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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.

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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.

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.”

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