Originally published October 29, 1984

Big Bad Business


George P. Brockway believes that he knows the lesson of Continental Illinois, Financial Corporation of America, Lockheed, and Chrysler. According to him, it is that “great size, in and of itself, is an economic evil” (“Big Is Ugly,” NL, September 3).

Brockway’s point is that big companies need big bailouts when they fail. True enough. But there are other, perhaps more important, economic evils. We ought to explore the proposition that corporate expansionism can have beneficial consequences, and examine all the effects of the corporate Balkanization he favors.

Consider the electronics industry. Japan competes against us through its handful of giant concerns. The United States, of course, has two that are even larger, IBM and AT&T. We also have a fair number of middling companies and a multitude of small ones. IBM is in fine shape. The telephone company certainly is not, though its difficulties result from its emasculation, rather than from its size.

Many of our other firms are in trouble, too. The basic reason is that in the competitive and mercurial high-tech marketplace, businesses must spend fortunes to create popular new products, yet have to replace them almost immediately with still newer ones. In a situation of this kind it is very difficult indeed to make money.

Of the American companies, only IBM and AT&T clearly have the resources to finance and carry out the kind of research and development that will be needed in future. Japan’s monoliths are smaller, but it has more of them. To compete, we may or may not have to concentrate our economy to the extent that Japan has. But our romantic preference for small, independent businesses is likely to be compromised; at the very least, we will have to permit cooperative R&D, financing and production.

Houston                                                                                                           TEDDY GONZALES

Rich Man’s Bluff

George P. Brockway may be a careful reader, but his amended rich man’s dodge of borrowing money, deducting the interest expense from income tax, and investing the principal in tax-exempt bonds (“Between Issues,” NL, September 17) is still wrong. Unfortunately for Brockway’s analysis, and fortunately for the American taxpayer, the Internal Revenue Service has ruled that if one borrows money to purchase tax-exempt securities, the interest on the borrowed funds is not tax deductible. This makes Brockway’s revised scheme either unprofitable or illegal.

Edwardsville, III.


Economics Department,

School of Business
Southern Illinois University

George P. Brockway replies:

Not exactly. As I said in the original piece, you’ve got to have some money to begin with. Let’s say you have $100,000 in loose cash and a hankering for a vintage model Rolls Royce. You buy some tax-exempts with your own money, and sometime later you borrow $100,000 to pay for the jalopy.

The New Leader

Originally published September 17, 1984

Between Issues

PRAISING Anthony Burgess’ A Clockwork Orange in THE NEW LEADER of January 7, 1963, Stanley Edgar Hyman declared: “Perhaps the most fascinating thing about the book is its language. Alex [the protagonist] thinks and talks in the ‘nasdat’ (teenage) vocabulary of the future, a remarkable invention by Burgess …. It has a wonderful sound, particularly in abuse, when ‘grahzny bratchny’ sounds infinitely better than ‘dirty bastard.”

Before the issue had been out a week, the phones were humming and the letters were pouring in: Didn’t Hyman know that the “amazing vocabulary” he was so taken with consisted largely of adaptations from Russian? At the NL, readers rarely write to praise; they seem to feel (rightly, in our view) that good or even excellent pieces should be the norm. But a goof will soon bring guffaws. And among those who could not resist at least a smile was Burgess’ publisher, George P. Brockway of W. W. Norton-who nonetheless thought so highly of Hyman’s essay that an emended version became the Introduction to the paperback edition of Clockwork.

We were reminded of all this when the phones began ringing and the letters started arriving about a blooper by Brockway- now an NL columnist-in “Big is Ugly,” his cover piece for our September 3 issue. One representative letter, from Lloyd McAulay Esq., will suffice to illustrate: “George Brockway’s original comments on the economic scene are interesting to read, for they certainly make one think. However, one would like to believe that he presents his proposals with some care. His example of financial alchemy in the 50 per cent tax bracket is amiss. He suggests that borrowing $100,000 from Bank Aat 15 per cent interest, and investing it in Bank B at 13.6 per cent interest, will provide an annual after tax net of$ 3,050. That is just not careful arithmetic. True, the $15,000 interest on the loan from Bank A will only cost the borrower $7,500 after taxes. But the $13,600 interest on the Bank B deposit is taxable income. At the 50 per cent bracket’ this will mean net earnings of $6,800. Since the loan cost $7,500, the taxpayer would have a net loss of $700.”

Apparently Brockway remains a careful reader, because we had not yet had a chance to get in touch with him when he sent along the following:

“Oops! I of course slipped in my column of September 3 when I parenthetically outlined a rich man’s scheme for borrowing money and buying CDs. For the dodge to work, you have to buy tax-exempt bonds and take your chances on the market. In other words, you have to do a little laundering, but it’s so simple that you don’t even have to go to Miami for the purpose. Sorry.”·

Readers may reasonably wonder why the editors were not more careful readers. To that we can only reply, rather lamely, that the games the rich play are Russian to us.

OUR COVER drawing of Israel’s Prime Minister Shimon Peres is by Claudia Fouse.

The New Leader

Originally published August 6, 1984

Dear Editor


I have regularly read George P. Brockway’s column on economics, “The Dismal Science”- albeit without great enthusiasm, but recognizing it as a serious attempt to educate himself and then us in a very difficult subject. The glorious reward for Brockway and for us has now come!

I refer to his “Civility and Labor Relations” in your June 25 issue. Brockway has there managed in a few paragraphs to give us an understanding of the quite deliberate way in which capitalism in general, and U.S. capitalism in particular, not in the dead past but today, creates unorganized and disorganized armies of the unemployed in order to drive wages down and keep workers out of unions. With extraordinary brilliance, Brockway has culled a series of passages from Marx’ Capital and shown that they express the present ideas of big capital in America. The living part of Marx – his profound grasp of the process of capitalist accumulation – is thus as it were rescued by Brockway, while he happily and correctly consigns the rest of Marxism to the grave it has dug for itself in the Soviet Union, China, Cuba, and the dreary wastes of Eastern Europe.

Big capital is armed with this understanding of the living part of Marx. The trade union movement here and in Europe is disarmed by its sodden failure to understand this process. More accurately, of course, I mean the trade union leadership. When Brockway concludes that whatever will happen will be our doing, each of us chooses his place in making the future. But some of us are better placed to affect the future, and it is in this sense that the trade union leadership bears responsibility for the terrible decline of the labor movement. In this darkness, Brockway has lighted a candle of hope.

New York City                                                                                      FELIX MORROW[1]

[1] Editor’s note:  We can’t know if we’ve linked to the correct Felix Morrow but, given the Wikipedia entry, it appears to be a reasonable guess…

Originally published May 14, 1984

Between Issues

…..Back on these shores, George P. Brockway exposes the “productivity scam,” in his upcoming “Dismal Science” column. Small wonder he has been sticking close to home. He has just completed Economics for the Living, to be published as a Cornelia and Michael Bessie Book by Harper and Row. Having had an opportunity to read the marvelously provocative and lucid manuscript, we suspect he’ll be doing a lot of traveling to talk shows when the book appears next winter…..

            The New Leader

Originally published September 5, 1983

Dear Editor


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
Urban Research Center
New York University

Editor’s Note:  Dick Netzer’s first letter re: The Dismal Science can be found here:

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 February 21, 1983

Between Issues

IT IS NOT uncommon for NEW LEADER writers who have something penetrating to say, and a gift for saying it well, to find themselves pursued by publishers bearing book contracts. The most energetic chase we were responsible for setting off, if memory does not deceive, occurred some two decades ago when we presented a piece by a young man who was then a Congressional fellow. The biographical note accompanying the article mentioned that it was adapted from a chapter of a book the author was working on, and no fewer than five major houses quickly expressed their interest. Viking won the prize – Ronald Steel’s The End of Alliance.

More typically, an individual publisher or senior editor will come upon a piece in the magazine that sparks an idea for fuller treatment. Early one morning, to cite a random example, an excited Alfred A. Knopf telephoned. He had been reading THE NEW LEADER at 3 A.M. as was his wont, he explained, when he came across an article that especially appealed to him and he wanted to talk to the writer about doing a book related to the subject. The piece was on Brazil; the author was John Mander, actually our man in London at the time who happened to be doing some traveling. Soon an agreement was reached that culminated in dinner at the Knopf “farm” in Purchase, New York, and Mander’s well received The Unrevolutionary Society: The Power of Latin American Conservatism.

Among other publishers who have kept a sharp eye on these pages over the years, one is Knopf’s neighbor in Purchase,

Roger W. Straus J r. of Farrar, Straus, Giroux. Another is George P. Brockway of W. W. Norton and Company. So we couldn’t resist a few thoughts on things coming full circle upon hearing the news that is the occasion for our comments here: Harper and Row has signed Brockway to do a book inspired by his column appearing in alternate issues of the NL, “The Dismal Science.”

As readers of this space know, Norton’s Chairman of the Board came to his present avocation out of frustration with inflation, high interest rates and Federal Reserve policy. That started his “reading everything I could get my hands on” in an area previously of little formal interest to him. His new preoccupation also resulted in a spate of pieces that drew unusual attention, and led-in the NL of January 11, 1982 – to the launching of the column that has consistently attracted even greater response.

An item in Publishers Weekly reports that Brockway’s book will be published under the Cornelia and Michael Bessie imprint, and continues: “Mike Bessie says the work is ‘intelligible economics’; the author says it’s ‘quirky and offbeat.'” We would say both are right, as Brockway’s thoughts on “Frictional Unemployment,” coming up in our next issue, will again demonstrate.

OUR COVER drawing of Michael Straight, whose new book happens to published by Norton, is by Claudia Fouse.


George P. Brockway’s “Productivity: The New Shell Game” (NL, February 8, 1982), which I have only recently come upon, makes more good than bad points. There is one instance where it strays from the facts, however, and I am sure you will welcome a correction. Being a metallurgist, I can assure you that U.S. Steel did not make the mistake of staying with the Bessemer process instead of switching to, as Brockway says, “whatever it was the Germans and Japanese switched to.” U.S. Steel has large blast furnaces and basic oxygen converters for making steel from iron, the same as the Japanese and the Germans.

The big difference is that the Americans are paying $24 an hour for labor, the highest in the world, while the Germans and Japanese are paying $5 an hour or less. Their workers are more literate, too. I urge Brockway to visit German and Japanese steel mills (as well as those in South Korea), where he will see how educated and productive the workers are compared with their American counterparts. Yet these countries spend far less for education than we do in the United States.

Brockway brings up steel mills in order to castigate American management. I would note that U.S. Steel has had good management for some time, and its current leaders are the best ever – probably the best in the industry.

As for the mergers Brockway takes exception to, why should U.S. Steel be restricted from going into some other lucrative business where it can make a profit and thus give its employees, suppliers,  stockholders, and all of its other constituents more security? U.S. Steel’s decision to take over Marathon Oil was wise, and one it should be allowed to pursue. After all, newspapers are not prevented from going into radio, television and other undertakings. Steel companies should not be hindered from doing the same – especially when the world market, for reasons beyond the industry’s control, renders it impossible to turn a profit by manufacturing steel. Foreign steel mills are government subsidized, they receive favorable loan rates from their bankers, and they are not persecuted by their governments, as our steel companies have frequently been in the past.

The present Administration at least has a better attitude,  although it still has not enforced the antidumping laws. Doing so would enable our steel companies to compete on a much fairer basis with subsidized foreign producers, who are dumping steel in the American market at prices far below those their own markets command.

I do not work for U.S. Steel or any big steel company, but fair is fair. I hope that in subsequent articles Brockway will bring out some of the facts I mention above.

President Reagan has done more than any other recent Chief Executive to encourage productivity. He deserves more credit than Brockway’s article gives him. Since productivity is such a big factor in our survival, we can all benefit from the President’s lectures about working harder. We badly need them to remind us of the necessity for more effort from everyone in our society who is working and doing something constructive.

Morristown, Pa.                                                                                                                DAVID M. SCHMID


George P. Brockway replies:

David Schmid may be right about the productivity of American steel mills. I was relying on the BusinessWeek series on reindustrializing America. Since I did not agree with the conclusions of the series, perhaps I should have questioned the premises.

I certainly agree that U.S. Steel should not be restricted from going into other lines of business. My position is that they should not be encouraged to do so, and that there are aspects of the tax law that give such encouragement. My main point, in any case, was that the venture into Marathon Oil merely rearranged the ownership of existing productive assets. It did not create any new ones.

On the question of the competition with the Japanese, I am probably closer to Schmid’s view than he thinks. Assuming his figures are correct, I am sure he does not believe that it would be either efficient or ethical to reduce the American wage scale to the Japanese level. I have, as a matter of fact, done a couple of columns on this very subject (“America’s Setting Sun,” NL, June 14, 1982, and “How Our Sun May Rise Again,” NL July 12-26, 1982). My general point about productivity, which I may have failed to state clearly, is that productivity per worker is a proper concern for the management of any enterprise, but productivity of the economy as a whole is the proper concern of the national government. This national productivity is obviously not improved by managing the economy in such a way that well over 12 million potential workers produce nothing at

Originally published September 20, 1982

Dear Editor

Oriental Labor|

The apparent clincher in George P. Brockway’s “How Our Sun May Rise Again” (NL, July 12-26) is his rhetorical question about explaining “the steadily increasing prices of electric irons and TV sets and cameras and automobiles, despite their being produced in the allegedly more efficient and assuredly lower wage Orient.” Steadily increasing compared to what? All the items he mentions have had small increases in price over the years relative to either the overall price level or disposable income.

Consider the following data on average annual increases from the end of 1970 to the end of 1971: Disposable income climbed 10.2per cent and the consumer price index for all items rose 8.1 per cent. Meanwhile, the prices of new automobiles and footwear went up only 5.1 per cent; household appliances, 4.8 per cent; apparel, 3.8 per cent; and television sets, a scant 0.3 per cent. All these are consumer goods that were heavily affected by imports from East Asia, especially the last two items. The answer to Brockway’s question is that his factual premise is all wet, not for the first time.

Brockway is also careless in describing the theory he sets out to overturn (by assertion). Like other valuable insights, the principle of comparative advantage was elucidated somewhat imprecisely by its formulator, David Ricardo, and has been refined in the 165 years since 1817. The principle does not depend on the trans-national immobility of capital. It is valid as long as some factors of production are geographically immobile to some extent: physical capital, mineral resources, skilled labor, entrepreneurial talents, whatever. Clearly, such immobilities are ubiquitous, otherwise there would be no differences in wages and other returns to factors of production among nations or among the regions of one nation. (The principle, pace Ricardo, does apply within a single country.)

Ricardo would not have discarded his law, nor would he have been as pessimistic as Brockway is about the American capacity to come up with “sunrise” industries. More likely, he would have remarked upon our repeated success over the years in replacing “sunset” with “sunrise” industries. To be sure, the international transmission of industrial knowledge and skills, as well as capital, is swifter than it was in the past. But that swiftness tends to raise, not lower absolute standards of living here “and elsewhere, although it reduces the disparity among industrialized countries’ standards of living, which is a good thing, not a bad one.
New York City

Urban Research Center
New York University

 George P. Brockway replies:

 Dick Netzer is agile at the old debater’s trick of answering resoundingly a question different from the one asked. When I said that various items produced in the Orient are steadily increasing in price, I meant precisely that. Netzer says that their prices haven’t gone up so much as disposable income, which is another question. Since his statistics, if they prove anything, prove my point, I’ll refrain from questioning his choice  of dates or inquiring into the effect of shifting exchange rates or comparing the behavior of the prices of American-made versions of these products  with those of the same products produced in the Orient.

As to the history of the Law of Comparative Advantage, I certainly do not question that refinements have been made in it since David Ricardo formulated it 165 years ago. As a practical matter, however, these are beside the point: The present putative Oriental advantage is the result of cheap labor and often unsafe working conditions. (Chinese doctors are good at reattaching chopped-off fingers and arms, because they have so much practice at it.) It would be dishonorable to treat American workers as Oriental workers are treated, and it is dishonorable to throw our citizens out of a job in furtherance of Oriental exploitation.

The Ricardian argument, moreover, implicitly requires that workers displaced by the transfer of their industries abroad will immediately find comparable positions in industries that (for some reason the theory cannot explain) stay home. My factual premise, which Netzer  unaccountably thinks is “all wet,” is that millions of Americans are out of work because we have exported their jobs, and that billions of ‘dollars’ worth of American plants are standing idle because we have exported their industries.

It may be that, as Netzer says, I am too pessimistic about the prospect of coming up with sunrise industries to replace sunset industries. If the real world were as optimistically fast-paced as he pretends, I should think he would at least have suggested a few sunrise industries to relieve my gloom. And I’d dearly love to have him explain why certain industries are sunset here but sunrise in the Orient, unless the difference lies largely in wage scales and working conditions.

Finally, I must diffidently point out that the rhetorical question Netzer has tried unsuccessfully to answer is only one of three that I asked, and the least important at that. And I really must object that I did not and would not rely on a rhetorical question in the middle of my essay as a “clincher.” I have more respect for my readers than Netzer allows.

Originally published April 19, 1982

Dear Editor


I feel tempted to say a word about one part of George P. Brockway’s Why Deficits Matter” (NL, March 8). Brockway draws a distinction between speculation and productive investment that is entirely misleading.

Of course, there is a difference between a purchase of a share of stock on narrow margin and a purchase of the same stock out of savings. The first is speculation, the second you might call investment, depending on the stock. The economic effect, however, is the same. The market does not distinguish where the buyer of a security got his money from. In fact, it has no way of knowing. In either case, the seller of the stock can do three things with the money he gets-consume it, hoard it, or put it into some other investment. Few sellers of stock consume their principal. Not much idle money is held at today’s interest rates. The chances are overwhelming that the seller of the stock, whoever he is, will put his money into another investment.

If that “new investment involves the creation of brick and mortar, it is directly productive. If it just leads to the purchase of an existing security, the same set of choices confronts each successive seller. Eventually, the money will find an outlet in directly productive new investment, unless it is consumed or hoarded. In the process, stronger demand for securities reduces interest rates and stock yields, reduces the cost of capital to investors, and in that way also stimulates investment.

In conclusion, I want to note that while I fully agree with the statement in the title that deficits do matter, I find the entire article so one-sided that in limiting my comments to the point I have made I do not mean to imply agreement with any of the rest of it.

Washington, D. C.                HENRY C. WALLICH

Member of the Board of Governors

Federal Reserve System


George P. Brockway replies:

To comment on Governor Wallich’s interesting letter I must try to summarize points I made in “Why Speculation Will Undo Reaganomics” (NL, September 7, 1981). There I proposed definitions of gambling, speculating and productive investing that, I believe, disclose the different economic effects of the three kinds of activity.

In brief, gambling is a zero-sum game that produces nothing but the players’ pleasure or despair. Speculating is not a zero-sum game: Over very long spans of time all who participate can gain, though some will no doubt gain more than others, but speculating is like gambling in that it only rearranges wealth that already exists. Productive investing is like speculating in that it is not a zero-sum game, but it differs in that goods and services are produced. It should be emphasized that all three activities are risky; consequently risk is not a useful criterion for distinguishing among them, though it is the one ordinarily used.

Governor Wallich’s view, which is the standard one, is that such distinctions are idle because ultimately the results of speculating go into consumption, hoarding, or “bricks and mortar.” This, I should contend, is one of those instances in which Keynes’ remark (“In the long run we are all dead“) is appropriate. Holland’s tulip mania increased in virulence from 1615-37-…It took nine years for the South Sea Bubble to burst. The Great Bull Market lasted six or eight years. Some of these speculative frenzies might, in Governor Wallich’s terms, be classified as hoarding or consumption; but they were not productive investments. They absorbed, and ultimately destroyed, vast sums that could have gone into productive investments.

More important than all this is the role of the stock and commodities markets. Governor Wallich says that “Eventually, the money will find an outlet in directly productive new investment unless it is consumed or hoarded.” The imagined event has to be a long time coming. Fewer than 1 per cent of the transactions on the stock and commodities exchanges have anything to do with productive new investment. Professional traders can and do spend their whole lives buying and selling without ever touching a productive new investment. Insurance companies and endowment funds tend to shy away from productive new investments. Investment bankers (so called) are now mainly concerned with mergers and takeovers. A very large nonproductive tail keeps the productive dog off balance.

I’m afraid it simply is not so that “stronger demand for securities reduces interest rates … and … stimulates investment.” This may be what the theory calls for, but it is flatly refuted by the present situation, when both exchange transactions and interest rates are at all-time highs. The “stronger demand” is a speculative demand, and it attracts money away from productive investment.

To cite an example, U.S. Steel abandoned plans to update its mills and borrowed $3 billion to acquire Marathon Oil. It would be fantasy to suppose that the happy Marathon stockholders, having unloaded at the top of the market, have not been encouraged to bid up the shares of other companies thought susceptible to takeover. There is nothing productive about this. Moreover, the $3 billion U.S. Steel borrowed has surely helped to keep the interest rates high. It is the same with margin accounts, which soak up available funds and thus help keep both securities prices and interest rates higher than they would otherwise be.

I agree with Governor Wallich that “The market does not distinguish where the buyer of a security got his money from.” For this reason (among others), I would not try to prevent speculation. But I would shut down margin accounts (as has been done before). I would see what could be done to discourage borrowing to finance mergers. And I would not encourage a hundred speculative transactions (as the low capital gains tax does) in the bumbling hope of stimulating one new productive investment.

As to the fact that the rest of my article on deficits was one sided, I admit the soft impeachment. If you have a reasoned conviction, I’d think it irresponsible to pretend to what is called a “balanced view.”

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