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Originally published October 17, 1983

CONSTANT readers of this column have foreseen since THE NEW LEADER issue of March 8, 1982, what last month burst like a paper bag full of cold water over the heads of the self-assured enthusiasts for Reaganomics. The New York Times, evidently relying on Federal Reserve Board figures, announced that our national rate of saving has steadily declined in spite of the massive supply-side tax cuts that were supposed to stimulate it.

This development has caused some bewilderment. Norman B. Ture, former undersecretary of the Treasury for tax and economic affairs, who was the “architect” of the 1981 tax cut, said the news was disturbing and surprising. “It’s very difficult to understand,” he added. Other worthies were tempted to dispute the figures, for the mind-boggling reason that “they cannot show tax-evasion income” (the inference being, I suppose, that the so-called recovery has been fueled by illegal savings).

As you know, I am like Adam Smith in that I hold no brief for statistics. (One of the most successful books I ever edited was entitled How to Lie with Statistics.) It does, nevertheless, seem to me fitting that those who live by statistics should die by statistics. In the present instance, I think it as likely that the rate of saving has been overstated as the other way around; but whatever the precise figures may be, they certainly show that the tax cuts didn’t do what President Reagan promised they would do.

Nineteen months ago I told you why they wouldn’t. I wrote that unless the government is running a surplus, there is no way for tax cuts to be a direct stimulus to productive investment.“ To emphasize the point, I said it in italics, a typographical device I don’t resort to lightly.

My reasoning was as follows: “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 [increased] deficits. No more money becomes available for productive investment than there was before the game started.” I continued: “You will note that I say ‘available,’ because I don’t for a minute believe that 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.”

Two months after my column appeared, the Times had a roundup of opinion on the economy, in which Professor Arthur Laffer was quoted. He was a big man in those days, with a curve named after him. The Laffer Curve, you will remember, was the principal intellectual underpinning of the Reaganomic tax cuts. Though it first appeared on a cocktail napkin and never was able to find empirical support, it was used to justify giving major tax cuts to the rich (whose incentive would otherwise be sapped). But on May 2, 1982, Laffer was quoted to the effect that the cuts would have “no economic effect” because the government would “give a dollar back and then borrow it right away from you.”

Yes, that is what I had said, and it amuses me to think Laffer might have gotten the idea from my column. That would have been sufficiently astounding. Sensationally astounding was the fact that here was one of the original supply-side gurus confessing that the scheme wouldn’t work. Laffer’s recantation was on a par with David Stockman’s confession that Reaganomics was a Trojan Horse for the rich.

Unfortunately, the Times business reporters are so used to stitching stories together out of mindless handouts, and Times readers are so used to skipping such stories that not even the Times editors noticed the recantation. In an editorial some weeks ago they still didn’t understand what had happened, attributing the fall in savings to the failure of the tax cuts to give individuals any “particular incentive” to save.

Now, in discussions like this, one can easily lose track of what the real issue is. The real issue here is not why savings have fallen but whether it makes any difference, and whether any “particular incentive” should be legislated to change the situation.

Classical economics noted that steam driven looms produced more cloth than hand looms, and were bought by men who had saved some money or could borrow the savings of others. Thus it seemed obvious that savings increased production (and so were virtuous and should be rewarded). That analysis, however, was inside out, as any moderately reflective businessman has known these past two centuries. For regardless of the savings one has accumulated, one is not well advised to buy a power loom if there is no effective demand for cloth or if the demand is already oversupplied. Of course, if there are no investment possibilities in textiles, there may be some elsewhere. But when you have 12 per cent of your labor force and 30 per cent of your industrial plant standing idle, the odds are against finding suitable places to put your savings, no matter how much you have laid by.

In this situation – which is the situation we have been in and are still in –  you can do two things with your savings: you can live it up, or you can speculate. Speculation, I’m ready to admit, is my King Charles’ head; I will therefore confine my remarks on the point to asking where you think all the billions came from that have gone into the stock market in the past 15 months.

Putting speculation aside, let’s look at living it up, otherwise known as consumption or demand. Here again, classical economics has something to say that seems plausible enough until you stop to think about it. The gimmick is Say’s Law. Jean Baptiste Say, a French contemporary of Adam Smith’s, had it figured out that production creates its own demand. He reasoned this way: If you set up a textile mill, you have to pay the people who build the factory and those who make the looms and those who raise and shear the sheep and those who run your looms. All these payments are used by these people to buy things they want or need, and the people who sell them these things use the money they are paid to buy what they want or need, and so on and on. Sooner or later, someone will buy your cloth. Or if no one does, it still happens that a lot of other goods are sold, so that, in the aggregate, production creates demand, and a universal glut is impossible.

MALTHUS, among a handful of others, saw that this is nonsense (because of the time lapses involved, if for no other reason), but he couldn’t convince his friend Ricardo or the followers of Ricardo. It took the Great Depression, when an unsalable glut existed for all to see, to exorcise the ghost of Say. And yet, only a half century later, the ghost of Say is again seen nightly on the battlements and occasionally stalking abroad in full daylight, driving Atari Democrats and self-advertised liberal businessmen mad with schemes to reduce consumption in the hope of increasing production.

A convenient example is at hand in an Op Ed page piece in the very issue of the Times that carried the story about the fall in savings. The author is one Fletcher Byrom, chairman of the Committee for Economic Development, described as “an organization of chief executive officers and university presidents.” Awesome. Byrom proclaims: “The United States needs to move away from a patchwork tax system that penalizes saving and investment toward one with more systematic emphasis on taxing consumption.” Someone should take Byrom aside and tell him about the Economic Recovery Tax Act of 1981.

He might also glance at another story in the same issue of the Times revealing that millionaires have multiplied like fruit flies even as savings have been languishing. There were about 180,000 millionaires in 1976 and 500,000 in 1981. It is not irrelevant that the great leap forward coincides with the introduction of the maxi tax on “earned” income. Goodness knows how many millionaires there are today, but I’ll bet the number has redoubled since the maxitax on unearned income went into effect two years ago. (I’ll bet the number of those below the poverty level has redoubled, too.)

If Byrom and his committee have their way, there will be still more people with millions to throw around. Their fortune-good for them but bad for the country – will be made possible by lowering the personal income tax and the corporation tax, while raising Social Security taxes and sales taxes, and maybe introducing a value-added tax, which is a semi-hidden kind of sales tax.

I am sorry, but I find it difficult to have proper respect for chief executive officers and college presidents who talk this way. The empirical evidence is plain that their policies have not done what they promised, yet they persist in them. The empirical evidence is plain as well that their policies have caused appalling suffering, not only in this country but throughout the world. Nonetheless, they persist. Although I find it hard to have proper respect for these people, I’m scared that they will continue to have their way.

The New Leader

Originally published September 19, 1983

LAST MONTH (NL, August 8-22) I suggested that the world’s Less Developed Countries might be better off if we denied their manufactures (mostly produced by multinationals) unlimited access to our markets. Here I propose to look at the problem from our point of view, starting with the reiteration of some observations I made a year ago about the Atari Democrats’ notion of inventing “sunrise” industries to replace “sunset” industries lost to foreign competition.

One of my points was that whatever we devise can also be devised or copied or, it is occasionally claimed, stolen elsewhere, particularly in the Orient. I must confess my astonishment at some people’s reluctance to accept this point, which seems to me as obvious as a sore thumb-now rendered somewhat sorer by the decision of Atari itself to start moving to Hong Kong. For again and again we have lost our domestic markets to multinational competition, with the results that millions of us are out of work and that our industrial plant is operating at 70 per cent of capacity.

The New York Times ran a story recently about the Sinchu Science-Based Industrial Park, currently being developed in Taiwan. “Sinchu has all the ingredients of Silicon Valley 20 years ago,” says Irving Ho, the park’s director. That may be commercial puffery, but why not? And how could anyone fancy it might be different with the as yet uninvented sunrise industries?

In the famous peroration of The General Theory of Employment, Interest, and Money, Keynes wrote: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” The almost universal obeisance to the doctrine of free trade confirms this observation. Adam Smith lives, defunct though he has been these two centuries.

Adam Smith indeed lives – that is, has a place in history – and we will better understand our own place if we understand his. The first eight chapters of his Book IV [of The Wealth of Nations], where his thoughts on foreign trade are laid out, are not written in a vacuum. They are an explicit, devastating attack on the mercantile system and especially on Thomas Mun‘s England’s Treasure by Forraign Trade, the leading exposition of that system.

Foreign trade, as Smith saw it, served two purposes: it enabled countries to exchange surpluses, and it facilitated the division of labor by expanding the market. In furtherance of these ends he opposed the monopolies and bounties and other restraints on, or inducements to, trade that were root and branch of the mercantile system. And he advocated independence for the colonies, largely because he judged trade with the nearby Continent more profitable.

But a lot has happened in the past 200 years, especially in America, and this makes The Wealth of Nations a historical document, not a present help in trouble. Our domestic market is now far larger than any world market Smith could imagine, and the division of labor has gone far beyond the 18 operations in the manufacture of pins that he immortalized. More important, his merchant adventurers have been succeeded by our multinational conglomerates.

Today’s problem with foreign trade is that our industries are losing out to foreign competition or are being shipped abroad by the multinationals. This happens because foreign labor is cheaper than ours. We are told by the three Harvard Business School authors of Industrial Renaissance: Producing a Competitive Future for America that the members of the United Automobile Workers had better shape up because they are paid 80 per cent more per hour than their Japanese counterparts, who are, in addition, more productive. The American man in the street reads this and says, “Just what I always suspected. American automobile workers are way overpaid. No wonder we’re having this depression.” The American man in the board room reacts a bit differently. “It’s a healthy thing we’re having this depression,” he says. “Now we’ll be able to get those wage scales back down where they belong.”

I venture to suggest that there is another way of looking at these figures (whose accuracy I will not question at the moment, though I may do so another time). One might as logically conclude that Japanese auto workers are underpaid as that our fellow citizens in Detroit are overpaid. Indeed, on the basis of the history of industrial relations, I’d lay even money that a better case could be made this way than that. When you stop to think of it, the idea that a working stiff anywhere is overpaid is not, on the record, over plausible.

Everyone talks about automobiles, but they’re comparatively well off. Sol C. Chaikin, president of the International Ladies’ Garment Workers Union, points out that 25 years ago imports accounted for 5 per cent of the sales of ladies’ and childrens’ apparel, but it is estimated that this year they will account for over 50 per cent. In the Peoples’ Republic of China, garment workers are paid 16 cents an hour; in the Federal Republic of China, the rate is 57 cents; and in Hong Kong it’s a little over a dollar. Does anyone seriously propose to reduce American wages (which in the garment industry are already low) to these levels? If not, what does the incessant chatter about “productivity” mean?

Fashionable economics tells us we should be delighted to buy cheap textiles from the Orient and should concentrate on selling “information” in return. Information about what? one wonders. Books are not meant, because they happily pirate whatever they want right now. Nor is hi-tech (as we’re learning to call it) meant, because our multinationals are already manufacturing “hardware” there. That leaves “software,” but that’s easy to pirate, too. And if Orientals should perversely take an interest in the data we busily beam at each other, they can pick up all they want off a satellite, with a disk they can make cheaply.

We’d better face it: until the world standard of living is brought up to ours, there is nothing whatever that cannot be manufactured less expensively abroad than here. Nothing whatever. How long will it take for the world standard to approach ours? If you’re old enough to read this, you’re too old to live to see the day. The question is, what do we want to do about it now?

There’s no doubt what the National Association of Manufacturers wants to do about it, or the Business Roundtable, or the Reagan Administration. They want to lower labor costs every way they can think of: cut wages, cut fringe benefits, cut safety regulations; and to keep those who still have jobs in line, cut unemployment insurance and welfare generally.

Let’s assume, however, that you and I don’t find labor-baiting attractive. Let’s assume we think it a good thing that the American standard of living is higher than the Japanese or the Taiwanese. If we make these assumptions, how can we protect our standard?

Well, the way to protect is to protect. First, we decide that certain of our important industries are threatened in our home market by severe competition from foreign industries. Second, we determine whether that threat is made possible by wages or conditions that we would consider exploitative. Third, we refuse entry to goods produced in grossly exploitative conditions.

The proposal is not complicated. It does not cover all industry but only the industries we declare to be important and threatened in our home market. It does not require elaborate cost accounting (as do the reciprocal trade provisions against “dumping”) but simply straightforward questions of fact: What are the wage scales? What are the working conditions? Is child labor employed? It does not interfere with foreigners’ or multinationals’ trade anywhere else in the world. In every respect the proposal is analogous to our present laws refusing entry to contaminated foods or dangerous drugs or unsafe automobiles. Those laws protect Americans as consumers; the proposed law would protect us as workers and, incidentally, as entrepreneurs.

IT WILL be objected that the proposal can’t work because it is impossible to compare foreign wage scales and working conditions with ours. In reply, I would enquire how, if the comparisons can’t be made, the noisy critics of the American workingman know he is overpaid. What is proposed is merely the reverse of the critics’ coin. The fact of the discrepancy in wages is accepted; but instead of saying that our fellow citizen Americans are overpaid, we say that our fellow-human Orientals are underpaid. Mathematically, there is no difference in what is said; morally, there is an astronomical difference.

Of course the comparisons can be made, and they will be invidious. The real question is, as the lawyers say, who should have the burden of proof? I am reminded of Thaddeus Stevens‘ reaction to proposals that the North tell the South eliminating slavery was not its war aim. “Ask those who made the war what is its object,” Thad growled. In the present case, I think we could reasonably ask those who want access to our markets to prove that their workers are fairly paid and fairly treated by our standards. American unions and American companies would have the right to challenge the proof. No need to make a big fuss about it, any more than a big fuss is now made about determining that certain foreign automobiles don’t meet our emissions standards or that certain drugs are impermissible.

No doubt many will argue against protecting the American standard of living. Two arguments stand out. The first purports to be consumer oriented. Cheap imports, it says, benefit everybody. But they don’t benefit those millions whose jobs are taken by the imports, and those other millions who are being forced back to the poverty level.

The second argument purports to be producer oriented. Restrictions on international trade, it says, threaten all our industries, because exports now represent our margin of profit. To this argument there are three answers: (1) Our really threatened industries-automobiles,

steel, textiles, etc.-have already lost their export markets; (2) our biggest export business-agriculture will continue because the world needs it; and (3) we have at home an unexplored market larger than any we might lose.

Our 14 million unemployed, plus the millions of working poor, plus their dependents, comprise a “nation” of up to 50 million people-bigger than all but a handful of the 157 members of the UN. In spite of our failures, these people are better educated than the rest of the world, have a better understanding of the work ethic, and are closer to the rest of us in needs and wants. If our national and industrial policies were directed to helping these our fellow citizens, there would be plenty of domestic business to keep U.S. industry fully occupied and highly profitable.

 

The New Leader

Originally published September 5, 1983

Dear Editor

Brockway

The Great Communicator had the right words for George P. Brockway’s Rereading Galbraith” (NL, June 13): “There you go again.” Yes, “much of what passes for economics” is a waste of time; the timewasting proportion of the total may be exceeded only in magazine nonfiction. What’s wrong with economics, however, is not what Brockway in this column (or in any other) says is the problem. Brockway claims that, “If there is no way of judging relative wants,” there is no way of making things either better or worse. Not so: We don’t have to weigh individuals’ preferences to assert that, if more of some wants can be satisfied without reducing the resources devoted to other wants, things are better. A good many of us economists (usually microeconornists) devote ourselves to just this kind of positive-sum game, the quest for policies and institutional changes that involve few and inconsequential losers and losses and substantial gains to the rest of us. We don’t have to sneer about advertising-induced tastes (like packaged holiday tours that may crowd Gstaad) to do something worthwhile.

The Affluent Society is an important book, one that changed our way of looking at things, as Brockway maintains. Yet Galbraith, like Brockway, can be wrong on critical points. There is no evidence whatever that advertising increases aggregate consumer spending (except for the trivial increases represented by the consumer spending of those employed in advertising). What advertising does is to increase spending for particular products or brands, at the expense of other products or brands. From this it follows, as Brockway would put it, that the existence of advertising does not tell us that American consumers as a whole spend too much, nor that their choices lack legitimacy. But rather conventional economics tells us that we can’t leave all choices to consumers because the economy left to its own devices will undersupply public goods. It may make unexciting copy; still, the fact is that the mainstream of the dismal science is not hostile to government per se.

New York City

                                                                       DICK NETZER
Director
Urban Research Center
New York University

Editor’s Note:  Dick Netzer’s first letter re: The Dismal Science can be found here:  http://wp.me/s2r2YP-291

Originally published August 8, 1983

LAST SUMMER I wrote a couple of columns questioning the Atari Democrats notion that we should write off our “sunset” industries (automobiles, steel, textiles, what have you), where we’re losing dominance in even our own market, and concentrate on some “sunrise” industries to be invented by a commission of unemployed economists. You will be astonished to hear that in spite of those pieces, the notion is still around. Now, the unstated premise of the Atari Democrats’ notion is the belief that protectionism is unthinkable in the modern world. We learned this in those high school courses on Problems of American Democracy we took instead of history. Even President Reagan learned it. In this year’s Economic Report he said, “I am committed … to preventing the enactment of protectionist policies in the United States.”

I am pained to suggest that President Reagan is wrong once again. In explanation, I am going to start with what the consequences of American protectionism might be for the rest of the world, particularly for what are euphemistically called Less Developed Countries, or LDCs. It is, make no mistake, the LDCs that would ultimately be most seriously affected by a rebirth of protectionism. Most of the talk now is about Japan, but that is merely because most businessmen and most business commentators don’t remember yesterday and can’t imagine that tomorrow may be different from today. It was only yesterday (let us remember) that the Germans were the Wundermenschen. The VW bug had bitten off a piece of the American market long before Toyota mastered the pronunciation of Corolla, Everyone had a Leica before Cheryl Tiegs taught us to prefer Olympus. The cognoscenti turned up their noses at Avery Fisher’s consoles and rushed to get the latest components from Telefunken. German productivity was proverbial.

But now all that is forgotten. The Germans are having a depression just like us, and the Japanese are selling cars and cameras all over Europe. VW is losing money hand over fist, and Telefunken is on the verge of bankruptcy.

A moderately reflective person might wonder whether what happened to the United States, and then to Germany, might not one day happen to Japan. As a matter of fact, it is already happening. The Japanese are writing off their textile industry and are manufacturing electronic components in Singapore and South Korea, just like the rest of us. Aha! says standard economics, this will benefit the Japanese. The benefit will come from lower consumer prices, and the Japanese who lose their jobs to Koreans will turn their hand to things the Koreans want but can’t make. That is the way standard economics thinks things work, and next month we’ll consider why they don’t work that way.

For the present, let’s step back a bit. The factors of production, we learned from standard economics, are land, capital, labor, and perhaps technology. Which of these factors do the multinationals seek in strange strands? Not technology, certainly, and not land, especially if they’re doing their seeking in Singapore. Not capital, either, though a sheik here or there may have more than he can think what to do with. No, the factor sought is labor.

Well, everybody knows that. Asian girls, especially young ones, have remarkably nimble fingers and are wiry and strong and able to work long hours, and they’re smart and eager to learn. Moreover, they’re fresh from the bush or the slums and never saw regular pay before and so are easily pleased. They don’t fuss about safety regulations or health insurance or sex discrimination or any of that stuff. Nor is this so bad as it may sound to us liberals, because these people are in for a tough life any way you look at it, and work in an electronics sweatshop is a lot better than their alternatives, and that is true even without mentioning prostitution.

Overworked and exploited though they may seem by our standards, these girls may have been chosen by destiny to use their nimble fingers to scratch out the first painful steps toward the establishment of a middle class in their underdeveloped lands. Such steps were not easy in the 19th-century Northern Hemisphere, and there is no reason to expect them to be easy in the 21st-century Southern Hemisphere. And unless the steps are taken, the LDCs will continue to be at the mercy of imperialist or neoirnperialist powers. This is the standard view of the situation-hard-nosed, perhaps a bit regretful, but above all forward looking.

Now, I will contend that neither standard economics nor Marxian economics understands what is wrong with imperialism. The thing about imperialism, I propose, is that it is extractive. It extracts the produce of mines and of agriculture, and it pays for these products whatever the market will bear[1]. Sometimes the market will bear a lot, mostly it won’t. Some American farmers are old enough to remember how it was in the days before price supports;  that’s the way it is now and always has been with LDC producers of copper and bauxite, cocoa and bananas and sisal. If you’re puzzled by this performance of the market, you will find it beautifully explained in the works of John Kenneth Galbraith, particularly Chapter VIII of Economics and the Public Purpose. Meanwhile you can rely on the avouchment of your own eyes that somehow prosperity has not come to Guatemala or Guinea or Bangladesh.

It is obvious enough that imperialism extracts the minerals of the earth and the fertility of the fields and ships them abroad. What it does to the factor of land, it also does to the factor of labor. The only reason for employing LDC labor is that it’s cheap. It’s far away and not always very efficient, and usually in need of an embarrassingly brutal dictator to keep it in line. But it is cheap.

Its cheapness is revealed by what it is exchanged for. When the labor of an LDC is used to manufacture products for export to the developed countries, the LDC earns foreign exchange that it spends in the developed countries on what it wants or needs – often on food it once produced itself – until seduced into maximizing exports. To understand what such an exchange means, we can compare the average hourly wage in the LDCs with that in the industrialized world. The precise numbers of course vary from place to place, but a ratio of one to five won’t overstate the differential and will do for purposes of illustration. This requires the LDCs to exchange five hours of their labor for one hour of our labor. The produce of the four-hour labor difference is in effect extracted, no less than the produce of their land was (and still is) extracted.

It is important to understand that this is not a situation of temporary unfairness, or of an imbalance that will be righted even in Keynes’ famous long run. What is extracted is gone forever. The situation, furthermore, has grown steadily worse in our time, much to the bewilderment of everyone who had great hopes for the results of liberation.

WHY HAVEN’T the newly liberated colonies been able to duplicate the success of the U.S. following its freedom? Wasn’t our position right up to World War I just like that of the LDCs? Didn’t we need and use British and European capital, just as the other former colonies need and use the multinationals’ capital today?

No, and again no. We used British and European capital, all right, and for the most part they were handsomely rewarded, but we used it first to build our infrastructure – canals, then railroads, eventually even street railroads. And we were inevitably the ones to employ that infrastructure; there was no way that benefit could be extracted. When foreign capital went into steel and soap and thread and chemicals, those products were for our own market; their benefits were not extracted, either. An interesting short book with a long title published last year, European Direct Investment in the USA before World War I by Peter J. Buckley and Brian R. Roberts, is able to discuss all the details of its subject without once considering the possibility that Europeans invested in the U.S. to manufacture for their own consumption. A sign that our development was not extractive is the fact that throughout the period in question – and indeed until very recently-our wage scales were the highest in the world. (That used to be a proud boast.)

In contrast, when GE manufactures plastic-frame irons in Singapore or Atari makes mind-boggling games in Taiwan, the irons and games do not stay in the underdeveloped world. They are shipped out, and with them is effectively extracted the wage differential between the underdeveloped world and the developed world.

The United States was able to escape similar domination by Britain and Europe in the 19th century mainly because of the sheer size of the country. A chronic shortage of labor kept wage scales relatively high, and a large internal market encouraged the use of foreign capital to produce goods for our domestic demand rather than for export. To duplicate the U.S. performance, the LDCs must duplicate the conditions. This won’t come naturally; they will have to be driven to it. Nevertheless, their objective should be to use their labor to produce what they themselves need. They should be manufacturing equipment for an equivalent of the Rural Electrification Administration. They should be developing trade within the LDC world and reducing their trade with the industrial world. The LDCs will always lose in trading with the industrial world (though a few of their citizens may become filthy rich); by trading among themselves they can pull themselves up by their bootstraps, just as we did a century ago.

Such quasi- internal trade would require cooperation on a scale that appears implausible. But the industrialized world-particularly, as I’ve said, the United States – could enforce such cooperation on the LDCs by the simple expedient of denying their manufactures unlimited access to our market. If GE could not sell its Singapore-produced irons in the U.S., it would find it necessary either to produce something else in Singapore, or to pass up the opportunity to employ its capital there in a highly profitable way. Even if it opted for the latter solution and pulled out, the Singapore economy would be, literally and figuratively, healthier.

The proposal to deny unlimited access to our market goes against everything we used to be taught. It also goes against what the publicists for big business continue to teach us. It is, however, merely an extension of the anthropologists’ commonplace that subsistence farming is better for peasants than is a one-crop plantation system. In my next column, I will take up more fully how a change might be implemented, as well as what its effect would be on us.


[1] Editor’s note:  Those who knew the author, and his wife Lucile H. Brockway, my parents, know that these ideas were discussed between them and that she published a ground breaking book, “Science and Colonial Expansion” in 1979, four years before this article appeared, that makes these points, and others, at length from an anthropological perspective.  The two of them were quite a pair….

Dear Editor

‘Dismal’ Pleasures

George P. Brockway has been one of the most enjoyable writers in THE NEW LEADER lately. The installments of “The Dismal Science” demonstrate wit, erudition – not that I always agree with him – and a refreshing willingness to question the assumptions that lie behind the experts’ arguments.

Brockway’s appreciative comments on John Kenneth Galbraith, for example, were excellent. (“Rereading Galbraith,” NL, June 13). They reminded me of the wrangling that greeted the publication of The Affluent Society. Much of the controversy centered on Galbraith’s observations about advertising, about “the contriving of wants” in order to increase production.

Galbraith’s case is convincing, and yet even the people who agree with his conception of the role Madison Avenue plays in our economy continue to wrongly believe that consumer choices guide production. This myopia simply shows the need for more of the kind of illumination that is shed by Brockway’s columns.

Dayton, Ohio                                                                                                                  RONALD LAMBRETH

Originally published July 11, 1983

 

 

 

 

 

 

TEN SCORE and seven years ago (give or take a few days) Thomas Jefferson undertook, with minor assistance from John Adams, Benjamin Franklin and others, to write the Declaration of Independence. Aside from the catalog of complaints against George III, there is one phrase or word of the Declaration that is of special economic significance. Rather, like Sherlock Holmes’ dog that didn’t bark, there is one phrase or word that curiously isn’t there. That word is “property.”

We learned in school that Jefferson (perhaps unconsciously) picked up the phrase “life, liberty, and property” from John Locke, the philosopher of the Glorious Revolution, and changed the last item in the series. In the first edition of Morison and Commager’s textbook (the one I studied), we read that “Jefferson substituted for the term ‘property’ the word ‘happiness’: a characteristic and illuminating stroke on the part of this social philosopher who throughout his life placed human rights first.”

Actually, Locke didn’t use the precise words thus attributed to him. In his so-called Second Treatise of Government, several similar phrases occur: “life, health, liberty, or possessions” (Sec. 6), “lives, liberties, or estates, which I call by the general name, property” (Sec. 123), and “life, liberty, or possession” (Sec. 135). The passage that is generally cited as a source for the Declaration reads: “Man … hath by nature a power … to preserve his property, that is, his life, liberty, and estate ….” (Sec. 87).

Historians have also noted that as Jefferson sat down to write the Declaration, George Mason handed him a copy of his preamble to the bill of rights proposed for the new Virginia constitution. In that preamble Mason described “inherent rights” as “the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.”

The change from “property” or “estate” to “pursuit of happiness” has aroused much comment. Dumas Malone was at pains to note that Jefferson was no communist, and he doubted that there was “any significance in his omission of the word ‘property’ … and his substitution for it of the phrase ‘pursuit of happiness.’ “Page Smith thought the change largely rhetorical, yet called attention to Jefferson’s reading of the Scotch philosopher James Harrington. Merrill D. Peterson felt that” Jefferson did not intend to depreciate the rights of property when he omitted it from the Declaration, but considering it an instrumental value, as a means to human happiness, and recognizing its civil character, he could not elevate property to the status of an inalienable right.”

Although there may be truth in all these speculations, there is no hard evidence for any of them. In any case, there is a simpler and more conclusive explanation that, I have now learned, was first suggested by Garry Wills (though I claim independent discovery).  It is this: The Declaration lists the pursuit of happiness as an inalienable (or “unalienable”) right, but property is an alienable right – you can buy it or sell it or give it away, and the state has a superior right of eminent domain. Thomas Jefferson was a more precise thinker than John Locke and a more subtle draftsman than George Mason.

That property be alienable was, in fact, a particular concern of Jefferson’s. He was especially proud of his role in abolishing entail and primogeniture, and was especially troubled by his legal inability to free slaves, some of whom may have been his children, if you accept Fawn Brodie‘s account (Malone, Peterson and Wills do not; Smith and I do) .

There is not, so far as I know, any indication in Jefferson – or in Locke, Harrington or Mason – of a view of property other than tangible. A thing or things may convey power, and for this reason Harrington thought property ought to be widely (though perhaps not universally) spread throughout the body politic. Jefferson is understood to have hoped for a nation of independent farmers, and he in fact proposed that the Virginia constitution give 50 acres of the public domain (Virginia’s original grant ran” from sea to sea”) to landless citizens. Locke’s position was slightly different.

“The preservation of property being the end of government,” he wrote, “and that for which men enter into society, it necessarily supposes and requires that the people should have property.” For all these men property could be taxed, divided and alienated, but it remained something you could walk on or touch or hold in your hand.

We continue to talk about property in much the same terms, except today our property is more a bundle of rights than of things. Those of a literary turn of mind will most easily see what is meant by thinking of a literary property, which is only incidentally a particular manuscript and is effectively a copyright, or a right to copy. The right to copy is itself a bundle of rights: U.S. and Canadian book rights may be licensed to one publisher, British rights to another, paperback rights to still others, while book club, first serial, second serial, translation, television, and movie rights may each be sold separately. And soon, for what may indeed be a bundle.

Even real estate is a bundle of rights, considerably smaller than it was in Jefferson’s time. Zoning laws, and today environmental laws, restrict the right to do as one pleases with one’s property. On the other side, some jurisdictions accept the gift of improvement rights, reducing taxes accordingly, so that one won’t be tempted to sell natural beauty for real estate “development.”

Condominiums and cooperatives are different sorts of bundles. In the city, air rights are bought and sold; in Texas, drilling or mineral or grazing rights may be detached from the bundle.

IN THE corporate world property has become progressively attenuated. The Modern Corporation and Private Property, published by A.A. Berle and G. C. Means in 1933, documented the separation of management and control of a company from ownership, or the right to alienate it. The idea was in the air: The Acquisitive Society, a soporifically earnest little book by R.H. Tawney, had made a similar point in 1921.

When the modern limited liability stock company was first formed in the 19th century, the owners were also managers. Today the stock certificate, which is evidence of” ownership,” is, for all intents and purposes, merely a counter used in playing the market. Like the Cheshire cat, the counter vanishes into thin air as well when options, index futures, and puts and calls are traded. It may be added that the company property that is “owned” is no longer so tangible as it used to be. The tangible property of a company is important to the owners only if the company is liquidated, and even then they are likely to watch helplessly as the creditors make off with everything they can lay their hands on.

A company’s stock is worth something only so long as the company is a going concern, and then it is the price/earnings ratio that matters, not the tangible assets.  The liquification of property raises questions of its legitimacy. Locke held that “As much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property.” He felt that a man’s possessions were limited to what he could use before it spoiled; he argued, however, that money was a store of value that allowed one to store as much as one wanted so long as society wasn’t hurt.

Since it has happened from time to time that great wealth is adverse to the interests of society, one wonders what to do about it. One wonders, too, what becomes of the legitimacy of property when the owners hold it pursuant to inheritance or speculation, rather than (as Locke theorized) as the result of their labors.

The remittance man has always bothered moralists like me. Tawney complained that every penny the” functionless investor” received was ipso facto a penny not available to those who did the work. Keynes, too, depreciated the role of the functionless investor. “Interest today,” he wrote, “rewards no genuine sacrifice, any more than does the rent of land …. I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work.”

As the world has turned, though, we have been trending in the opposite direction. Since the days of Arthur Burns, the Federal Reserve Board has agreed with the bankers that the thing to do with the interest rate is to raise it. That has been great for the functionless investor; it has brought on a depression for everybody else.

Reaganomics has turned the trend into a torrent. The maxitax on unearned income, the cutting of the capital gains tax, and the emasculation of the inheritance tax have all been wonderful for the functionless investor and bad for everyone else. This torrent will not be controlled, let alone reversed, until our economists and lawyers and statesmen can be persuaded that the issues confronting us are not technical but are, as Jefferson and his colleagues understood, deeply moral, and that what is moral today is different from what was moral at the time of the Declaration.

The New Leader

Originally published June 13, 1983

I HAVE BEEN rereading, 25 years later, John Kenneth Galbraith’s The Affluent Society, Galbraith is one of the great economists of our time, and this is one of several great books he has published. It has changed our way of looking at things. Even those who affect to sneer at the author for being funny must take it seriously. Attempts to dispute its thesis, such as F.A. Hayek‘s essay “The Non Sequitur of the ‘Dependence Effect,’ ” end by missing the point.

Galbraith’s attack on what he calls the conventional wisdom moves against its unquestioning acceptance of two propositions: (1) that production is per se desirable, and (2) that consumer choices, through the market, guide production into channels that society values. The first proposition leads to the current worship of the GNP, some of whose absurdities I mentioned in this space last month. Exposure of the second proposition’s failure, in an affluent society, is the great contribution of Galbraith’s book. He writes that “our concern for goods … does not arise in spontaneous consumer need. Rather … it grows out of the process of production itself. If production is to increase, the wants must be effectively contrived. In the absence of contrivance, the increase would not occur. This is not true of all goods, but that it is true of a substantial part is sufficient.”

It is sufficient for his argument, because if advertising or other means of persuasion have any effect at all, they must increase demand at the margin. And “since the demand for this part [of production] would not exist, were it not contrived, its utility or urgency, ex contrivance, is zero.” Hence “the marginal utility of present aggregate output, ex advertising and salesmanship, is zero.” From this it follows that private production is not sacrosanct, and it becomes possible to consider the likelihood that a clean environment may be more valuable than a newly packaged detergent.

In his attempted rebuttal, Hayek grants that “the tastes of man, as is true of his opinions and beliefs and indeed of his personality, are shaped in great measure by his cultural environment.” That is not exactly Galbraith’s point, yet on the basis of it, Hayek finds it impossible to judge some tastes less urgent than others, though he himself puts great store by “the novels of Jane Austen or Anthony Trollope or C.P. Snow.” Thus he undercuts his own position. If there is no way of judging relative wants, then there can be no way of judging the success of the economy in satisfying those wants, nor any way of making things either better or worse. Economics becomes a waste of time – as much of what passes for economics certainly is.

Although many are uneasily aware that The Affluent Society is a book on morals, few note that it is a history book. Consequently, those who think that economics is an immutable science of unchanging laws have trouble with it. Galbraith observes, for example, that “bad kings in a poorer world showed themselves quite capable, in their rapacity, of destroying or damaging the production of private goods by destroying the people and the capital that produced them.” In such circumstances, laissez faire was a reasonable response. Galbraith shows, however, that what was reasonable then is not reasonable now. The world moves.

The world continues to move, and as a result one of the minor or incidental arguments of The Affluent Society has been superseded. It is not central to the main thesis, but is a recommendation of a particular strategy for practical politics.

Galbraith contends that many measures for the public good are lost because liberals insist on raising “the essentially unrelated issue of equality.” In the debate over progressive vs. regressive taxation, for instance, a coalition of conservatives and simon-pure liberals defeats the socially desirable program. As Voltaire said, the best is the enemy of the good. Galbraith therefore urges liberals to get on with the programs and live to fight another day on the equality question.

Whether deliberately or not, the Democrats did in effect follow Galbraith’s strategy in 1981. The Republicans were encouraged, even outbid, in “reforming” the tax laws to their liking. Did they then acquiesce in the expansion of national programs for the public good? Not that anyone noticed. The sight of blood drove them mad. Even Budget Director David Stockman was shocked at their greed. It would appear that at some times and with some people a civilized accommodation is impossible.

A convenient and scary summary of what has happened to the tax laws is given in a booklet by Robert S. McIntyre and Dean S. Tipps of Citizens for Tax Justice. The study, entitled Inequity and Decline, is published by the Center on Budget and Policy Priorities, 236 Massachusetts Avenue NE, Washington, DC 20002. (I give the address because you won’t find the booklet in regular bookstores; the publishers will send you a copy free, though they wouldn’t object to your making a modest donation.)

One of the virtues of this booklet is its demonstration that what happened in 1981 was not an isolated event but had a history stretching back to the Nixon years and in several respects earlier. Especially illuminating is the analysis of the tax “revolt” that broke out in California in 1978 and spread throughout the country, contributing, probably decisively, to the Reagan election and to the Reagan-Kemp-Roth tax laws that followed.

As Mclntyre and Tipps show, the revolt had legitimate grievances that were skillfully misdirected. In California, homeowner property taxes had increased 61 per cent in the three years from 1975-78, the year of Proposition 13. In the same period, taxes on business, industrial and agricultural property were down 5 per cent (for reasons for this decrease, see Eliminating Frictional Unemployment,” NL, March 7).  The revolt, though, was not against the shift of the tax burden; it was against taxes in general, accompanied by vague cries of “waste” and “fraud.” The upshot was a greater movement away from business taxation.

THE SAME THING happened on the national level. A number of big-business lobbyists known as the Carlton Group (because they met for breakfast at the Sheraton-Carlton in Washington) had headed a loose coalition in blocking President Carter’s tax-reform proposals and in widening various loopholes. This preliminary success encouraged the group to refine its strategy and led to its devastating victories in 1981. Here are some of the results of its earlier and later lobbying, as culled from the booklet:

Item: In the years 1969-80 average hourly wages went up 6 per cent in constant dollars, while top executive salaries went up 71 per cent.

Item: “By 1981, one-quarter of all taxpayers had more Social Security taxes withheld from their wages than they paid in Federal incomes taxes.” Social Security taxes are, of course, regressive, and of course this year’s “reform” has increased them.

Item: The Reagan-Kemp-Roth tax cuts, coupled with the 1983 Social Security tax hike, have produced a tax increase of 22 per cent for those whose income is less than $10,000 and a tax decrease of 15 percent for those whose income is more than $200,000. (For those with incomes between $20,000-$30,000, the situation is about a stand-off.)

Item: The rate on capital gains is now lower than the marginal income and Social Security tax rate paid by a wage earner with a family of four earning $20,000.

The main concern of Inequity and Decline is with corporation taxes and their loopholes. You are probably aware that corporations – especially the Fortune 500 and the Forbes 500 – pay a smaller share of the Federal taxes than they used to. Back in 1950, when Harry Truman was President, the corporate income tax produced 26.5 per cent of the Federal revenue; by fiscal year 1983 the figure had dropped to 5.9 per cent. The fall has been steady, in response to growing pressure from businessmen and bankers and their publicists, who have been careful to insist that they really are not greedy but are anxious to increase investment in productive enterprise, for the advantage of us all.

Long before President Reagan’s ironically entitled Economic Recovery Tax Act of 1981, United States business was taxed much more lightly than that of Japan or of any Western European nation – with one exception. This fact and its exception should give pause to hard-nosed, pragmatic men of affairs accustomed to judging things by how they really work rather than by how someone who has never met a payroll says they ought to work. For the exception was Britain, which was also the only one of all those nations whose productivity grew less than ours in the 1970s.

That brings us back to The Affluent Society. Our recent experience shows that the question of progressive vs. regressive taxation cannot be postponed to some more propitious time, nor can it be safely separated from wider social concerns. Conservative tax policies are as destructive as conservative social policies; one leads to massive and degrading unemployment, the other to an impoverished society.

When he wrote The Affluent Society, even when he published the third edition in 1976, Galbraith could not imagine that the conservatives would be so blind and so brutal as to throw 14 million of their fellow citizens out of work and complacently plan to keep them there. Although sarcastic and witty at the conservatives’ expense, he was more generous in his opinion of them than that. He was, in fact, generous to a fault, the only fault in his great book.

 The New Leader

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