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Originally published November 29, 1982

EVER SINCE the elevation of Paul Volcker to its chairmanship three years ago, I have been one of those nattering about the Federal Reserve Board and the interest rate. Our steady cry has been that the Fed’s policy of trying (vainly) to control the money supply would first send the interest rate through the roof and then bring on a depression. Well, they’ve done it, and they’re not altogether pleased with the result. So now they are pawing at the start of the other course and are straining to bring down the interest rate and bring on prosperity. You might expect me to be happy, but I’m not.

My considered opinion, in which I’m not alone, is that they’re too late. A moment’s reflection will convince you that this opinion has extraordinary implications. If you say that something is too late, you are saying that chronological time is a factor [see footnote[1]]; and if you say that time is a factor, you are saying that you are dealing with history, not with science. So let’s face it: Economics is historical and ethical; it is not an exercise in algebra or analytic geometry. If economics were merely algebraic, and if a high interest rate depressed business (it does), then it would be a simple matter to lower the interest rate and stimulate business. In spite of what commentators say, though, there are no such tradeoffs.

It doesn’t work out that way in real life. It won’t work out that way in our life for at least two reasons: (1) Fourteen million of us (including those who have been out so long they’ve given up looking) are now unemployed, and (2) our industrial plant is running at less than 70 per cent of capacity.

Last month in this space I called attention to our World War II triumph of putting 15 million men and women in uniform and, at the same time, creating 7 million civilian jobs. But I remind you that it took an all-out effort. It took Mr. Win-the-War; Mr. New Deal had been unable, despite almost nine years of devoted endeavor by thousands of good men and women, to do more than make a dent in the mess created by the Harding – Coolidge – Hoover “prosperity. (The quotation marks call attention to the fact that at the height of that alleged prosperity almost 60 per cent of American families had annual incomes below the poverty level, then calculated at $2,000.)

I remind you, too, that President Hoover was not quite so feckless as his reputation allows. Not quite. To be sure, he did not believe in the dole. But he did come to believe in public works. Under the Federal Employment Stabilization Act of 1931, he drew up a six-year schedule of Federal projects to stimulate business. In a foretaste of the New Federalism, he urged the states and municipalities to expand their public works. And in the Reconstruction Finance Corporation (RFC) he anticipated the sort of industrial stimulation now advocated by those Robert Lekachman calls Atari Democrats. In relation to the GNP as it was then, and as it is now, the RFC was bigger than anything recently proposed. Yet things got steadily worse.

The lesson of the experience is that although it is easy to throw people out of work, getting them jobs again is a massive problem. John Maynard Keynes painstakingly explained all this 45 years ago, but many so-called Keynesians have persisted in thinking quick solutions are possible.

The underutilization of existing industrial plant should, of course, have warned the supply-siders (are there any left?) that investment was not the immediate difficulty. Why should I invest in a new or expanded plant when I don’t have enough business to keep my present one occupied? The size of this stumbling block is indicated by the fact that, with nearly a third of the nation’s plant idle, the economy would have to increase by almost 50 per cent simply to do what it is currently capable of doing.

Two years ago interest rates were a manageable factor. If they had even been held down to the usurious rates they have now descended to, the situation, while serious, would not have become as serious as it is. Now it’s too late. The recent fall in rates certainly has had some effect on the statements of profitable firms, and it will no doubt save some marginal businesses from bankruptcy; but it is probable that most still-profitable firms have already, by draconian measures, so reduced their reliance on borrowed money that the effect of the lower rates will be minimal. (The main use for borrowed money today is in takeovers like the Bendix fiasco.)

Consider a company that, before the advent of Volcker’ s form of monetarism, had been accustomed to borrowing $10 million of short-term money. When the prime went to 20 per cent (and higher), its interest costs soared to an unacceptable 2 million. Management did what had to be done: raised prices, abandoned plans for expansion, cut production and inventory, reduced marketing expenses, cracked down on slow accounts, perhaps shifted from FIFO to LIFO accounting, dragged its feet on pay raises-and laid off or fired  as many people as it had stomach for.

As a result, the company reduced its need for short-term money from $10 million to $2 million, and in the meantime the prime (partly because other companies drastically reduced their borrowing as well) went from more than 20 per cent to less than 12 per cent. Thus the firm’s interest costs fell from $2 million to $240,000 – and it survived. A further fall in interest rates from 12 per cent to 10 per cent reduces the firm’s costs merely another $40,000, a welcome development but nothing to get excited about – certainly not in the way Wall Street has been excited.

Our little scenario has applications right across the economy; and if you try to put yourself in the shoes of the managers of a company that has been through it, you will understand that they feel pretty smug about surviving and are not at all eager to put themselves in jeopardy again, at least not right away, not with the present people in charge of the banking system. The scenario also explains what must otherwise seem a case of levitation: why so many British companies are improving their earnings in the face of the ravaging of their economy. Since Messrs. Volcker, Ronald Reagan and Donald Regan have learned their lessons at the knee of Prime Minister Margaret Thatcher, we can expect similar occurrences here.

KEYNES laid all this out in The General Theory of Employment, Interest, and Money. The great message of that great book was that full employment is the only rational meaning of prosperity, and that it doesn’t just happen. The economists under whom Keynes had studied thought that a recession would lead to lower wages, which would make hiring people more profitable to entrepreneurs, which would bring about full employment again. Insofar as Volcker, Reagan and Regan think about people at all, they still think that that’s how it works. But it didn’t work that way in the Great Depression, and it doesn’t work that way now.

As Keynes showed, “the economic system in which we live … seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” It is, in short, perfectly possible for the economy to crawl indefinitely with (to choose some figures at random) more than 10 per cent of the labor force unemployed and more than 30 per cent of the industrial capacity unused. It is possible, too, that the modest proposals the Atari Democrats have advanced might in time knock as much as a third out of those figures and achieve a modest jog-trot at the lower level. That would be better, but it’s not great, and it is probably the best that can be done by indirect methods in the foreseeable future.

By indirect methods I mean schemes to diddle the taxes in order to promote savings or investment or international trade or sunrise industries or the like. I especially mean schemes to control inflation by keeping the economy cool. By direct methods I would mean those designed to do something for people. I don’t mind if you call me a populist. I hold that our greatest national sins are the unconscionable spreads we allow in incomes and in wealth. We have deliberately’ first under Richard Nixon and at present under Reagan, increased those spreads by the maxitax on earned income, the maxitax on unearned income, the reduction of the capital gains tax, and the emasculation of gift and inheritance taxes. And we now have before us the disgraceful spectacle of a private committee of so-called investment bankers (who make their fortunes arranging wasteful takeovers) spending heavy dollars to propagandize a cut in Social Security benefits and an increase in Social Security taxes.

Until we reverse these trends, the rich will stay as rich as they are, while the poor will grow poorer. If that is not bad enough on its face, no stimulation of the economy could come from consumption. The rich are already consuming as much as they want, and the poor are consuming as much as they can afford. We have surely seen that supply-side stimulation was, as David Stockman admitted, a Trojan Horse to make the rich richer. Even if the motives had been as pure as the driven snow (whose are?), the supply-side ploy was, as a bush-league politician said, voodoo economics.

Simply reversing the errors of the years from Nixon through Reagan, however, will not bring prosperity. Algebraic tradeoffs will at most keep things from getting worse. Nor will the job be done by the tentative public works programs that are being timidly proposed. No, to put 14 million of our fellow citizens to work will require perhaps $100 billion. If we don’t spend $l00 billion to pay our fellow citizens for doing useful work, we’ll have to spend upwards of $30 billion to maintain them in miserable inactivity. Can we find the $70 billion extra we need to do the job? Well, it’s proportionately much less than we accomplished in World War II. So the question is not Can we? but Will we?

The New Leader


[1] [Editor’s note:  even Einstein knew that time = money…..  :)]

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Originally published November 1, 1982

BY THE TIME this reaches you, the election returns will be in and the pundits may well have finished talking about them. As I write, however, the election is almost a month away and the pollsters have made only the vaguest of preliminary predictions. Yet I have no hesitation in saying that appalling numbers of people will have expressed approval of Reaganomics. (Since I am appalled that even Reagan himself approves of his policies, you may think that my crystal ball doesn’t have to be very clear.)  Very few of these approving voters are beyond disappointment with the present state of affairs, but all of them are sustained by the belief that we are on the right track. Or they may use some other metaphor.

The one that seems most popular now, almost two years into the Reagan Presidency, compares the economy to a person who has destroyed his health in years of overindulgence and today faces a long and rigorous convalescence. You cannot, we are earnestly assured, correct in a year or two the mess made in 10 (or 20 or 30) years of mismanagement. This is absurdity of a high order.

Nevertheless, let’s take it at its face value. The economy has, the story goes, been on an extended debauch. When did this all start? Is Jimmy Carter solely to blame? To say so is unfair, since it was he who appointed Paul Volcker chairman of the Federal Reserve Board and so may be said to have initiated the “cure.” Surely Gerald Ford and Richard M. Nixon aren’t the ones, for they are Republicans. Was it Lyndon B. Johnson, then? That would make John F. Kennedy the Golden Age, which can’t be allowed. One is tempted to like Ike, but the sad fact is that he ran up the largest peacetime deficits until the advent of Ronald Reagan.

The metaphor is nonsense on its face. The alleged debauch never began. There was never a pre-existing” healthy” state that we should now be returning to. The Golden Age is and always has been merely an enchanting dream.

Another trouble with metaphors is that, once you get them started, they’re hard to stop. This is perhaps particularly true with medical metaphors, medicine being an art and all that. In the present instance, the doctors of the far Right agree with the diagnosis of the doctors of the far Left; but instead of an austere program of drying out, they prescribe an equally drastic program of surgery. On the basis of metaphor, there is no choosing between programs. Block that metaphor.

Of course, there may still be some truth behind the metaphor. It is conceivable that when an economy has been badly damaged it cannot be repaired in a short period of time. If this is so, it would certainly be churlish to deny President Reagan time for his program, as he says, to take hold. If, on the other hand, there is a case where a ruined economy made a rapid recovery, then we had better recognize that Reaganomics is a failure and quickly embark on another program.

Well, there is such a case. I’ll name it, but first let’s glance at John Stuart Mill’s Principles of Political Economy, a work that even more than Adam Smith’s The Wealth of Nations can be called the leading statement of “classical” economics.

“Capital,” says Mill, “is kept in existence from age to age not by preservation, but by perpetual reproduction: every part of it is used and destroyed generally very soon after it is produced, but those who consume it are employed meanwhile in producing more …. This perpetual consumption and reproduction of capital afford the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war.”

Some may object that the world has grown vastly more complicated in the almost century and a half since Mill wrote, that today’s factories and infrastructure could not be replicated so easily as those of the mid-19th century. It might have been no great thing to reinvent the water wheel; it would be harder to rebuild the automobile industry from scratch. But this objection is beside the point.

The devastation alleged to have been caused by an economic debauch has not extended to factory buildings or machinery. As was pointed out in the debates over saving Lockheed and Chrysler, the physical factories would have remained even if the companies had gone bankrupt. The factories may be judged obsolete, as people tell us the steel industry is, yet it is noticeable that U.S. Steel decided against modernizing its plants, not because it lacked the ability to do so, but because it felt the economy too weak to need the steel it could produce. Nor has the infrastructure been destroyed; it has merely been allowed to deteriorate, and the deterioration has resulted precisely and solely from the astringent measures of the end the-debauch doctors.

In short, Mill’s observation remains as sound as ever. And we have had, well within the memory of man, a situation that confirms it. Although Congressman Jack Kemp (R.-N.Y.) is perhaps not old enough to have experienced the Great Depression, and President Reagan apparently had his mind on other problems, some of us remember how things were and how they changed. I hasten to add that I am thinking of Mr. Win-the-War, not of Mr. New Deal. I don’t mean to denigrate Mr. New Deal; I merely say that, for change, Mr. Win-the-War was nonpareil.

In the late’ 30s I was a traveling salesman and had occasion to travel over a good deal of the northeastern United States. I was not a very good salesman, but I did keep my eyes open, and what I saw out the day coach windows was miles and miles of abandoned factories, empty warehouses, and railroad sidings whose rusted rails were overgrown with weeds. In between were miles and miles of farmland that no one bothered to farm. People were scarcely visible. I did not sell many books; once I spent an entire day in Albany and Troy, called on a wholesaler, a department store, and five bookstores, and didn’t sell a single book. This was in the winter of 1938-39.

In mid-1940, when France fell, there were about 8 million unemployed in the United States, or 14.6 per cent of the labor force. Those figures make little allowance for women, who stayed home if they could, and blacks, who just tended not to be counted. The GNP, in 1958 dollars, stood at $227.2 billion. Two years later, unemployment was practically nonexistent and the GNP was up to $297.8 billion, for an increase of 31.1 per cent. Contrast these figures with those of the first two years of Reaganomics.

Yes, there was a war on. I noticed that myself. When you stop to think of it, that makes the achievement all the more remarkable. The state of the economy in 1940 was incomparably worse than it was in 1980. War industry does not, in itself, improve the standard of living. Guns (except handguns, which aren’t of much use in war) are not consumer goods. The 18 million of us who ultimately wore khaki or blue suits did not produce anything of ordinary usefulness while we did so. But by the end of the War, there were 7 million more civilian jobs than there were in 1939.

THERE IS ONE crucial difference between Mr. Win-the-War and all the proposals and programs that we have had for the last 35-40 years.  Mr. Win-the War saw what had to be done, and did it. All subsequent programmers – and I mean all, both Right and Left-have tried to accomplish their ends by indirection.

If millions are out of work, the problem is to be met by the indirect route of encouraging investment; and if one wants to encourage investment, one encourages savings; and to encourage savings, one attacks inflation; and controlling inflation seems to require controlling the money supply-which immediately throws people out of work but, it is hoped, will do better in time. That’s the conservative scenario.

The liberal scenario, I’m sorry to say, is not much better. It now goes like this: If people are out of work, they are disadvantaged and have the wrong skills or none, so they need to be trained or retrained; in the meantime, a nationwide commission of unemployed economists will be convened to figure out what industries should be fostered – and how they should be fostered – to  employ the retreaded workers. This remedy will also take time. In the long run we are all dead.

But can the national will be mobilized except in time of war? Is there a moral equivalent of war? There’d better be, or we are all either amoral or dead. It will not, however, be something incidental, like cutting down on the consumption of oil, as Jimmy Carter, costumed in a cardigan sweater, and posed before a fireplace in supposed imitation of FOR, told us an inner light had told him. Nor will it be something mean spirited and tawdry, like depriving the poor and helpless in order to bribe the rich and fortunate into making themselves richer, hoping thereby to improve the GNP. The GNP, too, is incidental, perhaps a means but certainly not an end in itself.

The only ends are people. I’m not going to give a lecture on morality – at least not a comprehensive one, not here-but I will say this: Each of us as individuals and as a nation is responsible for ourselves. If we are not responsible, we are nothing. One version of the Hippocratic Oath starts with the words, “First, do no harm.” Even in terms of medical metaphor, Reaganomics is a failure. Two years of irresponsibility in Washington are more than enough.

The New Leader

Originally published October 4, 1982

LAST MONTH, in this space, in the course of an argument against a flat-rate income tax, I offered some reflections on the way a chief executive officer’s high salary tends to produce high salaries down the line, with inflationary results. Let’s now start at the other end, toward the bottom, and look up, to see if we can find justification for the high CEO salary in the first place.

Suppose (that is what economists do) a bright and well educated young man of 21, who was thought to have “management potential.” He started work in 1952 for a Fortune 500 company, not as an apprentice sweeping the factory floor, nor even as a clerk running errands in accounts receivable, but as a management trainee. Although he was by no means at the bottom of the ladder, it was still a long way to the top, and at every rung he was in head-to-head competition with others like himself, many from outside his company. When he got to be CEO at age 51, he had survived perhaps 10 such contests.

It may be noted that this competition, while stiff, is not so stiff as that of a tennis tournament, which would require 512 starters to produce a winner after 10 rounds. It is more like a club ladder, where one periodically challenges the player above or is challenged by the player below.

At any rate, our man finally made it to the top. The question now is how much better was he than his competitors? The difference may be thinner than a double-edge razor. Jimmy Connors is undisputed Wimbledon Champion, but he and John McEnroe won the same number of games in the final match and even scored the same number of points. Beyond that, it is, as the announcers like to say, a game of inches.

Let’s grant our man all the credit we can by assuming that at each rung of the ladder he showed himself 10 per cent better than his competition. That is, one must admit, a pretty big margin if he ran into any competition at all. Considering the vagaries of personnel interviewing and executive recruitment, his margin of superiority is likely to have been greater in the early years than in the later, just as Connors could beat a hacker like me with his right hand, but had to use both hands to subdue McEnroe. So if we give our hero an even 10 percent superiority at every stage, we’re not understating his attainments.

On this assumption it is reasonable to claim that when he finally pulled himself to the top, he had proved himself l.1¹º, or 2.59 times-better than the losers in the first contest. Thus it would seem proper for his pay to be 2. 59 times better than theirs: If the first losers, with modest seniority raises, got themselves up to $30,000 at age 51, the winning CEO should be earning 2.59 times that, or $77,700. Giving him the breakage, it would be $77,812.

That’s right: we’ve justified a salary of $77,812 for the CEO of a Fortune 500 company. Good grief, they’ll be jumping out of windows all over town.

I haven’t bothered to check, but I’ll wager that there isn’t a Fortune 500 CEO who doesn’t pull down a good deal more than twice that. And as we noted last month, at least a dozen men rake in $2 million a year or more, counting only “earned” income. That makes these miracle-men 25.7 times better than our winner, or 66.7 times better than our losers, who were no fools to begin with.

Does anyone really believe that?

Well, I’m afraid that a great many do. Their reasoning goes something like this: As a man climbs the corporate ladder, several important things are being tested beyond his ability to calculate sums in his head and his cheerful willingness to do what his boss tells him. Perhaps most important of all, he is exhibiting his ability to learn, and especially his ability to understand at a glance how things work. If he’s going to get ahead, he’s got to have a quick ear and a sharp eye.

Having had some experience in business, once even with a Fortune 500 company, I’m ready to acknowledge that the quick ear and the sharp eye are far from common. At the same time, it occurs to me that we may have here another of those nature vs. nurture problems, like the debate over whether women are naturally slow at mathematics or merely are brought up that way. One’s genetic composition (whatever that may mean), home environment, and formal education may be of the most promising, but a few years in the lower reaches of a large organization that happens to be riddled with office politics can be devastating. I know, because I’ve been there. The winner in such contests proves himself adept at politics; and if he’s good at his job, too, that’s a plus. The losers’ talents never have a chance to develop.

The winner, in fair contests as well as in foul, gains something more than a pay raise. He gains experience. He has increased opportunities to practice the use of his eyes and ears. He learns by doing. Perhaps more important, he joins C. Wright Mills’ “Power Elite” and gradually expands his business connections so that he is eventually on familiar terms with the most “useful” people among his firm’s customers, suppliers and competitors. All of this makes him many times more valuable to his firm than the inexperienced, dispirited, though almost equally talented, losers and is said to justify the enormous difference between his salary and theirs.

There is also, in the minds of the directors who set the high CEO salary, another justification. They argue that they must pay their CEO well or he will decamp for some more generous rival, thereby subtracting his skills from their company and adding them to the competition. It is altogether probable that this reasoning is sound, especially since an extra $100,000 is a drop in a Fortune 500 bucket. Moreover, if he can increase his firm’s profit by $100,001, or prevent the loss of $100,001, or some combination of the two, he will have proved, as neoclassical economists say, the marginal utility of his raise.

This logic may remind you of the free agent auction in baseball; and indeed the same principles operate, with the same results: astronomical salaries for a few, whopping raises to keep the most important and most powerful of the rest in line, and higher prices for the paying customers.

ASSUMING that enormous pay differentials are a weakness in, if not a threat to, democracy (I refer you, as I did in my previous column, to Wallace C. Peterson’s Our Overloaded Economy), what can be done to change the situation? First, it must be recognized that the situation, being indeed rational, is not likely to change of itself. Second, it must be recognized that raising the consciousness of the losers might improve their self-respect (or perhaps the contrary), but is not likely to do much toward improving their lot. In this regard the problem is again analogous to that of women, who, even after overcoming their math anxiety, still need the ERA if they’re to get a fair shake.

There are, I think, two practical possibilities. Since we already set a minimum wage, there would seem to be no reason in principle why we might not set a maximum. Nonetheless, there are good reasons for avoiding rigidities where possible. That leaves the possibility of a steeply progressive income tax, coupled with the elimination of deductions and shelters, and probably with radical reform of inheritance taxes.

Now, it will be protested that a steeply progressive income tax – especially one frankly intended to rein in the drive for high executive salaries – is an interference in the workings of the free market. If there is a demand for a man’s services, it will be said, he should be rewarded with what the market will bear.

This objection has a fatal flaw, for it assumes that labor is a commodity like any other, and like the others is subject to the law of supply and demand. Marx, of course, charged that the capitalist mode of production depended on making labor-power a commodity. To fit the scenario of Capital (Chapter VI), labor-power had to be “free” (by which Marx meant unrestricted) and the laborer had to be “free” (that is, unconnected and without resources). It may be doubted that such a drama was ever staged in its pure form. In any event, since Marx’s time, the capitalist nations have all enacted not only minimum wage laws, but also laws governing hours and conditions of work, vacations, unemployment compensation, old age security, freedom to join labor unions, and much else; and all these laws implicitly recognize that labor is different from, and should be treated differently from, ordinary commodities.

It is, to be sure, a sad fact that those to whom we have entrusted present control of our economy actually think of labor as a commodity, just as they think of money as a commodity. Consequently, they vainly try to reverse inflation by raising the “price” of money to force the “price” of labor down. (For a justifiably caustic refutation of their theories, see Sidney Weintraub‘s Capitalism’s Inflation and Unemployment Crisis.)

But neither labor nor money is a commodity. Both are essential – primary, original – to our social and economic system. Neither can be explained in terms of something else. (See “Let’s Put Indexing on the Index,” NL, April 5.) We do with labor and money what we will; it is a moral act. It is a flaw in us – an ethical failure – that our current tax laws encourage greed. A low flat-rate tax, regardless of its ease of collection and all the other rationalizations of the editorial writers, is subject to the same indictment.

[Editor’s note:  For more on this subject read Executive Salaries and Their Justification in the Journal of Post-Keynesian Economics]

The New Leader

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

 DICK NETZER
Director
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 July 12, 1982

A NOTE IN Thomas Balogh‘s stimulating new book, The Irrelevance of Conventional Economics, tells the following story: When Professor Paul Samuelson was asked by a Harvard mathematician to name “one proposition in all of the social sciences which is both true and non-trivial,” he confessed that this was a test he always failed. “But now,” Samuelson wrote, “some 30 years later … an appropriate answer occurs to me: the Ricardian theory of comparative advantage; the demonstration that trade is mutually profitable even when one country is absolutely more or less productive in terms of every commodity.”

The anecdote is worth attending to because the so-called Law of Comparative Advantage is the foundation of most arguments for free international trade, and the dogma has been sanctified by practically all economists, liberal or conservative. The law thus provides at least part of the justification for deeds such as GE’s closing an electric iron factory in California and replacing it with one in Singapore (see “America’s Setting Sun,” NL, June 14).

As expounded by David Ricardo in The Principles of Political Economy and Taxationone of the half dozen most influential books in the history of economics-the law develops like this: Suppose (there goes an economist imagining things again!) that a certain amount of wine exchanges for a certain amount of cloth. Suppose that in England it would take a year’s labor of 100 men to make the cloth, and of 120 men to make the wine, while in Portugal the man-years required are 90 and 80, respectively. In these circumstances, it would be to Portugal’s advantage to make only wine and England’s to make only cloth, with the countries then exchanging the surpluses: Portugal would multiply its wine output 2.125 times ([90 + 80] ÷ 80), and England its cloth production 2.2 times-and since the cloth and the wine are equal in value, both countries would come out ahead.

I say that the law is false in the modern world, however, and I say that Ricardo knew why [editor’s emphasis]. “Such an exchange,” he observed, “could not take place between individuals of the same country. The labor of 100 Englishmen cannot be given for that of 80 Englishmen, but the labor of 100 Englishmen may be given for the produce of the labor of 80 Portuguese, 60 Russians, or 120 East Indians. The difference, in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.”

Ricardo went on to declare that “feelings, which I should be sorry to see weakened, induce most men to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign countries.”

What Ricardo could not foresee, and what his modern followers have overlooked, is that the new multinational corporations fail to share the feelings of patriotism or indeed of prudence that he ascribed (somewhat naively even in the 19th century) to the capitalists of his time. Today capital flits freely from here to there, moving as indifferently from the United States to Singapore as it did in Ricardo’s day from London to Yorkshire.

The results of this movement are neocolonial exploitation in the Third World and spreading unemployment in the industrial West, leading in turn to Reaganomic doctrines of lower wages, less concern for worker safety, disregard for the environment, and abandonment of consumer protection. Teenage girls now making electric irons in Singapore, though exploited by our standards, may be better off for the moment than they were before GE hired them. But the mature American men and women who lost their jobs when GE abandoned its plant in California are irremediably worse off. Many-perhaps most-of them, having worked with reasonable faithfulness (at least matching that of GE toward them) for 15-20 years, may never find a comparable job as long as they live.

This sort of thing is happening every day in what Lester C. Thurow calls “sunset” industries, and if you believe in the Law of Comparative Advantage, you see nothing wrong with it. Singapore produced irons will be (possibly) less expensive than California-produced irons, and American capitalists and consumers may benefit even though American workers will certainly suffer. We now have a good many” sunset” industries: textiles, steel, shipbuilding, electronics, optics, and of course automobiles. We also have 10 million unemployed.

Professor Thurow fears that our whole economy, except for service industries and agriculture, will be shipped abroad. He proposes a massive national R&D effort to identify “sunrise” industries and to channel investment into them. It would, he says, be better to underwrite the development costs of such hopeful undertakings than to shore up doomed firms like Lockheed and Chrysler. The professor points, too, at the Japanese experience, claiming that Japanese prosperity results from just such cooperation among big government, big finance and big business (in Japan there is no such thing as big labor).

The Japanese model gives me pause. I wonder what is to prevent the Japanese from moving into our new “sunrise” industries. The challenge comes not just from the Japanese, I hasten to add: GE and dozens of other multinationals are as American as apple pie; yet the effect on American workers of their operations in Singapore and Taiwan and Mexico is in no way different from that of Toyota and Panasonic. It was not so many years ago that we had a “sunrise” industry making TV sets and today that sun is slipping into the western ocean. I can’t see why the yet-to-be-invented “sunrise” industries won’t suffer the same fate in due course. As Ecclesiastes had it: The sun also goeth down.”

So what is to be done? Well, nothing, according to the Law of Comparative Advantage. Its adherents may drop a tear for GE’s former workers in California and sigh at the wasteful abandonment of the Ford plant in Mahwah. But they steadfastly accept these disappointments, secure in the stern faith that the long-run result will be lower prices and hence a higher standard of living for American consumers.

Three questions occur to me. First, how long will the run be? Second, how will unemployed American consumers get the money to pay the promised lower prices? Third, how do you explain 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? I leave the questions rhetorical.

Discard Ricardo’s law, as he surely would have done, and you may find it is precisely at this point that the Japanese have something to teach us. A much complained-of fact is that it is exceedingly tough for American firms to establish branches in Japan or even to obtain Japanese import licenses. This is partly bureaucratic bungling, partly preserving foreign exchange for essential imports, and partly requiring foreigners to produce goods in the Japanese way if they want to sell them in Japan.

These matters, it is important to notice, have little to do with tariffs in the usual sense. What is being protected is less Japanese fledgling industry than customs, and the Japanese don’t propose to allow them to be corrupted for any number of pieces of silver. As has long been noted, tariffs inefficiently shield new or weak industries. Import regulation, on the other hand, does help preserve a national way of life.

THIS IS a very sound approach, and one that we have taken as well, albeit not always for the right reasons. President Eisenhower, for example, restricted the importation of oil in the mistaken belief (yes, I credit him with having been merely naive) that he was protecting a war industry (our war-making ability would rather have been enhanced by keeping our oil in the ground and using foreign oil in peacetime). An accepted provision of Cordell Hull‘s Reciprocal Trade Agreements bans products that are “dumped” -that is, sold at a loss. And we quite reasonably refuse entry to automobiles that do not meet our safety standards, to drugs we judge to be harmful, to beef from cattle we believe to have been infected with hoof-and-mouth disease.

In short, we have long acted to protect Americans as consumers and Americans as entrepreneurs. If we protected Americans as workers in the same way, we’d have less trouble with “sunset” industries.

It is easy to foretell that multinational corporations will fiercely resist giving up the American market for products manufactured cheaply abroad. Moreover, they will succeed in mobilizing some consumer organizations and doctrinaire free-traders in their behalf.

There will also be those who worry, quite properly, about employment in the Third World. The reply here is that to break out of their underdevelopment, the nations of the Third World will have to encourage trade among themselves. If goods manufactured in the Third World had to be sold there, the multinationals would be constrained to produce what the Third World needs (maybe neither irons nor calculators) at prices it can afford. That way lies increasing prosperity, instead of neocolonialism and permanent poverty.

From our point of view (which is the only basis for our legislation), it is futile to try to prevent the flight of American capital abroad even if we wanted to. It would be easy to avoid the concomitant harm done to American workers, though, and to stop encouraging the flight of capital. Such protection would be no harder to handle than present regulations about drugs and diseases.

Unless we come to understand that the Law of Comparative Advantage no longer holds, and unless we therefore do something to protect American working men and women-in other words, us-we can expect industry after industry, no matter how thoroughly researched and comprehensively planned, to vanish with the setting sun. And as we continue to force additional millions of our fellow citizens onto the relief rolls, we can expect our standard of living to fall steadily lower among the industrial nations of the world.

The New Leader

Originally published June 14, 1982

I FIRST became conscious of the Japanese as supermen many years ago, when the 240th Coast Artillery of the Maine National Guard, in which my late brother-in-law was an officer, stood ready to be mobilized because of an uproar, as I recall it, over the exclusionary immigration law. A Japanese fleet was expected to steam over the horizon into the teeth of the 10-inch disappearing guns of Fort Williams, originally emplaced, some time after the event, to protect Portland Harbor in the Spanish-American War. Then as now, the Japanese were regarded as miracle-workers.

Today it is Japan’s industry that evokes awe. It has become fashionable to contrast the performance of that country’s labor with ours-particularly with Detroit’s. Even American management has come in for some criticism. Inventories of parts and components in Japanese factories, it is pointed out, are much lower than those in their U.S. counterparts. It is further claimed, by economists like Lester C. Thurow, that America is doomed to fall behind Japan if we try to support our” sunset” industries, where the Japanese are already beating us (automobiles, steel, electronics), rather than our “sunrise” industries (unspecified), where we can have a lead. Why automobiles are necessarily sunset with us and sunrise with them is not explained.

A new fashion (also popularized by Thurow, among others) emphasizes the fall in the American standard of living. Of course, we are still the world’s richest nation; our GNP remains far higher than anyone else’s, yet that is because there are so many of us. If we look instead at our standard of living, as we should, we have less to brag about. As Thurow observed in a recent New York Review: “German workers have twice as many paid holidays and vacations as American workers. American males can expect to live four years less than those of Switzerland, while American females lag ‘only’ three years behind. America ranks 18th in infant mortality [he doesn’t mean exactly what he says, and what he does mean is no longer exactly true, but no matter). Air pollution in the United States exceeds that in other industrial countries. The homicide rate is eight to nine times that of other major industrial countries.”

These depressing (if somewhat disjointed) statistics can be roughly summed up in one category: GNP per capita. A relevant table, using ordinary exchange rates to convert from one currency to another, was included in a study released a few months ago by the Organization for Economic Cooperation and Development. A more recent OECD report uses an index based on a market basket of some 1,300 items, and as I have previously made clear (“Let’s Put Indexing on the Index,” NL, April 5), I am wary of indices. The point here, though, is that one set of figures is as funny a hook on which to hang an argument for adopting Japanese industrial methods as the other. In the latest, for example, we are number one in 1960, ’70 and ’80. The earlier table, usually referred to in “setting sun” arguments, showed us number one in 1960 and ’70, but only 1Oth in 1980.

Strangely, the people crying up Japan do not seem to have noticed that it is toward the bottom of both lists in all three decades. Even Great Britain, everybody’s whipping boy, has continued to out produce Japan. Can it be that the Japanese performance is as much mirage as miracle? It can be.

In the well-propagated view of things, the Japanese economy turns on a lifetime commitment of worker to company and of company to worker. The relationship is recognized to be a trifle cloying for modern American tastes. A century and a half ago, our mills in places like Lawrence and Lowell, Massachusetts provided dormitories for unmarried “hands,” and that would not be appreciated today. Indeed, the company towns that are pointed to with pride in Japan have long been anathema in the U.S., and no one on either side of our bargaining tables is eager to resurrect them.

Nevertheless, the stability of the Japanese labor-management relationship is much admired. A special virtue of it, we are told, is that the Japanese worker- unlike workers elsewhere since the beginning of the Industrial Revolution- does not fear the introduction of new and more efficient machinery. He knows that if his present job is automated out from under him, his company will find him another job, and will train him for it if necessary. One result is that Japan has 70 per cent of all the robots in the world today. “With that head start,” Thurow remarks darkly, “others are unlikely ever to be able to compete successfully.” (He doesn’t say why, but I suppose it has something to do with momentum, of whose importance I am aware from listening to sports announcers.)

If we look at this arrangement a bit more closely (as in The Japanese Company by Rodney Clark, published by Yale University Press), it does not appear quite so idyllic. It seems that the “lifetime” commitment runs only to age 55, whereupon the worker is either demoted, farmed out at a lower salary to a supplier of his old firm, or turned loose with a couple of years’ severance pay. In all three cases he faces old age without a pension.

This is not the worst situation, however, it is the best. The Japanese economy is hierarchical in an idiosyncratic way. Automobile manufacturers can keep their inventories of components say, fuel pumps-low because they subcontract most of the work. The big companies dominate their suppliers, who have no other market for their products. A fuel pump designed for a Toyota is so much scrap metal if it isn’t put into a Toyota. The suppliers have to carry the inventories to meet the big companies’ shifting needs, and they have to be satisfied with the prices the big companies will pay. Consequently, the suppliers cannot offer lifetime employment. Their workers are laid off when business is slack and are fired outright when technological improvements are made. They are second-class citizens with a vengeance, and you don’t hear much about them in the American business press; yet they make up, in the Japanese automobile industry, roughly 70 per cent of the labor force.

Some will have noticed that I’ve been using the masculine pronoun. That is because men alone are meant. Although women comprise about 36 per cent of the non agricultural work force in Japan, they do not have the men’s guarantees and perks (such as they are), and they neither get a shot at the better jobs nor are paid well for the jobs available to them. That they know their place of course makes them especially attractive to our New Right.

Another turn of the screw: As always happens when you have two classes of citizens, people scramble to get into the favored class and scramble to stay there. So the big companies have the pick of the young men entering the labor market, and we will not be surprised to learn that they select the best trained as well as the most “cooperative.” Nor will we be surprised to find that fear of falling out of the favored class leads to brisk and careful work on the assembly line, whence comes the vaunted Japanese defect-free production.

This is not a very pretty picture. If it is what is required to create a sunrise industry, we’d better at least think up a new metaphor. And we’d better pause a moment to consider the fact that in spite of all of Japan’s sunrise industries (automobiles, steel, shipbuilding, textiles, electronics, optics), its GNP per capita is still well below ours-even though we are, for various foolish reasons, running our economy at less than 75 per cent of capacity. As Gus Tyler has shown (in “The Politics of Productivity,” NL, March 22), the notion that the Japanese are “catching up” is a statistical flim-flam.

THERE ARE other statistical flimflams lurking in most comparisons of the performance of various national economies.   Switzerland, for instance, is held up as an ideal. Its rate of inflation and rate of unemployment are relatively low. Is this because the sturdy and intelligent Swiss are imbued with the work ethic? Workaholics they may be, yet that is not the secret of their success. The secret lies in their importation of Italian labor for menial and unskilled and ill-paid jobs. As is true everywhere with people holding such jobs, the Italians are the first to be laid off when business slows down. But they don’t then draw Swiss unemployment compensation; they are simply dumped back into Italy. Hence the Swiss unemployment rate is very low and the Italian extra high.

Moreover, when the Italians are working in Switzerland they obviously help swell the Swiss national product. On the other hand, because they aren’t Swiss citizens-and can’t apply for citizenship- they aren’t counted in the denominator used to calculate the Swiss GNP per capita. That the latter is proclaimed to be the highest in the world is therefore to a considerable extent a statistical flim-flam.

The same phenomenon operates in West Germany (where Italians, Greeks, Turks, and Yugoslavs are imported), and in many more high-ranking countries. To some extent it operates in the United States, too, given the uncounted millions of Hispanics eking out precarious existence, especially in the Sunbelt. But because our native labor force is so large, and because the immigrants who go on the relief roles here are counted among the unemployed, our GNP per capita figure is more reliable.

The American style has been different. In addition to importing cheap labor, we have taken to exporting expensive capital. A segment of 60 Minutes the other night showed the shutdown of a GE electric iron factory in California. GE’s pretense was that the market had shifted from steel- frame irons to plastic ones, so it was forced to open a plastics plant in Singapore to meet international competition. Since the molding of plastics is not beyond American know how, there can be little doubt that the real reason for the shift to Singapore was that teen-age girls there will work longer hours, in less pleasant (if not more dangerous) conditions, for less pay than mature men and women in the United States. When all is said and done, similar reasoning is crucial in each of our sunset industries. Also important (as I noted in “How Micro Minds Make Macro Mistakes,” NL, May 3), is our burgeoning practice of making financial rather than productive decisions.

Neither the exploitation of foreign teen-age girls nor the abandonment of our fellow citizens is an honorable objective of public policy-or of private policy. Colorful talk of the sun rising and the sun setting only masks the real problem.

The New Leader

Originally published May 3, 1982

AN OLD TEACHER of mine once tried to “motivate” (a word he would never have used) his sullen pupils by arguing that Latin is the road to success in any line of endeavor. He was ready for us when we cited Henry Ford as an exception. “Ah, yes,” he replied, “but think of how much more successful Mr. Ford would have been if he had studied Latin.”

That kind of argument provides the principal, if not the sole connection between macroeconomics (the economics of the nation or world) and microeconomics (the economics of the firm or individual), as they are at present understood. Ordinarily the link is silently assumed. The root of both branches, like the root of both words, is the same. Surely, too, it is obvious that the prosperity of the nation depends on the prosperity of the entities that make it up.

I shall nevertheless dare to express doubt. For I have had the experience, not once but several times, of seeing the firm for which I work prosper in what were generally judged to be bad times. And, I am sad to report, I have also seen the contrary. There used to be, moreover, a bit of folk wisdom to the effect that the book business is, for various almost plausible reasons, depression proof. (Some say that it is prosperity-proof, as well.) In the face of all this, how can one assert a connection between macroeconomics and microeconomics?

My old Latin teacher would have had no trouble with that question. He would readily have granted that our firm could prosper in bad times, and then rejoined: “Think of how much more prosperous you’d have been if the times had been good.” That is a hard argument to meet and an impossible one to formulate. It seems the most obvious of common sense, but there is no way to test it. The fact of the matter is that our company sometimes-not always-prospered in bad times; beyond this fact we have merely wild surmise.

Indeed, I would suggest that the connection between macroeconomics and microeconomics actually is silently denied about as often as it is silently affirmed. The former head of General Motors who served as President Eisenhower’s Secretary of Defense, Engine Charlie Wilson (so called to distinguish him from Electric Charlie Wilson, at the time head of General Electric), was greeted with derisive laughter when he made his way into the dictionaries of quotations with the howler, “What’s good for General Motors is good for America.” You don’t have to cudgel your brains to think of lots of examples of business doing good for itself at the expense of the national interest. In such instances, macro and micro seem to be at war with each other rather than mutually supportive.

Many college curricula are also unmindful of a possible connection. It is not unusual to be able to take an introductory semester of micro without macro, or vice versa, or a semester of each in either order. It doesn’t matter, because the truth is one doesn’t depend on the other.

The discontinuity is not to be wondered at but to be expected. For we have here another instance of the fallacy of composition (see my “Productivity: The New Shell Game,” NL, February 8, on how this turns up in discussions of productivity). Webster’s New International Dictionary, using almost identical language in both the second and third editions, defines the misleading reasoning as follows: “The fallacy of … assuming that what is true of each member of a class or part of a whole will be true of all together.” Websters then gives an example from economics: “If my money bought more goods, I should be better off; therefore we should all benefit if prices were lower.” The fallacy of composition might well be called the characteristic economics fallacy.

In its relatively benign form it may underlie proposals to operate the government on “sound business principles”- that is to keep accurate accounts. Somewhat more dangerous is the belief, widespread at least among businessmen, that success in business is an indicator of probable success in government. This can lead to a lot of benefit- cost analysis and similar foolishness. Or it can lead to reliance on bankers (who are not, properly speaking, really businessmen) to settle monetary and financial questions (what is good for Citibank and Chase may in fact be very bad for America, as the Polish crisis has shown).

It is in the fields of taxation and regulation, however that the most dangerous misapplications of microeconomic principles to macroeconomic problems come. Reaganomics is frankly built on such reasoning, and the Democrats have been floundering because they tend to accept the same fallacies. As things stand today, their uneasy feeling that it is bad to be mean to the helpless is what distinguishes them from the Republicans. The sentiment is a credit to them; in a rational world it would be a badge of honor to be called a do-gooder. Yet feelings are an inadequate response to a ruthless and fairly consistent program, especially if one has the despairful suspicion that the theory behind the program may turn out to be pragmatically correct.

The Democrats have been kidded into believing that President Carter was from their ranks, and that his failures proved the Great Society was a bum idea. As a result, they have not only supported the Reaganomic tax breaks for the rich but have mindlessly tried to outbid the Republicans for the favor of the oil industry. Several, not excluding notorious liberals like Teddy Kennedy, are demanding credit for being in the forefront of actions to dismantle some regulatory agencies. The reasoning, again, is a fallacy of composition.

Current theories of microeconomics assume that the purpose of business enterprise is profit maximization, and a now well established principle of successful business management is that it is sensible to cut your losses. Any fledgling MBA has a quick eye for seeing how a firm’s activities can be divided into _ semiautonomous “profit centers,” plus a quick ear for hearing which profit centers are yielding a desired rate of profit, which ones can be made to do so, and which ones are hopeless. Those in the last category may be profitable; they are simply not profitable enough. The minimum acceptable rate of return is the money-market rate. If you can get roughly 15 per cent by lending your money to someone else, there clearly is no point in bothering to run a business that earns less. Or if in the normal course of your business you borrow money from banks, and pay the prime rate of roughly 16.5 percent, you’re obviously losing money on a profit center that doesn’t earn that much.

So the weak profit centers should be sold if possible, liquidated if not. You will probably have to take a loss, but more than half of your loss will be paid for by the government via the reduction of your income and hence of your tax bill. The funds thus freed can then be applied to the promising profit centers, or put into the money market, or used to reduce your corporate debt. Whether you sell or liquidate, the overall profit of your company will be improved.

There is no doubt that this barbarism works. Consider a profit center that is earning 5 per cent on invested capital of a million dollars, while the firm’s target is 15 per cent. Even if the weak profit center-workers, customers, machinery- is abandoned at a total loss, the after-tax result will be that more than a half million dollars will be available for use in the centers that earn 15per cent or more. Fifteen per cent of a half million dollars is $75,000, while 5 per cent of a million is only $50,000. It’s as simple as that, and the underlying principle is similar to that of the Blitzkrieg.

Let us note in passing that this sort of thing is encouraged by the corporation income tax, and that a higher tax would encourage more of it. It is of course also encouraged by the interest rates produced by the Federal Reserve Board’s monetarist policies.

NOW TRANSFER this microeconomic thinking to macroeconomics. Just as in a firm there are many profit centers, in a nation there are many firms. In the same way, therefore, that a firm is strengthened by eliminating relatively weak profit centers, the nation will be strengthened by eliminating relatively weak firms. From this, Reaganomics follows as night the day. And in the long dark night it makes sense to foster the strongest and starve’ the rest. It makes sense to embrace the reality that in monetarist economy strength is a question of financial-not productive-capacity, even though that may be literally counterproductive. It makes sense to keep the interest rate high and to push the bankruptcy and unemployment rates higher. It makes sense to promote the amalgamation of whatever industry remains.

If you stop to think about it, none of this makes sense. It is the most vicious, most debilitating nonsense you could imagine. But it is what results from the application of microeconomic principles to macroeconomic problems.

I hasten to emphasize that this sort of thinking is not the exclusive province of the Business Roundtable and other far out Republicans. During a Democratic administration alleged to be liberal, I was involved in discussions with representatives of the Federal Trade Commission and was told that bookstore chains deserve much better terms than individual stores because economies of scale benefit the consumer. Had the FTC lawyers looked at the actual situation rather than at their doctrine, they would have noticed that the chains, for a variety of reasons, would collapse without the more favorable terms. But my main point is that the notion of economies of scale is a notion in microeconomics. When the government-in this case the FTC-gets involved in microeconomics, it usually makes or perpetuates a mess.

Until the Democrats learn this lesson, we will have no relief from Reaganomics. It may well happen that the Republicans will achieve disaster so quickly that the Democrats will win in the fall elections. But so long as the Democrats, too, are bemused by microeconomic doctrines, the dark night will continue.

The President pleads for patience, for more time to allow his program to “take hold.” He will probably get his time give or take a few wrist-slaps at the Pentagon budget-because the Democrats, like him, are in the thrall of theories that have proved successful on the level of individual firms and individual banks. Let it be stipulated that those theories do in fact work on that level; they are uncivilized even there, but they do “work.” But let it some day soon be understood, and insisted upon, that the economy of the nation-and of a free market-is based upon entirely different principles.

The New Leader

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