heckscher-Ohlin, where it’s not much too much to say that the fate of nations–particularly this nation–hangs in the balance.

Now, I think you’ll agree that it would be legitimate to argue that the economics profession has, by and large, been morally irresponsible in its unequivocal advocacy of equivocal doctrines. This is not, however, the ethical issue that concerns me here. I wish to call into question, not the morals of economists (who as individuals are probably no better and no worse than ordinary people), but their view of their discipline as an amoral science– not an immoral science, whatever that might be, but an amoral science, like physics, where the behavior of electrons is neither right nor wrong.

Let’s begin at the beginning–at least at the beginning of international trade. The first requirement of international trade is that there be nations. If there are no nations, there can scarcely be trade among them. This point may be stupifyingly obvious, but its consequences are far from trivial.

We haven’t time to examine in detail the meaning of nationhood, but we can make a few observations. A nation will have citizens, and it will have boundaries, and within those boundaries it will be sovereign–a law unto itself. An aspect of that law will be that its citizens have, in the grand old phrase, certain rights, privileges and immunities that are denied to those who are not citizens. If we who are citizens are not, in this way, distinguished from those who are not citizens, of what meaning is citizenship to us?  And if national citizenship is without meaning, of what meaning is the nation?

I leave the questions open. Maybe we don’t want a nation; and immunities that are denied to those who are not citizens. If we who are citizens are not, in this way, distinguished from those citizens, who are not” of what meaning is citizenship to us? And if national citizenship is without meaning, of what meaning is the nation?

I leave these questions open.  Maybe we shouldn’t have one. Perhaps we reserve our loyalty for those who are very near and very dear to us. Perhaps, as D. H. Lawrence put it, we “love-whoosh for humanity.” I’m prepared to argue those questions, but my point here and now is merely this: If we have international trade, we have a nation; and if we have a nation, then the well being of our fellow citizens is vital to us. We can’t demand respect for our own well being unless we, at the same time, to the same extent, and for the same reasons, respect theirs.

David Ricardo was open to such considerations. He wrote that patriotic sentiments, “which I should be very sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.”

What Ricardo could not foresee, and what his modern followers have overlooked, is the fundamental irresponsibility of the modern multinational corporation, which knows no boundaries other than the bottom line. Today capital flits from Schenectady to Singapore more speedily and safely than it moved in Ricardo’s time from London to York. Aside from a few temporarily secret processes, technology anywhere is quickly available to literate people everywhere. Domestic availability of raw materials has not dictated a country’s industry since the Industrial Revolution and certainly does not do so now. Today the costs of all but one of the factors of production are nearly homogeneous throughout the world.

But the cost of labor is not internationally homogeneous. And since labor is usually the single most costly factor, as well as always the original and necessary factor, the heterogeneity of wage scales and working conditions overrides all other considerations.

Returning to our parable, we find that what happens is not that England specializes in wool and Portugal in wine, but that England abandons the production of both wool and wine and imports both from Portugal.

The question becomes, how will England pay for the imported wool and wine? By exporting something else, most economists will answer; but they tend to be coy when asked what that something else might be. If because of its wage scales (or for any other reason), Portugal can underprice England in the production of every product you can name (many of which Portugal does not consume herself), why should she buy anything at England’s higher prices?

Well, it may be urged, England, limping into the post-industrial world, can concentrate on service industries; and while some services, like dishwashing and motorcycle maintenance, can’t be exported, financial services can be. Economists make much of the importance to the British Empire of “invisible imports”–interest, insurance premiums, royalties, profits, and employment for younger sons. Keynes once amused himself by calculating that the entire overseas wealth of the Empire at its height could be accounted for by 350 years of Queen Elizabeth’s share of only 3 ¼ percent on the loot Sir Francis Drake plundered from Spain in 1580. Yet during all those years Britain compound interest also made pots of money in the usual visible ways of manufacturing and exporting textiles and steel rails and steam engines and anything else anyone could think of.

In any case, invisible imports can only help pay for visible imports; they can’t carry the whole load or even a major share of it. All financial services together, including exploitative profits, account for certainly less that 35 percent of the cost of a commodity and often less than 20 percent. Thus 65 to 80 percent of the cost of imports remains uncovered even when the importing nation contributes the entire cost of financial services. And it’s not clear why the exporting nation should not itself contribute part and, eventually, all of these services, as exporters are largely doing today. We call the consequence a trade deficit.

The ultimate consequence of abandoning productive industry is national stagnation and decline, not merely of power but also of standard of living. It has happened before. In 1675 a Spanish nobleman, one Alfonso Nuñez de Castro wrote, “Let London manufacture those fabrics of hers to her heart’s content; Holland her chambrays; the Indies their beaver and vicuña; Milan her brocades; Italy and France their linens, so long as our capital can enjoy them; the only thing it proves is that all countries train journeymen for Madrid and that Madrid is the queen of parliaments, for all the world serves her and she serves nobody.”

Don Alfonso understated Spain’s contribution to the wealth and happiness of mankind. She produced no cloth, but she provided services–military services, administrative services, ecclesiastical services–to the New World, and also to the Two Sicilies, to the Low Countries, to Burgundy, and even to the Holy Roman Empire. These services, valuable though they might have been (there has been doubt on this point), were not enough to support the imperial style in Madrid. When the silver from the Indies ran out, Spain slipped into a slough of despond from which today, three centuries after Don Alfonso, she has yet to escape.

Immeasurably more important than the loss of imperial glory, the consequence of service orientation is unemployment. The owners of financial services (including the previous owners of those sold to cash-rich exporting nations) are as happy as clams, but the disemployed workers in the abandoned industries are not. People say that what matters is that those who still have jobs or money in the bank can buy cheaper sports shirts and classier sports cars. Nothing, they say, should interfere with the automatic working of the free market.

It is barely conceivable, as an imaginative exercise, that the market could be allowed much greater sway if we had a world state. Then it might be possible to say that the efficient accumulation and distribution of goods was the most important function of the state, and that the free market was the most efficient way of performing that function. But as it is–a world of nations and of international as well as intra national trade—we do not and cannot allow the market to define our national purposes or the method of their fulfillment. We will not buy our battle tanks from the Russians no matter how cost-effective they are. We may buy golf carts from Poland, but we will not contract with China to supply us with ground-to-air missiles, although we could thereby save half or more of the cost.

Since we make such exceptions to alleged economic laws in order to protect ourselves militarily, it is logically perverse to refuse at least to consider other exceptions in order to protect also the morale and well being of our fellow citizens and of ourselves. Indeed, that is why we have a nation–and why international trade is something to have a conference about.

We started with a story told by Professor Samuelson; let’s conclude with a quotation from his famous textbook: “Thus [he writes] if exchange-rate parities and money wage rates are rigid in both countries or if fiscal and monetary policies are poorly run in both countries, then the blessing of cheap imports that international specialization gives might be turned into the curse of unemployment.”

There is no doubt that the curse of unemployment is with us, with all of us all over the world. Can we conclude that our fiscal and monetary policies are poorly run? Who will claim they are not? How else could we Americans have doubled our national debt and turned ourselves from the world’s leading creditor nation into the world’s leading debtor?

Another fact beyond doubt is that “protectionism” in any form has not been part of the fiscal and monetary policies that have done so poorly for us. So “free trade” is not a plausible panacea for any ailment from which we now suffer. We have pretty close to free trade now, and we are very ill.

Proper fiscal and monetary policies are no doubt beyond the scope of this conference, but moral questions are inescapable. It is morally wrong for me as an individual or for the citizens of this nation or any nation to pursue our private pleasures at the expense of our fellow citizens. I have no moral need for a state-of the- art sports car or a state-of-the-style sports shirt, but I do

…. [copy ends – Editor would appreciate readers who may have the last page to send it on]

Originally published February 23, 1981

Dear Editor

Foreign Policy

I agree with George P. Brockway’s conclusion that “policies like the human rights program are precisely what is needed, while unleashing the CIA will damage us severely” (“Foreign Policy in a Bipolar World,” NL, January 12). But it seems a gross exaggeration to attribute the decline of Eurocommunism or the survival of Spain and Portugal outside the Russian orbit to former President Carter’s human rights program and the Helsinki Final Act. While it may be easier to arrange “for our enemies to have enemies” than to increase the number of our friends, there is little evidence that this can be achieved by trumpeting the human rights cause. To direct human rights policies” more toward making the USSR mistrusted than toward making ourselves beloved or feared,” depreciates their value.

The best argument for a human rights program is not that it makes enemies for the Soviet Union and friends for the U.S. Human rights are intrinsically good, like international economic prosperity and the absence of world war. They are invaluable, not only because we like them, or because they are the foundation of American independence (“the objective of American foreign policy”), but because the more human rights prevail abroad, the easier it will be to preserve them here.

In the many regions that are critical for our foreign policy-the Middle East, Africa, Central America, Eastern Europe, South Asia-human rights are endangered not only, or even primarily, by threats of Soviet subversion or penetration. The greater danger is that human rights in these crucial areas are imperiled by economic and social disequilibrium. A credible human rights program cannot be separated from concern about and involvement in efforts to achieve more equitable social and economic systems in the destabilized regions.

President Carter’s human rights program was so selective that it seemed deceitful to many in the Third World. It was too obviously a propaganda weapon aimed at discrediting the USSR by focusing on Communist betrayal of freedom, while giving little if any attention to identical or even worse violations by regimes that were supposedly our friends-Iran, China, Korea, the Philippines, and others frequently cited by Amnesty International. Are Arabs, Indians, Latinos, and those to whom the Voice of America sends news about our human rights concerns supposed to take protestations about Soviet dissidents seriously when they fail to hear of our concern about their dissidents?

Carter’s human rights program also failed to link the rights of free speech, free press, free assembly, and free political organization with the rights to work, eat and grow old with dignity and security. In much of Africa, the Middle East, Asia, and Latin America it will be difficult, perhaps impossible, to achieve the first category of rights without the second. A credible human rights program cannot be selective; it must demonstrate concern for the rights of all, and must also seek the right to survive with dignity as well as to protest the misdeeds of oppressive government. Otherwise, the foreign policy advocated by Brockway will be perceived by most of the Third World and much of the rest of the world as mere rhetoric.

Binghamton, N. Y.

DON PERETZ

Professor of Political Science State University of New York

 

George P. Brockway’s article is full of provocative statements. Many of them I agree with, but not all of them can be logically advocated at the same time. I most certainly agree that promoting human rights is not merely moralizing, that this can serve a number of important foreign policy goals. For example, because the Carter Administration took human rights seriously in Latin America, our diplomatic and economic interests were advanced. As a number of countries successfully navigated the difficult transition from authoritarian to democratic rule (Dominican Republic, Ecuador, Peru), we were able to construct a series of close working relationships which immensely improved our diplomatic strength. With the United States no longer identified as a close collaborator of every dictator, American businessmen found a friendlier environment; in Latin America, no major investment disputes developed over the last four years.

I also agree that the United States too often places great stake in the momentary political posture of Third World governments. Treating the world as a zero-sum game, where the “loss” of any state is automatically a gain for the Soviets, the United States has squandered great energy and resources in trying to control the domestic politics of an innumerable number of developing nations. Yet the inherent economic and military importance of these nations, more often than not, is marginal to any reasonable definition of United States interests. Moreover, even if a nationalist government should come to power, whether of the Right or the Left, the chances are very great that it would still want to participate in the international economic system. It would want to trade with U.S. firms and to borrow from U.S. banks, and have no choice but to pay the interest rates established in the London money markets. Very few leaders in the developing world consider either autarky or the Soviet-led COMECON as an alternative to the Western economy. Indeed, even Communist countries-from Hungary to China are anxious to increase their participation in what has become a global economic system.

Brockway is also correct, in my opinion, to argue that an aggressive foreign policy, perhaps resorting at times to covert action, can too often be counterproductive. The Soviets and Cubans were active in Angola before South Africa invaded in 1975, but there is no doubt that the Cuban presence was legitimized in the eyes of most Africans by the South African invasion and the CIA presence. Even when covert operations succeed for the moment, the future can bring disaster. In Central America, an active CIA has helped maintain conservative, generally military governments for decades. But now Somoza is gone and El Salvador today-or Guatemala tomorrow-faces a powerful insurgency that views the United States as the major source of succor for their oppressive governments. Iranians remember all too well our long collaboration with the Shah and his secret police, SAVAK.

In arguing that the Soviets will often find that client states cost more than they are worth, Brockway offers a useful corrective to those who present each Soviet “gain” as a trauma for the West. The Soviets are undoubtedly finding their foreign obligations to be a major drain on their limited resources, and must be wondering whether an expansionist foreign policy is really in their interests. Nevertheless, I am not sure that the United States can be quite as relaxed about Soviet activities in the Third World as Brockway seems to suggest. Especially when Soviet actions take a military form, we ought to register loud disapproval. If we are to establish “rules of the game” for superpower activity in the Third World, constraints must be placed on both the Soviets and on us with regard to the use of force in there. If the Soviets do not desist, the pressure will continue to mount for the United States to respond in kind. Yes, our interest should be in seeing that Third World states are independent states, not clients of any superpower. As Algeria recently demonstrated in helping to gain release of the U.S. hostages held by Iran, genuinely independent countries can often be more useful than “loyal” allies who enjoy little respect in the world and have essentially passive foreign policies.

Yet this formula for genuine nonalignment is not consistent with Brockway’s view that we live in a bipolar world. In a bipolar world, it becomes extremely difficult for relatively weak states to avoid seeking the protection of one of the two superpowers. Each superpower logically sees the disengagement of any country from its sphere of influence as a “loss,” a weakening of its alliance system. Each superpower will therefore struggle, using various means, to maintain its friends in power around the globe.

Fortunately, today we live not in a bipolar nor even in a multipolar world, but a poleless one. Power has become so diffuse that many states have accrued significant quantities of it. Countries such as Mexico, Brazil, Argentina, Nigeria, Libya, Iraq, and India have enough power to try to maneuver international events in accordance with their national interests. Smaller powers in their areas recognize the presence of the regional “influentials,” and must· adjust to this. In the past, we mistakenly imagined that we could manipulate these regional “hegemons” to do our bidding. In fact, they have proven capable of defining their own foreign policies in the light of their perceived national interests. Their policies have sometimes converged with ours, but frequently have not.

A poleless world is infinitely more difficult for the superpowers to manipulate. Either superpower that tries to control events in the Third World today is bound to face frustration and disappointment. For that very reason, if the United States maintains a sense of proportion and keeps its eyes on its true interests, the Third World will be seen as a less threatening place.

Washington, D. C.

RICHARD FEINBERG

Resident Associate Carnegie Endowment for International Peace

 George P. Brockway replies:

 I full agree with Richard Feinberg that we should “register a loud disapproval” when Soviet actions in the Third World take a military turn, and I expect that he agrees with me that our disapproval should itself seldom take a military or even a quasi-military turn.

My fundamental differences from Don Peretz would, however, require volumes to elucidate, though the particular policies we would support are probably very close. In brief, he believes that some things are “intrinsically good,” while I find that the intrinsic goods he mentions are often in conflict. Forty years ago the “intrinsic” good of human rights was in conflict with the “intrinsic” good of the absence of world war. Was one more intrinsic that the other? The inability of “political science” to answer such questions produces the very “unstable amalgam of moralizing and Realpolitik” that I mention in my article.

An aphoristic summary of the position of my article may be found in the concluding words of a forthcoming volume on The Philosophy of History by the late Professor John William Miller: “History does not show men good or bad; it operates by assuming that they are moral-that is, agents. Good, in history, can mean only the perpetuation of those critical processes that define the moral.”

Originally published January 12, 1979

BEFORE HIS old broom sweeps it all away, Ronald Reagan should give careful thought to the possibility that some of Jimmy Carter’s foreign policy-in particular the human rights program and the downgrading of CIA activities-may have a better practical base than even its sponsors imagined. What probably was conceived as born-again do-goodism may actually be the epitome of hardheaded down-to-earth practicality in the world we face today. For unlike our parents and their parents, we now live in a bipolar world. This is something new under the sun.

We have had good experience with an analogous situation in domestic politics, where it is clearly recognized that a two party system is radically different from any other. We believe this  system gives our government a stability denied to those of, say, France and Italy. To the extent that our belief is well founded, and that we understand the nature of the foundation, we may hope for stability in international affairs. If we misunderstand the  situation, we are likely in for trouble.

From the point of view of the voter, the salient fact of two-party politics is that one is generally voting against, rather than for. To put it in its harshest light, as many recently did, one must choose the lesser of two evils. Only rarely is it possible to enter the polling booth with unbounded enthusiasm.

The resulting political atmosphere is often bland, which is another way of saying non revolutionary. The two parties crowd toward the center of the political spectrum and tend to become similar in their programs. That makes possible such sudden voter shifts as we experienced last November, when those who could have been expected to vote against Reagan voted against Carter because of his perceived ineffectuality.

Occasionally, true believers find ways of establishing something approaching an ideological difference between the parties, of giving voters “a real choice.” Handfuls of the faithful are made ecstatic, but the usual consequence is electoral disaster. Barry Goldwater and George McGovern are roundly defeated. Few can have loved Lyndon Johnson or Richard Nixon, even at the height of their powers, yet vast majorities had reasons to vote against their opponents.

On reflection, the vote-against syndrome is not surprising. Quite apart from the great variety of opinion called forth by any question, all tragic or comic views of life recognize that no one is perfect, and moreover, that perfectionists never get anything done. Perfection is not to be looked for; and when the choice is narrowed to two, the less imperfect is the best available. Whether this is good or bad is not to the present point; it is in any case generally acknowledged that this is the way things are in a two-party system.

Where in the end the choice is the lesser of two evils, the winning campaign strategy is not so much to build up one’s own candidacy as to tear down one’s opponent. There is, of course, the danger of a backlash, so it is advisable to mask or moderate the strategy, In recent American politics a tactic has been for the candidate himself to take the high road and let supporters do the mudslinging. Thus Dwight Eisenhower uttered healing platitudes as Nixon and Joe McCarthy screamed about the mess in Washington and 20 years of treason. When the new Nixon ran with Henry Cabot Lodge in 1960, both tried to be statesmanlike and it did not work. Eight years later the new new Nixon was the picture of highmindedness, while Agnew went after effete Easterners and the like in strings of alliterative vituperation. Harry Truman effected a subtle combination of both roles in himself: He gave the do-nothing 80th Congress hell, but left his opponent alone and gasping. John Kennedy and Carter tried variants of this tactic, and it is noticeable how futile Carter became once he had to shift to promoting his own virtue instead of castigating Washington’s sinfulness.

The essential meretriciousness of most of the campaigns mentioned should not mislead us into thinking that bipolar politics is always largely a media event. The classic refutation is provided by the Lincoln-Douglas debates, where Lincoln forced Douglas to destroy his own credibility, especially in the South, by admitting that his doctrine of squatter sovereignty would allow the people of a territory to vote slavery down as well as up. The admission won Douglas the debates, in that he was re-elected to the Senate. But Lincoln achieved his aim of splitting the Democratic Party, and two years later he was elected President. Douglas became the candidate to vote against, whether you were a Southerner in favor of slavery or a Northerner opposed to it.

IT IS ONLY in the last quarter century that the international system has polarized. The balance of power was destroyed by the world wars and consensus was destroyed by Korea. The two superpowers now confront each other. Each has as its minimum goal the maintenance of its independence. Each has as its maximum goal the elimination or metamorphosis of the other. Neither one intends-or wishes -to use the bomb to gain its ends; they must wage their war by other means.

The obvious means suggested by conventional diplomacy is a system of alliances; hence we have NATO on one side and the Warsaw Pact on the other. Yet not a day passes without some event reminding us that our allies do not exactly love us. Even when they seem to agree with us they find ways, often irritating ways, of asserting their independence. They also do not love the Soviets, however; should they have to make a vital choice they will rally, albeit reluctantly, to our side. It is much the same with the Russian satellites. Today the Poles are giving the Russians fits, but no one expects them to break away from their lord and master. In the end, the lesser of the evils will be grudgingly accepted.

The Third World offers a still closer parallel to that of the voter in a two-party system. The very claim of nonalignment testifies to an unwillingness to make an unequivocal commitment to either great power. It may frequently seem that nonalignment is a sham, and it is surely a nuisance. The Third World countries, however, no doubt all wish that they could simply follow the lead of one big power or the other with enthusiasm; their lot would be vastly easier if one of the two competing big powers were worthy of their undying affection. As it is, on issue after issue they must support what appears to them the less reprehensible side; they must decide against, rather than for.

Assuming the foregoing analysis is approximately correct, it would seem that U.S. foreign policy today should be directed more toward making the USSR mistrusted than toward making ourselves beloved or feared. In other words, it is more important for our opponent to lose friends than for us to gain them: the greater the world’s skepticism of the Soviet Union, the safer place it is for us, even if France thinks us tasteless and India is shocked by our materialism.

We have seen this principle at work. The Helsinki Final Act and the Carter human rights program have weakened the Soviet Union. Euro communism, only recently thought likely to engulf the Continent, is no longer heard of. Spain and Portugal, countries Henry Kissinger was ready to write off, have survived outside the Russian orbit. In America, the revisionists’ theory of the origin of the Cold War has become clouded with doubt. These substantial developments are at least partly due to the Soviets being forced to show their hand in their treatment of the dissidents. When Andrei Sakharov is not safe, after 60 years of total and unchallenged Bolshevik rule, it is difficult for anyone to believe in Moscow’s claims of having created an ideal society.

But since Sakharov is not safe, it can be argued as well that the value of the human rights program is open to question. Indeed, many of the dissidents themselves have made known their concern that the Soviet leaders have too weak a hold on power to tolerate being pushed very hard. Like the former American President who claims to understand them, they may, if forced to decide between admitting their guilt and acting it out, do the latter. To really help the dissidents, it is said, we should revert to quiet diplomacy.

There is no denying that our position here becomes ambivalent. Our national interest may be served by pursuing policies that could result in disaster for those we profess to assist. The unpleasant fact is, again, that it is more important for our enemies to have enemies than for us to have friends. This is equally true whether our potential friends are individuals or nations. It may therefore seem that we are using the dissidents to fight our battles, just as Britain was accused in 1940 of fighting to the last Frenchman. But of course the dissidents are using us, too. Humanitarians are, in the end, as tough-minded as self-advertised practical men.

In all this, though, there is an important difference between propaganda and policy. Young Abraham Lincoln’s plan for arguing a weak case was “Skin the defendant.” That is propaganda, and as Lincoln also said, “You can’t fool all of the people all of the time.” In the debate with Douglas, in contrast, he forced Douglas to skin himself. Naturally, Douglas could not have been forced to skin himself if squatter sovereignty had been a defensible idea-but then there would have been no need for a debate.

It is (or can be) the same in international affairs. Talk about Russians using gas in Afghanistan or Americans using germs in Korea or Germans slicing off virgin breasts in Belgium is propaganda. Such horrors are incidental to the main issue and almost  unprovable. Human rights is quite different. To a large extent it proves itself. If there is a free press, where are the opposition papers? If anyone can migrate, why all the barbed wire at the borders? If everyone can speak his mind, why prosecute those who do so? To a large extent, too, it confronts the defendant nation with impossible alternatives: If the Soviet Union cracks down on the dissidents or on the Poles, it loses credibility in the rest of the world. If it does not do so, it risks the gradual-perhaps rapid-erosion of its totalitarian system. To the Soviet leaders, these must be bitter options; we, meanwhile, might feel safer if their society opened up, yet even the first alternative would strengthen our position.

UNDER THE direction of five Presidents, the CIA has been operated on the opposite theory, namely that what we need in the world is friends. Given the results of its efforts, this may seem a perverse reading of events. But it is the sole sensible  explanation for our contributing to the overthrow of Jacobo Arbenz Guzman in Guatemala, Mohammed Mossadegh in Iran, Salvador Allende Gossens in Chile, and similar attempts elsewhere. The CIA has tried to get us friends, by purchase or by pelf, and it has managed to corral a few, several of whom survive. These friends are reasonably sure votes in the United Nations. They are generally enthusiastic suppressors of anything that looks even remotely like a Communist or populist movement. And they have given us a bad name in the world.

Some of this bad name is no doubt unjustified. Whenever anything goes wrong anywhere it is readily blamed on the CIA, whose initials have become a universal cussword. The charges are sadly credible because the CIA’s own propaganda claims credit for many dirty tricks and boasts of the Agency’s ability to do more if only unleashed. Even granting its view of international relations, this boasting is stupid. From any rational view, it undermines the national interest.

In yesterday’s multipolar world (where active friendships could be vital to us) subversive activities made it very difficult for potential friends to ally themselves with us. In today’s actual bipolar world, with its quite different requirements, a policy of buying friends and destroying apparent enemies makes it hard for opponents of the Soviets to declare themselves or to remain steady in their opposition.

It does not much matter to us whether the next blood-and guts corporal or law-and-order colonel announces he is Marxist or anti-Marxist. Either way he will be as suppressive of his fellow countrymen as he feels necessary and as eager for foreign handouts as the game will allow. Either way he will encourage foreign investors on Barnum’s principle about suckers. Either way he will vote against us in the UN as long as CIA posturing validates the theory that we are neocolonialists-and probably a while longer for good measure. But he can’t do us much harm, and more important, he can’t do the Russians much good. We can afford to be scrupulous in our dealings with him; and if our only pressure on him is in regard to human rights, we will, at the least, win the respect of his neighbors and, possibly, the gratitude of the internal opposition that may moderate his excesses or eventually supplant him.

Now that Angola is no longer in the news, for example, one wonders what all the flap was about. Gulf Oil still has its relatively minor business there, because the Angolans need it (or merely want it) regardless of ideology. And looking back, it is hard to see how anyone could have imagined that Angola was of more than marginal strategic importance. In the first place, Arabian harbors and Arabian oil fields would be handier targets for Russian missiles than tankers of whatever registry in the South Atlantic; in the second place, the German experience in World War I demonstrated the uselessness of isolated African outposts. Yet our UN ambassador made a tremendous fuss about Angola’s presumed threat to world peace, and the CIA semi-clandestinely wasted American lives (they were mercenaries but still human beings) and supplies there. Worse than that, the CIA encouraged the entry of the South Africans into the fray, thereby reinforcing in every black and every colored from Capetown to Cairo a conviction of our perfidy. Finally, the CIA’s actions made it impossible for us to gain a diplomatic triumph by exposing the Cubans, and this in turn made it easier for the Cubans to interfere in the horn of Africa.

The CIA (under orders, it would appear, from Secretary of State Henry Kissinger and so, presumably, from President Gerald Ford) could scarcely have done more damage to American national interests if the script had been written by the Russians themselves. It cannot be over emphasized that the ineffectiveness of the CIA is not the point. Most of the damage to the United States would have occurred even if the intervention had succeeded, and all we would have gained would have been another expensive client whose nonexistent Olympic team would have boycotted Moscow. In a bipolar world friends like that are of no use to us, and generally are actually harmful.

The dirty tricks operations of the CIA might have made sense in the last half of the 19th century; In the last quarter of the 20th century they are irrational in the extreme and flatly destructive of the national interest. It is admittedly exasperating that a curious double standard seems to let the KGB be 10 times dirtier and trickier than the CIA ever was. But that is no reason for a grand unleashing. Our interests will not be advanced by presenting ourselves as no better than the Russians, simply somewhat clumsier.

At first glance it might appear that the Soviet takeover of Afghanistan exposed the futility of the policies advocated here. After all, the human rights program and some restraining of the CIA have been in effect for upwards of three years, yet the Russians invaded with impunity. But the most obvious and regrettably soonest forgotten fact of American foreign policy is that its aim should be to protect and advance U.S. interests. Although an independent regime in Kabul might marginally contribute to that aim, it is not identical with it. Afghanistan fits Chamberlain’s mistaken description of Czechoslovakia-a far country of which we know little. It is by no means a second Czechoslovakia, nor is Southern Asia a second Western Europe.

Let us say, for the purposes of argument, that the Russians in Afghanistan are a threat to Pakistan. If they should try to take over that troubled land, it would serve them both right. The USSR would, to be sure, then have access, via Baluchistan, to the warm sea, thus satisfying a long-since-meaningless ambition of the Tsars. It might also, if it were not careful, wind up conquering and ruling India and Bangladesh.

The dominoes of Southern Asia line up from west to east, just as a quarter century ago we feared they were from Vietnam westward. But no matter what direction they topple, they offer nothing except trouble to the toppler. We are not dealing with a situation reminiscent of World War II when Hitler’s dominoes gained for him (and denied to his enemies) productive industry, productive agriculture, skilled manpower-plus a protected eastern flank that facilitated his conquest of Western Europe and opened the route for his eventual attack on the Soviet Union. This last may suggest a geopolitical question: Could the Russians use a conquered subcontinent as a springboard for an attack on China? No one who has heard of the Himalayas is likely to think so. Or could they have in mind an attack on Iran? But they already have a more congenial route open via Azerbaijan.

There remains the question of collective security, in which we have a serious interest. But it is quite different in our bipolar world from what it was hoped to be in the days of the League of Nations, or the early days of the united Nations. The conquest of Cambodia has dealt us a cultural deprivation in the inaccessibility of Angkor Wat; our strategic loss has been insignificant. In the same way we could have afforded to contemplate the takeover of Afghanistan with something less than absolute horror. .

It was really an issue for the Third World, and they rose to the occasion. The UN censure was a major Soviet defeat. But instead of letting this defeat stand as a permanent reproach and inhibition, we trivialized it by connecting it with, of all things, the Olympic Games. That might not have been so bad had we contented ourselves with our own boycott, which would have been noticed whether anyone joined us or not. We made the boycott the subject of a major diplomatic effort, however, and then trivialized that with such ham handed moves as sending Muhammad Ali to Nigeria. Even our handling of the grain embargo showed us more fervent believers in economic determination than the Russians.

As a result, we distracted attention from the Soviet defeat on a major issue to our own defeat on a trivial one. We had an opportunity for productive diplomacy and we threw it away, because we did not understand the bipolar world.

A POLICY IN the present world that involved tarnishing the Soviet’s image would not necessarily hurt their national interest, and this fact should be held steadily before their eyes and ours. Politics is not a zero-sum game. The election of Richard Nixon and Spiro Agnew amounted to a loss not only for the Democrats but for the Republicans as well. The election of Franklin Delano Roosevelt was a universal victory. It is the same in international affairs. The winners of a war suffer grave damage, too; the losers in a trade negotiation may still be better off than they were before. John Paton Davies, John Service and the rest may have lost Chiang Kai-shek’s China, but Mao’s China has proved a greater curb to Russian aggrandizement.

It is often remarked that American foreign policy is now an unstable amalgam of moralizing and Realpolitik. The instability is a consequence of the failure of either element to base itself on the historical situation of the world today. Fine talk and tough talk are equally inappropriate. Both hawks and doves are obsolete. We do not need either to join the Soviet Union or to bury it; we need merely to prevent it from getting into a position where it can bury us.

It is possible that in the long run the constraints of a bipolar international system, like those of a two-party national system, will narrow the differences between the contenders. It should not be expected that such narrowing will automatically decrease hostility. In 1914 Germany and Great Britain were more nearly alike than the most fanciful scenario can project for the Soviet Union and the United States. Nor should it be expected that people-to-people contacts (desirable though they may be in themselves) will invariably have positive nation-to-nation results. In 1940 young Germans, who as children had been cared for in Norway during the starving times of 1918-21, returned to their foster homes as Gauleitern.

In any event, whatever narrowing of ideological differences occurs will come about as a byproduct, not as the consequence of deliberation. Our deliberate policy should be to keep the Soviet Union on the ideological defensive. If this requires improvements in American treatment of black people and black nations, and in Russian treatment of dissidents: well and good. In the unlikely case that the policy requires the opposite: too bad. The objective of American foreign policy remains what it has always been: to maintain the independence of the United States of America. But the means of achieving that objective must suit the times. Our bipolar world is different from everything that has gone before, and policies like the human rights program are precisely what is needed, while unleashing the CIA will damage us severely.

GEORGE P. BROCKWAY, a previous NL contributor, is the
chairman of the board of dir
ectors of W. W. Norton & Co.

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