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By George P. Brockway, originally published October 30, 1989

1989-10-30 Polution - Going Once, Going Twice.... Title

WE ARE SUPPOSED to cheer the Bush Administration’s clean air bill, which is intended to cut sulfur dioxide emissions  in half by the year 2000 and to do various other things. Well, I do cheer. Anything at all is better than what we’ve had for the past decade.

But there is a catch here-as there seems to be to every kinder, gentler proposal. Pollution control is going to be turned over to the economists, led by Michael J. Boskin, chairman of the Council of Economic Advisors; and the economists are going to push for as silly an idea as any the profession has spawned in this century. Unfortunately, this idea of theirs is not simply silly; it is, in a word, uncivilized. They should be ashamed.

The scheme is to establish a market for licenses to pollute-or, as I have sometimes heard it delicately put, for effluent rights.

This scam has been around for several years (you might even have read about it in this space as early as December 28, 1981). The major premise is that enforcing antipollution laws is expensive. The minor premise is that the free market can do everything. The conclusion is that rights to pollute should be auctioned off to the highest bidder (an auction being erroneously viewed as the ideal market), then the government could use the money to clean up the messes the polluters bought the rights to make. Not  only that, but the rights could be transferable- sort of like taxi medallions and the hope is that they would be traded on one of the exchanges, even that a futures market could be developed. And not only that, but environmental groups could bid for the rights and thus render them more expensive for polluters. If it weren’t a restraint on trade, environmental groups might go ahead and buy some of the rights and keep them off the market, thereby actually stopping the corresponding pollution. The mind boggles.

Anyone who has had the slightest connection with government can foresee dozens of practical difficulties with the scheme, especially if local governments are involved. I’ll take up a couple of them later. For the moment, let’s look warily at the theory.

The first thing about the free market is not just that it can’t do everything; it can’t, by itself, do anything. It can’t even set itself up and maintain itself. As Leon Walras, patron saint of General Equilibrium Analysis (a.k.a. the theory that The Market Knows) wrote when his followers weren’t looking, “[Production in free competition, after being engaged in a great number of small enterprises, tends to distribute itself among a number less great of medium enterprises, then among a small number of great enterprises, to end finally, first in a monopoly at cost price, then in a monopoly at the price of maximum gain.(Walras’ emphases.)

Yet antitrust laws are so difficult to write and so expensive to enforce that Milton Friedman, our contemporary conservative guru, throws the whole thing over. We act as if we had perfect competition, he says; therefore we do. On the same reasoning, we act as if pollution weren’t worth taking much trouble about; therefore it isn’t.

Once you start thinking this way, there is not much left for government to do; and if the voters get excited about pollution or whatever, you can pacify them by holding an auction. It would seem, for example, that the current fuss over the best way to approach the drug crisis is misdirected. It would be more economical to auction off the right to sell crack on the streets, possibly restricting the bidding for certain prestigious posts (like Official Lafayette Park Purveyor of Props for Presidential TV Shows) to pushers who promise to shave and wear a jacket and tie, even in summer.

Closer to pollution rights would be adulteration rights. The Pure Food and Drug Laws are expensive and difficult to enforce, too, and require lots of enterprise- stultifying paperwork. Why not auction off adulteration rights? We might have separate auctions for the right to mix sawdust with flour, for the right to let a processing plant get a teeny bit filthy, and for the right to use handy carcinogens without telling anybody, and without being sued if found out. This last auction would have to be carefully handled to avoid adverse publicity for the winners, which might have a depressing effect on their sales, and hence on the GNP.

To be sure, carcinogens are life-threatening. But so are air and water pollution. And so, for a different sort of example, is jogging in New York’s Central Park at night. As I suggested here eight years ago, why not admit that taxes would have to go up if Central Park were made safe? The economical solution would be to auction off mugging rights. Wilding rights might go for a little less per participant because of economies of scale. Also, we’ll be better able to compete internationally if we teach these youngsters how the free-market system works-or anyway how economists think it works.

On the other hand, the knock-down price (no pun intended, of course) for the right to commit mayhem and murder might be a bit higher. One would not want to set the price too high, because there wouldn’t be any bidders, and there would be no money to pay for the homicide squads needed to catch cheaters who didn’t pay for the rights. Some of these costs, though, could be defrayed if cops wore little logos advertising their shoes and underwear, like tennis professionals.

The economists are too convinced of their own cleverness to notice, but at this point prospective polluters would see a fault in the scheme and might hesitate before putting in their bids. One of them, a veteran of the antiwar demonstrations of the’ 60s, might persuade the others as follows: “Suppose they held an auction for pollution rights and nobody came. Then there would be no money to enforce antipollution laws or to clean up the messes. There would not even be any laws, because the Environmental Protection Agency wouldn’t have enough money to write the appropriate regulations. Without any laws or enforcement, who cares about pollution rights? They’re free. Only a sucker would pay for them.”

All kidding aside, it is clear that the economists’ scheme is self-contradictory. It promises to get rid of bureaucratic interference with the free-market system. Visions of balanced budgets dance before the professors’ eyes, and of the fantastic growth in “productivity” that would result from not wasting time and money on nonessentials (“externalities,” economists call them) like clean air or pure water. Yet these visions cannot be realized unless the Environmental Protection Agency, or some surrogate, stands ready to lower the boom on polluters who refuse to play by the new rules. No one is going to pay to avoid what does not exist.

Furthermore, without continued enforcement after the auctions you can bet that crafty polluters here or there would buy certain rights and then exceed them. The malefactors would have a leg up on their competitors and might well win awards for competing internationally. In short, the economists’ scheme would cost as much as ordinary control but would be far less effective. (I’ll admit it would give brokers another “product” or two to trade on the exchanges.)

AS I MENTIONED earlier, there are some practical difficulties, particularly if, instead of nationwide auctions, local options are recognized. (After all, who knows the environment better than those who live in it?) Suppose you have a steel mill on the shores of Lake Superior and you want to pollute the lake. Fine. We’ll have an auction. What are we offered? Since no one else needs the rights, how about a dollar?

I’m not forgetting the busybody (and probably elitist) environmental groups. They’re spread pretty thin, however (an awful lot of their budgets goes to sending me junk mail), and can’t all enter every auction. They take turns. The steel mill, meanwhile, provides most of the employment for our Lake Superior town, and the mill’s conglomerate owner threatens to shut it down. So the town enters the bidding, swamps the environmentalists, and wins, whereupon it gives the pollution rights to the steel mill for free. Everyone is happy, except for the environmentalists and the fish and the people who drink lake water instead of beer.

In most towns or regions there may be more than one polluter seeking the rights, and naturally they will compete vigorously for them. It’s the American way. Once upon a time I lived in New Jersey, where there are God knows how many separate municipalities, and almost all of them hire scavenger services. In each county there are several competing scavengers. At any rate, they all submit bids for every municipality’s business.

Much to everyone’s surprise, the same fellow is low man in the same towns year after year, while other players always win in their usual towns. (Economists think they know about this, too. The scavengers’ “experience” enables them to avoid the “Winner’s Curse,” which is the result of bidding too low.) Occasionally a feud breaks out, and a few truly surprised towns find themselves opening sealed envelopes containing very low bids. The feuds don’t last long.

It doesn’t take much imagination to visualize something similar with pollution rights, especially since the oil industry (one of the most stylish polluters) is familiar with a practice that looks to suspicious souls like collusive bidding. Offshore oil leases are expensive and risky, moreover, prompting oil companies to form syndicates to spread the risk. Syndicates would also appear to narrow the bidding.

What I’m afraid it all comes down to is that today’s economists don’t understand government. They don’t believe in government. Although they would quickly and nervously deny it, they are like Karl Marx in thinking that the state should wither away because all questions are economic questions. They get irritated when people object to cheap imports that take away their livelihood, or when unions strike to prevent wage cuts, or when attempts are made to use taxes to distribute income a little more equitably.

It further has to be said that economists do not take the general welfare seriously. They certainly don’t take the environment seriously. They don’t really believe in the greenhouse effect, or acid rain, or the consequences of PCBs in drinking water, or the possibility of another, closer Chernobyl. They can’t possibly understand these matters and make their fatuous proposals about auctioning off the right to pollute.

 The New Leader

By George P. Brockway, originally published August 7, 1989

1989-8-7 Exxon And Squatter Economics Title

DEAN ACHESON once remarked wearily that if anyone, at any time, found him agreeing with any Indian on any subject whatever, that person should have him certified immediately. His judgment was no doubt colored by his experiences with V.K. Krishna Menon, who wanted all North Korean POWs shipped home whether they wished to go or not.

My feelings about standard economics are similar, perhaps because one summer, in a youthful fit of self-improvement, I spent many hours reading Frank Taussig’s introductory textbook when I could have been sleeping in the sun. My recollection is that Taussig, who was a big man in his day, started off by talking about Robinson Crusoe. I have since come to doubt that Robinson had anything to do with economics at all. So far as I know or Professor Taussig said, he never bought or sold anything, or used money.

One by one the classic laws have lost their savor for me. David Ricardo‘s Law of Comparative Advantage was an early loser, and I wrote three columns[1] about it six or so years ago. The notion that producers are profit maximizers and consumers are utility maximizers attracted my attention last year, and the Law of Diminishing Returns a couple of months ago. I’ve even dropped a hint or two concerning the Law of Supply and Demand, and might supply a column about it, if I detected any demand.

I’m ashamed to say that in one of my early columns I made a slip and endorsed the proposition that free competition in a free market makes for the most efficient allocation of scarce resources. As Abraham Lincoln[2] replied when requested to apologize for saying that Simon Cameron would not steal a red-hot stove, I now take that back.

The issue is in the news because of the great Valdez oil spill. Some excitable people want to punish Exxon, but they have been patiently told it would be inefficient to do so. Encouraged by the sound of their own voices, the naysayers add that it would be inefficient to impose further restrictions on the exploitation of Alaskan oil, and also that an increase in the gasoline tax would distort the allocation of resources. They urge, too, a relaxation of the already relaxed standards of gasoline efficiency (that word again) for new automobiles. Red-blooded Americans, if given their druthers, would prefer very big cars that can go very fast; therefore they should be allowed to put their money where their preference is, and the speed laws should be lifted while we’re at it.

The more beguiling advocates of free market theory admit that sooner or later oil will run out. They are confident, however, that the spur of possible profits will drive some mad scientist to invent a way of using crab grass or zucchini for fuel (as some tried to use dandelions for rubber in World War II), thus rehabilitating suburban agriculture and saving the automobile. In the meantime, they argue, as oil gets scarcer and the price rises higher, those willing to give up coarser pleasures are entitled to enjoy the daintier pleasure of burning gasoline in fast cars, fast boats and fast snowmobiles. Their willingness shows that is the efficient thing to do.

Let’s examine the proposition, not from the point of view of ecology or even of national security (where it’s a clear loser), but from the point of view of logic. Is economics really about the allocation of resources at all? To answer that question, we have to be able to say what a resource is. How about this: A resource is something that is useful or necessary to make something else, a component of an economic commodity.

(At this point there is a side issue we ought to deal with. The Education President tells us that a trained labor force is an essential resource in our struggle with Japan and Germany for the hearts and moneys of the world. But a labor force is not a thing; it is human beings, and human beings are ends in themselves. Trade is for human beings; human beings are not for trade. They are not a resource or a means to anything else. To treat human beings as means is the ultimate sin. I know that George Bush is a kind and gentle man who does not always mean exactly what he says. But if we are to read his lips, he should watch his tongue.)

So resources are things, objects. Natural resources are things untouched by human hands, lying around ready to be picked up or dug up or fished up, and used. Economic resources are also scarce. There is no point in talking about them if they are not scarce. Taussig (if my memory serves after all these years) gave air as an example of a noneconomic resource, the reasons being that there was a lot of it, and that no one could figure out how to bottle it and sell it. We’ve made progress, however. If you’re in the hospital and they decide to pep you up with oxygen, you’ll find $100 a day added to your bill. And Los Angeles knows that breatheable air would be impossibly expensive.

But of course not all scarce natural objects, even those that could be readily packaged, such as bluebird nests, are natural resources. Leon Walras, the patron saint of marginal utility analysis, credits his father Auguste with the notion that an economic good has to be useful as well as scarce. This does not seem a remarkably difficult advance in thought. It does not really advance us very far, either.

Maybe you are not clever enough to think up uses for bluebird nests, and maybe no one is; that does not mean a use will never be discovered or invented. Think of petroleum. If you had asked Adam Smith about it, he would have shrugged his Scotch shoulders. It was a sticky, stinky substance where it appeared, as in the notorious fields near Cumae, rendering useless the land that harbored it. Or you might have asked Karl Marx about uranium. He would never have heard of it, for one thing. What kind of resource is something you never heard of.  On the other hand, ancient man mined and traded obsidian, which, apart from the art and tools the ancients made of it, is now of no interest to a Harvard Business School graduate.

From these random samples we can infer that the usefulness of objects is not something inherent in them. As it happens, there is no dispute on this point. W. Stanley Jevons, who shares with Walras the distinction of having invented marginal utility, put it this way: “The price of a commodity is the only test we have of the utility of the commodity to the purchaser.” A half century earlier Jean- Baptiste Say had characteristically introduced an intermediate and indeterminable abstraction: “Price is the measure of the value of things, and their value is the measure of their utility.”

In our day, Gerard Debreu, a Nobelist and probably the world’s foremost mathematical economist, is in agreement with Jevons and Say. “The fact that the price of a commodity is positive, null, or negative,” he writes, “is not an intrinsic property of that commodity; it depends on the technology, the tastes, the resources … of the economy.”

(Please forgive another side issue. Noting the word “resources” before Debreu’s ellipses, I confess myself puzzled, since in a subsequent passage he says, “The total resources of an economy are the a priori given quantities of commodities that are made available to (or by) its agents.” It would appear that the price of a commodity depends, at least in part, on resources, and that resources are commodities-a line of argument that looks suspiciously circular to me.)

ONE WAY or another, then, we come to the conclusion that it is not so easy to say what economic resources are. They are useful, yes, but neither petroleum nor uranium nor a bluebird nest is, in and of itself, useful. Indeed, if you don’t know how to use them petroleum is nasty and uranium is dangerous. But our economy does know how to use them, up to a point. So they are resources for us. They are resources for us because of the way our economy is organized.

The organization of our economy is, as the marginal analysts say, a price system. (Like Oscar Wilde’s cynic, we economists know the price of everything and the value of nothing.) Every price is dependent on every other price in a delicately beautiful equilibrium. It is this balanced price system that allocates resources. If tomorrow morning some bright fellow comes up with a use for bluebird nests, the supply of and demand for them (the story goes) will set the price for them. Not only that, but as the demand for bluebird nests develops, the demand for some other things must decline. But other resources (including, sad to say, human resources) are shifted into the bluebird nest industry, restoring the equilibrium. Everything is properly allocated again.

Bluebird nests are now a resource, not simply because they are rare and a use has been found for them, but because they fit into the price system. That is crucial. The market does not so much allocate resources as tell us what resources are.

What, then, becomes of efficiency? It disappears. It is not separately discoverable, for resources are resources because the market says so, and their allocation is efficient only because the market says so. The market is not a better way of allocating resources; it is the only way. This is what the theory says.

Having said this much, it has uttered nonsense. If you really want to learn about resources and their allocation, you should go, not to Wall Street, but to someplace like World Watch Institute, which publishes an annual report called State of the World that explains the consequences of what we are doing and tells how we could do better.

Nonsense is always dangerous. The horror story that “The Market Knows” damages the ecosystem.  It also destroys economics itself, reducing the whole exercise to a defense of the status quo. True believers in the market apparently do not understand this, for they are very liberal (if you know what I mean) with advice about the sorts of issues we mentioned earlier – finding a way to make Exxon pay, restricting further exploitation of Alaskan oil, and so on. Yet these matters, as they now stand, are part of the present system. Changes in favor of the oil industry are no less an interference with the market than are changes in favor of the world and them that dwell therein.

Once any sort of change is admissible, every sort can be argued up or down. In the 1850s, Stephen A. Douglas proposed squatter sovereignty (allowing the territories to vote on slavery), which appeared to be impartial but actually favored the South. In their renowned debates, Lincoln forced Douglas to admit that slavery could be voted down as well as up. That won Douglas the Senate seat, but cost him the Presidency two years later. It would be lovely if we could come to understand the vacuity of squatter economics.

The New Leader


[2] Readers should see the upcoming link about “stealing a red-hot stove.”  The author attributes the quote to Lincoln but it was, according to Wikipedia, Thaddeus Stevens talking TO Lincoln.

By George P. Brockway, originally published April 3, 1989

1989-4-3 Minimum Wage vs. Maximum Confusion Title

THE FIGHT in Congress over a minimum-wage bill was recognized by both sides to be largely symbolic. It was nevertheless worth making. The press and TV characteristically presented what little they reported of the debate as a clash of personalities. But fundamental issues were at stake, and one must hope the debate has gone at least a little way toward educating the public (and the Congress) on the way the economy actually works.

First, a bit of background: The minimum wage is now $3.35 an hour. It has not been changed for eight years, even though the Consumer Price Index has gone up 32.3 per cent in that time. If you work full time, $3.35 an hour comes to $134 a week or $6,968 a year, which is well below the poverty level. But of course the assumption of full-time work is what economists call a heroic assumption (meaning that it doesn’t hurt the economists who make it any more than heroic medical procedures hurt doctors).  In fact, 25.3 per cent of the people employed in America work part time roughly half of them because they can’t get better jobs and half because they prefer it that way. It’s a fair guess that almost all of the minimum-wage workers are in the part-time group.

At present about 4 million workers earn the minimum wage or less. (Economics is full of miracles: In mathematics there’s nothing less than the minimum, but in economics there’s a great nether region below the minimum because commerce that doesn’t cross state lines is not covered by Federal law.) There are in addition just over 6.5 million people officially classified unemployed, and just under 1 million more who do not count because they are too discouraged to look for work. That adds up to 11.5 million Americans who work or are willing to work yet still are a long way below the poverty level.

The bills recently passed by both the House of Representatives and the Senate provide for the minimum to go to $3.85 in October of this year, then to $4.25 in 1990, and to $4.55 in 1991 (by which time inflation will have wiped out most, if not all, of the increase). In an attempt to attract Republican votes, the bills include a subminimum training wage: 85 per cent of the minimum for a first-time employee’s initial 60 days.  This provision would phase out in 1992. Though the bills have substantial support in both houses, particularly among Democrats, President George Bush has threatened to veto anything that goes beyond $4.25 an hour. Thirty-five Republican Senators have promised to sustain a veto. That should pretty much do it.

The threatened veto is, naturally, presented as a kinder, gentler act. The conservative argument is that companies pay the minimum wage (or less) because they cannot afford to pay more. Since they are at the limit of their resources, a pay increase would force them to fire those paid the present minimum and to turn away inexperienced teenagers, blacks and women looking for entry level jobs. The net result, conservatives say, would be an increase in unemployment.

Anyone who bothers to look at the record, however, will find that employment has risen in seven of the eight years when the minimum wage has been raised; and the one year employment fell (1975) was a time of severe recession when the drop was expected for other reasons. Moreover, the 11 states that now have a statewide minimum wage higher than the Federal standard also have the lowest unemployment.

You will have noticed that the argument shifts back and forth between the fate of the economy as a whole and that of individual workers and individual businesses – in other words, between macroeconomics and microeconomics. Several times over the years I have called attention to the fallacy of composition, which often pops up when such shifts are made, and I’ve suggested that economists must love it because they do so much dancing. In brief, the fallacy assumes that what is true of members of a logical class is thereby true of the class itself. Sometimes this leads to the laughable, as when Engine Charlie Wilson averred, “What’s good for General Motors is good for the country.”

In the present instance, conservatives argue that what may be bad for some workers must be bad for all. Liberals, on the other hand, argue that the possible microeconomic effect of some job loss will be more than offset by the macroeconomic effect of better jobs in the economy as a whole, resulting in increased spending that will stimulate business into hiring more workers.

Over a quarter of the low-income workers would have to be fired for the total wages to fall. It’s a judgment call, and the call pretty much separates the optimists from the pessimists, and the liberals from the conservatives. I’m such a liberal optimist, I doubt that as many as 10 per cent would be fired. In that case the macroeconomic stimulus would be considerable, making it likely the 10 per cent would be rehired almost at once, thus intensifying the stimulus and making inroads on those millions of unemployed.

If you too are an optimist, I ask you to consider a special implication of what we have been saying. The happier world we have projected depends on an act of Congress combined with a President’s willingness to sign his name. There is no economic law that will achieve our goal. Rather the contrary. Standard economics pits businesses in such implacable competition with each other that even good-hearted employers are unable to pay more than the minimum, while workers compete so fiercely for jobs that even the stout-hearted can’t hold out for more. (That, by the way, is the Iron Law of Wages, which prompted Thomas Carlyle to coin the name for this column.) Thus wages tend inexorably to zero, and profits do as well. So, to be sure, do prices; but since no one will have any money, I’ve never understood what difference that makes. Individual companies can’t stop this fall; it takes governmental action. Hence the minimum wage.

Shifting back to microeconomics, we are likely to find in boardrooms across the land another objection to raising the minimum wage. It cuts into profits, the gut feelings is, and cripples enterprise. This feeling is known as the wage-fund theory: it argues that the gross receipts of any enterprise form a fund from which wages, other costs and profits are paid. Therefore, as David Ricardo insisted, “There can be no rise in the value of labor without a fall of profits.” Karl Marx, an admirer of Ricardo, found the wage-fund theory handy in explaining the implacable opposition of labor and capital. Here, as in so many cases, we find the far Right in bed with the far Left.

But taking a peek at the real world, Joseph Schumpeter remarked the empirical fact that wages and profits tend to go up together. Really good times are at least pretty good times for everybody. Profits are high, wages are high, unemployment is low, and so, for that matter, is inflation. None of this could happen if the wage-fund theory were valid. It is not valid because wages are a cost of doing business, while profits are not.

Profit (or loss) is what is left over after all receivables have been collected and all bills paid. The costs of wages, interest, rent, and supplies can all be contracted for in advance; but profit is systematically residual. What’s to come is still unsure.

1989-4-3 Minimum Wage vs. Maximum Confusion boots

I’m talking about actual profit-the kind you pay taxes on. Business people talk also about “normal” profit – what they think an enterprise ought to earn to be worth the bother. There is obviously no such thing as normal loss. Normal profit is a planning concept. It is an estimate, even an expectation, but not an actuality. It is on the basis of this estimate that go/ no-go decisions are made, prices are set, and production runs are scheduled. Although in the real world some businesses are vastly more profitable than others, and more or less profitable from year to year, normal profits, making allowance for risk, are uniform, as are short-term interest rates. High-risk enterprises must promise high normal profits, yet in the real world the low-risk enterprises generally show the highest profits.

THERE IS clearly not much point in running an enterprise if it can’t earn the going interest rate and a bit more. You could lend your money to someone else and earn bank interest or better with no trouble at all. So the interest rate is what economists call an opportunity cost of normal profit: they are roughly equal. Consequently we have three related concepts: normal or hoped- for profit, the interest rate, and actual profit or loss. Since only the first two come out of the wage fund, only they are in conflict with wages.

A common error, from David Ricardo to Alan Greenspan, is to confuse interest and actual profits. Mathematical economists, too, have trouble with this phenomenon, because they are prone to work with normal profits rather than actual profits. Actual profits are earned in historical time, but mathematics knows only the present tense.

What Ricardo should have said was, “There can be no rise in the value of labor without a fall in the interest rate.” Wages and actual profits can and do go up and down together. They go up together when the interest rate is low, and they go down together when the interest rate is high.

As Henry Ford understood, it is in the rnicroeconornic interest of each business that all businesses pay good wages. For this macroeconomic phenomenon to happen reliably, it takes a law. It takes more than a minimum-wage law, but it takes at least that. It is not unlikely that pushing up the minimum wage would eventually push up the wages and salaries above it. That is why we have said (see “Reality and Welfare Reform,” NL, November 28, 1988) that doing something about the poor is inflationary unless a major effort is made to correct the massive maldistribution of income and wealth in this country.

That will not be easy, especially since we seem bemused by personalities, and since a previously wimpy personality will veto any attempt of personable Congressional leaders to move in the right direction. There is something more to the problem than David Rockefeller‘s objections to Michael Milken’s junky performance.

The New Leader

By George P. Brockway, originally published November 28, 1988

1988-11-28 Reality and Welfare Reform title

1988-11-28 Reality and Welfare Reform Daniel Patrick Moynihan

THE GIVEAWAY of Senator Daniel Patrick Moynihan’s new Family Security Act -aka welfare reform – is its cost. I don’t mean that the cost is to be given away; I mean that the low cost betrays the modest ambitions of the bill.

The estimated expenditure is $3.34 billion over five years. That’s $668 million a year, which may seem like a lot of money to you, but works out to $20.62 – exactly twenty dollars and sixty-two cents –  for every man, woman and child living in poverty in the United States of America.

Yes, I know that the plan isn’t intended to do anything about poverty, isn’t meant to help the working poor, isn’t supposed to shelter the homeless or nourish the ill-fed, has nothing to do with improving or expanding medical services. In fact, one of its charms for the radical Right is that it is expected to reduce expenditures for public housing, Food Stamps, Medicaid and Aid to Families with Dependent Children (AFDC). So let’s look at it this way: $668 million is 0.00015 – or 15 thousandths of 1 per cent-of the current GNP. Or this way: It’s about a third of the projected cost of the additional space shuttle they’re building.

I’m sorry, but I’ve overstated the case a bit, for the $3.34 billion includes a “workfare” provision that will cost $900 million. This is one feature of the bill insisted on by President Reagan and feverish-eyed Republicans like Senator Orrin G. Hatch of Utah. Everyone else, including more liberal (if they don’t mind my using the word) Republican governors who will have to administer it, apparently hopes to repeal the provision either because of its negative cost effectiveness or because of its meanness. If that $900 million is deducted from the total, we have $2.44 billion left, or $488 million a year for everything the bill promises to do. The summaries given the press naturally accent the positive. They emphasize that a real effort is going to be made to force fathers to share in the support of their offspring. No one (except the fathers) can object to that, especially since it may persuade some to stay home with their families and thus prove rewarding all around.

The summaries further emphasize education (not the same as workfare). You can’t object to that, either. We’ve heard about our illiteracy rate and our inability to do simple arithmetic and our ignorance of our government and of history. We know businessmen complain that they have to weary themselves with excessive interviews to find competent workers. And so on. It’s hard, therefore, to be against more education. It’s also hard to imagine that the puny budget will make much of a dent in the problem.

For my part, I become depressed when I hear vocational education touted as a panacea. We must train these people to be punctual, we are told, and to work diligently and not goof off. Does anyone suppose they don’t know all that? It’s no secret. They’ve heard it all before, but they haven’t seen much good come of it.

Few experiences can be more disillusioning and dispiriting than undergoing training for the kinds of jobs that don’t exist. Perhaps my long memory misleads me here, yet I recall the junior high school shop where I learned to solder Western Union splices and to thread separate black and white wires through clay pipes set in the joists and studs of a mocked-up house. I was astonished when, in the real world, I saw my first BX cable, and I remain skeptical of that sort of job training unless it is done on the job. I have had occasion to observe a couple of for-profit training schools in operation, too, and I really don’t think the answer is privatization.

The solution is jobs. We’ve seen the solution in action – but again my long memory probably misleads me, for hardly a man seems to be alive who remembers the famous days and years of the New Deal. Everyone else knows that the New Deal failed. It taxed and taxed, and spent and spent, and elected and elected, and still, in 1939, on the eve of World War II, the unemployment rate was 17.2 per cent.

As I have previously quoted Disraeli, there are lies, damned lies, and statistics; and I have yet to meet even a professor of economic history who is aware of how that 17.2 per cent lies. So I’ll tell you. It counts all the millions who worked for the CCC, NYA, WPA, and the rest of the so-called alphabet-soup agencies as unemployed. Now, the millions who worked for those agencies in fact worked and in fact produced goods for the common wealth, and were in fact paid for it. They built thousands of schools, libraries, post offices, hospitals, and dams; restored thousands of acres of forests; paved thousands of miles of highways and sidewalks; helped bring electricity to the farms; made a start on public housing; painted pictures; produced plays and concerts; published a set of state guidebooks that is still unequaled; and gave courses in every subject imaginable. If that was unemployment, we could stand a bit more of it. Nor would it be unbearable to have urban streets swept and suburban leaves raked.

Everyone knows, of course, that this was impossibly expensive and wasteful. Yes, the last budget of Herbert Hoover’s Presidency (fiscal year 1933) was only $2.8 billion in deficit. And what was the last prewar New Deal deficit? $3.1 billion; ten per cent larger. To be sure, $300 million was a lot more in those days than it is at present. But the point is that enabling millions of people to contribute to the common weal and to maintain their self-respect cost only 10 per cent more than doing nothing. Which approach was the really wasteful one?  Moreover, our wartime experience demonstrates that the so-called First New Deal would have been a lot more successful if it had spent more, not less.

1988-11-28 Reality and Welfare Reform Men Working

INSTEAD of the creative programs of the New Deal, the new scheme has its workfare, something Ronald Reagan wishes to be remembered for. He deserves to get his wish. The requirement is that by 1994, one parent in every two-parent family (an institution the bill is supposed to be encouraging) that receives benefits must be made to work at least 16 hours a week in what is grandly known as the Community Work Experience Program. What will they be paid for this work? Zero. Well, you know, beggars can’t be choosers.

Since this provision does not take effect until 1994, it is a fair guess that New York’s Democratic Senator Moynihan, among others, intends to try to repeal it after the Great Veto Threatener leaves the White House. This is a judgment call with which I beg to differ. It brings to mind Moynihan’s first attempt at welfare reform which came when he was Richard M. Nixon’s Domestic Affairs Adviser. The attempt was defeated by a combination of conservatives opposed to any form of welfare and liberals led by the late George Wiley of the National Welfare Rights Organization, who pointed out that the proposed benefits were lower than those then in effect.

I had the pleasure and privilege of knowing George Wiley, who was a wise and humorous and dedicated man. He was well aware of Voltaire‘s dictum that the best is the enemy of the good, and he understood perfectly the argument that the benefits could be improved once the law was in place. He simply doubted that the improvements would ever come. The record supports his judgment. Over the past several years, for example, AFDC payments have lost a good third of their value because of inflation. The Pentagon gets budget boosts on top of generous estimates of inflation, but I’ve not noticed any rush to rectify the AFDC situation. As for the workfare amendment, it has already, in this Democratic Senate, survived by a 41-54 vote an attempt to table (and so defeat) it.

Workfare should not be confused with what the sponsors of the Family Security Act consider its heart and sinews: JOBS (for Job Opportunities and Basic Skills. The republic would collapse without silly acronyms).The laudable aim of this program is to get people off the welfare rolls and into regular employment where they can be self-supporting and self-respecting. As I’ve said, I’m dubious about the training being offered. Anyway, after training the welfare recipients are supposed to get to work, and I don’t at all object to that. The regulations covering JOBS are moderately complicated, and some of them are not nice; but I want to talk about something more fundamental.

We are told that the unemployment rate has now fallen to 5.2 per cent. Everyone knows this figure is too low, but I’m not going to quarrel with it – at least not here and now. I’m merely going to note that currently received economic doctrine, taught in practically all colleges and universities in the land, and I am sure accepted as gospel by large majorities  of both houses of Congress, holds that full employment actually means 6 per cent unemployment. If unemployment really falls any lower than that, the economy is expected to overheat, and we’ll have inflation. (I’m not aware that we have been without inflation since World War II, except for one year in President Harry S. Truman’s second term, and one year in President Dwight D. Eisenhower‘s; so let’s just say that we’ll have even more inflation.)

Indeed, the newspapers and the airways are full of ominous questions right now: Will the Federal Reserve Board raise the interest rate again to head inflation off at the pass? Will that send the stock market into a tizzy? Will it abort our slowly recovering foreign trade? Will it make it harder to reduce the deficit? Will it make the mortgage rate so high that home ownership becomes an impossible dream even for two-earner Yuppies? Anyone who believes that mainstream economists know what they’re talking about will answer all those questions in the affirmative.

Where does that leave us? It leaves us with a JOBS program that is a mirage or a hoax. Assuming we believe the unemployment figures, we already have too many people working for our own good. Even if the JOBS training program should succeed beyond all rational expectations, even if the trainees could then be successful in finding work that would not (one of the requirements) displace anyone already working, we would have to head them off at the pass. We couldn’t afford to have so few people unemployed.

I AM NOT making any of this up. If you have merely glanced at journalistic reports of the thoughts of our mainstream economists, you may think that when they talk about 6 per cent of the work force being unemployable, they are saying all those millions are too little educated, too stupid, too sick, or too pregnant. That’s not exactly what they mean. They do classify many people under those headings, but they mean something else as well. They are speaking of friction in the economy – that is, time lost while workers are between jobs. Again there’s misunderstanding (and some of the economists even misunderstand themselves), for they make it sound as though there are several million people out there whimsically flitting from job to welfare to another job for no good reason. No doubt some such free spirits exist, and they will always be good for Presidential anecdotes; but the real friction results from business coming and going. It’s known as free enterprise.

In 1987, something more than 60,000 corporations went bankrupt. Most of the bankruptcies were very small. Nevertheless, they totaled over $36 billion. That ain’t hay, and it accounts for a couple of million people thrown out of work.

Then there are all the “efficient” mergers, which are efficient because they fire people. There is all the seasonal unemployment – clerks and warehousemen let go after the Christmas rush, farm workers between seasons, people laid off in model changeovers. There are all the customers’ men dropped after a market crash, and all those who lose their jobs when business temporarily slows, and those whose jobs disappear when their companies relocate for tax reasons – or in search of cheaper labor.

The foregoing account for the 6 per cent friction in the economy. The friction is not the fault of the workers; it is the fault of the system and its ethics. And the system is not a fact of nature; it is our creation. We created it in the image of mainstream economics, and the result is not altogether pretty.

The thing about mainstream economics is that it starts with the price system as given. The price system is not simply what the stickers read in the supermarkets or how the bidding goes in the grain pit in Chicago. It includes all prices, interest rates, rents – the works – and particularly and especially wage and salary scales. Mainstream economics assumes that the way the rewards of the economy are distributed is none of its business.

Our present price system will be relatively stable so long as there are 6 per cent unemployed or underemployed. This is not quite like Marx’ industrial reserve army, because the important point is that these people must be drastically under rewarded, whether they work or not, and that the next 10-15 per cent above them can’t be treated much better (the average income of the bottom quintile of our families is below the poverty level).

Under our present price system, anything substantial you do for those at the bottom has to cause inflation. Other things can cause inflation, too, but really helping the poor is sure to do so. The only noninflationary way of helping the poor entails fundamentally changing the price system, specifically and dramatically narrowing the chasm between rich and poor. For the past 15 years we have been passing by on the other side (see The Golden Mean,” NL, November 2, 1987), and it will take a whole lot more than JOBS, as well as something a whole lot different, to change direction.

The New Leader

By George P. Brockway, originally published September 7, 1987

1987-9-7 Morals of the Marketplace Title

1987-9-7 Morals of the Marketplace Trader

ETHICS IS suddenly a big topic. This is the doing of Ivan Boesky, Bess Meyerson, Jim and Tammy Bakker, and an obscure Marine lieutenant colonel, whose name I don’t recall. Those cynics who consider Lucifer/Satan the hero of Paradise Lost will not be surprised, nor will those realists who observe that the remembered hero of Watergate is not John G. Sirica but G. Gordon Liddy.

In all the current talk, business ethics has come in for special attention, and many an editorial has proposed required ethics courses in business schools. Lester C. Thurow, the new dean of MIT’s Sloan School of Management, resists the idea on the ground that the blight, if any, goes much too deep to be reached by a tacked-on series of lectures or bull sessions. Morals, he says, should have been learned at home and in the community long before graduate school. I resist the special course idea, too, but on the ground that if students have been learning bad ethics or no ethics, it is because they have been taught bad economics.

Economics used to be called an ethical science, an expression that resonates oddly in our ears. Come to think of it, our term, “social science,” gives off similar vibrations. Social relations surely have an ethical aspect (if it exists at all), while the propositions of the natural sciences (what we think of as proper science) do not. There is nothing moral or immoral about the solar system, or about the way electrons bond, or even about AIDS. Morals may be – most often certainly are – involved in the transmission of AIDS, but the physiology of the disease is neither right nor wrong. Indeed, it is only because the disease is a natural phenomenon that there is any hope of containing or curing it. Even the calls for sexual abstinence must depend on the fact that the disease obeys natural laws and is neither a random accident nor a supernatural visitation.

“Nature to be controlled,” as Francis Bacon said, “must be obeyed.” Thus disease control (which is a human end) uses medicines (which are natural means). Thus engineers use the principles of physics to achieve their ends. The ends are not natural, but the means are. It is frequently argued that economics presents a parallel situation. In 1874, Leon Walras, in his Elements of Pure Economics, distinguished at considerable length between economics as an ethical science, which considered what ought to be done; economics as an art, which taught how to do it; and economics as pure science, which described how it worked. Toward the close of the century, a similar tripartite analysis was made by John Neville Keynes (John Maynard’s father). In our day, Milton Friedman, perhaps indulging a puckish humor, has quoted favorably from the senior Keynes’ work.

The parallel between physiology or physics on the one hand and pure economics on the other is, however, false. There is no such thing as pure economics. Physiology and physics can be studied – must be studied – without regard to the willful act of any individual or group of individuals. But no antiseptic event of that kind occurs in economics. Walras, whose work was hailed by Joseph Schumpeter as “the only work of an economist that will stand comparison with the achievements of theoretical physics,” opened his analysis, after a long introduction, with the observation, “Value in exchange, when left to itself, arises spontaneously in the market as the result of competition.” But this pure proposition is immediately corrupted by willful humanity: “As buyers, traders make their demands by outbidding each other. As sellers, traders make their offers by underbidding each other.” (Walras’ emphases.)

Without those traders making their demands and offers, there is no economics, pure or applied. With those traders, economics becomes inextricably immersed in questions of morals. I do not mean merely that trade is impossible unless traders abjure fraud (at least up to a point), although certainly this is true. What I mean is that demands and offers – the fundamental elements of “pure” economics – are not acts of God or events of nature but acts of human beings who necessarily define themselves by what they do, including what they do in the marketplace. Perhaps more to the point: Demands and offers can be understood only as acts of will.

There has been no lack of attempts to develop other explanations, and they form the division of economics known as “value theory.” Prices are determined by the reconciliation of demands and offers, and demands and offers are said to be determined by values. There are three leading explanations of value. The first, found prominently in Adam Smith and Karl Marx, holds that things become valuable commodities in accordance with the amount of labor that goes into their production. The second, advanced by Jeremy Bentham, argues that only useful things are valuable, and that utility derives from the promotion of pleasure or the avoidance of pain. The third, credited by Leon Walras to his father Auguste, founds value on rareté, a combination of scarcity and utility.

All these explanations turn out to have exceptions. The labor theory cannot explain why a house in the Houston suburbs that sold for a quarter of a million dollars only yesterday can be bought for half that price today and will sell for a different price tomorrow. The utility theory cannot explain why proprietary drugs are more expensive than their generic equivalents. The simple scarcity theory cannot explain why gem-quality diamonds are more expensive than bluebird nests. Put them all together in the rareté theory, and you still can’t explain why baseball stars are paid in the millions of dollars and croquet experts have to pay to enter tournaments.

Of course, the problem of the exceptions has not gone unnoticed. The typical solution turns on a relaxed definition of utility. Proprietary drugs, for example, may be said to be more useful to some people because they carry an implicit guarantee of quality and so enhance satisfaction and pleasure or suppress apprehension and pain. The greater perceived utility naturally results in a higher price.

But see what has happened. The utility theory, like all the theories, was introduced to provide an objective foundation to value. Bentham intended his “felicific calculus” to be the equivalent of Newton’s laws of motion. In reality, though, it is highly subjective. Some people are pleased by drugs’ brand names and some are pained by the higher prices. Bentham himself summed up the situation in an aphorism: “Quantity of pleasure being equal, pushpin is as good as poetry.” One man’s pleasure is another man’s pain. Utility is what each individual says it is; it has none of the universality of gravity.

IRONICALL Y, the consequence was noted by William Stanley Jevons, a leader in developing Bentham’s utilitarianism into the modern quasi mathematical theory of marginal utility. Calling for increased efforts to collect economic statistics, he wrote, “The price of a commodity is the only test we have of the utility of the commodity to the purchaser …. ” And, he might have added, of its utility to the seller, too. Price may be explained by utility, but all we know of utility is price.

The other value theories are no less circular. Marx, recognizing that a lot of labor can go into producing positively harmful commodities, avers that “socially useful” labor makes value. So it is not labor that is the test of value; it is value that is the test of labor. The tree is known by his fruit. Walras’ rareté also leans on the weak reed of utility, as well as on scarcity.

The only way to keep a circular argument from chasing its tail is not to let the chase get started. Let us, therefore, return to the men and women who did the price-paying of Jevons, the offering and demanding of Walras, and the laboring and social evaluating of Marx. Who are these essential people? As Pogo might say, we have met them, and they are us.

The various value theories we have mentioned each try to make us into passive agents controlled by the economic counterpart of nature. Even perfect competition (the state imagined to provide perfect liberty) requires everyone to be what is called a “price taker.” Prices are then said to be made by the market.

Those who quarrel with the idea of perfect competition tend to do so on the ground that competition never is and never has been perfect. That is true enough, but the reason for this is that the notion of an impersonal market that sets prices is a pathetic fallacy.

Farmers are the standard textbook examples of price takers, unable to influence the price of what they sell, whether they produce more or less, and whether they sell now, or later, or never. Yet if all producers and all consumers – that is, all human beings – are price takers, where do prices come from? Only cynics claim that the individual voter is insignificant because he or she is merely one among tens of millions. The republic will not collapse if I fail to vote; it will collapse if no one votes. It is the same with economic agents. Someone has to set a price, or there is no price system and no economics. An economy of passive agents is a contradiction in terms.

Economics is one of the modes of ethics. Pure economics – economics without people and hence without ethics – is a myth. Morality can’t somehow be tacked onto economic affairs, which otherwise are amoral. Ethics is there at the beginning, or it is not there at all. It is always there because there is no economics that does not concern human acts, and all human acts are acts of will. What is true of economics, the theory of business enterprise, is obviously true of business itself. Business ethics is not merely the proposition that honesty is the best policy. The ethical question, in business and everywhere, is, What sort of person am I? There is no escaping it. That question is posed by everything I do.

The New Leader

Originally published May 5, 1986

 

 

 

 

 

 

 

 

BACK IN ONE of my early columns I threatened to say something about Marx’s theory of surplus value, and today I’m going to do it. If we keep our voices down, we may be able to make a few observations before the comrades accuse us of not commanding the literature and the Birchites accuse us of thinking.

Marx’s argument, stretching over Parts III, IV and V of Capital, turns on the notion that “The value of a day’s labor-power amounts to … the means of subsistence that are daily required for the production of labor-power. …” This is the exchange-value of labor-power and is what the worker is paid. But the use-value, or what the capitalist gets out of it, is very much greater (Marx usually estimates double), and the difference between the two is the surplus value the worker creates that the capitalist appropriates.

You will see at once that Marx has mixed apples and oranges. His workers sell their services at cost (apples), while his capitalist sells the product for whatever the market will bear (oranges). If both services and product were sold at cost, there would be no surplus value. If both services and product were sold at the market price, competition would theoretically force them back to cost, and again there would be no surplus value.

Competition doesn’t work as it is famed to do (see “Unthinkable Thoughts on Competition,” NL, April 2, 1984). In fact, today in the United States the sum of proprietors’ income, personal rental income, and personal dividend income is about 10 per cent of total personal income. (Were we to include personal interest income, the figure would jump to about 25 percent. From the point of view of an entrepreneur, though, interest is an expense, not part of a surplus. On the other hand, a large but undeterminable portion of proprietors’ income should be classified as wages rather than profit.)

Marx’s difficulty, which he shares with all economists of a materialist or realist persuasion, is that he wants to consider everything except cost as some unreal flim-flam. And he particularly wants the capitalist’s property to be a thing – a machine you can touch or land you can walk on.

Yet property is not and never has been a thing. It is, instead, a bundle of rights (see “Life, Liberty and Property,” NL, July 11-25, 1983). Different societies emphasize different bundles. Thus in the ancient world the household (the paterfamilias or patron, his family, his clients, his slaves) was the locus of power. Property was personal – by persons and in persons – and aspects of that arrangement survive to this day. In the medieval world, military power also a survivor – became crucial. In the early modern world, the factory came to the fore, and at present we are ruled by finance.

These distinctive emphases are close to what Marx meant by the modes (as distinguished from the means) of production. Although his need to see always in materialist terms skewed his analysis, he was insightful in recognizing that each society’s characteristic form of property engrosses the special rewards of the society and is protected by its legal and political organization. For this reason he noted at the start of the Grundrisse that J. S. Mill and his predecessors were wrong in claiming that an economy’s production of goods and consumption of goods are two different (and ahistorical) questions.

And for this reason he attacked Ferdinand Lassalle and the Social Democrats, who advocated “a fair distribution of the proceeds of labor.” In Critique of the Gotha Program [Marx] replied: “Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production …. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of non-workers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor-power. If the elements of production are so distributed, then the present day distribution of the means of consumption results automatically.”

There was a time – roughly the time of Marx’s life – when the material means of production did indeed dominate society. Factories were in the field (as Carey McWilliams said) as well as in buildings with smokestacks. Today, though the factories still exist, the ruling power is finance. The current observation, that we are moving from a production economy to a service economy, is true but superficial. There are no special rights attaching to service; there is, in our society, a special and encompassing bundle of rights attaching to finance, to money. Marx said money was a “purely ideal or mental” form of value. It certainly is, but it is not therefore imaginary or secondary or part of some sort of superstructure. This ideal form of value is now the ruling bundle of rights in our society. The owners of this bundle derive therefrom their claim to be entitled to the special rewards of the system.

Every system generates special rewards – rewards that go beyond what is necessary for the system’s day-to-day operation. How these surpluses are used is a question in macroeconomics (for a clear explanation thereof, I refer you to Profits and the Future of American Society by S. Jay Levy and David A. Levy). Why these surpluses are generated is a question in microeconomics.

More than that, it is a question in the philosophy of history. Since there is a present (otherwise, what are we doing?), there are both past and future, from which the present is distinguished. Whatever else you say about the future, you must say it is constitutionally unknowable. As Keynes concluded in his Treatise on Probability, “we simply do not know.” If we could know the future, it would then be the same as the present and the past.

A consequence of the unknowability of the future is the generation of surpluses or windfalls or profits. These cannot be contracted for (as wages and interest are); they are what is left over after all expenses are paid. Because what’s to come is still unsure, we can face the future with confidence only if we have sufficient resources to meet any eventuality. But what is sufficient for any eventuality is more than enough for most eventualities; and what is, most of the time, more than enough, becomes the surplus that every system generates if it is to survive.

Thus in the Middle Ages, the military power required to keep the peace in a given valley was much less than that needed to defend the valley from outside marauders. Yet even though the marauders appeared infrequently, the lord undertaking the valley’s defense had to have more than enough power for ordinary use. This surplus power took the form of a stronger and more magnificent castle, more and better equipped retainers, more impressive ceremonial displays, occasional forays to defend the domain by pushing its borders outside the limits of the valley, dynastic alliances with strategically placed peers … All of these emblems of power were at the same time the characteristic luxury or surplus goods of the society, and were exclusively enjoyed by those who wielded the power in the society.

SUCH INFLUENCE of the unknowable in our lives is pervasive. Thomas Hobbes saw it as the fear of death, which leads to “a perpetual and restless desire of power after power. And the cause of this,” he wrote, “is not always that a man hopes for a more intensive delight than he has already attained to, but because he cannot assure the power and means to live well … without the acquisition of more.” Or as Fritz Fischer has shown in a series of groundbreaking books, the leaders of pre-World War I Germany saw their options as “world power or decline.”

Likewise, it is often said that a business firm must expand or wither away. Even if it wants to stand pat, it cannot precisely anticipate its future business and so may find business booming and profits burgeoning. Alternatively, there is the risk that sales will be down and profits negative. Prudence dictates at least a defensive expansion – a drive for a larger market share, introduction of a new product, whatever. In any case, if expansion does result, its benefits accrue exclusively to the owners of the enterprise. It is an extra dividend or a capital gain.

The owners do not, however, necessarily accept the possible losses. The first sufferers are the firm’s workers, whose pay is cut, and some of whom are fired. Aside from the firing, it was not different for the underlings of an unsuccessful medieval lord. They were squeezed to rebuild the lord’s power, and this was reasonable because the lord – and the lord alone – maintained the peace. Without him there was anarchy, sometimes savagery. In the same way, without an ongoing enterprise, the workers have no jobs at all.

We are back in a familiar bind. If things turn out well, the owners of an enterprise get capital gains and other surplus or unearned income. If things turn out badly, the workers get fired. These outcomes are not inherent in any system, but the problem is inherent in every system, because it is inherent in life itself. The obvious solution is to unify society and make owners and workers the same people. Socialism does this, up to a point, but the dictatorship of the proletariat – that is, of the party – shows no sign of withering away. What is left? Well, if you have paid attention to previous lectures, you know that the answer is some form of employee ownership.

The New Leader

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

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