Tag Archives: 1985

Originally published November 4-18, 1985

ECONOMICS studies what people do and should do in certain situations. Its analyses, like all analyses, search out the factors that make up the situations. Thus a market involves selling and buying, or supplying and demanding. It is obvious that the selling and buying are done by human beings, and that no actual person is only a supplier while very few are only demanders. Though there may be nothing the vintners buy one half so precious as the stuff they sell, they nevertheless do some buying. Since no individual is merely an embodiment of an economic function, personification of economic functions may rate as a variant of the pathetic fallacy, whereby emotions and reasonings are ascribed to inanimate objects.

The fallacy is common among economists (perhaps even more common than the fallacy of composition, which we have noted here many times) and it has fateful consequences. It exercises an almost irresistible attraction, even for writers who explicitly warn against it. Ludwig von Mises, a pundit revered among conservatives, is loud and clear enough in Human Action:

“The entrepreneurs, landowners, workers, and consumers of economic theory are not living men as one meets them in the reality of life and history. They are the embodiment of distinct functions in the market operations. Living and acting man by necessity combines various functions. He is never merely a consumer. He is in addition either an entrepreneur, landowner, capitalist, or worker, or a person supported by the intake caused by such people. Moreover, the functions of the entrepreneur, the landowner, the capitalist, and the worker are very often combined in the same persons.”

I quote extensively because when I came to this passage in von Mises’ massive book, my heart leapt up. It does me good to find virtuous ideas in the midst of others that set my teeth on edge. But by the time I had reached the end of Human Action, my pulse was racing from an excess of adrenaline, not from a surge of joy. In the end von Mises forgets what he has said about living combinations of functions. What he calls investing is done only in a certain way by certain people, and these certain people are exclusively entitled to the rewards. He opposes unemployment benefits because they make it “easier for the unemployed to remain idle.” He sneers at those who talk of economic justice. The pathetic fallacy has led him to a pathetically mean-minded view of the world.

At the other end of the spectrum, Karl Marx seems brazen in announcing his devotion to the fallacy. In the preface to the first edition of Capital he writes: “I paint the capitalist and the landlord in no sense couleur de rose. But here individuals are dealt with only in so far as they are the personifications of economic categories, embodiments of particular class-relations and class-interests.” No matter how much he despises them, he resists the temptation of blaming individual capitalists for what they do. Marx won’t talk of blame, and von Mises won’t talk of justice: The pathetic fallacy knows not right and wrong.

At the same time, Marx is conscious of the danger that philosophical notions like individuality may become reified. For this reason he distances himself from his mentor Hegel and makes his famous move to stand the dialectic “right side up again” in the Preface to the second edition of Capital, holding that “the ideal is nothing else than the material world reflected in the human mind, and translated into forms of thought.”

The exploiting class and the exploited class, being based on materialistic functions, become monolithic and go at each other like the larger-than-life monomaniacal cudgelers in Goya’s “black painting, and we may wonder how materialization is an improvement on-or even a distinction from-reification. The notion of class is as surely an idea as anything in Plato or Hegel. No one has ever seen a class (except in a school) or heard one or touched one or smelled one or tasted one. Class is not a result of empirical inquiry.

It is no object of the senses. To talk of its force or action or reaction or progress is to talk pathetically. Class, in short, meets none of the usual tests for matter.

In the present connection, the idea of class is not only an odd ground for materialism, it imposes a rigidity on thought. The struggle is unremitting. It can be neither composed nor compromised but must be fought to the final battle. Marx’s vision is more generous than von Mises’, yet it is no less reductive.

What is true of the far Left and the far Right is true of most economists in between. Their analyses suggest to them the supply side or the demand side, public works or public austerity, saving or consumption, monetary policy or fiscal policy; and these impersonal policies or functions are in unremitting conflict.

To be sure, there is no lack of peacemakers ready to demonstrate that capitalists and workers need each other, nor is there a great lack of more or less grudging acceptance of that mutual need. Otherwise the economy would not work at all. There are periods, though, when the mutuality disappears. These are,  typically, periods of change, when business is faltering, or, quite the contrary, a technological leap forward seems possible or (depending on your point of view) desirable.

In depressions or recessions or growth corrections, some capitalists may lose some money (though mostly they do very well, and have done extraordinarily well the past five years), but what happens first is that many workers lose their jobs. This is so commonplace that no one ever thinks to defend it. I doubt that it can be defended. If both capital and labor are essential to production, by what right are things more worthy of protection than people? How is ownership more important than existence?

Technological advances have always been resisted by workers. How stupid of them! Britain could not have achieved its first breakthrough if landowners had not enclosed the commons and driven tenants off the land to make way for sheep. Later, had the Luddites had their way, the Industrial Revolution would have been aborted; and if the followers of Captain Swing had prevailed, the denizens of the cities could not have been fed even as well as they were.

As economists and editorialists continue to scold, such misguided people are with us still. Automobile workers resist giving up their jobs to robots; labor-saving machines are opposed as labor-eliminating devices. Why can’t these people see that new robotic industries will create new jobs, just as automobile making turned out to employ many more people than harness making? Why should anyone in his right mind fight to preserve mind-deadening work on the old-fashioned production line? What is so great about conditions in Southern textile mills that leads people to want to keep them going in the face of cheap imports from the Orient?

SOCIETY is certainly better off with more mechanization, more robotization. It is a blessing that the bulldozer and the earth mover have supplanted those who used to “push-a, push-a, push” on the Delaware-Lackawan. It is a blessing that the back hoe has made “ditch digger” an obsolete term of opprobrium. It is a blessing that the dishwasher has replaced the scullery maid. Not only is progress irresistible, it is largely beneficial.

But there is trouble in paradise. The trouble is systemic. The individuals who are displaced by progress are systematically denied the benefits of progress. Although the working class or the worker-as-function may be better off in the famous long run, many individual living workers are not, either in the short run or the long. As we have noted, when bad times befall, everyone may lose some money (well, almost everyone); however, the worker-as-function and the individual worker will often lose not only money but job, career, independent livelihood, sometimes forever.

The trouble is, I repeat, systemic. Short of war, the system is in no danger of immediate collapse, and it is without doubt a better system than that of India or South Africa or Chile or the Soviet Union or even Japan. Nonetheless, the conflict and squalor and heartbreak produced by this best of present systems, too, are unconscionable. One requirement for reform is cancellation of the pathetic fallacy and the reconstitution of economic man (and woman) as not merely producer or consumer, not merely worker or capitalist, not merely wage earner or profits engrosser, not merely time-clock-puncher or manager, but something of all of them, all at once, all the time, in theory and in law and in fact.

Another requirement is the redefinition of property. The need for this has, interestingly enough, been advanced by Friedrich A. Hayek, usually classed with von Mises as an ultraconservative (see “Strolling Down the Road to Serfdom,” NL, July 1-15). In Individualism and Economic Order Hayek criticizes “a slavish application of the concept of property as it has been developed for material things” (see“Life, Liberty and Property,” NL, July 11-25, 1983) and suggests that “There may be valid arguments for so designing corporation law as to impede the growth of individual corporations” (see “Big is Ugly,” NL, September 9, 1984).

The problem we have been discussing is approached from a different direction in an important short book by Professor Robert A. Dahl of Yale, entitled A Preface to Economic Democracy (University of California Press). A political scientist who, like Tocqueville, is concerned about the future of democracy, Dahl notes that it requires” a widespread sense of relative well-being, fairness, and opportunity.” He worries that this sense – this morale – is being eroded by the modern corporation with its dictatorial control and its unconscionable spread of rewards. Both, he argues, are unnecessary.

Dahl shows, point by point, that the case for political democracy is also valid for economic democracy. Again point by point, he considers the right to property and the peculiar form it takes today. At one stage he remarks drily, “Thus to say that [stockholders] are entitled to a return because they sacrifice the use of their money begs the precise question at issue: whether, if their money represents a return from property ownership, they are entitled to that money.” And later: “Given the passivity of stockholders in a typical firm, their utter dependency on information supplied by management, and the extraordinary difficulties of contesting a managerial decision, it seems to me hardly open to question that employees are on the whole as well qualified to run their firms as are stockholders, and probably on average a good deal more.” In conclusion, Dahl summarizes the experiences of a variety of existing employee-ownership plans operating here and abroad.

Readers of this column will recognize the relevance of Dahl’s argument to what I have been calling the Labor Theory of Right. I urge you to read his new book.

The New Leader

Originally published October 7, 1985


I have been happily working my way through Fernand Braudel‘ s tangled, lumpy, unmade-bed of a book whose three volumes have the overall title Civilization and Capitalism: 15th-18th Century. About halfway into the second volume Braudel makes some observations about mercantilism, and they have given me furiously to think.

Every American boy or girl who paid even the slightest attention in school knows that mercantilism was a bad idea. It bled the colonies for the benefit of the homeland, and consequently the colonies revolted. Those who listened a little longer also know that the mercantilist striving for a “favorable” balance of trade meant exportation of goods and importation of precious metals, a policy that is ultimately self-defeating because, as Midas found out, gold and silver are not good to eat. Braudel knows all this, too.

As an example of mercantilist foolishness, he tells us that in 1703, toward the start of the War of the Spanish Succession, the English were advised to send “grain, manufactured products and other goods” from home to their troops fighting in the Low Countries. They could have bought these supplies easily and presumably more cheaply on the Continent, but the government was” obsessed by the fear of losing its metal reserves.” Any follower of Adam Smith or David Ricardo can see that this policy led England to waste real wealth (usable goods) and save nominal wealth (unusable metal).

In the world of theory, the mercantilist passion for a favorable balance of trade seems indefensible. It is surely more sensible to collect what you can use than to squirrel away what is of little or no use in bank vaults. But as Braudel reads the historical record of the actual world, he is forced to recognize that the mercantilist policy was in fact successful. “In any case,” he writes, “every time we have to deal with a comparatively advanced economy, its trade balance is in surplus as a general rule.” Flying in the face of classical economics, the more advanced economies exported usable goods and imported gold and silver.

The classical theory fails here (as elsewhere) because it is both ahistorical and asocial. It describes an instantaneous slice of a world without time; and it concerns things, like the GNP, not people, like you and me. Criticism of the English policy of 1703 silently assumes that purchasing war materiel overseas would have had no effect on English farms and factories. The assumption is that the goods purchased on the Continent would have been added to those produced at home, and that the English wealth would have risen accordingly. But in the real world, English farmers, deprived of part of their market, would have cut back production expenses (which is another name for employment) even if production stayed high for a time. And English manufacturers of soldier suits and the like would surely not have continued producing them if the government didn’t buy them. Their employment, too, would have fallen. These drops in employment would have meant a decline in the English standard of living. The mercantilist policy preserved that standard of living (such as it was); the classical theory would have reduced it.

Carlo M. Cipolla, in Before the Industrial Revolution (a marvelous book that covers roughly the same ground as Braudel in about one-tenth the space), has an excellently apposite quotation that dramatizes the failure of the classical theory. In 1675 one Alfonso Nunez de Castro wrote, “Let London manufacture those fabrics of hers to her heart’s content; Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocades; Italy and Flanders their linens, so long as our capital can enjoy them; the only thing it proves is that all countries train journeymen for Madrid and that Madrid is the queen of parliaments, for all the world serves her and she serves nobody.” As it turned out, for lack of trained journeymen Spain fell into a slough of stagnation it has yet to escape three centuries later.

In the infrequently noticed catch-all Chapter 23 of The General Theory of Employment,  Interest and Money, John Maynard Keynes includes some “Notes on Mercantilism … ” He observes that a favorable balance of trade, by bringing in gold and silver, increased a country’s money supply, which forced down the interest rate (Federal Reserve Board  please note), which stimulated investment.

Let’s carry the argument a step further. Investment is not stimulated rationally, that is – for its own sake. From the point of view of the investor, the purpose of investment is to produce goods that are in demand. From the point of view of the nation, the purpose of investment is to provide employment for its citizens, and to produce things that are wanted. Since employed citizens are able to make purchases create demand – these two purposes can work together, though they do not necessarily do so.

In the early modern world of the mercantilists, the interest rate was, as Keynes said, held down indirectly (and very possibly unintentionally) by fostering a favorable balance of trade. To have a favorable balance of trade, a country must export more goods than it imports. To export more goods, it must produce more goods. To produce more goods, it must employ more people. The secret of mercantilist success lies in the increased employment of labor.

For the power of labor is very great. Even putting to one side the facts that capital is the result of past labor, and that natural resources can be exploited only by labor, labor power is our ultimate power. The laziest, least competent, least efficiently applied labor will today produce far more than it needs to sustain itself. What Marx called surplus labor is exponentially greater than the 11.1 per cent his admittedly arbitrary calculations yielded. Hesiod (eighth century B.C.) was closer to the mark when he wrote in Works and Days: “From men the source of life has been hidden well/Else you would lightly do enough work in a day/To keep you the rest of the year while you lounged at play.”

Less poetically, we know that agriculture now produces more food than we should or can eat, more than enough natural fibers to clothe us, more than enough lumber to house us, with less than 3 per cent of our labor force (or less than 1.5 per cent of our population). Since even at our present Reaganite shabbiest, we allow almost no one to fall through the safety net and actually starve or freeze to death, it is plain that we do not need additional workers to provide for their own subsistence. Therefore, the output of every previously unemployed worker we manage to put to work will raise our standard of living a bit more above subsistence. And we can do this without importing gold or silver to control the interest rate. We simply have to get some sense into the Federal Reserve Board.

READING Braudel on mercantilism in the War of the Spanish Succession, I was struck by the parallels with our current business “recovery.” As I remarked in this space a year ago (” All You Need to Know about the Deficit,” NL, October 29, 1984), military spending increases aggregate demand, which increases employment. Any spending increases demand, for the simple reason that spending is demand. There are limits to some sorts of spending. Keynes cites the uselessness of two railways from London to York. On a more personal level, once you have a television set in every room of your house, your demand for television sets tends to subside. But military spending (because it does not and cannot face a test of profitability or indeed usefulness) has the political advantage of being supported by conservatives who insist the rest of the government be “businesslike.”

As far as the GNP is concerned, it doesn’t make much difference what the government spends its money on. The spending increases employment even when the newly employed people produce battle tanks that won’t run on rough terrain and fighting planes too complicated to service in the field.

The increase in the standard of living would of course be greater if the newly employed people rehabilitated highways and subway systems instead of battleships that were militarily useless two generations ago. It would be greater if the newly employed people built housing here on earth instead of stations in space. It would be greater if the newly employed people were cleaning up existing toxic wastes instead of producing new poison gases that will have to be burned or buried. Yet no matter how useless the things they produce, the newly employed people earn newly augmented incomes that they spend (up to a point), thereby increasing their own standard of living. And the addition of their new demand to the previous aggregate demand calls forth still further employment, and so on.

This outcome can be dramatized by asking what would happen if our present peacetime military budget were cut back, not to a rational peacetime level, but merely to the level of 10 years ago, when we were still winding down a war in Vietnam. The military budget would then be reduced by approximately $200 billion (or roughly the size of the deficit everyone fusses about). If such a reduction were not immediately offset by an increase in domestic spending, can anyone doubt the economy would forthwith crash into a depression that would make the Nixon-Ford recession of 1975 and the Reagan- Volcker depression of 1981-82 seem like paradise?

A deficit, in short, has the same salutary effect on the GNP as a favorable balance of trade; and gold and silver have nothing to do with it. As it happens, we are giving mercantilist theory another and more direct test. Our strong dollar, which is a euphemism for an unfavorable balance of trade, enables some of us to buy Pakistani sports shirts and Japanese automobiles at bargain prices. These bargains for some people, however, cause unemployment and underemployment for many people in North Carolina and New York and Michigan and ultimately throughout the nation. Critics of the mercantilist theory of a favorable balance of trade should ask themselves why an unfavorable balance has such unhappy consequences. I’ll give them a hint: We perversely distribute the benefits of our economy in a way that additionally punishes those who lose their jobs by denying them income to demand the bargains.

The New Leader

Originally published September 9, 1985


As I WRITE, the great deficit debate is out of the headlines, and it may still be out when you read this. The news of the fall season is tax reform, and a determined effort is being made to separate the two issues. In a more rational world, one might expect taxes and the deficit to be intimately related, but in the lame-duck Presidency of Ronald Reagan the sloganeering calls for a “revenue-neutral” tax bill. Though convinced that the Republic hangs in the balance because the deficit doesn’t, even the Senate Majority Leader, Bob Dole of Kansas (perhaps reflecting on what happened last November to Fritz Mondale’s campaign for fiscal responsibility), is muting his austere determination to raise some taxes somehow.

It would be a mistake to consider the deficit merely a nuisance. It will continue to pop in and out of the news because it has us in what Gregory Bateson termed a “double bind.” Our situation is not so obvious as the classic example (“Have you stopped beating your wife?”); nonetheless, it is binding. If we do something effective about the deficit (such as raising taxes or cutting expenses across the board), we will almost certainly turn the current” growth correction” into a full-fledged depression. If we don’t do anything effective about the deficit, we will almost certainly induce a rate of inflation (and, probably, stagflation) far worse than anything we have yet experienced. That, in turn, simply because of our size, will place the entire free world at risk, not to mention those nations that former UN Ambassador Jeane Kirkpatrick taught us to view as authoritarian but not totalitarian.

Bateson developed the idea of the double bind in connection with his studies of schizophrenia. The pathology takes three recognized forms: paranoia (e.g., Secretary of Defense Caspar Weinberger’s and the Russians’ suspicions of each other), hebephrenia (endless absurd chatter, such as President Reagan’s call for a constitutional amendment mandating a balanced budget), and catatonia. The last has two states: agitated

(New York Republican Congressman Jack Kemp’s manic insistence that there’s no taxes like no taxes), and stuporous (Vice President George Bush’s silences on his best days). The periodic alternation of paranoia, hebephrenia and catatonia is what causes the deficit to be a media event one day and a nonevent the next. But the pathology remains.

It must be recognized that we are in a true double bind. We are damned whether we do or not. One has only to listen carefully to the pronouncements of Federal Reserve Board Chairman Paul Volcker to appreciate how hopeless our situation is. To be sure, Volcker continues to voice confidence that we will pull through. He bases his confidence on Congress’ success in cutting $50 billion from the 1986 budget. This is what he asked for as a signal to the financial markets (a.k.a. the speculators of the Wall Streets around the world) that we are serious about putting our house in order. He got his $50 billion plus a bit more, depending on whether you believe Bob Dole or House Speaker Tip O’Neill of Massachusetts. But now in September it is expected that the 1986 deficit, with the cuts, may be greater than it was predicted to be last January, without the cuts. Nevertheless, Volcker remains cautiously hopeful.

What can a rational man or woman make of that? I think you and I have two choices: We can head for the storm cellar because disaster is about to strike, or we can conclude that Volcker and the rest were in some way mistaken in their understanding of the significance of the deficit. Speaking for myself, I will confess that I am at least taking the precaution of scouting my route to the storm cellar. I’m allowing myself the dim prospect, though, that the almost universal misunderstanding of our distressing situation may suggest a way out of the double bind.

A double bind cannot be broken so long as you wrestle with it on its own terms. As Paul Watzlawick, Janet Beavin and Don Jackson put it in their classic Pragmatics of Human Communication, you have “to step outside the frame and thus dissolve the paradox by commenting on, that is, metacommunicating about, it.” Let us, therefore, do a little commenting on – or metacommunicating about – our predicament and the reasoning behind it.

Judging from the actions of our leaders and the dicta of our opinion makers, it would appear that our economy has three points of reference. One is a high gross national product, the second is a low rate of inflation, and the third is a high rate of saving. It would appear, further, that the rate of saving is understood to control the other two. On the first point, saving is assumed to lead to investment, which leads to increased production. On the second point, whatever is saved is seen to be withheld from consumption, thereby decreasing the number of dollars chasing whatever goods are produced. Hence the rate of saving is, as the mathematicians say, the independent variable: save that and you save all.

It will be observed that practically everyone who counts (with the possible exception of Tip O’Neill) believes this. The spectrum of believers stretches from Jack Kemp and his supply-siders, through Bob Dole and the sound money men, through Paul Volcker and the bankers of every size and shape, through the surviving New Frontiersmen and their investment tax credits, to Gary Hart and the New Industrial Policy of the Atari Democrats. And over them all arches the rainbow of President Reagan’s smile.

Let’s metacommunicate first about the rate of saving, that allegedly independent variable that is supposed to make the system go. We have, constant readers will remember, commented on this before, prophesying in “Why Deficits Matter” (NL, March 8, 1982) that the Kemp- Roth tax cuts and the associated accelerated depreciation allowances would not have the intended effect of increasing the rate of saving. Then, in “The Savings Bust” (NL, October 17, 1983), we diffidently called attention to the fact that our prophecy had come true. Now, as Coach Lombardi used to say, let’s get down to basics.

To illustrate the importance of saving, standard textbooks note that someone has to save seed corn if we are to have a crop to eat next year. This is surely true, and it seems to make saving prior to production. It is true as well that someone has to have harvested this year’s crop if we’re to have any seed to save, and that makes production prior to saving. It’s also true that no one would have planted this year’s crop (farming being uncompromisingly hard work) if we weren’t experiencing diminishing returns from hunting and gathering, so that someone could anticipate a strong demand for a substitute food. And anthropologists show that the demand was increased by an increase in population resulting from our prior success at hunting and gathering.

We have here four truths, independently valid, and they seem to be arranged in a straightforward cause-and-effect order. Accordingly, it would follow that if we want to grow more vegetables, we’d better stimulate hunting and gathering.  No one, however, is likely to see much sense in that, except perhaps the National Rifle Association[1]. Where’s the fallacy?

IN FACT, there are several fallacies here. For our purposes the most important lies in the assumption that living systems – systems composed of people – operate in the same way as the systems of classical physics (see “On Political Arithmetic,” NL, April 4, 1983). The idea of independent and dependent variables – a supremely powerful idea in its own domain – simply does not apply. With living systems you cannot learn much from experiments where you vary one factor, holding the others unchanged, and observe the outcome. The rate of saving depends on the GNP, as much as the other way around; moreover, a high rate of saving often depresses the GNP, while a rising rate of inflation may have a favorable effect on the GNP and on the rate of saving, too. But in other times and places it may not. Everything depends on the historical conditions of an actual place and time.

In a 1928 article that was a significant precursor of Keynes’ General Theory, Professor Allyn A. Young argued that in order to understand economic progress, “What is required is that industrial operations be seen as an interrelated whole.” (Or, in the terminology of the communications theorists, the economy is a system of interrelated feedback loops.)

In this connection Young made an observation that would have saved us all a lot of grief if it had been taken to heart by the late Mohammed Reza Pahlevi (and by Messrs. Richard Nixon and Jimmy Carter, who backed him, and George Shultz and David Rockefeller, who did business with him). “An industrial dictator,” Young wrote, “with foresight and knowledge, could hasten the pace somewhat, but he could not achieve an Aladdin-like transformation of a country’s industry so as to reap the fruits of a half-century’s ordinary progress in a few years.”

Although Young concluded that Adam Smith was right in emphasizing the importance of the division of labor, he cautioned: “The division of labor depends on the extent of the market, but the extent of the market also depends on the division of labor.” In short, in a living system it is nonsense to wonder whether the chicken comes before the egg.

What is not nonsense is to be concerned with people. All three of the points that define our double bind – the GNP, the rate of inflation, and the rate of saving – are measures of things. To break out of our double bind, we will have to shift our attention to measures of people: the number of unemployed; the number of men, women and children living below the poverty level; the spread of living conditions between the poor and the rich. If we did this, we would take a vastly different attitude toward Social Security, Medicaid, Medicare, and all the now-denigrated hopes of the New Deal, the Fair Deal and the Great Society. We would even find that we could afford these decencies once we abandoned the notion of a revenue-neutral tax law that leaves unchanged the taxes paid by the various levels of our society.

Of course, it may be nearly impossible for us to make the necessary moves to break or even weaken the double bind. That is a political problem, and a public opinion problem, and it would be pretty to think that our politicians and our opinion makers will rise to the challenge. Yet, as matters stand at the moment, they are, with a few exceptions, part of the problem.

The New Leader

[1] In the original it was the “American Rifle Association.”  The editor has decided this was an error.

Originally published July 1, 1985

INTHE PREFACE to their best seller Free to Choose, Milton and Rose Friedman write, “We are still free as a people to choose whether we shall continue speeding down the ‘road to serfdom,’ as Friedrich Hayek entitled his profound and influential book …. ” Since Hayek’s book was published 40 years ago, it would seem that we have been “speeding” down that road at a remarkably sedate pace. I must confess that praise like the Friedmans’ put me off reading The Road to Serfdom until now.

That was a mistake. Hayek is well worth reading, both for what he says and for what he doesn’t say. Looking first at the latter, we find that he is far from advocating the sort of libertarian – that is, practically nonexistent state the Friedmans envisage. The Friedmans share with Marx a longing for the state to wither away, but Hayek is having none of that; he merely wants the state to act responsibly.

He is, for example, willing to consider “restricting the allowed methods of production, so long as these restrictions affect all potential producers equally and are not used as an indirect way of controlling prices and quantities …. ” He also believes that “To prohibit the use of certain poisonous substances or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition.” Hayek would thus not be sympathetic with the notion, advanced by both neoliberals and neoconservatives, that factories should be allowed to pollute as they please, so long as they pay a fee for the privilege.

Nor would he approve of the merger movement and the consequent concentration of power in sprawling conglomerates. He disputes, without naming him, his fellow countryman Joseph A. Schumpeter (who is at present being touted by neoconservatives as a foil to Keynes), rejecting “the myth … that … competition is spontaneously eliminated by technological changes.” In addition, Hayek quotes with favor from the New Deal report of the Temporary National Economic Committee: “‘The superior efficiency of large establishments has not been demonstrated … monopoly is frequently the product of factors other than the lower costs of greater size. It is attained by collusive agreement and promoted by public policies. When these agreements are invalidated and when these policies are reversed, competitive conditions can be restored.'”

In another place Hayek says, “It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us.” He is against monopoly as well as against the “monster state,” and in his last chapter, he writes (anticipating E.F. Schumacher), “It is no accident that on the whole there was more beauty and decency to be found in the life of the small peoples.”

Though Hayek’s main thesis is objection to a comprehensively planned economy, he recognizes that “the case for the state’s helping to organize a comprehensive system of social insurance is very strong.” He holds, too, that the state should be concerned in “the extremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them.” And strong as he is in his insistence on private property, he thinks that the case for inheritance may not be supported with “the same necessity.”

I have quoted Hayek extensively because his reputation is that of an extreme, devil-may-care, laissez-faire conservative. His book was actually greeted with qualified praise by Keynes, as Robert Heilbroner tells us in The Worldly Philosophers; but endorsements like the Friedmans’ have established his reactionary” image.” Much of Hayek’s later work, however (e.g., his attack on John Kenneth Galbraith; see” Rereading Galbraith,” NL, June 13,1983), does exhibit a hardening conservatism.

This is not, I think, an instance of the notorious syndrome whereby flaming youths turn into reactionary elders (“When old age came over them / With all its aches and qualms, / King Solomon wrote the Proverbs / And King David wrote the Psalms”[1]). Rather, it is an instance of a common, albeit little noticed, progression whereby a great leader becomes misled by his followers. The change is not always in a conservative direction. Marx became more violent and conspiratorial at least in part because his most vocal supporters were conspiratorial. John Dewey, whose Human Nature and Conduct showed strong elements of philosophical idealism, became famous for the contrary theory of instrumentalism that appealed to his admirers.

I have also seen such changes occur at less rarefied levels. One of the most delightful books I ever published was Little Britches (I was never good at titles) by Ralph Moody. It was the first of several memoirs of family life. No one reading the series would guess Little Britches was begun as a polemic against the Social Security system. But Ralph’s readers – starting with those in an extension writing course in Berkeley-praised him for the warmth of his characterizations, and he became more interested in people and less in abstract theory.

THERE ARE other interesting themes in The Road to Serfdom.  One of these appears in his analysis of the failure of the Social Democrats to stop Hitler. We have heard much of the trahison[2] of the Communists; but Hayek argues that the socialist emphasis on comprehensive planning predisposed the German electorate in favor of grandiose schemes like Hitler’s. If he is right, this fact should give pause to our Atari Democrats, who want to set up a committee to decide which industries we should foster and which we should abandon and in general to plan how to use our resources. As Robert Lekachman has pointed out, such committees are more likely to be run by big business than by idealistic planners.

The Social Democrats were further weakened, Hayek says, by a split that appeared in the labor movement. For various reasons, certain unions and certain categories of workers were able to achieve remarkable economic gains, while others were left far behind. The laggers were understandably disillusioned about the Social Democrats and became ready to acquiesce in, if not support, the National Socialist program.

“To them,” Hayek writes, “and not without some justification, the more prosperous sections of the labor movement seemed to belong to the exploiting rather than to the exploited class.”

This is a problem that American labor leaders have yet to solve. The split in our labor movement was opened, as I suggested last year (“Voodoo on the Primary Trail,” NL, April 30, 1984) by the Vietnam War. But it has been astutely widened by apologists for big business and by the just- folks demeanor of President Reagan, and deepened by the misguided anti-labor Presidential campaign of Gary Hart.

It is said, by the way, that Hart appealed especially to the so-called Yuppies- young, upwardly mobile professionals. I venture to think that Hayek’s analysis of what happened in Germany is closer to what is happening here. He writes that “no single economic factor has contributed more to help [the Nazis] than the envy of the unsuccessful professional man, the university-trained engineer or lawyer, and of the ‘white-collar proletariat’ in general for the … members of the strongest trade unions whose income was many times theirs.” I suggest that the “white-collar proletariat,” hitherto most visible in countries like India, will become a growing and destabilizing factor in our public life as computerization and conglomeration steadily reduce the need for “middle management.”

Another theme of current interest in Hayek’s book is his concern over the tendency of legislatures to turn hard questions over to independent public authorities. I suppose he would therefore welcome a good deal of the current deregulation, but he would appear not to have been a knee-jerk deregulator. Hayek’s concern is also a central topic in Theodore J. Lowi‘s widely read The End of Liberalism. Both men describe the irresponsibility that results from the delegation of undefined powers. Hayek emphasizes the dictatorial arrogance that ensues; Lowi notes (as does Lekachman in the comment cited above) that ill defined regulatory commissions tend to be co-opted by the industries they regulate. A different example of irresponsible delegation is the willingness of Congress to give the President power to commit military forces to action, and indeed to launch a nuclear strike, without carefully defining limits to that power.

In the same way, control over our money, and hence over our economy as a whole, has been surrendered to the Federal Reserve Board. I regret to have to admit that three Democratic Presidents played crucial roles in the surrender: Woodrow Wilson, who admitted he knew nothing about banking, signed the Federal Reserve Act. Harry Truman allowed his Secretary of the Treasury to dissolve the agreement with the Federal Reserve that had held the prime interest rate down to 1.5 per cent during the War. Jimmy Carter appointed Paul Volcker chairman of the Fed.

How all this came about is told in fascinating and chilling detail by F.W. Maisel in a little book entitled Great American Ripoff (Condido Press, Box27551,San Diego 92128). Maisel may upset the sensitive by his espousal of a conspiracy theory of American banking; nevertheless, it’s hard to fault his facts, and I’m not even prepared to say he’s wrong about the conspiracy.

Should you feel that the bankers running the Federal Reserve, far from being conspirators, are idealistic public servants who have, in Hayek’s phrase, “devoted their lives to a single task,” there is still reason to be wary of them, for “From the saintly and single-minded idealist to the fanatic is often but a step.” Single-minded conservatives please copy.

The New Leader

[1] A poem by James Ball Naylor

[2] French for “betrayal” or “treason.”

Originally published May 6, 1985

TO WRITE THIS I had to turn off a television show featuring a rock star, eyes closed in rapture or agony or something, moaning an expression of his solidarity with the people starving to death in Africa. I should-and shall-leave the task of commenting on TV performances to Marvin Kitman. I  will even resist the temptation of recalling the Stan Freberg skit of a few years ago in which he asks everyone to stop at a certain hour of a certain day and tap dance for peace.

There is no question that our fellow citizens’ capacity for pity and terror has been stirred by the pictures they have seen of the starvation in sub-Saharan Africa. There is no question that they want to help in some way. It would be pretty to think of them beginning by wondering how the tragedy came about. For anyone ready to take that necessary initial step there is a new book available called Debt Trap: Rethinking the Logic of Development. Yes, I am afraid that to understand starvation in Africa you must start with money and banking, because they are the roots of the problem.

The author of Debt Trap is Richard Lombardi, a former vice president of the First National Bank of Chicago. His office was in Paris, a nice place to have an office, but he was in charge of lending in both French-speaking and English speaking Africa, and he traveled widely and steadily in those countries. What he saw troubled him deeply, for he is an intelligent and compassionate man. To think about the situation in greater depth he took a leave of absence and became a research associate and Thursday Fellow in Georgetown University’s School of Foreign Service. The result is his important and enlightening work.

Lombardi lays out the connection of starvation with banking roughly as follows: People starve because they cannot get food. They cannot get food because they either do not grow it or have no means of securing it from those who do grow it. In Africa they do not grow so much food as they used to, since many farmers have moved to the city and many more have switched to crops for export, like sugar and coffee and cola nuts. Their governments have induced them to switch to export crops to earn foreign exchange. The governments need foreign exchange to try (unsuccessfully) to meet the interest payments on their foreign loans.

Why do they have foreign loans? It comes down to Gertrude Stein‘s answer when she was asked why she had written Tender Buttons: “Why not?” As Lombardi tells it, the world’s big bankers bought the oil sheiks’ OPEC winnings on the Eurodollar market and then jet-setted around the Third World peddling the money. The bankers called this recycling; actually, it was salesmanship.

The bankers happened to launch their maneuver at about the time that the Third World nations, almost without exception, were in trouble with the World Bank and the International Monetary Fund (IMF). The bankers could offer assistance because they had money and also because they had a new vision-not of banking, but of what they came to describe as “world financial enterprise.” Lombardi credits (if that is the right word) this vision to Walter Wriston, who transmogrified the First National City Bank of New York into Citicorp in 1967. At any rate, the “Citicorp Concept” was reverently discussed in the business press and widely emulated by David Rockefeller‘s Chase Manhattan and the rest. The hairy details I’ll leave you to read in Lombardi’s book, only noting Wriston’s fatuous dictum, “But a country does not go bankrupt.”

The stage was now set. The Third World needed (or wanted) money; the bankers had it (or knew where they could get it). And the bankers had convinced themselves that all Third World loans were risk free. What happened? In 1960, Lombardi tells us, Third World debt totaled $7.6 billion. Today, a quarter of a century later, it is nearly $1 ,000 billion that is, $1 trillion, or an increase of roughly 12,000 per cent. The sum is not owed to the banks alone. UN agencies are heavily committed, as are our Export-Import Bank and its counterparts in other First World nations.

All of this occurred because those who count in both the First World and the Third World have been acting out what Lombardi (using an unlovely but fashionable word) terms a “paradigm.” Two components of the paradigm we have discussed here before: Ricardo’s Law of Comparative Advantage (How Our Sun May Rise Again,” NL, July 12-26, 1982), and the notion that a growing GNP cures all ills (“Sinking By the Numbers,” NL, May 2, 1983). A third principal component, perhaps not now so prominent as the others, is the theory of Walt Rostow (Lombardi erroneously calls him Walter) that developing societies invariably pass through five stages: “the traditional society, the preconditions for takeoff, the takeoff, the drive to maturity, and the age of high mass consumption.” A dream world.

In the grip of this paradigm, everyone began pushing the Third World to modernize and industrialize. The Export – Import Bank and its ilk underwrote sales of steel mills and sugar refineries and atomic energy plants. The national airlines of countries of fewer than a half million souls, most of them tribesmen with neither the need nor the possibility of flying anywhere, bought fleets of Boeing 747 jumbo jets. The World Bank lent money at low rates for roads and airports and dams and other infrastructure. The UN Development Decades favored an urban focus, precipitating a population shift from farm to city. The demand for agricultural exports accelerated the shift, because export crops tend to be more efficiently handled by agribusiness than by customary methods.

Under such prodding the Third World’s GNP rose even faster than the Development Decades had hoped. But Third World debt rose faster yet. This outcome, which should be a puzzle to true believers in the GNP, threatened to swamp the UN agencies. The IMF (then as now) counseled austerity, meaning cut imports (or, more frankly, reduce your standard of living) and expand exports (done by lowering wages and, again, your standard of living).

At that point in time (as Watergate taught us to say) the Citicorp Concept flashed across the horizon. Gone was the old-fashioned bankerly attempt to evaluate the business prospects of each enterprise applying for a loan. In its place was the actuarial notion that lots of risks are safer than a few. Risk itself disappeared because countries did not go bankrupt. Recycling could go on merrily as long as Third World countries could be induced to borrow money at a point or two over what the bankers had to pay for it on the Eurodollar market.

It turned out not to be difficult to induce Third World countries to borrow, what with everyone advising them to do so and especially with fewer and fewer questions asked. Lombardi has some horror stories to relate. A billion dollar steel mill in Nigeria is too sophisticated to use the low-grade ore it was originally intended for. Zaire has the longest transmission line in the world, and no particular need for it at either end. A loan to Costa Rica was underwritten by a banking syndicate on the basis of a news article in Time.

At least some of the borrowers were foolish like fox terriers. They didn’t bother to buy so much as a new presidential palace with the money, instead sending it straight to numbered bank accounts in friendly Switzerland. Periodically, statesmen who had that kind of foresight were overthrown, and their successors opened up their own numbered accounts. No one knows how many billions thus disappeared. The critical fact, however, is that the bankers lending the money didn’t care; they lent the money to countries, not to individuals, and countries don’t go bankrupt, even when they are stolen blind.

Of course, countries whose debts have increased 12,000 per cent in 25 years do usually have trouble meeting even the interest payments. So the IMP urges austerity; food is in short supply; starvation looms-chronic starvation, not the sort that results from a natural disaster.

LOMBARDI paints the unhappy picture with great fervor. He emphasizes that the Third World’s troubles are not merely those of an exploding population. The population problem certainly plays a role, but in the improbable event of zero population growth troubles would remain. The key is breaking that paradigm.

Lombardi suggests ways this can be done. He also shows the trouble the paradigm has caused and will cause in the First World-that is, to you and me. For when bankers lend money to Brazil to buy a steel mill or to Tunisia to manufacture blue jeans or to Taiwan to keypunch data into American computers via satellite, Americans lose their jobs.

The apostles of the Law of Comparative Advantage (a.k.a. “free trade”) counter that building the Brazilian steel mill and the Tunisian garment factory and the Taiwanese data-processing equipment makes jobs for Americans, and to a degree they are right. An hour or two at, say, John F. Kennedy Airport in New York will convince you that Boeing has sold (with Export-Import Bank help) an awful lot of747s to foreign airlines you never dreamed existed. Still, unless we are prepared to give our airplanes and steel mills and wheat and corn away, someone has to pay for them-that is, the loans the bankers have made for us have to be paid off. If they can’t be paid off, our friendly bankers will surely find ways to transfer the bad debts to us taxpayers. And if they are paid off, Third World austerity programs will throw Americans out of work. “When bank credit to Mexico stopped in 1982,” Lombardi observes tellingly, “more jobs were lost in the following six months in the United States than in the three previous years of a depressed U.S. auto industry.”

Banking, in short, is not an innocent enterprise. It can cause starvation in the Sudan and unemployment in Cincinnati. Faulty practice flows from faulty theory. Faulty banking theory flows from faulty reading of history. Lombardi devotes several chapters to this question, and though I don’t always agree with him (in particular, I think he misunderstands evolution), I certainly applaud his effort. I therefore earnestly commend his book to your attention.

A useful supplement to the foregoing is The Dangers of “Free Trade, a new booklet by Professor John M. Culbertson of the University of Wisconsin-Madison. Culbertson details the mischief caused in both the Third and First Worlds by the Law of Comparative Advantage, then suggests new trade policies suited to the actual situation of the actual world we live in. He makes a strong argument for conducting international trade between nations (rather than between private citizens or firms), and he makes a persuasive case for bilateralism (showing that he’s not afraid of unconventional thoughts).

The New Leader

Originally published March 25, 1985

IN MAKING the case “For a Labor Theory of Right” (NL, February 11-25), I remarked that “if you review all the problems of all the brands of economics, you will find that invariably the proposed solutions embrace or lead to some overt or covert control or depression of labor costs.” There is one fundamental reason for this, and two secondary reasons.

The fundamental reason is that anything wrong with an economic system shows up in the relation of price to values. If prices and values were identical, or roughly identical, the system would be perfect. Nobody would have a beef. Disordered prices are the sign of trouble, and life has troubles.

The first secondary reason is that the cost of labor is the largest component of the price of almost everything. For the economy as a whole, the cost comes to somewhere between 80-85 per cent of the gross domestic product. This does not mean that labor is getting a fair shake (quite the contrary), but it does mean that should you have a problem with prices, such as inflation or the need to close an international trade gap, labor cost is the obvious initial place to look for a solution.

The second secondary reason is that the most variable component of every price is profit. As S. Jay Levy and David A. Levy show in Profits and the Future of American Society, profit is essential for any enterprise, whether under a communist or a capitalist system. But profit varies, if only because sales are unpredictable. Wages and salaries are contracted for and can be fixed; rent and interest are contracted for and can be fixed, Profits are not contracted for and cannot be controlled. Consequently, by putting a collar on labor costs to hold down inflation, or for whatever reason, you are necessarily setting up a situation in which profits may be very high indeed, and stockholders will make a killing.

Can’t profits be controlled by taxation? Well, up to a point. I am reminded, however, of the 85 per cent excess profits tax of World War II. Each year at Thanksgiving time, book publishers began to see what their profits for the year would be (other industries pretend to be more farsighted; book publishing is inescapably myopic). If things looked good, they scurried around in search of ways to spend the profits before the tax collector got them. They couldn’t give unusual raises or bonuses because of wartime controls. They couldn’t invest in fancier offices because of a lack of materials and a lack of time. There was one thing they could do-advertise. As a result, the New York Times and the New York Herald Tribune and all the other papers that then existed bulged with book advertising in December. What the newspapers did with their profits I have no idea.

You may be tempted to think that the extra advertising sold more books and therefore increased profits and taxes. If so, you will please stay after class and I’ll try to disillusion you about book advertising. For the moment, you may take my word for it that this was institutional advertising. The aim was to show the publishers’ flags to authors and their agents and perhaps sign up some good books for future years. Because of the excess profits tax, the institutional advertising cost only 15 cents on the dollar, and at the worst was a cheap way for publishers to massage their own vanity as well as that of their authors.

Similar tricks can be played with profits in any industry at any time. Plant and equipment can be expanded or renovated on an accelerated or more ambitious schedule. Offices can be moved or redecorated. Last year’s marvelous typewriters can be replaced by this year’s word-processing wonders. Expense accounts can be relaxed. Executive limousines can be stretched a few inches longer.

These effects are like those of the present depreciation law, whereby General Dynamics and others pay dividends in the billions and increase their net worth astronomically, yet pay negative income taxes. Profits can always be sheltered, and the benefits will always accrue to the owners of the companies.

Now let me take a different tack. As Perry Mason used to say, I’ll connect it up. I suggest to you that the kernel of truth in Marx’s class theory had nothing to do with dialectics or materialism, which are (forgive the color) red herrings.

Today’s classes have come into existence precisely because they have no material base. In fact, they have no base at all; they are committed to nothing. The structure of the modern corporation and modern financial markets has liquefied – almost vaporized – loyalty. Ownership flows mindlessly hither and thither in search of immediate profits. Even the owners of old and distinguished publishing houses like Scribner’s can see no virtue in maintaining their firm’s existence. The owners of individualistic magazines like the New Yorker can see no virtue in maintaining their publication’s independence. Stockholders in corporations deny that there is any intrinsic virtue in owning the enterprise. Modern finance has created a class that is a class because it is without virtue.

A class does not exist (as Marx noted) except in opposition to another class and the owning class has its foil in the working class. Since the former proclaims its lack of virtue, it is tempting to infer that the latter is virtuous; but it, too, because of the structure of our corporations, is unable to risk commitment.

Although Marx was right enough in seeking a resolution of class conflict, the Soviets have shown even old-line enthusiasts that state ownership merely breeds what Milovan Djilas called the New Class. In socialist but non-Marxist Britain, five years before the recent bruising strikes, feisty Lord Shinwell said: “I nationalized the coal mines, but do you think I’m proud of that? No, not at all. The wages are better and the safety conditions are better, but you’ve still got the same old class divisions. We got rid of the coal owners and replaced them with bureaucrats. Despite all the fine and lovely idealism, it went wrong.”

On the other side, conservatives are right enough in trying to preserve (or create) opportunities for personal endeavor and innovation. Unfortunately, as the modern corporation has developed, the incentives reward those who merely own money. They do little or nothing to inspire those who do the actual work of the economy.

HOW CAN the valid aims of the communists and the conservatives be reconciled and realized? The answer brings me to another argument for some form of employee ownership. Last time out I urged the justice of what I call the Labor Theory of Right. Here I want to urge the social efficiency of that theory. It is stating the obvious to say that if you want to control corporations in any way for any reason (I can think of many reasons), you will remove one major source of trouble if you are able to heal the split between capital and labor. That healing can be approached through employee ownership, and, I think, only thus.

Profit sharing has been touted as a method of doing the same thing. It may be a step in the right direction. But profits can be sheltered; then there is nothing to share, and labor (including management) is justified in crying foul.

The profit-sharing scheme put forward by Martin L. Weitzman in his book The Share Economy (the “Best Idea Since Keynes” proclaimed the headline of a New York Times editorial) contemplates labor negotiations settling on relatively low hourly rates plus (for each company’s labor force as a whole) a percentage of profits or of revenues (the latter would eliminate the sheltering problem). In accordance with this scheme, the marginal cost of hiring a worker would always be below the average cost, so (Weitzman contends) it would be in the interest of every company to hire as many people as possible. The expanding companies would in this fashion achieve economies of scale, which would allow lower prices, which would increase sales, which would maintain the economy in a fully employed and inflation free boom.

You will be persuaded by this reasoning if you believe that economics is a branch of mathematics. Then you will believe that economies of scale are always achievable and, moreover, always proportionate to the size of the work force. You will believe that the demand for any product always rises in smooth proportion to a decreasing price. You will believe with Jean-Baptiste Say, of the early 19th century, and Congressman Jack Kemp (R.-N.Y.) of today, that you can always sell whatever you make. You will believe that John Maynard Keynes was wrong in noting that most people, for various reasons, will not spend or invest all their money, and that their clear preference for liquidity – even if there were no other reason would render Say’s Law inoperable. (See “The Savings Bust,” NL, October 17, 1983.)

Beyond the foregoing (and additional considerations that can be found in the current issue of the Journal of Post Keynesian Economics), it should be apparent that, with the best will in the world, Weitzman’s scheme is yet another that solves the ills of the world at the expense of the working man and woman. Indeed, he considers labor a commodity, albeit one he has great respect for. Capital gains still go to those who do no work. The professor unwittingly gives the game away when he remarks that his plan is a sort of share-cropping. Against his handful of cases of allegedly beneficial share-cropping, any student of agriculture could cite volumes of disasters.

For my part, I am also made uneasy by Weitzman’s assurance that his scheme would, after a little tinkering, automatically eliminate our problems. I don’t know whether Milton Friedman is right in saying there’s no such thing as a free lunch, but I am quite sure that there’s no such thing as perpetual motion.

The New Leader

Originally published February 11, 1985










I ENDED my previous column (“The Faith of Fiduciaries,” NL, December 24, 1984) with the scarcely original observation that the stockholders of public corporations, who are the legal owners, are neither willing nor able to accept responsibility for what the corporation does, while the workers (including the managers), who actually do whatever the corporation does, have no systematic reason for doing it well. No one is, or can be, loyal to anyone else. In the words of the Arab in Saroyan’ s The Time of Your Life, “No foundation. All the way down the line.”

This unhappy situation is implicit in the classical economics of the invisible hand, which is amoral at the start of its analysis and hence amoral in its conclusions. As the computer people say, “garbage in, garbage out.” More particularly, disorder is implicit in the structure of the limited liability corporation and in the impersonal liquidity of efficient securities markets. The recurrent waves of conglomerations, takeovers and greenmails have at last forced some commentators to recognize that there is a problem, though so far the proposed solutions – such as those of Peter F. Drucker in the Wall Street Journal have involved attempts to turn back the clock. Before we try to move the clock ahead, let’s take a brief backward glance of our own.

One of the hoariest problems in economics has been that posed by the Labor Theory of Value. Almost every great economist has held this theory in some form or other. The theme was announced by Adam Smith: “Labor alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.”

Smith’s successors stated the Labor Theory of Value in terms varying somewhat from his. David Ricardo contended “that it is the comparative quantity of commodities which labor will produce that determines their present or past relative value, and not the comparative quantities which are given to the laborer in exchange for his labor. … Karl Marx put it this way: “How then is the magnitude of [use value] to be measured? Plainly by the quantity of the value- creating substance, the labor, contained in the article.” John Maynard Keynes held that “the unit of labor” was “the sole physical unit which we require in our economic system.”

Labor is a curious yardstick here in that, unlike money, it can scarcely be a store of value. Nor is it easy to say exactly what labor is. The Army sometimes taught rambunctious soldiers to mind their manners by having them dig a hole six feet wide, six feet long and six feet deep, and then fill it up again. There was plenty of labor involved in the exercise, yet not much economic consequence. Maybe, then, it wasn’t really labor, but only labor in a manner of speaking, that is to say, nominally. Additional difficulties arise in trying to find a fair equation of skilled labor and unskilled labor, efficient labor and inefficient labor, mental labor and menial labor, labor paid and unpaid, earnest labor and timeserving.

A perhaps more intractable aspect of the question is the fact that, assuming one could decide on a definition, it is obvious that the amount of labor in a product has only the most tenuous connection with its economic value, or price. The matter remains unresolved even when one recognizes (as one should) that capital is produced by past labor, and that land produces nothing except by the application of labor. It might be argued that what is valuable in a product is the result of labor, past or present. What is contemptible or dangerous or illegal in a product, however, is also the result of labor, past or present. Moreover, an unwanted product sells for little or nothing, regardless of the amount or quality of labor that went into it. In short, it is impossible to establish a connection between the Labor Theory of Value and price.

Nevertheless, the impulse behind the Labor Theory of Value is sound. Although not a source of value, labor is primary: it is the source of right. I would, in fact, supplant the Labor Theory of Value with a Labor Theory of Right. The right in question is ownership of the enterprise, not (as is sometimes proposed) ownership of the products of the enterprise. The distinction is important: An enterprise is dynamic, ongoing; its products are static, finished.

Ownership of an ongoing enterprise is different from ownership of a house or a drill press or any individual thing. An enterprise uses things – fixed capital such as factories and working capital such as inventories – but is not itself a thing. Ownership of an enterprise is a bundle of rights, including the right to control policy, to receive profits (or suffer losses), and to receive capital gains or the net proceeds in case of sale or liquidation.

The right to receive profits requires a little elucidation. Profits – like the enterprise itself – are not fixed. The profit (or loss) for a period is what is left over after sales have been made and expenses have been met. The conventional factors of production are land, labor and capital; and their conventional costs are, respectively, rent, wages and interest. All of these factors (and any others you care to name) can be, and generally are, contracted for in advance; their costs can usually be budgeted. Sales, on the other hand, can only be estimated. Under the circumstances, no matter how careful and sophisticated your cost estimating, there is always something left over – the profit or loss – because the future is constitutionally unknown. If the future were known, there would be no future, and so no present. Our autonomy was secured when Pandora’s Box snapped shut.

Insisting that something is always left over, we do not have to – indeed, we cannot – know where that something comes from. In some instances it may be the result of chance or a risk well run; in others, the chance falls the opposite way. Sometimes it is the consequence of war or pestilence (favorable conditions for certain enterprises). Sometimes innovation is richly rewarded; occasionally it is cruelly rejected. Sometimes vigor achieves wonders; other times what was hoped to be vigorous action proves to have been the rushing in of fools. Whatever we may decide, after the fact, to have been the source of a particular profit, an enterprise has no way of systematizing all sources of future profits and losses. For this reason, business firms, like armies, establish reserves that can be committed against disaster or for the exploitation of breakthroughs. Uncommitted reserves are undistributed profits.

IN CLASSICAL economic theory, profits go to the entrepreneur, the one who creates the enterprise and makes it function. Frank H. Knight argued in Risks, Uncertainty, and Profit that in the modern corporation the entrepreneur is hired by the stockholders and therefore the profits go to them. But this imagined hiring is at best a legal fiction; it is not a personal action. The modern corporation, as I said in my previous column, is itself the entrepreneur. It is thus appropriate to inquire who the persons of the corporation are. Who are the people doing what the corporation does? Essentially, to return to my observation at the outset, they are the workers – skilled, unskilled, clerical, and managerial. Secondarily, they are those who provide the producers’ goods – the capital – of the corporation. Producers’ goods are of course themselves rooted in labor. Marx, a good man with a metaphor, called them “frozen labor.” Capital, no matter how defined otherwise, is saved labor.

Current labor and saved labor are involved in the act of production, so both are entitled to participate in the proceeds. The entitlement of current labor is immediate: The workers are present, and the sweat glistens on their brows. That of the owners of capital, by contrast, depends on their capital having once been a direct entitlement of labor. Hence it cannot rise higher than labor’s, which is its source.

The foregoing heads us in the direction of some sort of employee ownership. There are several sorts, and I could tell you a tale about them based on personal experience. For the moment, though, let me emphasize just two points.

First, if you review all the problems of the different brands of economics, you will find that invariably the proposed solutions embrace or lead to some overt or covert control or depression of labor costs. I mean all problems, from the allegedly benign effects of competition to the perceived malignity of inflation. Conservative economics would cure a depression by reducing wages; liberal economics would allow wages to drive the economy into an inflationary spiral that could be broken out of only by imposing wage and price controls.

The trouble with reducing wages or controlling them is that; since the future is constitutionally unknowable, there is no clean way of also controlling profits. It consequently turns out that the owners of the means of production (including the bureaucrats of a Communist state) generally lead invidiously comfortable lives when wages are controlled. This is not a just arrangement. The sole possibility of avoiding the injustice that I can see lies in the direction of the Labor Theory of Right.

The second point I would stress is that employee ownership is no more an automatic panacea than is the invisible hand. Supporters of the idea, from Boston department store owner Edward A. Filene to the present, have argued that ownership would stimulate employees to such a pitch of efficiency that their enterprises would sweep conventional competitors from the field, increase national productivity, and even reduce international tensions. It ain’t necessarily so.

And if it were, it would be economically irrelevant. As I never tire of saying, economics is not a matter of efficient production (that is engineering or agriculture). Economics concerns justice in monetary relationships among people. The power of the Labor Theory of Right is that it is just.

The New Leader

Originally published February 11, 1985

Between Issues

A TOAST to mark the appearance of his Economics: What: Went Wrong and Why and Some Things to Do About It began our very pleasant lunch the other day with George P. Brockway. Published by Harper & Row under the Cornelia and Michael Bessie imprint, the book grew out of, and to a large extent expands upon “The Dismal Science,” the popular alternate-

issue column Brockway started writing for us in January 1982. Pleased as we indeed are about that genesis, it also poses a problem. And it is a measure of this man-who in his book insists “economics is … a branch of ethics” – that we could engage him in a detached discussion of our views on the impropriety of reviewing works essentially derived from the pages of the magazine.

We would be remiss, however, if we therefore did not commend to your attention what Robert Heilbroner, in an advance comment on Economics, has described as “marvelously well written, a joy to read,” as well as “full of original and perceptive observations.” Brockway deftly draws on his better than 40 years as salesman, editor, president, and chairman of the board at W. W. Norton and Company before his retirement in December 1983 to deflate many of the assumptions commonly held by professional economists. Most significant, though, is the people-oriented philosophy that informs his thinking, which may be gleaned from the following in his opening chapter:

” .. .In the early 1980s, when upwards of 14 million men and women in the United States were unemployed, and there was much debate about whether we were in a recession or a depression, and how to end whatever it was, public attention was lavished on statistics supposed to indicate when recovery was finally under way. Among the ‘indicators,’ the rate of unemployment was understandably included. But this was, curiously, a’ lagging’ indicator. That is to say, standard economics held that something entitled to be called a recovery could be achieved leaving 6 or 8 or 10 per cent of our fellow citizens unemployed.

“An economics that is thus willing to disregard several million people will clearly differ in substantial ways from an economics that holds that full and just employment of men and women is the economic problem, and that a business recovery may be a means to that end, but certainly is not an end in itself.[1]

Guided by the same spirit, Brockway proceeds to offer several other ends, and the means for attaining them. Perhaps the most original dominates a chapter called “Property,”

bearing the subtitle “The Labor Theory of Right” – presented, as it happens (albeit in far too compressed fashion), in his column beginning on page 11.

Parting after lunch, we asked the former publisher turned author what he would be doing now. He responded, of course, that he had already started on a second book.

OUR COVERdrawing of AFL-CIO President Lane Kirkland is by Claudia Fouse.

            The New Leader

[1] Editor’s emPHAsis

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